Pragcap argues that the U.S. is in a balance sheet recession, not a gov’t debt crisis, and not a banking crisis (Geithner, Bernanke and Paulson all misdiagnosing the problem). And it won’t end till 2012 at the earliest. – Ilene
Few will argue against the fact that the U.S. economy is sputtering. For several years now I have been arguing that the government misdiagnosed our problems and subsequently applied the incorrect cure. If we take a look under the hood at the growth drivers of our economy we can reveal convincing evidence showing that this was in fact the case.
The following chart shows 30 years of US GDP along with potential output. The blue line represents actual GDP while the red line shows potential GDP. This represents what economists call the output gap.
(Figure 1)
At the current levels we are running an output gap of just over $1.2T. This merely means that the U.S. economy would be producing $1.2T more in total GDP if we did not have so much idle capacity.
The math behind the U.S. economic growth of the last 100 years is fairly straight forward. Economists describe GDP in mathematical format as follows:
Y=C+I+E+G
Y = GDP
C = Personal Consumption Expenditures
I = Fixed Private Investment
E = Net Exports/Imports
G = Government Consumption Expenditures
While all four components matter to the economy the C component (at roughly 71%) is the coaching staff, offense and defense of this football team. Let’s just call the other three components “special teams” – important, but far less so in the grand scheme of things. What’s happened to this crucial component of the U.S. economy in the last three years has been remarkable to say the least. There has been a dramatic stagnation in personal consumption expenditures (PCE). If we take a look at the historical data it’s truly incredible. PCE grew at an average rate of 7.5% for almost 50 straight years. Even more incredible is that this growth has been almost entirely uninterrupted.
(Figure 2)
(Figure 3)
When the Nasdaq bubble imploded, American balance sheets were cracked, but not shattered. Slowly, they began to come back. But as we all know now a far more nefarious bubble was brewing. One based on pure debt and speculation. When the housing bubble imploded in…
We were promised stimulus, programs and policies that would have lasting effects. What we got instead was a trillion dollar sand castle. Now that the inexorable tides have eroded away our leadership’s best-laid (and funded) plans, someone needs to be held accountable.
Haven’t you noticed the subtle shift in the rhetoric? It used to be about creating jobs, but lately they’ve been banging the drum about how many jobs they’ve "saved".
Not that John Boehner and the Republicans have put out any world-stopping ideas either (cut taxes for a change?)…but still, they are right: This Obama administration "economic team", or what’s left of it, couldn’t create a single net job if their careers depended on it.
"President Obama should ask for – and accept – the resignations of the remaining members of his economic team, starting with Secretary Geithner and Larry Summers, the head of the National Economic Council," Boehner said in the morning speech to business leaders at the City Club of Cleveland. The mass dismissal, he added, would be "no substitute for a referendum on the president’s job-killing agenda. That question will be put before the American people in due time. But we do not have the luxury of waiting months for the president to pick scapegoats for his failing ‘stimulus’ policies."
Somehow the Council of Economic Advisors member Austan Goolsbee (a Dickensian aptronym is ever there was one) got left out of this screed. Goolsbee shouldn’t even get out of bed these days…All those contentious, pitbull-like television appearances pre- and post-election, defending the Boss and his Keynes-On-HGH plan against any and all comers. All those fiery retorts of Goolsbee’s have amounted to nothing as the White House has gone from taking credit for statistics that could be spun positively to blaming the Republicans for the latest stats – the ones that are now so bad that even Obama can’t talk his way around them.
In hindsight, virtually all of the fiscal stimulus and extraordinary programs adopted by this administration now look like they merely forestalled the inevitable. Hiring has not happened and in the meantime, housing is headed down another leg and the almost-resillient consumer is back to playing hard-to-get.
Name a program, look at the lack of lasting results: What you’ll find is that the moment artificial stimulus or policy props were pulled away, that…
Is BHP high or is this market seriously undervalued? Well, for one thing, POT turned them down saying the offer($130/share – CASH) "substantially undervalues PotashCorp and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects." CEO Dallas Howe continues: "We believe it is critical for our shareholders to be aware of this aggressive attempt to acquire their company for significantly less than its intrinsic value. The fertilizer industry is emerging from the recent global economic downturn, and we feel strongly that PotashCorp shareholders should benefit from the current and potential value of the Company. We believe the BHP Billiton proposal is an opportunistic effort to transfer that value to its own shareholders."
Considering POT closed at $112 yesterday, so a 16% pop in the offer but POT was at $85 at the beginning of July and hasn’t been over $130 since the 2008 crash, although they did top out at $239.35 so I suppose a very patient investor could imagine that within 5 years, $200 is not an unreasonable goal. Still, is that enough reason to turn down $130 of cash now, with the proverbial 1.3 birds in the hand being worth 2 in the bush?
Back on July 12th (when POT was trading at $92.81 and the Dow was at 10,200) my premise for looking for S&P 1,100 and Dow 10,700 was that Corporate America’s Non-Financial companies were sitting on a $2Tn pile of cash and, as an old M&A consultant, it seemed pretty obvious to me what was going to happen to that money.
We’ve had plenty of M&A activity recently. In fact, M&A activity in the first half of 2010 saw 5,345 deals(up 49% from last year), the highest level since 2007, indicating that companies are INCREASING their confidence in the economy despite the BS spin you are getting from politicos who NEED you to believe things are worse than they seem and the MSM, who push fear like heroin to create a NEED for their product.
POT’s board of directors is very confident that they don’t NEED BHP’s money and BHP may NEED POT badly enough to want to sweeten the deal – frankly I’m surprised at the timing because I would have waited for another dip and the fact that BHP (one of the World’s largest resource companies with $50Bn in annual sales)…
After three decades of spectacular growth, China passed Japan in the second quarter to become the world’s second-largest economy behind the United States, according to government figures released early Monday.
The milestone, though anticipated for some time, is the most striking evidence yet that China’s ascendance is for real and that the rest of the world will have to reckon with a new economic superpower.
The recognition came early Monday, when Tokyo said that Japan’s economy was valued at about $1.28 trillion in the second quarter, slightly below China’s $1.33 trillion. Japan’s economy grew 0.4 percent in the quarter, Tokyo said, substantially less than forecast. That weakness suggests that China’s economy will race past Japan’s for the full year.
Former chief economist for the International Monetary Fund and filthy Group of 30 operative Kenneth Rogoff is convinced there’s a bubble: “You’re starting to see that collapse in property and it’s going to hit the banking system,” said Rogoff, 57, who also serves on the Group of 30, a panel of central bankers, finance officials and academics led by former Federal Reserve Chairman Paul Volcker. “They have a lot of tools and some very competent management, but it’s not easy.”
As opposed to #1 with no tools and completely incompetent management, right? I’m not naming names, I need not.
“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”
I doubt Tim Geithner actually feels China’s hot breath on his neck because last time I checked, our Zimbabwe Ben printing press was still in full working order and recognized by the global economy as all-powerful mover of the cheap money-hungry monster.
109 U.S. banks have failed so far this year, 23 in this quarter alone. These failures may not cost depositors, but they do come at a steep cost to the FDIC. As discussed here with ValuEngine’s Richard Suttmeier, the FDIC Deposit Insurance has already spent $18.93 billion this year, “well above the $15.33 billion prepaid assessments for all of 2010.”
The situation is likely even worse than the FDIC portrays, says William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City.
“The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn’t have remotely enough funds to pay for it,” he says.
William Black with Aaron Task Video
Partial Transcript
Aaron Task: Should we be surprise there are not more bank failures?
William Black: Not Surprised,we should be upset there are not more bank failures. The industry has used its political muscle to get Congress to extort the financial accounting standards board to gimmick the accounting rules so that banks do not have to recognize their losses.
Aaron Task: In practical terms, what does the gutting of that rule mean for the banks?
William Black: Capital is defined as assets minus liabilities. If I get to keep my assets at inflated bubble values that have nothing to do with their real value, then my reported capital will be greatly inflated. When I am insolvent I still report that I have lots of capital.
Aaron Task: You are saying the FDIC is intentionally keeping foreclosures down because it knows it does not have enough money to pay off depositors who are insured by the FDIC?
William Black: That is correct and that is going to make ultimate losses grow. It also means we are following a Japanese type strategy of hiding the losses and we know what that produces – a lost decade, which is now two lost decades. Your listeners and viewers if they are stock types, look at the Nikkei. It lost 75% in nominal terms and has stayed that way for 20 years. I…
Now that it’s perfectly obvious to everyone on the planet that the recovery is not much more than burnt toast, Economists Cut U.S. Growth Forecasts
A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.
Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month. Household purchases will climb at a 2.25 percent rate, compared with a 2.6 percent gain previously forecast.
“Simply put, job growth in the private sector hasn’t improved as we would’ve expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The consumer continues to contribute to growth but at a subpar pace.”
“Unemployment is high, income growth has been pretty slow,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, who lowered estimates for growth and spending. “Household wealth is a lot lower than it was three years ago.”
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting yesterday.
Revised Estimates Still Too Optimistic
Why was everyone so optimistic in the first place? There was no real reason for it. The answer of course is Fooled by Stimulus.
However, the economists still don’t get it. Second half GDP is likely to be closer to 0% than 2.55%. Negative GDP is plausible.
The post-mortems on the July employment report made me realize I’d missed the recovery.
While I was watching my garden grow, the U.S. economy “lost momentum,” according to every news report I read or heard over the weekend. Somewhere between the budding of the peonies and the blooming of the rudbeckia, private-sector job growth downshifted.
Which brings me to the point: In order to lose momentum, the U.S. economy has to have momentum to begin with. If it had any, I missed it.
Here we are back on the 50% retracement line at 1,121 on the S&P. As Barry Ritholtz points out, it’s the 5th time we’ve been here and, as I said yesterday, Barry says "Its going to take a lot of something — good earnings, liquidity, sentiment, breadth, momentum, psychology, quantitative easing, something – to move higher from here." Also great on Barry’s site today is a very neat summation of the housing crisis and his take on Timmy G’s NY Times Op Ed column, which I need to add my own .02 to.
Mr. Geithner tries to give us that "something" Barry and I are looking for by boldly stating: "Welcome to the Recovery," writing that "uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth." He continues:
While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent.
• Exports are booming because American companies are very competitive and lead the world in many high-tech industries.
• Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.
• Businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow.
• American families are saving more, paying down their debt and borrowing more responsibly. This has been a necessary adjustment because the borrow-and-spend path we were on wasn’t sustainable.
• The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales.
• Major banks, forced by the stress tests to raise capital and open their books, are stronger and more competitive. Now, as businesses expand again, our banks are better positioned to finance growth.
• The government’s investment in banks has already earned more than
The current system of trader compensation will continue to decay the heart of Wall Street.
Which is a greater threat to the nation — terrorism or the relentless decline of middle income families? Unless we abandon our core values out of unwarranted fear, terror cannot fundamentally change our way of life. The number of people affected by growing income disparity is vast. When I was a student, income disparity was indicative of an underdeveloped and unstable society.
The government appropriately devotes enormous resources to protect our lives and property from terrorism. It is unthinkable that a leader would display any weakness opposing this threat. Politicians have stiff backbones when it comes to terrorism.
In contrast, the government is timid and half-hearted in its approach to the system which perversely rewards a few Wall Street traders with billions of dollars of bonuses, yet allows the foundation to decay.
Kenneth Feinberg issued his report identifying outrageous Wall Street compensation of executives despite their role in the financial disaster and bail out. He proposed that the banks voluntarily adopt “brake provisions” that permit boards of directors to nullify bonuses in the event of a new financial crisis.
He might have more success asking the lions of the Serengeti to give the wildebeests a sporting chance of making an escape.
Over the last fifteen years, the financial sector’s percentage of GDP has increased dramatically. At the same time, the median family income stagnated and then declined. I do not believe that this is a coincidence.
The large banks have changed. They slice and dice the constituent elements of a stagnant economy, squeezing value out in ever more sophisticated ways. Wall Street has turned away from its roll as the financial backer of industry and commerce. In the short term, it is more profitable for them to use their capital for trading. Newfangled software and MIT “quants” allow the traders to “rip the faces off” of corporate counterparties and investors which were once trusted clients.
These young traders are simply doing what America has told them to do. They are allowed to earn obscene amounts of money using the advantageous information, technology and capital of their employers. Making money from less powerful counterparties is like shooting fish in a barrel. The banks make so much money that…
…. With regard to "stimulus" plans, my difficulty with last year’s policies is not so much an aversion to government spending as it is a rebuke of the notion that government spending is by its nature stimulative or beneficial to the economy. The issue is how this real value is used. Is it used to advance socially useful outcomes which private individuals, through some failure of coordination, could not achieve? Or is it used to defend bondholders, industries, and institutions with which the policymakers are most closely aligned?
The Keynesian view is that government spending is simply a monolithic letter "G." Keynes cared little about the productivity or lack thereof to which public resources were devoted, even writing " If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again… there need be no more unemployment." The only difference between Keynes and Tim Geithner is evidently that Geithner prefers to place the bottles a bit closer to Wall Street.
…Meanwhile, I continue to believe that both Bernanke and Geithner’s hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials – to precisely the worst stewards of capital in society – is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.
Basic ethical principle dictates that policy makers should not burden ordinary Americans to pay the losses that well-informed bondholders voluntarily took when they lent money to failing institutions. From my perspective, it is urgent to recognize that Fannie Mae and Freddie Mac obligations are not legally obligations of the U.S. government, that its backing was always at best implicit, and that even the Treasury’s distressingly generous 3-year promise
“Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.’”
Oh, well.
That’s one passage from John Heileman’s juicy article in New York Magazine. It provides a lot of background support for what many of us have been thinking for a while: the administration is happy with the financial reform bill roughly as it turned out, and it got there by taking up an anti-Wall Street tone (e.g., the Volcker Rule), riding a wave of populist anger to the point where the bill was sure of passing, and then quietly pruning back its most far-reaching components. If anything, that’s a testament to the political skill of the White House and, yes, Tim Geithner as well.
There are two other things in the article I thought worth commenting on. Here’s one:
“Obama could be forgiven for expecting greater reciprocity from the bankers—something more than the equivalent of a Hallmark card and a box of penny candy. He had, after all, done more than saved their lives directly by continuing the bailout policies formulated by Paulson and Geithner. He and his team could credibly claim to have kept the world economy from falling off a cliff. Yet with the unemployment rate still near double digits, Obama had (and still has) received scant credit from the public for what was arguably his signal accomplishment. At the same time, the one thing that almost every slice of the electorate would have applauded wildly—the sight of the president landing a few haymakers on Wall Street’s collective jaw—was an opportunity that the president had largely forsworn.”
This is a theme you hear a lot these days — the idea that Obama (or Geithner)…
Now that the Federal Reserve has hired every single pennystock trader and momentum-chasing algo in the world (or at least is enjoying Citadel's helping hand in regards to the latter) it is time for the Fed's human resources department to branch out and fill those really important gaping holes.
Industrial Production fell by 0.5 percent in April on a seasonally adjusted basis after having increased 0.3 percent in March and 0.9 percent in February, according to the Fed. The consensus estimate was for a decrease of 0.2%. Economists had been missing to the optimistic side on most forecasts for the past several months. This month they course corrected and now their estimates are too low.
The media only pays attention to this silliness because it has nothing better to do. I’m more interested in how the trend of actual, not seasonally manipulated, economic data lines up with the performance of the stock market, since there is some historical correlation.
The actual, not seasonally adjusted number fell by 1.3 points month to month and was up 2.4 points year to ye...
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The $OEXA200R Monthly (the percentage of S&P 100 stocks above their 200 DMA) is a technical indicator available on StockCharts.com used to find the "sweet spot" time period in the market when you have the best chance of making money. See Is This the Best Stock Market Indicator Ever? for a discussion of this technical tool.
The charts below are current through the week's close.
U.S. equity futures traded slightly lower in early pre-market trade following mixed economic data out of the eurozone. The moves follow basically flat trading on Wall Street from Monday after futures rallied into the open following weaker than expected Chinese data.
Top News
In other news around the markets:
The German ZEW Economic Sentiment Index rose to 36.4 in May from 36.3 in April but missed expectations of a gain to 38.3. The current conditions index was also weak and over 77 percent of respondents said they do not expect another rate cut in the next six months.
To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...
It seems that every Tuesday in 2013 since January 8 has been positive on the Dow. And this past Tuesday was no exception. Now that sounds like a trend to put money on -- buy the SPDR Dow Jones Industrial Average ETF (DIA) at the close each Monday and close out the position late on Tuesday.
The Dow and S&P 500 both hit new all-time highs once again on Wednesday, while the Nasdaq hit its highest level since November 2000. The “risk on” allocation of new investment capital into cyclicals continues, although Wednesday saw leadership from defensive sectors Consumer Staples, Utilities, and Telecom, along with Financials. Nevertheless, ConvergEx reports that the average correlation of the ten S&P business sectors to the overall index averaged 82% last month. While that is below the 86% averag...
BMY - Bristol-Myers Squibb Co. – Shares in drug maker, Bristol-Myers Squibb Co., are ripping higher today, up 6.5% at $44.94, the highest level in more than a decade, ahead of the release of the American Society of Clinical Oncology (ASCO) 2013 Annual Meeting abstracts tonight. The ASCO Annual Meeting begins on May 31st in Chicago. Options on BMY are far more active than usual today, with overall volume topping 64,000 contracts by 12:25 p.m. ET, versus average daily volume of around 11,400 c...
We are starting to see some very extreme readings on our monthly and weekly index charts since there has been no correction this year. I posted below first the monthly chart of the S&P 500 going back 15 years showing bollinger bands – rarely do we get above the upper one, and never have we been this far above. Then below that I posted (with 4 charts of 4 years each) the weekly data and you can see we are at a rare time we are above the weekly bollinger band as well. This non stop rally is getting very historical.
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Stock market posts another record setting week, but the big news came after Friday’s close.
Courtesy of NASA
The stock market put on another record setting show with the Dow Jones Industrial Average (NYSEARCA:DIA) closing at a record high 15,118 and the S&P 500 (NYSEARCA:SPY) closing at 1633.70, another all time closing high.
For the week, the Dow Jones Industrial Average (NYSEARCA:DIA) gained 1%, the S&P 500 (NYSEARCA:SPY) climbed 1.2%, the Nasdaq Composite (NYSEARCA:...
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Well, well, well....it is good to know that there are others in the scientific arena who believed that YMI Bioscience's data (cough - Gilead) is a better drug than Incyte's Jakafi. Now, the definitive data are still unknown, but there was enough evidence from a Phase 2 trial to take a small risk for a huge reward. So, let's forget about Apple (AAPL), and do nothing but biotechs from now until Congress passes universal health care coverage for prescriptions....and drive the prices down so that research and development is no longer feasible to conduct in the US. Even Seattle Genetics (SGEN) has been on a tear as of late...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(