Daily Investment
Interpretations Archive
July 1, 2010, to December
31, 2010
.
January 1, 2010, to June
30, 2010
July 1, 2009 to December 31, 2009
January 1, 2009, to June 30,
2009
July
1, 2008, to December 31, 2008
May
7, 2008, to June 30, 2008
2010-9-1 (Wednesday):
The markets rose nearly 3% today
on good news: Bulls storm into September. The NASDAQ Composite
climbed 62.81
points (2.97%)
to 2,176.84. The Dow rose 254.75
points (2.54%)
to close
at 10,269.47, and the S&P 500
added 30.96
points (2.95%)
to end at 1,080.29. Oil closed at $74.00 a barrel,
while Gold ended the day at $1,247. The VIX dropped
2.15 to 23.90.
The articles listed here don't seem to offer particularly
good news, but the manufacturing index was up slightly for August when it was
expected to have fallen.
Private-sector payrolls dip
Factories add fuel to fire
Mark Hulbert gives us September by the numbers,
and the news isn't good. September comes by its unsavory reputation honestly.
The markets will probably end this month a few percent lower than they began
them today.
Nick Godt has written: Denial symptom No.
36: Cyclicals stocks lead
High correlations reveal unhealthy market
Wage growth collapses
Michael Ashbaugh writes: Track a trendless market.
Silvia: Double-dip odds now 1 in 20
"Wells Fargo chief economist John Silvia calls the ISM report 'a shocker'.
He tells MarketWatch News Break the odds of a double dip recession are now one
in twenty."
2010-8-31 (Tuesday):
The markets ended the day
essentially unchanged. The NASDAQ Composite moved
down 5.94
points (-0.28%)
to 2,114.03. The Dow rose 4.99
points (0.05%)
to close
at 10,014.72, and the S&P 500
added 0.41
points (0.04%)
to end at 1,049.33. Oil closed at $71.79 a barrel,
while Gold ended the day at $1,249. The VIX dropped
1.16
to 26.05.
The markets began the day moving up on good
news: U.S. home prices rise
and August consumer confidence rises to 53.5,
but then sagged when the minutes from the last Fed meeting were released: Reinvestment plan sparks FOMC debate, minutes reveal.
Brett Arends observes that many of Ben
Bernanke's predictions have proven false: Bernanke's tiresome schtick:
"On forecasts, the Fed chairman is about as useful as a New England
weatherman.". He goes on to day, "Bernanke keeps talking about
bank lending and consumer confidence. But how can anyone look at the most
indebted nation in the history of the world and say it is suffering from a lack
of credit? And why on earth should consumer confidence miraculously pick up when
those consumers are broke and out of work? Is he suggesting we start handing out
Vicodin? Should we legalize pot? ...look at the numbers.
American families, according to the Federal Reserve itself, already owe $13.5
trillion. That is twice what they owed ten years ago, and four times what they
owed twenty years ago. For all the talk of people repairing their balance
sheets, that figure has fallen by a grand total of 2.7% from its all-time peak
in 2008.
He also addresses the unemployment situation. He notes
that: "25% of men of prime working age in America, one in four, today
lacks a full-time job. Nearly one in five lacks any job at all. This is
unprecedented in American history."
Death of equities exaggerated. The
author says, "In fact, rather than leaving stocks behind, evidence
suggests that investors are ditching U.S. stock mutual-fund managers and putting
money into index funds that track established U.S. stock benchmarks as well as
international stock funds."
Stock market future are up about ⅔ % tonight.
2010-8-30 (Monday):
The markets went south again today. (So
much for staying power.)
The NASDAQ Composite moved down 33.63
points (-1.56%)
to 2,119.97. The Dow dropped 140.92
points (-1.42%)
to close
at 10,009.73, and the S&P 500
fell 15.67
points (-1.47%)
to end at 1,048.92. Oil closed at $74.03 a barrel,
while Gold was unchanged at $1,239. The VIX climbed
2.76
to 27.21.
Recession won't end until 2011
A survey of business executives reveals that they believe the country is, for
all practical purposes, still in recession, and will be until sometime next
year.
Savings rate dips in July
Consumer spending outran growth in personal incomes in July.
Hedge-fund managers get more bearish on equities
The interesting quotation in this article is that some hedge fund managers have
had their heads handed to them on a plate by betting on rising interest rates.
Time to reappraise China growth outlook
Small-business hiring slows; outlook worsens
My investment advisory service warns that economic conditions
are being painted as more worrisome than they actually are. Mark Hulbert
echoes this optimism in The
news isn't all bad, pointing out that corporate insiders are buying shares
the way they did in March-April, 2009. But he also warns that insiders were
spectacularly wrong in the 2007-2008 bear market.
2010-8-29 (Sunday):
Expert rips fiscal-policy 'alchemy'
This article by Indiana University
professor Eric Leeper asks, "Does any model exist to show that 18 months
ago it made sense for the United Kingdom to expand fiscal policy, while now it
makes sense to implement the recently announced 25% nearly across-the-board
budget cuts? Leeper's remarks came a day after European Central Bank President
Jean-Claude Trichet argued that across-the-board deficit reduction was the best
strategy to foster growth in Europe and global economies after the global
recession. Leeper said there is no evidence to support Trichet's view."
J.P. Morgan lowers its oil futures price forecast
This article is interesting because of its
projections for global growth: "'With global manufacturing growth set to
halve over the coming months and projections of developing market growth being
ratcheted down, it is hard to argue that this will be any more than a temporary
bounce,' Morgan said" (referring to the recent uptick in oil prices. J.
P. Morgan is forecasting oil prices in the 60's by October.)
Jackson Hole
dispute: more economic medicine? This article explains the positions of some
of the players in the economics arena.
Death of Equities, Part 2
This article, drawing parallels with the 1979-1982 era, suggests that recent
articles proclaiming the death of the stock market may be pointing toward a new
super-bull market. The problem with this, as I see it, is that in 1979, we were
in the 13th year of the 16-year, 1966-1982 super-bear market. Today, we're in
the 10th year of the 2000-2016 super-bear market. Investors will eventually
return to the equity markets, but it may not happen before the next super-bull
market gets well underway. (And note that when the equity markets took off in
mid-August, 1982, most small investors didn't re-enter the stock market until
the bull market of the 80's and 90's had proven itself in the mid-80's. Also,
P/E, P/D, and P/B ratios were very much lower than they are today.
U.S. stock market facing tough data, tough month
"'The fear of deflation is what caused the market to correct in the last
three weeks, since what you don't want to own in deflation is any sort of asset,
since it'll be cheaper next week,' said Pado. The days ahead bring plenty
of key economic releases, including July income and personal consumption figures
to start the week and culminating with the August employment report. A mid-week
read on manufacturing activity in August could be pivotal, given 'manufacturing
had been what carried us through the early part of the summer,' before slowing
in July, said Pado. While the reports are likely to show further economic
deterioration, both Pado and MF Global's Kalivas said the impact on Wall Street
is debatable, given the negativity already priced into the market. That said,
while Pado does not expect September to be a good month for Wall Street he does
believe the stock market is building a base at the bottom end its current range,
with the market typically shifting gears in the final quarter, which brings the
holiday shopping season and fourth-quarter corporate investment in technology.
Paul Krugman wrote yesterday: Permanent Link to Failure To Rise.
He concludes with. "the important thing is that all signs are that the
next few years will be a combination of economic stagnation and political
witch-hunt. This is going to be almost inconceivably ugly."
Today, he's written, Permanent Link to Predictions I Wish Had Been Wrong:
"Looking for some other stuff, I found this post
from October 2008 in which I predicted a level of right-wing craziness about
Obama similar to that facing Bill Clinton, but worse.
"I really, really wish I had been wrong about that."
My investment advisory service recommends maintaining current
holdings through the coming week, though their signals are at the low end
of their neutral range.
2010-8-28: I
was wrong
about Nouriel Roubini. I found a video clip of the interview with Dr.
Roubini: Chances of Double Dip Now Over
40%: Roubini. His prediction of a GDP that's less than one and
closer to zero than to one refers to third-quarter
GDP rather than to second-quarter
GDP. And here's the interview with
Mohammed El-Erian: Economy
Losing Momentum For Recovery: El-Erian.
Barclays: Markets Pricing In Something Between A Recession And A Deflationary Depression
US Needs More 'Juice' — From the
Fed: Economist
Here's a picture of the Republican plan to straighten
out the economy: Boehner’s Pro-Growth
Message: Is a Mighty Stock Rally Next?. What is Representative
Boehner's pro-growth message? extend all the Bush tax cuts;
enact constitutional limits on government; repeal the national
cap-and-trade energy tax; enact an aggressive spending-reduction package
that would rollback non-defense discretionary expenditures to 2008
levels, freeze federal pay and hiring, eliminate transfer payments to
the favored few (Social Security? Unemployment Compensation?),
restore supply-side tax policies, and end TARP and all TARP bailouts.
[Huh? TARP (Troubled Assets Relief Program) was a Republican emergency
program aimed at keeping the banking system from collapsing, and designed and
administered by Republican Treasury Secretary Hank Paulson.]
2010-8-27: Well,
shiver me timbers! The economic news this morning was all better than expected,
and the markets have responded in kind: Stocks leap as Bernanke pledges to defend recovery,
Treasury yields up most since June. The NASDAQ Composite
moved up 34.94
points (1.65%)
to 2,153.63. The Dow increased 164.84
points (1.65%)
to close
at 10,150.65, and the S&P 500
lifted 17.37
points (1.66%)
to end at 1,064.59. Oil closed at $75.42 a barrel,
while Gold moved down to $1,239. The VIX fell
2.92 to 24.45.
This is certainly better than it would have been if Nouriel
Roubini had been right and the 2nd-quarter GDP had come in below 1%. It also
says things about Dr. Roubini. However, before we pop the champagne corks, it
might be noted that although things aren't as cataclysmic as they were purported
to be, they're still quite ominous: In
charts: What we learned about the economy, together with this, Permanent Link to Invisible Cavalry To The Rescue!,
and this Permanent Link to Nobody Could Have Predicted,
from Paul Krugman. There's a chart in this last article showing the recent GDP
progression, and it looks like this:

Of course, we won't know until we get there, but it looks as
though the logical next bar in this sequence has a height that's at or a little
below zero.
The charts shown in the first article are also an eye-opener.
They're trending relentlessly downward. Finally, Dr. Krugman's Permanent Link to Invisible Cavalry To The Rescue!
comments on Dr. Bernanke's comments this morning, including the phrase that
inflation expectations are well-anchored.
Here are three additional articles concerning what happened
at the Jackson's Hole meeting this morning:
Roundup of reaction to Bernanke's speech
Pushing back at more easing
Trichet sticks to guns in Jackson Hole.
Basically, it is that central bankers are sticking to the
story that prosperity is just around the corner, and that nothing further needs
to be done to stimulate the world's economies. Things will pick up in
2011.
Talk with Robert
Shiller (video) Dr. Schiller, of "Schiller Index" fame, believes
that there is a greater-than-50-50 chance of falling back into recession.
Today's action was nice, but we'll see next week how much
staying power it has.
2010-8-26: This
morning's unexpectedly improved jobless number--473,000 compared to the 495,000
that MarketWatch had predicted--gave the stock market an opening boost but it
didn't last: Stocks slide as cheer fades. The NASDAQ Composite
fell 22.85
points (-1.07%)
to 2,118.59. The Dow lost 74.25
points (-0.74%)
to close
at 9,985.81, and the S&P 500
subtracted 8.11
points (0.77%)
to end at 1,047.24. Oil closed at $73.44 a barrel,
while Gold moved down to $1,240. The VIX rose
to 27.37.
Apparently, everyone is waiting on tomorrow's numbers (the
downward revision to the GDP, and the consumer confidence reading) and upon Ben
Bernanke's speech.
A level of 1,040 on the S&P 500 index is a "line in
the sand". A close below this level would signify a downward breakout of
the current trading range. If this should happen tomorrow night, then to
paraphrase "Anthony and Cleopatra", 'Rome will in Tiber melt
and wide arch of the rang'd empire fall'.
Nouriel Roubini ("Dr. Doom") is predicting that 2nd
qtr. GDP will be revised to "well below 1%" and could wind up
being close to 0. It seems to me that Dr. Roubini has laid his reputation on the
line with this specific forecast. Now, PIMCO's CEO, Mohamed El-Erian, whom I
quoted on August 20th as having put the odds of a double-dip recession at 1-in-4
has just tonight endorsed Nouriel Roubini's dire assessment of the economy. Both
Dr. El-Erian and Dr. Roubini agree that the risk of recession is rapidly rising.
My investment advisory service, which, so far, has bought the thesis that this
is just a temporary soft patch in the road, and that the recovery will slowly
continue, has been shaken by Dr. El-Erian's ratification of Dr. Roubini's
warning. If the 2nd-qtr. GDP is revised below 1%, it would suggest to me that
GDP growth is negative by now. Of course, that would not necessarily make this a
double-dip recession, since a recession requires two back-to-back quarters of
negative growth. Still,...
Irish woes continue to flow
This is another reminder that Ireland's austerity program seems to be
backfiring.
Bond buyers are killing the recovery
This article refers to the fact that ultra-low bond interest rates are fueling a
feeding frenzy of mergers and acquisitions.
S&P 500 to retrace steps to 900,
and S&P 500 to hit 450, SocGen strategist warns
When these kinds of gloom-and-doom articles appear, it's usually a sign that the
markets are about to turn around and go up.
Ex-Fed
banker: Low on ammo The Fed's former vice-chairman, Alan Blinder,
warns that the Fed is running low on ammunition, and that buying private
assets... corporate bonds, small business loans, and credit-card receivables...
would be more effective than buying U. S. Treasuries.
2010-8-25: After
diving this morning, the markets recovered this afternoon in what is, in
all likelihood, a dead-cat bounce. The NASDAQ Composite rose 17.78
points (0.84%)
to 2,141.54. The Dow
gained 19.61
points (0.2%)
to close
at 10,160.06, and the S&P 500
added 3.46
points (0.33%)
to end at 1,055.33. Oil closed at $72.68 a barrel,
while Gold moved up to $1,243. The VIX fell
to 26.87.
My investment advisory service gives four
reasons for the disconnect between s stellar earnings season and so-so
performances of the stock market indices:.
First, by the time a stellar earnings season arrives, stocks
have generally discounted it and have moved on to what's going to happen
six-to-nine months later.
Second, the macroeconomic outlook is pretty bad, with a
decelerating economy encouraging investors to wait and see how far the
deceleration will go.
Third, some companies have had trouble keeping their revenues
up with their earnings.
Fourth, with high-frequency traders accounting for 70% of the
daily volume on the new York Stock Exchange, correlations among stock prices are
at an all-time high. That means that prices of individual stocks tend to move
with the overall market rather than depending upon the intrinsic values of the
underlying companies.
2010-8-25 (Afternoon):
My investment advisory service concludes that what's driving the markets
now is raw fear because of the downbeat economic news... i. e., an
overreaction.
Mark
Hulbert: Contrarian take on the bond market. Mark Hulbert
points out that, over the next century, bond yields (and inflation) are
apt to be higher than they are right now. For that reason, now is
probably not a good time to be buying bonds (unless, of course, we're
heading into deflation, in which case, current bond yields would look
pretty good.
U.S. 10-yr yields hit lowest since January 2009
The 2-year Treasury note . The 10-year Treasury bond is currently at
2.48%, after testing 2.42%. It closed at 2.50% last night. The 30-year
Treasury bond is currently at 3.54%, after touching 3.47%. It closed at
3.57% last night.
Banks fall after weak housing, manufacturing data.
The durable goods order, which Marketwatch had predicted would rise
2.7%, instead rose an anemic 0.3%.
New-home sales, which MarketWatch had predicted would
come in at an annualized 339,000, up from 330,000 in June, amounted to
276,000. Furthermore, the June number was revised downward to 315,000. July new-home sales fall to record low pace

Rex
Nutting: Two dangerous myths about the stimulus
Liz Miller sees good news amid all the bad
Bond frenzy fuels M&A while economy burns.
This article, Fed
retreats to the mountains as economy slumps, written by MarketWatch
columnist Nick Godt, repeats the Paul Krugman refrain that political and
ideological gridlock is paralyzing federal remediation efforts for the
economy. (Remember that the Fed is still predicting GDP growth of
3%-to-3.5% for this year.) We'll get a reading on this Friday when the
revised, 2nd-qtr. GDP is announced.
Tomorrow, the weekly unemployment number will be
announced. Last, week, it was an unexpected 500,000, which spooked the
markets. MarketWatch predicts a value of 495,000 for tomorrow.
On Friday, the revised, annualized, second-quarter
GDP figure will be released. Marketwatch expects that it will be 1.4%. A
consumer sentiment number will also be published. MarketWatch expects
that consumer sentiment will fall from 69.6 last month to 68.5 this
month.
From CIA to
BIA: Spotting execs who bend the truth
Pentagon CFO sees modest growth in 2012 budget
Where the optimists are
2010-8-24:
The markets took a bath today: U.S. stocks crater, sending Dow to six-week low.
The NASDAQ
Composite, down
35.07
points (-1.66%)
to finish at 2,123.76, took an even bigger hit than it did
yesterday. The Dow
dwindled 39.21
points (-0.38%)
to close
at 10,174.41, and the S&P 500
declined 4.33
points (-0.4%)
to end at 1,067.36. Oil closed at $72.82 a barrel,
while Gold moved down to $1,227. The VIX rose
slightly
to 25.66.
Money manager tells Brett
Arends: Strap in and hold on tight quotes star money manager Charles
De Vaulx, who believes that the U. S. government will step in and keep
the U. S. from sliding into a double-dip recession, but that GDP growth
will average 2% to 2.5% only a year for the next few years. Mr. De Vaulx
offers some recommendations for investments that should breast the tide
over the next few years. Mr. Vaulx manages the prosperous IVA Worldwide
mutual fund.
Ireland downgraded on concern about bank bailouts.
This is of interest because Ireland embraced austerity two years ago,
and who, if the deficit hawks are right, should now be enjoying credit
rating upgrades. Instead, it appears to be trending downward, as
foreseen by Paul Krugman.
In other indications of the times,
Retail stocks drop, led by Barnes & Noble
Baker: Home prices could sink another 15%
South Africa's growth slows in second quarter
Stone: Double dip recession not yet priced in.
This article mentions that Burger King reported weakening sales along
with Barnes and Noble.... "continued temporary soft patch
weakness which makes the already nervous investor more nervous."
Savers
beware: Interest rates dip below 1%: "Earlier this month,
Geller predicted that interest rates on deposits would continue to fall
as banks look for ways to make up for the loss of fee income as a result
of new regulations on electronic funds transfers."
Michael Ashbaugh advises us: U.S. markets poised to retest major support.
Paul Farrell warns us that the Righteous Right leads us straight to WWIII.
Irwin Kellner suggests that we're already back in a
recession (Blowing in the wind)...
unless we failed to come out of the first recession. (The Conference
Board has never officially declared that the Great Recession is over.)
"It is not hard to see why the economy is struggling. As
anticipated ( See
my column of Aug. 3), the push from inventories appears to have
faded. So has the stimulus from the housing tax credit and the
government's "cash for clunkers" program. Washington has laid
off temporary census workers, while many states and local governments
are furloughing people as well. For its part, the private sector is
creating few new jobs while terminating many."
My investment advisory service still sees what's
happening as trading at the lower edge of a trading range, although its
investment indicators are flirting with a "sell" signal.
One long-term trend that I think might be continuing
leveling of living standards and real wages between the developed world
and the developing world.
2010-8-24 (This Afternoon):
After the wicked recessionary reading from the Philadelphia Fed last
week, the Richmond Fed Index has fallen in August: Full Richmond Fed release
(but is still positive).
Yields on Treasury bonds probed new lows today, ,
with the 2-year yield dropping to 0.47% (after touching 0.45%), the
yield on 10-year Treasuries closing at 2.50% (down from yesterday's
2.58%) and the yield on 30-year Treasuries at 3.57%, down from
yesterday's 3.66%.
Paul Krugman just posted this article and chart: Permanent Link to 2.53.
(He finished this at 1 p. m. Eastern time.)

The time frame labeled "1" on Prof.
Krugman's chart was the period when fear of the phantasmagorical
"bond vigilantes" drove up interest rates in anticipation of
supposed reluctance to buy U. S. Treasuries.
The interval labeled "2" on Dr. Krugman's
chart is when, in December, 2009, Morgan Stanley predicted that yields
on 10-year Treasury bonds would be running 5½ % right about now. As we
know, the actual number today is 2½ %.
The "3" on the chart is this April when the
Wall Street Journal announced that fears about the huge U. S. deficit
was going to send interest rates on U. S. Treasuries higher and higher.
Instead, they dropped from 4% to 2.5%.
Stimulus plan boosted GDP by as much as 4.5% - CBO
2010-8-24 (This Morning): Believe
it or not, my investment advisory service is suggesting that hedge funds
are piling into Treasury bonds, having gone from $0.3 trillion invested
in Treasuries to $2.0 trillion in the past year. Of course, this
could be Great Recession 2.0, but it could also be a bond bubble. In the
meantime, new housing starts showed a 27% drop in July, which is a bit
more than the 11% decline expected Sunday's MarketWatch consensus table:
Existing-home sales plunge 27.2% in July.
My investment advisory service doesn't think this is The End, but
their actions will be guided by their indicators (which so far, aren't
quite shouting, "Sell!").
2010-8-23: The NASDAQ
Composite, down 20.13
points (0.92%)
to finish at 2,159.63, took quite a hit. The Dow
dwindled 39.21
points (-0.38%)
to close
at 10,174.41, and the S&P 500
declined 4.33
points (-0.4%)
to end at 1,067.36. Oil closed at $72.82 a barrel,
while Gold moved down to $1,227. The VIX rose
slightly
to 25.66.
I
said last night that I would discuss the article, Inflation, not deflation, Mr. Bernanke,
this morning. This morning had other plans for me, but here's what I was
planning to say. (Once again, it's 11 p. m. and I haven't had time to
write more than this.)
The article's author, Andy Xie, explains that enough
of the 2009 Western stimulus money played through to emerging market
economies to stimulate them mightily. For example, U. S. consumers,
looking for ways to cut expenses, bought more goods from East Asia, and
"U. S." global corporations, looking for ways to boost
productivity, outsourced more jobs to East Asia. As a result, emerging
market countries are grappling with inflation, while developed countries
are girding for possible deflation. Mr. Xie says that 10-year U. S.
Treasuries are at 2.8% (??? This article is date-lined August 22, when 10-year
Treasuries were yielding 2.62%. However, 10-year Treasuries would have yielded
2.8% ten days ago.) "Oil has climbed above $80 per barrel again. Copper
is back above $7,000 per ton, closing in on the pre-crisis peak." (Oil
closed tonight at $72.82 a barrel.)
Point is:
The Western stimulus money
didn't much stimulate the West as was intended. Instead, it was spent in
emerging nations, where it supercharged some emerging market economies, leading
to future financial bubbles. Some of these
nations are already experiencing 5% inflation rates, and are raising interest
rates to cool their economies. (Historically, in the U. S., there's been a
two-year lag between the raising of interest rates and the inflation peak. By
that time, inflation rates could reach 8%-9%.) Andy Xie argues that this
overheating of emerging nations' economies will lead to inflation in the West,
imported from the emerging nations. And as for the West, he says, "The temporary deflation due to suppliers
cutting costs at the expense of profit margins will not last."
I'll have to try again tomorrow to find time to finish this
material.
2010-8-22: In
Looking beyond the gloom, the
authors present the case that "the recent weak data is a 'mini-cycle
within the cycle' and not a double-dip recession. When trade and
inventory behavior are stripped away, underlying domestic demand was
fairly strong in the April-to-June quarter. Final sales to domestic
purchasers, which is GDP with inventories and external trade stripped
out, will be revised up from an already strong initial estimate of 4.1%,
said the economic team at Capital Economics in Toronto."
_____________________________________________
MarketWatch consensus
| date |
report |
Consensus |
previous |
| Aug.
24 |
Existing home sales |
4.78 mln |
5.37 mln |
| Aug. 25 |
Durable goods orders |
2.5% |
-1.0% |
| Aug. 25 |
New home sales |
339,000 |
330,000 |
| Aug. 26 |
Jobless claims |
495,000 |
500,000 |
| Aug. 27 |
GDP revision |
1.4% |
2.4% |
| Aug. 27 |
Consumer sentiment |
68.5 |
69.6 |
It will be interesting to see how well these Marketwatch forecasts agree
with the numbers that are actually announced this week. Marketwatch is
forecasting 1.4% for the 2nd-Qtr. GDP, compared to a prediction of 1.1%
by Goldman Sachs.
This article, Bonding with income,
recites the returns on junk bond funds vs. their risks.
"Douglas Cliggott, U.S. equity
strategist at Credit Suisse, in an Aug. 20 report cited three forces
that have driven 10-year yields below 3%.
"'One is investors lowering their U.S. economic
growth expectations. A second is good old-fashioned performance chasing.
And the third, and perhaps the most important, is many Americans losing
their appetite for risk,' Cliggott wrote. 'We believe the demand for
U.S. financial assets with relatively high yields and relatively low
volatility could remain elevated for several years.'"
I originally began writing this Investment Interpretations page in May,
2008, thinking I had strategies for surfing the upcoming recovery. More
than two years later, the recovery looks less certain than it did in
May, 2008. I've also learned just how frail a vessel I am when it comes
to understanding what's really going on in these markets, and how
dependent I am upon expert advice. The "core" GDP estimate of
4.1% for the second quarter of domestic GDP growth is a case in point:
it's information that I never saw in the news releases about GDP growth,
without this kind of information, it's quite hard to make sound
investment decisions. I suspect that institutional investors have this
kind of information and interpretation available to them. Edward Yardeni
seemed to have a solid grip on trends and their meanings during the 80's
and the 90's. In an August 12th interview, he paints an upbeat picture: Ed
Yardeni, President, Yardeni Research.
Here's another interesting treatise that i just
found: Inflation, not deflation, Mr. Bernanke.
This article is so good that it deserves more time than I can give it at
11 p. m. tonight. I'll revisit this topic in the morning.
In
striking shift, Small Investors Flee Stock Market
2010-8-21: In
Permanent Link to Bond Madness,
Paul Krugman reviews some of the (in his view) nutty justifications
given for why interest rates were going to surge by this time in 2010.
He suggests that the first of these, the "carry trade bubble",
may have cowed the Obama Administration into eschewing an attempt at a
follow-on stimulus package at a time when it might still have done some
good. Noriel Roubini floated this phantasmagoria back in the November
2, 2009, Daily Investment Interpretations (along with Todd
Harrison). For all I know, this unwinding of the carry trade may
still happen, but it would have afforded a very bad justification for
raising interest rates last fall.
He also mentions that Goldman Sachs estimates that
the revised second-quarter GDP will be only 1.1%, and will go downhill
from there.
Another interesting comment someone made in response
to an article is that although earnings are rebounding thanks to
increases in productivity, revenues are falling. And rising earnings
can't continue very long in the face of falling revenues.
Marketwatch columnist Nick Godt writes, No, it's not a bond bubble.
He explains that stock fund managers watching money pouring from the
stock market into the bond market have strong incentives for claiming
that the bond market is a bubble.
In reviewing some of the links in the right-hand box
on this page, I realize that right now, the best investment vehicle we
can find may be cash until we see which way the markets are going to
break. The markets always climb a "wall of worry", but right
now, things appear to be, as the Fed put it, "unusually
uncertain".
In the interest of balanced reporting, here's an
assessment by Howard Gold: Gloom and doom all over again.
2010-8-20: The
stock market ended a bit lower today: Retailers edge lower; Ann Taylor a bright spot. The NASDAQ
Composite ended up 0.81
points (0.04%)
to finish at 2,179.76. The Dow shifted down 57.59
points (-0.56%)
to close
at 10,213.62, and the S&P 500
declined 3.94
points (-0.37%)
to end at 1,071,69. Oil closed at $74.00 a barrel,
while Gold moved down to $1,229. The VIX dipped 0.89
to 25.55.
It would seem that even the experts don't know what's
coming next (although that won't keep them from telling you what's coming
next... "...often in error, never in doubt.") Paul Krugman today is
again presenting his view that many economists can't seem to get past their
fantasies and prejudices to recognize even what has already happened: Permanent Link to Expansionary
Austerity?. He gives as an example, the interest rate forecast
prepared by Morgan Stanley for their clients early this year. Last December,
Morgan Stanley predicted that the interest rate on 10-year Treasuries would be
about 5½ % about now. Instead, it's 2.62% tonight. (Morgan Stanley apologized
to its customers yesterday.) Other primary dealers weren't much better than
that, with JPMorgan Chase & Company, and Royal Bank of Canada
prognosticating 4.5% for 10-year Treasuries. His key point is the alleged
incompetence of the economists and politicians who are leading us.
So who's right? I suspect that we will get an answer
before the year is out.
PIMCO's Mohamed El-Erian sets the chances of deflation in the
U. S. at 1-in-4. Other economists estimate the odds to be somewhat higher: Preparing for Inflation and Deflation,
and Funds Look to Dangers of U.S. Deflation.
Meanwhile, bond yields continue to fall: Treasuries rally this week on flight to safety.
Roster of dividend-payers
2010-8-19:
Equity markets dove into the canvas today: Bulls battered as Dow falls.
The NASDAQ
Composite fell 36.75
points (-1.66%)
to finish at 2,178.95. The Dow dropped 144.33
points (-1.39%)
to close
at 10,271.21, and the S&P 500
declined 18.53
points (-1.69%)
to end at 1,075.63. Oil closed at $74.35 a barrel,
while Gold moved up to $1,234. The VIX ratcheted
up 1.85
to 26.44.
More tough U.S. economic times forecast by
Congressional Budget Office (CBO). and Economic numbers point to darker outlook
The CBO forecast still holds GDP growth for the year at 3%. However, 2Q
GDP growth is expected to be revised downward to 1.4% next Friday,
leading to average GDP growth for the 1st half of 2.55%.
Average growth for the 2nd half would have to be 3.45% to generate
a 2010 growth in GDP of 3%. I don't think that's going to
happen. Methinks we might possibly re-enter recession before this quarter is
over.
U. S. Treasury Yields Hit New Lows
U. S. Treasury interest rates hit new lows today: Treasurys yields fall to new lows after poor data.
The yield on the 2-year Treasury bond hit its lowest level ever, at 0.47%,
rebounding to 0.48%. The yield on the 10-year Treasury bond touched a new low of
2.56% before rising to 2.57%. The yield on the 30-year Treasury plumbed a new
low at 3.62% before returning to 3.65%. This comes after a brief, slight upward
move in interest rates following the Fed's first purchase of Treasury bonds this
week.
"'The current low levels of bond
yields, and even further falls, would be consistent with the prospect of a very
long period of near-zero short-term interest rates, low or negative inflation,
and lackluster returns on riskier assets that increase demand for the safety of
government bonds,' said Julian Jessop at Capital Economics.
"'An asset bubble develops when prices move far out
of line with anything that could reasonably be justified by fundamentals,' he
said, noting that's not the case with bonds currently."
The above article directly contradicts Marketwatch Editor David Callaway's
article: Big investors pull exit chute, beer in hand
that
warns about a developing bubble in the bond market that will allegedly
take down all asset classes when it bursts.
James Bullard is the Governor of the St. Louis Federal
Reserve Bank, and is the Fed governor who recently went from worrying about the
risks of inflation to worrying about the risks of deflation. Bullard: Fed may act if disinflation risks grow
The Beginning of When
China Rules the World?
China has been moving to take over from the United States as
the world's leading nation, and to replace the dollar with the yuan as the
world's reserve currency. These are long-term plans with timetables measured in
decades, but this is the direction in which China is heading. In one of the
first moves in this direction, MacDonalds is selling bonds for its Chinese
expansion in yuan rather than dollars. McDonald's sells yuan bonds for China expansion.
And as you can imagine: China to encourage more foreign yuan-bond issues.
Are Many Jobs No Longer
There?
In Job mismatch stymies economic growth ,
Minneapolis Fed bank president Narayana Kocherlakota explains that for about
one-third (6.5 million) of all unemployed U. S. workers, the jobs they left no
longer exist. These employees will have to be retrained for different work to
find jobs when the economy recovers.
2010-8-19 (Afternoon): Initial claims tip 500,000
and Philly Fed index negative for first time in year
are behind the markets' malaise this morning. (But note that the recent
extension of jobless benefits may be temporarily boosting initial
unemployment claims.)
On the other hand, the Conference Board's Index of
Leading Economic Indicators is still pointing toward a slow recovery: Leading indicators point to slowing economy.
The Conference Board's Index of Leading Indicators
after rising 0.5% in May and falling 0.3% in June, rose 0.1% in July
(for a three-month average rate of rise of 0.1% per month). "'The
indicators point to a slow expansion through the end of the year,' said
Ken Goldstein, economist at the Conference Board. 'With inventory
rebuilding moderating, the industrial core of the economy has moved to a
slower pace,' he said, adding there's no change of pace in the service
sector. 'However, the good news is that the data do not point to a
recession.'"
The Coincident Index rose 0.2% in July.
Among the components of the index that fell during
July were:
(1) consumer expectations,
(2) building permits,
(3) real money supply and stock prices,
(4) manufacturers' new orders for consumer goods, and
(5) materials,
while, on the other hand:
(6) interest rate spread,
(7) average weekly manufacturing hours,
(8) index of supplier deliveries,
(9) average weekly claims for unemployment insurance,
and
(10) Manufacturers' new orders for non-defense capital goods
rose during the month.
And on the third hand, today's boost in the
three-week average for jobless claims ("Claims had fallen as low
as the 427,000 level in mid-July but have worsened steadily since and
now have increased for three straight weeks. Read
the full government report."), along with the sharp
reversal in the Philadelphia factory sector, point toward further
reductions in the Index of Leading Indicators for August when the Index
is updated a month from now..
H-P culture crumbled further under Hurd
Apparently, Bill Hurd completed the job that Carly Fiona began. He
brought HP to profitability, but by selling the future to buy the
present, riding the company's reputation into the ground.
2010-8-18: This
has been a ho-hum day in the trading pits. The NASDAQ
Composite ended up 6.26
points (0.28%)
to finish at 2,215.70. The Dow eased up 9.69
points (0.09%)
to close
at 10,415.54, and the S&P 500
was nudged 1.62
points (0.15%)
to end at 1,094.16. Oil closed at $75.30 a barrel,
while Gold rose
$6
to $1,233. The VIX
added 0.26
to 24.59.
Marketwatch columnist Rex Nutting has created quite a
stir by writing Is there anyone the right doesn't
hate? Otherwise, there's almost nothing to report.
Stock market futures are up a little tonight.
The picture below was taken in 1930, exactly 80 years
ago. The not-too-happy camper in the foreground is me. At the time,
Dad and Mother were living in a "double house" across the
street from the house below. The two houses in the background are
next-door to the house below (with a vacant lot in between), where we
moved in 1931 when I was two. Virtually all new building in the
United States ceased in 1929, and remained frozen for 16 years, from
1929 to 1945. The houses in the background are "double
houses"... two independent houses for two independent families,
each with its own front and back door... like the "double
house" in front of which this picture was taken.
The caption that goes with this was, "You're
telling me that Santa Claus gets down all the chimneys in the
world in one night? OK. How about the Easter Bunny?"
These suburbs were made practical by the advent
of automotive transportation, and would have housed the first generation
of young couples migrating from the farms into the cities.
2010-8-17: The
markets soared today on Bulls wake up, smell coffee
and Staking out S&P 500's trading
range: Ashbaugh.
The NASDAQ
Composite hopped 27.57
points (1.26%)
to finish at 2,209.44. The Dow skipped 103.84
points (1.01%)
to close
at 10,405.85, and the S&P 500
jumped 13.16
points (1.22%)
to end at 1,092.54. Oil closed at $75.77 a barrel,
while Gold was unchanged at $1,227. The VIX subtracted
1.77
to 24.33.
My investment advisory service observes that
what counts is the bond market (Fed buys $2.55 billion in Treasury bonds,
and Treasury yields rise after Fed buys bonds). The
bond market would seem to be signaling deflation and recession, while the stock
market is anticipating The precipitous fall in bond yields over the past few
weeks is cause for pause, and that situation bears watching over at least the
next week or two. The two markets are on a collision course.
The article Fed hasn't lost faith in
upturn: Kocherlakota quotes the president of the Minneapolis Federal
Reserve Bank explaining that the Fed didn't decide to reinvest its mortgage
money in Treasury bonds because of concerns about the recovery, but to counter
excessive prepayments of mortgage-backed securities that are encouraging
homeowners to prepay their mortgage payments at today's ultra-low mortgage
rates, pulling down the Fed's principal balances. (The Fed has just lowered its
forecast for 2010 GDP growth from 3.2%-to-3.7% to 3.0%-to-3.5%.) Narayana
Kocherlakota also states that "Monetary stimulus has provided conditions
so that manufacturing plants want to hire new workers." "The problem
is a mismatch between firms who have jobs but can't find skilled workers."
Today's article, China: We're #102,
is a follow-on to yesterdays' article, China remains desperately poor.
The article says that China now has a per capita income equal to that of the
United States in 1932, or between 1/6th and 1/7th that of modern
Americans.
I remember full well the U. S. standard of living in1932. We
lived in an average suburban neighborhood in an average suburban house (shown
below). We had one car, and one bath. There was a gas stove,
a gas hot water heater, and a coal-fired furnace.

There was city bus service at one end of our street. There were street
lights and sidewalks. Things weren't much different than they are now, although
our level of material wealth is obviously much greater now than it was then. The
houses around ours were owned by factory and clerical workers, as opposed to
more expensive neighborhoods populated by professional and technical personnel.
Virtually none of our neighbors would have had a college degree. So if China has
reached this level of abundance they're far removed from the Chinese peasantry
of 1910 (just as urban Americans in 1932 were far removed from the pioneers of
1832).
These two articles, Three dividend ETFs to fight deflation,
and Yields on dividend ETFs come with stock-like risks
discuss the benefits and risks of dividend-yielding ETFs
2010-8-16: The
markets ended flat today: Modest rebound in Empire State Index for August. The NASDAQ
Composite gained 8.04
points (0.39%)
to finish at 2,181.87. The Dow shaved off 1.14
points (-0.01%)
to close
at 10,302.01, and the S&P 500
inched up 0.13
points (0.01%)
to end at 1,079.38. Oil closed at $75.05 a barrel,
while Gold rose $10
to $1,227. The VIX subtracted 0.14
to 26.14.
Bond Yields Hit New Lows
U.S. 10-year yields fall to March 2009 low.
Paul Krugman says it well with Permanent Link to Holy Bond Yield, Batman!.
Yields on the 10-year Treasury bond closed at 2.59%. (They bottomed at 2% early
in 2009.) It was only a few weeks ago that yields on the 10-year Treasury fell
below 3%.
The yield on 2-year Treasuries is now at ½ %.
The yield on 30-year Treasuries closed at 3.74 % after
falling below 4% a few weeks ago..
The article explains that the price of 2-year Treasuries has
risen 2.07% since the beginning of the year, while the prices of 10-year and
30-year Treasuries have climbed 12.4% and 16.5%, respectively: If Fed opts to buy more Treasurys, it will be a lot.
Consequently, bond traders are buying 10-year and 30-year Treasuries for their
profit potentials.
My investment advisory service explains that high-frequency
traders have clearly linked bond prices to stock prices in their computerized
trading programs. When bond prices go up, stock prices go down. At the same
time, it points out that our leading bond trader, Bill Gross of PIMCO, is saying
that the dynamics of the bond market don't suggest a double-dip.
On the other hand, strategists at CRT Capital Group expect
falling yields on longer-term bonds as bond investors lock in yields against the
threat of a double-dip recession.
Tomorrow, the Fed will begin its first purchases of U. S.
Treasury bonds.
Proof of a bond-market bubble
The Chinese Economy Becomes the
World's Second Largest
Japan eclipsed by Chinese growth
and China remains desperately poor.
This is an apples-and-oranges comparison. With 1/10th the population of China,
Japan would seem to have a per capita level of wealth that's 10 times that of
China. However, in terms of real purchasing power, China has about 1/5th the
Japanese standard of living. The United States is among the top 10 countries in
the world in terms of per capita income, with Japan having fallen to #20, and
China at #100, behind Namibia, Algeria, and El Salvador.
Investing in Home Mortgages
This article, House rules,
lists some funds that give modest returns from home mortgages. The best of
these, Metwest, has returned 9.7% for the year-to-date.
Sorting Conflicting Stories from the
Tower of Babble
I'm going to try to sort through the contradictory swirl of
stories and opinions and come up with some understanding of what's going on.
This will have to spelled out piecemeal because of constraints on my time, but
here's a fist installment.
For the first time since
the Great Depression, our traditional (and only) technique for bringing
us out of recession, (lowering interest rates) has failed. During the 2002-2003 recession, the Federal
Funds Rate rate got down to 1%, and there was talk about how dangerous
it would be (" like pushing on a string") if that didn't do
the job. But in 2002, 1% was good enough, and: the economy picked back up on its
own.
That didn't happen this time. This time, a 1% Federal
Funds Rate didn't even come close to getting the job done. So here we
are at the bottom of the Great Recession with our only proven way of
lifting us out of recessions having come a cropper. Last year's solution
was a one-time stimulus package that was twice as large, as a
percentage of GDP, as FDR's largest. (The 2009 fiscal stimulus was $862 billion,
or about 6% of the $14.4 trillion, U. S., 2009 GDP.) (On the other hand, FDR's
"New Deal" went on for four years, and even four years of the new Deal
wasn't enough to put Humpty-Dumpty together again.) That stimulus money kept a
Depression at bay while it lasted, and even fueled a mini-turnaround, but now
it's largely run out.
Bottom line: Left to its own devices, I'm led to conclude that
the U. S. economy is likely to slip into a double dip, or a deflationary morass.
This means (at lest to me) that comparisons with recoveries from other
recessions are highly suspect. The restocking of inventory (after an unusually
zealous abstention from restocking) and the 2009 fiscal stimulus have run their
course, and now, there don't seem to me to be any domestic drivers in the
pipeline to keep the economy from lapsing into a recessionary vicious circle.
OK. So why do so many prognosticators still think that the U.
S. economy will grow 3% or so this year? How can that happen?
I can think of two possible mechanisms that might support
such a scenario.
(1) Although the Fed is limited in what it can do from here, it does have
options, and it has signaled that it will use them going forward.
(2) If 50% of U. S, corporate sales take place outside the U. S., might a
global recovery keep U. S. corporations afloat even if domestic sales continue
to falter?
2010-8-13:
Stocks fell for the fourth day in a row. The NASDAQ
Composite lost 16.79
points (-0.77%)
to finish at 2,173.48. The Dow dropped 16.8
points (-0.16%)
to close
at 10,303.15, and the S&P 500
dipped 4.36
points (-0.4%)
to end at 1,079.25. Oil closed at $75.57 a barrel,
while Gold was unchanged at $1,217. The VIX increased
0.51
to 26.24.
No-shows are the real market movers now
mentions that with three weeks of summer left, and lots of Wall Street types on
vacation, and with others nervous about deflation and double-dip risks, it
doesn't take much to move the markets.
U.S. consumer prices climb 0.3%
The core rate of inflation remained at 0.1%. The other 0.2%
was caused by rising gas prices. The increase in core CPI over the past year was
0.9%.
Fed's 'dangerous gamble'
"Thomas Hoenig rips zero-interest-rate regime in perhaps
one of the sharpest critiques of Fed policy ever by a sitting policy-committee
member."
Mr. Hoenig's concern is that the Fed is loaning money to
"banks" at what amounts to a zero interest rate. Then the banks can
invest this "free" money in government bonds, and pocketing the bond
income. The Fed is blowing another bubble. Mr. Hoenig believes that the recovery
is slow but is on track, and that the financial world is deliberately talking
"double-dip" and "deflation" in order to keep interest rates
low.
Treasurys hold gains after retail, inflation data,
and Dollar holds gain.
The yield on 10-year Treasuries has fallen from 2.82% last week to 2.69% this
week.
Consumer confidence edges up
slightly in August from July, "but still remained well below readings
this year through June".
Consumers take a break.
Retail sales rose 0.4% during July, but about 0.2% excluding autos, and that
0.2% went into higher gasoline prices. Retail sales have been dropping 4% a
month during May, June, and July.
Euro-zone GDP's 4-yr. best:
a 1% rise in quarterly GDP (4% a year). At the same time, the peripheral
nations, such as Portugal, Ireland, Italy, Greece and Spain, are still in or are
expected to re-enter recession. "Brzeski cautioned against
ideas the euro zone is set to convincingly decouple from the U.S. economy. 'The
last 40 years have shown that euro-zone decoupling from the U.S. economy has
always been an illusion,' he said. 'At best, only the euro zone's current main
attraction, the German economy, has the potential to start a period of growth
outperformance.'"
In Europe's lesson for market,
the author writes, "And despite Germany's growth in the second quarter,
questions remain over how it will continue from here. Industrial giants like
Siemens AG /quotes/comstock/13*!si/quotes/nls/si
(SI
96.08, +0.27,
+0.28%) /quotes/comstock/11e!fsie
(DE:SIE
75.21, -0.25,
-0.33%) and BASF /quotes/comstock/11e!fbas
(DE:BAS
44.10, -0.20,
-0.45%) /quotes/comstock/11i!basfy
(BASFY
55.75, -1.34,
-2.35%) have to export
to somewhere, and even Chinese growth is slowing, to say nothing of American. As
for the laggards, they are still in trouble. The cost of Irish debt has jumped
over the past week. Greek restructuring is still a possibility. Spanish
unemployment has grown to a staggering 20%."
Talking with David
Rosenberg (video) offers interesting perspectives. Mr. Rosenberg was
formerly the Chief Economist at Merrill Lynch. He has a bearish forecast for the
economy. He thinks we should declare war on unemployment. With a federal 2010
deficit that is 10% of GDP, and a national debt-to-GDP ratio that's approaching
1.0, he thinks that we need to be quite careful how stimulus money is targeted.
He suggests tax breaks aimed at small businesses. But job creation should be
paramount. If jobs can be created, consumer spending will follow, and the
economy will heal. Like Paul Krugman, he emphasizes that the situation we're in
is unprecedented, not just since World War II. He thinks this current quarter
will be flat, and the 4th quarter could well see negative GDP growth again... i.
e., a recession. He also points out that we still haven't officially been
declared out of the current recession. (He thinks the odds of a double-dip
recession are well above 50%. He recommends investing in dividend-yielding
companies, and in gold.)
For what it's worth, the Conference Board Forecast rules out double-dip recession
(written 8/3/2010):
"The Conference Board projects North America’s economic
growth this year at 3%, noting that the chance of U.S. seeing a double-dip
recession are 'minimal.' Read more: http://www.financialpost.com/news/Forecast+rules+double+recession/3354946/story.html#ixzz0wXsVwK6l"
2010-8-12:
Stocks fell again today on a disappointing weekly jobless claims report: U.S. initial weekly jobless claims rise to 484,000,
(but note that part of this increase is due to the extension of jobless benefits
to 99 weeks in the hardest-hit states). The NASDAQ
Composite lost 18.36
points (-0.83%)
to finish at 2,190.27. The Dow dropped 58.88
points (-0.57%)
to close
at 10,319.95, and the S&P 500
dipped 5.86
points (-0.54%)
to end at 1,083.61. Oil closed at $75.86 a barrel,
while Gold ratcheted up to $1,217. The VIX increased
0.3 to 25.69.
My investment advisory service noted that after
an initial plunge, the dip buyers moved back in. My advisory service thinks
this is another excursion within a range-bound market rather than a
"game-changer".
The chorus of columnists sounding Paul Krugman's theme is
swelling mightily lately: Gold rises as world spirals toward deflation.
Still, not everyone believes in government intervention: Let the debt subside.
Many still subscribe to the Little Bo Peep guidance: "Leave them alone and
they'll come home, wagging their tails behind them."
Paul Krugman has pointed to Ireland as an example of
a country that went down the austerity path several years ago. He argues that
austerity hasn't helped them much.
Read story on ECB buying Irish bonds to calm volatility.
"Ireland has been the poster child for many optimists
convinced that if a country has the necessary discipline and appetite then it
can address major problems itself," said Jim Reid, strategist at Deutsche
Bank. "While this may still be the case, there seems to be increasing
headline risks from an economy that was a very early mover in terms of
austerity." Read
archived story on concerns about Ireland.
Fixed mortgage rates hit new lows
RealtyTrac: No foreclosure peak until 2011
Stock futures are mixed, but are basically down tonight.
2010-8-11:
What a day! perhaps the best thing you can say about today's market action is
that although the markets tanked, they didn't break below their recent trading
ranges in the face of some pretty glum news. The NASDAQ
Composite parted with 68.54
points (-3.01%)
to finish at 2,208.63. The Dow plunged 265.42
points (-2.49%)
to close
at 10,378.03, and the S&P 500
exfoliated 31.59
points (-2.82%)
to end at 1,089.47. Oil closed at $77.55 a barrel,
while Gold ratcheted up to $1,207. The VIX increased
2.97 to 25.34.
Stock market futures are down roughly ½ % tonight.
Analysis: Fast-fading recovery now looks even weaker
Paul Krugman has
posted quite a bit today.
In Paul Farrell's article, Reagan
insider: GOP destroyed economy, Mr. Farrell quotes former Reagan
budget director David Stockman as he takes on his (Republican) party for an
alleged transition from the Republican principles of 40 years ago to their
virtual antitheses today. Mr. Stockman cites four deformations of the national
economy.
Stage 1. Nixon irresponsible,
dumps gold, U.S starts spending binge
The first deformation happened when Milton Friedman persuaded
President Nixon to go off the gold standard:
"So for the past 40 years, America's been living
'beyond our means as a nation' on 'borrowed prosperity on an epic scale ... an
outcome that Milton Friedman said could never happen when, in 1971, he persuaded
President Nixon to unleash on the world paper dollars no longer redeemable in
gold or other fixed monetary reserves.'
"Remember Friedman: 'Just let the free market set
currency exchange rates, he said, and trade deficits will self-correct.'
Friedman was wrong by trillions. And unfortunately 'once relieved of the
discipline of defending a fixed value for their currencies, politicians the
world over were free to cheapen their money and disregard their
neighbors.'"
Stage 2. Crushing debts from
domestic excesses, war mongering
The second deformation (according to Mr. Stockman) was "the
extraordinary growth of our public debt."
"Back 'in 1981, traditional Republicans supported tax
cuts,' but Stockman makes clear, they had to be 'matched by spending cuts, to
offset the way inflation was pushing many taxpayers into higher brackets and to
spur investment.' The Reagan administration's hastily prepared fiscal blueprint,
however, was no match for the primordial forces -- the welfare state and the
warfare state -- that drive the federal spending machine.'
(Former Fed Chairman Alan Greenspan has just stated his
opposition to extending the Bush tax cuts, saying that although he supports tax
cuts in general, he doesn't support paying for them with borrowed money. He also
repeats that he supported the original Bush tax cuts with the proviso that they
be accompanied by corresponding spending cuts, but that didn't happen.)
"Yes, the GOP does have a welfare-warfare state:
Stockman says 'the neocons were pushing the military budget skyward. And the
Republicans on Capitol Hill who were supposed to cut spending, exempted from the
knife most of the domestic budget -- entitlements, farm subsidies, education,
water projects. But in the end it was a new cadre of ideological tax-cutters who
killed the Republicans' fiscal religion.'
"But then 'the new tax-cutters not only claimed victory
for their supply-side strategy but hooked Republicans for good on the delusion
that the economy will outgrow the deficit if plied with enough tax cuts.' By
2009, they 'reduced federal revenues to 15% of gross domestic product,' lowest
since the 1940s. Still today they're irrationally demanding an extension of
those 'unaffordable Bush tax cuts [that] would amount to a bankruptcy filing.'
Stage 3. Wall Street's deadly
'vast, unproductive expansion'
"Stockman continues pounding away: 'The
third ominous change in the American economy has been the vast, unproductive
expansion of our financial sector.' He warns that 'Republicans have been
oblivious to the grave danger of flooding financial markets with freely printed
money and, at the same time, removing traditional restrictions on leverage and
speculation.' Wrong, not oblivious. Self-interested Republican loyalists like
Paulson, Bernanke and Geithner knew exactly what they were doing.
"They wanted the economy, markets and the government to
be under the absolute control of Wall Street's too-greedy-to-fail banks. They
conned Congress and the Fed into bailing out an estimated $23.7 trillion debt.
Worse, they have since destroyed meaningful financial reforms. So Wall Street is
now back to business as usual blowing another bigger bubble/bust cycle that will
culminate in the coming 'American Apocalypse.'
"Stockman refers to Wall Street's surviving banks as 'wards
of the state.' Wrong, the opposite is true. Wall Street now controls Washington,
and its 'unproductive' trading is 'extracting billions from the economy with a
lot of pointless speculation in stocks, bonds, commodities and derivatives.'
Wall Street banks like Goldman were virtually bankrupt, would have never
survived without government-guaranteed deposits and 'virtually free money from
the Fed's discount window to cover their bad bets.'"
Stage 4. New American Revolution class-warfare
coming soon
"Finally, thanks to Republican policies that let us 'live
beyond our means for decades by borrowing heavily from abroad, we have steadily
sent jobs and production offshore,' while at home 'high-value jobs in goods
production ... trade, transportation, information technology and the professions
shrunk by 12% to 68 million from 77 million.'
"As the apocalypse draws near, Stockman sees a
class-rebellion, a new revolution, a war against greed and the wealthy. Soon.
The trigger will be the growing gap between economic classes: No wonder 'that
during the last bubble (from 2002 to 2006) the top 1% of Americans -- paid
mainly from the Wall Street casino -- received two-thirds of the gain in
national income, while the bottom 90% -- mainly dependent on Main Street's
shrinking economy -- got only 12%. This growing wealth gap is not the market's
fault. It's the decaying fruit of bad economic policy.'"
Warning: this black swan won't be pretty, will
shock, soon
"His bottom line: 'The day of national reckoning has
arrived. We will not have a conventional business recovery now, but rather a
long hangover of debt liquidation and downsizing.'"
Paul Farrell's bottom line: ..."a historic class war.
So be prepared, it will hit soon, when you least expect."
I don't believe that Paul Farrell or David Stockman mean to
say that the Democrats are better than the Republicans. Rather, they're saying
that the Republican platform no longer embraces the fiscal prudence that
characterized it 40 years ago.
Today, Mr. Stockman has warned again about the deficit: Runaway train.
Obama insiders out of touch on U.S. economy
2010-8-11 (Afternoon):
Had a dental appointment this morning.
Global equity markets are off sharply today: Growth fears grip the globe,
.Shiller on double-dip
risk: It's now even money, and GDP
revision: Look out below!
Noted Yale economist Robert Schiller has just
upped the odds of a double-dip recession above 50-50, and states that
the Fed may not have the power to stop it. He's calling for a
jobs-creation stimulus package. At the same time, it's being announced
today that the second-quarter GDP figure, which yesterday's article, Wholesale data to deflate Q2 GDP, economists,
suggests may have to be lowered from 2.4% to 2.0%, is now tipped at
1.3%!
Like Robert Schiller, MarketWatch columnist Rex
Nutting is singing Paul Krugman's song about a Washington that's
fiddling while Rome burns: Fed can't do much more to avoid a double dip.
The Obama Administration can't actually stimulate the
economy between now and the November election, even if in doing so, they
wouldn't face a firestorm of public protest. So the Democrats are forced
to try to jawbone the public into thinking that the economy is
recovering, albeit a little slower than had been forecast.
My investment advisory service is treating this as
though it's a range-bound fluctuation that's taking the markets to the
bottoms of their ranges... unless it's a game-changer, in which case,
the markets could continue to fall.
2010-8-10:
The markets sold off a bit today. The NASDAQ
Composite shed 28.52
points (-1.24%)
to finish at 2,277.17. The Dow lost 54.5
points (-0.51%)
to close
at 10,644.25, and the S&P 500
exfoliated 6.73
points (-0.6%)
to end at 1,121.06. Oil closed at $80.23 a barrel,
while Gold ratcheted up to $1,207 The VIX increased
0.23
to 22.37.
Today's action was all about the FOMC (Federal Open
market Committee): Fed: Economy needs help:
"The Federal Open Market Committee announced it would reinvest
the proceeds of its investments in mortgage-backed securities as they
mature into Treasurys. By reinvesting the principal, the Fed prevents
its balance sheet from shrinking, but the move does little to provide
new financing to the economy. See
full story on the FOMC meeting.
"As
economic stimulus goes, this is pretty thin gruel.
"But the psychological impact is powerful. It signals that
the Fed won't raise rates anytime soon and is in fact willing to do more
to support growth as the economy slowly crawls out of the worst spot
it's been in for a long time."
The author continues:
"What has the Fed accomplished? It avoided a second Great
Depression, but large sectors of the economy are still struggling. It's
not clear what easier credit conditions can do to ease that
suffering."
For
a chuckle, try this: How to read a Fed statement.
I was ready to conclude that the fact that the Fed
doesn't intend to do more than it does implies that the FOMC can and
will insure that this recovery continues: Danielson: Fed showing investors it's on the job.
However, my investment advisory service is a little more cautious
tonight than I would have expected. For one thing, the yield on 10-year
Treasuries, after closing at a new low of 2.83% last week, hit
another new low of 2.78% today. Also, Treasury sells 3-year debt at lowest yield ever .For
another, the Fed's predictions for 2010 and 2011 are expected to be
revised lower. Of course, that's still a long way from zero, but we're
talking about inflationary expectations for the next 10 years.
Meanwhile, Minyanville's Matt Theal is telling us that the Smart money bets on inflation.
Can you imagine! Those silly bond traders haven't a clue that inflation
is getting ready to explode!
Paul Krugman's reaction to today's Fed announcement
is that "The
Fed’s current policy is grossly inadequate, logically bizarre, and
slightly — but only slightly — encouraging."
Families dig deep
This article is shocking! It places the 2009-to-2010
rise in college costs at 20%-to-30%! Todd Harrison's predictions of
social acrimony may bear fruit.
The jobless recovery won't go further without jobs:

This article notes that productivity gains peaked in
the spring of 2009, and have since fallen, as employers squeezed all
they could out of their existing workforces. Going forward, the only way
that productivity can increase is by hiring additional
employees.
Meanwhile, Marketwatch columnist Brett Arends marvels
at the lack of stock market response to the growing ranks of the
unemployed and underemployed:
Jobless alarms fall on deaf ears of investors.
Wholesale data to deflate Q2 GDP, economists
says that second-quarter GDP growth will probably have to be adjusted
downward from 2.4% to 2.0%. The company's estimate of 2.4% growth for
the current quarter will probably also have to be lowered to
2.0%.
In Killing geese that lay golden eggs,
Dr. Irwin Kellner is concerned that repealing the Bush tax cuts at the
end of this year could havge a chilling effect upon an already weakened
economy,
In Reagan
insider: GOP destroyed economy, Paul Farrell quotes former Reagan
Budget Director David Stockman. As discussed in the archives
(July 7-9, 2010), Mr. Stockman believes that the Great Depression and
the current Great Recession were brought on by too much debt, and that
the only workable antidote is letting well enough alone until the
economy somehow eliminates its debt load. (The Great Depression spawned
Adolph Hitler and led on to World War II. Are we willing to risk another
psychopathic dictator, and an all-out nuclear exchange?)
I feel that Mr. Stockman makes some interesting
remarks in his article.
Michael Ashbaugh observes that the trend is shaky but
is still up: S&P 500 has a tenuous
hold: Ashbaugh.
Market futures are down significantly tonight.
2010-8-9: The
markets rose a bit today, battling with overhead resistance. The NASDAQ
Composite added 17.22
points (0.75%)
to finish at 2,305.69. The Dow gained 45.19
points (0.42%)
to close at 10,698.75,
and the S&P 500
appreciated 6.15
points (0.55%)
to end at 1,127.79. Oil closed at $81.45 a barrel, while Gold
ratcheted up to $1,203 The VIX increased 0.4
to 22.14.
This first article, The promise of quantitative easing,
written by Todd Harrison, puts forth the idea that the S&P is heading for,
e. g., 860. Additional quantitative easing might drug the markets a little
longer, but they'll soon tank. Also, he's concerned about how the Wall Street
game is changing, along with new financial regulations. He mentions major
players who are withdrawing from the financial markets until they stabilize.
The second article, Consumers: Soon to feed through,
talks about rising food prices at the same time that wages are falling.
The third article, Beware the deflationary mindset,
warns that all this talk about deflation is setting up deflationary
expectations.
The fourth article, Significant chance of recession next 2
years: SF Fed, is suggesting the probability of a renewed depression in
2012.
Stock market futures are down a bit tonight.
2010-8-7 (Saturday): Like 10-year
and 30-year Treasuries, the yield on
2-year Treasuries also closed on Friday at a new
low (0.51%). Treasury yields are a function of interest rate
expectations and of "flights to safety". Right now, with
European sovereign debt no longer dominating the news, "flights to
safety" wouldn't seem to me to be driving interest rates lower,
which leaves interest rate expectations as the presumed motivator for
continuing interest rate declines.
Most money managers seem to be anticipating a period
of slow but steady growth in the economy, and modest inflation rather
than a double-dip recession and/or deflation: Economy awaits fresh boost after summer slumber.
This slow, steady-growth scenario is on the other side of the crystal
ball from Paul Krugman's predictions.
We'll see.
Looking ahead, with a stellar earnings season
(compared with the dismal performances a year ago) behind us, it's going
to take something besides earnings to boost the markets for the rest of
this month. My investment advisory service, which adjusts its strategy
day-by-day and week-by-week, has a moderate "buy" signal going
into the upcoming week.
2010-8-6: The
markets fell a little more today on another disappointing jobs report: U.S. sheds 131,000 jobs,
71,000 more
[private sector] jobs not enough to dent unemployment rate, and Millions have simply given up.
The U. S. needs to add between 100,000 and 125,000 new jobs a month to keep up
with population growth. The total unemployment rate didn't rise, but only
because so many people have given up, or have run out of unemployment
compensation benefits. Not all economists are pessimistic:2
Top Economists Differ Sharply on Risk of Deflation. However, the yield on
10-year Treasury bonds, which fell below 3% a few weeks ago, closed today at
2.83%: Treasury yields touch lows.
(Of course, Treasury-bond yields are a function of supply-and-demand, and can
change quickly.)
A chilling picture of what long-term deflation and stagnation
can do is afforded in this article: Japan's
Economic Stagnation is Creating a Nation of Lost Youths.
The only upbeat news today comes from mark Hulbert who
observes that the third year in a presidential cycle is always an up year
(but it's important to remember that many or most of these "always"
rules are based upon the past 60 years of Fed-controlled recessions).
2010-8-5: The
markets fell a little today on disappointing weekly job claims and a
tepid retail sales ahead of tomorrow's key employment report: Stocks register displeasure. The NASDAQ Composite
parted with 10.51
points (-0.46%)
to finish at 2,293.06. The Dow declined 5.45
points (-0.05%)
to close
at 10,674.98, and the S&P 500
shaved off 1.43
points (-0.13%)
to end at 1,125.81. Oil
closed at $82.41 a barrel, while Gold ratcheted up to
$1,198 The VIX dipped 0.11
to 22.10.
My investment advisory service believes that there's still
air left in this rally's tires.
30-year fixed-rate mortgage lowest since 1971
is consistent with the possibility of deflation, and Treasurys up; jobless claims increase concerns
notes that:
"Expectations of further quantitative easing
have supported both the bond and equity markets. But this isn't likely
to last forever. Either bonds will be proved right on deflation and
equities will sell off or equities will be proved right about a better
economic environment and bonds will be hit hard."
Market futures are neutral tonight ahead of tomorrow's
payrolls data: Mostly bad news tipped for jobs data
2010-8-4: The
markets rose more today than they fell yesterday. The NASDAQ Composite
hopped 20.05
points (0.88%)
to finish at 2,303.57. The Dow skipped up 44.05
points (0.41%)
to close
at 10,680.43, and the S&P 500
jumped 6.78
points (0.61%)
to end at 1,127.24, putting it nicely above its 1,120 resistance level. Oil
aclosed at $82.41 a barrel, while Gold ratcheted up to
$1,198 The VIX rose 0.42 to 22.21.
Could the wild card in the current financial imbroglio be the
Fed? The moves that the Fed could make are allegedly expensive and unproven. The
Fed wouldn't seem to me to have a politician's incentives for political spin.
Ben Bernanke has recently been confirmed for another term as Fed Chairman. At
the same time, Chairman Bernanke has recently gone on record predicting a
3%-to-3.5% growth in U. S. GDP for 2010 and a 4.0%-to-4.5% growth in U. S. GDP
in 2011.Is he right? It seems impressive to me that the markets, which
look 6 to 9 months ahead, haven't plunged, and in fact, have broken out of their
recent trading ranges and are headed back up. It's also the case that there's a
lot of bearish sentiment about the outlook for the future.
Stock market futures are down slightly tonight.
2010-8-3: The
markets retrenched a tad after yesterday's 2% run-up: Stocks rally chilled by economic jitters. The NASDAQ Composite
dropped 11.84
points (-0.52%)
to finish at 2,283.52. The Dow dipped 38
points (-0.36%)
to close
at 10,636.38, and the S&P 500
deflated 5.4
points (-0.48%)
to end at 1,120.46, putting it right at its resistance level. Oil
advanced to $82.34 a barrel, while Gold exuented stage
left at $1,188 The VIX rose 0.62
to 22.62.
Market
Medics: Why bonds tell a better story summarizes the conflicting
stories that the stock market and the bond market are telling. Stocks
(says the article) have risen on the backs of global government
spending. Now, though, not only is that global government stimulus
running out, but in addition, many governments (including the Chinese
and the Australian governments) are tightening to head off potential
inflation. This fiscal austerity, by placating the postulated "bond
vigilantes", was supposed to elevate interest rates on bonds.
Instead, interest rates on two-year Treasuries have dropped dramatically
since April, tilting toward deflation.
This article sounds the Krugman theme that a
double-dip recession, or at least deflation, may be coming, after all.
In this blog: Permanent Link to Why Is Deflation Bad-,
Dr. Krugman explains why deflation isn't a good idea. But for a
quick-and-dirty glimpse of this, take a look at Japan's two "Lost
Decades".
Michael Ashbaugh's weekly technical column notes that
the major indices have cleared their resistance levels, but they've done
so on unusually light volume, raising questions about how meaningful
these breakouts have been: S&P 500 clears resistance without volume.
Irwin Kellner continues to forecast a grim denouément
to the current stock market story in Politics threatens economic recovery,
as does MarketWatch' Wall Street columnist David Weidner: Market's rise is a rally without a cause.
Of course, stock markets climb "walls of worry", but as I've said a
time or three, this time really is different. This time, for the
first time since The Great Depression, the Fed is out of conventional
ammunition.
Market futures are neutral this evening.
2010-8-3 (Late Afternoon):
My investment advisory service terms this a "news-driven
environment". Today's news is pointing toward deflation, with
downward revisions to past personal incomes and to prior values for the
consumer price index: Income, spending standstill.
This article, Orders to U.S. Factories Decrease More Than Estimated in Sign of Cooling,
has just appeared.)
Paul Krugman published this commentary, Permanent Link to Always Look On The Bright Side,
this morning critiquing Treasury Secretary Geithner's article: Welcome
to the Recovery. Secretary Geithner is... wait for it!... optimistic
about the continuing recovery. Paul Krugman is taking him to task for
knowingly dissembling the facts about the economy: that the stimulus
package was a couple of sizes too small, and that the Republicans are
blocking attempts to provide the additional stimulus needed to bring the
economy out of the pits. But my personal take is that the Democrats have
decided to fall back and punt. The midterm elections are three months
away. I suspect that party strategists have decided that it would be
political suicide to admit now that President Obama didn't ask for a
large enough stimulus last year, and to blame Republicans for blocking
further stimulus infusions. Democratic Party strategists might be
thinking that the best the administration can hope for right now is to
proclaim victory and to hope that the economy doesn't turn into a
shambles between now and November... which means that further
administration steps to invigorate the economy may be off the table for
the next three months. In that vein, I suspect that Treasury Secretary
Geithner is trying to buy some time: Geithner
Says U.S. Unemployment May Rise Again Before Declining.
David Weidner writes: Market's rise is a rally without a cause,
and Mark Hulbert observes: Wall of worry weaker after big rally.
2010-8-2:
" ...and the dish ran away with the spoon." The stock market
jumped about 2% today: An august day for stocks.
The NASDAQ Composite
gained 40.66 points (1.8%)
to finish at 2,295.36. The Dow lost 208.44
points (1.99%)
to close
at 10,674.38, and the S&P 500
rose 24.26
points (2.2%)
to end at 1,125.86. Oil vaulted to $81.46 a barrel, while Gold
rode into the sunset at $1,184 The VIX fell 1.49
to 22.01.
Why did the equity markets soar today? Because I was
pessimistic this morning about their prospects. Works every time (except when it
doesn't).
This first article, Big
Investors Fear Inflation, cited by Paul Krugman, says,
Some of the world's leading investors are becoming more worried about deflation
and are re-shaping their portfolios to prepare for a possible period of falling
prices.
"Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and
hedge-fund managers David Tepper and Alan Fournier are among the best-known
investors who are bracing for a possible bout of deflation, a development that
could cripple global economies and world stock markets.
"The investors cite weak economic figures and a
mounting consensus that global policy makers are reluctant, or unable,
to take further steps to boost economic growth as reasons for their
market positions.
"'Deflation
isn't just a topic of intellectual curiosity, it's happening," says
Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return
Fund, citing an annualized 0.1% decline over the past two years in the
U.S. consumer-price index. "It's an uncertain world that's tipping
toward deflation.'"
The second article, Bernanke to U.S.
states: Sock it away,
quotes Dr. Ben Bernanke saying that "consumer spending is set to sustain
the economic recovery." Given that Dr. Bernanke's position is
apolitical--he was appointed by the Bush Administration,--his assessment is
backed by the weight of his reputation.
The third article, Double-dip fears
overblown?, observes that if the private hiring component of Friday's
payroll number is positive, then it means the economy is still expanding.
My investment advisory service has concluded that today's
action indicates that we're not heading for a double-dip recession.
Stock market futures are slightly lower tonight.
2010-8-1:
The articles below tell an interesting story.
The first article, A Sin and a Shame,
written by the New York Times' Bob Herbert, explains that corporate
managements have used The Great Recession as an excuse to squeeze their
workforce to get more and more out of them. This is why corporations are
sitting on piles of cash. But I suspect that this is an object lesson in
why, even with all its warts, government intervention is essential. If one
corporation improves its bottom line by transferring more of its operations
overseas, its competitors have to fall in line or fall behind. For the economy
as a whole, this is bad because it reduces the number of employed consumers who
have the money to buy the corporation's products. But individual corporations
have to maximize their own profits, and leave it to someone else to regulate the
system: U.S. job growth still lagging.
The second article, The closer you look at the GDP report, the uglier it gets,
points out that consumer spending rose at a slow, and slowing (throughout
the quarter) pace during the second quarter. Furthermore, the principal
contributors to GDP growth were inventory replacement, fiscal stimulus,
and residential investment as homebuyers hurried to take advantage
of the homebuyers tax credit. In this current quarter, fiscal stimulus
is no longer present, and state and local governments which, thanks to
federal stimulus money, were slightly positive during the first half of 2010, are cutting
back sharply now that the federal stimulus money is no longer there. Here are three more articles in the same vein: Steep decline in GDP growth raises alarms,
What Today's GDP Report Says,
and Double-dip feared as US economic growth loses pace.
On the other hand, this article, Needed:
Better GDP Growth, in Barron's, argues that what we're seeing is
typical in this stage of a recovery. This article is no longer available
without a subscription to Barron's, but here's the part that is
available:
"'THE GDP REPORT MAY EASE
some fears that the U.S. is heading for a double-dip recession….But it also
confirms widespread concerns about a sharp economic slowdown,' commented
The Wall Street Journal.
"That news item could have been responding to Friday's report on GDP
growth in this year's second quarter. But it actually appeared in early February
2003. Widespread concerns about an economic slowdown seemed even more warranted
at the time, because growth in gross domestic product had been running much
slower. We know now that the sharp economic slowdown then expected turned out to
be a sharp acceleration by the ... "
I'm thinking that a highly important fact is buried in this article.
It sounds to me as though the author, Gene Epstein... and by extension,
Barron's, and perhaps, other fountainheads of financial interpretation
such as Marketwatch and the Wall Street Journal... have
forgotten to mention that this recession differs not only in
degree but in kind from any previous recession since World War
II. Last year, the Fed fired its last conventional bullet against the
bear, and it didn't stop the bear. (In fact, it hardly seemed to slow
the bear.) This means that comparisons with previous post-WWII
recessions may not be applicable. We're up against what Paul
Krugman dubs the "zero lower bound". I remember well the news
in early 2003. There was talk about the danger that Alan Greenspan's Fed
couldn't rekindle the economy... about "pushing on a string".
The question then was, as it is now, whether interest rates could be
lowered far enough to revive the economy. Dr. Greenspan's Fed found it
necessary to lower the Fed funds target rate to 1% and to hold it at
that level for over a year. (Dr. Greenspan has been roundly criticized
for holding the overnight lending rate so low for so long, and
that criticism may be well justified, but I remember the angst over
whether or not he would be able to re-ignite the economy. And we now
know that for all practical purposes, a 1% interest rate is about the
equivalent of 0%.)
Of course, once "Uncle Alan" lowered
interest rates, the economy rose sharply. But this time, we can't depend
upon "Uncle Ben" to pull our chestnuts out of the fire. He's
already tried and it didn't work.
This isn't to criticize Gene Epstein or Barron's for
comparing this recession with previous recessions. I didn't twig to this
caveat when I first read Mr. Epstein's article. I should have recognized
the problem the minute I read the article, but it wasn't until a few
hours later that I realized that we can't compare what's happening now
with what's happened in previous post-WWII recessions.
To summarize:
(1) In 2003, in the midst of a recession that was milder than the
current "Great Recession", the Fed fired its last conventional
bullet at the bear and it worked ("bearly"?) This time, it
didn't.
(2) Many of the prognostications being issued for the economy
going forward are probably based upon the prior experiences of the
prognosticators, virtually all of which is based upon Fed-controlled
recessions since World War II.
The Barron's article is suggesting a
second-half pace of GDP growth of 3.2%. It also states that a double dip seems
increasingly improbable. And finally, it observes that if second-half
growth is closer to 1.6% we may expect to see a rise in unemployment to,
e. g., to 9.8%.
"Conventional" Fed
Tools
I'm mentioning "conventional" Fed tools
because the Fed still has some (costly and untried) unconventional tools
available to it which it hasn't yet chosen to try.
Bottom Line:
Appealing to what's happened in past recessions to
chart the course of this recession doesn't appear to me to be a winning
strategy.
There will be one more week of heavy earnings
reporting and then the second-quarter earnings season will be winding
down.
For the coming weeks,
U.S. stock market to continue balancing act,
Investor sentiment rises,
and
Emerging markets, on healing path, climb in July
My investment advisory service explains that the
reason the markets haven't rallied on our excellent corporate earnings
may be
(1) that they're anticipating the situation 6 to 9 months out when the
major gains will already be behind us, and
(2) that traders may be uncertain about the macroeconomic outlook.
2010-7-30:
The markets ended today about where they started. The NASDAQ Composite
gained 3.01
points (0.13%)
to finish at 2,254.70. The Dow lost 1.22
points (-0.01%)
to close
at 10,465.94, and the S&P 500
rose 0.07
points (0.01%)
to end at 1,101.60. Oil ended at $77.96 a barrel, while Gold
said goodbye at $1,180 The VIX fell
0.63
to 23.60.
While the chart below shows a steady decline, that's only
because the first-quarter GDP was revised upward to 3.7%. If that can happen to
first-quarter GDP in the third quarter, why can't it also happen to
second-quarter GDP in the fourth quarter? If second-quarter GDP were revised
upward in October from today's 2.4% to 3.4%, suddenly, the chart below would
show a flattening-out, consistent with a recovering economy..
2010-7-30 (Morning):
Dr. Kellner missed the call today. Second-quarter GDP came in at 2.4%, or
very close to the 2.5% that had been forecast for it. Also, the Chicago
Purchasing Managers' Index was a little better than expected, and consumer
confidence, while down for July from June's anomalously high reading, was better
than expected. Nevertheless, there was initial consternation because the first
quarter's GDP was revised up to 3.7% from 2.7%, leading to the
chart shown below.

This chart suggests a steady decline, projecting a negative
GDP for the fourth quarter. However, these numbers are so subject to revision
that such apparent trends aren't entirely convincing, and the stock markets are
recovering.
2010-7-29:
Stocks ended the day down a little, but not drastically lower: Stocks end red, off lows.
the NASDAQ Composite
down 12.87
points (-0.57%)
to finish at 2,251.69. The Dow lost 30.72
points (-0.29%)
to close
at 10,467.16, and the S&P 500
fell 4.6
points (-0.42%)
to end at 1,101.53. Oil ended at $78.28 a barrel, while Gold
ended at $1,169 The VIX closed at 24.13.
"The U.S. is closer to a Japanese-style outcome today
than at any time in recent history," said James Bullard, the president of
the St. Louis Federal Reserve Bank, in a research paper: Bullard says U.S. close to Japan-style deflation.
What got everyone's attention today is the fact that James Bullard has been a
deficit hawk, calling for fighting inflation by raising interest rates.
Other Fed players such as Charles Plosser and John Williams (Fed's Williams sees bump, not swerve, in recovery)
are still deficit hawks, and are vocal in belittling the chances of deflation.
But as explained in Monetary
policy, the majority of voting members of the Fed, including John
Williams boss, Janet Yellen, are worried about deflation, and when the Fed meets
again week after next, might possibly announce plans for "Quantitative
Easing". Or the Fed may choose to wait longer to see whether or not
deflation is in the cards. As shown below, inflation is currently quite low, but
it's still north of zero.

Economist Gary Schilling is also predicting deflation: Gary
Shilling: Investing Advice for a Deflationary Economy.
For an alternative perspective: Why Deflation Fears Are Overblown.
In the meantime, I'm waiting to see what will happen with
tomorrow's GDP number: Recovery is spelled G-D-P.
Stock market futures are down a little tonight.
2010-7-29 (Noon):
After rising 1% on opening, stock indices fell about 2% from their peaks
this morning: U.S. stocks fall on reports of Fed deflation talk,
What to
believe? bonds or equities (video)? and disappointing results for a
few staples stocks. The first article refers to the fact that the
Federal Reserve's president, James Bullard, reiterated that the Fed
might need to buy Treasury bonds, etc., if deflation continued to
threaten. (This is like your three-year-old saying, out of the blue,
"Everything's all right. There's nothing wrong. I'm just
fine.") The second article says, that the bond market is signaling
deflation, while the stock market is pointing toward a subdued but
continuing recovery. In the past, the bond market has usually had better
predictive value because it was populated with professional traders, but
by now, retail investors have fled the equity markets, leaving them also
dominated by professionals.
The unemployment number was 457,000 this
morning compared to 464,000 last month, and Irwin Kellner's
forecast of 460,000. (His forecast for tomorrow's
2nd-quarter GDP is a 2.0% bombshell compared to the consensus
forecast of 2.5%.)
2010-7-28:
The markets ended the day lower,
with the NASDAQ Composite
down 23.69
points (-1.04%)
to finish at 2,264.56. The Dow lost 39.61
points (-0.38%)
to close
at 10,497.88, and the S&P 500
fell
7.72
points (-0.69%)
to end at 1,106.12. Oil ended at $76.77 a barrel, while Gold
ended at $1,166 The VIX closed up at 24.26.
Sam Stovall repeats his warnings about August and September
as "down" months, and advises using them to buy stocks for the
year-end rally: Stovall: Work on strategy, not your tan.
Kleintop: It's a soft spot, not a trend
echoes the ideas in Investor,
Be Nimble. This latter article observes that corporate CEOs are much
more confidant than is the average consumer, and that the mood among CEOs is a
leading indicator, whereas the consumer confidence level is a lagging indicator.
The latter article also points out that emerging markets are climbing rapidly.
2010-7-28 (Early Afternoon):
In Earnings offer little clue to the future,
Dr. Kellner presents a table giving his forecasts for this week's
economic numbers. So far, they've held up tolerably well. For Monday, he
predicted home sales up about 7%; they were actually up 23%. For
Tuesday, he predicted consumer confidence at 50%; it was actually (and
disappointingly) 50.1% rather than the widely expected 52%. For
Wednesday, he predicted that durable goods orders would be up 0% vs. an
expectation of +0.1%; they were actually down 0.1% (i. e., -0.1%).
For Thursday, he expects jobless claims to be about the same as they
were last quarter. For Friday, he anticipates 2nd quarter GDP growth to
be 2.0% versus the consensus projection of 2.5%. (I suspect that a
2nd-quarter growth rate of 2.0%, if it should happen, would be a
bombshell for the marketplace.) He also estimates the Chicago Purchasing
Managers' Index down 1.6%
to 57.5% from the first quarter's level of 59.1%.
So far, my investment advisory service considers
today's tug-of-war to be expected, with dip buyers moving in to keep the
indices from falling very far.
This article, Market may break out of range with a sledgehammer,
argues that the markets are holding up well in the presence of
disappointments, and that it maysoon break up to large gains.
This article, Investor,
Be Nimble, posits that corporate CEOs are bullish regarding the
economy, and that now is the time to be positioned for a continuing
recovery.
This article, U.S. stock market lingers lower after Fed report,
advises that the Fed is less optimistic about the economy than it was in
June, with growth stalled out in some areas of the country: Growth slows, stalls in some
regions: Beige Book.
2010-7-27:
The markets ended the day in neutral (Street battles to keep gains),
with the NASDAQ Composite
down 8.18
points (-0.36%)
to finish at 2,288.25. The Dow gained 12.26
points (0.12%)
to close
at 10,537.69, and the S&P 500
slipped 1.17
points (-0.1%)
to end at 1,113.84. Oil ended at $77.55 a barrel, while Gold
closed down at $1,164 The VIX closed at 23.19.
In Nasdaq, Dow show signs of a bullish shift,
Michael Ashbaugh suggests that now that the NASDAQ and Dow indices have closed
above their 200-day moving averages, they are looking more bullish.
Irwin Kellner notes that Earnings offer little clue to the future,
The excellent earnings being reported in July reflect information that is "already
four months old and trends that are even older". He's standing by his
prediction that there will probably be another down leg in this recession. This
outlook is consistent with tonight's article: Consumer confidence dips.
On the positive side: Revolution
Investing: Fear not (video) and Stovall: History's on our side,
but not until November. (August and September are the two worst months for the
stock market in the year.)
Market futures are slightly lower tonight.
2010-7-26:
The markets rose again today. The NASDAQ Composite added 26.96
points (1.19%)
to finish at 2,296.43. The Dow gained 100.81
points (0.97%)
to close at 10,525.43,
and the S&P 500 regained
12.35
points (1.12%)
to end at 1,115.01. Oil ended at $79.05 a barrel, while Gold
closed down at $1,187. The VIX fell 1.12
to 23.51.
The most
important piece of news today may be the fact that my investment advisory
service advises that the correction that began in April is fading. They're
maintaining and re-emphasizing their "buy" signal. Meanwhile, Second quarter gets no respect.
This article about BP CEO Tony Hayward is significant
primarily in terms of what the author says about U. S. executive compensation: Hayward likely wanted this all
along: Arends.
2010-7-25 (Sunday Night):
U.S. economy seeing gradual
recovery: Geithner, and Watch Geithner on Meet the
Press, and U.S. stocks upbeat on earnings, cautious on data.
In discussing whether or not the recovery is still with us,
we might want to note that in order to have a correction, professional
money managers must be convinced that the economy and the markets are going to
tank. Similarly, to generate rising markets, the pros have to be convinced
that things are going to improve from here. However, it had been anticipated
that the economy would slow down once the stimulus effects ran out and the
restocking of inventory was complete. A retrenchment of expectations should have
come as no surprise.
Stocks have moved above their 50-day (intermediate-term)
moving averages, but their 200-day (long-term) MA's are still moving down. The
200-day moving average for the S&P 500 lies at about 1,120, or about 18
points above where it closed last Friday.
As this article shows, Market will 'drift for the rest of summer',
more than ¾-ths of the S&P 500companies that have reported in so far have
topped earnings estimates, and ⅔-rds have beaten revenue expectations.
However, three companies have lowered third quarter estimates for every one that
has raised them. (The end of this coming week should give a better picture of
what second-quarter earnings have been.) Of course, second-quarter earnings are
a reflection of the past, including the effects of the fiscal stimulus and the
restocking of inventories. Third-quarter earnings should reflect a more-normal
set of conditions.
Then there's this: Stocks
on brink of breakout. And Treasury Secretary Geithner is saying, No new recession, let tax cuts
die: Geithner. Of course, Secretary Geithner had better
convince the public that the recovery is on track or the Democrats will be toast
in November.
This article, With Stocks, It's Not the Economy,
makes the interesting case that because of globalization, the S&P 500
companies now derive about ½ of their revenues from outside the United
States. Consequently, the domestic economy is no longer tied to the stock
markets the way it was in the past. Perhaps Paul Krugman could be correct about
the faltering U. S. economy, and at the same time, the U. S. stock market could
rise because of greater prosperity elsewhere. Martin Wolf is echoing the same
refrain and expressing the same frustrations as Paul Krugman in this article: The
political genius of supply-side economics.
The article, Obama, Republicans spar over jobs, contains the interesting claim that President
Obama stated last year that his fiscal stimulus program would generate
1,000,000 more jobs in the near term.
As China grows, massive hurdles loom
The markets are up slightly tonight.
2010-7-23:
Stock markets rose again today, bumping against resistance
The NASDAQ Composite added 23.58
points (1.05%)
to finish at 2269.47. The Dow gained 102.32
points (0.99%)
to close at
10,424.62 (Dow within 4 points of erasing 2010 losses),
and the S&P 500
regained 8.99
points (0.82%)
to end at 1,102.66. Oil ended at $79.05 a barrel,
while Gold
closed down at $1,187. The VIX fell 1.12
to 23.51.
Tonight is Friday night and the commentators have gone
home for the weekend. All we can say is that the markets closed a little
higher tonight than they have for the past month: Stress
tests: Seven failures, and Stocks hot after stress test..
If this has been simply a correction and stocks
resume their upward march, it would mean that the global stimulus has
been sufficient to re-ignite the global economy, and it would call for a
rethink concerning who's right and who's not. But tonight, all we can do
is wait and see.
It may be worth knowing that 70% of all the trading
that takes place on Wall Street these days is high-frequency
(computer-enacted) day trading. It may also be worth knowing that
news organizations such as Reuters offer high-priced, special
information news services for large-scale investors, whose computers
automatically evaluate the news as positive or negative. This would seem
to me to offer the potential for manipulating the markets by feeding
slanted information to these computers, with principals at the news
agencies having already bought or sold before releasing their privileged
information to their clientele.
2010-7-22:
Stock markets reached for the sky today after good earnings reports and
improved outlook statements from both home and abroad: Blue chips leap 200,
Economic data power Europe surge.
The NASDAQ Composite jumped 58.56
points (2.68%)
to finish at 2245.89. The Dow gained 201.77
points (1.99%)
to close at
10,322.30,
and the S&P 500
reclaimed 24.08
points (2.25%)
to end at 1,093.67. Oil ended at $79.05 a barrel,
while Gold
closed at $1,195. The VIX fell 1.01
to 24.63.
My investment advisory service has underscored its existing
"buy" recommendation. Of course, it will take follow-through and more
than one day to set the stock market on an upward trajectory. And a continuing
recovery would fly in the face of many a pundit.
In Ben we trust. What
this article argues is that Ben Bernanke's remark about an unusually
uncertain outlook for the economy belies the calm assurances that Fed officials
have given that the recovery is on track, The article avers that traders reacted
to this surprise yesterday, driving down the equity indices.
Dr. Bernanke reaffirmed his forecast that there won't be a
double-dip ahead, and that GDP growth for 2010 will average 3% to 3½ %, and for
2011, will run between 4% and 4½ %.
Double-dip
recession? Not so fast. This article claims that April saw the end of the
first, rapid-rebound phase of the recovery , and a shift into the second,
slower-growth phase. The article also suggests that the low interest rates on
Treasury bonds may lubricate the recovery by encouraging business investment.
Stock market futures are neutral tonight.
2010-7-21:
Stock markets fell today after less-than-encouraging words from Fed
Chairman Bernanke: Bernanke view riles Street.
Dr. Bernanke "failed to articulate any further steps to spur growth, as
some had hoped". Fed stands ready to act.
The NASDAQ Composite fell 35.16
points (-1.58%)
to finish at 2,187.33. The Dow lost 109.43
points (-1.07%)
to close at
10,120.53,
and the S&P 500
parted with 13.89
points (-1.28%)
to end at 1,069.59. Oil ended at $77.75 a barrel,
while Gold
closed at $1,192. The VIX added 1.71
to 25.64.
"Federal
Reserve Board Chairman Ben Bernanke said Wednesday that the outlook for the U.S.
economy is "unusually uncertain" and that the Fed is willing to do
more if growth proved to be weaker than forecast."
Mark Hulbert observes that sharp drops in consumer confidence
are more often than not, followed by stock market gains: Consumer confidence for contrarians
2010-7-21 (Afternoon):
Dr. Krugman has added this item, Permanent Link to Remote Control,
about the way the media distort reality. An Associated Press article states:
"Even though the prospects of deflation — a widespread and prolonged
drop in prices for goods, the value of stocks and homes and in wages — is
remote, some Fed officials are worried about it." Dr. Krugman asks: how
remote is deflation is, given this chart?

2010-7-21 (Morning):
Paul Krugman's charts showing that FDR's "New Deal" paid for
itself (Permanent Link to Depression Debt)
suggest a little further attention:
.
Incidentally, the reason that the
national-debt-as-a-percentage-of-GDP exploded during the Hoover
Administration wasn't because the Republicans were spending so much but
because the country's GDP was falling so fast. And the reason that
national debt leveled off when the FDR Administration was spending so
much on fiscal stimulus was because the country's GDP was rising so
fast.
Dr. Krugman also included a chart (Permanent Link to More Depression Debt,
see below) showing the cost of servicing the national debt under FDR:

The cost of servicing the national debt peaked the
year FDR took office.
In my experience, there's a great deal of public
confusion over the national debt. For decades, if you wanted to make
mail order money, all you had to do was warn about the way politicians
kept adding to the national debt each year, spending more and more
annually, rather than paying down the national debt. "This
fiscal folly can't continue!" you would thunder. "The
country is on its way to bankruptcy, and for only $99.95 a year, I'll
show you how to survive and prosper during the coming economic
breakdown." But of course, politicians can safely keep
adding to the national debt each year as long as long as the ratio of
national-debt-to-GDP doesn't rise. Also, interest rates play a role.
Relatively low interest rates mean relatively low costs to the
government of servicing the national debt.
The three squibs below recount Goldman Sachs
forecasts for the economy.
Four days ago (Permanent Link to De Facto Double Dips),
a Goldman Sachs analyst estimated the growth in GDP for the second half
of 2010 at 1½ %.
Two days ago, another Goldman Sachs research report (Permanent Link to Why I Worry)
estimated that the federal fiscal stimulus program has added 2½ %
annualized to the U. S. economy through last month. Going forward, they
estimate that GDP growth during the last half of 2010 and the first half
of 2011 will be about 2¾ % less than it was in the first half of
this year provided that
(1) additional federal aid is provided to state and
local governments to help them through this "time of
troubles";
(2) unemployment benefits are extended; and
(3) Most of the Bush tax cuts aren't allowed to
expire this year.
This morning, Goldman Sachs has concluded (Permanent Link to Fiscal Drag)
that federal aid to state and local governments won't be forthcoming,
and that that will subtract almost another percent from the rate of
growth of GDP over the next year... or not quite 3¾ % less than it was
in the first half of this year.
Does that sound like recession?
Later:
The
Fed is forecasting GDP growth of 3% to 3.5% this year, while private economists
are projecting 2.6%.
2010-7-20:
The markets rose again today: Fed speculation lifts stocks.
The NASDAQ Composite gained 24.26
points (1.1%)
to finish at 2,222.49. The Dow climbed 75.53
points (0.74%)
to close at
10,229.96,
and the S&P 500
added 12.23
points (1.14%)
to end at 1,083.48. Oil ended at $77.75 a barrel,
while Gold
closed at $1,192. The VIX subtracted 2.04
to 23.93.
Mark Hulbert writes, Deflation camp gets powerful new ally.
Jeremy Grantham has converted from worrying about inflation to worrying about
deflation.
U.S. 10-year yields fall to new 15-month low
of 2.9% interest. This isn't automatically a harbinger of deflation. It could
also signal greater fear and a flight to safety.
| Double dip is doubly
certain: Robert Murphy
Irwin
Kellner: Too much, too soon. Dr. Kellner has joined the ranks of the
double-dip forecasters. (It's worth noting that he correctly predicted the
rebound in the spring of 2009.)
Michael Ashbaugh: U.S. benchmarks confirm primary downtrend.
Not everyone expects a double-dip recession: Mark Luschini on double-dip odds.
Canada, in better shape than the United States, has just raised interest rates
for a second time: Bank
of Canada raises
interest rates (to 0.75%).
Also, relevant to Moody's downgrading of Irish sovereign debt
(Moody's
cuts Dublin's
debt): Irish bond auction goes well
Meanwhile: Senate poised to extend jobless benefits.
Brett
Arends: Crocodile tears for the rich explains that "according to an
analysis by the Central Intelligence Agency, the U.S. has one of the most
unequal income distributions in the world. The U.S.? Our income distribution is
more in line with Zimbabwe, Argentina, and El Salvador. As for all those
millions out of work: Maybe they can get jobs as servants."
Paul Krugman has two very interesting charts tonight in Permanent Link to More Depression Debt.
The first chart shows that the national-debt-to-GDP ratio rose rapidly under
President Hoover's conservative program, and didn't rise under President
Roosevelt's lavish stimulus program. The reason? GDP rose faster than the
national debt, allowing the ratio to remain essentially constant. This
highlights the (in my opinion) dangerous current fallacy that if we keep
running up deficits, it will increase the national-debt-to-GDP ratio. In the
first place, about one-third of the money spent to stimulate the economy will
end up back in the Treasury because of income taxes, and in the second place, if
the money is wisely spent, the boost in GDP may more than offset the rise in the
national debt. (The U. S. national debt is currently about 40 times as large as
it was at the end of World War II, but what counts isn't the absolute value of
the national debt but the debt-to-GDP ratio.) This isn't like borrowing money to
take a trip to Tahiti. This is (or can be,, I think, if spent on competitive
infrastructure) like borrowing money to invest in new equipment to boost
corporate revenue and profits.

Farrell: Goldman's dream-inception technology
2010-7-19:
The markets rose today. Stocks rebound after slide
The NASDAQ Composite gained 19.18
points (0.88%)
to finish at 2198.23. The Dow climbed 56.93
points (0.56%)
to close at
10,154.43,
and the S&P 500
added 6.37
points (0.6%)
to end at 1,071.25. Oil ended at $76.46 a barrel,
while Gold
closed at $1,184. The VIX subtracted 0.28
to 25.97.
You may recall that Dr. Krugman cited Ireland as a
country which embraced austerity two years ago, and which should, if the deficit
hawks are correct, because of their fiscal austerity be enjoying higher credit
ratings than the other four PIIGS (Portugal, Ireland, Italy, Greece, and Spain):
Moody's
cuts Dublin's
debt. Dr. Krugman took issue with that claim and noted that Ireland's
sovereign debt was no more highly regarded than that of Spain or Portugal.
The rest of these articles are self-explanatory.
Hungarian assets tank as IMF, EU talks collapse
Premier trumpets China's economic slowdown
Buy and hold is getting old
My investment advisory service clearly made an ill-timed
call when it recommended buying into this rally. It considers the markets to
currently be in a trading range from which they will break out above or below.
Unfortunately, that has all the predictive potential of a fortune cookie.
My personal bias is that it's time to be in cash until the
future direction of the economy is more easily discernible.
Here's another up-to-date Goldman Sachs assessment of
what to expect from the U. S. economy:
"By our estimates, (federal) fiscal policy has
contributed +2½ percentage points (annualized) to real GDP growth from early
2009 to mid-2010. From mid-2010 to mid-2011, we estimate an impact of about -¼
percentage point—i.e. 2¾ percentage points less than before—even under our
baseline assumptions of extended unemployment benefits, more aid to state
governments, and at least a temporary extension of the bulk of the 2001-2003 tax
cuts. We need a lot of improvement in private sector activity to offset this
swing, and at the moment it unfortunately doesn’t look like we’re getting
it."
This is taken from today's Paul-Krugman commentary: Permanent Link to Why I Worry.
Market futures are slightly negative tonight.
Summarizing the State of
the Economy
Saturday, July 17, 2010
Here is an excellent up-to-the-minute posting by Dr. Paul
Krugman:
De
Facto Double Dips
"From Ed McKelvey at Goldman Sachs, which has been very good at
calling recent economic trends (no link):
'Real GDP growth appears to have dropped below its 2½%-3% long-term
potential range last quarter, judging from the latest data on retail sales
and foreign trade. We have cut our estimate for second-quarter growth
from 3% to 2% (annual rate).
'This slowdown is occurring just ahead of the loss of growth support from
fiscal stimulus and the inventory cycle that we have been anticipating would
occur at midyear. With the various headwinds to private-sector growth
(excess vacant housing, state and local budget stresses, lack of lending,
reluctance to hire) still firmly in place, we reaffirm our view that real
GDP will grow at only a 1½% rate during the second half of 2010, and we
worry that reacceleration in 2011 will not occur as now projected.
'Despite these growing downside risks, US authorities do not exhibit much
urgency to apply more policy stimulus.'
"Let’s be clear: a recovery that involves growth so slow that
unemployment and excess capacity rise, not fall, isn’t really a recovery. If
we have only have 1 1/2 percent growth, that will amount to a double dip in
all the senses that matter."
In other words,
(1) the fiscal stimulus is expiring,
(2) the boost from the restocking of inventory is expiring, and
(3) there is an additional, unexpected slowing of growth adding to the
first two contributions.
As Dr. Krugman observes, a 1½ % growth rate will be
insufficient to offset population growth, much less reduce the unemployment
rate.
This assumes that Goldman Sachs doesn't further reduce its
forecasts later in 2010 or in 2011.
It seems to me that fiscal stimulus is politically dead in
the water*, leaving only previously untested tricks by the Fed to boost the
economy.
* - If I were a Republican strategist, I believe I would be arguing that it's
less than four months to the November elections, and that it's imperative that
Republicans wrest power away from President Obama. Bipartisan actions for the
hypothetical good of the country would be off the table until after the
elections.
The Bottom Line: If Goldman Sachs is right, then a continuing recovery,
if it occurs, will be a Potemkin Village.
I've also reviewed Paul Krugman's advice in early 2009. The
stock market bottomed on March 6, 2009. By March 30th, several influential
commentators were calling it a new bull market. However, on April 17th, Paul
Krugman was comparing the rally to the sucker's rally that occurred during the
Great Depression. He miscalled the March-May leg of the 2009 stock market rally,
and it wasn't until May that he said as much.
It was around the 18th of April that I lost faith in his
predictions concerning what was going to happen to the stock market.
On the other hand, right now, his 2009 forecasts of what
would happen economically about now appear to be spot on. But over the next few
months, we should learn who's right and who's not.
The following links connect to recent Paul Krugman
commentaries on topics related to what's happening now.
In Permanent Link to Conventional Madness, Revisited,
Dr. Krugman cites the forecast by the Organization for Economic Development and
Cooperation two months ago, that called for immediate fiscal austerity coupled
with "a sharp rise in US interest rates over the next year and a
half". This was based upon a temporary rise in the "TIPS spread",
followed by a recent plunge in the "TIPS spread". Dr. Krugman
concludes, "I eagerly await the OECD’s retraction of its previous policy
advice."
In Iraq:
Austerity, Updated, Dr. Krugman says,
"After I posted this,
Chris Hayes emailed me to point out that I had, in fact, made a very similar
comparison back
in February:
To me — and I’m not alone in this — the sudden outbreak of deficit
hysteria brings back memories of the groupthink that took hold during the
run-up to the Iraq war. Now, as then, dubious allegations, not backed by
hard evidence, are being reported as if they have been established beyond a
shadow of a doubt. Now, as then, much of the political and media
establishments have bought into the notion that we must take drastic action
quickly, even though there hasn’t been any new information to justify this
sudden urgency. Now, as then, those who challenge the prevailing narrative,
no matter how strong their case and no matter how solid their background,
are being marginalized.
"Update update: I see that a number of commenters
also found the column."
In Permanent Link to What Went Wrong- The Rahm Factor,
Dr. Krugman reviews last year's stimulus dialogue within the White House.
In Permanent Link to Carter, Reagan, Revenue,
he shows with a chart what President Reagan's "supply-side" (tax
cut) approach did to federal revenue. (The argument at the time was that
cutting taxes would generate such a vibrant economy that the boost in Gross
Domestic Product would more than offset the tax cuts. In practice, the
nation's rise in GDP was affected little if any by the tax cuts. Instead, the
tax cuts siphoned off the gains in GDP from the general public, diverting them
to the pockets of the rich and greedy.) (For an independent look at what the
Reagan-Bush tax cuts did to the national debt-to-GDP ratio, look at the lower
Wikipedia chart here,
or the "government" chart here.)
You might want to take a look
at what the ranking Republican on the House Budget Committee proposes
to do to enhance the transfer of wealth from the general public to the
wealthiest members of society.
2010-7-16:
The markets took a swan dive off the end of the dock today: Flight from stocks. The NASDAQ Composite
careered 70.03
points (-3.11%)
to finish at 2179.05. The Dow toppled 261.26
points (-2.52%)
to close at
10,098.05,
and the S&P 500
added 31.60
points (-2.88%)
to end at 1,064.88. Oil was unchanged at $75.87 a barrel,
while Gold
ended at $1,192. The VIX added1.27
to 26.41.
Today saw quite a contraction, and I don't as yet have any
guidance regarding how serious today's downturn was. Three pieces of bad news
drove it: Consumer sentiment dives,
and Too-freaky Friday,
and U.S. consumer prices retreating in June.
2010-7-15:
After spending most of the day in bear country, market indices climbed
in the last half hour to a mixed close: Worries weigh on stocks.
(Tomorrow is an options expiration day). The NASDAQ Composite
gave up 0.76
points (-0.76%)
to finish at 2249.08. The Dow dipped 7.41
points (-0.07%)
to close at
10,359.31,
and the S&P 500
added 1.31
points (0.12%)
to end at 1,096.48. Oil was unchanged at $76.89 a barrel,
while Gold
ended at $1,208. The VIX added 0.25
to 25.14.
Meanwhile, in the interest of confusing investors,
Tomi Kilgore writes, Don't be fooled by another breakout.
In that pessimistic vein, U.S. factories slow down,
and U.S. stocks drop along with views of recovery,
while on the other hand: An optimistic view from MAPI data,
Industrial output rises 0.1%,
Initial jobless claims fall,
and June's core PPI rate increases 0.1%.
Welcome to the Tower of Babble!
My investment advisory service welcomes a pullback in
order to relieve a short-term overbought condition.
Here are two articles abut China: China's economy on course for 'soft-landing'
and Double-digit growth may end for a while.
Stock market futures are neutral tonight.
2010-7-14:
The markets closed flat today after their recent run-ups.
The NASDAQ Composite added 7.81
points (0.35%)
to finish at 2249.843. The Dow increased 3.7
points (0.04%)
to close at
10,366.72,
and the S&P 500
dropped 0.17
points (-0.02%)
to end at 1,095.17. Oil fell
to $76.60 a barrel,
while Gold
ended at $1,211. The VIX added 0.33
to 24.69.
The Fed is mulling Stimulus
plans just
in case the economy fails to continue to flag.
Mark Hulbert writes, Market gain suggests rally has legs.
In China postures for the New World Order,
Todd Harrison opens the article by mentioning that China's leading credit agency
stripped America, Britain, Germany, and France of their AAA credit ratings. He
mentions that the chief of the International Monetary Fund has remarked that,
"Asia's time has come".
Market futures are slightly positive tonight.
2010-7-13:
The markets advanced nearly 2% today, apparently based upon promising earnings
reports and guidance going forward: Earnings cheer sparks rally. The NASDAQ Composite added
43.67
points (1.99%)
to finish at 2248.03. The Dow increased 146.75
points (1.44%)
to close at
10,363.02,
and the S&P 500
climbed 16.59
points (1.54%)
to end at 1,095.34. Oil rose
to $77.16 a barrel,
while Gold
ended at $1,213. The VIX fell 0.44
to 24.54.
My investment advisory service gave a
"buy" signal today based upon the indicators in their model.
Here are two other articles dealing with gold: Gold rebounds on Portugal's downgrade,
and The gold stock the smart money is buying.
2010-7-12:
With the first earnings report for the quarter (Alcoa's) due out after
the close, the markets finished the day about where they started. The NASDAQ Composite added
1.91
points (0.09%)
to finish at 2198.36. The Dow increased 18.24
points 0.18%)
to close above
10,000
again at 10,216.27,
and the S&P 500
climbed 0.79
points (0.07%)
to end at 1,078.75. Oil fell
to $74.85 a barrel,
while Gold
ended at $1,200. The VIX fell 0.44
to 24.54.
Taking Issue with Paul Krugman
In this article by Josef Joffe,
Mr Joffe, who is editor of "Die Zeit", disagrees with Paul
Krugman's thesis that the Europeans are more concerned about reducing
their debt than about recovery from the recession. He states,
"Good Keynesians, they’re merely reducing
their astronomical deficits, not eradicating them. They intend not to
slam on the brakes, but merely to ease up on the accelerator. It’s
deep-red deficits as far as the eye can see.
"What about the European Central Bank, the
Fed’s counterpart? Tight money poisoned the fitful recovery during the
Long Depression, and it triggered the GreatDepression after the collapse
of the Austrian Creditanstalt. Today, the world is awash in liquidity
while interest rates remain at rock bottom, where they will stay.
"
He also observes that the present social safety net
affords hugely more protection from economic slumps than did the
policies of the 19th century when the "Long Depression"
occurred, or even the 20th Century's Great Depression.
One point that he and others are making is that
"The U.S. will run a deficit of $1.5 trillion this year, and
unemployment has hardly budged." It's been my understanding that employment doesn't begin to rise until well
after the nadir of an economic cycle. In April ,there were the first
glimmerings of a rebound in employment, but given the slump since then,
those plans have probably been tabled. Employers would probably want to
make quite sure that demand had begun to rise, and that it could be
expected to continue to rise before they went out and rehired.
This debate is framed in bold
colors rather than in pastels
Nobody's tiptoeing around this economic debate.
There are going to be some decisive winners and decisive losers. Paul
Krugman gives a box score over the past year-and-a-half: Permanent Link to What Have We
Learned?.


The argument at that time was over whether or not we
were facing galloping inflation or disinflation. The charts above give
the answer..
In this piece, Permanent Link to Trending Toward Deflation,
Dr. Krugman finds that we're already on the ragged edge of deflation.
Continuing
Recovery?
Marketwatch' Forecaster of the Month is predicting a
slowed but continuing recovery: More
pluses than minuses.
Stock market futures are up a
bit tonight, probably on the heels of good earnings and good forward guidance
from Alcoa, CSX, and MBIA (Municipal Bond Insurance Corporation).
2010-7-11: As
investors, we need to "get it right"
I need to guard against letting any biases I might have
interfere with arriving at correct answers concerning what's going on
economically. In that vein, it may help to review the predictions that Warren
Buffett, Todd Harrison, and Paul Krugman made last year regarding what would
happen to the economy later last year and this year.
Offhand tonight, I don't remember what forecasts Warren
Buffett made last year except that I don't believe he sidestepped the meltdown
that occurred between October, 2007, and September, 2009. (I'll try to check on
this tomorrow.)
Todd Harrison warned of the "widow's peak" that was
going to occur any day now back in the summer of 2009. It didn't happen, and if
it happens now, it doesn't count, at least in my book.
In early 2009, Paul Krugman warned that the recovery wasn't
going to get off the ground, while stock market gurus were claiming that
proclaiming that it was underway, and that was the time to be buying stocks.
They were right and Dr. Krugman was wrong. In May, he quietly agreed that a
recovery was in progress.
Bottom Line:
None of the three got it right last year, although the Fed was correct in
supporting the ongoing-recovery thesis.
My investment advisory service is getting more pessimistic.
The intermediate-term trend is down. It would take a close above 1,080 (only 2
points above Friday's close) to break above the current resistance level, and
open the door to further advances. But my investment advisory service is driven
by its models and their indicators, and will depend upon their numbers to buy if
the models say "buy" and sell if the models say "sell".
Although it would be valuable to know whether the economy is going to rise or
fall from here, it isn't necessary to second-guess what the economy's going to
do in order to know when to buy and when to sell.
Stock market futures are down a few points tonight.
2010-7-9:
Is this rally a "dead-cat
bounce" that's not worth trading?
My investment advisory service is warning that so far, the current rally
is looking technically like a "dead cat bounce" rather than a
change in direction, and so far, it doesn't deem the
rally to be worth playing.
The NASDAQ Composite added 21.05
points (0.97%)
to finish at 2196.45. The Dow increased 59.04
points 0.58%)
to close above
10,000
again at 10,198.03,
and the S&P 500
climbed 7.71
points (0.72%)
to end at 1,077.96. Oil oozed up $0.82
to $76.26 a barrel,
while Gold
ended at $1,211. The VIX fell 0.733
to 24.98.
Three schools of thought regarding the
current slump:
(1) The IMF, the Federal Reserve, Warren
Buffett, and Henry
Paulson's Advantage
Funds are predicting that the stimulus has worked and the recovery
will slow, but will continue.
(2) David Stockman and Todd Harrison are arguing (I
think) that this is a plain, old-fashioned boom-bust cycle, and that the
markets need to be allowed to recover without government intervention.
(Presumably, there'll be a second leg of recession.)
Otherwise, the economy will be right back where it started in
2007, without paying down the enormous debt overhang that got us in this
fix in the first place. Furthermore, "to get through it we have to
go through it", and all the King's horses and all the King's men can do is
to delay the inevitable day of reckoning.
(3) Paul
Krugman has become the iconic lightning rod for a third position:
namely,
that we're on the brink of the U. S.' third Depression.
This may be an oversimplification... for example,
David Stockman may not have objected to FDR's fiscal stimulus program... but it
gives us a framework to launch a discussion.
Let's start with the Great Depression and see if we can get
an idea regarding what actually happened. One school of thought (the Milton
Friedman or "Chicago" or "monetarist" interpretation?) is
that the driver of the Depression was the Fed's monetary policy: the Fed didn't
"print" enough money fast enough from 1929 to 1932 to keep the
Depression from getting out of hand.
David Stockman arrives at a different
answer.
David Stockman's Different Answer:
(1) What caused the Depression:
The probable cause of the Depression, he thinks, was the unsustainable,
debt-fueled boom of the Roaring Twenties. The 1920's saw the shift from
public mass transportation to personal automotive transport. It also saw (I
suspect) the rise of the suburbs, riding on the back of this new private
transport system. A whole new generation of appliances from radios to
refrigerators was manufactured and sold to a growing middle class.
This booming economy caused an over-investment in production
and service capacities in response to the perceived market for goods and
services. "In short, the Great Depression had nothing to do with fiscal
policy mistakes because the "fiscal" [component] in question was
self-evidently too small to make a difference. Instead, it was the product of a
classic boom and bust cycle that originated in the inflationary finance policies
of central banks -- first to fund the carnage of World War I with printing-press
money and then to layer on the speculative merriment of the Roaring Twenties."
(2) New packaging of risk:
"...Main Street Americans were introduced to the twin
wonders of consumer installment credit and stock market margin accounts during
the 1920s."
Consumer installment buying would have greatly expanded the
potential for indebtedness for the "farm kids" moving into the cities
from the country. Further, stock margin rules allowed 10:1 leveraging,
permitting investment rookies to build highly unstable "houses of
cards", setting the stage for the Crash of '29.
(3) The role of the Fed:
With respect to fiscal influence, he reports that the federal
government increased its spending by 50% between 1929 and 1932, from a mere 3.1%
of GDP to a mere 4.6% of Gross Domestic Product (GDP) in 1932... both negligible
contributions to the GDP. At the same time, the "stock of money fell by
nearly 25% from late 1929 to January 1933 not because the Fed didn't make the
reserves available but because, then as now, "the Fed found itself 'pushing
on a string' in the face of massive loan liquidation owing to defaults and
working capital contraction -- the same headwinds thwarting the Fed's
hyperactive money string pushing today."
Bottom Line:
David Stockman argues that the Fed was responsible for setting up the debacle
from late 1929 to early 1933, but not for what happened during that collapse:
i. e., Milton Friedman was wrong.
My own memories of the era:
This picture squares with my own memories of the thirties and
early forties. I can't remember seeing new construction before World War II.
Also, in retrospect, a lot of what I saw around me in the 30's had been created
in the 20's.
To give an idea just how bad the contraction was between 1929
and 1932, the Dow-Jones industrial Average fell from a high of 381 in the
summer of 1929 to 41 in the summer of 1932.
Franklin Delano Roosevelt (FDR) and the
New Deal
Mr. Stockman has given one interpretation of the interval
from late 1929 to January, 1933. What about the period after that from 1933 to
World War II?
Early in 1933, FDR announced his radical fiscal stimulus
program, setting up various public works programs and guaranteeing sober men a
job with, e. g., the Works Progress Administration (WPA: "We Poke
Along"). A WPA job paid $50 a month, or about $9,000 a year by today's
standards. It kept families from starving, but it didn't make them affluent. The
Civilian Conservation Corps (CCC) was also established, providing jobs for young
men just entering the work force. And there were other programs such as the
Tennessee Valley Authority (TVA), which built dams and power-plants that
provided flood control for the Tennessee River, and electrified the rural South.
(TVA's rates are still well below those of most parts of the country. TVA is a
federal agency.)
Did it work? I'd say it worked resoundingly well. The
economy, which had been sinking like a stone, as shown in the "Four Bad
Bear Markets" chart below, suddenly began to rebound rapidly. Between 1933
and 1936, the stock market rose from 41 in 1932 to 200 in 1936.
The change was dramatic, with no indication, in my opinion, that the cause was
anything other than the FDR Administration's fiscal stimulus policies.
In 1937, FDR & company made a terrible mistake. They
listened to the deficit hawks and throttled back their expensive reconstruction
programs. It was too early. The economy fell back into depression. Finally, in
1941 came the huge fiscal stimulus program called "World War II".
After the war ended in 1945, after 16 years of deprivation, the economy boomed.
Most of the nation's durable goods had to be replaced, and this was seamlessly
followed by the "baby-boom".
One of the analogies to the current efforts to jump-start the
economy has been likened to trying to get a car up an icy hill by giving it a
running start. If the car isn't moving fast enough when it starts up the hill,
it may fail to reach the top, and may slide back down with potentially
disastrous consequences.
I think a closer analogy might be that of trying to re-light
a big log when the fire has gone out. You have to pony up enough kindling to
heat the log enough that it begins to burn again on its own.
This failure of FDR to complete what he started has been used
to claim that fiscal stimulus doesn't work, and is being trotted out now to
argue that fiscal stimulus never works (see: The New Direction Our Economy Is Headed),
and that the current fiscal stimulus program has been a total failure.
To
be continued.
2010-7-8: The
markets followed through modestly on yesterday's "relief rally"(?) The NASDAQ Composite powered upward
15.83
points (0.74%)
to finish at 2175.40. The Dow gained 120.71
points 1.2%)
to close above
10,000
again at 10,138.99,
and the S&P 500
advanced 9,98
points (0.94%)
to end at 1,070.25. Oil hopped $1.20
to $75.69 a barrel, while Gold
ended at $1,196. The VIX fell 1.13
to 25.71.
The two IMF articles below express the International Monetary
Fund's projections that although the recovery may be slower than anticipated,
the world's economies won't shift into reverse gear again: IMF thinks it's going to be OK,
and World GDP to grow 4.6%.
IMF warns against budget cuts
refers to the "Washington-based" IMF warnings that European
governments should be careful about cutting their budgets in the immediate
\future because of the danger of derailing the economic recovery.
Income Gaps Between Very Rich and Everyone Else More Than Tripled In Last Three Decades, New Data Show
Market futures are neutral tonight.
2010-7-7: The NASDAQ Composite powered upward 65.59
points (0.313%)
to finish at 2159.47. The Dow vaulted 274.66
points 2.82%)
to close above
10,000 at 10,018.28,
and the S&P 500
advanced 32.21
points (3.13%)
to end at 1,060.27. Oil hopped $2.50
to $74.49 a barrel, while Gold
ended at $1,204. The VIX fell 2.67
to 26.98.
President Reagan's budget director, David Stockman,
has written this cogent and insightful article about the Great
Depression: Inconvenient facts about austerity.
In the article, he takes to task Nobel Laureate Joseph Stieglitz for
claiming that federal spending cutbacks caused the Great Depression,
adding, "Perhaps you might want to copy Professor Krugman while
you're at it." He observes that federal spending in 1929 was a mere
3% of the nation's GDP ($104 billion in 1929). Furthermore, rather than
falling, federal spending increased from $3.1 billion in 1929 to $4.6
billion in 1932, shifting from a sizable surplus. Instead (the author
argues), the total value of
private-investment-plus-durables-consumption-plus-exports fell from $32
billion in 1929 to $7 billion in 1932. He states that the Fed's
easy-money policies in the '20s spawned a bubble: "But by 1929,
the Fed had created such a massive bubble on Wall Street that
corporations could obtain both equity and debt capital virtually for
free. Consequently, industry got massively overbuilt, speculative real
estate development was rampant, and inventory accumulation reached
precarious levels." He continues, "In short, the Great
Depression had nothing to do with fiscal policy mistakes. Instead, it
was the product of a classic boom and bust cycle that originated in the
inflationary finance policies of central banks -- first to fund the
carnage of World War I with printing-press money and then to layer on
the speculative merriment of the Roaring Twenties." "Thus,
the fact that the stock of money fell by nearly 25% during the same
period wasn't due to a policy mistake by the Fed in its provision of
reserves; rather, the Fed found itself 'pushing on a string' in the face
of massive loan liquidation owing to defaults and working capital
contraction -- the same headwinds thwarting the Fed's hyperactive money
string pushing today."
His conclusion is the same as Todd Harrison's: our
current problems stem from the creation of an enormous debt bubble
encouraged by the easy-money policy of Alan Greenspan's Fed. Now (he
says) we have to take our medicine.
Workers' salaries lost ground in past decade
2010-7-6:
After moving up and then down and then partway up again, the markets closed up a
bit today.
The NASDAQ Composite inched up 2.09
points (0.1%)
to finish at 2093.88. The Dow gained 57.14
points 0.59%)
to close at 9,743.62,
and the S&P 500
annexed 5.48
points (0.54%)
to end at 1,028.06. Oil dropped $0.11 to $72.16 a barrel, while Gold
ended at $1,195. The VIX fell 0.47
to 29.65.
Dr. Irwin Kellner's Perched between growth and recession
makes for interesting reading. He basically agrees with Paul Krugman that fiscal
restraint right now is an invitation to the W-shaped recovery that he forecast a
year ago: "See my column of Aug. 11, 2009.",
his confirmation of last year's predictions: "See my column of Aug. 11, 2009.",
and last week's update: "See last week's column."..
Hulbert: Contrarian indicator blinks bearish
Looming wave of estimate cuts
S&P to
1,500?
David Weidner poses Five burning questions for Wall Street
Michael Ashbaugh alludes to the S&P 500's resistance at
the 1,040 and 1,060 levels: S&P's pop quiz
Paul Farrell writes Conspiracy of Weasels is killing real reform
concerning bank reform.
Market futures are down modestly tonight.
2010-7-5:
The markets have now closed below their 200-day moving averages and
their 300-day moving averages. As this article recounts, it wouldn't
take much to initiate another bear market drop (down 20% or more): Stocks: Pursued by a bear,
and Vulnerable spot for market.
This article argues that, given that employment
numbers are weak, Watch for GDP weakness.
This week's issue of Time Magazine includes an
article entitled, "The Best Laws That Money Can Buy".
The article discusses the lobbyist explosion in Washington, mentioning
that, "In the 80's, when lobbying was a cottage industry compared
to what it is today, so many lobbyists swarmed the corridors like
the one outside the conference room that the press dubbed the halls
Gucci Gulch." Tens of thousands of lobbyists now wheel and deal
over our legislation. For example, the legislation creating the Federal
Trade Commission amassed 8 pages in 1914. The 1935 Social Security Act
ran to 28 page. The current Financial Reform Bill resides in 2,319 pages
of weasel-wording and legalese. Obviously, no Congress(wo)man knows
what's in that bill. It had to have been written by teams of lobbyists.
There aren't enough Congressional Assistants to handle the task in the
time available. It mentions the fact that "our democracy has become
a game for insiders".
Stock market futures are down ⅔ % tonight.
2010-7-2:
The markets closed a little lower again today: Stock-fund gains dissolve as 2010 turns perilous:
The NASDAQ Composite dropped 9.57
points (-0.46%)
to close at a new low for the year at 2091.79. The Dow declined 46.05
points -0.47%)
to close at 9,686.48,
and the S&P 500
dipped 4.79
points (-0.47%)
to end at 1,022.58. Oil dropped $0.68 to $72.27 a barrel, while Gold
rose to $1,212. The VIX fell 2.74
to 30.12.
The story of the day was the jobs report: It could've been worse:
"The unemployment report wasn't as grim as it might have been, but it
still showed an economy struggling to find firm footing."
2010-7-1:
The markets closed a little lower today: Dollar's drop is the real story of Thursday's glum data,
and Stocks at new 2010 lows. The NASDAQ Composite dropped
7.88
points (-0.37%)
to close at a new low for the year at 2101.36. The Dow declined 41.49
points -0.42%)
to close at 9,752.53,
and the S&P 500
doffed 3.34
points (-0.32%)
to end at 1,027.27. Oil dropped $2.89 to $72.74 a barrel (Slowdown fears slam oil), while Gold
collapsed to $1,198. The VIX
rose 1.68
to 32.86.
On technical grounds, market mavens are predicting a new
S&P 500 bottom in the upper 800's, although after six straight days of
declining markets, there are widespread predictions of a short-term technical
bounce. (Might that be a good time to sell, and buy puts?)
But Morningstar says: Take Managers' Gloomy Forecasts With a Grain of Salt,
and Don't Get Spooked by Jobs Report.
I bought shares of the Proshares Ultrashort S&P 500 ETF,
SDS, today but sold them when the markets began to climb again.
Tomorrow's job report for June has the herd restless and on
edge.
It's time to protect stock portfolios now
Financial reform bill falls short
Stock market futures are up a bit tonight.