The government yesterday released the third quarter GDP number for the US. The headline figure showed that the United States economy grew at an 3.5% annualized rate in the months of July, August and September.
Hooray! That's great, isn't? We are out of the recession, right? The media was celebrating the number and telling everyone to party. The stock market was up about 200 points...happy days are here again!
So then why did the stock market sell off on Friday? Part of the reason is simply that yesterday's up move was just the boyz - aka Goldman Sachs, etc. - pushing the market up, hoping that together with the media hype, they would get lots of "suckers" - aka small investors - to jump in, blindly euphoric. When that did not happen, they sold.
But the main reason the stock market sold off on Friday was that the 3.5% GDP growth figure was not all that it seemed.
Almost all of the 3.5% 'improvement' came from areas where the government is spending, incentivizing, or bailing out various sectors: autos, residential real estate, and Fed spending.
A large chunk of the gain - 1.66% - came from car sales in the form of the now-defunct Cash for Clunkers program. Unfortunately, car showrooms are now back to where they were before the Cash for Clunkers program, with cobwebs gathering on most of the vehicle inventory.
Another nearly two-thirds of a per cent came from the residential real estate market thanks to low mortgage rates and the government's $8,000 tax credit for new homebuyers.
So basically, if you took out the government-stimulated sectors, the "real" economy is still flat on its back and nearly comatose.
A side note -- according to many estimates, when the Cash for Clunkers program cost is spread out over the number of incremental cars sold, the cost came to $24,000 per vehicle.
And similar estimates made on the $8,000 new homebuyer tax credit showed that it cost $42,000 for each home sale the program spurred.
The bottom line is that the government has spent trillions of dollars on programs such as these and on bailing out Wall Street - the Federal Reserve has bought $2.2 trillion of "garbage" assets from Wall Street with money printed out of thin air.
Yet, we don't have much to show for it - a three month up-blip in an otherwise comatose economy. The worry is that our economy will need constant dosages of trillions of dollars just to keep afloat.
Friday, October 30, 2009
Friday, October 23, 2009
A "Jobless Recovery" is a Myth
The story we are getting from the government and the mainstream media is that the United States will experience a "jobless" economic recovery. This is a myth! A jobless recovery means no economic recovery in the United States
.
By definition, an economic recovery means a net increase in economic activity, which also dictates positive wealth generation. When an economy is expanding and producing real wealth, this must also result in job creation.
The phrase "jobless recovery" fails the test of rationality. Why?
When the very wealthiest members of society have most of the disposable income, it is impossible to have a robust economy.
The reason for this revolves around the economic concept of "marginal propensity to consume". The very poorest people have a marginal propensity to consume of 1 or 100%, since they are forced to spend their money as fast as they receive it just to survive. Conversely, a billionaire may have a propensity to consume of (at most) 0.1 or 10%.
When nations have a strong middle class, it means they have a large proportion of its citizens with a decent "marginal propensity to consume" and a large fraction of each new dollar of wealth produced is spent, which produces economic activity.
Conversely, in a society where wealth is concentrated in a small percentage of the population, only a small fraction of each new dollar of wealth produced gets spent.
Nowhere are these economic principles more true than in a consumer-based economy like the United States. More than 70% of the nation's GDP revolves around consumer spending.
For well over two decades, the US economy has become totally dependent on ultra-high levels of consumption in order to sustain the economy. We had bubbles in the economy - tech, housing, etc. - which produced illusory wealth and temporary jobs related to the bubbles.
The problem now is that the bubbles have burst, jobs are being lost and the middle class has little wealth (savings) left and they have hit the limit as to how much debt they can incur in an attempt to sustain their spending.
The wealth in the United States has become too concentrated in too few hands in order to sustain the economy the way the economy is currently constructed.
There was an interesting analysis, conducted by economists Emmanuel Saez of the University of California, Berkeley and Thomas Piketty of the Paris School of Economics, which showed that in the US the rich are indeed getting richer.
Their report revealed that two-thirds of the US's total income gains from 2002-2007 went to the top 1% of households, with this top 1% holding a larger slice of income in 2007 than at any time since 1928.
The findings, released by the Center on Budget and Policy Priorities, show that during those years in the study, the inflation-adjusted income of the top 1% of households increased than 10 times faster than the income of the bottom 90% of households.
The last time such a big share of the income gain during an economic expansion went to the top 1% - and such a small share went to the bottom 90% - was in the 1920s.
I'm sure many of you will recall reading about that era (The Great Gatsby, etc.) and what followed in the 1930s.
Without a larger portion of the populace having significant spending power, you cannot have a healthy economy - only "jobless recoveries" where Americans mortgage their futures and their children's on more and more debt.
This has been true for thousands of years. The Greek philosopher Plutarch said "An imbalance between rich and poor is the oldest and most fatal ailment of all republics."
.
By definition, an economic recovery means a net increase in economic activity, which also dictates positive wealth generation. When an economy is expanding and producing real wealth, this must also result in job creation.
The phrase "jobless recovery" fails the test of rationality. Why?
When the very wealthiest members of society have most of the disposable income, it is impossible to have a robust economy.
The reason for this revolves around the economic concept of "marginal propensity to consume". The very poorest people have a marginal propensity to consume of 1 or 100%, since they are forced to spend their money as fast as they receive it just to survive. Conversely, a billionaire may have a propensity to consume of (at most) 0.1 or 10%.
When nations have a strong middle class, it means they have a large proportion of its citizens with a decent "marginal propensity to consume" and a large fraction of each new dollar of wealth produced is spent, which produces economic activity.
Conversely, in a society where wealth is concentrated in a small percentage of the population, only a small fraction of each new dollar of wealth produced gets spent.
Nowhere are these economic principles more true than in a consumer-based economy like the United States. More than 70% of the nation's GDP revolves around consumer spending.
For well over two decades, the US economy has become totally dependent on ultra-high levels of consumption in order to sustain the economy. We had bubbles in the economy - tech, housing, etc. - which produced illusory wealth and temporary jobs related to the bubbles.
The problem now is that the bubbles have burst, jobs are being lost and the middle class has little wealth (savings) left and they have hit the limit as to how much debt they can incur in an attempt to sustain their spending.
The wealth in the United States has become too concentrated in too few hands in order to sustain the economy the way the economy is currently constructed.
There was an interesting analysis, conducted by economists Emmanuel Saez of the University of California, Berkeley and Thomas Piketty of the Paris School of Economics, which showed that in the US the rich are indeed getting richer.
Their report revealed that two-thirds of the US's total income gains from 2002-2007 went to the top 1% of households, with this top 1% holding a larger slice of income in 2007 than at any time since 1928.
The findings, released by the Center on Budget and Policy Priorities, show that during those years in the study, the inflation-adjusted income of the top 1% of households increased than 10 times faster than the income of the bottom 90% of households.
The last time such a big share of the income gain during an economic expansion went to the top 1% - and such a small share went to the bottom 90% - was in the 1920s.
I'm sure many of you will recall reading about that era (The Great Gatsby, etc.) and what followed in the 1930s.
Without a larger portion of the populace having significant spending power, you cannot have a healthy economy - only "jobless recoveries" where Americans mortgage their futures and their children's on more and more debt.
This has been true for thousands of years. The Greek philosopher Plutarch said "An imbalance between rich and poor is the oldest and most fatal ailment of all republics."
Friday, October 16, 2009
Dow 10,000 - So What?
There were a number of interesting financial news stories this week including:
1) The billions of dollars in profits the Wall Street banks made using taxpayers' money. Goldman Sachs alone is paying out $23 billion in bonuses this quarter to their employees!
2) Some of Tim Geithner's closest aides in the Treasury department reaped millions of dollars working for Wall Street banks and hedge funds - part of that revolving door that needs to be slammed shut between Wall Street and Washington DC.
3) It was reported that major banks and financial firms spent $114.2 million in contributions toward the 2008 election campaign. In addition, they spent $77 million on lobbying and $37 million on federal campaign contributions.
In return, these political activities have yielded them $295.2 billion from all the various government bailouts. That a return of 258,449%! Wow - these guys are brilliant "investors"! And let's not forget that financial "reform" is now a dead issue for both the Congress and the Obama administration.
4) With the current job losses due to the financial crisis, employment levels in the United States are now back to the same levels they were a decade ago. It has been a "lost decade" for jobs.
DOW 10,000
Yet the media could only talk about the Dow Industrials hitting the 10,000 level again.
I say - so what? The Dow Industrials hit 10,000 back in March 1999 - there has been zero progress for a decade!
And if you adjust for inflation, the Dow has actually lost 23.5% during the past decade. In terms of the Euro currency, it has lost 28%.
And in terms of that long-term store of purchasing power - gold - the Dow has nose-dived by 73.5%!
So where does the 60% rally since the March lows put the stock market now?
The stock market is now at its most expensive level in seven years. It is trading at 26 times operating profit and an incredible 180 times reported profit!
On a reported basis, this market is nearly times as overvalued, as it was during the tech bubble.
History has shown that when the stock market reaches these valuation levels, the odds of it being lower a year later are in excess of 60%.
Caveat Emptor!
1) The billions of dollars in profits the Wall Street banks made using taxpayers' money. Goldman Sachs alone is paying out $23 billion in bonuses this quarter to their employees!
2) Some of Tim Geithner's closest aides in the Treasury department reaped millions of dollars working for Wall Street banks and hedge funds - part of that revolving door that needs to be slammed shut between Wall Street and Washington DC.
3) It was reported that major banks and financial firms spent $114.2 million in contributions toward the 2008 election campaign. In addition, they spent $77 million on lobbying and $37 million on federal campaign contributions.
In return, these political activities have yielded them $295.2 billion from all the various government bailouts. That a return of 258,449%! Wow - these guys are brilliant "investors"! And let's not forget that financial "reform" is now a dead issue for both the Congress and the Obama administration.
4) With the current job losses due to the financial crisis, employment levels in the United States are now back to the same levels they were a decade ago. It has been a "lost decade" for jobs.
DOW 10,000
Yet the media could only talk about the Dow Industrials hitting the 10,000 level again.
I say - so what? The Dow Industrials hit 10,000 back in March 1999 - there has been zero progress for a decade!
And if you adjust for inflation, the Dow has actually lost 23.5% during the past decade. In terms of the Euro currency, it has lost 28%.
And in terms of that long-term store of purchasing power - gold - the Dow has nose-dived by 73.5%!
So where does the 60% rally since the March lows put the stock market now?
The stock market is now at its most expensive level in seven years. It is trading at 26 times operating profit and an incredible 180 times reported profit!
On a reported basis, this market is nearly times as overvalued, as it was during the tech bubble.
History has shown that when the stock market reaches these valuation levels, the odds of it being lower a year later are in excess of 60%.
Caveat Emptor!
Tuesday, October 13, 2009
More Wall Street Propaganda
All one has to do is visit an investing website like Seeking Alpha and read the articles there from financial professionals and other investors to see one of the major problems facing America.
People refuse to look in the mirror and face the fact that indeed all is not well with America's economy and that other nations are doing better than we are currently.
There are a good number of articles on Seeking Alpha from the same handful of authors that are constantly bashing our main economic competitor, China. All the articles read the same - lots of flag-waving, calling the Chinese evil and other unflattering adjectives - but never any hard facts.
These articles mouth the US government line that says that Americans and Wall Street aren't to blame for the economic crisis. It was all caused by "global imbalances" - too much saving and not enough spending by those "clever" Chinese who are doing this solely to bring down the US.
So there is a lot of table-pounding about "global imbalances" and anyone who brings up the fact that Chinese consumption is growing nicely is obviously a communist sympathizer.
For all of those flag-wavers, here are some hard economic FACTS for you:
During the past 30 years, personal spending has accounted for 60% of China's aggregate growth in GDP. Recently, spending has accelerated further - between 2006 and 2008 consumption grew at more than 8% a year - Asia's highest rate.
Compared to the US, China's consumption is still relatively small at only 41% of GDP. But consider the trend. China's incremental consumption of tradable goods last year, at about $275 billion, was nine times as great as the US's.
But, go ahead, ignore the facts and continue blaming other countries for the US's problems.....
People refuse to look in the mirror and face the fact that indeed all is not well with America's economy and that other nations are doing better than we are currently.
There are a good number of articles on Seeking Alpha from the same handful of authors that are constantly bashing our main economic competitor, China. All the articles read the same - lots of flag-waving, calling the Chinese evil and other unflattering adjectives - but never any hard facts.
These articles mouth the US government line that says that Americans and Wall Street aren't to blame for the economic crisis. It was all caused by "global imbalances" - too much saving and not enough spending by those "clever" Chinese who are doing this solely to bring down the US.
So there is a lot of table-pounding about "global imbalances" and anyone who brings up the fact that Chinese consumption is growing nicely is obviously a communist sympathizer.
For all of those flag-wavers, here are some hard economic FACTS for you:
During the past 30 years, personal spending has accounted for 60% of China's aggregate growth in GDP. Recently, spending has accelerated further - between 2006 and 2008 consumption grew at more than 8% a year - Asia's highest rate.
Compared to the US, China's consumption is still relatively small at only 41% of GDP. But consider the trend. China's incremental consumption of tradable goods last year, at about $275 billion, was nine times as great as the US's.
But, go ahead, ignore the facts and continue blaming other countries for the US's problems.....
Thursday, October 8, 2009
Welcome to Zombieland USA
The recent financial stories not covered by the mainstream media have been interesting to say the least.
First, we have Neal Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP) saying that the feds - Ben Bernanke and Hank Paulson - may have "stretched" the truth a bit about the supposed health of the nine major financial institutions which received $125 billion in capital infusions from the TARP program.
Secondly, we thought we had something 'good' that came from the recent G20 summit in Pittsburgh. The 'good' was the agreement among all the participants to have strict global guidelines on bankers' compensation.
But the United States and Treasury secretary Tim Geithner have now said that they will take a "flexible approach" to interpreting these compensation guidelines. In other words, these guidelines on bankers' compensation will be ignored. The Wall Street banksters win again! And the other nations are not pleased with US economic policies that are emanating from Wall Street.
In their rush to help their Wall Street friends, the federal government seems to forgotten the fact that small busineeses employ 50% of the country's workforce and contribute 38% of the nation's GDP. The middle class continues to be left behind......
So what exactly has TARP and the litany of other government bailout plans accomplished? It has propped up large institutions that have troubled assets which are still troubled and bad debts that are still bad.
On top of this, the Wall Street banksters have used these past six months to get back to 'business as usual' and incredibly increase their leverage even more. In other words, to make even bigger bets - with other peoples' money (taxpayers) - of the type that got them into trouble in the first place.
While this has been going on, at the regional and local level real businesses with real customers and real need for capital cannot get access to credit.
So what was the whole idea behind TARP? It was meant merely as a delaying tactic. The people (Wall Street) invested heavily in the old system of debt-based asset appreciation are stalling for time.
They are HOPING that time will somehow allow for a miraculous alchemy and turn the leaden assets and debts they have into gold. And the government went along with this dream of Wall Street and gambled the future of the country on it.
Welcome to Zombieland USA
The new movie - Zombieland - about a group of survivors in a world of zombies did fairly well at the box office. I can already picture the sequel......
Welcome to Zombieland USA - starring Ben Bernanke, Tim Geithner, Hank Paulson, and a cast of thousands of Wall Street banksters.
Survivors of the US economic bubble of 2002-2007 must defend themselves from the zombies!
Survivors are being attacked in the streets, in their homes, and in their workplaces. Zombie banks - kept alive only by artificial stimulants provided by the feds - take the survivors' money and their homes.
Meanwhile other zombies at the Federal Reserve and the Treasury department gnaw at survivors' savings by debasing the dollar and thus encouraging inflation. The only goal of these zombies is to allow the US to repay their debts with nearly worthless dollars.
All kidding aside, what we have done in this country is that we have saved zombie companies with zombie assets (debts that must be repaid for generations to come) at the expense of the living, breathing engine of the true free market capitalist system - small businesses and the middle class.
First, we have Neal Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP) saying that the feds - Ben Bernanke and Hank Paulson - may have "stretched" the truth a bit about the supposed health of the nine major financial institutions which received $125 billion in capital infusions from the TARP program.
Secondly, we thought we had something 'good' that came from the recent G20 summit in Pittsburgh. The 'good' was the agreement among all the participants to have strict global guidelines on bankers' compensation.
But the United States and Treasury secretary Tim Geithner have now said that they will take a "flexible approach" to interpreting these compensation guidelines. In other words, these guidelines on bankers' compensation will be ignored. The Wall Street banksters win again! And the other nations are not pleased with US economic policies that are emanating from Wall Street.
In their rush to help their Wall Street friends, the federal government seems to forgotten the fact that small busineeses employ 50% of the country's workforce and contribute 38% of the nation's GDP. The middle class continues to be left behind......
So what exactly has TARP and the litany of other government bailout plans accomplished? It has propped up large institutions that have troubled assets which are still troubled and bad debts that are still bad.
On top of this, the Wall Street banksters have used these past six months to get back to 'business as usual' and incredibly increase their leverage even more. In other words, to make even bigger bets - with other peoples' money (taxpayers) - of the type that got them into trouble in the first place.
While this has been going on, at the regional and local level real businesses with real customers and real need for capital cannot get access to credit.
So what was the whole idea behind TARP? It was meant merely as a delaying tactic. The people (Wall Street) invested heavily in the old system of debt-based asset appreciation are stalling for time.
They are HOPING that time will somehow allow for a miraculous alchemy and turn the leaden assets and debts they have into gold. And the government went along with this dream of Wall Street and gambled the future of the country on it.
Welcome to Zombieland USA
The new movie - Zombieland - about a group of survivors in a world of zombies did fairly well at the box office. I can already picture the sequel......
Welcome to Zombieland USA - starring Ben Bernanke, Tim Geithner, Hank Paulson, and a cast of thousands of Wall Street banksters.
Survivors of the US economic bubble of 2002-2007 must defend themselves from the zombies!
Survivors are being attacked in the streets, in their homes, and in their workplaces. Zombie banks - kept alive only by artificial stimulants provided by the feds - take the survivors' money and their homes.
Meanwhile other zombies at the Federal Reserve and the Treasury department gnaw at survivors' savings by debasing the dollar and thus encouraging inflation. The only goal of these zombies is to allow the US to repay their debts with nearly worthless dollars.
All kidding aside, what we have done in this country is that we have saved zombie companies with zombie assets (debts that must be repaid for generations to come) at the expense of the living, breathing engine of the true free market capitalist system - small businesses and the middle class.
Friday, October 2, 2009
The New World Economic Order
The G-20 summit occurred last week right here in my backyard of Pittsburgh, Pennsylvania. And no, I was not one of the black-scarved anarchists that was arrested for breaking windows!
Nothing much happened at the meeting as world leaders only met for a short time. The biggest news from the meeting had to be the announcement that the annual summit of the G-8 (the top 8 developed countries) will now be replaced by a meeting of the G-20 (which includes the major developing countries).
This passing of the baton signals an important change in the world economy. The days of US hegemony have ended, the peak of US power probably came somewhere between the fall of the Berlin Wall and the fall of Lehman Brothers. Economic and political power are slowly shifting from the US, Europe and Japan to Asia, South America and other developing nations.
The economy of the entire developing world now equals that of the entire developed world. One example - in terms of produced goods, the economy of Chindia (China and India) has surpassed that of the United States. Given the huge population of the developing world, it is easy to conclude that its potential for economic growth far exceeds ours.
What does such a change imply for us? One definite change for us is that the developing world's voracious appetite for commodities will act as a tax on us, pushing up prices for key commodities (oil,etc.) and choking off economic growth. So expect prices on most commodities to continue to head higher and to stay at elevated levels for years to come.
Such a change in the global economy also means that you should change the emphasis in your investment portfolio away from slow growing economies like the United States to the faster growing economies of the emerging world.
That's not to say that the United States is not home to many great companies. There are many fabulous American companies, but I would put an emphasis on the companies that sell a lot of their goods into the emerging economies. Companies such as Apple, Coke, McDonald's, Johnson & Johnson, Intel, Microsoft, Boeing, etc.
But the real emphasis should be on investing directly into those emerging market economies. This can be done by buying mutual funds, ETFs or individual stocks. Many individual companies do trade here on US stock exchanges in the form of ADRs - American Depositary Receipts.
My last piece of advice is to forget about those fancy long-term charts your advisor may show you that point out the fabulous long-term performance of the US stock market (although it has returned nothing for the last 10 years).
What your advisor will neglect to tell you is that much of those gaudy statistics were compiled when the United States went from being a developing economy, like China, to becoming the king of the developed nations after World War II. That scenario is impossible to repeat in the future.
So don't keep all of your investment eggs in the United States basket. Doing so and getting a great long-term return on your investment will be as likely as Muhammad Ali coming out of retirement and becoming the heavyweight boxing champ again.
Nothing much happened at the meeting as world leaders only met for a short time. The biggest news from the meeting had to be the announcement that the annual summit of the G-8 (the top 8 developed countries) will now be replaced by a meeting of the G-20 (which includes the major developing countries).
This passing of the baton signals an important change in the world economy. The days of US hegemony have ended, the peak of US power probably came somewhere between the fall of the Berlin Wall and the fall of Lehman Brothers. Economic and political power are slowly shifting from the US, Europe and Japan to Asia, South America and other developing nations.
The economy of the entire developing world now equals that of the entire developed world. One example - in terms of produced goods, the economy of Chindia (China and India) has surpassed that of the United States. Given the huge population of the developing world, it is easy to conclude that its potential for economic growth far exceeds ours.
What does such a change imply for us? One definite change for us is that the developing world's voracious appetite for commodities will act as a tax on us, pushing up prices for key commodities (oil,etc.) and choking off economic growth. So expect prices on most commodities to continue to head higher and to stay at elevated levels for years to come.
Such a change in the global economy also means that you should change the emphasis in your investment portfolio away from slow growing economies like the United States to the faster growing economies of the emerging world.
That's not to say that the United States is not home to many great companies. There are many fabulous American companies, but I would put an emphasis on the companies that sell a lot of their goods into the emerging economies. Companies such as Apple, Coke, McDonald's, Johnson & Johnson, Intel, Microsoft, Boeing, etc.
But the real emphasis should be on investing directly into those emerging market economies. This can be done by buying mutual funds, ETFs or individual stocks. Many individual companies do trade here on US stock exchanges in the form of ADRs - American Depositary Receipts.
My last piece of advice is to forget about those fancy long-term charts your advisor may show you that point out the fabulous long-term performance of the US stock market (although it has returned nothing for the last 10 years).
What your advisor will neglect to tell you is that much of those gaudy statistics were compiled when the United States went from being a developing economy, like China, to becoming the king of the developed nations after World War II. That scenario is impossible to repeat in the future.
So don't keep all of your investment eggs in the United States basket. Doing so and getting a great long-term return on your investment will be as likely as Muhammad Ali coming out of retirement and becoming the heavyweight boxing champ again.
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