Not everyone has been doing badly during the economic turmoil of the last few years. In fact, there are some Americans that are doing really, really well. While the vast majority of us struggle, there is one small segment of society that is seemingly doing better than ever. This was reflected in a recent article on CNBC in which it was noted that companies that cater to average Americans are doing rather poorly right now while companies that market luxury goods and services are generally performing exceptionally well. So why aren’t all American consumers jumping on the spending bandwagon?
Well, it seems that there are a large number of Americans who either can’t spend a lot of money right now or who are very hesitant to. A stunningly high number of Americans are still unemployed, and for many other Americans, there is a very real fear that hard economic times will return soon. On the other hand, there is a significant percentage of Americans who are blowing money on luxury goods and services as if the economy has fully turned around and it is time to let the good times roll. So exactly what in the world is going on here?
Well, in 2010 life is very, very different depending on whether you are a "have" or a "have not". The recent article on CNBC referenced above described it this way….
Consumer spending in the U.S. has turned into a tale of two cities in 2010, with an entire segment of consumers splurging confidently on the finer things in life, while another segment, concerned about unemployment and with little or no discretionary income, spends only on bare necessities.…
As you know I have been trying to ‘figure out’ Barack Obama and his mysterious background and equally mystifying rise to power, without having done anything notable, either in business, or civil service, or even military service. Granted, he talks one hell of a game but always seems to fall short. He seems to have less substance, far less accomplishments than his fellow actor in the White House, Ronald Reagan, who had been a governor before becoming President.
Perhaps the answer is as simple as this.
"It’s hard to believe that a two-year senator from Chicago with a background in ‘community organizing’ presides over this elaborate and opaque system of imperial rule. He doesn’t, of course. The real leaders remain hidden behind the cloak of democratic government and all of Washington’s phony institutions. Obama is merely a public relations hologram, a friendly face that conceals the machinations of a global Mafia. Other people--whoever they may be--control the levers of power moving the pieces as needed to assure the best outcome for themselves and their constituents." Mike Whitney, Kill Hugo?
Well, unlike his predecessor, at least he has not tortured anyone that we know about.
Bonds are signaling that the recovery is in trouble. The yield on the 10-year Treasury (2.97 percent) has fallen to levels not seen since the peak of the crisis while the yield on the two-year note has dropped to historic lows. This is a sign of extreme pessimism. Investors are scared and moving into liquid assets. Their confidence has begun to wane. Economist John Maynard Keynes examined the issue of confidence in his masterpiece "The General Theory of Employment, Interest and Money." He says:
"The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong….The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention."
Volatility, high unemployment, and a collapsing housing market are eroding investor confidence and adding to the gloominess. Economists who make their projections on the data alone, should revisit Keynes. Confidence matters. Businesses and households have started to hoard and the cycle of deleveraging is still in its early stages. Obama’s fiscal stimulus will run out just months after the Fed has ended its bond purchasing program. That’s bound to shrink the money supply and lead to tighter credit. Soon, wages will contract and the CPI will turn from disinflation to outright deflation. Aggregate demand will weaken as households and consumers are forced to increase personal savings. Here’s how Paul Krugman sums it up:
"We are now, I fear, in the early stages of a third depression….And this third depression will be primarily a failure of policy. Around the world … governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. … 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. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
"I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between
A bunch of legendary comedians got together to make a sketch, where the punchline is: "establish a Consumer Financial Protection Agency". It’s kinda a funny, but mostly because of the Darrell Hammond’s imitation of Clinton making sexual innuendos, and Fred Armisen’s impersonation of Barack Obama. It seems director Ron Howard was trying to find something to ‘do good’, so he chatted with the earnest and overeducated Elizabeth Warren, and decided consumer financial regulation was the kind of smart idea that would obviously work. After all, who’s against consumer protection?
I am! This is the same government that goaded banks to lower standard to lend more to historically damaged communities, and then when those borrowers defaulted, blamed such lending on the banks. Avoiding the poor is redlining, targeting the poor is predatory, which means, whatever goes wrong can be blamed on the banks. Government always wants to have its cake and eat it too: low taxes & high spending, high growth and union-type work rules, banks lending more today and raising their capital.
The CFPA tries to do what most regulators try to do: improve efficiency, eliminate waste, consolidate regulations,simplify regulations, protect consumers, and protect jobs! It seems banks are greedy and basically uregulated, leading directly to the 2008 housing crisis. There are seven government bodies already regulating banks, highlighting how incredibly naive this proposal is. If there’s a magic bullet for improving efficiency, etc., share it with existing regulators…unless you think that all the regulators have been captured by some interest group, which if true just means we are bringing in one more interest group to advocate why they should get a better deal.
More importantly, if your concern is about the irrational poor people easily duped by huckster bankers, lower prices and penalties on the poor doesn’t help them, it enables them. Life has carrots and sticks, and one definition of a vice is that which generates bad outcomes in the long run. If you are constantly overdrafting your account, don’t have enough money to make a 20% down payment on a property, you need better financial discipline. Helping the poor from being trapped by debt should try to minimize they amount of debt they have, say by increasing rather than lowering prices on credit cards.…
Barack Obama’s home state of Illinois is near the point of fiscal disintegration. "The state is in utter crisis," said Representative Suzie Bassi. "We are next to bankruptcy. We have a $13bn hole in a $28bn budget."
The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. "It’s a catastrophe", said the Schools Superintedent.
In Alexander County, the sheriff’s patrol cars have been repossessed; three-quarters of his officers are laid off; the local prison has refused to take county inmates until debts are paid.
Florida, Arizona, Michigan, New Jersey, Pennsylvania and New York are all facing crises. California has cut teachers salaries by 5pc, and imposed a 5pc levy on pension fees.
This is not to pick on America. Belt-tightening is the oppressive fact of 2010-2012 for half the world. Hungary, Ukraine, the Baltics and the Balkans are already under the knife. Latvia’s economy may contract by 30pc from peak to trough as it carries out an "internal devaluation", ie wage cuts, to hold its euro peg.
The eurozone’s fiscal squeeze is well advanced in Ireland. Brussels has told Greece to cut by 10pc of GDP in three years, Spain by 8pc, Portugal by 6pc. Britain must slash soon, or face a gilts strike.
The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France. It warns of "unstable dynamics", posh talk for a debt spiral. "Action is needed now."
The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract.
U.S. President Barack Obama dramatically altered policy direction during his first State of the Union address by announcing plans to focus fully on creating jobs while doubling exports in five years. This could put the United States on a collision course with China’s export strategy. And a head-on crash, possibly centered on China’s foreign exchange rate policy, might occur before America’s mid-term elections in November.
No one wants confrontation, especially at such a critical time for global trade, the world’s recovering economy and China’s property market. But a changing political mood is steering Washington into Beijing’s lane. China can respond by turning the wheel before it’s too late.
The trigger for Obama’s policy turnaround was the defeat of the Democratic Party in the Massachusetts election for a U.S. Senate seat left vacant when Ted Kennedy died.
Here’s another classic Dylan Ratigan tirade, this time directed squarely at President Obama. In it, he blasts him for perpetuating the "lie" that the banks have repaid the bailout, when in fact, says Ratigan, the bailout actually soared into the trillions, due to the Fed’s backstop.
The Obama administration’s embrace of a spending freeze at a time when it is proposing tax hikes is frighteningly reminiscent of the disastrous policies that exacerbated the Great Depression. He is doing nothing less than setting us on the path to economic suicide.
The Great Depression was actually two economic downturns. According to the National Bureau of Economic Research, the first recession ran from August 1929 to March 1933 and the second from May 1937 to June 1938. Unemployment remained high until the Second World War.
Neo-Keynesian Fears Of Contraction
The neo-Keynesians such as Paul Krugman and Christina Romer argue that what sparked the second downturn was an unfortunate inadvertent switch to contractionary fiscal and monetary policy. This is precisely what the Obama administration seems to be doing now: freezing spending and raising taxes even as the Federal Reserve retracts quantitative easing and considers rate hikes. All told this will take some $250 billion of spending out of the economy, according to the Obama administration. Doing this while job losses continue to mount threatens a new contraction, according to the neo-Keynesians.
But you don’t have to be a neo-Keynesian to be distressed at this combination of a spending freeze combined with a tax hike and monetary tightening. From a Hayekian perspective, the Obama policy mix also appears to be toxic for the economy. It threatens further contraction of the economy than necessary to correct the malinvestment from the boom years.
From the Hayekian perspective, the second downturn was the inevitable product of the first stages of the New Deal. The early New Deal stymied an economic recovery by creating…
Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner missed the critical warning signs of our recent financial crisis. In April of 2009, Steve Forbes called Geithner “the most formidable impediment to an economic recovery.” Ben Bernanke repeats past mistakes and hands out cheap money with insufficient conditions or regulation. Both economists have been economical with the truth. There were alternatives to their actions during the crisis that are based on sound financial principles and do not violate the spirit of democracy.
President Obama has proposed a baby step towards financial reform. He proposes to limit ill-defined proprietary trading, limit banks’ borrowings, and prevent banks from investing in hedge funds and private equity funds. Banks’ lobbyists and PR spin-doctors are already working overtime to thwart him.
Mainstream financial media got it badly wrong when it said that the proposal was based on populist anger. It may have motivated President Obama to (only partly take) Paul Volcker’s advice, but sound financial principles back that advice.
Some bank stocks fell in price after the President’s remarks yesterday. That was because savvy investors knew that speculators might no longer be able to report high risk-based earnings subsidized with taxpayer dollars. In this case, a fall in stock prices for banks driving down Wall Street should be viewed as a healthy sign. A few bank stocks rose, because they rely on traditional banking backed by sound financial principles.
Goldman Sachs’s stock went down a few percentage points. It became a newly created “bank,” to get on the taxpayer give-away gravy train. JPMorgan Chase claims only 1% of its revenue comes from proprietary trading, yet even before its merger with Bear Stearns, JPMorgan’s market share of credit derivatives was greater than 50% for U.S. banks. That meant you could combine the credit derivatives of all other domestic banks, and JPMorgan’s positions were greater. Those are just two examples. Banks’ “non-proprietary” trading desks are often invisible hedge funds.
Taxpayers currently subsidize banks with cheap money supplied by the Federal Reserve. Even banks that nearly crashed our economy borrow at nearly zero interest rates, while some consumers
Will they default or will they not? Are they out of cash or can they scrape together another half billion by tapping some heretofore untouched pocket of the public purse? Did they just institute capital controls? Because that’s what it looks like. What was Varoufakis thinking? Is an advance from Gazprom on the way?
These are just of few of the many questions which seem to get asked and re-asked on an almost daily basis as the crisis in Greece plays out like a slow motion car crash that no one can take their eyes off of even though everyone (the market, the creditors, Athens … everyone) is exhausted, exasperated (“Gratigue” maybe?), and ready for some manner of resolution. Unfortunately, as Citi...
Last week, stocks cycled bullish yet again. In fact, the S&P 500, NYSE Composite, and NASDAQ each closed at record highs as investors positioned for the heart of earnings season in the wake of strong reports from some of the Tech giants. Notably, Utilities stocks got some renewed traction as yield-starved investors returned to the sector. Although our trend-following sector rotation model remains bullish, strong overhead technical resistance and neutral rankings in our SectorCast quant model indicate that caution is in order, and this might not be the moment for a major upside breakout, particularly given the expected softness in earnings reports.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly funda...
Apple Inc.’s IPhone sales in China may have exceeded the U.S. for the first time in the latest quarter, thanks to brisk demand during the country’s New Year celebrations.
Apple will probably show on Monday that earnings jumped by more than 20 percent when it reports results for the second fiscal quarter, which ended in March. While Apple doesn’t break out shipments by country, the company may have sold 18 million to 20 million iPhones in greater China during the period, while U.S. deliveries were about 14 million to 15 million, according to Creative Strategies LLC.
Apple closed last week at an all-time weekly closing high at (1) in the chart above. Apple recently broke above its 4-year rising channel, came back to test old resistance and pushed higher, setting this new record high.
In November of last year, when Apple was trading below $110 per share, the Power of the Pattern shared that Apple’s upside target stood at $150.(See post here)
The big economic number this week will be the Q1 Advance Estimate for GDP on Wednesday at 8:30 AM ET.
What do economists see in their collective crystal ball for Q1 of 2015? Let's take a look at the GDP forecasts from the latest Wall Street Journal survey of economists conducted earlier this month.
Here's a snapshot of the full array of WSJ opinions about Q1 GDP with highlighted values for the median (middle), mean (average) and mode (most frequent). In the latest forecast, the median and mean were quite close. The mode (ten of 62 forecasts) was a tad lower at 1.2%, and the second most frequent value, held by eight respondents, was bit higher 1.5%. In essence, 35% of the economists' forecasts fell within a narrow 0.3% range.
As the visualization above illustrates, despite the cluster in the midd...
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Here's an interesting argument by Felix Salmon, although I think he is taking two correct observations and mistakenly attributing a cause-and-effect relationship to them: Bitcoin is going nowhere because women are not involved.
More likely, in my opinion, women are not involved in bitcoin because bitcoin is going nowhere (and they know it). Or maybe, simply, bitcoin is going nowhere and women are not involved.
Nathaniel Popper’s new book, Digital Gold, is as close as you can get to being the definitive account of the history of Bitcoin. As its subtitle proclaims, the book tells the story of the “misfits” (the first generation of hacker-l...
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
In my last post (Part 1 of this article), I looked at alternative ETFs that could be used as hedges against the corrections that we have seen during that long 2 year bull run. Looking at the results, it seems that for short (less than a month) corrections, a VIX ETF like VXX could actually be a viable candidate to hedge or speculate on the way down. Another alternative ETF was TMF, a long Treasuries ETF which banks on the fact that when markets go down, money tends to pack into treasuries viewed as safe instruments. In some cases, TMF even outperformed the usual hedging instruments like leveraged ETFs. There could of course be other factors at play since some of 2014 corrections were related to geopolitical events which are certain...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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