http://www.mckinseyquarterly.com/newsletters/chartfocus/2010_07.htm
http://www.nytimes.com/2010/07/18/business/18stra.html?emc=eta1
While many of us are thinking along with Nouriel Roubini that we're headed for a double dip recession, that the next "bubble" will be worse, that we'll be in a very slow GDP growth period (Bernanke) for at least 5 years (with all that implies for unemployment), Jeremy Siegel thinks this is probably a good time to invest. We tend to listen to Siegel because he is the best finance professor on the best finance faculty of any university in the world (Wharton at UPENN).
His position on this situation (quoted in the Times over the weekend, as well as in Knowledge@Wharton on line last week) is pretty much the direct opposite of Robert Prechter's (see our post "Taking Cover," 7/5/10). Prechter is looking at "fractals" and basically predicting the sky is falling. Siegel is looking at the same markets and suggesting that historically lower than average P/E multiples indicate that it's a good time to invest: "there is every reason to believe that (the) mean reversion will continue" - that despite sometimes excruciating declines, the market over the long run will produce average real returns of more than 6% annually. Based on consensus estimates, the P/E is currently at 13. That compares with an annual average of 15.2 since 1945.
If you're looking for optimism, here we go: according to Siegel, prospects for stock investments are excellent. How excellent? There would be a 96.6% probability of a positive return for the next 5 years, going up to 100% for 10- and 20-year periods. Average real returns would be "stellar": about 11% annually in holding periods from 1 to 20 years.
We'll see.
We've attached some data which arrived from McKinsey today on "A Generation of Overoptimistic Equity Analysts." Looking at the last 25 years, equity analysts growth estimates (10% to 12% annually) were way too high. Of course, the actual growth rate for those years was, indeed, the 6% Siegel refers to.
We hope Siegel is right but the uncharted waters that Roubini and others are defining, may not have a precedent. If so, predictions based on past data, may not apply.
Roubini: "The recent crisis has made it clear that the "Great Instability" may be a better description of the coming era than the "Great Moderation" (the years between 1980 and 2007 with low inflation, high growth and mild recessions). Asset bubbles and busts may occur more frequently, and crises once thought to occur only once or twice a century may hammer the global economy more often. Black swans may become white swans." ("Crisis Economics" - Nouriel Roubini/Stephen Mihm - 2010 - The Penguin Press)
It is hard to argue with Roubini.
Monday, July 19, 2010
Saturday, July 17, 2010
Zombie Banks and Elizabeth Warren
http://jubakpicks.com/2010/07/16/bad-news-banks-citigroup-and-bank-of-america-results-show-a-slowing-u-s-economy/?utm_source=Jubak+Picks&utm_medium=email&utm_campaign=15053d154e-RSS_EMAIL_CAMPAIGN
http://www.nytimes.com/2010/07/17/business/17regulate.html?emc=eta1
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"People will not always remember what you said or what you did, but they will always remember how you made them feel." (John C. Maxwell/Parker Palmer)
***************
The flip side of banks not wanting to loan money (something Fed chairman Ben Bernanke is trying to change because small businesses need loans to grow and create jobs) is businesses not wanting loans. As Jim Jubak points out, yesterday's profit reports from two of the "zombie banks" (Citigroup and Bank of America) showed a decline in loan demand, a big enough decline that their loan portfolios contracted in the quarter: "You don't get shrinking loan demand in a healthy economy. Consumers and businesses are sitting on the cash they have and not borrowing more because they're afraid the U.S. economy is going to slow."
This malaise of "stuckness" (that would be a term we've created to apply to the economy and GDP growth) would probably be what caused Ben Bernanke to conclude this week that the U.S. economy could be in this (slow growth/no growth) rut for the next five years.
On a happier note, there are some areas where zombie bank mediocrity is actually a blessing. The new financial regulation bill is probably not what it set out to be but it was passed by Congress this week and should be signed by the President when he gets back from vacation. While nobody is an expert yet on how that bill will work (especially since the wording in the bill relies heavily on regulatory interpretation), there are some bright spots.
From the outset, the zombie banks spent millions of taxpayer bailout dollars (they claim they didn't because the money came from different "departments" in those institutions) on lobbying to be sure they could "water down" new financial regulations. So, a "bright spot" would be a part of the bill where the zombies failed to water down/eliminate new regulations.
The Consumer Financial Protection Bureau survived the onslaught and is a key part of the new legislation. With an estimated budget of $500 million and broad discretion to write and enforce rules for mortgages, credit cards, student loans and debt collection, this agency can be a force for improvement. Today's Times refers to it as the most important element of the legislation. Experts put its potential influence on a par with the establishment of the Federal Trade Commission in 1915 and the Securities Exchange Commission in 1934.
Elizabeth Warren, a Harvard law professor, bankruptcy expert and Chairwoman of the Congressional TARP Oversight Committee, proposed the new agency and is on the three person short list to run it (if you're reading this, Google her and check out her Berkeley speech on what's happening to Middle America).
On television and in speeches, Ms. Warren continuously emphasizes that 30 years of deregulation has rewarded the financial industry but led to abusive practices and collapses that have hurt ordinary Americans - the same taxpayers who are paying for bank bailouts. Known for her bluntness, she told Congress that TARP may have overpaid for bank shares by at least 30%. This type of public criticism has not endeared her to Treasury secretary Tim Geithner. Treasury officials have denied reports that Mr. Geithner opposes the selection of Ms. Warren (this probably means that he does). We're not sure we care what Geithner thinks since he won't be running the agency, and, just incidentally, wasn't he in charge of the New York Fed when Wall Street was running amok?
While the new bureau will be nominally part of the Fed, the Fed has no power to name, supervise or remove the bureau's employees, or to interfere with the bureau's work. The Fed is required to turn over roughly 10% of its operating expenses to finance the bureau's work.
Lets see if President Obama appoints Elizabeth Warren. If he does, he's made a good decision. Any other decision won't be.
http://www.nytimes.com/2010/07/17/business/17regulate.html?emc=eta1
***************
"People will not always remember what you said or what you did, but they will always remember how you made them feel." (John C. Maxwell/Parker Palmer)
***************
The flip side of banks not wanting to loan money (something Fed chairman Ben Bernanke is trying to change because small businesses need loans to grow and create jobs) is businesses not wanting loans. As Jim Jubak points out, yesterday's profit reports from two of the "zombie banks" (Citigroup and Bank of America) showed a decline in loan demand, a big enough decline that their loan portfolios contracted in the quarter: "You don't get shrinking loan demand in a healthy economy. Consumers and businesses are sitting on the cash they have and not borrowing more because they're afraid the U.S. economy is going to slow."
This malaise of "stuckness" (that would be a term we've created to apply to the economy and GDP growth) would probably be what caused Ben Bernanke to conclude this week that the U.S. economy could be in this (slow growth/no growth) rut for the next five years.
On a happier note, there are some areas where zombie bank mediocrity is actually a blessing. The new financial regulation bill is probably not what it set out to be but it was passed by Congress this week and should be signed by the President when he gets back from vacation. While nobody is an expert yet on how that bill will work (especially since the wording in the bill relies heavily on regulatory interpretation), there are some bright spots.
From the outset, the zombie banks spent millions of taxpayer bailout dollars (they claim they didn't because the money came from different "departments" in those institutions) on lobbying to be sure they could "water down" new financial regulations. So, a "bright spot" would be a part of the bill where the zombies failed to water down/eliminate new regulations.
The Consumer Financial Protection Bureau survived the onslaught and is a key part of the new legislation. With an estimated budget of $500 million and broad discretion to write and enforce rules for mortgages, credit cards, student loans and debt collection, this agency can be a force for improvement. Today's Times refers to it as the most important element of the legislation. Experts put its potential influence on a par with the establishment of the Federal Trade Commission in 1915 and the Securities Exchange Commission in 1934.
Elizabeth Warren, a Harvard law professor, bankruptcy expert and Chairwoman of the Congressional TARP Oversight Committee, proposed the new agency and is on the three person short list to run it (if you're reading this, Google her and check out her Berkeley speech on what's happening to Middle America).
On television and in speeches, Ms. Warren continuously emphasizes that 30 years of deregulation has rewarded the financial industry but led to abusive practices and collapses that have hurt ordinary Americans - the same taxpayers who are paying for bank bailouts. Known for her bluntness, she told Congress that TARP may have overpaid for bank shares by at least 30%. This type of public criticism has not endeared her to Treasury secretary Tim Geithner. Treasury officials have denied reports that Mr. Geithner opposes the selection of Ms. Warren (this probably means that he does). We're not sure we care what Geithner thinks since he won't be running the agency, and, just incidentally, wasn't he in charge of the New York Fed when Wall Street was running amok?
While the new bureau will be nominally part of the Fed, the Fed has no power to name, supervise or remove the bureau's employees, or to interfere with the bureau's work. The Fed is required to turn over roughly 10% of its operating expenses to finance the bureau's work.
Lets see if President Obama appoints Elizabeth Warren. If he does, he's made a good decision. Any other decision won't be.
Friday, July 16, 2010
Grow Green Jobs
http://economix.blogs.nytimes.com/2010/07/12/grow-green-jobs/
Nancy Folbre, who is an economics professor at the University of Massachusetts, had a post this month on "Economix" about growing green jobs. Her point was that a way to deal with "sagging payrolls and global warming" simultaneously is to grow green jobs. She is quick to point out that there is a conservative backlash against the promotion of green jobs which is linked to skepticism about the threat of global warming. And certainly we would be a part of that "backlash". (See our year end 2009 post.)
But, who wouldn't want a cleaner planet with less pollution? So, Folbre has some thoughts that we like. She's leaned on a very thorough study by "The Pew Charitable Trusts" (Pew Finds Clean Energy Economy Generates Significant Job Growth - 6/09). The Pew Study estimated that green jobs grew nearly two and a half times faster than overall jobs between 1998 and 2007.
Frankly, we think the Pew Study performed a service in the sense that it produced a clear definition of the "clean energy" economy and conducted the first-ever hard count across all 50 states of actual jobs, companies and venture capital investments that supply the growing market for environmentally friendly products and services.
Pew found that clean energy jobs grew at a national rate of 9.1%, while traditional jobs grew at 3.7% during that 1998 thru 2007 period mentioned above. Certainly, that has potential.
Pew's definition of a clean energy economy comprises 5 categories: (1) Clean Energy, (2) Energy Efficiency, (3) Environmentally Friendly Production, (4) Conservation and Pollution Mitigation, and (5) Training and Support. This definitional framework provides a useful perspective for tracking jobs, investments and economic growth over time which, in turn, facilitates evaluating the effectiveness of policy choices and investments. Included in Pew's definition are jobs as diverse as engineers, plumbers, administrative assistants, construction workers, teachers and several others.
Venture capital investment in clean technology crossed the $1 billion threshold in 2005 and grew to $12.6 billion by the end of 2008.
Making investments in this area part of public infrastructure projects with a combination of public (federal loan guarantees) and private financing would certainly help cash-strapped state and local governments to improve energy efficiency at the ground floor while creating much needed jobs and tax revenue streams. But wait, that's a good idea so it's probably not politically palatable.
Of course, as Nancy Folbre points out, there's no need to spend money to create jobs or save energy if you think the market will take care of these problems on its own: "Likewise, you don't need to water your own garden if you're confident the rain will always come on time."
We like Nancy's perspective.
Nancy Folbre, who is an economics professor at the University of Massachusetts, had a post this month on "Economix" about growing green jobs. Her point was that a way to deal with "sagging payrolls and global warming" simultaneously is to grow green jobs. She is quick to point out that there is a conservative backlash against the promotion of green jobs which is linked to skepticism about the threat of global warming. And certainly we would be a part of that "backlash". (See our year end 2009 post.)
But, who wouldn't want a cleaner planet with less pollution? So, Folbre has some thoughts that we like. She's leaned on a very thorough study by "The Pew Charitable Trusts" (Pew Finds Clean Energy Economy Generates Significant Job Growth - 6/09). The Pew Study estimated that green jobs grew nearly two and a half times faster than overall jobs between 1998 and 2007.
Frankly, we think the Pew Study performed a service in the sense that it produced a clear definition of the "clean energy" economy and conducted the first-ever hard count across all 50 states of actual jobs, companies and venture capital investments that supply the growing market for environmentally friendly products and services.
Pew found that clean energy jobs grew at a national rate of 9.1%, while traditional jobs grew at 3.7% during that 1998 thru 2007 period mentioned above. Certainly, that has potential.
Pew's definition of a clean energy economy comprises 5 categories: (1) Clean Energy, (2) Energy Efficiency, (3) Environmentally Friendly Production, (4) Conservation and Pollution Mitigation, and (5) Training and Support. This definitional framework provides a useful perspective for tracking jobs, investments and economic growth over time which, in turn, facilitates evaluating the effectiveness of policy choices and investments. Included in Pew's definition are jobs as diverse as engineers, plumbers, administrative assistants, construction workers, teachers and several others.
Venture capital investment in clean technology crossed the $1 billion threshold in 2005 and grew to $12.6 billion by the end of 2008.
Making investments in this area part of public infrastructure projects with a combination of public (federal loan guarantees) and private financing would certainly help cash-strapped state and local governments to improve energy efficiency at the ground floor while creating much needed jobs and tax revenue streams. But wait, that's a good idea so it's probably not politically palatable.
Of course, as Nancy Folbre points out, there's no need to spend money to create jobs or save energy if you think the market will take care of these problems on its own: "Likewise, you don't need to water your own garden if you're confident the rain will always come on time."
We like Nancy's perspective.
Tuesday, July 13, 2010
A Second Stimulus
http://www.washingtonpost.com/wp-dyn/content/article/2010/07/04/AR2010070403856.html?referrer=emailarticle
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"People may HEAR your words, but they FEEL your attitude." (John C. Maxwell)
***************
Fareed Zakaria (he of "Fareed Zakaria: GPS" on CNN, and "The Post-American World", a worldwide non-fiction best seller in 2008) has some thoughts on how to get the U.S. economy going again. He sees a "political issue" going on that a has some validity: the Federal Reserve recently reported that America's 500 largest non-financial companies have accumulated $1.8 trillion in cash on their balance sheets - that would be the highest amount in almost 50 years. And, as Zakaria points out, most of these corporations aren't spending this money on new plants, equipment or workers.
Why not?
The answer is that most of the CEOs of the companies holding on to their cash see economic uncertainty as the primary reason for their caution (understandable). But, in addition, "politics" comes up as a continuing concern surrounding regulations and taxes. Some of these CEOs have begun to speak out publicly: GE CEO Jeff Immelt has complained that the government is not in sync with entrepreneurs. It's interesting that someone running one of the largest and most complex conglomerates in the world speaks out about the plight of the "entrepreneur." But, Zakaria sees a consensus amongst the most influential CEOs (some of whom will not speak on the record) that President Obama is anti-business. These CEOs point out that he has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, and that he's made clear he thinks government and nonprofit work are superior to the private sector. This adds up to, as Zakaria puts it, a "profound sense of distrust."
One of the CEOs pointed out that he has "teams of lawyers" working to figure out the implications of new legislation on health-care, financial reform, and cap-and-trade. And, of course, "lobbyists" are thrilled because it's more business for them. But, all this stalls the system of decision-making in many large companies. Zakaria implies that the Obama Administration is not unhappy about expanded government purview in many areas, but points out that some of that "expansion" has been necessary with all that's been done to save the U.S. economy.
Regardless of any "excuses", Zakaria points out, and we agree, that the Obama Administration needs to outline a growth and competitiveness agenda that is compelling to the business community. So far, there's nothing.
We want to add here that Zakaria mentions in passing the state and local government crisis going on in the U.S. He quotes Joel Klein, the New York City schools chancellor, who told him that when the government stimulus money runs out at the end of this year, he will be forced to lay off 5,000 teachers. So, a second government stimulus (which is politically impossible at this point) would have a use in situations like this throughout this country. Without a second stimulus, state and local governments will have to slash spending and raise taxes, "... which will produce a downward spiral of higher unemployment, slower growth, lower tax revenue and a larger deficit." Nothing to alleviate this looks to be on the horizon.
Relative to all of this, we note with interest that Fed Chairman Ben Bernanke said Monday that small businesses are having a tough time getting the loans they need to expand or stay afloat and keep the economic recovery going. Why? The answer is simple: banks aren't lending (enough) and yet small business is where most of job creation takes place. Bernanke has pledged to keep the main interest rate close to zero for an extended period partly because of this situation.
Until this is fixed, overall economic growth and unemployment will remain a problem.
***************
"People may HEAR your words, but they FEEL your attitude." (John C. Maxwell)
***************
Fareed Zakaria (he of "Fareed Zakaria: GPS" on CNN, and "The Post-American World", a worldwide non-fiction best seller in 2008) has some thoughts on how to get the U.S. economy going again. He sees a "political issue" going on that a has some validity: the Federal Reserve recently reported that America's 500 largest non-financial companies have accumulated $1.8 trillion in cash on their balance sheets - that would be the highest amount in almost 50 years. And, as Zakaria points out, most of these corporations aren't spending this money on new plants, equipment or workers.
Why not?
The answer is that most of the CEOs of the companies holding on to their cash see economic uncertainty as the primary reason for their caution (understandable). But, in addition, "politics" comes up as a continuing concern surrounding regulations and taxes. Some of these CEOs have begun to speak out publicly: GE CEO Jeff Immelt has complained that the government is not in sync with entrepreneurs. It's interesting that someone running one of the largest and most complex conglomerates in the world speaks out about the plight of the "entrepreneur." But, Zakaria sees a consensus amongst the most influential CEOs (some of whom will not speak on the record) that President Obama is anti-business. These CEOs point out that he has no business executives in his Cabinet, that he rarely consults with CEOs (except for photo ops), that he has almost no private-sector experience, and that he's made clear he thinks government and nonprofit work are superior to the private sector. This adds up to, as Zakaria puts it, a "profound sense of distrust."
One of the CEOs pointed out that he has "teams of lawyers" working to figure out the implications of new legislation on health-care, financial reform, and cap-and-trade. And, of course, "lobbyists" are thrilled because it's more business for them. But, all this stalls the system of decision-making in many large companies. Zakaria implies that the Obama Administration is not unhappy about expanded government purview in many areas, but points out that some of that "expansion" has been necessary with all that's been done to save the U.S. economy.
Regardless of any "excuses", Zakaria points out, and we agree, that the Obama Administration needs to outline a growth and competitiveness agenda that is compelling to the business community. So far, there's nothing.
We want to add here that Zakaria mentions in passing the state and local government crisis going on in the U.S. He quotes Joel Klein, the New York City schools chancellor, who told him that when the government stimulus money runs out at the end of this year, he will be forced to lay off 5,000 teachers. So, a second government stimulus (which is politically impossible at this point) would have a use in situations like this throughout this country. Without a second stimulus, state and local governments will have to slash spending and raise taxes, "... which will produce a downward spiral of higher unemployment, slower growth, lower tax revenue and a larger deficit." Nothing to alleviate this looks to be on the horizon.
Relative to all of this, we note with interest that Fed Chairman Ben Bernanke said Monday that small businesses are having a tough time getting the loans they need to expand or stay afloat and keep the economic recovery going. Why? The answer is simple: banks aren't lending (enough) and yet small business is where most of job creation takes place. Bernanke has pledged to keep the main interest rate close to zero for an extended period partly because of this situation.
Until this is fixed, overall economic growth and unemployment will remain a problem.
Monday, July 12, 2010
The "Volcker Rule" II
http://www.nytimes.com/2010/07/11/business/11volcker.html?_r=1&emc=eta1
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"Capitalism without bankruptcy is like Christianity without Hell." (Frank Borman)
***************
If one were to draw up a plan for totally incompetent financial regulation for a period of oh, let's say 10 years, then the U.S. financial regulatory system would be your model. Now, a disclaimer here: this subject is so incredibly "boring" that you should move on if you have other interests. The trouble is that we need to address it because we almost had a "Depression" out there in the world.
So many people were asleep at the switch and so many people were looking to get rich quick, it is just so hard to keep track of all of the players. Ah heck, we'll mention two: Alan Greenspan who gave us the already infamous statement, "Financial markets are self-regulatory," while he was basking in the glow of being called the greatest chairman in Federal Reserve history, a title which should probably go to the person whose name titles this post. And, secondly Lawrence (don't call me "Larry") Summers who helped Alan Greenspan lead the charge to set aside Glass-Steagall in 1999 (so that the monstrosity called "Citigroup" could be created, and so that banks could make risky investments just like the other financial institutions who knew what they were doing), as Secretary of the Treasury, and who now heads the President's Council on the Economy (or whatever it's called). For Summers, there was, we believe, a short stint in between where he served as president of Harvard, managing incredibly quickly to alienate all of the women on the faculty (but, that's another story).
We are following up here on Paul Volcker's separate effort to enhance the quality of pending financial reform legislation. The Times (7/10 attached) quotes him as endorsing the proposed legislation, but "unenthusiastically." He gives it a "B."
Volcker's problem is that he still feels that the legislation doesn't go far enough in curbing potentially problematic bank activities like investing in hedge funds.
Despite his recent efforts to ensure that financial legislation might correct what he regards as some of the mistakes of the "deregulatory years," he's concerned that the new legislation still gives banks too much room to repeat the behavior that got the U.S. in trouble in the first place.
We had runaway inflation early in Volcker's tenure as Fed chairman (1979 - 1987). He crushed it and is fondly remembered by many for the tough decisions he made then.
His "Volcker Rule" is still part of the new legislation but he feels that it has been watered down.
So, while the legislation is scheduled to be voted on in the Senate this week, Volcker is looking toward how aggressively the "regulators" implement the law as the key to whether it will work. The Volcker Rule itself went from "what is best" to "what could be passed." For aficionados of finance, the Volcker Rule, in effect, attempted to restore Glass-Steagall.
Neither Volcker, nor Alan Greenspan who followed him, anticipated the extent to which "credit-default swaps, derivatives and securitization" would be used after Glass-Steagall.
The legislation which is about to be passed contains an "... annoying and potentially dangerous loophole ..." according to Volcker: instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3% of their capital in such funds, so long as the fund is "walled off" from the bank in a separate subsidiary (where have we heard that before?).
Really? And this is supposed to work?
Our thought is that the lobbying on the part of the big banks worked. And, of course, that lobbying was paid for by taxpayers (government bailout money), or, was the lobbying money "walled off" from taxpayer money? It's all so confusing.
***************
"Capitalism without bankruptcy is like Christianity without Hell." (Frank Borman)
***************
If one were to draw up a plan for totally incompetent financial regulation for a period of oh, let's say 10 years, then the U.S. financial regulatory system would be your model. Now, a disclaimer here: this subject is so incredibly "boring" that you should move on if you have other interests. The trouble is that we need to address it because we almost had a "Depression" out there in the world.
So many people were asleep at the switch and so many people were looking to get rich quick, it is just so hard to keep track of all of the players. Ah heck, we'll mention two: Alan Greenspan who gave us the already infamous statement, "Financial markets are self-regulatory," while he was basking in the glow of being called the greatest chairman in Federal Reserve history, a title which should probably go to the person whose name titles this post. And, secondly Lawrence (don't call me "Larry") Summers who helped Alan Greenspan lead the charge to set aside Glass-Steagall in 1999 (so that the monstrosity called "Citigroup" could be created, and so that banks could make risky investments just like the other financial institutions who knew what they were doing), as Secretary of the Treasury, and who now heads the President's Council on the Economy (or whatever it's called). For Summers, there was, we believe, a short stint in between where he served as president of Harvard, managing incredibly quickly to alienate all of the women on the faculty (but, that's another story).
We are following up here on Paul Volcker's separate effort to enhance the quality of pending financial reform legislation. The Times (7/10 attached) quotes him as endorsing the proposed legislation, but "unenthusiastically." He gives it a "B."
Volcker's problem is that he still feels that the legislation doesn't go far enough in curbing potentially problematic bank activities like investing in hedge funds.
Despite his recent efforts to ensure that financial legislation might correct what he regards as some of the mistakes of the "deregulatory years," he's concerned that the new legislation still gives banks too much room to repeat the behavior that got the U.S. in trouble in the first place.
We had runaway inflation early in Volcker's tenure as Fed chairman (1979 - 1987). He crushed it and is fondly remembered by many for the tough decisions he made then.
His "Volcker Rule" is still part of the new legislation but he feels that it has been watered down.
So, while the legislation is scheduled to be voted on in the Senate this week, Volcker is looking toward how aggressively the "regulators" implement the law as the key to whether it will work. The Volcker Rule itself went from "what is best" to "what could be passed." For aficionados of finance, the Volcker Rule, in effect, attempted to restore Glass-Steagall.
Neither Volcker, nor Alan Greenspan who followed him, anticipated the extent to which "credit-default swaps, derivatives and securitization" would be used after Glass-Steagall.
The legislation which is about to be passed contains an "... annoying and potentially dangerous loophole ..." according to Volcker: instead of forbidding banks to make investments in hedge funds and private equity funds, the amendment allows them to invest up to 3% of their capital in such funds, so long as the fund is "walled off" from the bank in a separate subsidiary (where have we heard that before?).
Really? And this is supposed to work?
Our thought is that the lobbying on the part of the big banks worked. And, of course, that lobbying was paid for by taxpayers (government bailout money), or, was the lobbying money "walled off" from taxpayer money? It's all so confusing.
Thursday, July 8, 2010
Lost Generations
http://www.nytimes.com/2010/07/09/business/economy/09shop.html?emc=eta1
http://www.nytimes.com/2010/07/07/business/economy/07generation.html?emc=eta1
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"The measure of a great teacher isn't what he or she knows; it's what the STUDENTS know!"
(John C. Maxwell)
***************
It's good to watch the retail sales numbers if one is interested in where the economy is going and we're going to defer here to those economists who do that professionally, but here's a thought or two. First, how could any retail numbers be "good" if we still have 15 million (nominally) unemployed and an effective unemployment rate of 17%? Whatever the "numbers" are, they're certainly not as good as they could be from the point of view of "consumer demand!" Who's the "consumer?"
Second, it is interesting to look at where the numbers are "up." Costco Wholesale reported revenue gains but those were fueled by its international business. Limited Brands, which owns Victoria Secret, was also a bright spot. But, overall, discounting was heavier than expected just to get customer volume. That's not a good sign.
We have, for most of the last ten years, referred to the 40 to 55 year old old population cohort as a "lost generation:" specifically, the portion of that population that was "replaceable." For example, the tens of thousands of auto workers who were laid off because we couldn't make cars as well as our overseas competition. This is the sub-group that could be replaced by automation or overseas workers.
Who speaks for them?
Today's Times has an article (attached) by Louis Uchitelle ("American Dream Is Elusive For A New Generation": we've had to correct the grammar in the title - nobody says the Times is perfect) on the new generation we're losing to a disastrous job creation environment. Uchitelle has written extensively and brilliantly over the past decade on unemployment, and he has done so again today.
The percentage of young Americans (18 to 29 year olds) who are either unemployed or not seeking work is at its highest since 1971. The graphic from the Times article shows the real unemployment rate for that group pushing 40%. Then, we have the 20 to 34 year old group pushing 20% plus a growing portion of that population in "multi-generational households" (that's a fancy sociological term for: "moved back in with the parents").
So, the "millennials" (18 to 29 year olds) are graduating into a situation where the jobs are just not there. The real unemployment rate for them (37%) resembles the 1930s and, since they are our future, the issue is what to do about it?
Congress has an answer: cut back on government spending so that we can reduce the "deficit". We won't go into the fact that this century began with a "surplus", or why there is a deficit now. We will point out, as we and others have before, that not enough money has been spent to "prime the economic pump" (we've altered a very old saying) and Congress is now leading the charge to cut back on "spending" when we haven't spent enough (see Krugman and Buffet, and see the Great Depression for lessons in this area). Spending by government and private enterprise encourages job creation. Those who have jobs pay taxes and taxes help to reduce deficits. These are simple economic principles which seem to elude many elected representatives.
In a very telling reference to Glen Elder's (University of North Carolina) study, "Children of the Great Depression," Uchitelle points out that the Great Depression damaged the self-confidence of the young, and that is beginning to happen now. This generation is now growingly "risk averse" and it is hard to blame them.
Who speaks for the millennials, or for everybody under 40 years of age?
We encourage those we encounter to continue to get more advanced degrees in order to stay out of the "storm" until it blows over. That's a good idea and may, in turn, cause some students to get PhDs who otherwise would not have. That, in turn, will help to up-grade college education, management consulting and other professions.
The cycle for petroleum engineers is similar economically. There is a shortage right now of that professional group because of downturns and layoffs 20 years ago. Now, the oil business is facing a generation coming up for retirement and nowhere near enough people to replace them. Petroleum engineers can make significant salaries after graduating and there aren't enough degree granting schools.
In a poor economy, students have to target positions at profit/non-profit institutions that continue to grow, or have shortages of certain skills.
We hope the economy is coming back but the most optimistic forecasts we see are for a long slow recovery (like 2.7% GDP growth for the first half of 2010, and 2.5% GDP growth for the second half). If that means things will be staying the way they are now, then we're going to be losing another generation.
The best case scenario, and provable mathematically, is the anticipated major drop in "baby boom" generation employment from retirement. If true, within the next ten years, there will be "shortages" of people to fill jobs that will approach a "full employment" scenario and will have a dramatically positive impact on immigration policies. Demographically, there is "hope."
We choose hope.
http://www.nytimes.com/2010/07/07/business/economy/07generation.html?emc=eta1
***************
"The measure of a great teacher isn't what he or she knows; it's what the STUDENTS know!"
(John C. Maxwell)
***************
It's good to watch the retail sales numbers if one is interested in where the economy is going and we're going to defer here to those economists who do that professionally, but here's a thought or two. First, how could any retail numbers be "good" if we still have 15 million (nominally) unemployed and an effective unemployment rate of 17%? Whatever the "numbers" are, they're certainly not as good as they could be from the point of view of "consumer demand!" Who's the "consumer?"
Second, it is interesting to look at where the numbers are "up." Costco Wholesale reported revenue gains but those were fueled by its international business. Limited Brands, which owns Victoria Secret, was also a bright spot. But, overall, discounting was heavier than expected just to get customer volume. That's not a good sign.
We have, for most of the last ten years, referred to the 40 to 55 year old old population cohort as a "lost generation:" specifically, the portion of that population that was "replaceable." For example, the tens of thousands of auto workers who were laid off because we couldn't make cars as well as our overseas competition. This is the sub-group that could be replaced by automation or overseas workers.
Who speaks for them?
Today's Times has an article (attached) by Louis Uchitelle ("American Dream Is Elusive For A New Generation": we've had to correct the grammar in the title - nobody says the Times is perfect) on the new generation we're losing to a disastrous job creation environment. Uchitelle has written extensively and brilliantly over the past decade on unemployment, and he has done so again today.
The percentage of young Americans (18 to 29 year olds) who are either unemployed or not seeking work is at its highest since 1971. The graphic from the Times article shows the real unemployment rate for that group pushing 40%. Then, we have the 20 to 34 year old group pushing 20% plus a growing portion of that population in "multi-generational households" (that's a fancy sociological term for: "moved back in with the parents").
So, the "millennials" (18 to 29 year olds) are graduating into a situation where the jobs are just not there. The real unemployment rate for them (37%) resembles the 1930s and, since they are our future, the issue is what to do about it?
Congress has an answer: cut back on government spending so that we can reduce the "deficit". We won't go into the fact that this century began with a "surplus", or why there is a deficit now. We will point out, as we and others have before, that not enough money has been spent to "prime the economic pump" (we've altered a very old saying) and Congress is now leading the charge to cut back on "spending" when we haven't spent enough (see Krugman and Buffet, and see the Great Depression for lessons in this area). Spending by government and private enterprise encourages job creation. Those who have jobs pay taxes and taxes help to reduce deficits. These are simple economic principles which seem to elude many elected representatives.
In a very telling reference to Glen Elder's (University of North Carolina) study, "Children of the Great Depression," Uchitelle points out that the Great Depression damaged the self-confidence of the young, and that is beginning to happen now. This generation is now growingly "risk averse" and it is hard to blame them.
Who speaks for the millennials, or for everybody under 40 years of age?
We encourage those we encounter to continue to get more advanced degrees in order to stay out of the "storm" until it blows over. That's a good idea and may, in turn, cause some students to get PhDs who otherwise would not have. That, in turn, will help to up-grade college education, management consulting and other professions.
The cycle for petroleum engineers is similar economically. There is a shortage right now of that professional group because of downturns and layoffs 20 years ago. Now, the oil business is facing a generation coming up for retirement and nowhere near enough people to replace them. Petroleum engineers can make significant salaries after graduating and there aren't enough degree granting schools.
In a poor economy, students have to target positions at profit/non-profit institutions that continue to grow, or have shortages of certain skills.
We hope the economy is coming back but the most optimistic forecasts we see are for a long slow recovery (like 2.7% GDP growth for the first half of 2010, and 2.5% GDP growth for the second half). If that means things will be staying the way they are now, then we're going to be losing another generation.
The best case scenario, and provable mathematically, is the anticipated major drop in "baby boom" generation employment from retirement. If true, within the next ten years, there will be "shortages" of people to fill jobs that will approach a "full employment" scenario and will have a dramatically positive impact on immigration policies. Demographically, there is "hope."
We choose hope.
Wednesday, July 7, 2010
Service Sector Growth
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/the-housing-bubble-hangover-part-2.aspx
http://articles.moneycentral.msn.com/news/article.aspx?feed=OBR&date=20100706&id=11633677
The Institute of Supply Management (ISM) is basically a trade group of purchasing executives that produces an "Index" that has been very closely watched by senior executives in Top 500 companies for the last 30 years. When that index is over 50, things are good. It was 37.2 in November, 2008. It's pre-recession high was 67.7 in 2004.
However; the ISM said yesterday that its index tracking "service-oriented" companies dipped to 53.8 last month from 55.4 in May. With 80% of American employment now in the "service sector," a trend backward in that index is cause for concern.
Now, let's go to "housing". We've attached Fleckenstein on "The Housing Bubble, part 2." We've said in the past that we watch housing and unemployment as the two real bottom lines of how the economy is going. Well, here are some numbers:
* 8 million loans in some state of delinquency
* 100/125,000 new notices of default being given out monthly
* A pool of 15 million "short-sale eligible" homes
At a minimum, consumer wealth, as expressed thru home equity, is going nowhere for a while. Interestingly, Fleckenstein sees an extended period where the Dow Jones stays within a narrow trading range (like the 1966 to 1982 period where trading was never more than 300 points plus or minus).
So, job creation: not doing well. And, housing: not doing well.
http://articles.moneycentral.msn.com/news/article.aspx?feed=OBR&date=20100706&id=11633677
The Institute of Supply Management (ISM) is basically a trade group of purchasing executives that produces an "Index" that has been very closely watched by senior executives in Top 500 companies for the last 30 years. When that index is over 50, things are good. It was 37.2 in November, 2008. It's pre-recession high was 67.7 in 2004.
However; the ISM said yesterday that its index tracking "service-oriented" companies dipped to 53.8 last month from 55.4 in May. With 80% of American employment now in the "service sector," a trend backward in that index is cause for concern.
Now, let's go to "housing". We've attached Fleckenstein on "The Housing Bubble, part 2." We've said in the past that we watch housing and unemployment as the two real bottom lines of how the economy is going. Well, here are some numbers:
* 8 million loans in some state of delinquency
* 100/125,000 new notices of default being given out monthly
* A pool of 15 million "short-sale eligible" homes
At a minimum, consumer wealth, as expressed thru home equity, is going nowhere for a while. Interestingly, Fleckenstein sees an extended period where the Dow Jones stays within a narrow trading range (like the 1966 to 1982 period where trading was never more than 300 points plus or minus).
So, job creation: not doing well. And, housing: not doing well.
Monday, July 5, 2010
Taking Cover
http://www.nytimes.com/2010/07/04/your-money/04stra.html?emc=eta1
Taking 7 semesters of Philosophy (including "Metaphysics!") in college was not wildely exciting for me. Taking 7 semesters of Theology (also required) was broadening but, alas, not exciting either (the big finale was that "Metaphysics" is where philosophy and theology "meet." Really?!?!).
One of my few memories of that ordeal was a position that Descartes (or, was it Pascal?) took on "religion": his point was, why not bet on religion? That way, if there is a God, you'll be OK. If there isn't a God, at least you had some life rules to go by and what did "observing" a religion cost you?
Descartes (or his pal Pascal) had a good point.
Now we have Robert Prechter, a market forecaster and social theorist (perhaps a good combination), who is convinced that we have entered a market decline of staggering proportions - perhaps the biggest of the last 300 years! People who laugh at this idea need to read Nouriel Roubini who called the shot on the crisis that some say we are still in (and, those same people say we are headed for a "double-dip" recession). Most economists see the the Great Recession as having ended last year based on the strict definition of consecutive quarters of GDP growth (like many other things that economists do, their definition is overly quantitative and short sighted). We've had two or three 'positive' GDP quarters in a row so things are returning to normal, albeit slowly: consensus forecast. We don't think so, and, we would posit that Roubini doesn't either. For more on this, see our "Third Depression" post which attaches Krugman's thoughts.
Back to Prechter: his position is based on his version of the "Elliot Wave" theory - which is described as a "technical approach" to market analysis that uses "fractals" (repetitive patterns) for predictions of future market movements.
Prechter's approach is very much like the philosophical advice we referred to above: "I'm saying, 'Winter is coming. Buy a coat.' ... Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead. It's pretty benign advice to opt for safety for a while." His formal advice is that individual investors should move completely out of the market and hold cash and cash equivalents for years to come.
Keeping it real, it would be appropriate to go with Prechter's prognostication because it's "conservative" and then see what happens in the "short term." We don't offer investment advice here. But we do think he has a point. We thought Roubini was off-the-walls in the first half of the last decade when he kept predicting the "sky was falling." Michael Lewis (whose book, "The Big Short" is a current best seller) wrote a scathing article in the fall of 2006 about how ridiculous Roubini's positions on a coming Great Recession were, until it happened. Now Lewis has a best seller written about what happened and why. We wonder what Lewis and Roubini have to say to each other now at the great gatherings of the intelligencia like Davos. Roubini is not the type to say, 'I told you so', but many more people are listening to him than used to, including Lewis.
Food for thought.
*******************
Just a quick follow up on a subject we discussed last fall: it would appear that, as of last Thursday, people unable to get health insurance because of a pre-existing medical condition now have a new option. The federal government announced it was accepting applications for its new Pre-Existing Condition Insurance Plan, which was authorized by the health care overhaul bill. To be eligible, people must be uninsured for at least 6 months and have been turned down for coverage by a private insurer because of a medical problem.
Texas has a program (Texas Health Insurance Pool) for this situation but the premiums are double standard rates. The new federal program will charge similar rates to average individual market premiums charged to "healthy" people.
For those who might have missed the debate in Congress last fall, insurance companies "DROP" people from medical coverage when their medical bills are considered to be too expensive for the "insurers". These cancelations are called "cessions." They happen to 25,000 covered individuals per year. "Cessions" is a fancy word for unethically removing medical coverage from someone who is really ill (ergo, the high costs) because those costs could make a dent in the insurer's profit margin.
Most insurance companies are a good investment - ask Warren Buffet. But insurance companies can remain a good investment without cessions.
Taking 7 semesters of Philosophy (including "Metaphysics!") in college was not wildely exciting for me. Taking 7 semesters of Theology (also required) was broadening but, alas, not exciting either (the big finale was that "Metaphysics" is where philosophy and theology "meet." Really?!?!).
One of my few memories of that ordeal was a position that Descartes (or, was it Pascal?) took on "religion": his point was, why not bet on religion? That way, if there is a God, you'll be OK. If there isn't a God, at least you had some life rules to go by and what did "observing" a religion cost you?
Descartes (or his pal Pascal) had a good point.
Now we have Robert Prechter, a market forecaster and social theorist (perhaps a good combination), who is convinced that we have entered a market decline of staggering proportions - perhaps the biggest of the last 300 years! People who laugh at this idea need to read Nouriel Roubini who called the shot on the crisis that some say we are still in (and, those same people say we are headed for a "double-dip" recession). Most economists see the the Great Recession as having ended last year based on the strict definition of consecutive quarters of GDP growth (like many other things that economists do, their definition is overly quantitative and short sighted). We've had two or three 'positive' GDP quarters in a row so things are returning to normal, albeit slowly: consensus forecast. We don't think so, and, we would posit that Roubini doesn't either. For more on this, see our "Third Depression" post which attaches Krugman's thoughts.
Back to Prechter: his position is based on his version of the "Elliot Wave" theory - which is described as a "technical approach" to market analysis that uses "fractals" (repetitive patterns) for predictions of future market movements.
Prechter's approach is very much like the philosophical advice we referred to above: "I'm saying, 'Winter is coming. Buy a coat.' ... Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead. It's pretty benign advice to opt for safety for a while." His formal advice is that individual investors should move completely out of the market and hold cash and cash equivalents for years to come.
Keeping it real, it would be appropriate to go with Prechter's prognostication because it's "conservative" and then see what happens in the "short term." We don't offer investment advice here. But we do think he has a point. We thought Roubini was off-the-walls in the first half of the last decade when he kept predicting the "sky was falling." Michael Lewis (whose book, "The Big Short" is a current best seller) wrote a scathing article in the fall of 2006 about how ridiculous Roubini's positions on a coming Great Recession were, until it happened. Now Lewis has a best seller written about what happened and why. We wonder what Lewis and Roubini have to say to each other now at the great gatherings of the intelligencia like Davos. Roubini is not the type to say, 'I told you so', but many more people are listening to him than used to, including Lewis.
Food for thought.
*******************
Just a quick follow up on a subject we discussed last fall: it would appear that, as of last Thursday, people unable to get health insurance because of a pre-existing medical condition now have a new option. The federal government announced it was accepting applications for its new Pre-Existing Condition Insurance Plan, which was authorized by the health care overhaul bill. To be eligible, people must be uninsured for at least 6 months and have been turned down for coverage by a private insurer because of a medical problem.
Texas has a program (Texas Health Insurance Pool) for this situation but the premiums are double standard rates. The new federal program will charge similar rates to average individual market premiums charged to "healthy" people.
For those who might have missed the debate in Congress last fall, insurance companies "DROP" people from medical coverage when their medical bills are considered to be too expensive for the "insurers". These cancelations are called "cessions." They happen to 25,000 covered individuals per year. "Cessions" is a fancy word for unethically removing medical coverage from someone who is really ill (ergo, the high costs) because those costs could make a dent in the insurer's profit margin.
Most insurance companies are a good investment - ask Warren Buffet. But insurance companies can remain a good investment without cessions.
Saturday, July 3, 2010
Job Creation
http://www.nytimes.com/2010/07/03/business/economy/03jobs.html?emc=eta1
http://articles.moneycentral.msn.com/Investing/JubaksJournal/biggest-problem-now-job-creation.aspx
http://www.nytimes.com/2010/07/02/business/economy/02manufacturing.html?emc=eta1
We've been waiting for the jobs numbers and they came out yesterday. Economists estimated (and, that's a mistake right there) that the "OVERALL" numbers of new jobs would be down net because the census jobs were ending: the U.S. lost 125,000 jobs in June. Now, with the appropriate political excuses, the real net jobs number is 83,000 jobs added to the private sector for June. The consensus economist guess was that the number would be 112,000.
Recalling a prior post on Paul Krugman's estimates, the U.S. economy would have to create 300,000 plus jobs per month for 5 consecutive years to make up for the jobs that have been lost since the recession began. This assumed roughly 120/150,000 jobs per month simply to cover new entrants to the workforce coming on each month and then the net difference to 300,000 would be new jobs for those who were not employed. So, by that measure, the new data is pathetic.
There are some bright spots overall: in the first six months of 2009, the U.S. lost 3.7 million private sector jobs; during the first six months of this year it gained 590,000. Of those jobs, 136,000 were in manufacturing which is starting to hire back but not at rates consistent with production volumes (they'd prefer to use "temps" where possible until "forced" to go full time). In addition, as Motoko Rich points out in the article attached, many manufacturers invested in automation during the recession and are looking for people with skills to handle that: "The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed ... Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker ... Makers of innovative products like advanced medical devices and wind turbines are among those growing quickly and looking to hire, and they too need higher skills."
At the college level, there's a very interesting article in the Wall Street Journal this week on those who got bachelor's degrees and stayed in school to get a master's as the financial crisis grew hoping for a better employment market now. Those people are saying that "strategy" didn't work because they aren't getting jobs. They're saying that there are people "ahead" of them who, for example, have master's degrees and 5 years of experience and, if unemployed, would get jobs ahead of them. While sad and true, many of these individual examples don't represent the overall issue that the "strategy" was right but the "timing" of the recession was very much longer than "usual." Someone staying in school to get a master's now might find a better job market in 18 mos. Or, they might get another master's or a PhD.
Jim Jubak has a current look at the staggering numbers that need to be overcome for the employment situation to right itself. Firstly, we don't pay any attention to the monthly "... is it 9.7% or 9.5% unemployment rate?" analysis. The real unemployment rate right now is 16.6%. For some portions of our population it's substantially worse. For the Great Depression, it was 25%.
Jubak points out that the Congressional Budget Office (CBO) projection is that the "unemployment rate" will be down to 8% in two years. If we paid attention to that 8% number, that would be "DOUBLE" what the unemployment rate was in 2,000!
While we don't have any political affiliation, if one looks at the jobs situation from the point of view of the Bush Administration (2,000 thru 2008), 3 million jobs were created during a period when the U.S. population grew by 22 million. Using the nominal number assigned to net population participating in the labor market (May's number was 58.7%), 13 million jobs needed to be created just to keep pace with population growth during that 2,000 thru 2008 period. So, the U.S. went into the recently ended recession about 10 million jobs in the "hole." Then, things got worse. According to the Economic Policy Institute (EPI), the U.S. lost 7.5 million jobs from the "official" start of the recession in December of 2007. In that same period (the institute calculates), because of a growing population, the U.S. needed to add 3 million jobs just to stay even. From the December, 2007 start of the recession, the U.S. has dug itself an additional hole of 10.5 million jobs. Regardless of the "math" and some overlaps in calculating, we'll go with Jubak's estimate that the jobs "hole" is somewhere between 15 and 18 million jobs.
Looking at low or slow economic growth for the foreseeable future (3% GDP), and assuming no "double-dip" recession situation, it's difficult to see where substantial job creation is going to be coming from.
We agree with Jubak that neither fixing the U.S. financial system nor reducing the deficit addresses the job creation problem that existed before this financial crisis occurred. There is no way to "financially engineer" job growth and it doesn't appear that the job creation problem is going away.
Has anybody read "Atlas Shrugged" lately?
http://articles.moneycentral.msn.com/Investing/JubaksJournal/biggest-problem-now-job-creation.aspx
http://www.nytimes.com/2010/07/02/business/economy/02manufacturing.html?emc=eta1
We've been waiting for the jobs numbers and they came out yesterday. Economists estimated (and, that's a mistake right there) that the "OVERALL" numbers of new jobs would be down net because the census jobs were ending: the U.S. lost 125,000 jobs in June. Now, with the appropriate political excuses, the real net jobs number is 83,000 jobs added to the private sector for June. The consensus economist guess was that the number would be 112,000.
Recalling a prior post on Paul Krugman's estimates, the U.S. economy would have to create 300,000 plus jobs per month for 5 consecutive years to make up for the jobs that have been lost since the recession began. This assumed roughly 120/150,000 jobs per month simply to cover new entrants to the workforce coming on each month and then the net difference to 300,000 would be new jobs for those who were not employed. So, by that measure, the new data is pathetic.
There are some bright spots overall: in the first six months of 2009, the U.S. lost 3.7 million private sector jobs; during the first six months of this year it gained 590,000. Of those jobs, 136,000 were in manufacturing which is starting to hire back but not at rates consistent with production volumes (they'd prefer to use "temps" where possible until "forced" to go full time). In addition, as Motoko Rich points out in the article attached, many manufacturers invested in automation during the recession and are looking for people with skills to handle that: "The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed ... Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker ... Makers of innovative products like advanced medical devices and wind turbines are among those growing quickly and looking to hire, and they too need higher skills."
At the college level, there's a very interesting article in the Wall Street Journal this week on those who got bachelor's degrees and stayed in school to get a master's as the financial crisis grew hoping for a better employment market now. Those people are saying that "strategy" didn't work because they aren't getting jobs. They're saying that there are people "ahead" of them who, for example, have master's degrees and 5 years of experience and, if unemployed, would get jobs ahead of them. While sad and true, many of these individual examples don't represent the overall issue that the "strategy" was right but the "timing" of the recession was very much longer than "usual." Someone staying in school to get a master's now might find a better job market in 18 mos. Or, they might get another master's or a PhD.
Jim Jubak has a current look at the staggering numbers that need to be overcome for the employment situation to right itself. Firstly, we don't pay any attention to the monthly "... is it 9.7% or 9.5% unemployment rate?" analysis. The real unemployment rate right now is 16.6%. For some portions of our population it's substantially worse. For the Great Depression, it was 25%.
Jubak points out that the Congressional Budget Office (CBO) projection is that the "unemployment rate" will be down to 8% in two years. If we paid attention to that 8% number, that would be "DOUBLE" what the unemployment rate was in 2,000!
While we don't have any political affiliation, if one looks at the jobs situation from the point of view of the Bush Administration (2,000 thru 2008), 3 million jobs were created during a period when the U.S. population grew by 22 million. Using the nominal number assigned to net population participating in the labor market (May's number was 58.7%), 13 million jobs needed to be created just to keep pace with population growth during that 2,000 thru 2008 period. So, the U.S. went into the recently ended recession about 10 million jobs in the "hole." Then, things got worse. According to the Economic Policy Institute (EPI), the U.S. lost 7.5 million jobs from the "official" start of the recession in December of 2007. In that same period (the institute calculates), because of a growing population, the U.S. needed to add 3 million jobs just to stay even. From the December, 2007 start of the recession, the U.S. has dug itself an additional hole of 10.5 million jobs. Regardless of the "math" and some overlaps in calculating, we'll go with Jubak's estimate that the jobs "hole" is somewhere between 15 and 18 million jobs.
Looking at low or slow economic growth for the foreseeable future (3% GDP), and assuming no "double-dip" recession situation, it's difficult to see where substantial job creation is going to be coming from.
We agree with Jubak that neither fixing the U.S. financial system nor reducing the deficit addresses the job creation problem that existed before this financial crisis occurred. There is no way to "financially engineer" job growth and it doesn't appear that the job creation problem is going away.
Has anybody read "Atlas Shrugged" lately?
Thursday, July 1, 2010
The Third Depression
http://www.nytimes.com/2010/06/28/opinion/28krugman.html?_r=1&emc=eta1
http://blogs.ft.com/martin-wolf-exchange/2010/06/27/is-monetary-policy-too-expansionary-or-not-expansionary-enough/
http://economix.blogs.nytimes.com/2010/06/30/another-recession-or-a-long-slow-recovery/?emc=eta1
Krugman begins his 6/28 article with: "Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as "depressions" at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929 - 1931."
Krugman goes on: "Neither the long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline - on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses."
Krugman's fear is that we are in the early stages of a third depression. And, he sees it occurring because of a failure of worldwide economic policy. This, of course, is most recently exhibited by the deficit hysteria exhibited by the G-20 in Toronto last week. We give President Obama credit for going in to those meetings advocating spending to keep consumer demand up, but to no avail as the other 19 countries out voted him.
Key here is Krugman's point that: "... future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression. After all, unemployment - especially long-term unemployment - remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly ... In the face of this grim picture, you might have expected policy makers to realize that they haven't yet done enough to promote recovery. But no: over the past few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy."
So, Krugman concludes, it's as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression (which deepens that depression and paves the way for deflation) is actually self-defeating.
As we have said here many times, unemployment is the lagging indicator for any recovery, the "canary in the coal mine." We are with Krugman when he asks who will pay the price for this current "cut the deficit" orthodoxy? And, of course the answer is tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
We have attached a blog from Martin Wolf of the "Financial Times" where he essentially takes the same position as Krugman about the absolute necessity of continuing to spend. His point is that the overall supply of credit and money in the economies of the developed world is stagnant. Wolf is very highly regarded internationally and frequently appears on "Fareed Zakaria GPS" which is where we get an opportunity to hear his positions.
We have also attached a post by Casey Mulligan on the Times "Economix" blog. Mulligan is a very highly regarded University of Chicago economics professor. Mulligan's point is that, while some economists are saying that we will soon have a second recession, he expects a labor market recovery although it may take many years.
Mulligan includes in his post an excellent multiple trend line graphic of leading indicators over the past nine months (Case-Shiller Housing Price Index, private durables spending per person, etc.). For example, real private consumption has risen, with spending on consumer durables up almost 10%. The stock market is down over the past two months but still higher than it was last fall.
Based on multiple factors like those he refers to (not all of which are "up") in his post, Mulligan predicts that seasonally adjusted national employment and work hours will be a couple of percentage points "higher" at the end of 2010 than they are now: "... that is, we will be weakly recovering from the first recession, not starting a new one."
So, while Krugman has become very "Roubini-like", there are others in his profession that don't see the "gloom" before us. Mulligan is realistic and makes sense.
On the subject of "Roubini", we recommend his new book ("Crisis Economics - A Crash Course in the Future of Finance", Nouriel Roubini and Stephen Mihm, Penguin Press, 2010) which we are currently reading. It's a good perspective-getter on what we've just been through economically and suggests what to do for the future.
A "Third Depression"? No. We hope not.
http://blogs.ft.com/martin-wolf-exchange/2010/06/27/is-monetary-policy-too-expansionary-or-not-expansionary-enough/
http://economix.blogs.nytimes.com/2010/06/30/another-recession-or-a-long-slow-recovery/?emc=eta1
Krugman begins his 6/28 article with: "Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as "depressions" at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929 - 1931."
Krugman goes on: "Neither the long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline - on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses."
Krugman's fear is that we are in the early stages of a third depression. And, he sees it occurring because of a failure of worldwide economic policy. This, of course, is most recently exhibited by the deficit hysteria exhibited by the G-20 in Toronto last week. We give President Obama credit for going in to those meetings advocating spending to keep consumer demand up, but to no avail as the other 19 countries out voted him.
Key here is Krugman's point that: "... future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression. After all, unemployment - especially long-term unemployment - remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly ... In the face of this grim picture, you might have expected policy makers to realize that they haven't yet done enough to promote recovery. But no: over the past few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy."
So, Krugman concludes, it's as if the financial markets understand what policy makers seemingly don't: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression (which deepens that depression and paves the way for deflation) is actually self-defeating.
As we have said here many times, unemployment is the lagging indicator for any recovery, the "canary in the coal mine." We are with Krugman when he asks who will pay the price for this current "cut the deficit" orthodoxy? And, of course the answer is tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.
We have attached a blog from Martin Wolf of the "Financial Times" where he essentially takes the same position as Krugman about the absolute necessity of continuing to spend. His point is that the overall supply of credit and money in the economies of the developed world is stagnant. Wolf is very highly regarded internationally and frequently appears on "Fareed Zakaria GPS" which is where we get an opportunity to hear his positions.
We have also attached a post by Casey Mulligan on the Times "Economix" blog. Mulligan is a very highly regarded University of Chicago economics professor. Mulligan's point is that, while some economists are saying that we will soon have a second recession, he expects a labor market recovery although it may take many years.
Mulligan includes in his post an excellent multiple trend line graphic of leading indicators over the past nine months (Case-Shiller Housing Price Index, private durables spending per person, etc.). For example, real private consumption has risen, with spending on consumer durables up almost 10%. The stock market is down over the past two months but still higher than it was last fall.
Based on multiple factors like those he refers to (not all of which are "up") in his post, Mulligan predicts that seasonally adjusted national employment and work hours will be a couple of percentage points "higher" at the end of 2010 than they are now: "... that is, we will be weakly recovering from the first recession, not starting a new one."
So, while Krugman has become very "Roubini-like", there are others in his profession that don't see the "gloom" before us. Mulligan is realistic and makes sense.
On the subject of "Roubini", we recommend his new book ("Crisis Economics - A Crash Course in the Future of Finance", Nouriel Roubini and Stephen Mihm, Penguin Press, 2010) which we are currently reading. It's a good perspective-getter on what we've just been through economically and suggests what to do for the future.
A "Third Depression"? No. We hope not.
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