Monday, July 23, 2012

Paybacks Are Indeed a (well you know …)

Young Billy Economy had just graduated from high school.  He had earned decent grades, but had not received any scholarships.  He did not have any money saved up for college, but he did have a long-range plan.   He would borrow money for college, study arduously, get a degree, get a great job with a high salary, work very hard and then someday, have a big-ol’-pile of money.     

So he applied for a student loan and was approved.  However, in this fable, he received his entire four-year loan in one lump sum up front.  Billy sat and looked at the newly acquired funds.  And then Billy had an epiphany.  “If my goal was to acquire a big pile of money” thought Billy, “then I have achieved my goal very fast without having to do all that work!”
Then Billy took the money, ran off and partied like a rock star.  He frolicked with the chicks from “Bankers Gone Wild”.  He engaged in multiple encounters with that promiscuous “dame” Becky Housing.  He injected derivatives.  He engaged in back-door financing and sub-prime deals.
He was having a great time with his wild, lascivious, lifestyle until one morning when he awoke and called the bank to get more money.  To his utter surprise he was told his account was dry.  He rolled over and found a fat, ugly, Greek, woman in bed next to him. (Bloggers note:  I think Greek women are very beautiful and know several attractive Greek ladies, however for purposes of the story, this woman was lacking important assets).
“Shall we do it again, dahling?” she purred.
“I’m out of money! exclaimed Billy.
“Get out of my bed now, you worthless piece of crap”, she demanded.
So now young Billy found himself broke and forlorn.
Now you might think this is a modern, economic-based, version of the story of the Prodigal Son, but it isn’t.  There is no wealthy father to bail Billy out and Billy is not at all repentant.  He is sorry that the money ran out, but he is not sorry for his behavior.
You might think that Billy is back to “square one”, but in effect he is much worse off than when he started.  He now owes the bank for the large student loan and he can’t get another loan because he wasted the first one.  He still needs to get a degree and now he is behind schedule.  He will have to work his way through college, which means it will take him much longer to graduate.  And unfortunately his first job is a night shift telemarketing job soliciting contributions for a political campaign. “No ma’am, he’s not inept, he just needs a few more years to really fix things.  Now can I put that on your Visa card?”
The Lesson
We basically partied like economic rock stars starting in the mid-90’s.  We feasted on cheap foreign-made goods.  We created a big Internet bubble. We pumped up the money supply and threw cash around at random.  This fueled an enormous housing bubble that did not pop, but exploded.  Our government watchdogs and regulators showed the same discipline as Secret Service agents with Columbian call girls.
And we all benefitted.  We didn’t object to these actions because people don’t care about the sins of others if it benefits them.  The problem is that after the crash, we did not all suffer equally.  Some of the worst offenders kept their illicit profits, while many innocent people lost their jobs and/or their homes.  A free-market, capitalist, system is not fair, just like life.  I think the aughts (00’s) should be labeled the “Enron Decade” because the total books “were cooked”.  Our stocks weren’t as valuable as we thought they were.  Our houses weren’t as valuable as we thought they were.  And our economic growth was based on lies.
Because we were irresponsible for so long, the Great Recession didn’t take us back to “ground zero”.  It put us in a big hole, just like Billy Economy.  That is why we can’t “snap back” from this recession as we have from previous ones.  This is why growth has been so anemic.   This is why unemployment remains so high.  Yes, bad choices made by the current administration have contributed to our lack of progress, but if the economy had been managed “perfectly”, things would be better, but certainly not yet good.  
It is going to take several more years of tough work to dig us out of this mess (just like Billy again).  Some people have said we are going to experience a “lost decade” (economic stagnation) similar to Japan.  I prefer to label it a “Payback Decade”, a payback for our years of “reckless” economic behavior.  And in this case, payback is indeed a bitch.

Monday, July 9, 2012

Feelings, Really Bad, Feelings

Feelings, nothing more than feelings,
trying to forget my feelings of love

Last October I detailed the giant “economic smack down” between Warren Buffet and the Economic Cycle Research Institute (ECRI).  ECRI was forecasting a recession and Buffet said emphatically there would be no recession.

Here are the GDP results since then:

Q3 = 1.8%
Q4 = 3.0%
Q1 = 1.9%
Q2 = 1.8% (expert panel estimate).
So the winner is Buffet in a rout.  In the same post I tried to split the difference between the two behemoths and forecasted a very mild recession with GDP near 0% during the time period.  And I was wrong.  I based this forecast on the belief that the best economic cycle model (ECRI) could be that wrong.

And neither could ECRI.  The Chief Operating Officer of ECRI will not admit they made a wrong call.  He instead claims that the forecast is still correct and that the recession just hasn’t happened yet.  I think a better explanation is that the economy is moving so slowly that it can’t even get to a recession.

The reason that ECRI has not backed off its recession prediction is that even though the economy continues to grow, the ECRI model never has stopped “flashing red” and it is flashing even brighter than it was nine months ago.  Say you have a warehouse of flammable material.  You install the best, state-of-the-art, smoke alarm system you can buy.  One day the smoke alarm sounds.  Firefighters rush to the warehouse, inspect the entire facility, but find nothing unusual.   So you have the system thoroughly inspected and tested and determine that it is functioning fine.  You then reactivate it and immediately the alarm sounds again.

Something is definitely wrong.  Last year there were logical reasons the economy sputtered after a hopeful start.  This year the economy is slowing for no apparent reason. (Unless you count Obamacare) I would be tempted to label this the “Molasses” recovery because it is moving so slowly.  But I won’t because molasses is sweet and this economy is anything but sweet to the millions of unemployed.   The latest employment report was sickening.  Forget 8.2%, the Wall Street Journal calculates the “real” jobless rate at 14.9%. 

Patti Domm (CNBC) has labeled this the “Zombie Economy”.  I said early this year the economy was wearing ankle weights, now it seems more like a ball and chain.  Last year I said it was the “Grocery Cart” recovery.  The wheels of this cart are now locking up.

So where are we?  We are slowing down from around an estimated 1.8% growth rate in Q2.  I think that number is high because the recent statistics for Q2 are weaker than Q1, so I’ll go with 1.5%.  Unfortunately, the question must be asked again: Are we now headed for recession?

Recessions are extremely difficult to predict, and very few economists are forecasting one now, even after the horrible jobs report.  Recessions are like diseases, they begin long before you realize something is wrong. The best model we have, the ECRI, was unreliable last year. The ECRI still says recession.  Buffet said in early June that the possibility of recession was low (not as positive as last October).

In December of 2007 I called my colleague Economist Pat because I thought the economy was getting worse.  I told him that it “feels” like we are entering a recession and he agreed.  I remember this conversation because the last recession ended up starting that month.

And I have a similar feeling now.   It feels like the economy started to recede in late June or early July.  I say feel, not think or even believe.  For the record, Economist Pat does not think a recession is imminent this time.

I do think this recession be extremely mild.  It could be a six-month period of just under 0% growth.  This is basically the same forecast I gave last October which was in fact “wrong”.  This recession will not be that traumatic because the economic was not growing that fast.  There won’t be massive layoffs because companies cut drastically during the previous recession and have been very careful in adding workers.  So expect very weak hiring, sort of like the June jobs report (get it?).  The stock market will retreat, but not that much.  So stay on guard and please let me know what you think.

And now we can say goodbye to the hopes of a strong economic recovery in 2012:

Teardrops falling down on my facew we can say goodbye to trying to forget my feelings of hope (love)

Feelings wo-o-o, feelings ....

Follow Up: I posted this on July 9.  On July 10, Lakshman Achuthan, ECRI COO, said in an interview on Bloomberg Televison he believes the economy is already in recession.