Roubini "The Predictor"

http://www.huffingtonpost.com/2010/10/29/nouriel-roubini-fiscal-train-wreck_n_775870.html

http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html

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"Thought is action in rehearsal." (Sigmund Freud)

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As we reach the end of October, we'd like to thank two of our former students who have forwarded data that is germane to what's happening right now in the economy. They both know that my position on "economics" (which is not that different than most current and former Top 500 executives) is that it leaves something to be desired from the point of view of professional consensus on anything.

From 2/14/09, we have Greg Mankiw's post ("News Flash: Economists Agree") which is enlightening as it applies to what economists CAN agree on (based on various polls of the profession). We'll list the first few:

1 A ceiling on rents reduces the quantity and quality of housing available. (93%)

2 Tariffs and import quotas usually reduce general economic welfare. (93%)

3 Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)

4 Fiscal policy (e.g. tax cut and/or government expenditure increases) has a significant stimulative impact on a less than fully employed economy. (90%)

5 The United States should not restrict employers from outsourcing work to foreign countries. (90%).

There are 14 consensus items that Mankiw has put together and they're good: read his post attached.

Moving on to Nouriel Roubini, he was quoted yesterday in the Financial Times as indicating that the U.S. economy is a "train wreck" waiting to happen. He went on to say that the current U.S. situation "... risks ushering in a period of stagnation featuring minimal growth, high unemployment and deflationary pressure."

For many reasons, we tend to listen to what "Dr. Doom" has to say. He was, after all, one of the first economists (and the most well known) to predict the worldwide financial crisis. In addition, his 2010 book, "Crisis Economics (A Crash Course in the Future of Finance)" not only describes what has happened up to now in world economics but predicts what needs to be done in the future (or else). (Paranthetically, we get no income from recommending his book.) No book comes close to Roubini's for that subject matter.

Back to Roubini in the Financial Times. He credits fiscal and monetary stimulus for preventing another depression. But he said that further quantitative easing will have little effect on U.S. growth in 2011, "... so fiscal policy should be doing some of the lifting to prevent a double dip recession." The problem here is that, while we would like to remove "politics" from the equation, the elections coming up Tuesday could have an effect on the ability of the U.S. government to boost fiscal stimulus: if the polls are correct, enough Republicans who are against fiscal stimulus could be elected, in which case those considerations end.

Roubini even goes on to predict what could snap the economy back into another recession: the trigger could be a debt rollover crisis in a major U.S. state government.

Quoting Roubini again: "The worst of the coming fiscal train wreck will be prevented by the Fed's easing. But the risk is (Obama) ... will then preside over ... a Japanese style stagnation, where growth is barely positive, and deflationary pressures and high unemployment linger."

While we would like to disagree with Roubini, we don't have any facts to refute his position. And, neither does anybody else.

Roubini's prediction of a 40% chance of a double dip recession seems real to us. Paul Volcker's prediction of prolonged unemployment also seems real to us.

This would correlate with a new Associated Press poll (of 43 leading private, corporate and academic economists) released yesterday that found economists thinking that unemployment won't drop to a historically normal 5.5% to 6% until at least 2018. This latest quarterly AP survey shows economists are pushing back their estimates (significantly) of when key barometers like hiring, spending and economic growth will signal strength.

We will continue to hope for the best but things do not look promising.

Following Larry Summers

http://chronicle.com/article/Larry-Summersthe/124790/

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"I never think of the future. It comes soon enough." (Albert Einstein)

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One of my colleagues sent me an article from "The Chronicle of Higher Education" that does an outstanding job of summarizing the "deficits" (actually, that's a very good word) implicit today in that combination of universities, government and banking that economists sometimes travel thru in their careers.

Lawrence (don't call me "Larry") Summers has moved thru the chairs of government and universities while presiding over and consulting with banks. His journey reminds me of the childrens' game: Finding Waldo (if I'm not correct with the name of that game, I'm close). Except, in this case, we're "Following Waldo" (Larry) thru the many public service (or non-profit) chairs of his career.

Recall that "Larry" has been one of our "favorites" in the past for his breathtakingly ignorant position as president of Harvard where he lost his job after suggesting that women might be innately inferior to men at scientific work. How could anybody so smart be so stupid? Which causes us to ask: is he really very smart?

Perhaps we should adjust our perception of Larry to a character more like "Pig Pen" from the "Peanuts" comic strip. The dirt seems to just circulate around him as he walks thru his various roles in life. Or, perhaps, that person that drives at 20 mph causing traffic accidents in his or her wake all the time oblivious to the wreckage.

So, the Obama Administration has announced that Larry is resigning as director of the National Economic Council (oh, and Larry, how's the economy going?) and will return to Harvard early next year. Charles Ferguson's article attached considers the damaging influence that some senior academic economists have on the effective functioning of the overall economy - Ferguson calls it "conflicts of interest." We call it inept.

As a rising economist at Harvard and the World Bank, Summers argued for privatization and deregulation in several areas, including finance. Later, as deputy secretary of the treasury and treasury secretary in the Clinton Administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation of the financial sector.

There is a general consensus amongst economists (right there, I worry) that Raghuram Rajan's 2005 paper presented at the annual Jackson Hole conference of central bankers was the first warning of the worldwide financial crisis to come. He argued, among other things, that the bonus structure for executives at financial institutions reinforced taking huge risks with other people's money. When he finished his talk there, Summers rose up in the audience and shouted him down with various accusations. Ridiculous and disrespectful.

We could go on here but we won't. Ferguson points out some interesting facts about the pay levels that some economists enjoy for being on various boards of directors. That perspective is certainly of interest. And, while Ferguson is obviously promoting his new documentary "Inside Job," nothing that he has summarized about the "economist triangle" (our new term for the dreaded economists movements between universities, government and banking) is incorrect. It's actually a great summary and all it involved was following "Larry."

Gordon Gekko Jr.

http://www.slate.com/id/2271265/

The ultimate disrespect for the American university system comes in the form of paying students NOT to go to school. Jacob Weisberg (chairman and editor-in-chief of the Slate Group) chronicles in his 10/16 article (attached) what Peter Thiel has decided to do with some of his fortune: the Thiel Fellowship will pay would-be entrepreneurs UNDER 20 $100,000 in cash to DROP OUT of school.

What a concept!

In announcing the "program," Thiel made clear his contempt for American universities which, like governments (according to him), cost more than they're worth and hinder what really matters in life: starting tech companies. His scholarships are meant as an escape hatch from those "... insufficiently capitalistic institutions of higher learning."

Thiel has a profile: he was the first outside investor in Facebook, putting up $500,000 to finance the site's original expansion in 2004. And, that deal buys him a brief on screen character appearance in the plot of "The Social Network."

According to Weisberg, Thiel has a "big vision" and has been spending the millions he has made from PayPal, Facebook and a hedge fund called Clarium trying to advance it. Weisberg goes on: "Thiel's philosophy demands attention not because it is original or interesting in any way ... but because it epitomizes an ugly side of Silicon Valley's politics."

Thiel's belief system is based on unapologetic selfishness and economic Darwinism. His most famous quote (borrowed from Vince Lombardi) is: "Show me a good loser and I'll show you a loser." His "personal statement" produced last year for the Cato Institute was: "I no longer believe that freedom and democracy are compatible."

Our thought here is that Thiel should, indeed, go someplace else if he feels that freedom and democracy aren't compatible. And, if he doesn't see that the same $100,000 grants from his foundation would be better used giving a young adult a "chance" to go to college (when that person would otherwise not have that chance), then he's missing his own best possibility of making a contribution to mankind.

Compare Thiel's philosophy to what Gates and Buffet are doing with their foundations. The money they're investing in Africa is saving lives.

GG, Jr. comes up short. We're guessing Vince Lombardi would have thought so too.

Purple Squirrels

http://www.msnbc.msn.com/id/39604781/ns/business-careers/

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"Advice is seldom welcome, and those who need it most like it the least." (Samuel Johnson)

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HR professionals have a name for the highly sought but elusive job candidate whose skills and experiences precisely match an employer's needs: the "purple squirrel."

What's happened with the aftermath of the Great Recession is that the process of hiring back staff in the "average" organization has been delayed by both software/computer upgrades that allow companies (especially manufacturers) to do more with less people, and, the predisposition by employers to fill "open" positions with upgraded personnel (those that may have broader skills and/or certifications).

All this makes "productivity" (as measured by output per hour worked) go up: 3.5% last year. This is certainly laudible but it is brought about by a slowness to rehire that, in many cases, puts a strain on those left behind after layoffs. Only 49% of people laid off from 2007 to 2009 were re-employed by January 2010.

Companies are complaining that they can't find qualified people. Well, if those employers have now combined business analyst and systems analyst positions into one job, for example, the pool of people who can qualify for that "opening" substantially reduces. So, those "openings" are now there but info tech companies now want "dual threat" people.

So, the statistic for the number of unemployed Americans, on average, competing for each opening is still high at 4.6 to 1. Prior to the recession, it was 1.8 to 1.

In a new survey released yesterday, 46 economists forecast that the economy will grow this year and next at a slower pace than previously thought (National Association of Business Economists). The new forecast predicted economic growth to be 2.6% for 2010 and 2011. That's down from it's May forecast of 3.2%. During that period, these same economists don't see the official unemployment rate going much below 9.2% and they don't see home prices rising much.

While this forecast is not considered "optimistic," it does not seem to reflect the most recent official GDP growth number (actually, they say it does - we say it doesn't): 1.7% for the U.S. second quarter.

The survey expectation for "hiring" is that the economy will add 150,000 jobs per month until the middle of 2011 after which the numbers will increase to 175,000. Since the economy needs to add 125,000 net new jobs each month just to keep up with population growth, these numbers are positive. But, there is a generally accepted number for GDP growth that correlates with the 125,000 jobs number and that's 2.5%. That's the GDP growth number that most economists feel is needed to keep unemployment from rising. As we indicated above, the NABE economists' 2.6% GDP growth number doesn't look supportable to us, given the most recent quarter at 1.7%.

Last, foreign trade was not seen as weighing on economic growth. The NABE economists said trade deficits would remain constant as a share of GDP. In addition, those surveyed forecast a one-third chance of a "bubble" in China's economy which, to them, means not a high level of concern.

So, between purple squirrels and slower than expected economic growth, things are not as good as they could be.

Flying Fewer Planes

http://www.nytimes.com/2010/10/09/business/09air.html?th&emc=th

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"As time goes by, the way people live outweighs the words they use." (John C. Maxwell)

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For the first time since deregulation (1978), airlines in the U.S. have managed not to increase the number of planes they fly.

Empty seats are increasingly difficult to find and fares have jumped. A record number of planes are stored at the edge of the Mojave Desert, the home for decommissioned passenger jets.

We'll be anxious to see, after the Southwest and United mergers shake out, whether the industry can climb back up to consecutive years of profitability. The overall economics of the industry show zero total net profit over the entire 32 years since deregulation.

Airlines trimmed their capacity in recent years by grounding planes, reducing the number of flights they offered between cities and flying smaller planes. Last year's cuts in capacity, at 7 percent, were the deepest since 1942. Demand has risen 6.1% this year yet airlines have added just 1.5% more seats. The key number is 80%. The airlines now fill up more than 80% of their seats where the traditional level has been 70%.

All of this is key to getting "price" but we want to see what happens when (we hope) the economy comes back and demand for "seats" goes up.

We hope to be pleasantly surprised.

Fixing Wall Street

http://opinionator.blogs.nytimes.com/2010/10/07/make-wall-street-risk-it-all/?emc=eta1

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"Over the last 35 years ... payroll employment in San Francisco has dropped by 50%, but self-employment has shot up 150%, including a large number working in software, consulting, video games, and other high wage professions." (Joel Kotkin)

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William Cohan's post in "The Opinionator" yesterday reflects my position on almost everything that's happened since 2007 on Wall Street.

To quote Cohan: "The 2,200 page Dodd-Frank Act, which President Obama signed this summer, creates an Orwellian alphabet soup of new agencies, oversight boards and offices intended to protect us from ourselves.

The problem is that since the incentives on Wall Street have not been changed one iota by the new laws - nor are they likely to be changed by any of the soon-to-be-written regulations of federal agencies - we're no better protected from bankers' potentially reckless behavior than we were before the latest round of reforms."

The key word is "INCENTIVES." People will do what they get paid off for. The really well done behavioral studies endorse that position. Getting huge bonuses for recirculating subprime mortgage CDOs (aka toxic trash) creates no actual product nor pays for any actual result of value. By contrast, huge bonuses for saving a company (and the "jobs" implied by that) are "worth it."

For the more sophisticated financial types, the new Basel III capital rules which will require banks to hold more "capital" (common equity up from roughly 3% to 7%), don't change the incentive plans of the folks who manage the banks.

It is interesting to note that on Wall Street 50% of every dollar of revenue generated is paid out to employees in the form of compensation. Really. Why? The Dodd-Frank "say on pay" is a shareholder right that is "non-binding" on any company. So there is no improvement in shareholder rights to amend outrageous pay practices.

Cohan's suggestion that the Top 100 executives at Wall Street's "systemically important" firms be personally liable for the risks they take gets at the issue of accountability. His quote on the fact that the days of privatizing the profits of Wall Street and socializing the risks must end suites the situation perfectly.

Fix the incentives - fix Wall Street.

Auto Sales: Paris and Ford

http://www.nytimes.com/2010/10/02/business/02auto.html?ref=business

http://www.nytimes.com/2010/10/03/automobiles/BMW-PARIS.html


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"Nobody wants to be sold, but everyone wants to be helped." (John C. Maxwell)

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The place to be this week has been Paris. This has been more than the annual "Paris Auto Show." It's been more like what cars are going to sell and where will they be selling?

Ford has continued its incredible comeback with a 46% increase over prior year for September. And, Ford had had a good month in September of 2009 so those numbers are real. Ford paced the overall U.S. auto market which gained 28.5% from a year ago.

Ford's market share has improved for the 23rd month in the last 24.

Alan Mulally (Ford's CEO) was quoted in Paris as indicating that Ford's net debt will be zero by the end of 2011. Since Ford borrowed over $23 billion at the end of 2006 (mortgaging everything they had, including the "Ford" logo) after years of net losses, the industry has watched Mulally turn around Ford without declaring bankruptcy or taking money from the taxpayers.

Mulally expects the U.S. car market to grow at a pace of 3 to 5% in the future while he sees the global market expanding by 5 to 10%. Ford has regained its number 2 position in U.S. market share at 16.7% (GM is #1 at 18%, Toyota is #3 at 15.3%).

The U.S. auto industry's seasonally adjusted annualized selling rate for September was 11.76 million cars (the highest level this year). That rate was 9.38 million a year ago. But relatively slow sales in the first half of the year mean total sales for the industry in 2010 are expected to be around 11.5 million. That compares with 10.4 million in 2009 and more than 17 million in 2005.

Our question: will the U.S. auto market ever get back to 17 million cars sold?

Back to Paris. China's auto market (where reports had total sales there last year well beyond 17 million autos) appears to be headed for a leap beyond diesel. Europe is used to diesel and is receptive to the new refined versions of those engines. According to BMW's head of sales, China may skip diesel cars all together and move directly to gasoline-electric hybrid vehicles. Because Beijing limits sales of diesel fuel to trucks, Chinese consumers, unlike Europeans, have never gotten used to the idea that diesel is more economical than gasoline.

BMW's goal for China is to be the top luxury carmaker. Last year, they sold 90,000 cars there and their forecast for 2010 is to sell as many as 120,000. Their brands there include the "Mini" and, of course, Rolls Royce.

BMW is not ignoring the U.S. market. They've invested $750 million in their Spartanburg, South Carolina facility to produce the new X3 luxury crossover, which was rolled out in Paris.

The BMW sales perspective is key: despite the weakness of volume automakers in mature markets, the global luxury sector is holding up well. This is not just true for cars, "... it's true for handbags and hotels too."

Paris is a great place to hear positive news about the U.S. car market and especially Ford, where the comeback has been amazing and free of government bailouts.