BEAR MOVES IN THE stock market have anticipated nine out of the past five recessions, as an economist once famously quipped. Rebounds in stock prices are no more reliable in anticipating economic recoveries.
The only way to tell if the recent rebound in stocks is truly signaling recovery is to look at supporting data. And those data continue to suggest a bottoming in the economy by the second quarter, which would then turn out to have been duly anticipated by a bottom in the stock market in early March, the first quarter's final month.
This hardly suggests the bull is about to roar. Growth of real gross domestic product in the second half of 2009 is likely to be modest, running at an annual rate of 2% to 3%. The level of real GDP by year end will still be lower than the recent peak. There is always a danger, then, that equity prices will run ahead of this modest outlook. But at least the outlook is beginning to look positive.
Among upside surprises reported last week, one was the widespread rebound in February of durable-goods orders, tracked monthly by the Census Bureau. A durable good, as you might imagine, is technically defined as a tangible item that lasts at least three years. As such, it includes items that consumers buy, like cars and computers (although not plastics like Tupperware), but mainly covers nonconsumer goods like machinery and equipment.
The Census report on durable-goods orders is therefore a useful look into the activities of the manufacturing sector. (Yes, Virginia, there really is a domestic-manufacturing sector, even if much of it is owned by foreign companies.) The February increase in orders followed six consecutive monthly decreases and only partially reversed the decline in January. It tended to confirm the picture of a manufacturing sector that is still contracting, but at a slower rate. If final demand for goods really is beginning to stabilize, then manufacturing activity should be due for a rebound.
THE STRONGER PATTERN OF final demand got further confirmation from data for real consumer spending, released Friday. In the first two months of this year, real personal consumption ran positive, virtually guaranteeing that it will be up in the first quarter relative to the fourth.
Even if consumption flattens in the second quarter, the excessive liquidation of inventories should mean that production will still be due for a pick-up. Despite crushing job losses, it is still possible consumption will trend upward.
Job losses are not the only decisive factor in determining the trend in consumption. Otherwise, we would have to wonder how consumer spending could be higher in the first quarter than it was in the fourth, when the jobless rate was lower. One key factor that should help to buoy consumption is mortgage refinancings, fueled by a mortgage interest rate of 4.85%, the lowest on record.
The low mortgage interest rate helped bring another upside surprise reported last week, the February increase in existing home sales. With strengthening home sales, the negative wealth effect from declining home prices should diminish. One key home price tracked by the Federal Housing Finance Agency actually showed an increase in January.
Already much diminished is the negative wealth effect from the decline in stocks. That, too, should help buoy consumption.
Monday, March 30, 2009
Monday, March 23, 2009
Soros: Ready for slow growth
Billionaire hedge fund manager George Soros has been warning of a global financial crisis for some time now. And when The Australian’s Peter Wilson interviewed the former partner of Jim Rogers lately, he noted how Soros has been handsomely-rewarded for such foresight. Wilson wrote yesterday:
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent.
The chairman of Soros Fund Management, whose new book The Crash of 2008 and What it Means: The New Paradigm for Financial Markets is scheduled to be released before the end of this month, shared his latest outlook for the global economy with readers of the Australian publication. From the piece:
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth. One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
And foreseeing the biggest economic crisis since the Great Depression has certainly paid off financially. In August 2007, with the first symptoms of the credit crunch on the horizon, Soros came out of semi-retirement to reassume control of his Quantum investment fund, astutely repositioning it for the tsunami about to hit. By year’s end Quantum was up almost 32 per cent for 2007, netting Soros profits of $US2.9 billion at a time when other financiers were struggling to break even.
His fortune was estimated at $US11 billion by Forbes in September 2008 and it has grown even larger amid the spreading financial carnage. That same year, in which Hedge Fund Research estimates the hedge fund industry lost a record 18.3 per cent, Soros was up another 9 per cent.
The chairman of Soros Fund Management, whose new book The Crash of 2008 and What it Means: The New Paradigm for Financial Markets is scheduled to be released before the end of this month, shared his latest outlook for the global economy with readers of the Australian publication. From the piece:
The entire world, but especially the West, should now brace for slower economic growth, he warns, and it will be at least a decade before the US sees robust growth. One important effect will be a new wariness in China about the US economic model, Soros says. “The Chinese used to look up to the West and try to imitate the West and they have now discovered that it may not be the right thing to imitate. They now feel suddenly impelled to develop their own system and in some ways they are actually ahead of us.
“For instance, they have been using variable capital requirements as a policy tool. They changed the minimum capital requirements for banks 17 times in the past year, first raising it rapidly and then lowering it. I think we will have to learn to do the same thing.”
In any case, the Chinese government can no longer be relied on to plough money into US government debt, he warns. “They will have less money to spend because their surplus is shrinking and their exports are falling, so they will have less to dispose of, so I think that there will be a definite shift.”
Monday, March 16, 2009
A Continent Adrift
I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.
Just to be clear, I’m not about to rehash the standard American complaint that Europe’s taxes are too high and its benefits too generous. Big welfare states aren’t the cause of Europe’s current crisis. In fact, as I’ll explain shortly, they’re actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.
On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing.
The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.
The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.
But such “automatic stabilizers” are no substitute for positive action.
Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.
But there’s a deeper problem: Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
Europe, in other words, is turning out to be structurally weak in a time of crisis.
The biggest question is what will happen to those European economies that boomed in the easy-money environment of a few years ago, Spain in particular.
For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction.
In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
Just to be clear, I’m not about to rehash the standard American complaint that Europe’s taxes are too high and its benefits too generous. Big welfare states aren’t the cause of Europe’s current crisis. In fact, as I’ll explain shortly, they’re actually a mitigating factor.
The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis.
Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.
On the fiscal side, the comparison with the United States is striking. Many economists, myself included, have argued that the Obama administration’s stimulus plan is too small, given the depth of the crisis. But America’s actions dwarf anything the Europeans are doing.
The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates (it actually raised rates last July), and it has shied away from any strong measures to unfreeze credit markets.
The only thing working in Europe’s favor is the very thing for which it takes the most criticism — the size and generosity of its welfare states, which are cushioning the impact of the economic slump.
This is no small matter. Guaranteed health insurance and generous unemployment benefits ensure that, at least so far, there isn’t as much sheer human suffering in Europe as there is in America. And these programs will also help sustain spending in the slump.
But such “automatic stabilizers” are no substitute for positive action.
Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.
But there’s a deeper problem: Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
Europe, in other words, is turning out to be structurally weak in a time of crisis.
The biggest question is what will happen to those European economies that boomed in the easy-money environment of a few years ago, Spain in particular.
For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction.
In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
Wednesday, March 11, 2009
Real S&P 500 chart - inflation adjusted:
When you have to look at the same chart over and over again it can get a bit boring so here’s the ‘real’ S&P 500 - inflation adjusted:
The chart shows monthly data from 1900 to February 2009 and is logarithmically scaled so that a percentage move in any year is comparable to other years. I’ve used the CPI (monthly) data available from official US government sources. Some say it is under-reported but what other real alternatives do we have? Removing the distorting effect of inflation is important for long term charts and also because we know that the Fed is doing all it can to create inflation. The most recent data shows the largest one year increase in money supply.
Like walking down your hometown streets, things look similar but different. For example, the chart doesn’t show the massive double top that is now recognized by everyone. Also, from 1900 to 1950, the market tread water after inflation. Then a roaring bull market followed, to then be deflated by an equally intense bear market.
Most interesting is that the bear market low is July 1982 - not 1975 as we usually see on non-inflation adjusted charts. This is where the bull market that followed next was launched. The inflation adjusted level of 238 acted as support, just as it had acted as resistance on so many occasions (temporarily pierced only by the roaring bull market of the 1920’s).
A similar situation is setting up today. We had a bull market that took us to new inflation adjusted levels and subsequently almost all the air was let out because the market is now back to where it broke out from the 1968 top. To be accurate we have a little more air to let out before the market ricochets off that level once again.
Assuming that this is the playbook the market is following; and if not, cheer up! we can only go to zero.
Friday, March 6, 2009
Unemployment Number
1974 (Half of the work force)
November - 368K
December - 602K
January -360k
February -378k
March -270k
April -186k
May +160k
June -104k
2008
November - 533K
December - 589K
January - 655K
February - 651K
Stay tuned.
November - 368K
December - 602K
January -360k
February -378k
March -270k
April -186k
May +160k
June -104k
2008
November - 533K
December - 589K
January - 655K
February - 651K
Stay tuned.
Monday, March 2, 2009
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