Monday, December 27, 2010

My Economic “Bowl” Picks

It’s college football bowl season and it’s also time to make economic forecasts for 2011. So I am combining these two things and making my “Economy Bowl” predictions. I will use the average forecast of my top seven economists (published at as the “betting line” with my prediction on which “team” will win in 2011.

The GDP Bowl
Pittsburg Positives vs. Detroit Double Dippers
Line: Positives by 2.8% (GDP growth for year)

The Positives had a comeback year in 2010 after a horrible performance in 2009. The momentum is with the Positives going into 2011. Look for uneven growth next year, but to be overall stronger than expected. My pick: Positives by 3.8%

The CPI Bowl (Consumer Price Index)
Indiana Inflators vs. Denver Deflators
Line: Inflators by 1.7% (CPI for year)

Most experts are picking the Inflators by a narrow margin in 2011which means inflation is held in check for another year. However, many investors are putting their “gold” on a bigger Inflator victory. With commodity and gas prices on the rise, I think the panel is a bit low. That’s why I like the Inflators in this one. (In addition, the Deflator cheerleaders are not very bouncy). My pick: Inflators by 2.2%.

The Unemployment Bowl (sponsored by
Jacksonville Jobs vs. Los Angeles Layoffs
Line: Layoffs by 9.2% (unemployment rate at year end)

The employment environment continues to improve and my sources “on the ground” continue to report very positive progress. It is still taking people too long to find jobs, but layoffs are way down. I’m betting on the “Jobs”. My pick: Jobs by 8.7%

The Housing Starts Bowl
Boston Builders vs. Philadelphia Foreclosures
Line: Foreclosures by 700,000 (housing starts for year)

Look for the housing market to bottom out sometime in mid-year. That means the second half of the year will see more housing starts than expected. My pick: Builders by 820,000 starts.

The Price of Crude Bowl (Sponsored by OPEC)
Houston Oilers vs. San Francisco Solars
Line: $88.70 per barrel (year end)

You’ve got a weak dollar, you have greater U.S. demand as the economy grows and you have strong demand growth in China. I’m taking the Oilers big. My pick: Oilers by $93

The Stock Market Bowl
The Bulls vs. The Bears
Line: No consensus

I am picking the Bulls early and then the Bears and then the Bulls again before the Bears rally late. This will set up a big year for the Bulls in 2012. The Model T is now indicating a 2011 high in the S & P 500 Index of around 1,400.

The Blog Year in Review

We started off the year with that great economist Sting signing of a Brand New Day. From there we looked at underwear sales, toilet paper sales and “bucket washers” to try to understand our economic world. We visited the land of Emplovia and Nectarina (land of the Honey Dippers). We gained insight from Billy Banker, Becky Housing, Sammy Subprime, The Frito Bandito and Pooh Bear. Thanks for reading. If you are checking this out on a LindedIn or Facebook group, e-mail me at to get put on the mailing list.

A Personal Rollercoaster Ride

2010 was one of the most eventful and challenging years of my life. I felt like I was in one of those “life comes at you fast” commercials except that it wasn’t humorous at all. As the year ends, I feel like I have just exited from the most wild rollercoaster ride of my life. On one hand, I feel exhilarated from the experience. On the other hand, I feel like I could puke at any moment.

Rinnnnnnnnnnnnnng. That was 2011 on the phone. It said the next ride is starting soon. Happy New Year!

Check out this video clip on a Lesson From My Mother

Sunday, December 12, 2010

We're Addicted To Junk

Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk
Might as well face it, you're addicted to junk

Rail Freight Shows a Trend

We can learn some interesting things about the current state of the economy by analyzing the rail freight data published by the American Association of Railroads. If you look at the Carload data that includes minerals, lumber, chemicals, etc. (stuff you use to build things), it shows an economy that is better than 2009, but still considerably weaker than 2008. And there is an even wider gap between 2010 carload freight and the peak years of 2006 and 2007. This data is very consistent with the trends in the general economy.

But if you look at the Intermodal freight numbers you get a very different picture. Intermodal freight is shipped in containers that can be efficiently transported long distances by rail and then easily transferred to trailer chassis and hauled by truck to its final destination. Much of this type of freight is imported consumer goods from China and other countries that arrive by ship to the west coast ports. Intermodal freight surprisingly is back to the same level it was in 2008. If you look at this data, you would conclude that the economy had made nearly a full recovery and unemployment had already fallen to reasonable levels.

Of course intermodal freight growth is fuel by increases in consumer spending. And this increase in spending does help the economy grow --- in China. And it does create many jobs --- for Chinese workers.

Yes, we are doing it again. One of the things that got us into this mess is a vociferous appetite for cheap, imported, consumer goods. The result of this behavior (and trade policies) first resulted in the exporting of production line jobs and now we are also exporting many professional, manufacturing, support jobs.

Happy Campers?

So why are we returning so quickly to the damaging behavior of the past? Didn’t we learn our lesson? What is causing this relapse? Could we be addicted to this junk?

I was pondering this last question a few weeks ago when the annual news stories hit about the people camping out at retail stores three days before “Black Friday” in order to be at the front of the line for the hot sales items. What is your opinion of these people? Do you find them amusing? Do you say to yourself, “I wouldn’t do that, but I understand their desire to save money at Christmastime”?

I believe there has to me more going on here. Economists use the concept of opportunity cost to assign a value to what you give up by taking an alternative action. The opportunity costs of spending three days camping in front of Best Buy are huge. You are basically sacrificing three days of your life that you could be enjoying doing other things. Even if you spent Tuesday and Wednesday working, you may be able to earn more money than you end up saving (which in the spirit of Thanksgiving would please the Puritans). Spending Thanksgiving in a tent instead of sharing a great meal with your family would also be a great opportunity cost for most people.

No, something more is at work here. Researchers report that when day traders make a profitable trade it causes a physiological brain reaction very similar to a heroin high. I believe the people camping out achieve a similar high by “scoring” this big hit when they buy their sale items.

Now consider this: If someone announced that they would be selling discounted crack cocaine in a parking lot Friday at 8 a.m., you would expect crack addicts to begin lining up days in advance. It would not be a surprise, because after all they are crack addicts. You would not find it amusing, because they are crack addicts. You might even think that these people should get help, because they are crack addicts.

The reason we can’t see this with our Black Friday campers is that most of us in this culture literally buy into this mass consumerism. We may not be as bad as the “junkies” (what an appropriate term), but you might as well face it, you’re addicted to junk. And as you look around your house and see all the things you have accumulated that you either didn’t really want or really didn’t need, it isn’t difficult to understand that there is a pleasure in the act of purchasing things that often exceeds the utility provided by the products.

Marketers have figured this out just like pushers in the inner-city. The heroin pipeline begins in Afghanistan and the junk pipeline begins in China. I don’t have an answer for this one. And if you look at my Visa statement surely you would understand (shout out to Leslie Nielsen) that this is an observation and not a judgment.

Once there was a rouge economist that claimed that a person’s life does not consist in the abundance of his possessions. That life is more than food, more than clothes, and yes, more than junk. He said don’t worry about material stuff because there are more important things to focus on (Sounds like he really does understand opportunity costs). But of course this guy doesn’t have any credibility when commenting on how we choose to celebrate Christmas in 2010, does he?

I wish everyone a Very, Merry, Christmas!

Refuge of Hope

My friend (and fan of this blog) Duane manages an outreach shelter for the needy in downtown Canton. You can provide a Christmas dinner for a table of hungry people for a small donation of $25.Click here to donate.

Sunday, November 28, 2010

Stoned Slackers

You are driving down the interstate nearing your destination, when suddenly the unmistakable sound of The Stones starts humming through your stereo. If you are a middle-aged guy, this immediately causes you to crank up the volume (way up cause your hearing is fading), stomp down on the accelerator (even if you are driving a Buick) and start doing the Jagger rooster bob. (I personally believe that all speed limits should be suspended if a Stones song is playing on the radio and I also believe explaining to the officer that “there’s fever in the funk house now” should be good enough to get off with just a warning).

It’s after the song ends, when the volume has been lowered and the rooster has been returned to its cage, that you realize you have blown by your exit and gone entirely off course. Unfortunately, you cannot immediately start repairing the damage. You need to wait until the next exit. Even then you may need to stop for a while to make sure you know how to get back on course and to refresh. And for certain when you get turned around, you drive much slower and more cautious than when Mick was blasting through the speakers. (You might even listen to Barry Manilow instead). What your mistake has produced in your trip is slack. In order to get back on track, all the slack must be eliminated.

Today’s topic is slack and how it impacts economic recovery. In a previous post I stated that I now believe the economy will be stronger in 2012 than most experts now forecast. (the government just downgraded its 2012 forecast last week, which actually reinforces my thinking.) One reason I believe the economy could grow at a rate of 5% or more in 2012 is slack.

Recessions create slack in the economy and large recessions create significant slack. This slack must be used up before the economy can really start growing. When all the slack is removed from the economy the impact can be dramatic, but slack is usually very difficult to measure.

To illustrate, consider what happened in the platform trailer market in the previous recession. Before the economy slid, the platform trailer market was booming. Existing trucking fleets were buying many new trailers and new fleets were entering the market to handle a seemingly continuous increasing demand for freight. Trailer dealers had huge inventories to service this demand. Trailer manufactures were running multiple shifts and struggling to keep up with orders. Even after the first signs of economic weakness were apparent, trailer manufacturers considered it “just a blip” and continued at full production rates in order to keep manufacturing costs lower.

When the real recession hit, freight demand quickly dropped. Fleets had too many trailers so they parked or tried to sell their excess units. When older trailers broke down, they were repaired instead of replaced. Many fleets went out of business and their trailers went into the huge used trailer inventory. Thousands of new trailers sat in dealer lots ready for customers that no longer existed and thousands more sat at the manufactures a result of the irrational exuberance that characterized the time period. There was a tremendous amount of slack in the platform trailer market.

After the economic recovery began, it took an extended time before this slack was used up. For a long time, people in the industry wondered why the demand for new trailers was not stronger. During the time though; freight was growing, fleets were putting units back into service, profits were increasing so there was money to buy new equipment and used inventory was being depleted. When all the slack had been eaten up, something almost magical happened. Demand for new platform trailers exploded, catching the industry by surprise.

Slack impacts economic recoveries like this. Imagine that you have a very tangled rope with a ball attached at the very end. Then you tie the other end to a pick-up truck. The pick-up truck starts to move forward. You can’t see the truck or most of the rope, so you watch the ball and use that as an indicator to determine how fast the truck is moving. The truck starts at a slow speed and the ball moves a little. As the truck accelerates the slack in the rope is being tightened up, but the ball still doesn’t progress much. Now the truck is moving at a high rate of speed, at some point the rope becomes taut and the ball now accelerates at a speed equal of the truck.

This is what I expect to eventually happen with this economy. People are hoping for a fast recovery, but you don’t always get what you want with this economy, but with the economic forces at work, you get what you need. This has been a very long economic slide. We’ve been holding out so long and we miss you (economic good times). The unemployed try, yes they try, but they can’t get no satisfaction in this labor market. It’s enough to make a grown man cry.

But at some point this misery will end. It will be a memory, a memory of a slump that used to mean so much to me (and you). And once you start it up, this economy will never stop (until the next downturn of course).

People think I’m crazy, others think I’m hazy, but that’s my roll of these tumblin’ dice on when the economy will climb out from under the thumb of economic hardship and finally say goodbye to those rueful Tuesdays.

So to review: It’s all right now, except for some slack. Then it’s a gas, gas, gas.

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Thursday, November 11, 2010

Real Time Election Results

The true election results are what happens in the time following the election, not what happens on election night. After the votes are tallied, it’s not important who won, but what that person actually does in office.

While this blog is about economics and not politics, let’s look at some issues that will impact the economy after the mid-terms….

Do You Hear Me Now?

The Voters Wrote the Following Message on President Obama’s Facebook Wall: “FOR THE LOVE OF GOD, PLEASE JUST STOP IT!!!!! PLEASE JUST *#$!*!* STOP IT RIGHT NOW.

President Obama replies: Hey, you don’t need to shout. I don’t understand what I’ve done to cause this type of reaction.

The Voters reply: Uhhh … we already knew that.

Repossession Order

The main problem with the healthcare bill is there is no money available for the states to be able to pay for it. That’s why governors are so opposed to it and after the election this opposition will increase.

The healthcare plan is similar to buying a new Rolls-Royce on credit. It is wonderful to drive. Your friends and neighbors just ooh and aah about it and of course the chicks dig it. Absolutely everything about the car is a positive experience until the first bill comes. Of course you can’t pay it, so you don’t. Then Matt and Sonia from Operation Repo show up with a camera crew and rip the car right out from under you at a most inappropriate time.

So now the Republicans want to change most of the healthcare bill while the Democrats do not. This is similar to two doctors operating on the same patient at the same time, but not agreeing on what needs to be done. This is not going to end well.

California Screaming

Both my California (business) girls (Whitman and Fiorina) lost. No sour grapes, but the financial problems in the state are huge and I just can’t see them improving much now. Expecting political veteran Jerry Brown to sharpen his pencil (literally) and solve the problems is like asking your grandfather to fix you iPod. “This is pretty small for a transistor radio. How do you get a 9-volt in this dadgum thing?”

The California ballot initiative on legalizing marijuana also went down to defeat. Supporters of the initiative reportedly were very bummed about the outcome. If only there was some way for them to relieve their sadness.

Seems to me if you were going to return to the hippie era and elect Jerry Brown, you would want to go the whole way and legalize pot. California could really use the tax revenue and with Brown in charge of handling their financial crisis, they are going to need more than just medical marijuana to deal with this pain.

WWF Defeated

Voters also rejected former World Wrestling Federation CEO Linda Mc Mahon in Connecticut. But don’t worry; with this divided government I predict that the upcoming political fighting will make the WWF look like the World Series of Hopscotch.

Get ready for a smack down. Pelosi better put on her game face (or at least pump up her present one). Boehner better hope his tan goes deeper than the first layer because he’s going to lose lots of skin in this game.

And that’s too bad. Many people believe that the government that governs best governs least (Quote often attributed to Ronald Reagan, but he was quoting Thomas Paine). Gridlock results in less “governing” and that worked great in the 1990’s. However, I agree with several commentators that have warned that we have serious problems right now that need to be addressed.

The First Cut is the Deepest

Many people are now alarmed that people who won elections are actually going to --- gasp and gasp again --- cut spending. Oh the horror! If you are spending too much, you either have to get more money, i.e. raise taxes or yes, cut spending. Is this concept too difficult to understand? When people lose their jobs and have less money, they have to cut their expenditures. What makes government so special that it would not have to do the same thing?

Yes, We Have No Bananas (Republic)

It’s probably too late for the election to change this…..

When third-world countries recklessly inject mass quantities of capital into their economies, we laugh at them and refer to them as “banana republics”. When we do it, it is wise monetary strategy. We’re not “printing money” it’s “Quantitative Easing”. The name sounds so pleasant and gentle. You might also say that quantitative easing is what your Uncle Ned does right after finishing his huge Thanksgiving dinner. That doesn’t turn out to be so pleasant and gentle either.

This quantitative easing in this case is like pouring water on a chemical fire. It appears like you are doing something but you are achieving very little. Banks say they have the money to lend but there is little demand from customers. It’s like a restaurant with bad food that tries to stimulate demand by offering all-you-can eat specials. If people aren’t hungry for what you are serving, lowering the price doesn’t help.

Please checkout this video clip from a recent presentation I gave to a job seekers group: Click Here

Monday, November 1, 2010

Hard Questions, Difficult Answers

Hey Don, if the recession ended in June of 2009, why does it feel like we are still in one 17 months later?

Because even though the recession officially ended the economy remains recessed. reports that the economy is currently 0.8% below pre-recession peak and industrial production is still 7.5% below peak.

Think of a recession as an event and a recessed economy as a condition. If you suffer a wound that results in significant bleeding, stopping the bleeding is a good thing. However, it will take time for your blood count to return to normal.

So as soon as we get back to where we were in November 2007, things are going to be great. Right?

Unfortunately, no. Recessions are actually good for the economy because they squeeze inefficiencies out of businesses and reallocate capital that has not being optimized. But recessions are similar to fevers. Mild ones often accomplish the task and the recovery time is fast and the event relatively painless. Severe ones are very painful and recovery takes an extended time before the patient is healthy.

This economy was very sick. Now the fever is gone, but other problems still persist. Unfortunately just getting back to “even” will not significantly reduce unemployment. Millions of workers lost their jobs during the recession. This is part of the efficiency improvement. Companies are now functioning with less employees and this helps profits and makes them stronger. Under normal conditions the displaced workers would find jobs with newly expanding companies benefiting from the more productive reallocation of capital. That is not happening now. The credit markets are still dysfunctional so capital is not being reallocated and we are still “exporting” jobs to China. Therefore, once we get back to “even”, unemployment will remain elevated.

When will the economy be strong enough to really make a difference?

The Model T shows the economy growing slowly in 2011. The economy will reach 2007 peak levels sometime in the first half of the year and slowly keep moving ahead in the second half. Unemployment will decrease, but not substantially.

But the Model T does predict strong economic growth in 2012. GDP could grow in excess of 5%. This is higher than most economists are predicting. But when the economy is weak, people tend to believe things will continue to stay the same indefinitely. It is the same when the economy is very strong. Some of the 2007 quotes by Ben Bernanke, Henry Paulsen (then Treasury Secretary), and some top economists predicting an on-going strong economy and a continued great housing market are now laughable.

In 2012 things will start to hum. Consumer confidence should improve leading to more consumer spending. Business confidence will then improve leading to more investment. The credit markets will be healthy enough to support the increased need for capital. These conditions will finally start to create jobs and drive down unemployment. More workers getting paychecks helps fuel a recovery, just as it is supposed to. In addition, it is a big election year. There is nothing like an important election to get Republicans and Democrats to work together to boost the economy and improve everyone’s reelection chances. And if the economy is booming, don’t count out a second term just yet.

What will happen with the stock market?

I am officially abandoning the Model T’s prediction of an S & P low of 580 at this time. I still believe the model would have worked, but the extreme government intervention created a “false bottom” for the stock market and the economy. The government stopped the market from crashing. The trade off is in taking these actions it kept things pushed down for an extended period of time and has delayed an economic recovery. Only time will tell if these actions were brilliant or boneheaded. The fact that it could be either proves how difficult it was to make decisions during the midst of the financial meltdown.

Several analysts now predict that the next correction will take the S & P down close to 800. That makes sense. It would be logical for the market to drop sometime in 2011 as investors lose patience with the economy. If the S & P approaches 800 or below, it is time to jump back in. Even if the market continues to fall below 700, it should not take long to get back to 800. And you definitely want to be in the market before the boom year of 2012.

Monday, October 11, 2010

Story Time: Featuring Sammy Sublime, Billy Banker, and the return of Pooh Bear

Sammy Sublime Yearns for the Past

There once was guy named Sammy Sublime. Sammy lived life to the fullest. He drove luxurious sports cars; he wore expensive suits, ate the finest foods, drank exotic liqueurs, smoked big cigars and lived in a Mc Mansion. This flashy lifestyle naturally attracted extensive female attention. Sammy choose for his main squeeze one Valerie Vapid. Valerie was drop dead gorgeous, a very sexy vixen. She had more curves than a calculus test and was delicious, double “D” delicious, if you get my drift and I know you do. Sammy liked Valerie’s eye candy appeal and Valerie liked all the things that Sammy had.

But Sammy’s lifestyle was all built on cheap credit. He borrowed piles of cash to support his luxuries and when the banks finally realized his game, they cut off all his funds. Sammy’s life came crashing down. He lost his car, he lost his house, and without the bling-bling, he lost Valerie. It turns out that Sammy wasn’t sublime, he was really subprime.

Sammy fell fast and hard on his way to the bottom. He then slowly began to recover and put his life back together. He lived a much simpler and modest lifestyle that matched his income. He even met a woman named Patty Plain. Patty is a very average, pleasant, woman. She is a sensible match for Sammy’s new lifestyle. She isn’t A-List; she’s an “A” cup. She isn’t interested in Sammy for what he has; she is interested in him for what he is. But even though Patty is a nice woman and a perfect match for Sammy, he isn’t interested in a relationship with Patty. He longs for the hot sultriness of Valerie, even though their entire relationship was based on false wealth and deceit.

Billy Banker was Too Big to Fail

Billy Banker was too big to fail. While the other children in third grade read their assignments and did their homework, Billy watched television, played video games and engorged himself on enormous amounts of junk food. He even refused to participate in gym class. While the other children exercised and played sports, Billy just sat on his ever expanding butt.

When the school year ended Billy’s grades were horrible. The teacher had seen many Bankers in her class over the years, but Billy’s performance was exceptionally poor. Any student receiving such poor grades would not pass the class and would have to repeat the third grade, but Billy Banker was too big to fail.

Billy’s poor behavior, the junk food and lack of exercise, had caused him to grow very large. He was almost too heavy for a third grade desk, so new furniture would have to be made to accommodate him. In addition, the third grade classroom was on the second floor of the school house. Already the floor had started to bow under Billy’s tremendous weight. If he was not promoted to the fourth grade classroom on the first floor, it was feared that Billy might crash though the floor and bring the whole school building down with him. Finally, all the junk food had festered in Billy’s digestive system causing him to carry a large amount of toxic gas which he would emit at very inappropriate times. This scared and sickened the other students. The fourth floor classroom had more windows with a better ventilation system and was better able to handle Billy’s eruptions.

So the decision was made to not let Billy fail, but to help him down the stairs to the new classroom. But the principal gave Billy a stern warning. He told Billy that he needed to perform better, to study harder, and to exercise more. He told Billy that he needed to be a better Banker. To help him do that, the principal said he would enact new strict rules for Billy to make sure he improved. This made Billy very sad. Billy’s face got red, he stamped his foot and finally he turned his back to the principal and bent over. The principal quickly relented and said he was just joking about the new rules. Billy gave him a big hug and promised never to act so irresponsibly ever again. Until of course nobody is watching, and it happens again.

Pooh Bear’s New Sports Car

There was a problem in the land of Nectarinia (See July 5 post). There was a recession in the land and the production of honey was down. However, the council in Nectarinia had a plan. The honey refinement factory was powered by a wood-burning furnace. If they could get more wood to the furnace, they could stimulate more honey production and bring the economy out of recession. So they commissioned the Grand Pooh Bear to request funds from the treasury to purchase a new wood hauling truck to carry more wood to the factory. The treasury enthusiastically supported the plan and granted a large amount of funds to the program.

Pooh Bear took the money and went to the lot to purchase the new truck, but then something went horribly wrong. Before he even looked at the truck, he saw a bright, shiny, new, sports car. It was wicked awesome. I could buy this sports car and give all my friends free rides and they would have a great time thought Pooh Bear. They would love me so much for the car rides that they would surely remember it when it was time to decide if I should remain the Grand Pooh Bear. And there would still be room in the trunk to haul wood to the factory.

So the Pooh Bear bought the sports car instead of the truck and spent all his time giving all his friends rides in it. He told the people of Nectarinia how great the sports car was and how happy people were to be getting the free rides. But as a result, not much wood was getting to the factory. Honey production increased, but at a very slow rate.

When the people complained, Pooh Bear told them that what we need is a new truck to haul more wood to the factory to stimulate production. “But didn’t you already buy a truck for that purpose”, the people asked? “Why of course”, said Pooh Bear. “What I meant to say is that we need a second truck to stimulate production.” So Pooh Bear went back to the treasury to get funds to buy the truck. Buy the treasury wizards told him that there were no more funds available for a second vehicle and he would have to make do with the one he had. And so the honey production slowly dripped ahead and the recession continued.

Thursday, September 23, 2010

Happy Anniversary Model "T"!

Happy anniversary baby
Got you on my mind

Hey everybody, I am excited about a big upcoming anniversary. If my wife is reading this, of course I’m talking about my 30th wedding anniversary. For everyone else, I’m referring to the one-year anniversary of the Model T Stock Trends Blog.

I started the blog a year ago to share the Model “T”, which attempts to predict the highs and lows of stock market cycles using data primarily connected to the commercial transportation industry. It also helped me keep my skills sharp as a looked for employment.

My friend Robert who helped me set up the blog page, asked me a year ago, “Who is going to read this?” I said maybe the 15 people who already know about the model and whoever else is interested. But the blog has a readership larger than I ever expected. It is read by people who want an understandable explanation of the economy. It is read by financial professionals in New York who remain curious about the model’s potential. I have received e-mails from readers in India, Sweden and other countries.

After presenting and explaining the model in my initial posts, I delved into factors that impacted the economy and made many predictions and forecasts along the way. The interesting thing about blogging is those predictions “go on the record” and can be reviewed at anytime. And it is now time for a review. So what did readers of the blog get over the past year?

The Losers

Let’s start with the failures. The Model “T” predicted the S & P 500 index would bottom out at around 580 in September or October of this year. So the model has not been accurate the past 18 months. The main reason for this “miss” is that the economic conditions are very unique and the government has injected an enormous amount of support and stimulus to stabilize the economy. I have been critical of Timothy Geithner, but the one thing he has been very successful at doing is stabilizing and strengthening the stock market. And don’t dismiss this. It was a very important factor in controlling this crisis.

The Model “T” has not been accurate in predicting the recent stock market, but none of the other sophisticated models developed by your PhD in Economic experts have worked either. As I have stated before, even some very accurate economic indicators have been rendered useless in this Redression (my new term for the Recession/Depression) So as a marketing person, I can honestly say that the Model T has been as accurate as many of the models developed by respected economists.

The Winners

Don’t focus so much of the content, much of which is obvious now, but when the predictions were made.

- In October 2009 you read that the economic recovery would not be a V-shape, a U-shape, an L shape or a W. It would be a “UL” with a slow, sluggish growth rate after riding the bottom of the cycle. (Almost a year later, this one has been spot on).

- In October 2009 you read that the unemployment situation was unique and pervasive. The number of displaced skilled, white-collar, workers meant that that unemployment would remain high for an extended period of time (some government officials still don’t understand this).

- In November 2009 you read how lack of credit availability was choking the economy and would not improve much until well into 2010 and would not fully recover until 2011. (Count it)

- In November 2009 you read that 2010 GDP would be below 3% and that the housing market despite the government stimulus efforts and low interest rates, would not recover in 2010. Housing starts were predicted to be below 700,000. (GDP is forecast at 2.7% for 2010 and housing starts at 590,000 (Wells Fargo))

- In November 2009 you read that the recession ended in July 2009 (NBER just announced this week that it ended in June 2009. (Okay, one month off but 10 months ahead of the experts).

- In December you read that the government programs to stimulate the economy were not working. In February 2010 this issue was addressed in more detail. (No comment necessary)

- In January 2010 you read that the economic indicators predicted slow, choppy, economic growth in 2010. (Slow and getting choppier)

- In January 2010 you read that this was not going to be an economic recovery as much as it was going to be an economic “healing”. Also, there would be no “double-dip” recession. (The “recovery” hasn’t really happened)

- In March 2010 you read that there was a structural unemployment problem that a typical economic recovery would not solve. (Several economists agreed with me several months later, but the government still doesn’t get it.)

- In May 2010 you read that the recovery was it trouble and there was an economic slowdown ahead. (Swish)

Of course there were other predictions made earlier in 2010, but it is too soon to determine the accuracy of those. The Model “T” would still indicate that the stock market will see a significant drop to compensate for the rally that has taken place the past 15 months, but the market continues to show surprising strength.

I am tempted to boast about the accurate predictions, but my Pennsylvania Dutch upbringing prevents me from doing so. Proud Pennsylvania Dutch boys get sent to bed without any cheese and birch beer! So I will just quote Walter Brennan’s character from the 1960’s western The Guns of Will Sonnett: “No brag, just fact.”

Happy anniversary baby
Got you on my mind

Thursday, September 9, 2010

What is This Thing Called, Love?

I've been through the desert on a horse with no name,
It felt good to be out of the rain.
In the desert you can remember your name,
'Cause there ain't no one for to give you no pain. (America)

I have previously stated that economists are having a difficult time explaining the current economic situation due to the unusual conditions that exist. In is interesting to note that economists and the government have underestimated the current downturn at almost every point in the process. If you go back and read some of the 2008 quotes of FED Chairman Ben Bernanke and former Treasury Secretary Henry Paulsen about the economic conditions at the time, you find the analyses faulty and the forecasts laughable.

This is not your father’s recession. Unfortunately the government has viewed this as a typical recession and has responded accordingly. Remember that the first economic stimulus program from the Bush administration. Talk about p***ing on a forest fire. Then the Obama administration follows that up with a stimulus package that is less about creating jobs as it is about solidifying and rewarding voting constituencies (never let a crisis go to waste). I really believe they expected the economy to recover regardless of how poor the stimulus package really was. Similarly, Cash for Clunkers and the housing tax credit programs were “gadget” plays to prop up these industries until the economy improved. It’s hope and change all right --- you keep stalling and you hope that things will change.

This downturn is more than just a recession. If it wasn’t, The Great Recession of 2008-2009 would have been followed by the Great Recovery of 2010 and we would all be partying to the music of Kool & the Gang right now. It is not a depression, because the economy did not drop far enough for that designation. Some economists have noted that this is not a depression because the unemployment rate during the Great Depression was 25%. I say be careful here. If you take the unemployment rate, add the underemployment (part-time wanting full time) rate, plus the people not counted because they have given up looking, you are up to over 20%. Obviously this is not as devastating as the 1930’s, but that was The “Great” Depression, not just any depression.

Our current situation has characteristics of both a recession and a depression (See excellent article “You Say Recession, I Say Depression”). So what do we call this thing? If you have lost your job or taken a pay cut during the last two years, you want to call this the **#**x!!!! Recession, but that doesn’t translate well in civilized discussion. So here are my suggestions:

The Great Repression

Psychologists define repression as excluding painful or disturbing memories from the conscious mind. You put uncomfortable thoughts in inaccessible areas of the mind. And what uncomfortable thoughts do we need to repress?

- That one major political party blindly led us into this mess and now the other major political party is pathetically attempting to blindly lead us out. Different clowns – same circus. Who do we vote for now?

- That CEOs of some major financial institutions were removed from their posts, but not before received receiving seven-figure bonus checks as a reward for their fine efforts. They now make difficult decisions about whether to order the quiche or the croissant before tennis at the club.

- That the government’s response to the banking crisis was a 2,300 page financial reform bill that somehow never got around to fixing many of the things that went wrong. The banks are bigger than ever – Too tremendously big to fail! The reform bill concentrated more on your credit card bills and bank fees. Darn, it was my credit card bill that caused this mess.

- That the current administration has enacted healthcare legislation that will increase business costs and possibly personal costs at a time when we can’t afford it. Introducing this burden and uncertainty into this weak, unstable, economic environment is sheer lunacy. Even if the new healthcare system works wonderfully (a very big “if”) down the road, it is not worth the damage that it is doing right now. Ditto for Cap and Trade.

The Great Redression

To redress is to set upright, restore, to make up for, to repay. As I have stated before, we are now paying for a credit, housing, and cheap import, binge that started around 1995. It is payback time and you know what they say about paybacks. I think this term is perfect.

After two days in the desert sun
My skin began to turn red
After three days in the desert fun
I was looking at a river bed
And the story it told of a river that flowed
Made me sad to think it was dead

You see I've been through the desert on a horse with no name
It felt good to be out of the rain
In the desert you can remember your name
'Cause there ain't no one for to give you no pain

Horse With No Name Video

Benny Hill Video that explains the title

Wednesday, August 25, 2010

Where Are We?

Are we in an economic recovery, stuck in a period of below average growth, or headed for a double-dip recession? Let’s look at some more of the traditional and non-traditional economic indicators to find out.

Kicking the Bucket

There is a business district close to where I live that has been devastated during this recession. The only company in this area making any money is the one making the “For Lease” signs. Right in the middle of the district is a coin car wash. For around $4 worth of quarters you can soap, rinse, and wax your car. There were always prominent signs at the car wash that said “Bucket Washing Strictly Prohibited”. If people use buckets to “hand wash” their cars before rinsing, they take up space without spending more money and increase the waiting time of other customers. So recently I was shocked to see a large sign beside the car wash proclaiming “Bucket Washing Welcomed”. This is an act of desperation. This is the equivalent of a Baptist church advertising “Bring Your Own Bottle”on Sunday morning. If people don’t have enough quarters to wash their cars, things can’t be good.

Bottoms Up

Speaking of bottles, Ohio just announced that hard liquor sales were up strongly in 2009 and still steady in 2010. A spokesperson claimed that this is in no way related to people drinking more due to the state’s double digit unemployment rate. Of course this is a contributing factor, they just won’t admit it. But a bigger reason is that more people are saving money by drinking at home instead of in bars.

Eating In

Not only are people “drinking in”, they are also eating in. The latest data from the restaurant industry show that sales are up some from the bottom in 2009, but still weak. Discretionary income is still tight and people are not increasing outside meals. It is speculated that many restaurants are losing money, but are holding on and hoping business picks up soon.

Basket Case

Charitable giving continues to suffer. Reports from several churches show that giving is actually down from 2009. Unemployment remains high and people with jobs are being very conservative with their money.

Still Cutting

Companies continue to cut workers. My daughter became a victim recently when the call-center where she worked reduced manpower. Even in good times companies reduce workers, but in a recovery there should be plenty of new jobs for these people. Now they just join the 14 million other job seekers competing for the few new jobs available. One local job seeker group has actually grown in membership the past few months.

Temporary Workers

Temporary workers are increasing. This is good news and is usually the first sign of an economic recovery. The way it is supposed to work is that companies hire temporary workers until they are confident business is increasing. They then hire these people as standard workers and hire more “temps”. This time they are hiring temporary workers, but are not making these workers “permanent”. I do not believe that businesses have confidence in the government to effectively manage this economy. A friend of mine says he gets more nervous every time he hears Timothy Geithner speak.

The Sound of Silence

There is a landscaping material business close to my house. The sound of the digging equipment is audible from my house and it always been very busy in the spring and summer months, 6 days a week. But this year, there has been no work on Saturdays and it has also been quiet sometimes during the week. People are spending less money on their homes as property values continue to suffer.

The Rest of the Best

It is interesting that a multitude of economic indicators show an increase of only 1-2% versus a year ago. That was when the recession was ending. That means we have not moved that far from the bottom, which helps explain the lack of job growth. In addition, the experts expect Q2 GDP to be revised downward (not upward as I anticipated). This means the top economist were totally baffled by the Q2 results which is consistent with my belief that some economic indicators are giving false readings due to the unusual conditions.

So Where Are We?

Most of the indicators previously discussed reflect a very slow economy. There are no reliable trends and few reliable leading indicators at this time. Economists will still be analyzing the last three years of turmoil, twenty years from now.

The Model “T” still says no double-dip recession, but a long, slow, climb up a steep hill. This definitely can’t be called a recovery, but the conditions are unusual and economists are struggling to understand where we are. And if you don’t know where you are, you can’t know where you are going. More on this next time.

Wednesday, August 11, 2010

Facing Off With the White House

Was it just a coincidence that less than 24 hours after I declared the “recovery’’ over that Tim Geithner op-ed piece “Welcome to the Recovery” appeared in the New York Times? Is the White House reading this blog? (If so, I may want to review my tax returns). Maybe they are looking at the same data I am and coming to the same conclusions. However while it is safe for me to declare the recovery over, Tim needs to convince us that it is just beginning. It reminds me of the dead parrot skit from Monty Python. (Link at the end of the blog).

Me: “This recovery is dead.”

Tim: “Oh no. The recovery is certainty not dead. It’s just resting a bit.”

So I disagree with Tim Geithner. And many economists also disagree, so Tim you just got faced.

Romer Also Gets Faced

My March 25 blog (Jobs Are Job One) put forth the idea that there is a big problem with structural unemployment. In April, White House economic advisor Christina Romer declared in a speech that structural unemployment is not a significant factor. In the past few weeks several economists have written articles about the impact of structural employment in this recession (Come on guys, try to keep up. For the love of Maynard Keynes, I don’t even have an economics degree!).

I disagree with Christina Romer as do bunch of real economists, so Christina you also got faced. She was so embarrassed, she resigned.

The Long-Term Unemployment Problem

In my last post I presented the idea that the economy was operating in a traditional manner, except for there were 14.6 million people “officially” unemployed and millions more that were either working part-time or had dropped out of the labor force. The unemployment problem is huge due to the unique economic conditions. This recession is different because of the many professional, white-collar, workers who lost their jobs. These are engineers, accountants, information technology workers, production support and other “office” workers. Many had been with their companies for over ten years and many are over 50 years of age. In previous recessions, fewer white collar workers were cut and most decisions were based on seniority. This time it was largely based on salary and workers who had been with their companies the longest and therefore made the most money were let go.

These workers are having difficulty finding new jobs. The competition for the few jobs being created is fierce. The number of people unemployed more than 27 weeks was a record 6.75 million in June and still at 6.57 million in July. After factoring out all the noise, a paltry 12,000 jobs were created in July that and available to the 20-million plus job seekers. You don’t need a calculator to do the math. Does this look like a recovery to you? Many economists do not expect the unemployment rate to drop to acceptable levels until 2015. I think if you add in all the potential job seekers it could stretch well into 2016.

The New Structural Unemployment Problem

Structural unemployment is unemployment caused by fundamental changes in the structure and make up of employment markets. It differs from cyclical unemployment which is caused by the business cycles. The recession caused the increase in unemployment, but I contend it is structural unemployment that is keeping the unemployment rate high.

One type of structural unemployment involves geography. If jobs exist in Seattle and the workers to fill those jobs are in Miami, then you have structural unemployment. (Note: You do have some of this now in that many workers cannot move to new jobs because their mortgages are “upside down”. Traditionally we have considered this geographic structural unemployment only within our borders. But if this is a “world economy”, then this model is outdated.

I believe that when we started exporting production jobs to other countries in the 1990’s, we laid the groundwork for the exporting of the professional jobs that were supported by a balanced workforce. The reason why the professional jobs did not exit sooner is that they were being supported by the housing bubble. When the bubble burst, so did the support.

Now the investment capital, innovation, new factories and pure economic growth is in China, India, and other countries. The professional jobs that support this growth are where the factories are. The workers that have the skills to fill these jobs are older workers in the U.S. who do not speak Chinese and are not going to move to China. I questioned my logic until I saw an article on MSN Money titled “Should GM just move to China?”

Who Moved My Job?

Millions of unemployed workers are left to ask, “Who moved my job”? And of course it was your government. This was done by all your government, both parties, for a long time. No matter what the excuses, the U.S. has not played the game well. When you look across the poker table and your opponent has most of your chips and hasn’t been hitting any lucky draws, then son, you have been outplayed.

Our government needs to realize this is mainly structural, not cyclical unemployment. Stimulus programs are useful for cyclical unemployment, but ineffective for structural (that’s why we saw a limited impact to the huge stimulus plans). Unemployment compensation is designed to help workers during cyclical unemployment, but becomes welfare at some point during structural unemployment. I’ve seen this from both sides (having received unemployment benefits during my job search) and I have no good answer to this one.

More Than Just Votes

To get out of this mess it will take more than just voting to change the party in power (although this may help eliminate some of the factors holding the economy back). It will take more government intervention. But just throwing more stimulus money at the problem will not work for the reasons listed previously. What is needed is a strategy to rebuild and restructure the U.S. economy. It will take skilled people with expert knowledge to do this. These people exist, but they are not in the government today.

We desperately need more people with solid, international, business experience in our government. The consequences of not utilizing these skills at this time are dire. In 2008, facing the biggest economic challenge of our lifetime, we were given the choice of the financial Tweedle brothers and we firmly rejected Tweedle Dee.
Dead Parrot Video

Monday, August 2, 2010

Something Just Ended (But It Wasn’t the Recession)

To review some prior observations:

- The U.S. economy had been growing due to “artificial” factors since 1995. This period ended abruptly with the housing and financial crises in 2008.

- Because the period preceding the crash was far from normal conditions, we cannot expect the economy to ever return to those exact conditions. Instead we should expect a “new normal” at some point, with many conditions similar to those in 1995.

- The economy is being propped up by government stimulus and bailouts. The strategy is to offer support in the short run and buy time until the economy heals and can grow on its own. This has impacted the normal business cycles and has caused some traditional economic indicators to be unreliable.

- Because of the damage done to the financial and housing markets, this will be a long, slow, recovery that is a “UL” in shape. Others have called it a “reverse checkmark”.

I still believe all these things are true, except for the last one.

The economic recovery is over. Did you miss it?

I’m not trying to be funny. And this is far from a laughing matter for the15 million people who are unemployed.

2010 looks like a “reset” rather than a recovery. Many of the graphs of industry sales and economic conditions are now following a normal cyclical pattern. If you look at just the curves, you would have no indication than anything is amiss. It is only when you compare to 2010 data to the peak years in the growth cycle that you realize how weak the economy still is. Recessions and recoveries tend to interfere with the seasonal patterns. This is not happening in 2010. The economy is not recovering, nor is it receding. Therefore, I contend it has “reset”.

Consider the job market for example. When job postings increased in Q1 of this year, people thought that the job market was improving. However, this always happens (unless you are in recession) because companies get their hiring budgets approved for the new year. But job activity cooled in Q2. In a true recovery, the job market growth would have accelerated, not fell back to seasonal patterns.

So this is a reset, not a recovery. With most industries returning to normal business cycles and the government stimulus programs losing impact in other industries, I believe the economic recovery ended sometime in May. This recovery lacked in both duration and strength. Like a disappointed bride on her wedding night, we cry out, “That was it?”

Almost every article on the economy mentions the progress of the recovery. We are expecting a full recovery, because that is what is supposed to happen. We are hoping that things recover to the same conditions as early 2008 before the downturn. But we are like older children who still believe in Santa Claus because it’s good to get the presents. We are like the fair maiden who expects the prince to show up because it’s good to the princess. But Santa Claus has declared bankruptcy and the prince’s castle just got foreclosed on.

If you apply this logic to the economic reports, it does make sense. This is not a “jobless recovery”. It is not a recovery at all, so you don’t expect much job growth. There won’t be a double dip recession because in order to dip, you had to significantly rise. Sure there was a slight recovery, but falling out of the first story window hurts much less than falling off the roof.

I expect the economy to keep following normal cycles at a growth rate consistent with a high unemployment rate and tight credit. This translates to 2% - 3% growth until the housing market begins to grow and the credit markets return to normal (two key markets that have yet to reset). Of course under these conditions, it will not be steady growth. There will be some bumps and jumps along the way.

There is some positive news with the Great Reset of 2010. Many companies are generating profits and operating well with the return of normal business cycles. Looking at the charts you could assume that everything is now fine, except that we have reset with the unemployment rate at 9.5%. That is a problem, a big problem, and will be the subject of my next post.

GDP Update

My panel of economic experts predicted a Q2 GDP (in March) of 2.9% and the first government estimate was 2.4%. The panel ended up nailing Q1 with a forecast of 2.6% versus 2.7% actual.

The forecast for Q3 is 3.0% which looks high at this point. I expect Q3 GDP to be around 2%. There is some type of shift going on because the total Wall Street Journal panel of economists seemed to be fooled by the low Q2 estimate of 2.4%. Only two out of 55 economists forecasted a Q2 GDP of less than 2.5% in the June survey so I would expect the 2.4% estimate to be adjusted upward.

Sunday, July 18, 2010

Let’s Hear It for the Mom

My mother Betty Ake passed away on July 9 at the age of 88. While she was alive I would have said she had no connection to this blog. However, you see so many things looking backward that unfortunately you don’t see in the present.

Here are some influences my mother and her father (my grandfather) have had on me (and this blog):

Good Writers are Made, Not Born

Good writers start out as good readers. I grew up in a home that subscribed to two newspapers, seven days a week. The newspapers were read front page to back every day. My mother read books her entire life and read her Akron Beacon Journal to the very end. Therefore, it is no surprise that I developed a love of reading, a thirst for knowledge, and strong writing skills.

The Stock Market Can Be a Source of Great Wealth

Many grandparents buy their grandchildren savings bonds. My maternal grandfather was a superb stock picker. I’m not sure he bought a savings bond in his entire life. When I was born he bought me a small amount of stock in three companies. Two of the three stocks (the lesson of diversification) did very well. The stock growth (including splits) and the dividends invested in a savings account were enough to pay for my college education 18 years later.

However, my father was determined to pay for my college education himself and did so. The stock money was used to assume a very favorable mortgage on my first house. The low interest rate allowed me to both save more money and build more equity in the house. This simple act of giving me stock resulted in a tremendous start to building wealth. In addition because I was already a stock owner, I was motivated to learn about and become interested in the stock market. I am not anywhere near the stock picker my grandfather was, but I think he would be very proud of the Model T.

Money is Important – Manage it With Care

My parents taught me how to manage money. My mother managed her money very well and passed those values down to me. After my mother suffered a heart attack two and one half years ago, I had to manage all her finances. She was never totally comfortable with this situation. What she didn’t realize is her influence and guidance had assured that her money was in very capable hands.

You are Responsible for Your Decisions

My mother was big on personal responsibility. When I failed to achieve something growing up, excuses were not tolerated. So when making financial decisions I try to understand the investment and the risk, because the outcome is my responsibility and I have to live with the results.

Hard Work Is Expected and Enjoyed

My mother began working in her uncle’s grocery store at age seven. She later worked in her father’s grocery store and then took an additional job as a school secretary. So for many years she worked two jobs, until a quick romance turned into to an unexpected marriage and subsequent pregnancy. (See a video clip of the story here). As I write this I realized that my mother gave up a career (two jobs) she loved, to raise me.

Moving Forward

At a time when newspaper readership is down, I subscribe to two newspapers, seven days a week. The newspapers are read front page to back every day. I have always worked two jobs including leading projects at church, my stint as a stand-up comedian and my current work teaching college classes. That doesn’t include my third job of managing my mother’s business affairs, a job that unfortunately I have just recently successfully completed. I doubt that I will ever be able to pick stocks as well as my grandfather, but that doesn’t mean I will quit trying.
Here is another video clip from my eulogy for my mother.

Monday, July 5, 2010

A Tale of the Honey Dippers

Once upon a time there was a land called Nectarinia. It was a land flowing with vast amounts of honey. (Yes, there was also some milk, but this wasn’t the Promised Land.)

The people actually had to work to harvest the honey, but they loved producing great amounts of honey and the freedom to enjoy it as they choose. The people also understood that they needed to contribute some of their hard-earned honey for the common good of Nectarinia. This honey would be used to pay for public goods, such as guards to protect the land from outside honey raiders.

The people’s honey was sent to a special location called the District of Nectar and placed in a big honey pot. The inhabitants of Nectarinia selected certain people to go to D.N. to manage the honey pot and distribute the honey to where best it was needed.

For a while everything was wonderful, but over time things began to change. The selected “honey dippers” were mesmerized by having access to so much delicious honey. Also, they were captivated by the power they gained by deciding who in the land would receive special honey from the honey pot.

So they kept asking the people to provide more and more honey for the honey pot. “We need more honey please. We can do so many wonderful things, if we can just have some more of your sweet honey”, they would say. The people would sometimes object, but the honey dippers did say they would do wonderful things. So the amount of honey flowing into D.N. greatly increased. Bigger and bigger honey pots were built to contain all this delicious honey. The honey dippers relished being able to control more and more honey and found creative ways to enjoy some of the honey themselves.

The honey dippers gained so much power and influence that they gained many friends who just wanted to get close to and have access to the honey pot. Honey making organizations sent gifts of honey to the honey dippers to gain favors and hopefully gain some more scrumptious honey from the honey pot. So called “honey diggers” were also attracted to the honey dippers because of their honey and power; some even were motivated to shake their honey makers to gain their favor. This made being a honey dipper a highly desirous job. They weren’t really working but they were getting honey for nothing (and the chicks for free).

At some point the honey dippers became totally obsessed with honey and power. They craved the honey and became addicted to it. They ate it, they drank it, and they rolled around nude in it. They knew it was the dipping and giving of the honey that created the intoxicating honey power. So they started dipping so much that they soon ran out of honey. They extracted more from the people, but that wasn’t even enough. They began borrowing more honey to dip. That worked great so they borrowed some more. They even started dipping into the large pot that held the honey collected so the older people in the land would have some honey in retirement. They said they would replace it someday, but they were so obsessed with dipping the honey that they never did.

The people of Nectarania tried to replace the obsessed honey dippers with new ones, but this was very difficult to do. Some of the dippers had been dipping so long that people just accepted their honey addiction as normal and were consigned to providing them with greater amounts of honey. In other instances, new dippers were sent to D.N. and were better for a while, but the longer they were there the more they too became enamored with the honey pots.

Just when it looked like things couldn’t get any worse, the people choose a pooh bear as their next leader. They knew pooh bears loved honey, but this pooh bear promised the most wonderful things the people had ever heard. And this pooh bear was so full of it, that sweet honey literally dripped from his lips. Even though the production of honey was temporarily receding in Nectarania, the pooh bear dipped honey like crazy. While some people complained that he was dipping too much honey, the pooh bear reasoned that after this slow time was over that he could come up with many new ways to extract more honey from the people. The people of Nectarania began to fear that this great pooh bear would squeeze them harder than ever before.

The people of Nectarania consulted their history books and read that at one time a king ruled the land and controlled all the honey. This king was deposed when the people decided that they wanted the freedom to control their own honey. But now it seemed that the king had been replaced by many little kings led by a grand pooh bear who at times seemed to want all the honey he could get his paws on.

Monday, June 21, 2010

Potty Economics

The latest unusual economic indicator is located in your bathroom. It’s toilet paper! I’m not making this up. A recent article on MSN Money says toilet paper sales can tell us much about the economic recovery. (article here)

I feel obligated to comment on this new indicator since I have written about other unusual economic indicators. But I assure you that I will treat this subject with the seriousness and professionalism it deserves and will resist the temptation to include any snide puns.

Some economists are flush with excitement at the possibility of a new economic indicator, but I think the argument on this one is a bit too thin to do the job. You know that the situation has hit bottom (or touched bottom) when economists are reading toilet paper instead of tea leaves.

Toilet paper sales plunged in late 2008 and 2009 as the economy swirled downward. You could have knocked me right off my stool with this news. I would have theorized that toilet paper sales would be impervious to economic conditions, but The Great Recession was so nasty sales and production both went down.

Consider that there are no substitutes for this product. Corn cobs or leaves might work in a pinch, but are not viable in the long-term. However, many “downsized” people downsized their toilet tissue purchases. It is speculated that people went from using two-ply to one-ply and from name brand to cheaper off-brands. I knew the recession resulted in tough times, we now know it also created rough times.

There is a possibility that some people did intentionally cut back on toilet paper usage for environmental reasons. Sheryl Crow proposed in 2007 that global warming could be improved if people limited themselves to one sheet per session. Then there was the 2009 campaign from Greenpeace that claimed that our use of plush toilet tissue was destroying the environment. While I think it is important to go green, when green goes up against brown, brown usually wins. And if you wanted to quickly destroy an environment, imagine yourself on a four-hour plane ride with a group of Sheryl Crow disciples. (I wonder if those drop-down masks work at normal cabin pressure).

But what makes this recession different is the amount of people who suffered a reduction of income. The unemployment rate is around ten percent. Add in the part-time workers for economic reasons and the discouraged workers (no longer looking for work) and you are up to 17% of workers. Now add in the people who took a pay cut in 2008-2009 which is basically everyone in the transportation industry as well as many other hard-hit industries. Add to that nearly every commission sales person (including every real-estate agent). You need to include all waitresses and service providers whose income and tips depend on customer volume. Finally, you have many small business owners whose income also is based on volume. People depending on dividend and interest income from investments also took a hit.

Run the grand total and maybe 30% or more of the working population suffered a drop in income. And even with the recession over, incomes are still lower than a few years ago. While most corporate pay cuts have been restored, many people in the other categories are still are trying to recover. In addition, many workers laid off in 2008-2009 have found new jobs that pay less than their previous ones.

However, the economy after being strained is starting to loosen up and interestingly toilet paper production is up 13%. Toilet paper factories are being dumped on with orders and are pushing out product at a rate not seen in months. This is an indication that consumers are wiping away their economic fears and spending money again.

And now the market may be having a movement back to the other end. A new three-ply toilet tissue sold well in 2009 and continues to swell in popularity. The product’s success was probably fueled by people who maintained their income levels and were looking for more comfort. Or it may just be the stress of the economy has inflamed the hemorrhoids of the nation like never before (we need some o-balm-a).

You don’t need to be a bloodhound to know that conditions were smelly and this is one paper that you didn’t have to read to know things had hit the skids. I don’t want to poo-poo the findings too much, but this is a trailing indicator (so lift up your shoe and remove it from the discussion). I don’t believe this indicator means squat unless there is another recession of this magnitude. There are many products that followed the same sales pattern as toilet paper during this recession. It is not unique so I believe that we can eliminate this indicator from the discussion and start back to square one.

Thursday, June 3, 2010

Very Dippy Thoughts

Today’s topic is the “double-dip”. Some double-dips are good. My favorite double-dip is a German Chocolate Cake/Jamoca Almond Fudge combination at Baskin Robbins. Likewise, double-dip roller coasters can be fun. Riding these is very similar to investing in the stock market. The major difference is that you are guaranteed to get off of the roller coaster with the same amount of money you started with, very different with stocks.

Most double-dips have negative connotations. The charlatan who unethically or illegally gains financially from drawing income from two sources, George Constanza double dipping his potato chip, and of course the dreaded double-dip recession.

Some analysts appear obsessed with the possibility that we will have a double-dip recession. Every week there are new articles on the subject, but double-dip recessions are rare. Economists are concerned that global credit problems, a Spanish banking crisis, a new Korean War, a second housing slump, money supply tightening and a disruption in Chinese trade, will plunge the U.S. economy back into recession. It is possible for this economy to fall back into recession, but to dwell on the subject is sort of morose and potentially self-defeating. There will be plenty of time to analyze it after it happens, so shut up already.

The Model T is not predicting a double-dip recession. The current graph of The Model T is shown below. It still says we are in the beginning of a “UL” shaped recovery. Note though that according to the graph, the economy will take an extended time to recover.

GDP Forecasts
My panel of economic experts forecasted a 2.8% growth rate for Q1 and the last revision was 3.0%. The panel is forecasting 3.5% for Q2, 3.1% for Q3 and 3.2% for Q4. So not even close to a double-dip predicted here. Although it should be noted that the panel members did not predict the first recession. (For what it’s worth, I personally think the forecasts for Q3 and Q4 are high).

The Stock Market

June is a key month for the market. The May drop was more pronounced than normal for the start of a bull market. If there is more correction in June, this market has no legs. Almost all the “data driven” models are predicting some type of market correction of 10-40% or even more. Most analysts predicting market increases are basing their forecasts on emotional based factors. They argue that the data models are not valid due to the indicators being unreliable due to the bizarre financial circumstances. This argument is self-defeating. If the economic indicators remain messed up, it is because the economy remains messed up. The unreliability of the indicators is a bad thing, not a good thing.

Yes We Could Double-DipThere is a way that a double dip recession could happen. If the stock market drops 20% or more in a short time period, panic will reenter the economy. Remember that all recessions have some psychological factors and if panic causes consumers and businesses to stop spending, you will get more layoffs and possibly another recession. This would indeed be a strange occurrence. The stock market could drop to where the data models say it should be and this causes the recession. It hurts my head to even think about this one. My suggestion is for everyone to head to Baskin-Robbins and chill out.

Monday, May 24, 2010

Hee Haw Economics

With respect to the late, great, Archie Campbell (video clip at the bottom)...

Q1 GDP increased at a rate of 3.2%

That’s good. The economy continues to grow and is growing at a rate slightly above average.

No, that’s bad. The economy usually snaps back much stronger when recovering from a deep recession.

Unemployment increased to 9.9% in April.

That’s bad. There are over 15 million people unemployed and the rate is approaching the psychologically depressing 10% mark.

No, that’s good. The unemployment rate increased despite the fact there was job growth of 290,000. This means the job market is improving and many “discouraged workers” have started looking for jobs again.

The housing market is showing signs of life

That’s good. Sales of new and existing houses are very strong and builder confidence is improving.

No, that’s bad. The housing market was being propped up by the tax credit that ended in April and action by the FED to support lower mortgage rates. There was a steep drop in building permits in March and inventories of new houses remains very high. This means future demand may not be as strong.

Gas prices are going down.

That’s good. Lower gas prices provide people with more disposable income which supports higher consumer spending.

No, that’s bad. Gas prices are an indicator of economic health. Prices are going down while crude is still spewing in the gulf. Something isn’t right.

Wal-Mart sales are up 6%

That’s good. Sales are recovering for many major retailers, indicating consumer spending is growing.

No, that’s bad. Wal-Mart’s U.S. sales are actually down 1.4%. Wal-Mart claims that many of its customers are so strapped for cash that they are making fewer shopping trips (due to gas expense) and using more food stamps.

Business inventories are increasing.

That’s good. Businesses are restocking in response to the severe inventory draw down and stronger consumer spending. The inventory build-up has boosted manufacturing activity and has been a strong contributor to GDP growth.

No, that’s bad. Inventories are approaching levels that are adequate for current spending amounts. This means the boost provided by inventory restocking is ending.

The government monetary and fiscal stimulus is working.

That’s good. The government’s efforts have stabilized the economy and have bought time for the economy to begin growing on its own.

No, that’s bad. The stimulus can only take us so far. As the stimulus begins to wear off, expect the economy to slow later in the year. The latest Leading Economic Index was negative for the first time in over a year.

The stock market went down over 300 points in one day last week.

That’s bad. The stock market rally has been the most positive economic news of the last year. The Greek freaks and slower economic growth could stop the rally.

No, that’s good. Several market analysts are predicting an ugly stock market crash. If the market is headed down, better that it happens in tolerable chunks instead of a frightening decent. Even if the stock market suffers a significant drop, it is critically important that consumer panic does not return.

A woman I saw at the supermarket was buying over 20 packages of frozen peas.

That’s good. If you have that much money to stock up on frozen peas, things can’t be that bad.

No, that’s just plain weird. I just hope her family is not surviving on only pea soup.

Check out the Archie Campbell clip: That's Good

Sunday, May 16, 2010

This Insanity Won’t Stop!

Now for some words of wisdom from that great financier Buffet…..

I took off for a weekend last month
Just to try and recall the whole year.
All of the faces and all of the places,
wonderin' where they all disappeared

It's these changes in latitudes, changes in attitudes
Nothing remains quite the same
With all of our running and all of our cunning
If we couldn't laugh we would all go insane

Things are getting better. Attitudes are improving. The great majority of experts believe that the worst is behind us and the recovery has begun.

Yes, the economy is recovering faster than many expected, but we still have a long way to go. Things are not quite as good as they seem. Some factors to consider:

- The "percentage change" bias factor: Most economic statistics for 2010 are quoted as a percentage change over 2009. Since 2009 was such a horrible year, the 2010 percentage increases look better than they really are. On many factors it is more enlightening to look at the statistics over time. Many economic indicators (and industries for that matter) won’t “recover” until 2011 or 2012.

- Several sectors (housing, auto, finance, etc.) are being propped up by the government. There could be issues when the total government stimulus effort wears off. Expect economic growth to slow in Q4.

- A recent article in Business Week concluded that the banks are not doing as well as it appears on paper (love those creative accountants!).

- There are still problems in the housing sector and experts are uncertain what happens when all the so called “shadow inventory” (vacant houses owned by banks and individuals that are not on the market yet) comes back into play.

- There is a structural unemployment problem. The number of long-termed unemployed continues to grow. There are many people who have been unemployed for over a year. The number of people in the job-seeker groups that I previously belonged to is not decreasing.

On the other hand, there are many positives:

- Wages and hours worked are increasing. This means business activity is growing and more companies will need more workers at some point.

- Industrial production and capacity utilization keeps increasing.

- Freight growth is up. Trucking and railroad freight is growing faster than forecasted. UPS recently increased its forecast. Businesses continue to replenish inventories to support future sales increases.

- Retail sales are up. Consumer confidence is growing stronger by the week. The people with jobs are spending more money. I even did my part by finally buying a new, very expensive, big-screen TV so I could watch the Cleveland Cavaliers win the NBA championship (not making this up!).

- Auto sales are much stronger than forecast.

The Model T Got This One Right

While the Model T has not been accurate recently as a stock market predictor (its intended purpose), it has been very accurate charting the economic recovery. Back in October (seven months ago!), The Model T predicted what I called the “UL” recovery. It wasn’t a “V” shaped, it wasn’t an “L” shaped, but it was weaker than a standard “U” and it wasn’t a “double dip”. Here is the graph from October, and this basically reflects where we are at seven months later. We may be doing a little better than the graph right now, but if the economy does slow down in Q4, it should just about balance out. (I will publish a new graph soon)

What About Stocks?

This will be an extended recovery due to the damage to the financial and housing sectors. Because the business cycle has been extended, the stock market fluctuations within the cycle may be more pronounced. There is still a concern that the market has priced in a “V” shaped recovery, but is actually getting a much weaker “UL”. If this is the case, get ready for another wild ride. Remember, if we all weren’t crazy, we would just go insane.

Reading departure signs in some big airport
Reminds me of the places I've been
Visions of good times that brought so much pleasure
Makes me want to go back again (not quite)

If it suddenly ended tomorrow
I could somehow adjust to the fall
Good times and riches and sons of a bitches
I've seen more than I can recall

Thursday, April 29, 2010

The Frito Bandito Rides Again

"Aye, yii, yii, yiiii, I am dee Frito Bandito. I like Frito's Corn Chips. I love them, I do. I want Frito's corn chips. I'll take them, from you."

You remember the Frito Bandito (If not, click here). He went around stealing everyone’s Fritos Corn Chips. He was very happy doing it. When he was caught, he was totally unrepentant. There is no evidence that he was ever punished for his crimes and the stolen Fritos were never taken away from his possession.

What a disgusting role model for children!

Today’s parallel? No, we’re not heading to Arizona. We’re going to Wall Street. Wall Street, where some financial firms sold securities that were loaded with “toxic assets” as high quality products to unknowing investors. Knowingly doing this is a crime. It’s called fraud. This crime was committed thousands of times. So how many arrests have there been? Haven’t read about many. Some executives have lost their jobs, but overall accountability has been virtually non-existent.

Repentance? Very weak there also. The Goldman Sachs executives testifying this week offered many excuses, but no contriteness. They tried to say it was the investors fault for buying the securities. If you knew the securities were flawed (as internal e-mails indicate) and you marketed them deceitfully, you are guilty. If you didn’t know the securities were flawed, you needed to know because that’s your job. That’s your area of expertise. You are still guilty.

Not only are the guilty not being punished, some are being rewarded. Those risky securities deals didn’t work out so well? That’s okay, here’s a bailout. Oh, profits are down? Here’s a big bonus anyway. If there is no profit, there should be no bonus. That’s the way it works everywhere else. The argument that not paying a bonus would result in a significant pay cut is laughable. Don’t like taking a 30% pay cut? Hey buddy, try taking a 100% pay cut like 15 million people in the U.S. because the companies you worked for (bleeped) up the whole (bleeping) economy! And the argument that workers not receiving bonuses would then leave their companies for other jobs? That means they voluntarily get to seek other employment. Again, many people now wish they had that opportunity.

If a robber gets caught stealing $100 after breaking into your house, he goes to jail. Some people who are responsible for millions in fraud, drive by the jail on the way to the country club. You may have some compassion for a robber stealing to feed his family. It is more difficult to forgive someone stealing to obtain a bigger yacht.

And they get to keep the money! What a sweet deal. Wearing wingtips and cufflinks should not prevent you from being punished for your crimes. How have they evaded the government’s punishment? The people in the government wear wingtips and cufflinks also. They also get massive campaign contributions.

So the Frito Bandito was just ahead of his time. He would have made a great securities trader during the past decade. Still, I would advise him to stay away from Arizona. Better to steal your Fritos in some other place. Aye, yii, yii, yiiii, indeed.

Wednesday, April 21, 2010

California Dreaming

News Item: 78% of Americans say they can’t trust the federal government and do not believe in its ability to solve the nation’s problems (Pew Research).

What it means: 22% of Americans are not paying attention.

A few weeks ago I wrote about the structural unemployment problem the nation is facing and the challenge of government to create an environment in which many new jobs are created by the private sector. To accomplish this we would need congressmen who have practical business experience in the private sector.

So quick, name all the current congressmen you know who fit this description. There may be some, but I can’t name them. Okay so let’s lower the bar. Quick, name all the congressman you know who show any understanding of business or basic economic principles. I can name two.

I knew there was a problem in late 2008 after the credit crunch hit. As I watched my company’s orders fall off the cliff because our customers could not obtain credit, I thought that unless this problem was addressed quickly a major economic plunge would soon follow. At the time Congress was engaged in discussions about many things regarding the economy, but this was being ignored. Finally, Rep. Eric Cantor (R- Virginia) clearly stated the potential impact of the credit freeze on equipment spending. Yes, I thought. Someone gets it, maybe we can be saved! No, members of both parties seemed confused by Cantor’s statement and went on discussing possible actions that did not prevent or even slow down the recession.

Another defining moment happened recently during the “Healthcare Summit” which was supposed to be a discussion and debate about the proposed healthcare bill. You remember what a debate is supposed to be. You give your argument without name calling, or stupid sound bites and then the other person gives his argument and then you productively discuss the issue back and forth. The audience is educated by the discussion and then has ample knowledge on deciding for themselves which ideas they prefer. This is essential in a democracy and oh so lacking today.

During the summit, Rep. Paul Ryan (R-Wisconsin) brought up some economic issues of the plan for discussion. The problem was that no one on the other side felt qualified or comfortable to engage him in debate. This was sad and embarrassing. President Obama was left hanging with no help. It wasn’t really his place to debate the details of these issues, so he made some meaningless comments and quickly changed the subject.

So we need many more people in Congress who have business and practical economic knowledge for the new challenges we face. We need small business owners who have experience building things, making payrolls and managing workers. We need people who have gotten their “hands dirty” and understand how the economy works at the ground level. We need these people in cabinet level positions also. We have plenty of buttoned down geeks who understand high finance, what we really need are people who understand low finance.

There must be a change soon. We send trillions of dollars of taxes to be spent by people who have no practical economic sense of how to spend it. Most are lawyers and career politicians. Again, would you give your investment money to a financial advisor who had no financial experience? Would you set up a trust with an executor who had no idea how to manage it? If you don’t understand business and practical economics, I don’t want you anywhere near my tax dollars and it doesn’t matter what party you belong to. And they are my tax dollars because originally they came out of my paycheck. Some politicians are so dense that they oppose the Tea Party movement not on principle, but because they really do not understand why these people are so angry.

But things may already be changing. In two house district primary elections near where I live, there are candidates with strong business experience. One has no political experience but owns several car dealerships. Would I vote for him (I don’t live in his district) in November over the political hacks who vote as the party tells them to and then read the talking points to explain their actions? I think I would.

Also it is interesting to see what is happening in California this year since this is where many trends originate. Two of the strong contenders in the primary elections are Meg Whitman former CEO of eBay (governor) and Carly Fiorina former CEO of Hewlett- Packard (Senate). While you can’t consider them “small” business people, these woman know how to balance a budget, manage people and make a payroll. I almost wish that I lived in California so I could vote for both of them.

Wednesday, April 14, 2010

Beware the Devil Woman

This is the story of one man’s attempt at the pursuit of happiness and how it contributed to the Great Recession.

I won’t forget the first time I saw her. Bleached blond hair, heaving breasts, tight jeans, packaged all so right. You couldn’t miss her. I just stared at her from a distance, instantly realizing that she was oh so attractive and oh so out of my league.

I quickly passed by for a closer look when suddenly she spun around and said “Like what you see?”

I stood mesmerized, unable to speak a single word.

“Shy, I like that”, she cooed as she winked and bit down seductively on her puffy lower lip.

I still just stood there staring into her big blue eyes.

“My name’s Becky, Becky Housing, and I can make all your dreams come true”, she said.

“But I don’t think I can afford you”, I replied. “I mean I don’t think my assets are big enough to satisfy your requirements.”

“Oh don’t worry about that”, she said. “We will try a position I call “subprime”. It will give me all the pleasure I need and will be absolutely tantric for you.” 
She's a brick ---- house!

Then she slowly slid her hand down my body and squeezed my most private part ---my wallet.

Wow! She was a prime piece of real estate and I wanted in.

It felt so good being with Becky and my net worth continued to increase all because of her. There seemed to be no limit to the heights she could take me and it appeared to me that her assets actually grew more attractive every time that I saw her.

My friends marveled at my new found love. I was so in love with Becky and she had told me the truth: She was making all my dreams come true.

And she was so sexy and mysterious. When we had relations, the lights were always turned off. Becky said it was better for her if I was kept in the dark. I didn’t care, it was the best stuff I ever had.

I knew I had found true love and financial bliss and she kept taking my portfolio to higher and higher climaxes. I was determined to ride Becky wherever she wanted to take me.

But I was at work when I heard the news. There was a report that something very bad had happened to Becky. Some sort of “crash” that was related to this subprime method.

I rushed home and there was Becky lying motionless on the floor. Her fake breasts had ruptured and fluid was pouring out of her body and steaming out the door. Likewise liquid flowed from her fake lips. The beautiful hair was really a wig that was now lying on the floor beside her. I now realized that everything about Becky had been false. And incredibly, she wasn’t even a woman.

And it was even worse than that. There was this awful stench. It turns out her assets were toxic. I ran out the front door to warn my neighbors, but it was too late. To my horror I found out that other guys on the block had been secretly involved with some of Becky’s many sisters. One poor guy was involved in a threesome with Cindy Housing and Fannie Mae. He didn’t even realize that Fannie Mae would give it up cheap to just about anybody.

Now there was such a stream of toxic assets flowing down the street that it even destroyed the houses of people that never were involved with Becky and her sisters. It caused a chain reaction of pandemonium. Many people lost their homes. Many people lost their jobs. Some people lost both.

If only I could have resisted the allure of Becky Housing, my life and the lives of other would be so much better now.