(Cue Elton John)
You could never know what it's like
Your blood like winter freezes just like ice
And there's a cold lonely light that shines from you
You'll wind up like the wreck you hide
behind that mask you use
I have important economic news to report: the number of unemployed people in the U.S. just decreased by one. One out of 15 million does not seem that significant except this report is very personal. I have found a job. I am back at work.
The nine long months of my job search have been filled with many contradictions. Last June I was preparing to speak as an expert at an upcoming industry conference. Industry experts are not supposed to lose their jobs. I cut short my vacation to come into the office on a Friday to pick up some reports so I could work at home over the week- long July 4 break. That was my last day. Loyal, hard-working, employees are not supposed to lose their jobs.
Don't you know I'm still standing better than I ever did
Looking like a true survivor, feeling like a little kid
And thus began the battle. You’ve heard the saying “What doesn’t kill you, only makes you stronger.” That is true, but “What nearly kills you, still hurts like hell.” And what a battle it was. I have stared down the devil, blinked many times, but never retreated. I have literally sweated blood (yes, really). I started off this journey weak, but I got stronger as it got tougher.
This was a battle of endurance. You get knocked down many times, but you learn how to get up and keep on fighting. That is the only way to win it. But winning is not so much the thrill of victory as it is survival. But survival is underrated; there is a deep satisfaction that comes from slaying the dragon and living to tell about it.
And did you think this fool could never win
Well look at me, I'm coming back again
Another contradiction is that out of negative circumstances come positive things. Through this trial I have emerged with a renewed faith in myself and a renewed faith in God. Through being helped by others in my time of need, I have learned how to give of myself in a deeper way. I have also met some outstanding people, most of them fellow jobseekers who should have never been put into this situation. And finally, I have rediscovered my ability to write. Writing this blog weekly greatly sharpened my skills and I am now writing better than I have in my entire life. Which leads naturally to the question you have right now…..
Are You Going to Continue To Write the Blog?
I never expected to continue the blog after I found a job. But I never expected to have this many readers. I knew I had a real issue a few weeks ago when people started telling me, “I hope you find a job, but I hope you continue to blog.” My friend Bob, who isn’t easily impressed, told me I have to keep writing the blog. So I will.
The blog will have to change some. Due to time constraints I will probably include more opinion and less statistics. I may not be able to post every week depending on my circumstances. The month of May will be especially tough since I am teaching two night classes. Please be patient during this transition. Also, please give me feedback on the new format and post comments to the blog when you think I am off base.
I would like to take this opportunity to thank everyone that helped me in my job search. Whether it was a job lead, an encouraging e-mail, a prayer, a suggestion, a kind word, whatever. It did make a difference.
I'm still standing yeah, yeah, yeah
I'm still standing yeah, yeah, yeah
Video
Tuesday, April 6, 2010
Thursday, April 1, 2010
Don’t Be Messin’ With the Law
After all the political spitting, yelling, and backbiting (and that was among people in the same political party) over the healthcare bill, I thought a more objective, economic-based, review is needed. Because the Law of Economics doesn’t care if you are Republican or Democrat. It doesn’t care how many votes you have in the Senate or what deals were made in the House. It doesn’t care about your race or gender. It doesn’t care how eloquent you are and it doesn’t read opinion polls. The law is the law and it cannot be violated.
The original problem is that healthcare costs (and prices) have been steadily increasing overtime. This increase means that many people cannot afford healthcare services or the price of insurance. Healthcare costs also consume an increasing percentage of most people’s incomes, leaving less discretionary income for other things.
So let’s look at the economics of the healthcare bill:
Supply:
There is already a shortage of primary care doctors in some regions and now there will be an estimated 32 million more people with health insurance in 2014. This will lead to an estimated (industry report) shortage of 40,000 doctors by the end of the decade.
It doesn’t appear that the bill did anything to increase supply. It may have even decreased supply since more government control (perhaps more price controls) makes practicing medicine a less attractive career.
One major factor that impacts supply is the high cost of medical school. The medical school political lobby must be one of the strongest ever because I never heard a word from anyone, regardless of party, about this issue during the debate. Medical schools limit the number of students and charge outrageous tuition. They make millions of dollars, but the number of graduates is restricted and doctors start practicing with huge student loan balances. This results in higher fees for services.
If you allow more medical schools, you increase the competition for students, driving down tuition costs and increasing the number of doctors. Another strategy would be to give nurse practitioners more authority. Both these moves would increase supply, but the quality of healthcare would decrease. This is a fair trade off. If we want to provide healthcare for everybody, then something has to give. People wanting to see a real doctor who graduated from a top medical school can pay more for that privilege.
Demand:
Demand greatly increases under the new bill. As stated before, 32 million new customers in 2014. And these are likely to be active customers. If you give people access to inexpensive healthcare, they are going to consume it in mass quantities (although probably not as bad as the Coneheads).
Price:
Demand is expected to greatly increase. Supply is expected to remain the same or decrease slightly. Prices therefore are going up, way up. Since few things in the bill adequately address the cost issues, healthcare costs should continue to increase for the next few years and then really take off starting in 2014.
The Result:
The original problem is that healthcare prices are out of control. The “solution” will only make this situation worse. Sure if you like your doctor and current health insurance plan you can keep it, but only if you and your company can still afford it. If you think prices are high now, just wait. The healthcare bill did provide some needed benefits, but at what cost?
Because the government is more involved, there will be more waste and fraud which serves to drive up both prices and demand. I know there are supposed to be provisions in the plan to reduce waste and fraud, but it is ridiculous to believe the government will actually cut waste and fraud. The government is waste and fraud. It is comparable to hiring an obese dietician.
You: “Can I eat a doughnut?”
Obese Dietician: “Yum, doughnuts taste good. I like doughnuts. You can eat one and be sure to bring me one with sprinkles!”
Government involvement will also mean that people will figure out how to exploit the system. There are many people making millions of dollars legally “gaming” the Medicare system. It is incredible the amount of tests and products that are ordered simply because Medicare “will pay for it”.
The worst example is the scooters you see advertised from the Scooter Store. Who needs a scooter to go from the front room to the kitchen? But the commercial shows grandma on a geriatric joy ride. You wonder how much the scooter gets used after the thrill is gone and granny knocks over the big-screen television and runs over the cat. I bet the old guys even race their scooters down the main drag of the retirement village on Saturday evenings (because even the older chicks dig it!).
Don’t Ignore This
One of the best solutions is tort reform (limiting the amount and nature of malpractice lawsuits). The reason tort reform is important is that it is beneficial in several ways. It lowers the cost of production (malpractice insurance decreases in price) for the doctor. This means there will be more doctors and they can charge less for their services. Because doctors would not have to order so many tests to protect them from lawsuits, demand for those tests and thus the prices for the tests would go down. In addition, the system becomes more efficient since the money saved from not doing the tests could be redirected to someone in greater need of healthcare. Unfortunately, tort reform was only given “lip service” in the healthcare bill.
What I Don’t Know
I admit there could be errors in this analysis because I did not read the 2,400+ pages of the bill. But if you really want me to understand and then support a proposal, could you please give me something simple in 100 pages or less? Think about it. If a financial advisor presented you with a 200-page proposal that you didn’t understand, would you give him all your money to invest? If so, I have some shares of the Bernie Madoff Stock Option Fund to sell you.
Next Week: A Big Announcement
The original problem is that healthcare costs (and prices) have been steadily increasing overtime. This increase means that many people cannot afford healthcare services or the price of insurance. Healthcare costs also consume an increasing percentage of most people’s incomes, leaving less discretionary income for other things.
So let’s look at the economics of the healthcare bill:
Supply:
There is already a shortage of primary care doctors in some regions and now there will be an estimated 32 million more people with health insurance in 2014. This will lead to an estimated (industry report) shortage of 40,000 doctors by the end of the decade.
It doesn’t appear that the bill did anything to increase supply. It may have even decreased supply since more government control (perhaps more price controls) makes practicing medicine a less attractive career.
One major factor that impacts supply is the high cost of medical school. The medical school political lobby must be one of the strongest ever because I never heard a word from anyone, regardless of party, about this issue during the debate. Medical schools limit the number of students and charge outrageous tuition. They make millions of dollars, but the number of graduates is restricted and doctors start practicing with huge student loan balances. This results in higher fees for services.
If you allow more medical schools, you increase the competition for students, driving down tuition costs and increasing the number of doctors. Another strategy would be to give nurse practitioners more authority. Both these moves would increase supply, but the quality of healthcare would decrease. This is a fair trade off. If we want to provide healthcare for everybody, then something has to give. People wanting to see a real doctor who graduated from a top medical school can pay more for that privilege.
Demand:
Demand greatly increases under the new bill. As stated before, 32 million new customers in 2014. And these are likely to be active customers. If you give people access to inexpensive healthcare, they are going to consume it in mass quantities (although probably not as bad as the Coneheads).
Price:
Demand is expected to greatly increase. Supply is expected to remain the same or decrease slightly. Prices therefore are going up, way up. Since few things in the bill adequately address the cost issues, healthcare costs should continue to increase for the next few years and then really take off starting in 2014.
The Result:
The original problem is that healthcare prices are out of control. The “solution” will only make this situation worse. Sure if you like your doctor and current health insurance plan you can keep it, but only if you and your company can still afford it. If you think prices are high now, just wait. The healthcare bill did provide some needed benefits, but at what cost?
Because the government is more involved, there will be more waste and fraud which serves to drive up both prices and demand. I know there are supposed to be provisions in the plan to reduce waste and fraud, but it is ridiculous to believe the government will actually cut waste and fraud. The government is waste and fraud. It is comparable to hiring an obese dietician.
You: “Can I eat a doughnut?”
Obese Dietician: “Yum, doughnuts taste good. I like doughnuts. You can eat one and be sure to bring me one with sprinkles!”
Government involvement will also mean that people will figure out how to exploit the system. There are many people making millions of dollars legally “gaming” the Medicare system. It is incredible the amount of tests and products that are ordered simply because Medicare “will pay for it”.
The worst example is the scooters you see advertised from the Scooter Store. Who needs a scooter to go from the front room to the kitchen? But the commercial shows grandma on a geriatric joy ride. You wonder how much the scooter gets used after the thrill is gone and granny knocks over the big-screen television and runs over the cat. I bet the old guys even race their scooters down the main drag of the retirement village on Saturday evenings (because even the older chicks dig it!).
Don’t Ignore This
One of the best solutions is tort reform (limiting the amount and nature of malpractice lawsuits). The reason tort reform is important is that it is beneficial in several ways. It lowers the cost of production (malpractice insurance decreases in price) for the doctor. This means there will be more doctors and they can charge less for their services. Because doctors would not have to order so many tests to protect them from lawsuits, demand for those tests and thus the prices for the tests would go down. In addition, the system becomes more efficient since the money saved from not doing the tests could be redirected to someone in greater need of healthcare. Unfortunately, tort reform was only given “lip service” in the healthcare bill.
What I Don’t Know
I admit there could be errors in this analysis because I did not read the 2,400+ pages of the bill. But if you really want me to understand and then support a proposal, could you please give me something simple in 100 pages or less? Think about it. If a financial advisor presented you with a 200-page proposal that you didn’t understand, would you give him all your money to invest? If so, I have some shares of the Bernie Madoff Stock Option Fund to sell you.
Next Week: A Big Announcement
Thursday, March 25, 2010
Jobs are Job One
A few weeks ago the government announced the details of its great, new, “jobs” bill that is designed to generate jobs and lower unemployment. Two days later, the government announced that the unemployment rate would basically stay the same the rest of the year.
This means you are admitting that your plan isn’t going to work before you even implement it. Can you image doing this is the private sector? “Hey boss I’m going to spend big bucks on our new campaign, but I don’t expect sales to increase at all.” And they don’t understand why people have a problem with this. Brew some tea.
However, the $17.5 billion “jobs” bill enacted last week is a huge improvement over the original $150 billion version. Why? The original cost $150 billion to provide few jobs, but the new bill costs $132.5 billion less to do almost the same thing. It’s a bargain!
In reality, the government cannot do much to create jobs in the short-term. If it could, we would have full employment all the time. The private sector has to create the jobs and the government’s role is to create an environment that promotes job growth while maintaining the general well being of the people. But the people demand that the government do something, so you get expensive programs that don’t accomplish much.
Unemployment is expected to improve very slowly in this recovery. Most forecasts have unemployment just above 9% by the end of 2010 and still around 8% for 2011. The government’s forecasts are actually now more pessimistic that most economist. I believe they are trying to lower expectations after woefully failing to meet expectations in 2009.
Two Types of Unemployment
There are two types of unemployment (sounds like a Vytorin commercial) impacting the job market right now. Cyclical unemployment is the unemployment that results due to the periodic drops in the business cycle, commonly referred to as recessions. When the business cycle rises, companies start hiring, and unemployment drops. There was considerable cyclical unemployment during this recession and most of the current job openings are the result of improvements in the business cycle.
Structural unemployment is much more complicated and has a much greater impact. Structural unemployment results from a mismatch between the sufficiently skilled workers seeking employment and demand in the labor market (Wikipedia). There was a huge, unexpected, impact of structural employment during this recession. To understand why, we need to review the economy of the aughts (00’s).
A Tale of Two Bubbles
The dot com bubble was created by people overestimating the growth potential of the Internet. Too much money flowed into the sector, pushing up stock prices and propping up weaker companies. When the bubble burst, the excess capital left the sector. But some good things came out of this. We were left with a strong Internet- related industry that was right-sized and ready for future growth.
In a free market economy, capital flows to where there is the greatest return on investment. After the dot com bubble burst, the capital ran straight into the housing market. You could make great money building, buying, and selling houses. Because housing is related to so many other industries, money flowed into these places also. The companies offering the highest returns on their bonds and preferred stock were all connected to housing since they could take the capital and get a high return on investment. (I still own some awful bonds from GMAC. I thought they were only financing cars!).
Of course we now know the bubble was created using risking mortgages and toxic assets. When this one popped, the result is huge inventory of empty houses, a damaged financial system, huge government debt and much of the “false” wealth the bubble created evaporated. Worse yet, the repercussions rippled through the economy crippling industries and resulting in our current unemployment situation. Because this bubble was based on falsehoods, there are no positive results.
And it is even worse than that. Because during the aught’s capital was flowing into the housing market and related industries, it was not flowing into true growth industries and small start-up companies that provide long-term economic growth. Instead of money being available in 2005 for the new company “Growth Industries Inc.” which would have employed 100 people today, it went to “Skipper the house flipper”. Think about it, what is the macro-economic benefit of flipping houses? Now he’s known as “Skipper the burger flipper”.
So there are many skilled, unemployed, people looking for work, but there are few jobs available that require their skills. This is the reason the under-employed numbers are so high. The WSJ economic panel estimates that 2.1 million jobs lost during this recession will not return. The scope of the “structural” unemployment problem also is impacting the business cycle (and thus cyclical unemployment) by limiting consumer spending.
Even if the government cannot create jobs in the short-term, it does need to create a better environment so the private sector can create more jobs. Because housing made things appear so good before the recession, the government neglected some issues that are restraining job growth today.
Issues to Address:
1. Develop a national business strategy
There needs to be a strategy of assisting the small, high-tech industries that will create the jobs of the future. An education strategy needs to compliment this to provide the workers needed for these jobs. China has a business strategy and I hear that it just may be working for them.
2. Develop an energy policy based on economic factors
Energy is considered too much to be just an environmental issue. It is primarily an economic issue with national security implications. If all the solar panels and wind turbines are produced in China, what have we really accomplished? It is a great strategy to promote the conversion to electric powered automobiles. This would generate innovation and jobs in the battery industry and create the need for many nuclear power plants to be built throughout the country. We create jobs, decrease pollution, and improve national security at the same time.
3. Develop “fairer” trade policies.
“Exporting” jobs may have worked when housing was propelling the economy, but it doesn’t work now. We have to export more products and fewer jobs.
4. Enforce the immigration law
There may been an economic reason to ignore illegal immigration when unemployment was at 5%, but can you really continue to do this with unemployment at 10%?
5. Increase market competition
The trend has been to promote business consolidation to create greater efficiencies. If you go too far, you reduce competition and limit job growth. It causes other problems also (Hey, how about them giant banks!). Again the strategy worked when housing was strong, but we went too far. It is time to strengthen the anti-trust laws and deconsolidate where needed. The increased competition will result in new companies, new technologies, and new jobs.
This means you are admitting that your plan isn’t going to work before you even implement it. Can you image doing this is the private sector? “Hey boss I’m going to spend big bucks on our new campaign, but I don’t expect sales to increase at all.” And they don’t understand why people have a problem with this. Brew some tea.
However, the $17.5 billion “jobs” bill enacted last week is a huge improvement over the original $150 billion version. Why? The original cost $150 billion to provide few jobs, but the new bill costs $132.5 billion less to do almost the same thing. It’s a bargain!
In reality, the government cannot do much to create jobs in the short-term. If it could, we would have full employment all the time. The private sector has to create the jobs and the government’s role is to create an environment that promotes job growth while maintaining the general well being of the people. But the people demand that the government do something, so you get expensive programs that don’t accomplish much.
Unemployment is expected to improve very slowly in this recovery. Most forecasts have unemployment just above 9% by the end of 2010 and still around 8% for 2011. The government’s forecasts are actually now more pessimistic that most economist. I believe they are trying to lower expectations after woefully failing to meet expectations in 2009.
Two Types of Unemployment
There are two types of unemployment (sounds like a Vytorin commercial) impacting the job market right now. Cyclical unemployment is the unemployment that results due to the periodic drops in the business cycle, commonly referred to as recessions. When the business cycle rises, companies start hiring, and unemployment drops. There was considerable cyclical unemployment during this recession and most of the current job openings are the result of improvements in the business cycle.
Structural unemployment is much more complicated and has a much greater impact. Structural unemployment results from a mismatch between the sufficiently skilled workers seeking employment and demand in the labor market (Wikipedia). There was a huge, unexpected, impact of structural employment during this recession. To understand why, we need to review the economy of the aughts (00’s).
A Tale of Two Bubbles
The dot com bubble was created by people overestimating the growth potential of the Internet. Too much money flowed into the sector, pushing up stock prices and propping up weaker companies. When the bubble burst, the excess capital left the sector. But some good things came out of this. We were left with a strong Internet- related industry that was right-sized and ready for future growth.
In a free market economy, capital flows to where there is the greatest return on investment. After the dot com bubble burst, the capital ran straight into the housing market. You could make great money building, buying, and selling houses. Because housing is related to so many other industries, money flowed into these places also. The companies offering the highest returns on their bonds and preferred stock were all connected to housing since they could take the capital and get a high return on investment. (I still own some awful bonds from GMAC. I thought they were only financing cars!).
Of course we now know the bubble was created using risking mortgages and toxic assets. When this one popped, the result is huge inventory of empty houses, a damaged financial system, huge government debt and much of the “false” wealth the bubble created evaporated. Worse yet, the repercussions rippled through the economy crippling industries and resulting in our current unemployment situation. Because this bubble was based on falsehoods, there are no positive results.
And it is even worse than that. Because during the aught’s capital was flowing into the housing market and related industries, it was not flowing into true growth industries and small start-up companies that provide long-term economic growth. Instead of money being available in 2005 for the new company “Growth Industries Inc.” which would have employed 100 people today, it went to “Skipper the house flipper”. Think about it, what is the macro-economic benefit of flipping houses? Now he’s known as “Skipper the burger flipper”.
So there are many skilled, unemployed, people looking for work, but there are few jobs available that require their skills. This is the reason the under-employed numbers are so high. The WSJ economic panel estimates that 2.1 million jobs lost during this recession will not return. The scope of the “structural” unemployment problem also is impacting the business cycle (and thus cyclical unemployment) by limiting consumer spending.
Even if the government cannot create jobs in the short-term, it does need to create a better environment so the private sector can create more jobs. Because housing made things appear so good before the recession, the government neglected some issues that are restraining job growth today.
Issues to Address:
1. Develop a national business strategy
There needs to be a strategy of assisting the small, high-tech industries that will create the jobs of the future. An education strategy needs to compliment this to provide the workers needed for these jobs. China has a business strategy and I hear that it just may be working for them.
2. Develop an energy policy based on economic factors
Energy is considered too much to be just an environmental issue. It is primarily an economic issue with national security implications. If all the solar panels and wind turbines are produced in China, what have we really accomplished? It is a great strategy to promote the conversion to electric powered automobiles. This would generate innovation and jobs in the battery industry and create the need for many nuclear power plants to be built throughout the country. We create jobs, decrease pollution, and improve national security at the same time.
3. Develop “fairer” trade policies.
“Exporting” jobs may have worked when housing was propelling the economy, but it doesn’t work now. We have to export more products and fewer jobs.
4. Enforce the immigration law
There may been an economic reason to ignore illegal immigration when unemployment was at 5%, but can you really continue to do this with unemployment at 10%?
5. Increase market competition
The trend has been to promote business consolidation to create greater efficiencies. If you go too far, you reduce competition and limit job growth. It causes other problems also (Hey, how about them giant banks!). Again the strategy worked when housing was strong, but we went too far. It is time to strengthen the anti-trust laws and deconsolidate where needed. The increased competition will result in new companies, new technologies, and new jobs.
Thursday, March 18, 2010
The Economics of Underwear
In December I listed men’s underwear sales as an unusual economic indicator. This indicator was first developed by former Fed head Alan Greenspan in the 1970’s. My initial thought was that the men’s underwear market is much more complex now and so I questioned if this was still a valid indicator.
I couldn’t find an update on men’s underwear sales, so I started thinking about my own underwear purchases over the last three years:
2008 – The economy was still strong and I had plenty of disposable income. I purchased six pair of underwear. It was the most expensive underwear I have ever purchased in my life. It was underwear that is sold on individual hangers, not in packages. It was colorful, it was flashy, and it was totally unnecessary. My wife is not going to be impressed by my choice of underwear after nearly 30 years of marriage. I don’t have a hot, young, girlfriend. And the underwear looks “slightly” out of place on my aging, baby-boomer, body.
So why did I buy it? Because I could. My underwear selection is representative of the wild conspicuous consumption, over- the- top spending, that characterized the years prior to the Great Recession.
2009 – The Great Recession was in full gear. My disposable income was gone due to job loss. I bought no underwear, even though the pair I was wearing when they told me I was downsized had to be destroyed.
2010 – The recession has ended and a subdued recovery has begun. My disposable income is still low; however underwear is still a necessity even in these times. I do not recommend “going commando” to save money and it is certainly not acceptable attire for job interviews. I agree with Kramer on this one, “my boys need a house”.
However after a year of no underwear purchases, some existing inventory is wearing thin. So I recently have made my first underwear purchase in almost two years. But did I buy the fancy, high-priced, stuff on the hangers? Of course not, but I was able to purchase very good underwear at a close-out store. This underwear cost 70% less than the ones I bought in 2008. Why was it sold at close-out? Because the maker of this formally expensive underwear went out of business when the recession hit. His sales were dependent on people having significant disposable income to spend on “high-end” (not tight end) underwear.
And that’s why this recovery will be subdued. People are not going back to their previous uninhibited buying habits either by necessity or choice. This recovery is being led by cheap underwear!
Unusual Economic Indicator Check-Up
It’s time to check to see what some of the unusual economic indicators that were identified in December are telling us now.
Baltic Dry Index (measures international shipping) – A slow, uneven, climb upward.
Scrap Metal Prices – Very positive increases across the board.
Coal Futures – Very positive. Prices expected to be 17% higher a year from now.
Men’s Ties – The big trend now is subdued pastels. This would be consistent with the start of a subdued recovery. Maybe this indicator has more credibility than you think.
The Hot Waitress Index – I have not seen any hot waitresses lately, so maybe they have all found better jobs. So this would be a positive indicator.
Some Other Indicators
Woman’s clothing – Sales are down. This is a negative because women control the disposable income in most households. If women are not spending money on clothing, they probably aren’t spending much money on other things either. Men’s clothing by the way (which includes underwear) was up 5.7% in the last report.
Beer Sales – Were down 2.2% for all of 2009, but increased 1% in Q4. This is great news. If only there was some appropriate way to celebrate this occasion.
Coca-Cola Sales – Expected to be flat in 2010. Don’t you just hate it when Coke goes flat?
Mc Donald’s Sales – Up 1% in December after two months of decline. Mc Hopeful.
Charitable Giving – Initial indications are that donations are lower than last year, a negative.
Short Skirting the Issue
Several readers pointed out to me that I did not include the “hemline” index in my December analysis. This states that women’s hemlines rise in good economic times and fall when things get tough. This index actually was first developed in the 1920’s and was very logical. Women raised their hemlines to show off their silk stockings which were a both a status symbol and an attention getter. When bad economic times hit, women could no longer afford the silk stockings and lowered their hemlines to hide the fact they weren’t wearing any. When things improved, hemlines went up to reveal the new stocking purchases.
This indicator is still cited, but the original logic behind it is no longer valid. Regardless, short skirts are a very hot fashion item for this spring.
What It Means: short skirts are back in fashion just as all the hot waitresses are going back to other jobs. I absolutely hate this economy!
I couldn’t find an update on men’s underwear sales, so I started thinking about my own underwear purchases over the last three years:
2008 – The economy was still strong and I had plenty of disposable income. I purchased six pair of underwear. It was the most expensive underwear I have ever purchased in my life. It was underwear that is sold on individual hangers, not in packages. It was colorful, it was flashy, and it was totally unnecessary. My wife is not going to be impressed by my choice of underwear after nearly 30 years of marriage. I don’t have a hot, young, girlfriend. And the underwear looks “slightly” out of place on my aging, baby-boomer, body.
So why did I buy it? Because I could. My underwear selection is representative of the wild conspicuous consumption, over- the- top spending, that characterized the years prior to the Great Recession.
2009 – The Great Recession was in full gear. My disposable income was gone due to job loss. I bought no underwear, even though the pair I was wearing when they told me I was downsized had to be destroyed.
2010 – The recession has ended and a subdued recovery has begun. My disposable income is still low; however underwear is still a necessity even in these times. I do not recommend “going commando” to save money and it is certainly not acceptable attire for job interviews. I agree with Kramer on this one, “my boys need a house”.
However after a year of no underwear purchases, some existing inventory is wearing thin. So I recently have made my first underwear purchase in almost two years. But did I buy the fancy, high-priced, stuff on the hangers? Of course not, but I was able to purchase very good underwear at a close-out store. This underwear cost 70% less than the ones I bought in 2008. Why was it sold at close-out? Because the maker of this formally expensive underwear went out of business when the recession hit. His sales were dependent on people having significant disposable income to spend on “high-end” (not tight end) underwear.
And that’s why this recovery will be subdued. People are not going back to their previous uninhibited buying habits either by necessity or choice. This recovery is being led by cheap underwear!
Unusual Economic Indicator Check-Up
It’s time to check to see what some of the unusual economic indicators that were identified in December are telling us now.
Baltic Dry Index (measures international shipping) – A slow, uneven, climb upward.
Scrap Metal Prices – Very positive increases across the board.
Coal Futures – Very positive. Prices expected to be 17% higher a year from now.
Men’s Ties – The big trend now is subdued pastels. This would be consistent with the start of a subdued recovery. Maybe this indicator has more credibility than you think.
The Hot Waitress Index – I have not seen any hot waitresses lately, so maybe they have all found better jobs. So this would be a positive indicator.
Some Other Indicators
Woman’s clothing – Sales are down. This is a negative because women control the disposable income in most households. If women are not spending money on clothing, they probably aren’t spending much money on other things either. Men’s clothing by the way (which includes underwear) was up 5.7% in the last report.
Beer Sales – Were down 2.2% for all of 2009, but increased 1% in Q4. This is great news. If only there was some appropriate way to celebrate this occasion.
Coca-Cola Sales – Expected to be flat in 2010. Don’t you just hate it when Coke goes flat?
Mc Donald’s Sales – Up 1% in December after two months of decline. Mc Hopeful.
Charitable Giving – Initial indications are that donations are lower than last year, a negative.
Short Skirting the Issue
Several readers pointed out to me that I did not include the “hemline” index in my December analysis. This states that women’s hemlines rise in good economic times and fall when things get tough. This index actually was first developed in the 1920’s and was very logical. Women raised their hemlines to show off their silk stockings which were a both a status symbol and an attention getter. When bad economic times hit, women could no longer afford the silk stockings and lowered their hemlines to hide the fact they weren’t wearing any. When things improved, hemlines went up to reveal the new stocking purchases.
This indicator is still cited, but the original logic behind it is no longer valid. Regardless, short skirts are a very hot fashion item for this spring.
What It Means: short skirts are back in fashion just as all the hot waitresses are going back to other jobs. I absolutely hate this economy!
Thursday, March 11, 2010
Hyperventilating Unemployment
(Cue Maroon 5)
“When it gets cold outside and you got nobody to love”
The Cold, Hard, February Facts
- The unemployment rate was 9.7%, unchanged from January. 14.9 million people were unemployed and a net 36,000 jobs were lost.
- The underemployment rate was 19.8%, down from 19.9% in January (Gallup). Approximately 8 million people are working part-time for economic reasons.
- 6.13 million workers were unemployed for more than 26 weeks, down from 6.3 million in January (Gallup)
- The unemployment rate for people with a bachelor’s degree or higher was 4% and appeared to have just peaked. (The highpoint during the last recession was around 3%).
- There have been 8.4 million jobs lost during this recession. In addition, 2.7 million jobs that should have been created during the time period were not. Therefore, there is a current deficit of 11.1 million jobs. (NY Times).
What it Means
Once again the pundits on both sides tried to politicize the data. It is not great news, but it not alarming news either.
Back in October, I wrote that the experts were forecasting job growth to begin sometime between February and May of this year and unemployment to peak between 10-11%. Job growth should begin in March and unemployment may have topped out at 10.1% in October. So the forecasts appear to be very accurate and we are doing somewhat better than expectations.
The good news is that the employment situation appears to be bottoming out and is not getting any worse. There was an increase in job openings in January and layoffs were significantly lower. In addition, demand for temporary workers (leads demand for permanent workers by about four months) has been increasing for several months.
The bad news is that hirings have not increased. Companies are conserving cash and trying to squeeze more productivity out of current workers even as sales increase. Business confidence remains low.
A December Head Fake
The government reported a small net job gain in December. I also previously reported that two good friends received job offers in December after looking for over a year. In addition, there was an increase in people getting job offers in the job seeker groups that I belong to. All this positive data coming in the traditional worst month for hiring, led me to conclude that the job market was getting considerably better.
But it was just a “head fake”. My theory now is that many companies had job openings in 2009 that they delayed filling due to the struggling economy. They could afford to wait because there were many available applicants and the economy was recovering slowly. These job requisitions were set to expire at the end of the year, so many companies finally pulled the trigger in December. Job listings for larger companies have increased some so far this year, but hiring remains slow.
This is Not Your Father’s Recession
During previous recessions (before 2001), if your father was laid-off from the factory he collected unemployment until orders improved. He then went back to work at the same company, doing the same job.
This time, millions of degreed professionals have been downsized and will not be returning to their previous jobs. Many of these people have a bachelor’s degree or better, years of experience, and have been unemployed more than six months.
Commentators and analysts continue to write articles about the unemployment situation using historical data to reach their conclusions. But their conclusions are usually faulty because this recession is very different. The old rules no longer apply.
Most people don’t understand how difficult it is to get a job in the current market, although that is changing. A recent cartoon went like this:
Woman: “So what do you do for a living?”
Man: “I’m between jobs”
Woman: “Oh, so you’re optimistic?”
If you are a “good” candidate, it is taking about 8 to 14 months to find a new position (my analysis). This of course this can vary depending on personal factors, expertise and geography.
“How dare you say that my behavior is unacceptable
So condescending, unnecessarily critical”.
Some commentators have stated that the unemployment rate remains so high because extended unemployment benefits are acting as a disincentive for people to go back to work. While this may have been true at times in previous recessions, is not true in this one. The people in my job seeking groups are trying hard to find jobs, but there too few openings for professionals available.
“I have the tendency of getting very physical
So watch your step cause if you do you’ll need a miracle”
If you said to my job-seeking buddy Craig, “Hey why don’t you get off of unemployment and go find a job?” you had better be ready to either duck or run. Likewise, my friend Lori, who is a very pleasant soccer mom, might be tempted to split your goalposts.
The Forecast
Expect the job growth number in March to turn positive. Any impact of the February snow blast will be gone and there may even be some carry over. Construction jobs should also improve due to the weather. Economic growth should continue to add some jobs. Census jobs will add to the total (while some commentators are dismissing census jobs as special circumstances, I say thank God they are happening at a time people desperately need work).
Economists from IHS Global Insight and RBS Securities Inc. expect job growth of 100,000 to 200,000 a month to start soon and then increase to around 300,000 to 400,000 in Q4. While this is good news, the unemployment rate is still expected to be in the 9.0% - 9.5% range at the end of the year.
We’re still on a slow road to recovery.
“When it gets cold outside and you got nobody to love
You’ll understand what I mean when I say
There’s no way we’re gonna give up
And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there, cause it’s getting harder and harder to breathe”
http://www.youtube.com/watch?v=rV8NHsmVMPE
“When it gets cold outside and you got nobody to love”
The Cold, Hard, February Facts
- The unemployment rate was 9.7%, unchanged from January. 14.9 million people were unemployed and a net 36,000 jobs were lost.
- The underemployment rate was 19.8%, down from 19.9% in January (Gallup). Approximately 8 million people are working part-time for economic reasons.
- 6.13 million workers were unemployed for more than 26 weeks, down from 6.3 million in January (Gallup)
- The unemployment rate for people with a bachelor’s degree or higher was 4% and appeared to have just peaked. (The highpoint during the last recession was around 3%).
- There have been 8.4 million jobs lost during this recession. In addition, 2.7 million jobs that should have been created during the time period were not. Therefore, there is a current deficit of 11.1 million jobs. (NY Times).
What it Means
Once again the pundits on both sides tried to politicize the data. It is not great news, but it not alarming news either.
Back in October, I wrote that the experts were forecasting job growth to begin sometime between February and May of this year and unemployment to peak between 10-11%. Job growth should begin in March and unemployment may have topped out at 10.1% in October. So the forecasts appear to be very accurate and we are doing somewhat better than expectations.
The good news is that the employment situation appears to be bottoming out and is not getting any worse. There was an increase in job openings in January and layoffs were significantly lower. In addition, demand for temporary workers (leads demand for permanent workers by about four months) has been increasing for several months.
The bad news is that hirings have not increased. Companies are conserving cash and trying to squeeze more productivity out of current workers even as sales increase. Business confidence remains low.
A December Head Fake
The government reported a small net job gain in December. I also previously reported that two good friends received job offers in December after looking for over a year. In addition, there was an increase in people getting job offers in the job seeker groups that I belong to. All this positive data coming in the traditional worst month for hiring, led me to conclude that the job market was getting considerably better.
But it was just a “head fake”. My theory now is that many companies had job openings in 2009 that they delayed filling due to the struggling economy. They could afford to wait because there were many available applicants and the economy was recovering slowly. These job requisitions were set to expire at the end of the year, so many companies finally pulled the trigger in December. Job listings for larger companies have increased some so far this year, but hiring remains slow.
This is Not Your Father’s Recession
During previous recessions (before 2001), if your father was laid-off from the factory he collected unemployment until orders improved. He then went back to work at the same company, doing the same job.
This time, millions of degreed professionals have been downsized and will not be returning to their previous jobs. Many of these people have a bachelor’s degree or better, years of experience, and have been unemployed more than six months.
Commentators and analysts continue to write articles about the unemployment situation using historical data to reach their conclusions. But their conclusions are usually faulty because this recession is very different. The old rules no longer apply.
Most people don’t understand how difficult it is to get a job in the current market, although that is changing. A recent cartoon went like this:
Woman: “So what do you do for a living?”
Man: “I’m between jobs”
Woman: “Oh, so you’re optimistic?”
If you are a “good” candidate, it is taking about 8 to 14 months to find a new position (my analysis). This of course this can vary depending on personal factors, expertise and geography.
“How dare you say that my behavior is unacceptable
So condescending, unnecessarily critical”.
Some commentators have stated that the unemployment rate remains so high because extended unemployment benefits are acting as a disincentive for people to go back to work. While this may have been true at times in previous recessions, is not true in this one. The people in my job seeking groups are trying hard to find jobs, but there too few openings for professionals available.
“I have the tendency of getting very physical
So watch your step cause if you do you’ll need a miracle”
If you said to my job-seeking buddy Craig, “Hey why don’t you get off of unemployment and go find a job?” you had better be ready to either duck or run. Likewise, my friend Lori, who is a very pleasant soccer mom, might be tempted to split your goalposts.
The Forecast
Expect the job growth number in March to turn positive. Any impact of the February snow blast will be gone and there may even be some carry over. Construction jobs should also improve due to the weather. Economic growth should continue to add some jobs. Census jobs will add to the total (while some commentators are dismissing census jobs as special circumstances, I say thank God they are happening at a time people desperately need work).
Economists from IHS Global Insight and RBS Securities Inc. expect job growth of 100,000 to 200,000 a month to start soon and then increase to around 300,000 to 400,000 in Q4. While this is good news, the unemployment rate is still expected to be in the 9.0% - 9.5% range at the end of the year.
We’re still on a slow road to recovery.
“When it gets cold outside and you got nobody to love
You’ll understand what I mean when I say
There’s no way we’re gonna give up
And like a little girl cries in the face of a monster that lives in her dreams
Is there anyone out there, cause it’s getting harder and harder to breathe”
http://www.youtube.com/watch?v=rV8NHsmVMPE
Thursday, March 4, 2010
Cat Bounce Fever
Noted author and financial analyst Robert Kiyosaki recently predicted that the Dow could sink to 5,000 (the S&P 500 equivalent is 540) in 2010. Kiyosaki is probably using a sophisticated formula using strange mathematics sometimes referred to as “calculus” to get his number. I use a much simpler model and a spreadsheet, often referred to as “Excel”, to get the Model “T” number, which remains at 580.
Kiyosaki describes the recent jump in the market as just a “dead cat bounce”. “The term "dead cat bounce" is derived from the idea that "even a dead cat will bounce if it falls from a great height"(Wikipedia). In investing, it means even a bad stock will increase some after it hits bottom.
What I want to know is who goes around dropping dead cats from the top of buildings. It is not hygienic to be handling dead cats and to drop them off of buildings is just sick. Interestingly, it is one of the few things that PETA and Larry the Cable Guy would agree on. One would call it “a heinous abuse of a corpse”; the other would say “that ain’t right”.
But I think the 3,800 point jump in the Dow is more than a dead cat. If you coated the dead cat in latex and heaved it off of a skyscraper, it wouldn’t even bounce that high. While PETA would still object to this, Larry would say, “Hey, that looks like fun. Can I chuck the next one?”
At the beginning of the year, I wrote about how wide the forecasts were for the stock market in 2010. After more than two months, this has not changed. Some very prominent experts are predicting the Dow could reach 12,000 or more, while Kiyosaki and others are forecasting something near or below the previous low of 6,547.
Checking The Model “T”
I have a dual axis graph of the Model “T” value and the S&P 500 index for the past 20 years. Even in periods when the Model “T” was not as accurate, the two lines were still relatively close together on the graph. The gap between the lines is currently more than double than the previous maximum. The divergence began in March 2009 when the current stock market rally started, but the Model T continued to fall.
When examining the graph, you would conclude that some major, positive, factor that is outside the Model “T” occurred in March 2009 that spurred the stock market jump. What was it? I have no clue. Something is wrong.
If the current gap between the two lines on the graph is too wide, you would expect something to happen soon to bring the lines back into their historic relationship. Of course this can happen in one of two ways:
Scenario One: The commercial transportation market takes off faster than a rocket with freight demand and equipment usage increasing at a tremendous rate. At this point the people still fortunate to have jobs in commercial transportation are laughing because this is so far from reality. The two expert firms in the field, ACT Research and FTR Associates, are both forecasting a very dismal 2010. The industry will improve over 2009, but remain at historically bleak levels.
Scenario Two: The stock market plunges to below the previous S&P 500 bottom of 666 (was God sending us a message?).
Which one of these would you bet on?
A Live Cat Bubble
Instead of a dead cat bounce, I think we have a “live cat bubble” (my new term). The cat is still alive and has been lifted high in the air on a new stock market bubble. I will let the experts explain the causes of this bubble. And if you believe we are just too darn smart to create another bubble so soon after the last one, I have some Greek bonds that I need to unload. Financial historians will probably label the last 15 years the Lawrence Welk Era because you can never have too many bubbles.
So the cat is still floating high, contently sitting on the bubble. Everything goes well as long as the cat is calm. If the cat becomes frightened, its claws instinctively come out, the bubble bursts, and the cat comes crashing down. Then you get your dead cat bounce.
Kiyosaki describes the recent jump in the market as just a “dead cat bounce”. “The term "dead cat bounce" is derived from the idea that "even a dead cat will bounce if it falls from a great height"(Wikipedia). In investing, it means even a bad stock will increase some after it hits bottom.
What I want to know is who goes around dropping dead cats from the top of buildings. It is not hygienic to be handling dead cats and to drop them off of buildings is just sick. Interestingly, it is one of the few things that PETA and Larry the Cable Guy would agree on. One would call it “a heinous abuse of a corpse”; the other would say “that ain’t right”.
But I think the 3,800 point jump in the Dow is more than a dead cat. If you coated the dead cat in latex and heaved it off of a skyscraper, it wouldn’t even bounce that high. While PETA would still object to this, Larry would say, “Hey, that looks like fun. Can I chuck the next one?”
At the beginning of the year, I wrote about how wide the forecasts were for the stock market in 2010. After more than two months, this has not changed. Some very prominent experts are predicting the Dow could reach 12,000 or more, while Kiyosaki and others are forecasting something near or below the previous low of 6,547.
Checking The Model “T”
I have a dual axis graph of the Model “T” value and the S&P 500 index for the past 20 years. Even in periods when the Model “T” was not as accurate, the two lines were still relatively close together on the graph. The gap between the lines is currently more than double than the previous maximum. The divergence began in March 2009 when the current stock market rally started, but the Model T continued to fall.
When examining the graph, you would conclude that some major, positive, factor that is outside the Model “T” occurred in March 2009 that spurred the stock market jump. What was it? I have no clue. Something is wrong.
If the current gap between the two lines on the graph is too wide, you would expect something to happen soon to bring the lines back into their historic relationship. Of course this can happen in one of two ways:
Scenario One: The commercial transportation market takes off faster than a rocket with freight demand and equipment usage increasing at a tremendous rate. At this point the people still fortunate to have jobs in commercial transportation are laughing because this is so far from reality. The two expert firms in the field, ACT Research and FTR Associates, are both forecasting a very dismal 2010. The industry will improve over 2009, but remain at historically bleak levels.
Scenario Two: The stock market plunges to below the previous S&P 500 bottom of 666 (was God sending us a message?).
Which one of these would you bet on?
A Live Cat Bubble
Instead of a dead cat bounce, I think we have a “live cat bubble” (my new term). The cat is still alive and has been lifted high in the air on a new stock market bubble. I will let the experts explain the causes of this bubble. And if you believe we are just too darn smart to create another bubble so soon after the last one, I have some Greek bonds that I need to unload. Financial historians will probably label the last 15 years the Lawrence Welk Era because you can never have too many bubbles.
So the cat is still floating high, contently sitting on the bubble. Everything goes well as long as the cat is calm. If the cat becomes frightened, its claws instinctively come out, the bubble bursts, and the cat comes crashing down. Then you get your dead cat bounce.
Thursday, February 25, 2010
Someday We’re Going to Party Like It’s 1995
“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
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
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