“I was dreamin’ when I wrote this, forgive me if it goes astray”
Everyone is asking the same question: When will things get back to normal? I think the more important question is: What is normal? We tend to want to define normal as the conditions that existed before The Great Recession hit.
But 2007 was far from normal. We had an economy fueled by an artificially stimulated housing market and out of control conspicuous consumption. This was funded by large financial entities taking extreme risks and consumers running up unreasonable levels of debt. This was very abnormal. We would like it to be normal because times were so good, but it was far from normal.
The rest of the aughts (00’s) were not normal either. The beginning of the decade featured a recession caused by the dot com bust and after that came the run up of the housing bubble. The 2001 recession turned out to be mild because we had two bubbles going at once. The dot com bubble burst, but the growing housing bubble kept consumer spending propped up.
The period of 1996-2000 was not normal. This was the run up of the dot com bubble and the beginning of the housing bubble. In addition, Robert Rubin (Treasury Secretary under Bill Clinton) figured out that you could have strong economic growth with low inflation by importing cheap goods from China. This strategy resulted in an erosion of the manufacturing base and created high trade deficits, but it resulted in an increase in the standard of living, so it was deemed to be good. We tend to enjoy abnormal, as long as it provides positive outcomes.
Many charts of economic and consumer trends start to make an unusual accent around the 1994-1996 time period, so I am deeming 1995 as the last year of “normalcy”. This is significant because it was so long ago. If you are under 40 years of age, you have no concept of “normal” because you didn’t have enough business experience at the time to understand it. If you are older than 40, you may just have trouble remembering that far back.
I can’t tell you when we will get there, but here is what I expect the “new normal” to look like:
Interest Rates: The current prime rate is 3.25%. It was 8.5% in 1995. Interest rates may spike due to inflation but should eventually return to levels resembling 1995. Mortgage rates were around 10% in 1995. Banks will return to the more tradition ways of making money. No more wild speculation, they will have to earrrrrrn it.
Inflation: Inflation may also jump in the short term as the Fed has a big challenge ahead. It has to try to put the brakes on the monetary stimulus by pulling money out of the system (let’s hope the Fed isn’t driving a Toyota!). Inflation was only 2.8% in 1995 and 2.7% in 2009, but now you have too much money in the economy and too much debt. The Fed will eventually stabilize the inflation between 3.5%-5.0%.
Home Ownership: Home ownership peaked at 69% in 2007. It was 64% in 1995. We don’t know how far this will drop before housing stabilizes. Ultimately, the 64% rate seems reasonable. Demand for housing will be impacted by the higher interest rates and lower ownership percentages.
Savings Rate: The savings rate was 1% in 2008. Some economists predict it will hit 8%. The 1995 rate was 6%. After the smoke clears and people become more confident, look for the savings rate to settle in around 4%-5%.
Imports/Exports: Imports from China were $268 million in 2008 versus $33 million in 1995. Of course we can never get back to 1995. However we have to implement fair trade practices and programs that increase exports and decrease imports. Trade balances have to even out in the long run and we have been on an import binge for over 15 years.
Taxes: We have created a huge federal debt due to reckless spending. Taxes may need to be increased to pay for all the bubbles and excesses of the past 15 years (you know what they say about paybacks). Expect a value-added tax to reduce the debt. This could even work if the tax has an end date and the money is used for debt reduction only (and you trust the politicians to do this, right?). Also expect an increase in the gasoline tax as the government attempts to squeeze every nickel it can out of people without raising income taxes.
Unemployment: Unemployment was between 5.6%-6.1% in 1995, it is around 10% now. We sacrificed some jobs by importing too many goods. We sacrificed more jobs due to consolidation. While mergers increase efficiencies, at some point you stifle competition and create “too big to fail” banks.
Under these conditions, it will take time to bring down the unemployment rate. A new, intelligent, job creating strategy is needed. Perhaps we can go back to the old days when the country relied on its advantages in innovation and education to provide economic growth. Without a new strategy, it may be difficult to get unemployment under 7%.
Consumer Spending: The rate of growth will decline due to a myriad of factors including, increase savings rate, higher interest rates, higher unemployment, higher taxes, and higher inflation.
GDP: Is very difficult to predict GDP as we pull out of this recession under very abnormal circumstances. Maybe 2%-3% average GDP growth is all we can expect for a few years based on all the factors listed above.
Two thousand zero eight party over
Ooops, stop this jive
Someday we gonna party like it’s 1995
Thursday, February 25, 2010
Thursday, February 11, 2010
Come Together – Right Now ….
Previous posts have discussed the government’s inability to deal with our current economic problems. While libertarians will argue the government should stay out of the process, others will say the severity of the situation dictates federal action.
I believe government has some responsibility to improve things since it was partially responsible for the financial crisis. Government is supposed to act in a security function to prevent overzealous capitalists from greedy exploitation. In this case, our guards resembled Barney Fife (one bullet, so many crooks) and Sergeant Schultz (who could easily be bribed by chocolate bars).
With unemployment near 10% and the economy just starting to heal after the worst recession in over 60 years, we need our best and brightest people in Washington working closely together as a team to develop the solutions that will lead us out of this mess and into prosperity. This is what we need, but it is not what we’re getting. Here are some reasons why:
1. Economic Problems – Political Solutions
Politicians are experts at getting re-elected, not solving economic problems. They apply politically based solutions when faced with any issue. The health care reform bill wasn’t even finalized and there were already three deals made to essentially “buy” votes. Do you really think the deal making regarding health care was going to end when the bill was passed? It was only the beginning.
It is great when the business networks interview small business owners and get their opinions on the impact of various government proposals (healthcare, jobs, cap and trade, etc). These people are very intelligent because have to understand all facets of their business and are also close enough to their employees to understand the concerns of the average worker.
It would be more productive to have 20 small business owners get together and write legislation that impacted commerce. Then have the politicians vote on the bills without the endless political posturing and deal making.
2. No Teamwork
We are facing the biggest economic crisis of our time and fighting two wars and our political parties are fighting each other. This is insane. We don’t want the Democrats to get together and develop a “Democrat Plan” and we don’t want the Republicans to form a “Republican Plan”. Just get together, develop the best solution available, and then vote based on what is best for the people without regard to party loyalty and lobbyists.
Sometimes good ideas are rejected because the “other party” came up with them first. This reminds me of my difficulties of counseling my mother. She will reject any solution I come up with just because it came from me (remember,if someone has powdered your butt, they won’t take your advice).
There needs to be an attitude adjustment soon. Our politicians often resemble junior high brats rather than educated adults. When you have old ladies attending tea parties in the streets instead of in the parlors, there is something seriously wrong.
3. Limited Political Debate – Unlimited Name Calling
Calling your opponents names is not a substitute for political debate. It would help if we could actually have televised debates on some issues with skilled, objective, moderators forcing participants to give real answers.
The political commentators are not helping this process. As the political conflict intensifies, advocates from both sides are intensifying the rhetoric and making more inflammatory comments. It helps their ratings, but it may prevent productive debate.
It would also help if reports of good economic news were not immediately disparaged by some commentators for partisan purposes. This also goes for causing unnecessary fear about “what could happen”. Remember, there is a psychological element involved in recovering from a recession and scaring people doesn’t help the process.
4. Keep it Simple
The healthcare bill was much too long and complex and tried to do too many things at the same time. Doesn’t it make more sense to just focus on reducing healthcare costs first? If you are successful at lowering costs, you improve things for the vast majority of people and businesses. By driving down the costs, you give more people access to affordable insurance and it becomes much easier to devise a plan to help the rest.
And regardless of your opinion of the healthcare reform bill, the problems still remain and need to be addressed soon. I agree with the president, something needs to be done and the status quo is not acceptable. But it needs to be the right thing. Maybe a team of small business owners working with the stakeholders in the healthcare industry could come up with a plan.
“One thing I can tell you is you got to be free.
Come together, right now …”
I believe government has some responsibility to improve things since it was partially responsible for the financial crisis. Government is supposed to act in a security function to prevent overzealous capitalists from greedy exploitation. In this case, our guards resembled Barney Fife (one bullet, so many crooks) and Sergeant Schultz (who could easily be bribed by chocolate bars).
With unemployment near 10% and the economy just starting to heal after the worst recession in over 60 years, we need our best and brightest people in Washington working closely together as a team to develop the solutions that will lead us out of this mess and into prosperity. This is what we need, but it is not what we’re getting. Here are some reasons why:
1. Economic Problems – Political Solutions
Politicians are experts at getting re-elected, not solving economic problems. They apply politically based solutions when faced with any issue. The health care reform bill wasn’t even finalized and there were already three deals made to essentially “buy” votes. Do you really think the deal making regarding health care was going to end when the bill was passed? It was only the beginning.
It is great when the business networks interview small business owners and get their opinions on the impact of various government proposals (healthcare, jobs, cap and trade, etc). These people are very intelligent because have to understand all facets of their business and are also close enough to their employees to understand the concerns of the average worker.
It would be more productive to have 20 small business owners get together and write legislation that impacted commerce. Then have the politicians vote on the bills without the endless political posturing and deal making.
2. No Teamwork
We are facing the biggest economic crisis of our time and fighting two wars and our political parties are fighting each other. This is insane. We don’t want the Democrats to get together and develop a “Democrat Plan” and we don’t want the Republicans to form a “Republican Plan”. Just get together, develop the best solution available, and then vote based on what is best for the people without regard to party loyalty and lobbyists.
Sometimes good ideas are rejected because the “other party” came up with them first. This reminds me of my difficulties of counseling my mother. She will reject any solution I come up with just because it came from me (remember,if someone has powdered your butt, they won’t take your advice).
There needs to be an attitude adjustment soon. Our politicians often resemble junior high brats rather than educated adults. When you have old ladies attending tea parties in the streets instead of in the parlors, there is something seriously wrong.
3. Limited Political Debate – Unlimited Name Calling
Calling your opponents names is not a substitute for political debate. It would help if we could actually have televised debates on some issues with skilled, objective, moderators forcing participants to give real answers.
The political commentators are not helping this process. As the political conflict intensifies, advocates from both sides are intensifying the rhetoric and making more inflammatory comments. It helps their ratings, but it may prevent productive debate.
It would also help if reports of good economic news were not immediately disparaged by some commentators for partisan purposes. This also goes for causing unnecessary fear about “what could happen”. Remember, there is a psychological element involved in recovering from a recession and scaring people doesn’t help the process.
4. Keep it Simple
The healthcare bill was much too long and complex and tried to do too many things at the same time. Doesn’t it make more sense to just focus on reducing healthcare costs first? If you are successful at lowering costs, you improve things for the vast majority of people and businesses. By driving down the costs, you give more people access to affordable insurance and it becomes much easier to devise a plan to help the rest.
And regardless of your opinion of the healthcare reform bill, the problems still remain and need to be addressed soon. I agree with the president, something needs to be done and the status quo is not acceptable. But it needs to be the right thing. Maybe a team of small business owners working with the stakeholders in the healthcare industry could come up with a plan.
“One thing I can tell you is you got to be free.
Come together, right now …”
Thursday, February 4, 2010
Taking Inventory
Warehouse workers Roy and Jim had just finished unloading and storing their first large product delivery in months. Roy looked at the shelves and said, “Wow, I can remember just a couple years ago when every shelf was packed full of goods. We even had to buy more shelving units to hold it all. But now, there are as many empty shelves as full ones.”
“That might by so,” said Jim. “But just last month we hardly had any product in here and now look at this place!”
And thus the rest of the day was devoted to debating that eternal inventory question: Is the warehouse half-empty or half-full?
There is much debate about initial Q4, 2009 GDP coming in at 5.7%. Most of this growth was due to companies replenishing their inventories after drawing them way down during the depths of the recession. The optimists see the 5.7% as a strong sign of economic recovery. The pessimists complain that the 2% “underlying growth” rate (after the inventory factor is eliminated) is weak.
It is silly to argue about this. While the growth rate of 5.7% is not sustainable, businesses were confident enough to order more goods. Now there is more inventory available in anticipation of increased future sales, and that is a good thing.
Checking the Commercial Transportation Industry
Because the commercial transportation industry is a microcosm of the general economy and the source for most of the factors that make up the Model “T”, it is a good time to check on what is happening in this sector.
▶ Truck freight improved in Q4, 2009. All of the freight indexes showed gains, although the growth was “choppy” and the increases small.
▶ Rail freight last week was up 3.9% from 2009, but still down 11% from 2008. Most categories of freight were up except for some materials used in new construction. Rail freight has been improving, but also has seen month to month variation.
▶ Spot freight (this is the equivalent of the demand for temporary workers in the employment market) was up 11% in December (third straight y/y gain) and was much improved from last year.
▶ Several large trucking fleets returned to profitability in Q4 due to cost cutting, improved productivity, and improved freight demand. Many mid-sized and small fleets are still losing money and some long-time haulers have closed their doors.
▶ Over 80,000 truck drivers remain unemployed. November payrolls were only down 0.2%. Fleets are only operating at around 75% of capacity, but utilization has increased four straight months. Fleets are expected to start hiring back some drivers in Q1.
▶ Freight Transportation Research says that truck freight has bottomed out and will return to sustained, modest, growth beginning in Q2. It predicts 3.6% freight growth for 2010.
▶ There is an excessive amount of trucks and trailers (and rail cars) sitting idle. In addition, used truck and trailer inventory remains bloated. This “slack” will severely limit new truck and trailer sales in 2010. On the other hand, ACT Research reports that new trailer inventory is at a four-year low.
What it Means: It is very good news that demand for “spot” freight is growing. Freight has bottomed out and is on its way back, but it won’t be a large gain in 2010. It appears that most industries are now recovering, except for the housing market. This would make it an economic recovery without growth in the housing market. This is similar to having a circus without clowns and animals. It’s not much of a circus and initially it won’t be much of a recovery. Oh I forgot, this recovery does have its clowns. They just aren’t very funny.
Taking Inventory
The latest data shows the Business Inventory-to-Sales Ratio at 1.28 which is back to the “normal” range. Wholesale inventories are also stabilizing. The data from the purchasing managers index shows that inventories are still tightening, but very slowly and that customer inventories are very low. The American Trucking Association says that bloated inventory levels are no longer a drag on trucking. Therefore it appears that inventories have been brought back into line with current sales levels. If we could get an increase in consumer demand, it would cause a positive ripple effect throughout the supply chain.
The Model “T” Update
Now that the transportation market is stabilizing, the timing element of the Model “T” becomes clearer. The model now predicts a bottom in the S & P 500 occurring in September-October (let’s not be concerned about where that bottom is right now). The stock market would then begin to climb very early in 2011.
From My E-mail Box: The economy is so bad that if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
“That might by so,” said Jim. “But just last month we hardly had any product in here and now look at this place!”
And thus the rest of the day was devoted to debating that eternal inventory question: Is the warehouse half-empty or half-full?
There is much debate about initial Q4, 2009 GDP coming in at 5.7%. Most of this growth was due to companies replenishing their inventories after drawing them way down during the depths of the recession. The optimists see the 5.7% as a strong sign of economic recovery. The pessimists complain that the 2% “underlying growth” rate (after the inventory factor is eliminated) is weak.
It is silly to argue about this. While the growth rate of 5.7% is not sustainable, businesses were confident enough to order more goods. Now there is more inventory available in anticipation of increased future sales, and that is a good thing.
Checking the Commercial Transportation Industry
Because the commercial transportation industry is a microcosm of the general economy and the source for most of the factors that make up the Model “T”, it is a good time to check on what is happening in this sector.
▶ Truck freight improved in Q4, 2009. All of the freight indexes showed gains, although the growth was “choppy” and the increases small.
▶ Rail freight last week was up 3.9% from 2009, but still down 11% from 2008. Most categories of freight were up except for some materials used in new construction. Rail freight has been improving, but also has seen month to month variation.
▶ Spot freight (this is the equivalent of the demand for temporary workers in the employment market) was up 11% in December (third straight y/y gain) and was much improved from last year.
▶ Several large trucking fleets returned to profitability in Q4 due to cost cutting, improved productivity, and improved freight demand. Many mid-sized and small fleets are still losing money and some long-time haulers have closed their doors.
▶ Over 80,000 truck drivers remain unemployed. November payrolls were only down 0.2%. Fleets are only operating at around 75% of capacity, but utilization has increased four straight months. Fleets are expected to start hiring back some drivers in Q1.
▶ Freight Transportation Research says that truck freight has bottomed out and will return to sustained, modest, growth beginning in Q2. It predicts 3.6% freight growth for 2010.
▶ There is an excessive amount of trucks and trailers (and rail cars) sitting idle. In addition, used truck and trailer inventory remains bloated. This “slack” will severely limit new truck and trailer sales in 2010. On the other hand, ACT Research reports that new trailer inventory is at a four-year low.
What it Means: It is very good news that demand for “spot” freight is growing. Freight has bottomed out and is on its way back, but it won’t be a large gain in 2010. It appears that most industries are now recovering, except for the housing market. This would make it an economic recovery without growth in the housing market. This is similar to having a circus without clowns and animals. It’s not much of a circus and initially it won’t be much of a recovery. Oh I forgot, this recovery does have its clowns. They just aren’t very funny.
Taking Inventory
The latest data shows the Business Inventory-to-Sales Ratio at 1.28 which is back to the “normal” range. Wholesale inventories are also stabilizing. The data from the purchasing managers index shows that inventories are still tightening, but very slowly and that customer inventories are very low. The American Trucking Association says that bloated inventory levels are no longer a drag on trucking. Therefore it appears that inventories have been brought back into line with current sales levels. If we could get an increase in consumer demand, it would cause a positive ripple effect throughout the supply chain.
The Model “T” Update
Now that the transportation market is stabilizing, the timing element of the Model “T” becomes clearer. The model now predicts a bottom in the S & P 500 occurring in September-October (let’s not be concerned about where that bottom is right now). The stock market would then begin to climb very early in 2011.
From My E-mail Box: The economy is so bad that if the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them.
Thursday, January 28, 2010
An Economic Indicator Check Up
It’s time to check the current state of some major economic indicators:
GDP
GDP for Q4, 2009 is expected to be 4.5% (this is per the “Ake” index which averages the forecasts of my favorite seven economists. They do the math so I don’t have to!)
The forecast for Q1 is 2.8% and 2.7% for Q2.
What it means: The economy did not really grow at 4.5% in Q4. According to the experts, the number is inflated due to inventory replenishments. The 2010 first half forecasts are predicting a moderate recovery.
What I think: The GDP estimate is less accurate when economic conditions are abnormal and this is about as abnormal as it gets. The economy did grow in Q4, but not significantly (Goldman Sachs says that growth is about 2% when you eliminate the “noise” from the data). Future forecasts are becoming more consistent and accurate as the economy heals.
Housing
Housing Starts: Rate of 557,000 per year. Down 4.0% from November. Up 0.2% y/y.
Existing Home sales: Rate of 5.45 million per year (SA). Down 16.7% from November. Up 15% y/y.
Existing Home Prices: Up 1.5% y/y – first increase since August 2007
Home Builder Confidence Index (HAHB) – Fell to 15
What it means: Housing starts remain weak due to the large inventory of upscale existing homes on the market. Existing home sales (and also new home sales) fell because many sales were pulled forward due to the expiration of the tax credit. The increase in prices was unexpected, but next month’s data will be important in determining if this is a blip or a trend. Home builders remain pessimistic about 2010.
What I think: Because housing got us into this mess, people expect housing to lead us out. This has been true of many economic recoveries. There will be no big snap back in housing this time. Housing will take an extended time to recover and so should the economy.
Existing home sales will jump back up in January due to the tax credits being extended and expanded. Sales should plunge again in May due to the credits expiring in April. Therefore, June becomes a critical month. It will be in the peak of home buying season, but the tax credit is gone, mortgage rates will be higher, and there could be even more foreclosed homes on the market.
The Consumer
Retail Sales: Down -0.2% from November (SA), up 5.4% y/y (excludes auto sales)
Light Vehicle Sales: Yearly rate of 11.25 million (SA), third straight monthly increase
Consumer Confidence: The Conference Board Index is low and trending up, the ABC News index is low and trending lower.
What it means: People with jobs are spending more money than they were a year ago. People who need automobiles are buying them. Much of the fear and panic are gone and consumers are starting to behave more rationally. One of the two consumer confidence indexes is wrong. Watch for the University of Michigan Index (a third survey) released tomorrow, to break the tie.
What I Think: Retail sales are doing better, but it is not a steady increase. The low consumer confidence scores tell you the reason why. It does appear that the auto industry is recovering stronger than experts predicted.
Don’t look for consumer spending to take off just yet. As long as unemployment stays high, consumer confidence will remain weak and there will also be less disposable income available. Usually the employment rate is a lagging indicator (improves after the economy does). This time employment could be a coincident indicator (improves as the economy does). As people find jobs, they spend more money and the people that already have jobs feel more confident and spend more money also. This would be consistent with the theory that employment could improve faster than expected due to how and why the layoffs happened in 2008-2009.
Businesses
Moody’s Survey of Business Confidence - Very positive increase, at highest level since late 2007
PricewaterhouseCoopers World CEO Survey- Significant increase in confidence for 2010
National Federation of Independent Business Optimism Index – Low and staying low
What it means: Large businesses are recovering but small businesses continue to struggle.
What I think: Small businesses are still having extreme difficulty obtaining credit. This should have been the government’s number one priority starting in October 2008 when credit started to dry up. The problem still remains and it is vitally important because of the number of new jobs that can be created by small businesses. There was a plan presented in the State of the Union address to provide $30 billion for small business loans. We will wait and see how fast Congress jumps into action this time.
The Predictive Indicators
The Conference Board Leading Economic Index – Up for the ninth straight month. It predicts steady growth in Q1 and increased growth in Q2.
Economic Cycle Research Institute Weekly Leading Index – Q1, 2010 growth will be slower than Q4, 2009. There will be a slight decrease in growth in Q2, 2010.
What it means: It is good news that both indexes predict the economy will continue to grow for the next six months. This is consistent with the GDP forecasts listed above. One of the two indexes, which strongly compete with each other, is wrong about Q2.
What I think: All of the indicators point to a slow, steady recovery. This is consistent with the GDP forecasts and the Model “T’s” prediction of a long, slowly ascending, curve (or the “UL” recovery).
GDP
GDP for Q4, 2009 is expected to be 4.5% (this is per the “Ake” index which averages the forecasts of my favorite seven economists. They do the math so I don’t have to!)
The forecast for Q1 is 2.8% and 2.7% for Q2.
What it means: The economy did not really grow at 4.5% in Q4. According to the experts, the number is inflated due to inventory replenishments. The 2010 first half forecasts are predicting a moderate recovery.
What I think: The GDP estimate is less accurate when economic conditions are abnormal and this is about as abnormal as it gets. The economy did grow in Q4, but not significantly (Goldman Sachs says that growth is about 2% when you eliminate the “noise” from the data). Future forecasts are becoming more consistent and accurate as the economy heals.
Housing
Housing Starts: Rate of 557,000 per year. Down 4.0% from November. Up 0.2% y/y.
Existing Home sales: Rate of 5.45 million per year (SA). Down 16.7% from November. Up 15% y/y.
Existing Home Prices: Up 1.5% y/y – first increase since August 2007
Home Builder Confidence Index (HAHB) – Fell to 15
What it means: Housing starts remain weak due to the large inventory of upscale existing homes on the market. Existing home sales (and also new home sales) fell because many sales were pulled forward due to the expiration of the tax credit. The increase in prices was unexpected, but next month’s data will be important in determining if this is a blip or a trend. Home builders remain pessimistic about 2010.
What I think: Because housing got us into this mess, people expect housing to lead us out. This has been true of many economic recoveries. There will be no big snap back in housing this time. Housing will take an extended time to recover and so should the economy.
Existing home sales will jump back up in January due to the tax credits being extended and expanded. Sales should plunge again in May due to the credits expiring in April. Therefore, June becomes a critical month. It will be in the peak of home buying season, but the tax credit is gone, mortgage rates will be higher, and there could be even more foreclosed homes on the market.
The Consumer
Retail Sales: Down -0.2% from November (SA), up 5.4% y/y (excludes auto sales)
Light Vehicle Sales: Yearly rate of 11.25 million (SA), third straight monthly increase
Consumer Confidence: The Conference Board Index is low and trending up, the ABC News index is low and trending lower.
What it means: People with jobs are spending more money than they were a year ago. People who need automobiles are buying them. Much of the fear and panic are gone and consumers are starting to behave more rationally. One of the two consumer confidence indexes is wrong. Watch for the University of Michigan Index (a third survey) released tomorrow, to break the tie.
What I Think: Retail sales are doing better, but it is not a steady increase. The low consumer confidence scores tell you the reason why. It does appear that the auto industry is recovering stronger than experts predicted.
Don’t look for consumer spending to take off just yet. As long as unemployment stays high, consumer confidence will remain weak and there will also be less disposable income available. Usually the employment rate is a lagging indicator (improves after the economy does). This time employment could be a coincident indicator (improves as the economy does). As people find jobs, they spend more money and the people that already have jobs feel more confident and spend more money also. This would be consistent with the theory that employment could improve faster than expected due to how and why the layoffs happened in 2008-2009.
Businesses
Moody’s Survey of Business Confidence - Very positive increase, at highest level since late 2007
PricewaterhouseCoopers World CEO Survey- Significant increase in confidence for 2010
National Federation of Independent Business Optimism Index – Low and staying low
What it means: Large businesses are recovering but small businesses continue to struggle.
What I think: Small businesses are still having extreme difficulty obtaining credit. This should have been the government’s number one priority starting in October 2008 when credit started to dry up. The problem still remains and it is vitally important because of the number of new jobs that can be created by small businesses. There was a plan presented in the State of the Union address to provide $30 billion for small business loans. We will wait and see how fast Congress jumps into action this time.
The Predictive Indicators
The Conference Board Leading Economic Index – Up for the ninth straight month. It predicts steady growth in Q1 and increased growth in Q2.
Economic Cycle Research Institute Weekly Leading Index – Q1, 2010 growth will be slower than Q4, 2009. There will be a slight decrease in growth in Q2, 2010.
What it means: It is good news that both indexes predict the economy will continue to grow for the next six months. This is consistent with the GDP forecasts listed above. One of the two indexes, which strongly compete with each other, is wrong about Q2.
What I think: All of the indicators point to a slow, steady recovery. This is consistent with the GDP forecasts and the Model “T’s” prediction of a long, slowly ascending, curve (or the “UL” recovery).
Thursday, January 21, 2010
Welcome to the Kingdom of Employvia
The Iz and the Uns
Once upon a time there was a kingdom called Employvia. Two classes of people lived in the kingdom, the Iz and the Un. The Iz were the preferred and more respected class. They had much greater access to the many riches of the kingdom and thus could consume more goods and services.
Almost every Un wanted to become an Iz. Under normal conditions 95% of the people were Iz and 5% were Uns. People moved from one class to the other due to personal or situational factors in the everyday life of Employvia. In good times it wasn’t difficult for an Un to become an Iz. An Un still had do exert some effort to become an Iz, but the transition period was relatively short. Under these conditions the great majority of the people were happy and the kingdom thrived.
Then one day it was discovered that some greedy men had been manipulating the kingdom’s resources for their own gain. This caused a great panic among the people. This panic resulted in terrible conditions in Employvia. Many people involuntarily went from being an Iz to an Un. Worse yet, no matter how hard the new Uns tried to turn back into Iz, the great majority remained Uns. And so the number of Uns continued to grow.
This situation alarmed the people so much that they demanded action by the king to increase the number of Iz. So the great King "O" (not much of a stretch) waved the royal stimulus wand that was supposed to magically transform the Uns into Iz (even less of a stretch). But alas, this did not work. Iz continued to become Uns.
The fear and panic had caused another problem. Many Iz were afraid they might become Uns. They knew of many family, friends and neighboring cubicle dwellers who once were very successful Iz who had suddenly been turned into Uns. Because of this fear, they started behaving more like Uns than Iz. They started to consume less goods and services. Ironically this change in behavior resulted in even more people becoming Uns.
Now the king and his royal advisors must restore confidence in Employvia so that the Iz return to acting like Iz. This will result in more Uns becoming Iz and as the number of Iz grows, it will provide even more opportunities for Uns to become Iz.
Recovery or Healing
While we all talk about an economic "recovery", it will resemble more of a healing. It is similar to an athlete who suffers a serious hamstring injury. The injury is a traumatic event with much pain and suffering. Immediately after the injury it is difficult and painful to even walk. You can take medication to reduce the pain, but there is little you can do to accelerate the healing process, it just takes time. At some point you can walk again without pain. But athletes need to run, not just walk.
There is a psychological barrier that needs to be overcome in the transition from walking to running. The leg feels different than before and the pain from the injury is still very fresh in your memory. But you jog, and then you trot, and one day you run again. And that is a great day. Our economy has been injured. It will take time to heal, but someday we will run again.
Once upon a time there was a kingdom called Employvia. Two classes of people lived in the kingdom, the Iz and the Un. The Iz were the preferred and more respected class. They had much greater access to the many riches of the kingdom and thus could consume more goods and services.
Almost every Un wanted to become an Iz. Under normal conditions 95% of the people were Iz and 5% were Uns. People moved from one class to the other due to personal or situational factors in the everyday life of Employvia. In good times it wasn’t difficult for an Un to become an Iz. An Un still had do exert some effort to become an Iz, but the transition period was relatively short. Under these conditions the great majority of the people were happy and the kingdom thrived.
Then one day it was discovered that some greedy men had been manipulating the kingdom’s resources for their own gain. This caused a great panic among the people. This panic resulted in terrible conditions in Employvia. Many people involuntarily went from being an Iz to an Un. Worse yet, no matter how hard the new Uns tried to turn back into Iz, the great majority remained Uns. And so the number of Uns continued to grow.
This situation alarmed the people so much that they demanded action by the king to increase the number of Iz. So the great King "O" (not much of a stretch) waved the royal stimulus wand that was supposed to magically transform the Uns into Iz (even less of a stretch). But alas, this did not work. Iz continued to become Uns.
The fear and panic had caused another problem. Many Iz were afraid they might become Uns. They knew of many family, friends and neighboring cubicle dwellers who once were very successful Iz who had suddenly been turned into Uns. Because of this fear, they started behaving more like Uns than Iz. They started to consume less goods and services. Ironically this change in behavior resulted in even more people becoming Uns.
Now the king and his royal advisors must restore confidence in Employvia so that the Iz return to acting like Iz. This will result in more Uns becoming Iz and as the number of Iz grows, it will provide even more opportunities for Uns to become Iz.
Recovery or Healing
While we all talk about an economic "recovery", it will resemble more of a healing. It is similar to an athlete who suffers a serious hamstring injury. The injury is a traumatic event with much pain and suffering. Immediately after the injury it is difficult and painful to even walk. You can take medication to reduce the pain, but there is little you can do to accelerate the healing process, it just takes time. At some point you can walk again without pain. But athletes need to run, not just walk.
There is a psychological barrier that needs to be overcome in the transition from walking to running. The leg feels different than before and the pain from the injury is still very fresh in your memory. But you jog, and then you trot, and one day you run again. And that is a great day. Our economy has been injured. It will take time to heal, but someday we will run again.
Thursday, January 14, 2010
A Story, an Attitude Check, and a Warning
A Model “T” Allegory
Once there was a car that was travelling down the road very fast. Its maintenance staff kept it running with high-octane, but poor quality, fuel. As the quality of the fuel deteriorated, the engine started to sputter and smoke. The car began to shake so violently that it left the road and went down a large hill before coming to rest.
Two expert mechanics were called to repair the car and get it back running again. We will call the mechanics Ben and Timothy. They changed the fuel, made repairs to engine and then restarted the car. The engine ran, but it was apparent the car did not have enough power to make it up the hill and back on to the road. Let’s call the road “Recovery”.
So Ben and Tim decided to push the car up the hill with the engine running. They told the owner of the car, Barry, to get in the driver seat and steer the car back on to Recovery while they pushed.
Ben and Tim pushed the car harder than it had been pushed in a long time. The car started up the hill, but moved slower than expected due to several obstacles. Barry attributed some of the problems to the car’s previous owner, George, who he said did not maintain the car properly.
Because Ben and Tim were pushing so hard it was difficult to determine how much of the car’s power was being generated by the improving engine performance. Barry bragged about the gain in horsepower to onlookers, but could still be heard shouting, “Push Tim, Push Ben”.
But the car is not yet back on the road and Ben and Tim are getting tired. Soon they will no longer be able to push the car very hard. At that point the car will be reliant on the engine alone to make it the rest of the way.
There are three possible endings to the story:
1. The car keeps traveling at a good speed up the hill, gets back on to the road and then accelerates. Call it the Mazda ending, Zoom, Zoom, Zoom.
2. The car continues to climb the hill, but at a slower pace than when it was being pushed. It eventually gets back on to the road, but takes a long time to get there. Once back on the road, it may even take some more time to accelerate due to the energy exerted climbing the hill. Call it the grandma drives a Buick ending.
3. The car’s engine sputters, it loses power and starts to roll backward down the hill. It will not reach the previous low point due to Barry pushing the brake pedal through the floor and Ben and Tim throwing themselves under the car (if they fail to do this, they will end up thrown under the bus). Call it the clunker (hey somebody got cash for that!) ending.
Hope for number one, plan for number two and recognize that number three is possible.
Psychological Factor Update
Because psychology plays a significant role when entering and exiting a recession, it’s wise to keep track of the key consumer and business confidence surveys.
The University of Michigan Index of Consumer Sentiment
- Up 7.6% in December to 72.5. First increase after two months of decline, but still very low.
The Conference Board Consumer Confidence Index
- Up 2.3 points in December to 52.9. The second consecutive increase, but still very low.
ABC News Customer Comfort Index (weekly index)
- Down six points (big drop for this index) last week to -47 after significant gains the last few weeks.
Chief Executive Magazine CEO Confidence Index
- Surged 9.2 points in December, after two consecutive declines
What it means –
All three consumer indexes were reported to be influenced by the latest jobs data. The two monthly indexes by the positive November employment numbers and the ABC survey by last week’s disappointing December report.
It appears that consumer confidence is very fluid and dependant on the latest job news. This can be unsettling since unemployment is a lagging indicator and should increase some even as the economy improves. People were expecting a better employment report in December after November’s pleasant surprise. However, the economic recovery is not going to be a smooth one. Expect data on unemployment, retail sales, etc. to fluctuate in the short-term. The increase in CEO confidence is still a good sign.
Follow Up From Last Week’s Post
The Model “T” has written something on Don Ake’s Facebook Wall:
“Oh, so you think my forecast of a 48% drop in the stock market is too low? The current edition of the Economist says stocks are overvalued by 50%. I pity the fool who takes too much risk.”
Sounds more like Mr. Model “T” to me.
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Once there was a car that was travelling down the road very fast. Its maintenance staff kept it running with high-octane, but poor quality, fuel. As the quality of the fuel deteriorated, the engine started to sputter and smoke. The car began to shake so violently that it left the road and went down a large hill before coming to rest.
Two expert mechanics were called to repair the car and get it back running again. We will call the mechanics Ben and Timothy. They changed the fuel, made repairs to engine and then restarted the car. The engine ran, but it was apparent the car did not have enough power to make it up the hill and back on to the road. Let’s call the road “Recovery”.
So Ben and Tim decided to push the car up the hill with the engine running. They told the owner of the car, Barry, to get in the driver seat and steer the car back on to Recovery while they pushed.
Ben and Tim pushed the car harder than it had been pushed in a long time. The car started up the hill, but moved slower than expected due to several obstacles. Barry attributed some of the problems to the car’s previous owner, George, who he said did not maintain the car properly.
Because Ben and Tim were pushing so hard it was difficult to determine how much of the car’s power was being generated by the improving engine performance. Barry bragged about the gain in horsepower to onlookers, but could still be heard shouting, “Push Tim, Push Ben”.
But the car is not yet back on the road and Ben and Tim are getting tired. Soon they will no longer be able to push the car very hard. At that point the car will be reliant on the engine alone to make it the rest of the way.
There are three possible endings to the story:
1. The car keeps traveling at a good speed up the hill, gets back on to the road and then accelerates. Call it the Mazda ending, Zoom, Zoom, Zoom.
2. The car continues to climb the hill, but at a slower pace than when it was being pushed. It eventually gets back on to the road, but takes a long time to get there. Once back on the road, it may even take some more time to accelerate due to the energy exerted climbing the hill. Call it the grandma drives a Buick ending.
3. The car’s engine sputters, it loses power and starts to roll backward down the hill. It will not reach the previous low point due to Barry pushing the brake pedal through the floor and Ben and Tim throwing themselves under the car (if they fail to do this, they will end up thrown under the bus). Call it the clunker (hey somebody got cash for that!) ending.
Hope for number one, plan for number two and recognize that number three is possible.
Psychological Factor Update
Because psychology plays a significant role when entering and exiting a recession, it’s wise to keep track of the key consumer and business confidence surveys.
The University of Michigan Index of Consumer Sentiment
- Up 7.6% in December to 72.5. First increase after two months of decline, but still very low.
The Conference Board Consumer Confidence Index
- Up 2.3 points in December to 52.9. The second consecutive increase, but still very low.
ABC News Customer Comfort Index (weekly index)
- Down six points (big drop for this index) last week to -47 after significant gains the last few weeks.
Chief Executive Magazine CEO Confidence Index
- Surged 9.2 points in December, after two consecutive declines
What it means –
All three consumer indexes were reported to be influenced by the latest jobs data. The two monthly indexes by the positive November employment numbers and the ABC survey by last week’s disappointing December report.
It appears that consumer confidence is very fluid and dependant on the latest job news. This can be unsettling since unemployment is a lagging indicator and should increase some even as the economy improves. People were expecting a better employment report in December after November’s pleasant surprise. However, the economic recovery is not going to be a smooth one. Expect data on unemployment, retail sales, etc. to fluctuate in the short-term. The increase in CEO confidence is still a good sign.
Follow Up From Last Week’s Post
The Model “T” has written something on Don Ake’s Facebook Wall:
“Oh, so you think my forecast of a 48% drop in the stock market is too low? The current edition of the Economist says stocks are overvalued by 50%. I pity the fool who takes too much risk.”
Sounds more like Mr. Model “T” to me.
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Thursday, January 7, 2010
It’s a Brand New Day
Let’s start off with some advice from that great economist Sting:
Turn the clock to zero, honey
I’ll sell the stock, we’ll spend all the money
We’re starting up a brand new day (or year, or decade, for that matter)
Actually not bad advice if you expect the stock market to tank and inflation to rise.
What will happen to the stock market in 2010? Seldom has there been such a wide divergence of opinion as we begin a new year. You can be certain the market will go up, unless of course it goes down, or maybe it will just “move sideways” (I love that expression). Let’s look at some predictions:
The Stock Market Will Go Up
The market is up over 60% from its low last March. It has momentum and will continue to rise as the economy continues to grow. There are many respected analysts predicting stocks will increase 10-20% in 2010. One of the most optimistic is the team of Brian Wesbury and Bob Stein (Forbes.com). They are predicting a 24% increase in stocks this year and were very accurate in forecasting the 2009 jump.
The Stock Market Will Go Down
The stock market is very “over-bought” and prices are much too high. The fundamentals are bad. Sales volumes have been too low. The economy will slump once the fiscal and monetary boost provided by Treasury and the Fed fades, taking the stock market down with it. There are many respected analysts predicting a drop of more than 15% in 2010. One of the most pessimistic is David Tice (Federated Investors) who predicts a 40% decrease in 2010.
The Stock Market Will Go Down ----- Then Back Up
Stock market prices are too high after the 2009 rally. The market will dip (10-15%) in the first half of the year. Later, continued economic growth will boost the stock market and it will finish the year with a gain of 10-15%. This scenario is favored by Shaeffers Research and Dennis Keade.
What the Model “T” Says
The Model “T” is still forecasting an S&P bottom of 580. This would be a 48% drop from 2009 year-end and significantly lower than most of the pessimistic forecasts. It is apparent now that the commercial transportation industry (which is very connected to the housing industry) declined much more than most industries during this recession. Because the Model “T” is based on the transportation market, it is probably reading too low at this point.
There is also a timing factor to the Model “T”. Current graphs of stock price trends would indicate a long-term rally has begun. So is this a real recovery or just an artificial upward bending of the curve causing by the extraordinary actions taken by the Treasury and the FED to stabilize and prop up the economy? At this point, no one knows.
The Model “T” however indicates the recovery is premature. It says the real recovery should begin in Q4, 2010. This would mean a significant drop in the market for the first nine months of the year, with a recovery beginning in Q4.
What I Think
Using the most optimistic and pessimistic predictions from the experts, I can confidently forecast the S&P 500 index will end the year between 670 and 1390. Amusing, no doubt, but I did this to make a point. With this much uncertainty, now is not the time to make any bold moves. It is probably wise at this point to reduce your risk since it is likely that there will be some pull back on stocks in the first half of the year.
Because the recent rally was largely fueled by optimism, it will be interesting to see what happens if the optimism fades. If this were a movie, it would be fun to watch. Unfortunately it is more like reality television and everyone with stock investments is a participant in this show.
Turn the clock to zero, boss
The river’s wide, we’ll swim across
Starting up a brand new day
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
Turn the clock to zero, honey
I’ll sell the stock, we’ll spend all the money
We’re starting up a brand new day (or year, or decade, for that matter)
Actually not bad advice if you expect the stock market to tank and inflation to rise.
What will happen to the stock market in 2010? Seldom has there been such a wide divergence of opinion as we begin a new year. You can be certain the market will go up, unless of course it goes down, or maybe it will just “move sideways” (I love that expression). Let’s look at some predictions:
The Stock Market Will Go Up
The market is up over 60% from its low last March. It has momentum and will continue to rise as the economy continues to grow. There are many respected analysts predicting stocks will increase 10-20% in 2010. One of the most optimistic is the team of Brian Wesbury and Bob Stein (Forbes.com). They are predicting a 24% increase in stocks this year and were very accurate in forecasting the 2009 jump.
The Stock Market Will Go Down
The stock market is very “over-bought” and prices are much too high. The fundamentals are bad. Sales volumes have been too low. The economy will slump once the fiscal and monetary boost provided by Treasury and the Fed fades, taking the stock market down with it. There are many respected analysts predicting a drop of more than 15% in 2010. One of the most pessimistic is David Tice (Federated Investors) who predicts a 40% decrease in 2010.
The Stock Market Will Go Down ----- Then Back Up
Stock market prices are too high after the 2009 rally. The market will dip (10-15%) in the first half of the year. Later, continued economic growth will boost the stock market and it will finish the year with a gain of 10-15%. This scenario is favored by Shaeffers Research and Dennis Keade.
What the Model “T” Says
The Model “T” is still forecasting an S&P bottom of 580. This would be a 48% drop from 2009 year-end and significantly lower than most of the pessimistic forecasts. It is apparent now that the commercial transportation industry (which is very connected to the housing industry) declined much more than most industries during this recession. Because the Model “T” is based on the transportation market, it is probably reading too low at this point.
There is also a timing factor to the Model “T”. Current graphs of stock price trends would indicate a long-term rally has begun. So is this a real recovery or just an artificial upward bending of the curve causing by the extraordinary actions taken by the Treasury and the FED to stabilize and prop up the economy? At this point, no one knows.
The Model “T” however indicates the recovery is premature. It says the real recovery should begin in Q4, 2010. This would mean a significant drop in the market for the first nine months of the year, with a recovery beginning in Q4.
What I Think
Using the most optimistic and pessimistic predictions from the experts, I can confidently forecast the S&P 500 index will end the year between 670 and 1390. Amusing, no doubt, but I did this to make a point. With this much uncertainty, now is not the time to make any bold moves. It is probably wise at this point to reduce your risk since it is likely that there will be some pull back on stocks in the first half of the year.
Because the recent rally was largely fueled by optimism, it will be interesting to see what happens if the optimism fades. If this were a movie, it would be fun to watch. Unfortunately it is more like reality television and everyone with stock investments is a participant in this show.
Turn the clock to zero, boss
The river’s wide, we’ll swim across
Starting up a brand new day
Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).
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