http://www.nytimes.com/2010/11/24/business/economy/24econ.html?emc=eta1
Yesterday's report from the Commerce Department showed that "corporate profits" were the highest on record at $1.659 trillion for the third quarter. This is the highest figure since the government began keeping track over 60 years ago (plug in here various inflation caveats).
Profits have grown for seven consecutive quarters at some of the fastest rates in history. Obviously, these numbers can at least partially be attributed to strong productivity growth where companies are testing the outer limits of producing more with less.
More importantly, that same report showed the nation's output grew at a slightly more rapid pace than original estimates for the third quarter: 2.5% (vs. the 2% originally estimated). This is as against 1.7% for the second quarter of 2010. 2.5% GDP growth is the number at which the U.S. economy needs to be in order to keep unemployment from "rising." This is also a number more in line with those economists who feel that that U.S. GDP growth could achieve a number between 3% to 4% by year end 2011. We saw numbers from Yale over the weekend that project GDP growth at 3.69% for the first three quarters of 2012.
As we have observed on more than one occasion, capital has no conscience, and we're pretty sure that Fareed Zakaria's numbers from earlier this year still apply: somewhere between $2 and $3 trillion of Top 500 capital still on the sidelines because those CEOs don't have a clear picture of the regulatory and tax environment in the U.S. Add to this now the growing all time record business profits mentioned above and we have a "spending situation."
We like that term - we don't think we've heard it before so we'll use it here as our idea. The "situation" is this: only so much "capital" can be held back in larger companies. It's almost a law of nature - it gets spent. So, that may start soon - almost like a dam overflowing, it has a life of it's own (we exaggerate, but not by much). And, where are all these profits going? To cash on the books - not likely, because that's just an invitation to acquisition. Then maybe to buy back stock? That's last year's idea. We feel that the cash and the capital will conspire to be spent hopefully in the U.S. or, at least more in the U.S. than elsewhere. If so, then those more optimistic GDP growth numbers mentioned above will happen.
Not everybody can invest in China and we're not sure we'd want to right now.
Wednesday, November 24, 2010
Saturday, November 20, 2010
Debasement Inflation
http://dealbook.nytimes.com/2010/11/18/from-russia-expert-a-gloomy-outlook/?emc=eta1
William F. Browder was on the front lines of investing in Russia from 1996 to 2005. He was one of that country's most prominent and vocal investors with a fund that rose from $25 million to $4.5 billion by the end of 2005. Browder focused on under-researched Russian companies that were trading at sharp discounts to their more widely followed peers.
In 2005, he was expelled from Russia after the Kremlin turned against him. Many believe the "expulsion" was because of his criticism of some of Russia's prized companies like Gazprom. The story of what actually happened there reads like a crime novel. Fareed Zakaria's interview with him on "Fareed Zakaria: GPS" (CNN) is both gripping and sad.
Fortunately, he escaped Russia with most of the money from his very well known fund "Hermitage Capital." He then started a new fund in London called "Hermitage Global."
Browder's new fund invests globally so it's making bets on what the worldwide economy is doing and specifically avoids Russia where, he says, "I think it is a place to avoid both for financial and moral reasons."
Interviewed after speaking at Columbia Business School a few weeks ago, Browder made several points which are hard to disagree with:
(1) Rising prices and no growth are a given in developed countries,
(2) Central banks in the developed world are printing money so we want to own "hard things" that can't be printed,
(3) His fund owns gold,
(4) Emerging markets went thru this a decade ago in the Asian financial crisis: their currencies aren't going to go thru "debasement" (Browder sees the emergence in developed countries of "DEBASEMENT INFLATION" - rising prices with no growth) again,
(5) Hard assets in emerging markets are a BETTER STORE OF VALUE FOR INVESTORS - over there, it's right to own gold mining stocks and real estate developers,
(6) He sees the world in the SECOND STAGE of the worldwide financial crisis: governments won't be able to borrow much more - ergo, they will be forced to print money,
(7) People are going to lose big in long term bonds,
(8) The next stage of the world economy: a "collapse of currencies" or a crisis of confidence in developed market currencies and you can't bail out currencies once they start collapsing,
(9) If Browder were finishing business school right now: he'd become an expert in the U.S. residential real estate market - it's 50% off its peak and will become an inflation hedge in the U.S. as others start printing money.
We see Browder's perspective as a highly informed one. How many people grow a fund from $25 million to $4.5 billion in Russia and get out of their with that fund substantially intact when Putin turns against them? And, today, Browder's new fund is investing in the "world." We like his odds and we respect his perspective.
William F. Browder was on the front lines of investing in Russia from 1996 to 2005. He was one of that country's most prominent and vocal investors with a fund that rose from $25 million to $4.5 billion by the end of 2005. Browder focused on under-researched Russian companies that were trading at sharp discounts to their more widely followed peers.
In 2005, he was expelled from Russia after the Kremlin turned against him. Many believe the "expulsion" was because of his criticism of some of Russia's prized companies like Gazprom. The story of what actually happened there reads like a crime novel. Fareed Zakaria's interview with him on "Fareed Zakaria: GPS" (CNN) is both gripping and sad.
Fortunately, he escaped Russia with most of the money from his very well known fund "Hermitage Capital." He then started a new fund in London called "Hermitage Global."
Browder's new fund invests globally so it's making bets on what the worldwide economy is doing and specifically avoids Russia where, he says, "I think it is a place to avoid both for financial and moral reasons."
Interviewed after speaking at Columbia Business School a few weeks ago, Browder made several points which are hard to disagree with:
(1) Rising prices and no growth are a given in developed countries,
(2) Central banks in the developed world are printing money so we want to own "hard things" that can't be printed,
(3) His fund owns gold,
(4) Emerging markets went thru this a decade ago in the Asian financial crisis: their currencies aren't going to go thru "debasement" (Browder sees the emergence in developed countries of "DEBASEMENT INFLATION" - rising prices with no growth) again,
(5) Hard assets in emerging markets are a BETTER STORE OF VALUE FOR INVESTORS - over there, it's right to own gold mining stocks and real estate developers,
(6) He sees the world in the SECOND STAGE of the worldwide financial crisis: governments won't be able to borrow much more - ergo, they will be forced to print money,
(7) People are going to lose big in long term bonds,
(8) The next stage of the world economy: a "collapse of currencies" or a crisis of confidence in developed market currencies and you can't bail out currencies once they start collapsing,
(9) If Browder were finishing business school right now: he'd become an expert in the U.S. residential real estate market - it's 50% off its peak and will become an inflation hedge in the U.S. as others start printing money.
We see Browder's perspective as a highly informed one. How many people grow a fund from $25 million to $4.5 billion in Russia and get out of their with that fund substantially intact when Putin turns against them? And, today, Browder's new fund is investing in the "world." We like his odds and we respect his perspective.
Friday, November 19, 2010
Cultivating Growth
http://www.nytimes.com/2010/11/17/business/economy/17leonhardt.html?emc=eta1
Here's a concept: everybody wants to "trim the deficit" by cutting spending - very timely: it puts us back to 1937 when doing that just made the Great Depression worse and the only thing that got our economy out of that was WW II.
Here's a concept: foster policies that encourage "more rapid GDP growth." We're guessing here that most members of Congress and the administration have some form of advanced education. If so, an aspect of that education would include some basic economics and some recent economic history.
In the late 1990s the U.S. government was running a budget "surplus." So, we went into the 21st century with a "surplus," not a deficit. What was going well then? The ECONOMY. It actually grew more rapidly than expected in the late 90s. The faster growth pushed up incomes and caused more tax revenues (from tax rates that had been raised) to flow into the Treasury.
As David Leonhardt points out (article attached), today's deficits are too large to be closed exclusively with growth. The baby boom generation is too big, and the rise in Medicare costs continues to be too steep. But, "growth" could make a big difference.
As several of you have pointed out to me, there is a NY Times "Deficit Puzzle" which was created as an interactive device to allow anyone to juggle the variables of the deficit and see what works to tame it and what doesn't. It asks you to find almost $1.4 trillion in annual spending cuts and tax increases by 2030. If growth were a half point faster than expected, the needed "savings" would instead drop to less than $700 billion.
So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth.
So, in the short term, we should actually spend more. This is the point Warren Buffet and Paul Krugman made back when the U.S. stimulus plan was first enacted (they said at that time that it wasn't enough). As Alice Rivlin puts it: "We can do both. We can put money in people's pockets in the short run and trim government spending in the long run."
Here's a concept: one aspect of the Bowles-Simpson plan calls for a gradual 15-cents-a-gallon increase in the federal gasoline tax to pay for highways, mass transit and other projects. Now that would be a tax that directs moneys toward infrastructure where our crumbling highways and "bridges" are in much need of repair AND creates (or preserves) jobs where they're needed. We believe it was Mark Zandi who pointed out to both houses of Congress that there is a "spending multiplier" into the economy for this type of investment.
Stimulating growth: what a concept!
Here's a concept: everybody wants to "trim the deficit" by cutting spending - very timely: it puts us back to 1937 when doing that just made the Great Depression worse and the only thing that got our economy out of that was WW II.
Here's a concept: foster policies that encourage "more rapid GDP growth." We're guessing here that most members of Congress and the administration have some form of advanced education. If so, an aspect of that education would include some basic economics and some recent economic history.
In the late 1990s the U.S. government was running a budget "surplus." So, we went into the 21st century with a "surplus," not a deficit. What was going well then? The ECONOMY. It actually grew more rapidly than expected in the late 90s. The faster growth pushed up incomes and caused more tax revenues (from tax rates that had been raised) to flow into the Treasury.
As David Leonhardt points out (article attached), today's deficits are too large to be closed exclusively with growth. The baby boom generation is too big, and the rise in Medicare costs continues to be too steep. But, "growth" could make a big difference.
As several of you have pointed out to me, there is a NY Times "Deficit Puzzle" which was created as an interactive device to allow anyone to juggle the variables of the deficit and see what works to tame it and what doesn't. It asks you to find almost $1.4 trillion in annual spending cuts and tax increases by 2030. If growth were a half point faster than expected, the needed "savings" would instead drop to less than $700 billion.
So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth.
So, in the short term, we should actually spend more. This is the point Warren Buffet and Paul Krugman made back when the U.S. stimulus plan was first enacted (they said at that time that it wasn't enough). As Alice Rivlin puts it: "We can do both. We can put money in people's pockets in the short run and trim government spending in the long run."
Here's a concept: one aspect of the Bowles-Simpson plan calls for a gradual 15-cents-a-gallon increase in the federal gasoline tax to pay for highways, mass transit and other projects. Now that would be a tax that directs moneys toward infrastructure where our crumbling highways and "bridges" are in much need of repair AND creates (or preserves) jobs where they're needed. We believe it was Mark Zandi who pointed out to both houses of Congress that there is a "spending multiplier" into the economy for this type of investment.
Stimulating growth: what a concept!
Wednesday, November 17, 2010
Warren Buffet
http://www.nytimes.com/2010/11/17/opinion/17buffett.html?hp
Warren Buffett's letter to Uncle Sam will probably stand the test of time. It was published this morning in the NY Times.
He named some of the key people responsible for saving us from a Depression: Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair.
Buffett goes on to point out that: these people "... grasped the gravity of the situation and acted with courage and dispatch."
Nobody ever talks about the fact that Bernanke, to cite one case, sent $350 billion to the EU central bank before the U.S. government even created a bailout fund because the EU was about to tank. Bernanke did that because he knew what he was doing. He's in the right place - his PhD was on the Great Depression.
Bernanke is now being criticized for putting $600 billion more into the U.S. system this week because that "purchase" will devalue the dollar and cause inflation (etc.). So, a barrel of oil will cost more. So what. Do we really think he doesn't know what he's doing? If some of that money gets to smaller banks that lend money to smaller businesses, then jobs (and growth) get created.
We'd like to thank Warren Buffett for giving some perspective to the situation.
Warren Buffett's letter to Uncle Sam will probably stand the test of time. It was published this morning in the NY Times.
He named some of the key people responsible for saving us from a Depression: Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair.
Buffett goes on to point out that: these people "... grasped the gravity of the situation and acted with courage and dispatch."
Nobody ever talks about the fact that Bernanke, to cite one case, sent $350 billion to the EU central bank before the U.S. government even created a bailout fund because the EU was about to tank. Bernanke did that because he knew what he was doing. He's in the right place - his PhD was on the Great Depression.
Bernanke is now being criticized for putting $600 billion more into the U.S. system this week because that "purchase" will devalue the dollar and cause inflation (etc.). So, a barrel of oil will cost more. So what. Do we really think he doesn't know what he's doing? If some of that money gets to smaller banks that lend money to smaller businesses, then jobs (and growth) get created.
We'd like to thank Warren Buffett for giving some perspective to the situation.
Saturday, November 13, 2010
The South Korea Trade Deal
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/11/AR2010111103288.html?referrer=emailarticle
So, our President went to India with an entourage of U.S. business leaders and proposed "freer" trade. He did the same in Indonesia. But, when he got to South Korea, the country hosting this week's G-20 meetings, he couldn't close the most important deal: a deal that would increase U.S. exports by $10 billion annually and support 70,000 jobs in the U.S. Although the list of outstanding issues was short, and the U.S. Chamber of Commerce lobbied heavily for the agreement, key labor and auto interests and their allies in Congress demanded a fuller opening of South Korea's market.
South Korea is a hot economy. As Nouriel Roubini pointed out in his 2010 book, "Crisis Economics," what used to be called "BRIC" (depicting the major moving economies of the world: Brazil, Russia, India and China) might be better be depicted as "BRICK" to include South Korea. Roubini: "South Korea is a sophisticated high-tech economic power: innovative, dynamic and home to a skilled labor force. Its only major problem is the danger that North Korea will collapse and inundate it with hungry refugees."
But we can't make a trade deal with them. Really. Forgive my patriotic zeal, but they exist because of us. My wife's father was a decorated Marine wounded twice at Iwo Jima during WW II who went back to fight in the Korean War. We lost 40,000 men in Korea so these people could have a country of their own. But, forgetting that, how incompetent are we that we can't get our act together and make a deal that was set to happen BEFORE President Obama got there. We look like fools.
Is this what "mid-term losses" cost a President? Or, is this just an incompetent Presidential administration?
How many Hyundais can an unemployed U.S. worker buy?
Make the deal.
This is a President that has pushed to elevate the G-20 as the main forum for coordinating world economic policy (and it should be: it's the 19 largest economies plus the EU). But, it does not appear that the G-20 is giving back much cooperation - there's an undertone of: the worldwide economic crisis was the fault of the U.S. Nobody in the G-20 is going to pressure China over its undervalued currency when the Fed has just pumped another $600 billion into the U.S. economy, basically "undervaluing the dollar" as we watch "oil" go up to $86 per barrel.
But the EU has made a free-trade pact with South Korea which means that European cars and other products will soon face lower duties as they enter South Korea. What does the EU know that we don't?
Here's an idea: how about we remove some troops from Korean demilitarized zone unless we get the free trade deal we want? Let's take off the gloves - everybody else has.
So, our President went to India with an entourage of U.S. business leaders and proposed "freer" trade. He did the same in Indonesia. But, when he got to South Korea, the country hosting this week's G-20 meetings, he couldn't close the most important deal: a deal that would increase U.S. exports by $10 billion annually and support 70,000 jobs in the U.S. Although the list of outstanding issues was short, and the U.S. Chamber of Commerce lobbied heavily for the agreement, key labor and auto interests and their allies in Congress demanded a fuller opening of South Korea's market.
South Korea is a hot economy. As Nouriel Roubini pointed out in his 2010 book, "Crisis Economics," what used to be called "BRIC" (depicting the major moving economies of the world: Brazil, Russia, India and China) might be better be depicted as "BRICK" to include South Korea. Roubini: "South Korea is a sophisticated high-tech economic power: innovative, dynamic and home to a skilled labor force. Its only major problem is the danger that North Korea will collapse and inundate it with hungry refugees."
But we can't make a trade deal with them. Really. Forgive my patriotic zeal, but they exist because of us. My wife's father was a decorated Marine wounded twice at Iwo Jima during WW II who went back to fight in the Korean War. We lost 40,000 men in Korea so these people could have a country of their own. But, forgetting that, how incompetent are we that we can't get our act together and make a deal that was set to happen BEFORE President Obama got there. We look like fools.
Is this what "mid-term losses" cost a President? Or, is this just an incompetent Presidential administration?
How many Hyundais can an unemployed U.S. worker buy?
Make the deal.
This is a President that has pushed to elevate the G-20 as the main forum for coordinating world economic policy (and it should be: it's the 19 largest economies plus the EU). But, it does not appear that the G-20 is giving back much cooperation - there's an undertone of: the worldwide economic crisis was the fault of the U.S. Nobody in the G-20 is going to pressure China over its undervalued currency when the Fed has just pumped another $600 billion into the U.S. economy, basically "undervaluing the dollar" as we watch "oil" go up to $86 per barrel.
But the EU has made a free-trade pact with South Korea which means that European cars and other products will soon face lower duties as they enter South Korea. What does the EU know that we don't?
Here's an idea: how about we remove some troops from Korean demilitarized zone unless we get the free trade deal we want? Let's take off the gloves - everybody else has.
Corporate Profits
http://economix.blogs.nytimes.com/2010/11/12/a-high-water-mark-for-profits/?emc=eta1
According to a new analysis from Deutsche Bank's economics research team, corporate profits appear to be heading toward a record high. Those economists estimate that in the third quarter of 2010, corporate profits rose to $1.68 trillion at an annualized rate, higher than their previous peak in the third quarter of 2006 at $1.66 trillion. The numbers are not "normalized" for inflation but so what?
Since their cyclical low in the fourth quarter of 2008, profits have grown six consecutive quarters at an annualized rate of 38%. This is the fastest rate of increase in history.
According to Joseph A. LaVorgna, chief U.S. economist at Deutsche Bank: "That means that companies have more money than they know what to do with." This is a very scientific observation!
But, however humorous we find it, there's a real implication for the economy's number one lagging indicator: unemployment. While profits and productivity have been climbing, the unemployment rate is stuck at 9.6%. Deutsche Bank is watching to see if the numbers they're watching will correlate with an increase in hiring because those numbers usually do.
This is something to be optimistic about so we hope that the Deutsche Bank team is right.
According to a new analysis from Deutsche Bank's economics research team, corporate profits appear to be heading toward a record high. Those economists estimate that in the third quarter of 2010, corporate profits rose to $1.68 trillion at an annualized rate, higher than their previous peak in the third quarter of 2006 at $1.66 trillion. The numbers are not "normalized" for inflation but so what?
Since their cyclical low in the fourth quarter of 2008, profits have grown six consecutive quarters at an annualized rate of 38%. This is the fastest rate of increase in history.
According to Joseph A. LaVorgna, chief U.S. economist at Deutsche Bank: "That means that companies have more money than they know what to do with." This is a very scientific observation!
But, however humorous we find it, there's a real implication for the economy's number one lagging indicator: unemployment. While profits and productivity have been climbing, the unemployment rate is stuck at 9.6%. Deutsche Bank is watching to see if the numbers they're watching will correlate with an increase in hiring because those numbers usually do.
This is something to be optimistic about so we hope that the Deutsche Bank team is right.
Facebook Protection
http://www.nytimes.com/2010/11/09/business/09facebook.html?_r=1&emc=eta1
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"The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first class mind is only happy when it is thinking." (A.A. Milne)
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In what labor relations officials and lawyers view as a ground-breaking case involving workers and social media, the National Labor Relations Board has accused a company of illegally firing an employee after she criticized her supervisor on her Facebook page.
This is the first case in which the labor board has stepped in to argue that workers' criticisms of their bosses or companies on a social networking site are generally a "protected activity" and that employers would be violating the law by punishing workers for such statements.
Here's a statement from Lafe Solomon, the board's acting general counsel: "This is a fairly straightforward case under the National Labor Relations Act - whether it takes place on Facebook or at the water cooler, it was employees talking jointly about working conditions, in this case about their supervisor, and they have a right to do that."
Really.
Here we have a group of lawyers working for the government (our tax dollars at work) interpreting a law that was passed prior to the existence of such an entity as "Facebook"
and insisting that an individual's rights were violated because a company fired that person for ridiculing an immediate supervisor on (or in) a public forum? Do we have that right? In this case, the board filed a complaint against an ambulance service, American Medical Response (AMR) of Connecticut, that fired an emergency medical technician for violating a "policy" against depicting that company in any way on a social media site. But wait, it gets better. The board also faulted another company policy, one prohibiting employees from making "disparaging" or "discriminatory" remarks "when discussing the company or the employee's superiors and co-workers."
So, let's look at AMR's response: "The employee in question was discharged based on multiple, serious complaints about her behavior. The employee was held accountable for negative personal attacks against a co-worker posted publicly on Facebook."
How does this become a violation of employees' rights to discuss wages, working conditions and unionization (what the NLRB protects)? This looks more like the government stepping in to protect an employee's right to "slam" anybody they want at the "workplace."
And, just a "sidebar" your honor: Morgan, Lewis and Bockius, a law firm with a large labor and employment practice "representing hundreds of companies" sent out a "lawflash" advisory: "Employers should review their Internet and social media policies to determine whether they are susceptible to an allegation..." AMR had a "policy" and it didn't do them any good.
When it looks like a duck, and quacks like a duck ... we're pretty convinced that this is an example of a government agency trying to prove its worth in the 21st century and, instead, proving that it is an artifact of the 20th century.
***************
"The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first class mind is only happy when it is thinking." (A.A. Milne)
***************
In what labor relations officials and lawyers view as a ground-breaking case involving workers and social media, the National Labor Relations Board has accused a company of illegally firing an employee after she criticized her supervisor on her Facebook page.
This is the first case in which the labor board has stepped in to argue that workers' criticisms of their bosses or companies on a social networking site are generally a "protected activity" and that employers would be violating the law by punishing workers for such statements.
Here's a statement from Lafe Solomon, the board's acting general counsel: "This is a fairly straightforward case under the National Labor Relations Act - whether it takes place on Facebook or at the water cooler, it was employees talking jointly about working conditions, in this case about their supervisor, and they have a right to do that."
Really.
Here we have a group of lawyers working for the government (our tax dollars at work) interpreting a law that was passed prior to the existence of such an entity as "Facebook"
and insisting that an individual's rights were violated because a company fired that person for ridiculing an immediate supervisor on (or in) a public forum? Do we have that right? In this case, the board filed a complaint against an ambulance service, American Medical Response (AMR) of Connecticut, that fired an emergency medical technician for violating a "policy" against depicting that company in any way on a social media site. But wait, it gets better. The board also faulted another company policy, one prohibiting employees from making "disparaging" or "discriminatory" remarks "when discussing the company or the employee's superiors and co-workers."
So, let's look at AMR's response: "The employee in question was discharged based on multiple, serious complaints about her behavior. The employee was held accountable for negative personal attacks against a co-worker posted publicly on Facebook."
How does this become a violation of employees' rights to discuss wages, working conditions and unionization (what the NLRB protects)? This looks more like the government stepping in to protect an employee's right to "slam" anybody they want at the "workplace."
And, just a "sidebar" your honor: Morgan, Lewis and Bockius, a law firm with a large labor and employment practice "representing hundreds of companies" sent out a "lawflash" advisory: "Employers should review their Internet and social media policies to determine whether they are susceptible to an allegation..." AMR had a "policy" and it didn't do them any good.
When it looks like a duck, and quacks like a duck ... we're pretty convinced that this is an example of a government agency trying to prove its worth in the 21st century and, instead, proving that it is an artifact of the 20th century.
Monday, November 8, 2010
The Anti-Roubini
http://www.nytimes.com/2010/11/07/business/07gret.html?emc=eta1
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"The real problem is not whether machines think but whether men do." (B. F. Skinner)
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Gretchen Morgenson does an excellent job as a feature writer/editor for the NY Times on business and economic issues. We were happy to see over the weekend that she sought out an economist with the opposite position to Roubini's (always) depressing outlook (see our 11/6 post): Ian Shepherdson, chief U.S. economist for High Frequency Economics.
Shepherdson warned his clients in the fall of 2005 that real estate would crash and a recession would ensue. We think that there only two kinds of economists now: those who saw the train wreck coming and those who didn't. So, we listen to Shepherdson.
Shepherdson sees the beginnings of a turn in the economy that could translate to a rise in gross domestic product growth and an improving employment picture in the second half of 2011.
The basis for his view is a shift in commercial and industrial bank lending. The trend is real and as it gains steam, small businesses should receive more credit "... for which they have been starved." And, since these "small" businesses employ half the nation's workforce, this credit expansion will translate into real employment gains.
Shepherdson: "The depression in small businesses explains pretty much everything in the weakness of this cycle ... I reckon in the last cycle they accounted for two-thirds of all new job creation ... they are better job-creation engines than big companies, which are more inclined to do their hiring offshore."
If Shepherdson is correct in his assumptions, we could achieve annualized GDP growth of 3% to 4% in the second half of 2011. In the meantime, the U.S. will bump along at 2% GDP growth with no "double-dip recession." As commercial and industrial credit eases up, it will unleash a pent-up demand among smaller companies for capital equipment, software, vehicles and other goods.
We noted with interest over the weekend that Fareed Zakaria had Paul Krugman on his "GPS" television program. Krugman remarked that, with the Republicans back in power in the House, we will be entering a period of "Herbert Hoover Economics." Nothing will get done to stimulate the economy - if anything, "deficits" will be reduced (we've even read that the Republicans have publicly stated that their goal will be to "starve" the financing for the new health care bill, which would effectively kill it.).
Meanwhile, Ben Bernanke has the Fed doing "QE 2" (most people of a certain ilk think of that term as meaning the newer version of a very famous cruise ship). Bernanke's PhD was on the subject of "The Great Depression" and his track record through "The Great Recession" has been historically right. The second "quantitative easing" (announced last week) is adding $6 billion to the economy and just in time for small business. So, while Congress "fiddles," Bernanke delivers.
Overall, we hope Shepherdson is right about when the economy gets better. We know Krugman and Bernanke are right.
***************
"The real problem is not whether machines think but whether men do." (B. F. Skinner)
***************
Gretchen Morgenson does an excellent job as a feature writer/editor for the NY Times on business and economic issues. We were happy to see over the weekend that she sought out an economist with the opposite position to Roubini's (always) depressing outlook (see our 11/6 post): Ian Shepherdson, chief U.S. economist for High Frequency Economics.
Shepherdson warned his clients in the fall of 2005 that real estate would crash and a recession would ensue. We think that there only two kinds of economists now: those who saw the train wreck coming and those who didn't. So, we listen to Shepherdson.
Shepherdson sees the beginnings of a turn in the economy that could translate to a rise in gross domestic product growth and an improving employment picture in the second half of 2011.
The basis for his view is a shift in commercial and industrial bank lending. The trend is real and as it gains steam, small businesses should receive more credit "... for which they have been starved." And, since these "small" businesses employ half the nation's workforce, this credit expansion will translate into real employment gains.
Shepherdson: "The depression in small businesses explains pretty much everything in the weakness of this cycle ... I reckon in the last cycle they accounted for two-thirds of all new job creation ... they are better job-creation engines than big companies, which are more inclined to do their hiring offshore."
If Shepherdson is correct in his assumptions, we could achieve annualized GDP growth of 3% to 4% in the second half of 2011. In the meantime, the U.S. will bump along at 2% GDP growth with no "double-dip recession." As commercial and industrial credit eases up, it will unleash a pent-up demand among smaller companies for capital equipment, software, vehicles and other goods.
We noted with interest over the weekend that Fareed Zakaria had Paul Krugman on his "GPS" television program. Krugman remarked that, with the Republicans back in power in the House, we will be entering a period of "Herbert Hoover Economics." Nothing will get done to stimulate the economy - if anything, "deficits" will be reduced (we've even read that the Republicans have publicly stated that their goal will be to "starve" the financing for the new health care bill, which would effectively kill it.).
Meanwhile, Ben Bernanke has the Fed doing "QE 2" (most people of a certain ilk think of that term as meaning the newer version of a very famous cruise ship). Bernanke's PhD was on the subject of "The Great Depression" and his track record through "The Great Recession" has been historically right. The second "quantitative easing" (announced last week) is adding $6 billion to the economy and just in time for small business. So, while Congress "fiddles," Bernanke delivers.
Overall, we hope Shepherdson is right about when the economy gets better. We know Krugman and Bernanke are right.
Saturday, November 6, 2010
Hiring & Unemployment
http://www.nytimes.com/2010/11/06/opinion/06obama.html?emc=eta1
http://www.nytimes.com/2010/11/06/business/economy/06jobs.html?nl=todaysheadlines&emc=tha1#tab=1
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"Where success is concerned, people are not measured in inches, or pounds, or college degrees, or family background; they are measured by the size of their thinking." (David Schwartz)
***************
The good news is that the economy added 151,000 jobs in October (159,000 private sector) on a surge in the service sector. That's good because our economy is now 70% "service." There are really 2 magic numbers here. By general consensus, 125,000 jobs is the key number to be ABOVE: there are that many new entrants (roughly) into the workforce each month. The other is 5%: our GDP growth would have to average that much for a year to drop the unemployment rate by 1 percentage point. As it is, we have to average 2.5% GDP growth just to keep unemployment from rising. Both numbers are approximate, but then so is "economics."
The interactive graphic in the Times article attached does a nice job of showing the public and private numbers on increased hiring. This may be an early indicator that GDP may be growing at a more rapid rate than the 2% many economists project. According to BLS data, the average hourly workweek and average hourly wages also rose in October.
The Fed followed thru with their plan to spend $600 billion on the economy this week. We see that as good. Others worry about inflation down the road. Our response is that, without spending like this, there will be no "road." It's that simple. The real (BLS U-6) unemployment rate dropped from 17.1% to 17.0%: this is the more realistic rate that includes people who have given up looking, etc. This number has to go down short term and long term or we will creep closer to the 25% rate we saw in the Great Depression. We already have higher numbers for the "long term unemployed" than at any time since the Depression.
In one of the most disingenuous acts we've seen in a long time, Rush Limbaugh and other talking heads of his "ilk" have criticized President Obama for his current trip to India and other Asian countries because it will cost $200 million a day. We're going to dignify the "source" of that data by saying that an Indian stringer spouted those figures without any facts to back it up and people like Limbaugh ran with it.
Those aren't the numbers, but, even if they were, are we going to criticize the President for what he does or what it costs? We've attached his explanation of what he's doing and we think it's reasonable. He'd like to improve our export situation: as he says, for every $1 billion we export, that's 5,000 jobs in the U.S. Asia is where three of the five largest economies in the world are (with a rapidly expanding middle class). In India, the President will be negotiating about reducing barriers to U.S. exports and increased access to Indian markets. In South Korea, the host of the G-20 economic forum, he will be participating in signing a trade pact that could be worth billions in increased exports. We used to be the top exporter to South Korea; now we're in fourth place. Who let that situation slip?
Hours worked and temporary hiring are key indicators but exports have a role in the process and we haven't paid attention to that situation in a long time.
We read Nouriel Roubini and he defines "worst case" for us. We're hopeful that 2018 (per Roubini) is not how long we'll have to wait for a "comeback."
http://www.nytimes.com/2010/11/06/business/economy/06jobs.html?nl=todaysheadlines&emc=tha1#tab=1
***************
"Where success is concerned, people are not measured in inches, or pounds, or college degrees, or family background; they are measured by the size of their thinking." (David Schwartz)
***************
The good news is that the economy added 151,000 jobs in October (159,000 private sector) on a surge in the service sector. That's good because our economy is now 70% "service." There are really 2 magic numbers here. By general consensus, 125,000 jobs is the key number to be ABOVE: there are that many new entrants (roughly) into the workforce each month. The other is 5%: our GDP growth would have to average that much for a year to drop the unemployment rate by 1 percentage point. As it is, we have to average 2.5% GDP growth just to keep unemployment from rising. Both numbers are approximate, but then so is "economics."
The interactive graphic in the Times article attached does a nice job of showing the public and private numbers on increased hiring. This may be an early indicator that GDP may be growing at a more rapid rate than the 2% many economists project. According to BLS data, the average hourly workweek and average hourly wages also rose in October.
The Fed followed thru with their plan to spend $600 billion on the economy this week. We see that as good. Others worry about inflation down the road. Our response is that, without spending like this, there will be no "road." It's that simple. The real (BLS U-6) unemployment rate dropped from 17.1% to 17.0%: this is the more realistic rate that includes people who have given up looking, etc. This number has to go down short term and long term or we will creep closer to the 25% rate we saw in the Great Depression. We already have higher numbers for the "long term unemployed" than at any time since the Depression.
In one of the most disingenuous acts we've seen in a long time, Rush Limbaugh and other talking heads of his "ilk" have criticized President Obama for his current trip to India and other Asian countries because it will cost $200 million a day. We're going to dignify the "source" of that data by saying that an Indian stringer spouted those figures without any facts to back it up and people like Limbaugh ran with it.
Those aren't the numbers, but, even if they were, are we going to criticize the President for what he does or what it costs? We've attached his explanation of what he's doing and we think it's reasonable. He'd like to improve our export situation: as he says, for every $1 billion we export, that's 5,000 jobs in the U.S. Asia is where three of the five largest economies in the world are (with a rapidly expanding middle class). In India, the President will be negotiating about reducing barriers to U.S. exports and increased access to Indian markets. In South Korea, the host of the G-20 economic forum, he will be participating in signing a trade pact that could be worth billions in increased exports. We used to be the top exporter to South Korea; now we're in fourth place. Who let that situation slip?
Hours worked and temporary hiring are key indicators but exports have a role in the process and we haven't paid attention to that situation in a long time.
We read Nouriel Roubini and he defines "worst case" for us. We're hopeful that 2018 (per Roubini) is not how long we'll have to wait for a "comeback."
Tuesday, November 2, 2010
Fiscal Austerity & GDP Growth
http://www.economist.com/node/17147618?story_id=17147618&fsrc=rss
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"The value of life lies not in the length of days, but in the use we make of them; a man may live long yet live very little." (Michel Eyquem de Montaigne - French Essayist)
***************
Again a solute to one of my former students who sends a most interesting article on settling the arguement amongst macroeconomists and politicians on the issue of reducing government spending as a path to long term growth.
Terms like "Cyclically Adjusted Primary Fiscal Balance" (CAPB) are, for us, real sleep inducers but the studies that determine whether it is appropriate to claim GDP growth can result from government cost reductions are important. The "Economist" article attached outlines the debate on that issue and concludes that cutting back does not do what some in government think it does.
We're guessing there is "debate" on this issue because economists can't agree on what time it is, let alone the effects of fiscal austerity. We're also guessing that one of the lessons of the Great Depression is being ignored in this modern debate: the U.S. government decided to be fiscally "austere" in 1937 and simply made things worse. What is that old saying about those who ignore the lessons of history ...?
Fortunately, Ben Bernanke (whose PhD work was done on the Great Depression) has not ignored that lesson and will be continuing to "spend" (if the current Fed discussions are acted upon). But, of course, there is much debate about QE (Quantitaive Easing: just a fancy two word classification for the Fed spending money) and how much of an effect it can have on the economy.
In any case, the IMF study on belt tightening carefully defined "intent" and "action" in defining what quantitative results to study and compare.
The IMF concluded that, on average, a rich country attempted a fiscal contraction of more than 1.5% of GDP about once a decade. It concluded that the typical such episode is clearly contractionary: a fiscal consolidation of 1% of GDP leads on average to a 0.5% decline in GDP after two years, and an increase of 0.3 percentage points in the unemployment rate. The charts supporting this conclusion showing trend lines for net exports, unemployment, GDP and domestic demand are excellent.
Interestingly, simulations carried out by the fund show that slashing spending in an environment where interest rates have no more room to fall DOUBLES the contractionary effect of such cuts compared with a situation where the central bank still has scope to cut rates.
In English, it is stupid to go for fiscal austerity programs in the middle of a severe recessionary environment. We believe it was Paul Krugman (along with Warren Buffet) who said the U.S. economic stimulus package was not large enough, and went on to say that spending "big" now will save the economy now, and that fiscal austerity can be achieved when we get back to full employment.
Then, of course, there is the history that we are doomed to repeat.
***************
"The value of life lies not in the length of days, but in the use we make of them; a man may live long yet live very little." (Michel Eyquem de Montaigne - French Essayist)
***************
Again a solute to one of my former students who sends a most interesting article on settling the arguement amongst macroeconomists and politicians on the issue of reducing government spending as a path to long term growth.
Terms like "Cyclically Adjusted Primary Fiscal Balance" (CAPB) are, for us, real sleep inducers but the studies that determine whether it is appropriate to claim GDP growth can result from government cost reductions are important. The "Economist" article attached outlines the debate on that issue and concludes that cutting back does not do what some in government think it does.
We're guessing there is "debate" on this issue because economists can't agree on what time it is, let alone the effects of fiscal austerity. We're also guessing that one of the lessons of the Great Depression is being ignored in this modern debate: the U.S. government decided to be fiscally "austere" in 1937 and simply made things worse. What is that old saying about those who ignore the lessons of history ...?
Fortunately, Ben Bernanke (whose PhD work was done on the Great Depression) has not ignored that lesson and will be continuing to "spend" (if the current Fed discussions are acted upon). But, of course, there is much debate about QE (Quantitaive Easing: just a fancy two word classification for the Fed spending money) and how much of an effect it can have on the economy.
In any case, the IMF study on belt tightening carefully defined "intent" and "action" in defining what quantitative results to study and compare.
The IMF concluded that, on average, a rich country attempted a fiscal contraction of more than 1.5% of GDP about once a decade. It concluded that the typical such episode is clearly contractionary: a fiscal consolidation of 1% of GDP leads on average to a 0.5% decline in GDP after two years, and an increase of 0.3 percentage points in the unemployment rate. The charts supporting this conclusion showing trend lines for net exports, unemployment, GDP and domestic demand are excellent.
Interestingly, simulations carried out by the fund show that slashing spending in an environment where interest rates have no more room to fall DOUBLES the contractionary effect of such cuts compared with a situation where the central bank still has scope to cut rates.
In English, it is stupid to go for fiscal austerity programs in the middle of a severe recessionary environment. We believe it was Paul Krugman (along with Warren Buffet) who said the U.S. economic stimulus package was not large enough, and went on to say that spending "big" now will save the economy now, and that fiscal austerity can be achieved when we get back to full employment.
Then, of course, there is the history that we are doomed to repeat.
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