bizzXceleration: Performance, Value and Profit

We just finished our regular economic outlook update and at the same time did the integrated prep work for an upcoming speech on the Financial Crisis. The result is a presentation uploaded to Scribd that consists of three major parts. The first a re-introduction to the nature of the Business Cycle and an update on the current economic data. The second a survey and summary of the last ~ three years work, a lot of which appeared on the blog first and only, the genesis, history, causes and consequences of the Financial Crisis. And the third part is a long-term look ahead the lingering effects of the Crisis on Savings, Investment and Growth as well as some review of public finances, deficits and debt. In effect what we have to say is that the Economy is weak but recovering, we're facing a shallow U that will stretch over a long period of time with weak job creation, that we skirted the Abyss (within 24 hours actually) of a major collapse but there's lasting damage. That lasting damage takes several forms. One is that the Banking sector is still damaged and has a long way to go for self-repair, another is that credit is being badly destroyed and the third is that excess private debt and consumption beyond our means damaged L.T. growth and job creation. Taken all together they define the contours of the New Normal that will face us for the next decade.

 Now let's turn to the Outlook Update which is embedded below and available via Scribd for downloading. NB: Prieur du Pleiss over at Investment Postcards cited it as reading in some pretty heady company (Prieur’s readings (March 8, 2010)) but even before that the number of hits in a single day exceeded anything else we've ever put up. Something touched a nerve. BtW - if you're near Greenwich, Ct. next Mon., the 15th, we'll be speaking at the Greenwich Public Library and the details are here at the home page of the World Affairs Forum.

 Skirting the Abyss: From Economic Downturn to Financial Crisis to Long-term Malaise

Serendipitously  two major articles just came out talking about Tim Geithner and Administration economic and financial policy. Surprisingly they are very well written, actually display a pretty good grasp of the complexities but convey it clearly, cleanly, simply and accurately, bring in a lot o the history - especially the Atlantic article which explains how the shibbleths of unregulated markets set the table for the crisis which the banks proceeded to run to near bankruptcy for us all - and the political and practical ins and outs of policy making in a shrill and polarized political environment. These are the first informed and balanced assessments of any sort we've seen about the big picture and they dovetail almost perfectly with our recent update. We highly recommend them as must-read background.

Continue reading "Skirting the Abyss: Economic Outlook, Financial Crisis & LT Consequences" »

Posted by dblwyo at 06:12 AM | Permalink | Comments (0)

It's time for a brief data interlude to check in with the "real world" and see how it's doing. With today's Employment data the markets were pretty happy so as a consequence not only did they dance higher but the it looks like the chances of a correction are well behind us. Given all that and what we've had to see before about L.T. trends, PE's, Employment, yadda, yadda we could dance back thru stuff, update the charts and say about the same thing. We're going to let it rest a bit, start with the markets and then focus on some other economic data.

This is a policy-dependent environment where the biggest challenge is for the various fiscal and monetary authorities to gently unwind things while not aborting a nascent recovery. Speaking of which you'll find a very nice composite chart courtesy of the STL Fed's data system in the readings comparing GDP to Employment but then walking you thru what's going on with employment - take a VERY good luck because we've never seen this many people out of work for this long and there are some real structural risks. You'll also find some other stuff reinforcing the notion of a U-shaped recovery plus a bunch of stuff on Europe (Greece), Japan and China. In fact there's a big chunk of China stuff in both the Markets and Economy sections. The readings end up with some very interesting excerpts on credit and monetary policy, which is where we want to concentrate. The video clip is an interview with Charlie Munger done at Stanford (early 2009?) on the Crisis and what he thinks of policy. This is a man completely devoid of ideological biases who makes it his business to understand things - in vast contrast to almost all the other strategists and pontificators. We suggest you pay attention because what he had to say almost a year ago played out about as he called and the ripples are still with us, which subjects we take up next!

What's Going on With the Markets

 But let's start the graph- and chatfests by taking a quick look at the state of the markets, courtesy of INO.com and channeled via Investment Postcards. Now this is actually an interactive tool clip where one of INO's analysts walks you thru the DJIA, the NASDAQ and the SP500 and talks about trends and turning points.

In each case he finds nearly identical results, which is there is a magic resistance level and if the markets stay off, or bounce off, that number they'll still be in an uptrend are likely to head higher. Given that they've effectively been in a sideways trading range since September and the long-term downtrend from Oct07 is still intact we're definitely talking about a trader's market.

The really interesting thing is not all that per se but that so many other folks are seeing it roughly the same way as we're seeing it. So, as usual, the acid questions: at these valuations and given the economic outlook where's the return? Feel free to keep riding this as long as you like but have your fallback positions thought out and prepared. Just as a little anecdote in Jan08 my suggestions to a bunch of folks was to head for the sidelines with short-term Treasuries. Out of maybe 50+ folks (actually on a network basis more like 150+, not counting the blog posts) maybe 1-3 paid any attention whatsoever. Of couse my second suggestion was to look into inverse ETFs. No we're not about to repeat all that but over the rest of this quarter and thru the next stimulus will fade and earnings realities will start catching up. 

Where's the Money: Dangerous Ideologies vs. Real Data

A few other lessons we've learned is that every expert thinks they're qualified to pontificate on related matters even when they don't know about them, that said experts tend to substitute ideologies and mythologies the farther they get from their home turf and when we're in an unprecedented period of rapid structural change that none of these experts have ever seen their refusal to learn the new patterns and rely on the old ones, which are now broken, is really dangerous. That's all by way of preamble for all the folks huddling in fear about the Fed's huge balance sheet resulting in rampant inflation. Now as Uncle Milty taught us (and Kasriel, Mauldin, et.al.) keep reminding us inflation is a monetary phenomenon. That is the money has got to get out there in circulation.

What people are all frightened about is the UL corner, the Fed's balance sheet. Or for us quasi-normal folks the stuff they bought to keep the money system flowing and keep every credit market in the world from collapsing. Normally when the Fed buys stuff it puts money into the banks as a result. Which is why you'd see looking back forever that the Treasuries were about all they bought. When credit markets started seizing up in late 2007 they started doing odder things and when everything went to hell in a handbasket they lent directly to Financials, to Money Market Funds and, eventually, to the Mortgage-backed securities markets. That's what we mean when we talk about Quantitative Easing. You'll notice btw that they've been letting the special QE for the financials ease off dramatically. On the other hand literally the only thing holding Housing together is the Fed's purchase of Mortgage Backed Securities, largely from the Frannie Twins. Everybody else is out of that market, and they originate something like 80% of the mortgages today.

Well a funny thing happened on the way to the Economy. In the UR corner you see the Monetary Base sky-rocket. If things were normal banks would turn around and start lending that out but instead they've been letting it stay on the Fed's books, that is in the LR corner otherwise known as excess reserves. What the banks are leaving with the Fed above their safety and security capital requirements. Which leads us to the LL corner where the Money Multiplier, the speed with which that created money goes into circulation, has dropped like a rock. In other words none of that liquidity is getting out in the economy, almost whatsoever!!!

Where's the Credit: Frightened Banks, Cautious Consumers

At this point probably everybody's heard of Reinhardt and Rogoff's multi-century survey of financial crisis where the found that a) they're not unusual and b) it takes a long time to repair the damage. You've probably also heard that businesses and consumers are deleveraging and will continue to do so for a long time. For the next 5+ years because credit constraints force them to and after that if we've all learned our lessons about the dangers of eating more than you can hold, and buying to much on credit.

Now make no mistake about, when LEH splashed into the credit pond the markets were essentially destroyed. Which is why you see the TED spread spike to unheard of levels. Yet the the spread (the difference between 3Mo Treasuries and the LIBOR) has returned to something resembling it's normal historical spread of almost zero %! On the top of the L.H. chart you see the 10Yr:3Mo ratio, which is a measure of how steep the Yield Curve is. The steeper it is in normal circumstances the more likely the economy's in trouble. As the economy picks up short-term rates rise and the curve levels out as money tightens. In the crisis s.t. rates got driven to less than zero (sorta) and are still about there. And so did 10Yrs! Unprecedented again, of course, as wasn't it all. That was the infamous flight to quality and the reason anybody in Treasuries last year made a lot of money. Now we're getting back to "normal" and 10Yr rates have returned to trend - BUT they ARE NOT rising as serious inflation and/or debt financing pressures would indicate.

Meanwhile look on the R.H. three chart set which looks at Consumer and Business Loans and Total Credit both in absolute and YoY% terms. In all three areas we're seeing the worst credit crunch we've seen since the Great Depression. All that money may have gone to banks and be sitting at the Fed but it's not getting out in the economy. Which is exactly what R&R tell us happens historically. And THAT's the key economic variable we need to be focused on now - there is no credit flowing into the Economy. And not just because the Banks are scared or re-building their balance sheets. But also because Consumers and Businesses aren't borrowing.

The Economic Outlook: Stiglitz on the Short-, Medium- and Long-term

Let's wrap up this survey of the state of the Universe with a recent Charlie Rose interview with Joseoph Stiglitz, who's a very good economist though not a great policy-maker. There's an element of truth in almost everything he has to say and you need to listen and think. But we will say that in the first 1/3 he's dead on but in some of his policy prescriptions he lacks a certain, shall we say, grasp on political feasibility and implementation workability. Be that as it may he still makes a lot of good sense and his take on the long-term economic outlook as well as where we're currently at jibes with about everything we've ever had to say, and that of a whole bunch of other folks.

If you listen to the whole program it'll cost you an hour but it's an hour well-spent IOHO. But at least listen to the first 20 min. or so to get a good take on where we're at.

Continue reading "It's All About the Money: Markets, Economy, Credit, Oh MY!" »

Posted by dblwyo at 06:52 PM | Permalink | Comments (0)

Well we've had a few weeks chock-a-block with a few years worth of news, and none of it good. The Fed has started moving to reduce quantitative easing (emergency) programs, sovereign credit crisis appear to be metastasizing from Dubai to Greece to the PIIGS and China further tightened it's monetary policy. There was even a frisson of fear that China was beginning to walk away from the dollar! The last is NOT true though though the former are but, as we keep reminding everyone, we're in a policy-driven and fragile environment where deep structural changes that normally occur gradually over decades are occurring in months or worse, in weeks. The end result is that we have a turbulent situation that's beyond hard to read because no clear patterns emerge that sustain themselves for long. There's a whole slew, and we mean slew, of readings after the break that surveys the landscape that confirms all this and covers ground we've covered a lot in the last nine months. The really interesting, and truly dangerous thing, is that so many folks are so surprised at things that have been visible for months. It was almost exactly at this time last year that we were warning that the economic data was going to be much worse than the markets were expecting - the end result was last year's March Market Madness when the sky truly fell.

Will it happen again? NASA flies what's called the Vomit Comet, a padded airliner, that flies a parabolic arc at the top of which the astronauts get a few minutes of weightlessness to get some experience. But everyone knows that it will end and starts preparing for the return of reality by getting back on the deck. Or risks serious injury. Are we in a similar situation? Meanwhile the WealthTrack video clip will give you a professional view of the state of things, an accurate one we think, and this YouTube clip will give you the popular attitude. Both are important.

Is That All There Is: Market Madness V2.0

 It looks like the "risks" of a real 10% correction are fast fading, despite all the gyrations in the world markets. Of course that's what they were saying in 2007 when we had the Shanghai Surprise (the canary) or the BSC Collapse (the first collapse). Now that's not to say that we're expecting anything like that, but as you'll see in the readings, none of the economic data is particularly good and the outlook is what we've been saying it is - another long jobless recovery and a decade of doldrums.

So, when you look at the chart, we see a downtrend that's still intact, a market that tried to rally over it and couldn't, a bear market rally after surviving last year's March Madness and seem real questions. Are we for example at the top of that NASA vomit arc? Given how badly the markets have misread the economic data this year, and for the last several, we can envision a couple of scenarios. In the short-run this complacent dynamics keeps playing out and the market turbulates sideways for a couple of quarters. Then the real economic data starts to show up, sans the Inventory boost, with stimulus fading, policy beginning to move away from emergency measures and earnings getting away from easy YoY gimme comps. That's a recipe in the last half of the year for a real correction. The question you have to ask is do you want to play that game (which has been going on since September after all)? Or is it time to start thinking about preserving capital. Unless you're prepared to get into the trading game the risks factors are mounting, the return outlooks are deteriorating (where are PEs for example, cf. the readings) and the chances of decent returns over the next several years are fading if not gone.

Continue reading "Welcome to Murphy's World: Markets, Economies, Policy & Fragilities" »

Posted by dblwyo at 10:09 AM | Permalink | Comments (0)

With the last two posts under belts we should have a baseline on how the "New Normal" is going to play out, frankly, for the next decade and how widely our perceptions are shared or reflected among some of the world's most influential decision-makers (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance, The Cusp Point is Here: Lessons From Davos). Now it's time to look at the consequences for markets and the economy. If you'll recall we've said the economy is policy-dependent while the markets were afloat, likewise, on a policy-funded carry trade and complacency. Which means that the major factors we see in the NN (jobless recovery, weak demand, deleveraging, slow sub-potential growth, re-balancing = trade wars, worldwide over-capacity) were not reflected in an arguably over-valued Market which was pricing an immaculate V and ignoring all the fragilities, risks and turbulence that we're facing. Something we've been saying since the Summer but hammering on since the early Fall. In the readings we've provided earlier links to previous posts as well as white paper collections on the markets, the economy and investment strategy that not only go thru all that but provide a lot of tools and machinery for analyzing it and investment management. So let's dig into the state of things.

Markets Re-discover Reality

In case you haven't noticed the markets are still marching in lockstep and those have been down (EM's down over 5% and developed markets down over 4% in Jan to date). The proximate triggers were a minuscule, almost meaningless tightening in Chinese monetary policy, the re-discovery of sovereign debt risks in Europe (causing a renewed flight to the $ and re-invoking $Down, Markets Up dynamic) and a growing awareness of a weak recovery. Combined with being 1/2-way thru earnings season and suddenly realizing profit growth was still largely cost-cutting (wow, deja vu') and not on organic revenue growth (Technology is a separate issue but we did cover that previously:Talking Business: the Outlook vs. the Preparations).

Because the markets are all still moving in lockstep (again a hallmark of being driven by internals and not fundamentals) we don't really need to put up the charts on each of the separate pieces but you can see Sectors & World Markets, Finance/Rates/Commodities(Oil) and Gold/Dollar Markets by clicking thru on the highlights to take you to the various composite chart sets. The composite at right compares and contrasts the short-term vs. the long-term but some complementary views of the intermediate term are here and here.

Continue reading "Policy-dependence, Transitions and Turbulence: Market and Economy in the New Normal" »

Posted by dblwyo at 08:06 AM | Permalink | Comments (0)

The primary concern of the last post was defining the "new normal" and adding on the strong suggestion that each and every business needs to be constantly monitoring external events and not keep getting blindsided by them (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance).

As it happens almost everything we've had to say about the nature of the new normal, the pressures on governance and performance, etc. almost ad nauseum were discussed at last week's Davos sessions. Over the weekend we had a chance to sample many of the major presentations and 99% of the readings this time are the links to the ones we think you need to pay attention to. The real reason is that the WEF and the Davos participants have largely done your work for you in terms of assessing the multiplicity of risk factors and outlining the likely paths things will follow over the next several years. So between our work on the economy and business and theirs on the big picture environment most of what you need to populate your own dashboard is readily available. We start with a session that Bill George (Harvard, Medtronics) led on re-thinking global capitalism which gives you a pretty good flavor of the pressures that will be mounting and mounting over the rest of this decade (it's an hour+ but just the first few minutes tell you what you need to get started about trust in Business!).

Continue reading "The Cusp Point is Here: Lessons From Davos" »

Posted by dblwyo at 09:25 PM | Permalink | Comments (0)

A few interesting things happened in this last week that define the things we want to address here. In an exchange with a friend on business performance in the new normal, despite several months of back and forth, most of what we'd been saying about the next decade hadn't really sunk home but we finally managed to get the other shoe to drop. His reaction was somewhere between Wow and OMG! What that exchange makes clear to us is that, in line with our expectations, most businesses haven't a clue as to what's coming at them. So those issues (defining the New Normal benchmark and assessing business preparation and performance outlook) define our endpoints. At the same time we had an amazing, in many senses State of the Union and Davos 2010 kicked off. This environment has moved from Chaos to Turbulence and is still very Fragile - and will remain both Turbulent and Fragile for the decade as deep structural adjustments in the global economy, governance (corporate and public) and geo-politics that will radically alter the deep foundations we've taken for granted for the last three decades are changed in response to the crisis and governance and performance failures. Those changes are a central theme of this year's conference.

Taken all together the economic outlook, the implications for investment and asset performance and business governance define the touchpoints of our highly selected readings section after the break, including several critical vidclips from Davos as some from the FT on emerging markets. There's nothing there that we're putting up just for fun. But the central questions are what will the New Normal look like and how are businesses prepared for it? And how will public authorities deal with restoring a fragile world economy. To set the stage you might want to listen to this brief round table from McKinsey. But we'll let a much wiser man define the situation in words we hope you recognize and take to heart:

"The dogmas of the quiet past, are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall our selves, and then we shall save our country. Fellow-citizens, we cannot escape history. We of this Congress and this administration, will be remembered in spite of ourselves. No personal significance, or insignificance, can spare one or another of us. The fiery trial through which we pass, will light us down, in honor or dishonor, to the latest generation."

Annual Message to Congress (1 December 1862) – A. Lincoln

Continue reading "Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance" »

Posted by dblwyo at 02:58 PM | Permalink | Comments (0)

The Markets have been tanking most of this week and have given up most of mini-bubble beyond 1100, which if you recall was our upper resistance limit in previous posts. It's doing so because a bunch of things have come together, though semi-predictably there's a chorus of voices blaming the President's announcements of a major reform to restructure the Finance Industry and change what it's allowed to do and how it functions. Given the poor quality of earnings since last March, recent reports showing how weak the core businesses are and Industry behavior over the year with regard to reform that announcement was, at best, a trigger that crystallized an already saturated solution. What really saturated things and put them on the cusp point of teetering over an edge was a slew of disappointing earnings, an improved grasp on the real economic outlook and China's major changes in policy. ALL of which we've been discussing for months.

Rather than reviewing all that it's collected in the readings but we're going to use it as our fulcrum to focus on the salvo across the bow fired on reform, and ask you to start with investing eight minutes in listening the President's announcement. This is not just political theater, though there's some of that, it's to the point, substantive, grounded and a sensible reaction to being stone-walled by the industry for one year (bear in mind the Administration reached out to the Industry within days of taking office and has been trying to reach out for months).

Continue reading "Comes 'round, Goes 'round: Hastening Forward Slowly to Finance Reform" »

Posted by dblwyo at 10:15 AM | Permalink | Comments (0)

Since we're about to dive into the first working day of the new year and the new decade we thought we'd provide a bit of review and an outlook on things.Comment - if it's not clear the intent of this post is to make the review and outlook available to you all, for free btw, in downloadable form. In fact we do so with three different alternatives: clicking thru the Summary graphic below, online viewable at Scrib or directly by clicking thru on the highlighted file name. Please do so as we feel that the real value here is in the comprehensive views across the major economic, market and business factors as well as their integration.

Now, let's start with this recent PBS Newshour interview from their show conducted at the recent Am. Economics Assoc. meetings. Several short interviews with some very serious players indeed, including Bob Shiller and George Akerlof.

We hope you take the few minutes (about 8) necessary to watch - or even go to the web site and read the whole story/transcript here. We think it's worth your time.

The central question(s) being raised was "why you didn't you tell us that we were headed for the ditch?". The answers are somewhat various but converge on three key ones:

1) Actually we did, several of us in particular, but nobody paid any attention because everybody wanted to believe this was Dr. Pangloss's world.

2) Everybody got too wrapped up in and by the "animal spirits" of the moment and forgot both that markets go down as well as up, and that they REQUIRE more supervision than we remembered.

3) Everybody got focused on their own little niche and didn't see the big picture of how it all tied together. We knew there were lots of problems scattered around that were serious but nobody put all the pieces together.

Continue reading "Review & Outlook: Economy, Markets and Business in the New Normal (COMMENT!)" »

Posted by dblwyo at 06:21 AM | Permalink | Comments (0)

Here's hoping you had a great Christmas and are enjoying the weekend. It's time for a quick update and snapshot of the markets and economic information from the last week or so. It being the end of the year, and the decade, a lot of look-backs are starting to show up and some of them are interesting. Not least of course being that this last decade had negative returns and the worst performance of any decade since the Great Depression. On the economic side of things Durable Goods came out, and the MtM change wasn't what the forecast was expecting but doesn't look too bad on a YoY basis. But, not to dampen your season's spirits, our preferred indicator of future demand (the change in Wages + Employment) isn't looking so encouraging. And, this being a time for reflection, we've also included a couple of decade look-back/look-aheads and associated deep attitudinal shifts. In particular the radical change in attitudes toward equities. So let's see if we can find some signal in the noise.

Current Market Situation

Here's four views of a market composite (UL - last few months, UR - the "carry trade" indicators [$ & Gold], LR - decade view and LL - 2Yr view). Recently the markets have been in a narrow trading range (UL) but broke above it slightly. Interestingly despite dollar strength and gold weakness. If all the myths floated over the summer and fall were true that shouldn't happen. We think it's telling us that the carry trade WAS the driver, it's coming off (or being displaced by the Yen) and, fascinatingly, stocks and the $ went up together! We take that as a sign of an optimistic outlook, combined with end of year dressup.

On the other hand the (LL) shows there's still a ways to go to break above our infamous down-channel. When we go with the flow and look back over the decade it really is kind of depressing. Stocks are still lower than they were in mid-98, have a ways to go and will face stiff resistance at the next Fib level. If the Fall was the end of the world, March was the banks are/aren't failing, spring and summer - oh, we guess they aren't then the Fall was carry-funded fantasies. As Ritholz says in the readings we may still have some upside but we're really facing a range-bound and volatile market for at least the next decade (especially if you believe all the evidence we piled up on structural challenges).

Continue reading "Markets & Economy: Noise, Signal, Some Worrisome Signs" »

Posted by dblwyo at 04:51 PM | Permalink | Comments (0)

Two posts ago we took a quick slapshot at the state of the economy (Slapshot in Time: Economy Status and Appalling Military Metaphors) and the outlook to set up a deep dive on the underlying structural foundations, this post. And interrupted ourselves to divert on all the amazing news coming out of the Financial Sector (The Business of Banking: Challenges, Issues & Outlook) with regard to the smoldering firestorm of reform being fanned into life. Strangely enough the two are completely related, as we'll show here, but we're going to start with long-term employment trends. Lest, however, you think this is just boring economic data take a look at this story from tomorrow's WSJ on the Lost Decade in the markets (Stocks' 'Nightmare' Decade) or CalculatedRisk's comments on that and Employment (The Lost Decade). After we're done, if not before you should be convinced that they aren't unrelated. The accompanying chart shows New Jobs, Net New Jobs (New-450K/Qtr needed for breakeven) and cumulative job creation from 1980 to now. We may have "lost"7+ million jobs during the downturn but according to our calculations we're actually 12.2 million in the hole. The point being that for our economy to be prosperous and growing where wages go up and drive investment and new hiring, thereby in turn driving profits, earnings and markets, we need jobs, jobs, jobs. And, if you recall the last econ post we estimated that over the next decade we needed 46 million of them and were going to be lucky to get 20 million (the BLS has since estimated that we'll create 15 million over the next decade). Welcome to the new normal.

Continue reading "Jobs, Debt & Growth: Level Setting the New Normal" »

Posted by dblwyo at 08:52 PM | Permalink | Comments (0)

Before we get back to dissecting other aspects of business performance let's take a break and look at a snapshot of the current state of the Economy, pulling together recent data plus stuff we've been scattering around other posts. It might be a slapshot depending on how you take it, of course, but we think the news is good. Applying our appalling but all too accurate Eastern Front metaphors we compared last Fall to the Battle of Moscow when only last minute emergency action saved things from collapse. That makes this last winter thru summer the Battle of Stalingrad when great sacrifices were able to stem the tide of attack (notice we don't say German or economic 'cause the darm metaphor is too accurate, almost close enough to be a model). Continuing to abuse it because it works that means we're now facing the Battle of Kursk, when the Russians turned the momentum in their favor. By that analogy we're going to define the business cycle equivalent of Kursk as when we start to seriously create jobs again, no matter how weak it is. (NB: Moscow (1941/Fall08, Stalingrad 1942/Winter-Fall09, Kursk 1943/ Winter09-2010). If you expand the composite map you can see the ebb and flow of these battles which pretty much exactly mirrors the last year+ that we've struggled thru.

Recalling the Nature of the Business Cycle

Of course these aren't giant military battles but in some wasy the stakes are as high. We are "debating" the prospertiy and health, and to some extent, the survival of our economies and soceities. Certainly we are wrestling with the attempt to help ourselves, and get the economy back on its feet. As part of that this snapshot is intended to place us pretty exactly the flow of the business cycle so you can improve your own planning and decision-making, as well as judge that of others. Just to put a point on that last observation the slowdown downturn was visible from 2006 forward and certainly clear thruout 2007 and early 2008. The metastasis of the credit crisis and the near collapse of the markets was unexpected in extent but was also predicted (and not just here). The good news is that more people are paying a lot more careful attention and getting it right. The bad news is that it's not clear how much that's sinking in around town or influencing decision-making.

Continue reading "Slapshot in Time: Economy Status and Appalling Military Metaphors" »

Posted by dblwyo at 08:23 PM | Permalink | Comments (0)

Let's serve it up all at once. The very extensive readings start with current comments on Market Technicals segue to the outlook and valuations and then bridge to investment strategy implications. Since the Markets are being entirely driven by Central Bank Policy which is in turn dancing around the turbulence of the Economy we then pick up the Economic situation. We've been covering that directly and indirectly (embedded as the starter points in business performance discussions) all along so we won't pick up much on particular data sets. Instead the readings focus on implications and consequences, include a lengthy discussion of policy and lay down some markers on really big picture implications and structural outlooks. Obviously each excerpt deserves a post and discussion of its own and combining the two major topics makes our usual readings section long evern for us. But this way you can step back, hopefully, and get an impression of all these factors and build your own mental model of how they're doing individually and all together. This is a system with many moving parts and it's those interactions that determine the outcomes we all care about. In our discussions we're going to focus on key, central driving points that tie it all together and leave it to you to at least skim the readings and tack them to our framework.

Continue reading "Antipasto Appetizer, Bouillabaisse Main Course: Markets, Economy, Policy, Outlook" »

Posted by dblwyo at 07:38 AM | Permalink | Comments (0)

Well if last week was a surprise downward revision to GDP this week was, ostensibly, a massive surprisingly good number on Employment. Even more interesting the Markets should have shot thru the roof. Instead they barely moved as the Dollar rallied strongly, Gold fell dramatically and Oil did poorly. Now if the Markets were based on fundamentals you'd have expected the opposite. We're not going to dig into the detailed analysis and interpretation of either the Economy or the Markets - almost entirely because everything that's been going on and just happened were things we've been dissecting extensively. We will poke at both chartwise (the Market composite dashboard chart's in the readings) and there are some very good readings you should at least skim. Instead we're going to continue our focus on Business Performance - in fact the intent is to continue the theme of the last post thru the next several because adaptability, resilience, innovation and performance are going to be the sine qua non of returns for the next decade and beyond.

We do our level best to be evidence-driven around here and focus most of our efforts to those ends,as hopefully you've noticed. In filtering all the myriads data points and shibboleths down to key findings we end up with pretty good dashboards on the economy, markets, assets, strategies and businesses but if we were to boil it down to four key things we'd ask (plead?) with you to remember it would be it would be to four major things. First, this time it really is different (the Reinhardt and Rogoff findings that this is a major downturn associated with a financial crisis which take forever to repair). Next, with a jobless recovery likely it's going to be a long, slow and painful process to re-build employment (est. 2019 before Unemployment reaches 2019!). Third, valuations are aberrational and the markets are as divorced from those underlying realities as they have been and there is NO MARGIN of SAFETY. Finally, and the reason for our focus on performance, businesses taken as a whole weren't prepared for the downturn, reacted poorly, aren't prepared for the New Normal and ARE NOT preparing. At the end of the day this is a failure of Leadership, Governance and a willingness to be evidence-driven in decision-making. Implying that the search for the performers is in reality a search for the clear-headed, simple and honest.

Continue reading "Response vs. Performance: Walking Wounded & Mental Attitudes" »

Posted by dblwyo at 07:56 PM | Permalink | Comments (0)

Well Happy Thanksgiving - now that the holiday in the US is over and we're getting back to realities it's time to consider what little surprises were brought to us. One of course is the downward revision of US GDP numbers from 3.5% to 2.8%, a whopper of a surprise, though in our preferred YoY approach it was a drop from -2.3% to -2.5% "growth". Among other real surprises was the announcement from Dubai that the government was going to seek to re-structure the debt on some very grandiose real estate projects. There's a great deal of confusion and x-connections making things harder to de-cipher, not least of which is because Dubai is one of the UAE members and not the major one. So what debt gets supported or not by which government is up in the air. Nonetheless the threat of sovereign defaults shook up markets around the world.

Market Situation

We think people should be paying careful attention to Dubai and related tremors but not for the reasons you think, or are being commonly discussed. It being the tailend of the holiday we're going to throw out one chart on the Markets that we've looked at over the last couple of weeks, in some form, but not all the others we typically wrap around it to cover more ground.

Part of the reason is that the fundamental finding remains exactly the sames as it has (we almost ought to let the readers draw it out) but a) we're still in the downtrend, b) the bear rally hasn't touched the upper bounds and in fact keeps failing there and c) we're right at the 50% resistance line on the Fib limits.

What we think is really important is the re-iteration and re-confirmation of the logic chain from the last posting, the notion of fragile markets exposed to surprises and a policy-driven recovery. It's also critically important that you take all those points together as a set - as most investors haven't been. What Dubai was was a wake-up call about the fragile underpinnings that they were getting over-complacent about and the major risks and flaws that still have to be carefully worked thru to keep the wheels on the wagon and keep them turning. Back in Mar07 when the Shanghai Exchange dropped 8% with no warning we talked about the Shanghai Surprise in this post -Tender is the Market. And tried to argue that, based on economic fundamentals, the market was tender, i.e. fragile and tipsy and therefore prone to surprises and upsets. Now the next show to really drop was Bear-Stearns almost a year later but... surely you take the point? :)!

Continued....

Continue reading "Thanksgiving Surprises: GDP to Dubai to "Fragile"" »

Posted by dblwyo at 01:32 PM | Permalink | Comments (0)

Our next planned post was a deep dive on some key business challenges and how well positioned the general distribution of businesses were for the new normal. A structural assessment as a follow-up to the earnings and outlook assessment. Instead we're going to take a "quick" pass at the Markets and the Economy. Partly because the Markets were so much fun this week and there was such a slew of important economic data but also because business performance the Econ/Mkt situation are NOT independent; as we keep harping "performance is everything". On the other side in this turbulent environment where all the old patterns are semi-broken the last string of posts on taking apart various stories that are being told ties directly - one damm thing linked to another as they say. In fact that might be an alternative title for this post but an even better one would be the new paradigm emerges. All of a sudden, evolving and emerging over the last month, the new meme has metastasized to explain it all - RiskOn/RiskOff, DollarUp/MarketsDown, ZIRP/QE for ever, or at least until jobs start recovering if they ever do. In fact the quickie summary we thre out seems to cover it extremely well:

 We think that captures the new consensus pretty well except for the last line, which is our own little contribution thought we've been talking about the others for a while now. But it's the most important and carries the most fraught implications. As John Mauldin put it in his latest newsletter (Where the Wild Things Are). Ask yourself this - assume it all makes sense and the markets will keep running - what's your expected return? What's a fair value? And what's your risk?

Continued....

Continue reading "Markets in a Policy-Driven Economy: Turbulence, Data and Idiocies" »

Posted by dblwyo at 08:36 PM | Permalink | Comments (0)

In the last post we took a special dive on the current Employment situation and the strategic and structural outlook while also spending some time talking about seeing things as they really are, instead of how ideological distortions would have. We're going to continue that with a look at the overall economic situation, as we really think it is, and look back on some key policy issues. One critical point is that normally policy evolves slowly but in this sustained crisis it's been changing very rapidly, which means deep structural factors are gyrating on the same pace as high-frequency economic or market data. That the G-20 announced continued support for stimulus and monetary easing led to the market rally early in the week. But it also highlighted how weak and challenged things remain. Make absolutely no mistake about it - all that's keeping the wheels on the wagon right now is public spending.

Current Economic Situation

We've liked to use military metaphors around here and in particular the timeline of major Eastern Front battles, comparing last Fall's near-collapse to the Battle of Moscow and the months from Jan. to recently to the Stalingrad campaign. The really good news, in two pieces, is that we have avoided Depression 2.0, something that the policy makers are now publicly admitting was, as the Iron Duke said, "a near run thing, a damn near-run thing." Almost as good is that we judge Stalingrad to have been won.

As you can see both GDP and Consumption on a YoY% basis turned up and we definitely got a jump on a QtQ basis. But the bottom chart also defines the next major campaign - to start growing jobs again. Continuing the metaphor we'll compare the problem of job growth to the Kursk Campaign, where the Russians had a chance to attack (or more properly counter-attack for the first time) by careful intelligence and planning. Our problem right now is that the economy is a long way from self-sustaining, organic growth - hence the need for stimulus and eased monetary policy. And, by way of collateral damage, the continuing crunch in the credit markets which will continue to hamper the recovery for a long time. BtW - Kursk was fought in 1943, as we recall.

Continue reading "The Policy-driven Economy: Turbulence, Outlook, Recovery?" »

Posted by dblwyo at 02:07 PM | Permalink | Comments (0)

One of the things we try and do around here is find the right data, put it thru the right filters and interpretative frameworks without torturing it to say what we want and then use to reach the conclusions and make the right decisions. Over the last five years that approach has served us very well by and large and hopefully helped those who've read this blog or seen our newsletters or other communications. Beyond that when we don't understand something we try and dig into until we find the right data, a useful explanation and even a framework for thinking about it. The last several posts have all served that "tradition" but rather than get back to our knitting we're going to take another example and then try some big picture lessons from it. The example, which is vitally important for its own sake, is the Employment Data. The important lesson is understanding the data sources and interpretations but the critical lesson is the implied one about letting your thinking be distorted by your pre-dispositions. Which we'll come back to you in a bit. Let's dive in on the Employment data.

There are three OMG look at the data ideas floating around the memosphere (meme+MSM+blogosphere) about the Employment data. Now we'll just say that in the last few years this is not the first such tempest that's blown up from conspiracy theories to mal-adjustment in inflation data to....on and on. EVERY single one of them on being checked out was somebody not looking at the data, charting it out and seeing whether or not it made sense or if they had a workable suggestion for making it better at an affordable cost. NOT a single OMG moment has held up in five years. There are three related ones floating around about the Employment data that we want to test in the process of learning something about what's really going on. One is that the Non-seasonally adjusted data shows job increases so it's not as bad, another is that the two different sources of data - the Establishment survey which talks to businesses directly and has a more limited but more accurate sample and the Household Survey which picks up freelancers, consultants, farmers and other n'er do wells like ourselves have a huge disparity and the third is because this economy "is so different this time" that you can't rely on the employment data as a lagging indicator because it's actually a leading indicator. Putting these to rest is almost as important as understanding the data per se.

Three Gotchas in the Employment Data

Let's start with looking at the Establishment employment data, both seasonally adjusted and unadjusted, and comparing it to the Household survey data and seeing what we see. As usual and always click to enlarge the chart please! The top chart shows SA and NSA Establishment vs Household Employment. The thin red line is the NSA and notice especially that a) it's very noisy constantly wiggling around the SA data and b) there's a constant gap of around 10 million jobs between the two surveys, which once you adjust for the difference in data sources, turns out over the last several decades to yield the same answer as to the state of Employment. At least according to the Fed in several repeated looks they've taken at the issue. If you get what we just said all three of the OMG shibboleths just died on the facts. We could spend the rest of this blog explaining in detail but will pass on.

The second sub-chart shows new jobs, from which we've dropped the NSA data which is SO noisy that the repeated and useless up & down spikes result in a chart too noisy to read and interpret. By and large over nearly three decades the two surveys yield exactly the identical number of new jobs, though there is a slight discrepancy on this quarterly basis in the last quarter. Which is not out of line with previous discrepancies. The third sub-chart shows YoY% changes - SA and NSA are so close that the red and blue lines overlay and turn purple. Compare that inadvertently created line with the Household survey and guess what - again the YoY changes give us just about the same answer again. Though the Household survey is nosier and therefore it tends to be harder to rely on period to period. The bottomline therefore is that YoY SA data gives us the cleanest, most reliable indicator of trends, patterns and turning points.

Continue reading "Turbulence vs Chaos: the Buddha's Lessons on Data, Distortions & Decisions" »

Posted by dblwyo at 06:36 PM | Permalink | Comments (0)

Recently when the dollar's been up stocks have been down, and visa versa. Lying behind that turbulence is the gyrations between RiskOn/RiskOff trading based on liquidity-fueled speculation and the dollar carry trade. All this turbulence has been with us in some form for almost two years but seems to be dampening down. The two problems with a turbulent environment is that the risk and uncertainty is higher so everyone's looking for the patterns and explanations to make high-information signals out of the noisy data. Part of that filtering is the one we just applied (RiskOn/RiskOff) but there are layers behind it as well. A lot of those layers have to do with the outlook for deficits, trade flows, interest rates and exchange rates. And because we're in a policy-driven environment where deep structural changes that are normally predictable and evolve slowly are moving more like high-frequency technical information and subject to changing policy decisions. In this environment it's hard to decide whether or not turbulence is chaos - unpatterned or unpredictable - or not. Sometimes in fact it's not only hard to tell the differences but there aren't many (aerospace engineers talk about turbulent flow which is best modeled with chaos math for example but can be approximated by better behaved equations work ably enough).

What makes the chaos more likely is when to many folks substitute simple-minded ideologies based on philosophical or political preferences for the best available data, analysis and information. In other words when they worship at certain political shibboleths. We're going to attempt to keep on de-bunking yet another set of those shibboleths as part of our continuing efforts to find the patterns and develop the workable, good-enough models for our needs. This time we're going to focus on the Dollar and its relationships to Trade and Rates, while trusting you to review the prior discussions on the economy, deficits, economic policy, inflation, etc. Just to close the loop though the chart is two analysis of the same 3yr weekly SP500 chart which shows that a) all the downtrends we've been talking about are still intact and b) despite the recent rise it's both bumping against the Fib limits from the Oct07 high and churning around now on shorter timeframes of the recent bear rally. Which way it breaks is going to be a tradeoff between liquidity and reality.

Talking About Trade and Rates

To sort the chaos into patterns and make it merely turbulent we're going to try and present some machinery, admittedly conceptual, to try and explain how trade flows are linked to exchange rates and how those are linked to interest rates. The basic relationship is that Net Exports = Savings-Investment, which makes sense when you think about it but also follows from an accounting identity we've talked about before. Briefly (sorry for the shortness but...) Y=C+I+G+X-I. If Net Exports NX=X-I then Y-C-I-G = NX. But Y-C-G is savings so S-I=NX and voila'.

In the long run (at the bottom of this layer cake) you'd like for trade flows to balance out, that is we buy as much stuff abroad as we sell. That requires that we either make lots of stuff they want or don't buy as much from them as we want or they'd like to sell. NB: we've just explained the last ten years inter-dependency between China and the US. In this example Europe buys US goods but needs $ to do that while we need E to buy their stuff. When we buy too little or they sell to much we end up with fewer E than we'd like and they have a hoard of $. One way for that to balance out is for the E:$ exchange rate to adjust, in this case since they've got to many dollars by a drop in the E:$ rate, which would then work backward to reduce the demand for their goods until things are balanced out again.

Another way to re-balance is for that excess hoard of European $ to be invested in US assets, say stocks, bonds or loans. Which is exactly what's been happening between the US and China, or the $ and the Renminbi. We buy more stuff from them, they end up with too many $ so they loan us the funds which we use to buy more stuff. Simple right? In our equations NX<0 => S<I and R:$ should increase to re-balance things. Oops..that didn't work. So now the machinery runs backward, so to speak. Since R:$ is to low money keeps flowing to the US and we keep borrowing to buy things. Before you get to upset about all that let's bear in mind both sides are culpable. We kept playing grasshopper and they got to bring millions and millions of people out of poverty and keep their country from blowing up. There trade and international relations in one easy two paragraph lesson, right?

Continue reading "Turbulence Isn't Chaos: Dollar, Rates, Trade and Markets" »

Posted by dblwyo at 11:50 AM | Permalink | Comments (0)

Surprise, surprise is the start of the punchline to a terrible junior H.S. joke about Gomer Pyle and the neighbor girl told when you're to young to know better and still puzzled by life's mysteries. Now that we're all older the supply of mysteries seems to keep going and it's one damn surprise after another. In fact there were so many that instead of a couple of updated additions to the prior post we ended up with a huge inventory that calls for a separate one, driven by the two big surprises: Th. GDP number and Fr. market shock. What they have in common, other than surprise, is that they're tied together by a mystery. That mystery is the mythologies we've been working our way thru, doing our best to debunk and de-mystify, and look for the structure and relationships.

A Quick Look at the Market

 That we're completely being bombarded shouldn't be a surprise - we are after all dealing with the after-shocks of the biggest disruption in the economy and markets since the 1930s where all the old structural relationships got shaken up. One thing that happens in complex systems subject to shocks is that it takes them a long time to return to stability and normal operation. When the shock is severe enough the linkages and parameters get changed so that the old system is not the new one. That's exactly the case here. Let's take a quick look at the markets to start with.

You should read this chart composite clockwise starting with the UL corner and working round. The point there being that March saw the world is ending as economic reality sank in and as fears of bank failures exponentiated. When that got fixed by the stress tests we got back to some measure of sanity but followed it with ill-grounded optimism bordering on illusion and went for a liquidity and leverage driven mini-bubble not based on realism about economic growth, earnings and profits or valuations. All of which led immediately to the UR chart - the real question is will fantasy return triumphant or will self-delusion be reduced enough to return to reasonable estimates and valuations? In the readings BtW Prieur du Pleiss has one of the best summaries we've read (Stocks and risky assets stumble ) on the subject. The bottom two charts tell us something, technically speaking, about where things might end up if reality wins. That reality is defined by whether or not the continuing turbulence of a fragile system continues to see the Central Banks trying to pump money in and what the Financial System does with it.

And a Look at GDP

One way to sort out the pattern from the noise is to find a set of instruments and filters, and we like YoY% changes which makes economic patterns about as crystal clear as they get. The bottom chart here shows us GDP, Consumption and Employment and, on the surface, it's nothing but good news. We'll make it official - the Recession is indeed over as measured by GDP. Of course there are several catches which we've yaddayaddad about forever. The recovery is not just highly but utterly dependent on government policy (Fed rates, quantitative easing, tax cuts & transfers, stimulus spending) which are going to be vitally necessary for a long time. The real key is how fast, when and if the economy transitions from a dependency on policy to internal, self-sustaining and organic growth. Which really means when does it start creating jobs and beyond that when does it make up for all the lost ones.

Continued ...

Continue reading "Surprise, Surprise:Not a Rally and It's Still Different" »

Posted by dblwyo at 07:38 AM | Permalink | Comments (0)

Well today's market might be taken as confirmation, a tad, of our red-flag waving twer it not we've been here before. Instead of Bove on Wells Fargo as on Tu. we had some reality from the transportation companies, not to mention that earnings have been beating "expectations" but, as usual, not very well on revenue, mostly on continued cost cutting and careful management by the Investor Relations departments. We so remind ourselves of the broken records we were playing thruout 2007 on this but at least it's a song we know by heart. Recall that we started the last post (Markets Away: Run Baby Run? Or Stumble? Or What?) re-warning about fumes and euporillusion. Now we're going to run ahead and visit some more economic realities but just for the record we start the readings after the jump with some excerpts that could have been added to that post (Stocks Slide as Railroads, Oil Lose Ground, Andrew Ross Sorkin: Banks Look Stable But "There's Got to Be Another Leg Down", Roubini: A Big Crash Is Coming, But I Don't Believe in Gold) just to close the loop and set the table, so to speak. Let's shift gears now and pick up some more economic de-mythologizing, in the spirit of our last post on the economy.

Current State of the Economy

Fortune has done a nice little job creating an interesting and straight-forward index of the state of the economy which we recommend you look at. Fortunately there wasn't a lot of major/surprising econ news this week so we don't need to dig into that.

The early warning indicators may be telling the techno-wizards that a recovery is in the offing (which it is by the way) but they also reinforce how weak it's going to be.For the mostly coincident indicators that Fortune works with we're still at the bottom of a trough.

In the readings you'll find some more current economic information on retail outlooks, employment and housing. None of which are looking particular good. There, that said, we can shift to the some more neglected and deeper structural factors. BtW - this post is intended as a complement to an earlier one looking at some other realities:From Mythologies to Realities: Economy, Employment, Credit & Trade . We really.....really suggest you re-read and review those arguments there because they'll start showing up over the next several months as well.

Continued ....

Continue reading "More De-mythologizing: a Little Markets, Some Economics, Lots of Policy" »

Posted by dblwyo at 10:55 PM | Permalink | Comments (0)

We didn't really want to circle back to pure economics so quickly but there's so much mythologizing going on, without looking at the underlying structure and trends, that it seems necessary. Plus of course we had all this nifty accumulation of information and readings to point to! :) But with stuff like Brian Wesbury writing in the WSJ things like The Economic Recovery Is Well Underway it seemed necessary. BtW if you don't have a sub to be able to read it, don't bother (as my blogging buddy Barry put it- not worth the time). This is after all the guy who has yet to get anything right. Instead, for deep insight into the realties, we'll point you to The Daily Show, which cuts closer to the quick in the accompanying vidclip. You have to admit it's not very often that you hear the greatest economist of the 20thC being cited in a hip-hop video, now is it? And, all seriousness aside, the point of the video is actually fairly accurate...it certainly captures the situation that most people are finding themselves in.

Current State of the Economy

For something a little more straight-forward we'll point you to this extract from the latest Northen Trust economic outlook update. The graphic is a composite taken from Paul Kasriel's most recent road show and if you click on it it'll pull up a Powerpoint presentation with some selected excerpts. On the other hand the entire presentation is well worth your time so if you'll click on thru on the highlight you'll get the entire presentation in PDF format and can download - we highly recommend it since you'll be able to see the entire pitch and read Paul's words that're wrapped around the charts.

We'll ask a little patience as well since we're going to cover a lot of composite and complex pictures that deserve their own extended discussions but aren't going to get it. That's because when you put them all together a large-scale picture emerges that's at the heart of the points we want to focus on. In this case the pictures are pretty clear - the worldwide economies appear to be turning back up but be careful to notice that the UL chart is a YoY chart and the rest QtQ changes annualized. On the whole the key take away is identical, except worldwide, to our last major econ post (Between Stalingrad and Kursk: Real Economy, Policy and Outlook).

Continued ...

Continue reading "From Mythologies to Realities: Economy, Employment, Credit & Trade" »

Posted by dblwyo at 04:52 PM | Permalink | Comments (0)

We could title this post a lot of things but wanted to focus on a metaphor we've been using because it's powerful and accurate. The Battle of Moscow in 1941 was when the Russians were saved, after letting themselves be surprised thru wishful thinking and ideological self-delusion (our term has been and is euphorillusion) by last minute miracles (Zhukov's Mongolian divisions were marched thru the streets of Moscow in a "parade" straight to the front). That was followed by many things but a central one was the extendes Stalingrad Campaign (as part of the larger Uranus) in 1942 which was only the end of the beginning. The beginning of the "middle game" was the giant battle of Kursk in 1943, where the Russians entrapped the Germans into the world's largest tank battle and defeated them, partly thru better intelligence and decision-making, partly thru luck but mostly thru a lot of darn hard work. Last Fall, as is now becoming all too clear, was our Moscow. We've been saying that for a while but how close we came to the edge of a worldwide collapse in the financial markets is becoming clearer and clearer. This last Winter and Spring was, and is, our Stalingrad. So, consider this post an addendum to the last as well as its own thing. We're going to largely let some key excerpts speak for themselves with a little judcious commentary but will also point to a selected set of excerpts to back up many of the points after the break.

Fall in Moscow: Near-Death Experiences

 Don't let anybody kid you, it was as the Iron Duke said in another context, a "near-run thing, a damn near-run thing". Not only did LEH, FNM and FRE die but MER disappeared but we were within a hairsbreadth of seeing Citi, MS and GS go as well, despite the denials at the time and, especially on the part of GS, since. NB: we have no problem with the artful dodging of Paulson and other policy makers - tell the idiot horses that the fire was out of control would have triggered the panics they were trying to stop. Let us let an excerpt from Andrew Ross Sorkin's just out book tell the story, but we'll draw your attention to the stock charts....even might Goldman almost died in those few days and hours. And below we'll also point to the charts on credit....which we've talked about before. Just in case the point's not clear - the financial system is still broke and credit is shrinking....without continued Fed support the whole thing will blow away. We're a long way from fixed and from starting to fight Kursk.

Continue reading "Moscow, Stalingrad, Kursk: Edge of the Abyss to "Recovery"?" »

Posted by dblwyo at 07:54 AM | Permalink | Comments (0)

Welcome to the "New Normal"! One of the most fascinating things about it is that, like the "old normal" denial seems to be a fundamental element. We were going to put up a refresh of the economic data yesterday but delayed to catch the most recent Employment numbers, which were about as bad as it gets, not least of which was because the BLS revisited and revised its numbers and took another 800K+ jobs out of the last two years. If there's any debate that this is going to be a long, ugly and jobless recovery that should start disappearing here, though slowly (that's the denial part) and we have heard more and more folks singing from the same hymnal that we use. Now there's not many/any radical structural or trend shifts in the data so, after a "brief" look at the employment data per se we're going to take a different perspective on what that new normal might look like.Though we'll bet it looks like this collage to most!

Re-visiting Employment

Starting with the Employment data (& there's a bunch of excerpts and URL pointers in the readings) let's take a scan of the data. YoY Employment, Private jobs, Hours worked and Unemployment all continued to worsen (Unemp would have been worse but labor force participation dropped again!). In the LL corner though we highlight the Private Jobs - the heavy red line makes a point about the 3rd jobless recovery in the last 20 years: no new private jobs have been created since Q298! That's not after labor force, population or productivity adjustments - that's PERIOD! Speaking of which we need 440 jobs/quarter to breakeven but net job creation was still negative, though improving slightly. On a cumulative basis though we're no about -12 million jobs in the hole. In other words addon whatever we loose over the next 18 months, the under-employed and that 12 million and we're just back to breakeven. Think we'll dig out of the hole by 2019? The OMB doesn't, as we discussed (Between Stalingrad and Kursk: Real Economy, Policy and Outlook). And just for the record the LR corner compares the business cycle to Employment for a little schadenfreudische unsinn!

Continue reading "Refreshing the Economic Outlook: Fundamentals to Business Outlook" »

Posted by dblwyo at 01:14 PM | Permalink | Comments (0)

It's time to re-visit, update and wrap-up our discussion of the Finance Industry and the chances for regulatory and legislative reform. On the one hand this is an important part of the domestic policy agenda, and in some senses, arguably the most important. On the other it's been back burnered ostensibly by the press of events which has resulted in all the last few weeks punditry commentary getting it wrong, at least in our 'humble opinion. Analogously to Healthcare Reform the administration first focused on the necessary emergency measures while trying to build a sense of cooperative self-interest in the finance community. An attempt that, unlike the HC communities (believe it or not), has foundered on the rocks of short-term and narrow self-interest. A point we've been arguing for a very long time and used as our central point in the last post which reviewed the state of play. Here we want to concentrate just a bit more on the stakes, the liklihoods and outcomes and the potential impacts.

In Fed We Trust: Our Near-Death Experience

David Wessel of the WSJ has written an excellent book on the crisis, which he started before Bear-Stearns went under and which he tracked thru the entire crisis. While he's appeared on several talk shows, of various sorts, the talk he gave in a Washington D.C. bookstore was the best because he had time to cover his findings in some detail and because of the audience's pointed and intelligent questions. Before leaving this topic we highly recommend your watching the CSpan video clip. He concludes by making three points: 1) we had a near-death experience and were saved by emergency heroics,perhaps largely those of Ben Benanke and the Fed, 2) we've survived the worst of it barely but have a long way to go before we're restored to health and 3) there's been little or no change in the regulatory and legislative framework.

We'll come back to that last point at the end, and it's vitally important, but our critical observation is that the commentariat mis-understands the process the Administration is following. First, put out the fire and start the repair work while second, attempt to inclusively line up support. Now they are shifting to a full-bore press and we would suggest that the Industry NOT under-estimate their chances. It wouldn't take much to fan the smoldering torches into a conflagration.

Continued ....

Continue reading "Debt, Wealth, Finance & Outlook: Sixty Years of Bubbliciousness" »

Posted by dblwyo at 08:47 PM | Permalink | Comments (0)

Stalingrad was not just a terrible battle but an extended, multi-month campaign that was part of a larger operation, but it was the end of the beginning. Since we like military metaphors, especially ones that work this well, compare last Fall to the Battle of Moscow where Russia almost died and Zhukov's troops were marched from the trains directly to the Front. The real point is that we are wrapping up our Stalingrad in that we've stopped cliff-diving but we're lying at the bottom, broken and bleeding with a long and painful crawl across the other side and a cliff waiting us there. Kursk was in front of the Russians in 1942 and a lot of war after that. NB: if you think we're kidding about all this check out Timeline of the Eastern Front of World War II. The really scary metaphor that's so close it's a model is how deep in trouble Stalin got by ignoring the intelligence from Richard Sorge that told him the Germans were going to attack. Stalin didn't want to hear it and Russia almost died. We trust the comparison to the willful denials that got us here are clear but the real problem, in all the sturm und drang, is that people are substituting ideology for analysis and are about to repeat the mistakes. The accompanying graphic, used before, explains where we're at and what the outlook is, and we intend to prove our points as best we can.

Current Economic Situation

Sorry if this is a little to much data crammed into to small a space but we wanted to cover lots of ground AND present it all as one gestalt, in the same way a pictographic language like Chinese (subliminal hint) convey background ideas by using pictures of real things while its saying something directly. All charts are YoY% changes of real data and the UL chart shows GDP, Consumption & Employment. GDP was down -3.9% vs. last quarter's -3.1% while Consumption was down -1.8% vs -1.5%, though on the charts you can see it flattening; that's all despite the huge stimulus effects.Two prior posts spend more time on the shorter-term data if you want to see that flattening more clearly (Interrupting Your Reported Data Distortions: More Darkside for the Economy, Same 'Ol, Same 'Ol: Economic Cliff-bottoms vs Cliff-diving).

BtW - responsible, non-ideological analysts put the impact of the first round as adding up to +4% to GDP and saving our bacon. Sorry to tell the ideologues, it worked. Employment though is down -1.6, -3.1 and -3.8% over the last three quarters, which explains why we have two your are here lines on the cycle conceptual chart. Output wise we're flattening but Employment wise we've not hit bottom yet!!!

Strategic Outlook

We re-visited our estimates of job creation and cumulative growth by directly pulling the employment and labor force growth, estimating productivity impacts from historical data and calculating aggregate job creation. It turns out we need about 147K/month, or 440K/quarter instead of the 150K we were using to breakeven. Breakeven also requires at least 2.5% real GDP growth and preferably 3%. Without that level of growth we dig the hole deeper and we're now about -10 million jobs in the hole, as shown in the LL sub-chart above. The UR and LR charts compare changes in Consumption and GDP to changes in national income real wages plus employment (our old indicator was changes in real weakly (deliberate Freudianism) wages but deflation is badly distorting that for the first time in decades. As long as jobs keep disappearing, people keep dropping out of the labor force and incomes are under pressure demand will have a tough time growing. Especially now that asset-backed borrowing (the Housing ATM) is history. That means the ugly recovery we should have had after 2001 but were saved from is back and it's really PO'd.

The OBM just published its Mid Session Outlook and gave us its long-term prognostication to 2019. Before you upchuck because it's the government we'll mention that there projections are consistent with the major international agencies (IMF, World Bank, OECD,...), major players (Roubini, Feldstein, Krugman, et.al.) and private/street forecasters (GS/Hartzius,...). If anything they all converge, roughly, but are a little optimistic. We've piled up a whole bunch of readings and John Mauldin in particular has an excellent series (the Statistical Recovery). Unemployment peaks out near 10% and takes a long.....g time to get back to 5%, GDP peaks up about 4.3% in 2012 but tails off to 2.5%. This is going to be the Mother of painful, extended and jobless recoveries we're sorry to say. BtW: for all the gold bugs buying food and ammo the OMB's interest rates are pretty sanguine for a long-time. Again we're looking at the triumph of ideology and not data or analysis. But that's a really important point - you don't just play the game, you compete with the player. And if that many people are insisting on using funhouse glasses colored red, by all means, prepare to take advantage.

Politics, Policy and Salvation

Speaking of using your forebrain to rationalize what is into what you want to see we might mention what's been going on on the policy front. Which we discussed extensively in a prior post with looks at spending, the structure of the package and the real history and outlooks for the deficits. (Realities vs Rhetorics: Economy, Policy, Real Data) The really fascinating thing to us is that no single member of our network has given any credence to our analysis, bothered to look at the numbers or taken a position that they didn't go in with.

Menzie Chin has a very straightforward estimate of the impact of the stimulus so far, and came up with 4% which he then chopped in half to keep the trolls off his back. (For an interesting dissection of public intellectual disputes and bad math click here.) The package was very carefully constructed to get tax cuts, transfers and rebates out the door fast and then gate more effective and directed programs that are at the limits of what can be implemented. Other than the Administration itself there are no commentators who have clearly put the economics, the impacts, the mechanics or the politics together into a holistic assessment. We've done our best with this graphic which relates the various alternative paths forward to the structure of the package and the cusp points where we are at risk of mission abort.

Right now we're in for a U-shaped recovery that'll be drawn out as balance sheets are re-built and people turn from spendthrift borrowing grasshoppers to frugal and saving ants. If the political pressures for killing the remaining programs mounts far enough the risks of a W-shaped recovery increase exponentially. Worse, that recovery will be non-organic and have high likelihood of stalling us in a long-term malaise in we don't succeed in re-basing the economy. We won't go into the package structure or deficits, which were covered previously with charts on the Stimulus Structure and Deficit History but each is not what you've been told. For recent updates by Menzies on the nature of the deficit/sources and on the budget deficit outlook click on the highlights. What he highlights is that the higher the economic growth rate the lower the deficits, the faster the debt paydown and the lower the burden. But we all know that from our private lives right - when we borrow to spend we dig a hole and when we borrow to invest we get future returns? Right? Right? Oh, never mind.

Seeing the World As It Is...Are You Kidding?

Let's pick up on that point, starting with this graphic from a recent Money/CNN online survey which tells us what the man in the street thinks (sorta), instead of us bloggers, the pundits or the pontificators. Based on what we've just been saying the people seem to be more realistic than the pundits; or paying less attention to the so-called "statistical recovery" and feeling the pain of real job losses, income shortfalls and poor prospects. In some ways, looking out to 2019 with the OMB, they're too optimistic. Compared to the folks who just ran the markets up they're paragons of pessimism and/or realism of course.

The LT corner sub-chart in the very first graphic might have been a puzzlement, though the reason we shaded certain indicator dials should be clearer. And if you read the excerpts after the break, e.g. on Housing, even more so. But why did we indicate that the international economy is worse off the US domestic economy? That's a key question and one we dove into deeply in an earlier post (Same 'Ol, Same 'Ol: Economic Cliff-bottoms vs Cliff-diving), triggering off of Mike Pettis' "China Financial Markets" observations, which again in the readings, you'll find is now in wide circulation.

Basically it's this: yes indeed, China has held up well with rapid, forceful and large stimulus actions. Unfortuantely it needs 6% growth to stay ahead of the riots. That would be yellow all by itself but for one thing their accounting is kinda funny (not necessarily deceptive) in that intermediate output is counted in the stats so they look much better than they probably will. For another all that sloshing cash injections went into loans that are likely to turn bad. That all taken together at least turns China pinkish, to be technical. But they, along with the rest of rapidly developing Asia, face a major structural conundrum. They need to shift from export oriented economies to domestically driven ones and that's not happening. As US consumers save more they will import less and we will need enormously less in terms of foreign financing. That's why they and the rest of the international economy, and for similar reasons in the aggregate, are shown as bright red. But, as usual, none of this is reflected in the headlines or most analysts thinking...yet.

Continue reading "Between Stalingrad and Kursk: Real Economy, Policy and Outlook" »

Posted by dblwyo at 11:40 AM | Permalink | Comments (0)

The immediate prior post actually covered the ground we're going to re-cover with this one. The difference then is that we pivoted around the new and revised GDP numbers to hang everything else on while this time we'll focus a bit on employment and retail sales. While we put up this longish posts that cover some ground and attach excerpted readings to go with them this time we've outdone ourselves on the readings. In fact normal blog practice would have had almost 20 separate posts on just the first item - the hot, recent econ news, alone. This way though you don't get machine-gunned with a bunch of data that doesn't fit into a larger picture. Instead we're going to drop a round of artillery with many big guns to try and link it all together. We start with the recent economic news (employment, output & consumption and real estate) then we hop to some big picture topics on the longer-term consequences of the new new thing...FRUGALITY ! Then we segue to the international consequences with particular attention to China, move on to talking about oil and the dollar and conclude with a few readings on policy. Which, btw, was extensively covered in the last post (Interrupting Your Reported Data Distortions: More Darkside for the Economy).

Employment and Outlook

 Amazingly enough a loss of only 270K jobs had everybody dancing in the streets, completely unjustifiably so in our opinion. The basic chart on YoY Employment is shuttled off to the readings. The only number that showed any "improvement" was unemployment, which was down "only" -60% instead of the prior '-80% ! Jobs and hours continued to deteriorate. Consumer spending is NOT going to come back until we see significant long-term job creation, which will be a long time coming. Based on this prior chart of job re-creation (HT CalculatedRisk of course and not the NYT, et.al. who ripped him off w/o attribution) this is already longer and deeper with more to come; ioho we're not going to see significant job creation for a long time indeed. To breakeven we need to create 150K jobs/month, otherwise it's the Red Queen falling farther behind. We entered this recession ~3million in the hole and are now about 12 million jobs in the hole. It'll take a long period (five years ?) to make that up and required we hit 4-5% GDP growth (3%+ real growth ?). The Fed's looking for 2.5% growth in real GDP at best !

Consumer Behavior

Some folks outlook is pretty sanguine but some have a more realistic view, as you can see in this chart on consumer spending recovery. More importantly we funded the growth in consumption in the '90s on the wealth effects of the Tech Bubble and during this decade by leveraging the housing ATM. Those are both going away, consumer are converting to savers, faced with years of having to re-build their balance sheets AND we're seeing some fundamental re-thinkings about what we actually need. So for many years at least credit availability restrictions will constrain spending, followed by balance sheet constraints and then we might reach a new normal. But that new normal will be at alower set point. The best depiction of all that we've seen is (HT !) from our buddy Jake over at Econpic where he looks at 10yr annualized change vs. net worth. Read a certain way the last four decades of consumer wealth creation has just been destroyed. And people are pricing the market for a quick-hit V-shaped recovery ? We don't think so.

The China Syndrome and Consequences

China's performance so far has been miraculous while India and Brazil's have been excellent. But Russia is sliding over the lip of a black hole. We want to talk about China mostly but a few words on the others as well. First off, China's recovery has resulted from massive public spending and money injections. But unlike in the states where the new money disappeared into the banks balance sheets China's sloshed on thru to spending. The question is how much of that went to productive investments that will pay off in the long-run. Not a lot. Aside from severe data reporting problems where there kumquats are not either our apples or oranges (cf. the Jim Jubak URL in the readings on China's realities) the real problem is their continued dependence on exporting. If the US and the other developed countries become net savers and reduce consumption the demand for Chinese exports will drop dramatically. That in turn will lower the demand for commodities over what the speculative fantasists are currently imagining. When you look at the long-term prospects China has to keep running faster and faster to stay ahead of its population's needs for jobs but is facing some major barriers. So, of the BRICS, we'd have to say that Russia is a basket case headed for worse, India will face many challenges and China is storing up serious problems for the not to far future. On the whole the best of the four is Brazil which has pursued careful monetary and fiscal policies, has a more robust and balanced economy and has a shot at growing domestic consumption enough to be self-sustaining.

China may eventually get there (certainly they are aware of the problem) but it won't be easy, will take longer than expected and be at a lower growth rate than we've seen. So for everybody expecting commodities and gold to shoot off think again. The one major caveat, which we've discussed before, is that folks like Russia, Mexico, Venezuela and Nigeria have been over-exploiting their existing oil fields and not investing in new ones. So, even with reduced Chinese growth, we're likely to be back at a D>S imbalance.(Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions)

Note: this will also impact the dollar. The dollar rose in the last several months as a flight to quality play when everybody was piling into US Treasuries (so much for the "replace the $" theory) and is since dropping as people are becoming more comfortable that worldwide Armageddon has been averted. What drove it down secularly, over a period of years, was that we were exporting borrowed dollars to buy oil, goods and other stuff from China and the ME. As we shift to a Savings > Investment world net exports will tend to get more positive. And fewer dollars will be flowing abroad; the net result will be the reduction, if not elimination, of the structural down pressures.

Welcome to the Brave New World of the New Normal.

But bear in mind lots of folks think we're kidding so you may want to play them !

Continue reading "Same 'Ol, Same 'Ol: Economic Cliff-bottoms vs Cliff-diving" »

Posted by dblwyo at 01:18 PM | Permalink | Comments (0)

We're interrupting your regularly scheduled data dumps of economic data, and our planned posting schedule, to bring you this special bulletin about what yesterday's GDP numbers really said. First off there were not just huge revisions but a complete re-factoring of the data. This is not, and for the record, some nefarious government plot (though it will again be taken that way) which resulted from better data and revisions stretching back decades. Which made, among other things, the '01 downturn much milder and this one must worse. More importantly our recurrent theme of needing to really look into things needs re-emphasizing because the reported headlines are based on QtQ data instead of YoY and when you look at properly are much worse than anybody is telling you. The fact that mis-interpretations and resulting distortions are beyond widespread, beyond endemic and would appear to be innate is another critical factor.

This morning's WSJ put it all very nicely in historical context though by comparing the decline in GDP to previous downturns since the end of WW2 with this nice chartporn. We'll dig into all this graphically because it's critically important but what you need to know is the headlines reported QtQ changes over the last three quarters in real GDP of -5.4, -6.4 and -1.0%. Which gives great weight to the fantasies of a V-shaped recovery. In actual fact, on a YoY basis, the last three quarters were -1.9, -3.3 and -3.9%. Let me repeat that - REAL GDP WAS DOWN IN Q209 BY ABOUT -4% !!! If you take out the effects of trade (exports were down -15.7% while imports dropped further by -18.6% and net exports as a whole were -28.7% YoY. That last number is a slight improvement over the previous -29.8%) GDP x-Trade was down the last four quarters by -1.1, -2.5, -4.4 and -4.7%. Let's try that again too...DOMESTIC GDP WAS DOWN ALMOST -5% !!!!!. No way, shape or form that one can read those as good numbers. Nor can one argue that they show much flattening of the rate of decline, or bottoming out. The QtQ numbers do tell us that we're in the process of crossing that cusp point though and we'd expect to see better numbers in the next few quarters, at least in the sense that the rate of declines drops. Positive GDP improvements are a ways off, significant positive GDP improvements farther, growth in employment and investment and the return of a naturally growing economy is much...much...much farther off. In fact the Fed expects that after a bump up the long-term outlook is for an average growth rate of 2.4% - that's barely breakeven on required new job creation and means we're going to have an organically weak economy - thru 2015 and beyond.

Letting the Real Economy Stand Up

Let's put all that in context with this graphic so you can what the data really says and how it looks in comparison to the last two decades plus (we'd go back farther but the structural revisions of the data are a work in progress and it'll be some time before it's completed and we can rebuild all our spreadsheets). There's a pernicious meme in wide circulation, mostly driven by deliberate distortions for political purposes, that the stimulus program isn't working. In actual fact about $300B of tax cuts and transfer payments have already gone out the door and have been what's kept state and local disasters from turning into catastrophes. A very rough cut of GDP, with and without Federal spending, shows the downturn would have been significantly worse. NB: that initial $300B is about all that could be shoved out the door and actually work. NB2: and the pace, timing and structure of the program thru the rest of this year and thruout next, on which continuing to keep the wolves at bay depends, is beyond what the operational capabilities of the federal departments can handle; in other words about all that can be done is being done. (Realities vs Rhetorics: Economy, Policy, Real Data). Understanding the real data is critically important but it would appear that understanding how it's being mis-reported and deliberately mis-represented is even more so. Without Federal spending YoY GDP growth would have been -0.6, -2.7, -4.0 and -4.7% the last four quarters. In other words the economy was almost a full percentage better than it would have been otherwise in Q2.

The Real Outlook: Consumption, Investment and Implications

Current consumption tells you how the engine of the economy is doing, investment (real estate and business) tells you how it's likely to be doing and the combination of wages and employment tell you how the future is likely to evolve. The second chart above shows us that Consumption is still bad but it leveled off somewhat, instead of following over the cliff with GDP as it usually does. For the last four quarters real Consumtion was -0.7, -1.8, -1.5 and -1.8%, so it's bumping along a bottom for now. That is its not getting better but it's stopped getting worse - in some significant part because of stimulus. Employment on the other hand is dropping like cliff-diving lemming, along with GDP.

Consumption drives future business expectations which in turn drive hiring and investment decisions; which, in turn, feedback on consumption decisions. With consumption still very weak and employment dropping we'll be lucky if demand holds up which means investment and hiring will be constrained for a long time. Take a careful look at investment in this second composite - it sharply peaked in early '04 and began declining immediately. The first thing that tells you is one of the major reasons we had a very weak and jobless recovery - the organic feedback loop never caught and the engine was just sputtering along with poor capex spending and hiring. Then it started falling rapidly until it went cliff-diving very early in '08. The last four quarters were -8.1, -12.5, -25.2 and -27.4% YoY ! Investment dropped by almost 30% in Q2 !! Residential investment generally leads the business cycle and this last time housing price bubbles led to sustaining Consumption on the back of the Housing ATM. That's created a long-term structural problem where excess inventory will have to be worked off, where Housing won't recover as it normally does and where the ATM is never coming back. Business spending fell -6.0, -17.4 and -19.6% the last three quarters. Again the start of a bottoming process but -20% is a LONG way down in our book.

Investment and Future Demand

In this third composite the top part breaks down Investment into its two major components so you can the RI and Business pieces separately. (Again the revisions to the reported data and the on-going updates make the earlier data a little squirrely, technically speaking, but the recent data appears reliable.). In the top of this graphic you can see how the cliff-diving real estate drop preceded the overall downturn and then how business spending has followed it off a cliff. With all this in mind (the worst downturn, preceded by a jobless "recovery", VERY poor business spending prospects) we can probably say that getting back to 2.4% growth would be an optimistic outcome.

The next question is how is the Consumer going to react, now and in the future. Remember no more stock market or housing bubbles to subsidize consumption. Then there's the re-balancing and de-leveraging of consumer balance sheets - the fuel that drove the engine the consumption engine for three decades is being taken away. Now at this moment in time consumption depends, and will depend, on incomes and nothing else. The best indicator of that is the combination of real wages and employment. In the second sub-graphic here you can see where real wages have jumped up as inflation has dropped. But you can also see where job market pressures are beginning to impact wages. Meanwhile of course Employment is in terrible shape, and given normal business cycle behaviors in combination with terrible job creation prospects, will worsen significantly (at least 10% Unemployment and likely worse) and will be followed by a really terribly jobless non-recovery. At 2.4% growth businesses will NOT be hiring nor investing much.

What's Really Going On

This rather large and complex composite puts together four different graphics we've put up several times and like to re-use because they tell the complete story. One of the advantages of ideographic languages like Chinese is that the characters also tell a story because they are pictures. Think of this graphic as four ideograms that also form a fifth, master, picture of how the major currents are playing out all together inter-actively. First you have the business cycle where Consumption drives business spending and hiring but both Consumers and Business decide based on income, prospects and funding/borrowing. As we cycle around this feedback loop, which can be either virtuous or vicious (and we're in a vicious one indeed), the economy oscillates like a wave pattern.

But we have some deep-seated structural feedback problems where Credit Markets sustain or constrain how the economy does. They are self-repairing in the sense that collapse is no long immanent (make no mistake last Fall and this Winter that was NOT a given - Bernanke, Paulson and Geithner saved Western Civilization). So Credit and Housing are still in trouble but the US Economy is, as we've just been pounding away at, in deeper trouble. As it happens, not matter what you here in the headlines, the International Economy is much worse. Partly because Japan and Europe are in the deepest dodo but also because China's reported growth is still not good enough to breakeven on job creation requirements. It's not an accident that so many serious civil disturbances have been breaking out, getting bigger, more serious and widespread. And also because China acted fast and well but has created terrible problems for the future by pumping too much money that moved out of their credit system into bad loans.

The bottom left-hand chart pulls all this together and tells you where we think we're at in the cycle and what the alternative paths were and are. A shallow V-recovery is out of the question. Depression 2.0 has been avoided, so far ! Judging by GDP one could estimate we're at the beginnings of a bottoming process. But, especially with poor future growth prospects, the continued deterioration and poor future prospects for Employment - which is IOHO the best gauge of overall economic health - has not begun that process yet.

There's a log of pain to come and our long-term condition will be chronically poor for a longer-time, even if we manage to start putting together positive growth on a sustainable basis.

Continue reading "Interrupting Your Reported Data Distortions: More Darkside for the Economy" »

Posted by dblwyo at 08:14 AM | Permalink | Comments (0)

Long past time for another post and, as things cycle around, it probably should be on the state of the economy. But we've hammered that a whole bunch and nothing has changed our conclusions (The Vast, Ignored Difference: Economic Bottoming vs Recovery, Drugged Wallabies, Crop Circles and World Economies (Refreshes). We did keep repeating that the slowing of decline was not either green shoots or a harbinger of recovery (our constant theme for months now !) so the good news is that we're hearing that reflected all over now. Alleluia ! So we're going to spend less time on pure economics and focus more on the conundrums and policy dilemmas we find ourselves in. The level of mis-understanding about the state of the economy, the outlook and the role of government policy is just astounding; and it rests on a fundamental mis-understanding of how cycles and stimulus work. That will be our focus. But just to hattip last week's economic data take a look at the chart set, which shows monthly data back to Jan00 and Jan93 and quarterly back to Q160 on a YoY% basis. Despite the "it's better, it's better" meme running around in fact it's flattened off around approx. -10% ! The real thing to note is this: every single data series in the last few weeks has looked exactly like this (including revenues being reported in the earnings announcements !). Like we said the only ray of light is that the fact that things are NOT good and this is going to be a very weak and drawn out recovery has dawned among a wide group of observers.

Current Cycle and Strategic Outlook

When consumer demand drops as badly as this businesses will also cut their spending. In fact increases in hiring and investing happen ONLY after a recovery begins as companies don't need to add to capacity until demand uses up existing capacity. That's why employment and capex are lagging indicators. In normal times the economy naturally follows a cycle where rising consumer demand leads to more business spending which generates new hiring which in turn leads to more spending. The Fed can help mitigate the worst extremes of this as long as we're in a normal environment thru interest rate management. But we're in a once in multiple generation state where things are anything but normal. THE ONLY SOURCE OF DEMAND IS GOVERNMENT SPENDING. Without it we'd be in much worse circumstances, with some serious risk of Depression 2.0. If the Fed and Treasury had screwed up last Fall we'd have had one anyway. This 4-panel composite tries to convey all that and link it to our strategic alternatives. We've likely avoided GD 2.0 but are now trying for a weak recovery instead of a long L-shaped malaise. There are a bunch of "abort" points we need to navigate until we get back to the self-priming normal cycle of organic growth. But even if that works everybody from the Fed to Roubini is seeing poor long-term growth prospects (2% or so), far below potential, for years. To restore long-term growth we've got to invest in things like infrastructure, energy, healthcare and education to re-base the economy.

Stimulus Package Structure

A couple of weeks ago I sat thru an online presentation by GE Healthcare discussing it's electronic medical records and physicians practice software solutions. As the result of a sliver of a sliver of a sliver in the stimulus package they are offerring low-cost financing to the 95% of doctors who haven't yet even begun to think about the problem. That sliver was pretty well-crafted. When you look at the breakdown of the stimulus package it was pretty well constructed. There was a big chunk that was in tax cuts and transfer payments, e.g. extending unemployment benefits. That was and is a big help in mitigating some of the downturn and employment impacts. But 2/3 of the package will hit later on this year and thru next. The other thing that the package does is start laying the groundwork for not only getting us past the abort point but also in jump-starting a structural evolution to a re-based economy.

Now there's no denying that the process of rushing thru the package saw some pork loaded in but the extent has been enormously exaggerated. Some reasonable and responsible estimates put it somewhere between infinitesimal and ~3%, a minor political price to pay for getting something that large out that fast and that reasonably well-crafted. When people criticize the package they have no clue as the real challenges. First off the package was about as large as could have been passed given the political situation. Second, when you examine the graphic and think about my anecdote, it's well-crafted. It's not like folks haven't been examining much of this for decades, e.g. infrastructure spending requirements. ANOTHER key thing to keep in mind is that the package is the down payment and tabs into follow-on legislation on the budget, education,  energy and healthcare. Taken all together and in conjunction with what the Fed and Treasury are doing to restore the credit markets and re-regulate the Finance Industry this is comprehensive and integrated a system of initiatives as we've seen in almost four decades. Finally, and this speaks to the call for a 2nd stimulus, what's authorized is about as much or more as the current mechanisms of the various Federal departments can handle. Or beyond. To make this work we're going to need a revolution in government operations that's one of the major hidden challenges. And if we end up needing a second stimulus we'll need it on the state and local levels, as the CA. nightmare tells us. The bottomline here is that people are doing the best they know how, it all hangs together and it's all at the limits of what we can manage. In many senses !

The Deficit Bogeyman

A really key thing, setting aside the partisan political posturing that's done to try and exploit old shibboleths that are unworkable and discredited, is that most folks are judging things thru ideological blinders. If we've learned anything in the last couple of years is that the simple common wisdom is no substitute for actually knowing what you're doing. Faced with a problem of this scope and magnitude and complexity what you want is a set of approaches that are as complex as necessary and understand the feedback loops built into a system. Simple answers just won't do it. One of the key bogeymen is the fear of excess deficits so let's take a look at that and try to make it a little clearer. If you're with us this far we hope it's crystal clear that we have NO choice but to spend or face a decade+ long period of 1% growth or less; and hope it doesn't turn over into a depression which is still a possibility. This little composite collection we've accumulated over several years might help.

Despite supply-side idolatry what Reagan actually did to restore the economy was create the most massive deficits in post-WW2 history. In other words he pursued as Democratic like a policy as anybody had in decades. The good news is that it worked and got the economy back on a growth path. The bad news is that the resulting deficits were massive. Clinton, bless his pointy little head(s), not only eliminated the deficit but briefly put us in surplus thru a combination of fiscal discipline and taking advantage of reduced military spending. Unfortunately BushII, returning to idolatrous worship, chose to both cut taxes AND enormously expand spending. Some of which was unavoidable. But the net result is that we came to the end of a mini-boom and entered the worst recession extremely far in the hole. When you look at the sources of the current and projected deficit about $200B of $1.3T is due to the current administration. The other thing to keep in mind is the odd thing that if we get back on a higher growth path tax collections will increase and we'll have less of a deficit burden and pay it down faster. In the long-run it really matters what you spend your money on - invest it for future growth or chew it up in frivolous short-term spending. So far we're more on the former path than the latter. When you combine that with the even deeper structural shift of the public from over-borrowing consumers to folks who will be forced to be savers this isn't going to be hard to finance; nor will it crowd out private investment. Initially because there's no demand for private investment and then because a growing economy where Savings > Investment throws off lots of cash. In fact if we can keep this all together for the next decade we're going to be in a far...far better place then we're in now or would have been otherwise.

BtW - there's a whole slew of readings and some more charts after the break that span current economic data, the long term outlook, oil/commodities, the mounting problems in China with Rio Tinto that will make sustaining their growth more difficult, a bunch on the policy issues and some more on re-thinking the relationship between markets, policy and institutions.You might want to pay particular attention to the collection to the second China collection if you want to understand a) the long-term problems they ARE creating, b) what a dangerous stimulus program looks like and c) whether we can count on them to pull us out of this (otherwise HA !).

Bon Appetit' !

UPDATEs:

We added a Bloomberg clip on the failure of a recent Chinese bond market auction that discusses the general Asian economic and financial outlook along with a chart on worldwide monetary aggregates from Macro Man. The conjoint point here is that China has pumped monetary stimulus unlike any other player yet, unlike the US, China's money is flowing into consumer spending and more highly questionable loans. In the US the increases in the monetary base has NOT entered the credit markets because of reduced velocity; i.e. the money is sitting on bank balance sheets and credit is tightly constrained. Not good for the US and terrible for China and the worldwide impact ! Be warned.

Continue reading "Realities vs Rhetorics: Economy, Policy, Real Data (Updates)" »

Posted by dblwyo at 04:56 PM | Permalink | Comments (0)

We're going to take a quick pass thru the economic situation, markets and - picking up on last post's theme's - talk a bit about business resilience or not, as the cases may be, with examples. Last week's payroll employment data seems to have convinced folks that what we've been saying for months about non-existent green shoots, a weak outlook, a drawn-out recovery and a de-leveraged jobless future is in fact what's the outlook. Interestingly you need to tear yourself away from the US and major foreign business and financial news and listen to BNN; in the readings you'll find some selected vidclip URL's that are NOT there by accident and we highly recommend them all but especially the two *** ones. The market has bounced on PEs not on earnings and that's the story of the moment with the longer-term implications of all this still being struggled with. As we've tried to make clear this is a matter of responsive adaptation in the shorter run and adoptive innovation in the long. Also in the readings you'll find some specific cases on how well that's working and the brave new world we're all facing. The NYT did provide a superb graphic slideshow illustrating how a business cycle works which, if you'll click thru on the graphic, you'll be taken to. Watch it and think about it. We've talked about business cycles a lot and even provided a tutorial earlier so were particularly happy to see this; a superb use of new technology that gets the story right (NB: we've also notice that the YoY meme is really getting much wider spread use as well !).

Back to the Future: Employment & Consequences

This little gem of three composited charts tells multiple inter-locking stories with the top part showing the YoY% changes in Employment and Unemployment since 1998 monthly. Like we've been saying, a leveling off in the rate of decline is NOT a recovery, and you can see both the steepness and depth of the decline as well as the slight leveling - though Unemployment continues to worsen. Folks are starting to pick up on the differences between unemployment in folks actively looking for work and those pushed out of the labor force (Many Left Uncounted in Nation's Official Jobless Rate). That rate of unemployment is 16.3%. Those points are reinforced in a longer-term context in the 2nd sub-chart which shows Employment dropping -4%, Hours Worked -6% and Unemployment increasing by 70% !!! If you think the consumer is coming back any time soon think again. Worse yet the 3rd sub-chart gets back to our long-running theme about how weak job creation was during the recent "recovery" (reaching almost -4 million jobs in the hole) and how disastrous it's become. We're now about -12 million jobs in the hole. REALLY think about that - how long will it take to even get back to breakeven ? Bearing mind that unemployment will keep increasing for some time - perhaps thru all of next year ? What can we say except OMG X 2. First time for the numbers and second because almost nobody gets it.

Market Realities Return

The green shoots and China will save us theories led to a major bear rally between March and May though we've gone nowhere since then. In the last few days (largely on BNN again admittedly) we've heard pundit after pundit talk about the same things we've been jabbering away at. And in the last week we've seen a bunch of market analysis on the likely breakdowns in the market, for which you'll find another bunch of URL addresses to reinforce that point. If there's one must watch please watch the online vidclip presentation of MarketClub's tool demo assessing the SP500. Wonderful. Here's two SPX charts compounded to make our points, which are nearly identical. As you can in the top chart the critical level is about 880, which we busted yesterday on weak volume. If that keeps up, depending on how earnings run, then we can expect things to run down. But where ? In the lower sub-chart we look for some natural limits using Fibonacci limits. A first bottomline here is that you should be on the sidelines - as we said last major market post - take your money off the table ! The next stopping point is ~840, which we consider likely. If that's breeched the downward momentum will build and running down to 780-790 is highly likely. Depending on how things look, the news is running and what the sentiment is that might be breech as well. If that happens then we're back in the where's the bottom in a long-run sense. A question extensively previously considered but if you want to look at an updated long-term chart click thru. Which we recommend and you can't say you haven't been warned ! :)

Business Reactions and Performance

 Recent earnings estimates have been extensively revised downward, which you can see by consulting the S&P Earnings Estimates. They're calling for earnings of $55.54 and $74.02 in '09 and '10 with PEs of 16.55 and 12.42, which leads to estimates for the SP500 of 919. In other words a flat market at best, though if you use our Graham-Dodd approach lower PEs, like 10 or less, are appropriate. But even so that's telling us two major strategic things, actually three. 1) There's a lot of risk in valuations, 2) the recent runup was the limit for two years (and possibly more if you go with our pessimistic outlook) and 3) real earnings in a terrible economy are going to be the critical determing factor.

Gee, somehow or another we've circled back to business performance, short- and long-run. Our recurrant mantra is understand the strategic context (Economy and Geo-Politics), understand how each Industry is trending and then understand how each company is dealing with the things it cannot control and the things it can, now and for the future. There's a vidclip in the readings of Ivan Seidenberg being interviewed on Rose which is as perfect an exemplar of this sort of balanced thinking. The take on the current secular trends and how Verizon is being positioned is outstanding but the look ahead to the worldwide future of the Telecom Industry is worth the time.

In the readings there are some specific examples for your skimming pleasure. The section starts with some examples like a Greek Shipping company as well as Apple, talks about the Finance Industry which is the exact opposite of an industry adapting well. They're still locked into the way things were, not the way they are or will be. The lack of effective response and thining ahead can only be described as stunning. Then we have Rio Tinto, the Australian mining company who road the commodity boom into worldwide acquisitions sprees starting to spin off pieces as the result of the downturn. Talk about foresight and mis-readings ! NOT !! We spent a whole long post taking apart the Auto Industry but the outlook for sales is abysmal but the triple tsunami is the growing capabilities of the rapidly developing world, e.g. China's acquisition of Opel and the fact that India has turned out a great car in the Nano. Sadly it would appear that the kind of innovative adoptiveness required is more on display outside the developed world than in it. A theme enormously reinforce by Saab's moving to migrate production of the Grippen to Brazil - really.....really....really think about what that says not just about opportunity but about capabilities. Aircraft are among the most complex and demanding products in the world - advanced fighter aircraft are another order of magnitude. Meanwhile pharma sales are going to decline in the developed world so Big Pharma is looking outside the US, which has been its development base since it's founding. Now the Rapidly Developing Economies are very exposed because they are so export oriented to the downturn and future weakness. But in the long run.... ? Well...we'll leave it at that because we think the implications are both obvious and taken apart in depth and detail in the last post.

Continue reading "Brown Shoots, Weak Markets, Resilient Business ?" »

Posted by dblwyo at 11:41 AM | Permalink | Comments (0)

It's been quite a week for the data that was and the data that was reported, starting with a much more pessimistic World Bank Report leading, allegedly, to a major market drop that was entirely recovered by a slightly more optimistic OECD report that saw a "full" recovery along with some US domestic data, e.g. consumer income, spending and savings. For the record when you actually read what was written and dig into the headlines as usual were almost completely distortionate. We sound like, and are, a broken record on this topic but will keep replaying the old songs as long as no one else is despite a desire to moving on. The chart is a short-term look at only two data indicators - real personal consumption and real retail sales and makes one of our major, critical points: the rate of decline has stopped accelerating but is still about as bad as it's ever been. Abysmal to put a word on it that's both accurate and revealing, and ignored apparently. Rather than spend this whole post on digging thru the other data and re-repeating ourselves we'll point you to this downloadable PDF file of all the recent data on both a short- and long-term basis so you can see that ever series confirms this and how bad they all are in historical context: Recent Economic Data.

The Real World Economic Outlook

In the readings you'll find addresses and excerpts for both the World Bank and OECD reports as well as some news stories. In the Markets section you'll also find discussions on BNN regarding each of the BRICs specifically. This chart encapsulates what the OECD really said and shows maps of the '09 and '10 outlook as well as graphics for the BRICs and the major developed economies. What they really said was "weak recovery in sight but damage will be long-lasting". In fact if you do some more digging around the have an associated part of the report that ALSO says that long-term economic potential has been badly damaged and will result in anemic "growth" for a long-time to come. NOT what appeared in the headlines - adjusting for differences in weighting factors their outlook is identical to the Bank's as well as that of private forecasters (another one of the BNN vidclips). The sad fact is that this not what most are reporting, seeing or acting on. You'll find graphics with more details in the readings BTW.

Structural Changes: Reversing the Virtuous Cycle to a Vicious Cycle

The World Economy has undergone tremendous structural evolution, even abrupt re-structuring, in the last decade with the BRICs as a whole crossing thresholds into entirely new economies. Those changes will remain but they are both one time events that set the stage for new secular evolutions and will proceed at slower rates in the future. If everybody's ignoring the real data the implications of these shifts are even more neglected; that is they are not reflected in investors or business executives planning. A primary driver that's going to shift is that US consumers have been the driving engine of worldwide economic demand and they are shifting from dissavers to savers as they re-build their balance sheets. They are not the only ones that will be de-leveraging and re-building their balance sheets either - the entire worldwide financial system will as well. The devil's bargain that is unraveling in front of your eyes is that the developed economies borrowed from the rapidly developing ones who, in turn, built export based economies based on that demand and exported their "excess" savings as loans to finance the excess consumption of the world's grasshoppers (puns intended). Now that set of feedback loops will be running in reverse which means that Chinese growth, for example, will be lower in the future. By some estimates as much as 2-3% or more. That means that demand for commodities won't grow like it did, impacting countries like Brazil and Australia, nor will demand for the tools and equipment that made it workable, impacting Germany and Japan for another. One of the lessons of the last lost decade is that the markets went nowhere per se but certain anomolies did well for a time, e.g. real estate, emerging markets or commodities. If the point isn't clear the under-pinnings of those anomolies just got knocked out and will stay knocked out for a long time. But, because the "common wisdom" is looking for a return to old patterns we'll likely see a short-run effort to speculate on those patterns. Which explains the recent runups in emerging markets, oil and commodities. We won't repeat an earlier NYT chart on the implosion in world trade but here's the link so you can re-examine it as statistical evidence for how these cycles have reversed: World Trade Implosion.

Structural Changes and Strains

Which is not to say that the structural shifts in the world economy won't be continuing in some form, albeit at a lower level. Bridging back to the last post on the strategic outlook for the Auto Industry we borrow this chart from one of the reports we pointed to in our update on the industry outlook in the Rapidly Emerging Economies (REE). Our friends at Booz & Co also provide this more detailed prognostication: World Auto Demand Outlook.We think those outlooks are reasonable, fact-based and are representative of the huge shifts facing every industry. Shifts it's NOT at all clear they are preparing for or able to adapt to. At the same time we think that the actual levels will be reduced and the numbers will take longer to reach. That's on the assumption that the reductions in worldwide growth and the shift in demand don't strain the socio-political institutions of the BRICs to far. On that topic we'll point you to these discussions (G-20 Persepctives: How Well Do Bears Dance ?, Brave New World: the Emerging Balance, Pluralities, & Non-zero Sums, Existential Crisis Around the Agora II: New World Stories). The fundamental points here are that the development of the BRICs (or REEs) is fragile and dependent on the institutional framework. When Chinese growth drops to 8% they are under strain, if they drop to 5-6% that's more threatening to them than a sustained -6% would be for US.

Trade, Growth and Innovation: Choices About the Future

What's enabled and sustained all this change and growth is world trade. Trade is, on the whole, unambigously beneficial to all participants though certain sectors of the economy and segments of the population suffer serious adjustment impacts and costs. For example in the '90s everybody was  afraid of the Four Tigers after been afraid of Japan during the '80s. They missed the fact that what was going on was the shift of 15thC economies to 20thC ones with labor shifting from agriculture to manufacturing. China is playing out that adjustment on a ginormous scale. As a result they shifts will continue, if they are sustained for a long...long time. When you compare China's coastal areas to their interior you are in effect making a comparison across those years. The coast is a REE and the interior is just the opposite. We are faced with several alternative paths forward which depend on maintaing stability, the continuation of trade and economic growth and renewed innovation on the part of all parties. These chart tries to capture (too many) things but shows how the gains from trade effect wealth at a point in time, how each economy changes and what might happen depending on the paths we end up on. Almost needless to say the red and yellow lines are colored for a reason - on those paths like the possibilities of severe disruption. Even the blue path, a muddling thru, will see severe strains. It's the green path we need for things to all hold together. And that requires large-scale innovation.

Meanwhile the readings excerpts below contain a number of vidclip excerpts from BNN, the only financial news network aside from PBS' Nightly Business Report, worth listening to IOHO. The discussions on the world outlook and the investment climate are extended and worthwhile. The sections on each of the BRICs highlight the differences, though occasionally you need to watch out for someone talking their book, e.g. Russia. Also included in that section are some grahpic summaries of world markets worth looking at. By the way the "drugged wallabies" story is also in that section. It turns out they make the crop circles but also, at least to our mind, characterize how most observers are looking at the economic, investing and geo-political situations. For the record we stand by our own last two posts on the Economy (The Vast, Ignored Difference: Economic Bottoming vs Recovery) and the Markets (Time to Fold 'em (Updates): Market Outlook vs Investment Strategies), as well as our assessment of business performance (Beyond Specifics to Principles: Business Performance Principles & Outlooks). Each component is critical in its own right but what really drives things is the interaction between the three !

UPDATES: Oil, Corporate Bonds and Investor Reality Gasps (GraspNot ?)

In case you haven't been scrolling down onto the readings there was something on the strategic outlook for oil which resonates with our basic theme here of the consensus being a drugged walleby - to wit $250 oil is a pipe dream based on things as they were not as they're going to be. Well the IEA updated it's outlook recently and confirmed that; as well Iraq held its first major oil exploration and development auctions yesterday. You'll find some added readings in the markets section along with some more superb BNN vidclips as well as a couple on the corporate bond markets. The Mike Santolli (Barron's) interview is particularly interesting for what he has to say about the deep changes in investor's view things. Lo and behold it reinforces are theme. Wonder how that happened ? :)

Continue reading "Drugged Wallabies, Crop Circles and World Economies (Refreshes)" »

Posted by dblwyo at 08:27 AM | Permalink | Comments (0)

The readings contain sections on the current situation and purported outlook, largely from Paul Kasriel of Northern Trust, recent Consumption and Employment data, the outlook for recovery in the US and worldwide (with an illustrative reading on Germany) plus Krugman's most recent take on the non-V recovery and a potential lost decade and the credit and policy situation with Janet Yellen of the SFO Fed's assessment that the "Great Moderation" of the last two/three decades is likely gone forever. Brave New World indeed ! There are several bottomlines here that are incredibly important, not least for the fact that they are being completely ignored.

1. There is a vast difference between a bottoming process and the beginnings of recovery. The economy is stabilizing in that a panicked cliff-dive has stopped (Western Civilization is saved) but recovery won't begin until we start creating jobs again and won't be sustainable until both employment and investment begin growing significantly, if ever.

2. Consumption data on a YoY basis as well as Employment data continued to drop. Worse, the decline in job losses, is more due to really dangerous structural factors than moderation; the Employment:Population Ratio is cliff-diving as badly as it has done in three decades, indicating huge downward employment pressures, reflected in Hours Worked and the beginnings of Real Wage declines.

3. The commentariat, punditocracy, allegedly responsible economic forecasters, the investment community and business leadership (to some extent) is reacting month-to-month to the headlines, missing the vast difference, ignoring the underlying realities on trends and patterns and generally setting itself and us up for some serious disappointments. For which, worse, nobody will be prepared again.

The chart is a snapshot of some of Kasriel's latest key outlook assessment showing the Leading Indicators are bottoming, that New Orders are not shrinking anywhere near as fast, that Monetary policy is apparently very stimulative and the credit markets are self-repairing. Paul is one of only two economists in the forecasting business who's largely gotten it right (the other being Roubini), which is not to ignore Summers, Feldstein or Krugman who comment more than regularly publish assessments (and not to neglect CalculatedRisk nor ourselves who have been accurate as well). That said we think his outlook for a Q4 upturn is optimistic but in any case, as he admits, will see a drawn-out and very weak recovery that will feel more like a recession.

Employment

Let's show you why by considering the Employment situation now that we have today's latest figures which, as the top sub-chart shows, is still cliff-diving on a YoY basis having dropped in the last four quarters -0.4,-1.6, -3.1 and -3.8%. That latter number certainly doesn't indicate much of an improving situation being that much larger than Q1 - though admittedly Employment is a lagging indicator. In the second sub-chart though you can see where the pressures are really showing up with an over 6% drop in Hours Worked and the YoY change in Unemployment nearing -70% !!! That's not a typo - the YoY% change for the last four quarters in Unemployment is 30,44, 63 and 70% ! Doesn't get any worse than that - well actually it might. Our e-friend and blogging colleague CalculatedRisk dives into the Employment:Population Ratio to look at the worst consequence - the number of folks being driven out of the Labor Force. His set of posts are linked in the readings are as his charts. Read 'em and weep but start paying attention. Our approach to the long-term structural consequences is to look at New Jobs, Net New Jobs (> 150K/month breakeven) and the cumulative creation of jobs. In the third sub-chart the redline tracks the latter and there are two points. The one we've made and keep making - how incredibly weak a job-creating "recovery" this was - and a new one that's really scary. New job creation has gone as badly in the tank as it has since we can apply this approach, and not be a little big either. In the last four quarters we went from being -5.2 to -6.9 to -9.4 to, now, -11.2 million jobs in the hole. 11.2 million jobs in the hole, we repeat; what do you say ? OMG seems grossly insufficient, doesn't it ? What kind of recovery is going to create 11.2 million jobs just to get back to breakeven ? And how long will it take ? And what will growth look like while we struggle with just getting back to that point ? Oh, btw, if the US consumer was the engine of worldwide growth over the last three decades and is going to go in retreat for the next decade to repair the damages what replaces them ? Where does demand for the BRICS come from ?

A High-Frequency Snapshot

Let's dial up the granularity and dive into our collection of monthly data that serves as our dashboard of the detailed current situation, starting with current Consumption and Investment. In the top sub-chart YoY Personal Consumption and Retail Sales continue to decrease though the rate of decline is leveling off (remember our first key finding !) with Consumption down about -2.0% and Sales down over -10%. Key thing to note - both dropped these last couple of months ! Investment wise new capital goods orders are truly cliff-diving, being down almost -25% YoY, Industrial Production (which is more coincident than lagging) following though the scale reduces the drop and Residential real estate improving only if you consider a change from -40% to -33% a vast positive sign. Good luck on that. The two things that drive a recovery in more normal circumstances are Consumption and Residential Investment. The former is going to be incredibly weak for a long time while the latter has enormous accumulated damage to repair. We'd say a long, drawn-out and very weak recovery is the best we can hope for.

Shifting gears what about that possible growth in future demand ? Well that's where we come full-circle. What drives Consumption is consumers ability to spend which depends on wages and employment plus their ability to borrow against their assets. At this point we hope everybody is clear that the late '90s stock bubble is never coming back and the Housing ATM that sustained spending, and the US and world economies, is likewise one with the Dodo. In fact given the state of bio-genetic research we consider it more likely that historical recovery and cloning of Dodo DNA is more likely to see the birth of new Dodos than seeing serious jumps in consumer spending for a long time. THE KEY INDICATOR is the YoY change in Real Wages plus Employment. That showed a steady drop as both weakened until Fall08 when the sudden drop in commodity-driven inflation drove up wages. Now W+E is dropping again and rather seriously. Part of that's due to the Employment pressures, which will worsen significantly over the next 18 months or so and continue to pressure spending. Worse the bad Employment situation, really coming full-circle now, is beginning to drive down Real Wages.

So now we've linked the macro-outlook to the long-term structural and secular trend picture and then to the immediate high-frequency indicators. We're in for a weak, U-shaped, recovery at best with the problems in Employment keeping the risk of an L-shaped recovery very real.

And NONE of this is being factored into any outlook or market advisories that we can see !

Continue reading "The Vast, Ignored Difference: Economic Bottoming vs Recovery" »

Posted by dblwyo at 09:23 PM | Permalink | Comments (0)

The major recent economic news was the abysmal Housing data (which the readings link to the goto guy, CalculatedRisk for a thorough dissection) plus increasing pressures on debt, defaults and the finance sector (ditto). What we found really interesting last week on the economic front is the realization from many quarters that things look pretty much as we've been warning they are and will be: a weak, prolonged recovery back to a new abi-normal, a world of continued de-leveraging and fundamental changes. The other interesting points are that the rest of the world is in far worse shape than the US, a trend who's implications is not widely grasped as yet, and the structural consequences of forced frugality on the US Consumer. All of these issues taken up in graphics form below and iterated thru in selected readings after the break. Starting with the San Francisco Fed's recent FedView update. As we found the biggest impact on GDP was a huge drop in Investment last quarter but the Fed, no surprise given their locale, translates that into consequences for the Tech Industry, which is now being hurt as bad or worse than any other. Something the Industry is struggling to come to grips with. Take a look at their assessment and you'll notice that things aren't as bad, yet, as in '01 but are still headed down. No surprise when you realize the Capex investment is a lagging indicator and, with an economy still likely to weaken further, one which will be worse before it gets better. Something the Tech Industry and investors have yet to come to grips with.

Weak Recovery

 The Fed chart pair we like, in the sense of conveying crucial information that aligns with our findings and views not in the sense of liking the news, is this pair which looks at the outlook and then compares the "recovery" to past ones. The mothership Fed has also released it's outlook and basically concurs. That is they see "hopeful signs" but lowered their outlook. Translation - that means that there's still drops to come but the unmitigated freefall is likely over as long as credit markets continue to repair themselves but growth will be lower for longer than they were publicly admitting in previous outlooks. In fact if you were to extrapolate along the second sub-chart here envision a world in which the economy only slowly bumps along the 100-index line for many quarters before gradually and grudgingly climbing back to say 101-102. You need to bear in mind CalculatedRisk and the Fed's finding that it was the Housing ATM that kept the last downturn from being a disaster. That source of consumer spending is gone forever. You also need to bear two other strategic factors in mind - things we've learned the hard way to think about. 1) While the logic is clear most are and will continue to ignore it and 2) the resulting investment and business decisions will be based on the old, not the new abi-normal. Btw the SFO's FedView chart pack is one of the better short and succinct presentations of what's going on. If you click on the highlighting you'll find yourselves with a dloadable PDF file which we recommend to you.

The New Abi-Normal: a De-Leveraged World

 Earlier (The Long Dark Veil: Economy, Markets, Business) we spent some time on the outlook for savings, debt, investment and leverage and the McKinsey Global Institute turns out to have taken a similar look at the situation. You'll find an interesting assessment in the readings excerpts that's worth your time. We find these charts fascinating, for their own sake, and because they look like and come to identical implications as ours using slightly different approaches. The top sub-chart shows how abberrational and above trend consumer borrowing got since 2000; and how far it has to go to correct. The middle sub-chart shows you why and how that happened; a lesson in the truth meaning of the wealth effect. You can see the bad impacts of the previous bad times in the '70s, the re-building in the Great Moderation in the '80s and '90s and the leveraged bubbles in the Tech and Housing Booms. Those ARE NEVER COMING BACK - voila' Force Frugality whether we want to or not. Like we said a weak, slow recovery with a very different world on the other side of it. Circle back to the implications for hiring and capital spending and ask yourselves whether you think those will be very robust in the new regime ? No surprise in all that that net new borrowing went in the tank and is likely to stay there for some time to come. Now we've still got a lot of hangover debt write-offs to go - the consumer and credit problems are just beginning and will get worse as employment worsens. But what's it mean for the future of the Finance Industry, for example, that we'll be forced back to being a nation of savers ? Again something about which the Industry as a whole is in denial.

World Economic Situation

As everybody has now noticed debt-financed consumption, especially that of the US consumer but also including many Europeans, was THE engine of economic growth for most of this decade. As consumption has been cut back those economies that were and are dependent on export growth to grow their economies have been much...much worse hurt by the downturn than those that were based on domestic, organic growth. Germany and Japan for example are going thru their worst downturns since WW2 with no prospect for improvement. China is experiencing major strains which means that the folks who sell to China, i.e. Australia and Brazil, are also facing challenges and will continue to do so. Now  China is a long-way from being a domestically driven economy though it's moving in that direction. IF the US consumption engine doesn't come back, ever, to what it was what are the implications for Chinese economic growth ? What does that mean for the rest of the BRICS ? How about the implications for Oil and Emerging Markets ? The meme running around the financial community is that we're back to where we were but we don't think the implications of a de-leveraged and lower growth world have been worked thru very well as yet. In fact not at all.

Public Policy and Strategic Consequences

McKinsey makes another telling point - as US consumers re-build their balance sheets, which they must do, it makes an enormous difference whether they do so with growing incomes or stagnant ones. As they point out a 1% rise in the savings rate means about $100B in decreased consumer spending. If we return to the world of modest savings with a 5% rate that's $500B...but if we go back to what it was in the halcyon days of the '60s with a 10% rate....well you do the math. Turn that around and ask what decisions they are likely to make. Or, in other words, if a 5% rate would re-build balance sheets well enough if incomes were growing ? The different answers make all the difference in the world. They also mean that re-factoring the US economy back to a higher growth path based on real gains in productivity, investment, new industries and new jobs is a matter of vital concern. Not just to the US btw but to the rest of the world. We tried to put it all in context wit this conceptual chart which shows some of the strategic alternative we are facing. The first big danger is that we fail to get the economy back on a self-sustaining footing where organic growth leads to a virtous cycle of employment growth driving increased consumption leading to increased investment. That is, to be honest, problematic for the reasons we just reviewed. The second big challenge is raising the long-term speed limit from the low growth 2.5% that is the "new normal" back to what it was in the prior decades of 3.2-3.5%. That's partly dependent on population and labor force growth, i.e. immigration. But it's mostly dependent on creating new innovations, new products and industries and re-discovering the '50s. You might want to consult these related posts: Re-building On A Rock: Policy, Economy & Values, Existential Crisis in the Agora I: Economy, Policy and US Strategic Outlook (Addons).

Continue reading "They See What We See: Weak Recovery, De-Leveraging, Strategic Change" »

Posted by dblwyo at 05:02 AM | Permalink | Comments (0)

We're in the interesting situation where the real economic data - as it was at this time last year - is different from the headlines, where the future appears murky, where fragile green shoots are mistaken for the promise of a large and healthy crop and the markets, largely on the back of banking earnings surprises and the well-conducted stress test exercises have had a spectacular runup. For the record the 40%+ run since Mar9th would have been a fair return over three normal years ! Unfortunately we didn't believe it was real until it was, in our judgment too late to jump in. Now the interesting question is where do we go from here. In the readings section we start with some short-term data, segue to the strategic economic outlook, the international, including oil. The reading on the structural causes of China's poor product quality is worth the price of admission - on of three must reads. Then we pick up the market readings where the key findings are a) Merrill's Roseberg in his swan song of "yes, it's a sucker's rally" and backs it up and b) earnings may have surprised by not being as bad as expected but it was the result of cost cuting. Revenues fell badly. Which naturally sets up the Business section readings which by and large provide empirical evidence for the topic of our last post....which on the day that GM is annoucing a 25% reduction in it's dealer network should hardly be necessary but there you are. The real must-reads are the ones on the WSJ survey where the vast majority of respondees warn we're in for a long-tough slog along with the Economist's and (especially) El-Erian's discussions of a poor longer-term outlook. We're in the midst of an inflection point in consumer behavior and economic growth that will be with us for a long time. The graphic btw is extracted from the WSJ survey both because it makes the point and because who'd have thought the Journal had a sense of humor ?! If you want to see the serious results click away.

Short-term Data: Retail Sales,Oh MY !

Short-term, so-to-speak since it was this week and should have been a wake-up call but obviously hasn't been. Judging from this composite which shows nominal and real retail sales along with auto sales the word cliff-diving is in order and this week continues the event. We find it rather odd that before this crisis short-term meant back a few years, now to get some context we have to run our monthly charts back to '92 ! For a serious long-term view where you can actually compare last week's results in a big enough picture to understand the implications try this clicking on this chart that goes back to 1960, and also looks at Consumption and GDP. This recent cliff-dive puts real and nominal sales in the biggest drops they've ever been in. In fact nominal (non inflation-adjusted) is far worse than every year except '67, when it's only much worse. So much for the "second derivative" meme, in other words that the rate of decrease has gone to zero. It does appears to be slowing but....

Snipe Hunting: Where's the Markets ?

The question then becomes where's the Markets in all this. And in an interesting place is the answer. Given that the Market is still holding up it doesn't seem like time to go poking at the big picture, long-term charts so we're going to focus on the short-term and compress way to many technical geekicators (that's technical indicators for wannabe stock market geeks like myself) to try and make a bunch of points that are important. We think the fundamental context here is a very week economy that will be weak for a long-time to come, even if we get a modest late-year upturn, and one where none of that is being priced. So notice the up-channel lines are still basically intact - or just breached but the lines of resistance from the Jan/Feb trading box are still in place about 875 and 825. Then notice the turning point indicators that worked earlier (the Slow STO and MACD) which gave off three clear signals Down (1), Down (2), Up (3) and are now a little fuzzy to warnish (4). This is a market that can't make up it's mind. Now a real technician would have the courage of his tools and, without getting into the stress test of day-trader and scalping, would have ridden this reacent rally. We couldn't believe it was real for 2-3 weeks. And in fact it wasn't - notice the "false" downturn signals around March 30th and April 15th. Other than the green shoot delusion this has been a market that rode to the sky on the backs of earnings in general and banking earnings and government actions in particular. For a chart comparing the Finance ETF (XLF) with the Sp500 and noting some of the major "surprises" that sustained this rally when it shouldn't have been based on the real data click on thru. You might be surprised to learn that the XLF channel is very much intact but also that each of the aborted failover points we mentioned was associated with things like the Pandit Put.

Alea Iacta Est: Crossing the Inflection Point

Alea Iact Est is what Julius Caeser reportedly said as he took his provincial legions across the river Rubicon and began the Civil War which turned the Republic into the Empire. Having put together the shorter-term data and the markets let's focus on our Rubicon, actually the second we consider structurally significant. A set of socionomic Rubicons. The first we discussed yesterday in taking apart the history of corporate profits and argued we'll not see those days again. Now let's focus on changes in consumer behavior and the implications for the long-term economic outlook. The top sub-chart shows the cumulative growth in GDP, Consumption, Investment and Savings from 1948 to now, about as long we care to get. Notice that they were roughly in sync until 1995 or so; in fact Savings ran ahead of (and funded) growth and investment. That cusp point where the Tech fantasy boomed Investment has now almost completely corrected but the wealth (I'm rich, I'm rich) effect of first stocks and then houses sent savings into the tank. There's actually an earlier point where cumulative growth leveled off. That's reflected in the second sub-chart which shows the trends in YoY growth of Consumer Debt (r.h.s.) and Personal Savings. The former inflected into a climb from 4 to 6% in 1974 and then shot up to 7.5% this decade. The latter crossed it's Rubicon around 1984 or so and it's 2nd derivative was definitely negative. The long-term structural and strategic consequences are shown in the third sub-chart which compares the YoY trends in GDP, Investment (r.h.s) and Savings (red line). Under the impact of the '70s the long-run economic growth rate dropped and hasn't recovered; recently of course it's gone in the tank as well. The lesson is very clear - in the long-run increased Savings fund Investment which increases productivity and growth. The question we're facing right now and for the next several decades is whether we return to being a nation of values-centered savers and investors and restore our economy to a higher potential growth path. Or settle for third best where l.t. potential growth is likely to be around 2.5%, far below the 3.3-3.5% rate that's the previous norm. One of the other l.t. measures we like to look at is cumulative job creation, for that chart click on thru, which we've looked at several times before. We're now about -10 million jobs in the hole, i.e. below what's required to breakeven on labor force and productivity growth. It's no accident whatsoever that job creation has been poor and poorer since 1980 when the growth weakness set in and we became increasingly a nation of Grasshoppers. So what're the chances for our re-crossing the Rubicon and restoring frugality, sobriety and performance ? That IS the question isn't it ?

Continue reading "The Long Dark Veil: Economy, Markets, Business" »

Posted by dblwyo at 05:57 PM | Permalink | Comments (0)

Having done two major uber-nerd posts, and you wouldn't believe the time to write 'em let alone build the charts, required :) ! But we thought it was a necessary and vitally important foundation. We're seeing to many headlines like this one from the AP: Evidence piling up that worst of recession is over Hopefully nobody reading this blog is prepared to casually go along with that story. If you disagree with all our data-crunching and chart-churning so be it, at least it's not casual. Just to reiterate our main point though, green shoots are NOT a crop. They're few, young and sparse right now and the chance that they'll turn into yellow weeds is not that small. In some ways the real economic news this week was the results of the stress test - which despite all the criticism is turning out to have been a truly brilliant policy move because it's announcement calmed the credit and financial markets and let them keep self-repairing, which they are. Unfortunately the headlines told us more about the capital shortfalls, not the losses still to come. We're going to put a point on things by starting with the stress tests, briefly since there's so much coverage, then segue to the continuing saga of the Credit Death Spiral that's on-going and future prospects for the economy.

Stress Test and Consequences

Where do we start - we're going to defer detailed discussions to all the mainstream media which is doing a fine job; and plan on picking up some detail in the future when we wrap up our on-going series on the health and strategic outlook for the Finance Industry. There was a lot of criticism of the tests as a political maneuver which wasn't very serious. It's turned out to be a brilliant policy ploy that calmed down the markets, bought time for the rest of the economic policy package components to be rolled out and start implementation and for TimmyG to flesh out his plans in particular. The sad fact is that the test were a tad optimistic - as you know we expect a longer downturn, a more sustained period of low growth which will further strain the banks and years of below potential growth. Nonetheless "mild" as it was the test restored some measures of confidence but also showed a need, depending on reports for $65-75B in additional capital. The part that should have gotten more headline coverage though is that another $600-700B or so of losses are anticipated. If you want to see some of the details the WSJ interactive graphic (click to start) is one of the best. Surprise, surprise Lewis' BAC is by far the worst off on every measure with Citi not far behind. Just out of curiosity what was Kenny-boy thinking ? And why is he still there ? For reference: Leaders, Leadership & Culture: Crisis, Values and Perfomance (Updates).

The Rolling, Rocking,Rampaging Credit Crisis

We've seen this graphic before - it lays out all the detailed vicious feedback loops in various markets and instruments. Briefly what we saw was poor quality housing loans turned into synthetic debt instruments that were leveraged and re-leveraged.As Housing went into the tank the losses in these instruments were multiplied many times leading to huge loses, write-downs and balance sheet damage. That resulted in a near freeze of credit last year and the damage percolated from the financial markets and housing over into the core real economy. Which was headed for a downturn anyway. Now that we're in the midst of this crisis people forget that we're hear of what's going to happen as the economy stays in the tank. All the other "normal" business like credit cards, consumer loans, auto finance, business financing, etc. etc. are beginning to go thru their own vicious cycle. We don't think that was reflected in the stress tests nor in the way investors are treating banks so far.

The Consumer Debt Conundrums

During the '80s and the '90s but most especially in this decade everybody took on greater and greater loads of debt from financial institutions to businesses to consumers as they got more confident that a stable and growing economy meant "it was different this time"and asset values would keep rising forever. The end result was a huge consumer debt, paid by the Housing ATM largely, and a nation of borrowers not savers. If/when/we hope the economy begins to arrest, stabilize and recover there will still be two tremendous problems facing us in the long-term. First, all  that debt will have to be paid down. And second, consumers are very unlikely to return to their old spending patterns. And boy, does that have implications for the long-term economic outlook.In the top sub-chart the YoY changes in consumer debt shows the biggest drop, a startling one, during the entire data series. So big in fact that it dwarfs all others. The bottom sub-chart shows an abrupt shift to consumers being savers. We consider all too possible that consumers will evaluate the levels of uncertainty in the economic outlook and slowly re-build their positions to where it was prior to the 1980s. Even returning to the '90s would be a major shift. If borrowing is truncated that much AND consumers move to being savers  in-line with history consumer demand will be very low for a long....long time. In other words the driving engine of the economy will be turning over a lot more slowly. If you recall the prior charts where Consumption peaked at ~73% of GDP what happens when they return to being 67% ? Or 65% Or, as is both possible and sensible, a more historic 63% ?

Long-term Consequences and Economic Policy

That means the US must find other engines of demand to generate sound, sustainable growth of face an L-shaped Japanese recovery. Which is not an impossible outcome, though hopefully an unlikely one. Right now the only source of demand is government spending which either continues until the economy returns to a self-sustaining, organic growth path or fails and aborts. There are at least three major risks of that happening to...do we fail to arrest the downturn ? Do we fail to keep on stimulating the economy ? Do we fail to reach the cutover to self-sustaining growth ? Even if we manage to navigate thru all thos challenges we're still faced with a low and slow economy for years. The only hope for paying down debt, having consumers put a new emphasis on thrift AND return the economy to sustainable, higher growth is if we put the economy on a new footing. In other words all out hopes for the future rest on whether or not we can invest in Education, Healthcare and Energy and get industries, jobs and growth out of it. Put differently - our lives are in the hands of the policy-makrers and will be there for a long...long tme.

Continue reading "What's It All Mean: Economic Landscape" »

Posted by dblwyo at 04:36 AM | Permalink | Comments (0)

The headlines over the last six weeks or so have been that green shoots are breaking out all over. That's wrong and badly so for at least two reasons, if not three. A typical headline would be this one from the AP: U.S. sheds fewest jobs in 6 months.Compare it this chart which compares private job losses between ADP and the BLS on a MtM vs YoY basis, where MtM is annualized and the YoY is on the r.h. scale. Over the last three months the MtM change for BLS where -7.1%, -7.2 and -6.4 and for ADP they were -7.0%, -7.4 and -5.2. That indeed shows some improvement in that the rate of decline is slowing but still terrible. BUT.....BUT on a YoY basis they are -3.8%, -4.3 and -4.7% for BLS and -3.4, -4.0 and -4.3%. In fact looked at properly with the seasonal noise filtered so you can see the structural pattern emerge more clearly the downturn continues to accelerate. The gap between the headlines and the realities would appear to be widening and about as far apart as this time last year when de-coupling was all the rage and a V-shaped recovery would begin at the end of '08 ! The problem is, even if they are green shoots, that's not a harvestable field. The other problem, as this data makes clear we hope, is that they aren't very green nor big. Finally there's serious risk of them turning out, or into, yellow weeds.

In this rest of this post, boring as it may be, we want to lay down some more stuff building on yesterday's foundation that walks thru the major components of the economy and compares the QtQ to the YoY numbers (or the MtM where appropriate).

An Overview of the Economic Situation: GDP, Consumption & Investment

In this next chart GDP, real PCE and Investment are shown on the two basis in what we hope are nice clean, simple charts that make our fundamental points. The last post had a pretty complete data table of the real data so we'll try not to bore you will repetition of the numbers. The top sub-chart here shows real GDP which went down -6.3 and -6.1% QtQ, which hardly strikes us as green shoots, other than the rate of decline has stopped increasing. And doesn't represent much of a difference IOHO. BUT (again) on a YoY basis the actual numbers to pay attention to are the drops of -0.9 and -2.6% in Q408 and Q109, respectively. If anything the economy went farther in the tank faster ! The second sub-chart shows real Consumption (PCE) which went down QtQ by -4.2% in Q4 but went up 2.2% in Q1. On the surface that's great news which we'll come back to shortly. The real "shocker" was investment which, in the third sub-chart, went down -23 and -53%. OMG - that's terrible, ain't it ? It also explains why GDP continues to deteriorate - back to normal business cycle structure, where Investment lags changes in Consumption and GDP (as we explained yesterday). We'll need to break down Investment into it's components since the behavior of real estate investment and corporate capital spending are driven by such different things and behave differently as a result. In particular real estate investment has always led the cycles where business capex is the lagging variable.

Breaking Down Consumption

Before we get too excited about Consumption we need to tunnel down for a more granular view, though the data is only available thru March. When you do that the underlying realities get a lot clearer. On a MtM basis real PCE increased 0.6% in Feb but dropped -2.6% in March. Now THAT hardly seems like cause for celebration or green shoot harvesting. Again, it looks to us, as if the news is abysmal but you wouldn't know it from the headlines. But MtM can be pretty noisy so what happened on a YoY monthly basis - which is also a compare and contrast to the quarterly charts above. Well, it turns out both months went down by -1.0 and -1.5% respectively. Again the rate of decline accelerated, and again that hardly seems to justify the headlines or the market's reactions. The thing we'd urge you to do is think thru the consequences for revenues, profits, earnings, PEs and stock prices for the consumer-related sectors, industries and companies.

There is NOTHING in these charts to indicate that good news is on the horizon for anybody.

Breaking Down Investment

Now let's look at Investment which is Residential Real Estate, Commercial Real Estate (Structures) and business spending on Equipment and Software. The news on either a QtQ or YoY basis is a lot less open to ambiguity or misinterpretations but hasn't received any coverage whatsoever that we've seen. In fact Cisco just announced it's earnings this week and was guardedly optimistic though declining to look ahead very far because of a lack of "visibility". Well let's try and give them some and repeat our two key warnings. Investment is a lagging indicator and Capex spending will drive the Tech, equipment and commercial real estate sectors. Let's do that by just eye-balling the charts (which as usual if you click they should enlarge). Starting with real estate it looks, par for the course, as if things got a lot worse. QtQ RE investment looks to have dropped almost -12% but to be down almost -23% YoY. Worse, on both measures, the rate of decline doesn't appear to be slowing. The second sub-chart looks at capital spending and there's NO ambiguities there at all. Again eyeballing the QtQ drop looks to be -40% while the YoY looks like -15% to us. That sorta explains why the GDP number was so terrible. Let's hope that the rate of decline slows down in the next couple of quarters. Tunneling down specifically on equipment and software (which we've labeled Tech) in the third sub-chart the QtQ number looks like -40% and the YoY number looks to be worse than -20% ! Taken all together real estate is still getting worse and capital spending is cliff-diving now along with it. The first means that Homebuilders and housing related industries and retailers are going to continue to take it in the neck. The latter means that the Tech and equipment industries as well as commercial real estate are also. In fact our friend CalculatedRisk guestimates that now that the collapse of Commercial real estate has begun it will go on for the next two years.

Coming Full Circle: Future Demand

As we explained yesterday in the great circle of life that is the economy Consumption => GDP => Investment + Hiring => future consumption. A feedback loop that can be virtuous or vicious depending on how it's running. When the Housing ATM was holding up consumer spending, on debt admittedly, it helped us all out. Now it's running in the other direction. Consumers make their current consumption decision on the basis of future expectations and resources which depend on the job outlook, real wages, assets and borrowing conditions. Or expectations and experiences thereof. We've found that a good way to judge, proxy if you will, these expectations for future demand are to look at changes in real wages and employment and add them up. We dove into employment a bit above, and it's continuing to get worse. In the top sub-chart QtQ Employment looks to have continued dropping on an annualized basis and be about -6% while YoY it appears to have about -3%. Worse, on both measures, the rate of decline is accelerating. That's actually the normal response since Employment is another major lagging variable. Like Investment it too is likely to get worse in the months ahead. The spot of good news, in the second sub-chart, is real wages which jumped up on both a QtQ and YoY basis. Now here we're back to a bit of a puzzlement. On a YoY basis the increase is unambiguously positive but the rate of increase QtQ dropped considerably. This results from two opposing forces. The increase was the result of a huge drop in inflation beginning in Q3 last year and accelerating in Q4. That resulted in the big Q4 jump in real wages. But as employment continues to be bad, and possibly continues to worsen as we expect, the pressures on wages will mount and it's likely that they too will start dropping.

WHICH MEANS THAT FUTURE DEMAND WILL START DROPPING !

There's one other thing you need to factor into your thinking on the real data, it's interpretation and it's application to investment, business and personal decisions:

NONE OF THIS UNDERLYING REALITY IS REFLECTED IN THE GENERAL AWARENESS.

In other words most folks are still flying along dumb and blind and could easily get side-swiped by something they don't see coming. Think about...eventually they will too.

Posted by dblwyo at 12:51 PM | Permalink | Comments (0)

Now even Schwab has called March 9 as a market bottom (we'll revisit that) and suggested buying the dips; all based on the hypothesis that we've seen so many green shoots that the worst is over. As we keep saying there's at least two huge problems with telling the difference between them and yellow weeds. First off is what does the data really say and second what's the long-term outlook. When everybody from Bernanke to the CBO to the acronymics (OECD, IMF,World Bank) tells us that the long-term outlook is very week for years somethings wrong. We visited this point in a prior post on deconstructing GDP (Will The Real Economy Stand Up? : GDP, Consumption, Investment) but thought we'd take another detour into the real data and try and offer up some foundations. Just for the record YoY GDP dropped much worse in Q1 than in Q4, as you can see from the table below.At this point in case you're wondering why do I care - we'll let the cartoon composite speak for us and our arguments subliminally. Judging from friends, neighbors and acquaintances it pretty well captures the general response. The sad fact is that much of this was avoidable but that's a long-term structural statement so never mind. The sadder fact is that most of it was dodgable if you'd paid attention to the warning signs. And that didn't require major national policy changes - just a good dashboard of properly filtered and structured indicators.

ADP Private Employment: Real Trends

Also just for the record everybody got all excited about ADP's private employment report but the reality is that, again YoY, it went down -2.4, -2.9, -3.4, -4.0 and -4.3% YoY in the last five months. Not only wasn't that good news from last month to this but that looks like an accelerating downtrend to us.The key problem is quick hit headlines and sounds bites that report on the MtM instead of the YoY changes. To try and show you what the reporting covers vs. what we think you should be looking at we've built this chart of the MtM changes annualized vs. the YoY% changes. Take a moment and see how warm and fuzzy you feel about all that; us, we go back to the cartoon as capturing the spirit of the moment. The Zeitgeist is shock and awe but we're probably all too burned out by adrenaline surges to panic anymore. So we thought we'd dig thru the real data and trying and frame the situation a little better in a couple of posts. This one will give you some background on the structure and components of the economy and we'll follow it up for each of these components with a post comparing QtQ vs YoY as soon as tomorrow's employment numbers come in.

Surveying the Real Data

But before doing the graphics thing for the components let's at least start with this summary table of the major elements to be watching. Pretty dry and boring right - just a table of meaningless numbers ? Maybe, but look around you, talk to your neighbors, ask yourself about your job and your kids futures and the meaing may get clarified and more important. We jokingly said one time that economics was the largest experimental science in the world...and we're all the lab rats. Some of the key things to watch (think of them as the scientists anal thermometers if you like) are red-highlighted and reinforce points we've been making for a long....g time. The only slightly bright spot is Real Wages which is up because Inflation has dropped so far and fast. We expect the continuing decline in Employment, which went down -3.1%, to reverse that trend. Employment is yellow highlighted because it was one of two early warning signs of the slowmotion slowdown (try a search on that term here to see how many times for how long it's been showing up) and the beginnings of a downturn. The other being the obvious Residential Investment, which leads the cycle, has been bad going to worse since early '06 and got worse this last quarter - despite the headlines. Take a look at the last columne where, except for Wages, every single number got much worse than in the prior quarters. Real GDP dropped -2.6% vs .9%, Capex and Industrial Production went in the tank and so on.

The Economic Ecology: Structure and Components

Before we get to the YoY vs QtQ debate de-construction let's put some foundations in place. So much of what you hear not only misses the real trends but isn't set in any kind of context, let alone an accurate one. The top sub-chart shows each major component as a % of the economy with Consumption on the r.h. scale, for about three decades. Notice that it ran about 67% until the investment boom of the Tech Bubble but actually went up to about 73% after the crash on the back of the Housing ATM. Talk about a House of Cards or building on sand - the economy tanks and you spend more by borrowing ? Notice the evil twin that resulted - Net Exports were about 0% as Imports balanced Exports until the Consumption Borrowing Bubble led to a huge surge in imported consumer goods. The bottom sub-chart zooms in a little to a shorter timeframe and breaks out some of the detail. After the break we'll break down each of these components yet again and you might want to pay attention because some of the results could surprise you. For example Gov't spending is a big chunk but it's not the welfare queens. The other little item of interest to note is that it went down during the '90s which led the reduced deficits and boom times of the Clinton Era. What was behind that.

Continue reading "Real Data Interlude I: Econ-ecostructure (GDP to Trade)" »

Posted by dblwyo at 09:24 AM | Permalink | Comments (0)

Well "green-shoot" optimism continues to triumph among the talkerati if not among my neighbors or, according to polls, among the general population. Which has kept the markets up so far, despite a big down gap last Mon. The interesting thing is that when you de-construct the actual data there's no sign of the kinds of improvements necessary to sustain things and the markets continue to suffer from slow leaks. We want to get on with thinking about the business issues all this raises but are going to pause for another "brutal realities" interrupt to review some of the evidence but in a slightly different way. As usual there's plenty of reading for skimming but our normal more technical graphics and explanations are down there rather than here in the summary/intro section. Instead we'd like to give our warnings some more emotional oopmh and hopefully bring them home that way more convincingly. Fortunately we're not the only ones seeing what we're seeing as this week's Economist cover points out - and in one fell swoop captures the entire message IOHO ! In the readings you'll everybody from Geithner to Immelt talk about the details of the bright shiny thing followed by some tunneling down into some higher-frequency indicators like Employment, Housing and Credit. Words like "unprecedented in modern" times are being used, or "economic crisis resetting capitalism". Back down to earth the crisis continues to worsen on a worldwide basis which raises some interesting challenges for the energy industry and the folks responsible for keeping the wheels on the trade policy wagon so we don't make it worse.

[Technology Mechanics: just a note - for some reason clicking on the graphics hangs up on YouTube but you can find the actual vidclips in the blue-highlighted entries discussing them and those seem to be working. Since a major part of my message here is the vidclips please feel free !]

Employment vs Earnings

Another recurring mantra is the notion that earnings aren't as bad as expected. Well that depends on who you ask. For example as we and many others keep pointing out the Banks earnings (despite the stress test results announced today and discussed below) are bat guano with worse to come as credit deteriorates and defaults and loss rates go up. Then there's the problem the even the exemplary folks (Apple, Amazon, et.al.) who turned in decent performances still saw lower revenues (not to mention that MSFT turned in the worst performance in it's history), offered up negative outlooks where they said anything and overall weren't very encouraging. Especially the industrial firms. The other little thing that's snuck by folks is the tiny little challenge of whether or not these were improvements in conditions, improved business performance or just plain 'ol slash and burn. Judging from the real employment numbers (continuing claims are setting records) the answer is slash and burn - translation: earnings were as "good" (poor) as they were because of short-term and ill-thought cost costing not because of fundamental improvements. Fortunately one tech tool provides useful access to a clever little summary of how most companies are going about it - click and see. Pretty funny if you can stop crying long enough to laugh.

Jobs vs Spending: Then What ?

Given that everybody's hunkered down in the bunkers and reducing their spending anyway you'd expect consumer spending to be retracting. Add in the layoff and fears of same and you end up with a whole new dynamic. Like we said continuing unemployment claims are abysmal. Down in the readings you'll find the latest edition of of high-frequency indicators that look at Consumption, Investment and Future Demand. Click on thru this other little vidclip to get a better grasp of the realities (call it an intuitive look at consumer confidence and spending plans if you like) as most people see them. Then take a careful look at the charts in the next section. A few high points - New Home Sales are still down ~ 40% YoY, while consumption and retail sales aren't dropping as fast there still as bad as they've been post-WW2, harbingers of investment like Industrial Production and capital goods orders however are continuing to accelerate downward (significantly in fact) which means there's no kicker there. And in some ways the most revealing - the sum of YoY changes in real wages and employment turned down. Now that's really important and our favorite short-term, high-frequency indicator because it's so good at look aheads. Employment's been tanking of course but YoY W+E had turned up because of the drop in inflation. Well real wages growth deteriorated a bit and as the labor markets worsen that'll continue. More importantly the drop in Employment swamped, or is beginning to, Wages. Which means what for future consumption - watch the vidclip. Take Scotch and Kleenix.

Which Means What for the Markets ?

Needless to say the themes continue when we try and translate the implications into market impacts, despite all the talking heads have to say about the generational low being behind us. While the accompanying vidclip is an exaggeration we're not down with this. If you believe our arguments on the quality and outlooks for earnings recent optimism is grossly mis-placed, particularly since it was almost entirely driven by finance fantasies (about which we've ranted enough until next time). Basically the markets have come to far too fast without any substance combined with a gross mis-reading of the economic data and the underlying realities of earnings. The markets readings end with two big picture excerpts. One on how to start examining potential candidates by looking for fundamental strengths - needless to say we think the suggestions are consistent with our approach. The other is a discussion of how the major private investment advisers are beginning to re-think their entire approach to advisory services and move from a pure buy-n-hold toward a more thematic and trend driven opportunistic style. Now the old shibboleths took decades to set in so this'll be awhile. But make no mistake this was a "Road to Damascus" moment.

Who You Gonna Believe

Your really need to do some, if not all, of your own homework here instead of letting the talking heads drive you into another corner. We know - it's a little late for that or for Mea Culpas but we are where we are. By way of compare and contrast we give you Milhouse's dad from the Simpsons (around min. 3:50) or so giving us his take on Cramer...of course you can always take another look at Jimmy-boy having it out with the Stewart. Never seen him that polite, contrite or quiet. Oddly enough we'd consider that to have been the only major confessional we've heard but it's as if it never happened. Odd that, wouldn't you say ?. We will mention that this whole show from intro and the not-so-hidden puns and jibes to the storyline offers some relevant moral lessons that are ironic in the extreme. We leave interpretation and application to you however.

By way of compare and contrast we offer up this little table that compares the findings and recommendations from four of our newsletters over the last 3+ years (actually running back closer to 4+ but who's counting). If you'd like a PDF copy that's downloadable for the summary, or for any of the four newsletters here you go. There's actually quite a body of tools and findings that build up over time. Now the intention here is not to brag, or at least not much, but the results have been pretty accurate. And that's not our particular virtue but the results of some simple tools and techniques we "borrowed" here and there that provide about as simple a view of the economy, markets, valuations and business performance as we can manage. Our hope that not only will it be interesting and useful but something you can use and re-use.

1. BizzX Newsletter Summary

2. Winter09 Newsletter

3.  Spring08 Newsletter

4.  Winter07 Newsletter

5.  Spring06 Newsletter

 We would however like to suggest that that track record is just a tad better than Jimmy-boys...by a fairly large margin in fact. But you be the judge...and at least consider what we have to say here might be well-grounded as well.

UPDATES:

Continuing our standard practice of refreshing large posts we have several new additions that provide some more context and interpretation (HT Barry Ritholz of Big Picture for some of this !). Three or four key ones as a major of fact. First up is Martin Wolf of the FT (one of the world's great newspapers IOHO - ranking up there with the Economist and ahead of the WSJ and NYT as they now stand !). There are two video clips that are relatively short but trace out the roots, consequences and outlook for the crisis that are as good as anything we've read. Martin concludes by pointing out how crucial government policy and international cooperation is - raising the specter of the significant retreat of globalization as well as fundamental shifts in world trade and financial balances (Reset indeed). To that end we'll refer you to two posts on our other blog on the geo-politics of things (Re-building On A Rock: Policy, Economy & Values, G-20 Persepctives: How Well Do Bears Dance ? (Updated)). He's also got a recent column on why things are still very shaky. Finally there's a recent vidclip from the WSJ/Barron's confirming that the major investment managers see things as we see them - to wit this is a very....very shaky rally indeed. Now as you listen/read this stuff we ask you what are the implications if our dire warnings are becoming common currency ? Interesting indeed. And finally there's this chart from the NYT pointing out how bad this recession is so far - which leads to the next challenge. If we're right and it's still early days how much worse does it get ? Even if Wolf's scariest prognostications don't come true ?

Wolf of the Credit, Balance Sheet and Economic Crisis:

Part I: The Sources of the Problem

Part II: The Long Road to Recovery

Is This Bull Run for Real ? (Barron's)

Why the ‘green shoots’ of recovery could yet wither

Longer excerpt below in the readings. This is another must-read IOHO. And we'll remind you that not only are there a lot of readings but that our normal inventory of economics and market charts are in the readings section since we experimented with humorous substitutions up front :) !

Continue reading "The Reset Marches On: Economy and Market Update (Updates)" »

Posted by dblwyo at 09:38 PM | Permalink | Comments (0)

Euphoria from a five-weeks market rally combined with the sight of a few "green shoots" is dominating the news and general reactions. That optimism is badly misplaced and is substituting the noise for the signal in the available data and then misinterpreting what is there as favorably as possible. We'd rather hoped that having to spend our (yours and mine) time investing in continuing to de-bunk mythology had gone away but human nature will triumph in the end. The Hindus and Buddhists have a deity called Mara, the master of illusion. Or we should say delusion where one's simple beliefs about things distorts everything about you - when they talk about the world being an illusion they don't mean  it doesn't exist. They mean that people see it as they want to rather than as it is. Granted that's often difficult given the extremely noisy data but that means that spending time on looking for and testing reality is well spent indeed. So that's our goal.

Some years back I did a little rock climbing and took a couple of falls, which tends to distort your whole view of things naturally. One of them was coming back down a snowy ravine after a very long mountaineering route and had me rocketing down the ravine on my back dazed and bemused. Fortunately my partner was experienced and skilled and I was soon arrested. Getting up and moving on it came to me my next stop was the lip of the ravine and a 1,000' dropoff to a rocky slope far below. The end result that could have been takes very little imagination indeed. Well that experience is metaphor, analogy and almost a model for what we've been going thru - a downward climb last year, a major fall in the Fall and an arrest conducted by a skilled partner. We still have a long way down before we can start the next climb though.

Level vs Rate, Signal vs Noise: Economic Realities

The first reading is an interview with Larry Summers in which he compares our situation to having just fallen off a cliff. The fall has stopped but it doesn't still mean we're in good shape - both because we still down and because of the long-term damages ! The confusions that many are suffering are between rate and level (a point Janet Yellen made a couple of weeks ago and we used in the last econ post). Rate is the change in activity while level is the on-going amount; in other words we've slowed the huge rate of decrease - it's not getting worse faster. But it's still getting worse and will for some time to come. A point of view, btw, shared not only by Mr. Summers but in the last week by the OECD, IMF, World Bank, CBO and many others including lots of the financial houses. For example everybody was all excited about the slowdown in the drops in Retail Sales and Consumption. The latter "only" dropped -1.4% in Q1 as opposed to -1.5% in Q4 after all ! That still makes it the worst numbers in the post-war world after the disequilibriums right after the war. We won't re-discuss the accompany chart but let you inspect it for yourselves. Some of the other readings you need to pay real attention to are Alan Blinder's NYT oped as well as Summer's FT piece on policy and outlook as well as the excerpts on the longer-term outlook. We're facing a situation where a recovery will be drawn-out, below potential and be followed by a major structural shift in consumer behavior from spendthrift to saver. At the end of the day the new economy will be more grounded, resilient, innovative, productive and prosperous but the climb back to that peak will be long and difficult. Let's summarize:

4. There is no substitute for the US economy. While eventually China and India may shift to more of a domestic basis that'll take time; and in any case the relative magnitudes are too small to make up the differences.

 Mara vs Markets: Continuing Madness of Popular Delusions

If economic realities are being distorted by the rosy glasses of popular delusions - with the signal being swamped by delusional and self-created noise - the markets are even worse. A major driver, other than the green-shoot theory of course, has been the alleged "recovery" in the financials. Despite the still on-coming wave of other credit problems, the over-throw of four decades of structural characteristics and the need to fundamentally re-think the industry (all of which we've been hammering away at these last few weeks in gruesome detail) the delusions have been rampant. From the Pandit Put to the TimmyG Rescue Suite for Toxicity. The latest of which was Wells Fargo's much better than expected earnings report - not that it wasn't but good golly one positive report doesn't make for a fix to all the problems we've been discussing or reviewing. NOW is NOT the time to get back in though from the multiple market studies collapsed onto this overly complex graphic there might still be room to run, based on misplaced optimism again as well as extremely distortionate data interpretation and market misreadings. If anything it's a time to start thinking about going inverse. Again, let's summarize:

All of which you'll find discussed and reviewed in another extensive collection of excerpts in the market-related readings which look back at the similar mis-interpretations in Nov. as well as the poor earnings likely due out as well as examining lessons from past bear markets and the breakdown in normally dependable trading and investing patterns. All told this wasn't your father's downturn, it won't be his recovery and it definitely won't be his market. But the most important point - nobody appears in the aggregate to have adjusted their thinking or rules of thumb to these new realities as yet. Sadly the debate is not whether or not to change those but whether it's voluntary and deliberate or forced and painful. Not changing is NOT an option !

Continue reading "Green Shoots vs Self-Arrest: Back to Economic Realities (UPDATED)" »

Posted by dblwyo at 09:49 AM | Permalink | Comments (0)

After hammering away at the Finance Industry, the implications and the structural reforms there's several directions we ought to go. We could look at the industry specifics for Finance or shift gears to other industries (Autos come to mind for some reason but we could re-iterate and wrap-up our look at Technology as well). Or we could really pop up and look at the core causal breakdowns in business management which lie at the root of almost all of this. But with a three week runup in the markets apparently loosing steam plus the the "ray of sunshine" economic reports it's time to re-set the baseline back to reality yet again. The readings cover the US and World Outlooks (Janet Yellen' speech is a thing of professional beauty if scary and the OECD has just lowered it's worldwide outlook significantly) and the Market situation. Just to review the bidding remember it was the Pandit Put that got this whole thing rolling, followed by historically unprecedented Fed quantitative easing (Prof. Ben Addresses the Lizard-brain: Steady-hands Vs DiscomBOOBulations (Update)) and carried further by Geithner's two major proposals.(Helmet Laws vs Adult Supervision: Re-Regulation & Finance Industry Futures) But the market was already loosing it's upward momentum. The real reason we want to focus here is that the headlines and mis-interpretations remind us of this exact time last year and in the readings you'll find some older posts excerpted to remind us of how distortionate the analysis was then, as well as panglossian in an extreme. Our best judgement is that we're back to that, so be warned. And also remember that in these circumstances policies and politics are as much a key driver as anything else; this week's G-20 meeting (which ain't going well) will be a major driver. (Sounds of Angry Men, Whimpering Politicians & the Global Crisis)

Economic Outlook

Contrary to the headlines NONE of the economic data really offered up much in the way of encouragement, especially when you look at the data using our preferred YoY% change measurements. One ostensibly favorable WSJ headline was pretty optimistic but when you read the story it was anything but ! Fortunately the YoY change meme is now widespread enough that most of the reporting includes it so you can see for yourselves. The top part of this graphic shows the high-frequency indicators that got some excitement but aren't encouraging at all. Turndown points are marked in yellow while tipping points are noted in red. The thing to really notice is the cyclic structure with New Home Sales falling off the cliff, then Autos and now Capex (durable good x-aircraft). Besides Capex the other stimulating headline was about Personal Consumption where the monthly number was "o.k." but in this YoY view you can see where PCE and real sales are still terrible; as bad as they've been in the post-war period.(Previous posts here and here).What got everybody going was the apparent flattening of the rate of decrease. Which leads to a key point that Yellen makes - there's changes in rates and changes in levels. While the rate of decrease may be slowing the level of activity is still bad. That's NOT a recovery or even close you see in those charts.

Markets

Like we said everybody's bottom calling but if you look at this chart thru last Friday you can see where the markets (the whole proxied by the SPX) is really running out of steam indeed. Again, of course, IOHO. Sorry if this is confusing but it's four different "studies" of the SPX compressed on one page so you can see multiple timeframes simultaneously. The UR corner shows a 30Min 15Day chart where you can the uptrend of the last three weeks loosing momentum while the LR chart uses something called a Fibonacci Fan to look at March on a daily basis. Notice that the runup kept tipping farther and farther over; that is hitting a lower and lower fan-line. The middle chart shows YtD for the SPX and how the technical indicators are giving off ambiguous signals; notice especially the yellow-circled Slow Stochastic Indicator which has stayed in over-bought territory thru last Fri. So far this week btw it's tipped over rather abruptly (threatening GM and Chrysler with bankruptcy didn't help but not only was that long over-due but the steam was leaking out anyway). The LH chart runs back to Nov. and what you see is that the longer-run downtrend is not only perfectly intact but that the recent rally ran right up against that downtrend and is failing. So much for bottom-calling and the end of surprises. Sucker's Rally indeed. Now the markets may run sideways here for a while but, again, compare it to last year when the de-coupling meme was still around and there was lots of bottom-calling as well. We especially enjoyed all the folks telling us that the worst of the credit market breakdown was over. In actual point of fact the markets are now starting to function after heroic efforts but credit is still widely unavailable.

Two other little details we'll call attention to. One is China's call for a new international standard currency and the other is something we've pointed out before - the impact of credit constriction and an economic downturn on oilfield investment and development. Even if, as we expect, economies perform poorly for several years and energy demand doesn't pick up very much demand will still exceed supply. Now that'll be an ugly situation for sure.

UPDATES:

In case you missed it the OECD and the World Bank came out with new economic forecasts that severely reduced the outlook for the rest of the year and anticipated a very poor and extended recovery. The OECD/WB scenarios now is as bad as the worst case for the stress test. In other news Moody's anticipates unprecedented credit card defaults and corporate bond defaults/BKs as well. Below are the URL's for several key announements and in the readings section you'll find several major additions excerpted as well. There are two in particular we think are mandatory self-interest readings. One is the OECD vs Worst Case graphic from CalculatedRisk and the other is Todd Harrison's update on the investment outlook, from which we quote:

"January thought: The entire spectrum of industries, from finance to media to retail to philanthropy to academia, will be forced to reinvent themselves and the leaders coming out of this crisis won't be the same as the leaders that entered it. Update: We use the forest-fire analogy because it's so very apt, scary and dangerous, yet necessary for a fertile rebirthing. A snapshot of once-venerable icons such as General Motors (GM) , General Electric (GE) , Citigroup (C) and AIG (AIG) supports the notion that market leadership, and leadership within individual sectors, will look drastically different once this process of price discovery passes."

Here are the NEW URLs:

Despite Interventions Global Outlook Deteriorates (World outlook update survey from RGE Monitor)

Roubini: Go Ahead, Keep Dreaming of That "V-Shaped" Recovery(vidclip on Tech Ticker with Dr. Doom laying it out)

Comparison: OECD and "More Adverse" Scenarios(CR graphic comparison of new OECD outlook with stress test worst case)

Stress Test, Quarterly Forecasts for Unemployment and GDP (earlier graphic comparisons)

Asian Data Shows Severity of Slump

Has Housing Industry Hit Bottom Yet?

Credit card charge-offs hit record high -Moody's 

10 Investment Themes for 2009, Revisited

This is enough material to call for a whole major new post, or re-threading them thru this one. But there was so much startling new news that confirms our basic arguments we wanted to put them in the context we already developed. The new excerpts are in a concluding section at the bottom of the readings. BUT...if you don't think this is worth really paying attention to we urge you to look at the 2010 OECD outlook and then think thru the implications for what Harrison is saying.

Continue reading "Re-Establishing the Baseline: Econ & Mkts Ain't Look'n That Good ! (UPDATES !!)" »

Posted by dblwyo at 11:26 PM | Permalink | Comments (0)

Well last week should have been another stunner, beginning as it did with the biggest extension of the biggest bailout since the GD and ending with the largest regulatory re-thinking since the cumulative total of GD and intervening decades legislation and regulation. REALLY stop and think about that for a moment - almost EIGHT DECADES of incremental change has been compressed into sixty days. Or being slightly more fair 120 going back to Sept and the TARP kickoff. Five weeks ago everybody wanted to hang Geithner for malfeasance and lack of detail, now he's a genius and a hero. Be careful what you ask for too ! Pundits and interests on the left, right, up and down are all choking, albeit more quietly, on these details. Yet nothing should be a surprise since there's a clear pathway from Bush Administration decisions and recommendations, including Paulson's tentative plan from last spring (btw on of the key readings is a FT oped by Henry supporting a regulatory overhaul that looks like this one on a worldwide basis). Of this set of initiative what's most important - the economics, the financial technicalities, the politics or the popular reaction ? Actually all of them !! What's still missing is a context to help organize, categorize and organize our thinking about these myriad complexities so we're going to take our best shot at explaining what's going on. And make no mistake - these are enormous changes, mostly for the better IOHO, long over-due and the Finance Industry and it's role will never be the same again. The last three decades of business models, strategies and profit/performance relationships are gone forever ! We ended the last post with the accompanying cartoon to capture the popular reactions to date and so we start there. Now lets dig into the strategic context.

Helmet Laws and the Public Good

My personal reaction to seatbelt laws was they were unnecessary interferences in private decisions; as we used to say in the rock climbing game when the tourists went round the back side of difficult climbs, started down ravines and went splat in the parking lot that's how you sort out the riffraff and wannabees from the folks who belonged there. Ditto for motorcycle helmet laws and cellphone laws. All of which have become widely adopted. Now for anyone who's almost been run over by some weekend shopper chattering away (in our case one nice lady looked us directly in the eye and then almost ran us over and didn't even notice !) these laws begin to make more sense. Take at look at this YouTube clip and ask yourself what level of responsibility was displayed by the rider. Then ask whether or not the law made sense. Without a helmet this guy would have been history. Here's the policy implication - if the only person to be hurt had been the rider then sobeit. And if irresponsible riders had to post insurance for the bucket and mop brigades required for cleanup as well the public costs would have been balanced out. The realities are lots of folks continued, continue and will continue to act irresponsibly and the costs are not restricted just to them but impact the general public. There's the general principle - when the costs to society greatly exceed the cost to private individuals regulation is our only recourse.

Keep On Breathing: the Financial Circulatory/Respiratory System

What does that say about the Financial System ? If you go back to the Congressional testimony in the summer of '07 on executive compensation one can only characterize the responses of the boards, chairmen and compensation committees as being beyond tone deaf. And as publicly irresponsible as a drunken motorcyclist driving thru streets full of school children. We have at least $180B invested in AIG to date trying not to save the company but save the world economy; literally. (If you check out several of the last posts that show the credit and equity markets and economic data that should now be beyond challenge we hope !!!). The credit breakdowns and crisis is often compare to a terrible plumbing problem with rusted and clogged pipes, frozen values, and bad water. A fair analogy if you consider that it's not just a house but the whole neighborhood and town. A better analogy we think, that represents the complexity and inter-connections is how your circulatory system takes oxygen and energy and gets it into your system until it reaches the cellular level where a complex and inter-connected set of metabolic and bio-checmical reactions keeps you going. Credit has been called the lifeblood of the economy and, in some senses, that's almost literally true. It's pervasive, systemic and systematic involving inter-actions at the most minute and granular levels on up to grand flows of macro-systems. To tell that story we've composited a graphic that traces thru the flows of the circulatory system as a model and metaphor.

Supreme Truth and Systemic Poisonings

Back in 1995 the Aum Shinrikyou cult put Sarin gas into the Tokyo subway systems to purify things and bring on the new world, since they were an elect and spiritual elite who had deeper insights into the mysteries of the Universe. Now there are many good people in the Finance Industry but the leadership, perverse incentives and lack of controls combined with the "deeper grasp of the mysteries" of financial engieering led the Finance Industry as a whole to effectively mimic the cult's actions. Only instead of 5,000 people who were affected locally we had six billion who are effected globally. For nearly three decades the Industry has argued that it was capable of self-responsible adult supervision, that is it wouldn't drive recklessly, didn't need to wear helmets and was performing both a privately profitable and public good service. That turns outs out to be entirely false to fact. And, judging by the shell-shocked lack of leadership in response to these disasters the industry isn't stepping up to the plate to help re-formulate the proper "helmet laws" so society is going to do it for them. Which is truly unfortunate on many levels and in several ways. First off we truly do need a finance industry to help mobilize and allocate capital; much of human progress is built on the gradual evolution of capital markets, at least indirectly. And there's still going to be huge profit potentials for well-constructed, designed and operated financial institutions as a result. The question really becomes which ones.

Can You Hear the People Singing ?

 As Peter Drucker pointed out almost forty years ago businesses are social institutions and cannot survive or prosper if the societies of which they are a part are not also healthy and prosperous. Enlightened self-interest would, for a responsible adult, motivate businesses to encourage the welfare of the broader society. Or at least not damage it. Drucker identifies three major goals or responsibilities of the effectively managed business: 1) deliver an effective service that creates value - in the case of businesses this means making a profit that is sustainable in the long-run, i.e. balances short- and long-run decisions. Then, 2) operates efficiently and effectively by making work productive and the worker achieving. In other words by making sure that work is logically designed but also recognizing that people are social animals and to be effective one has to account for the non-economic dimensions of the business as a social institution. Finally, 3) act in a socially responsible manner to ensure that society is doing well (or as we put in an earlier post make sure that the prey populations are sustainable and self-renewing). Social responsibility requires two things - first when the activities of your business impact the broader society move to reduce the harm. For example when you create a pollutant act to clean it up before society forces you to do it. Second, identify broader social problems that are connected to your business and act proactively to eliminate them before they become so bad that society has to. The classic example is the Auto companies and Healthcare, which they've known is a competitive problem for six decades yet failed to pursue the social remedies of regulatory and insurance overhauls required.

Farther and Farther Behind the Curve

In particular Drucker points out that denial and fighting rear-guard actions to prevent regulation when it's in the interests of society and your company is a management failure, grossly counter-productive and irrational in the long-run. Paraphrased, either change the regulations or change the regulations !

Let me translate that: if business operations create a problem that individual businesses cannot solve because of the profit impacts and therefore require general regulation it is the fundamental responsibility of management to proactively engage in working with other institutions to craft the legislation and regulation. To fail to do so is irresponsible, malfesant and a gross failure of managerial leadership.

The Finance Industry would never be the same again after testing their engineering skills to destruction. But after the social damage they've done society cannot allow them to self-supervise. Something they should have been addressing for the last thirty years; there have been plenty of warning signals. Instead they chose to pursue the path of lobbying for greater and greater freedom which led to greater and greater risk-taking. Pursuing the analogy it's as if the Aum cult kept making more sarin.

The question is what happens now ? We'll take that up in another post but here's a hint: get out in front and help shape things or get run over by the Juggernaut. Two more: you won't like the alternatives AND if it gets out of control nobody will win.

Continue reading "Helmet Laws vs Adult Supervision: Re-Regulation & Finance Industry Futures" »

Posted by dblwyo at 08:57 AM | Permalink | Comments (0)

First off if it's not clear we hope you took at least two fundamental points away from the prior post: 1) we've got a long....g way to go in this business cycle, it's just started and eyeball inspection tells you it's gonna get deeper and uglier. And 2) the last two week's rally is a bear market sucker's rally not founded on realities but triggered by the Pandit Put and whimpering out with the Big Ben (not)Bang. Which roughly translated means it's time to go inverse. The third major sub-theme is that we are utterly dependent on public policy, both in the US and around the world, for triage, damage repair, stimulus and recovery and long-term restoration of growth. Which hides a fourth - public policy is co-dependent between political leadership and the "will of the people". Before trying to walk rationally, and we hope, rigorously thru the various policy aspects and consequences we need to do some emotional (lizard-brain) level-setting. Accordingly we appeal to those great diagnosticians of the public pscyhe, Monty Python, who in one simple five-minute vinette capture and encapsulate everything from crowd psychology to false positive leadership to letting apparent logic mislead you. We really do think you ought to watch the whole clip to ground the rest of this post !

There are three things at play here: 1) downturn in the economy vs fiscal stimulus policy, 2) broken credit markets vs monetary policy and credit "fixes" and 3) political will, games and leadership. Of the three the most important at this juncture is the third. We say juncture because the Administration and the Fed are taking almost all the right steps IOHO (btw all the smart punditocracy who're so smart should dig into the details and come up with alternatives if they're so much more brilliant than the guys on the hot seats; as TR puts it, "there's nothing like stepping into the ring's blood and dust yourself" or something to that effect !). All that said we say juncture because the AIG bonus screwup is serving as a lightening rod for the fears, uncertainties and massive distrust of our private sector leadership. Who in fact failed us miserably. We spent a whole post (Predator Prey Symbiosis: Crisis, Leadership and Values) discussing why their behaviors were immoral, reprehensible, severely damaging the public well-being and violated the essential foundations of the social contract. All well and good. And the sensible pundits, e.g. Joe Nocera, et.al. of the NYT, who're trying to inject a few notes of rationality into the "burn the witches" anger are doing their best. But nobody is getting the whole picture right, again IOHO. The problem is that, as an essentially social species, we rely on trust between members of the same tribe to function and for twenty years or more that trust has been increasingly abused. The net result is a poisoning of the ecology on which we all rely. So here's the bottomline, so-to-speak; the anger is entirely justified even if counter-productive. Until it's bled off or re-directed our risks of doing something self-damagingly stupid are going to increase. In other words the single most important economic and financial datum to watch is whether this firestorm blows out or turns into a populist conflagration and takes us with it. The latter we give a low probability but an increasing risk. Unfortunately the former is also low - about all we can hope for is that the lid is kept on the pressure cooker long enough to bleed off the over-pressure and give the substantive programs some time to work.

Economic Policy

In the readings you'll find another collection that looks at various policies designed to get the economy going again and repair and re-start the credit markets, both in the US and around the world. At the end you'll find a bunch of excerpts that speak to the mini-essay we just wrote on the political challenges. As we said in our last post (History Review to Look Ahead: Markets, Economy & Business Trifecta) getting the economy going again is the fundamental strategic priority; and doing it in such a way that it becomes first self-sustaining and then gets back on a growth is the intelligent way to go about it. In the last set of readings we pointed you especially to two Econtrary essays by Paul Kasriel discussing fiscal policy during the Great Depression and the role of smart vs. stupid public spending. Public spending that subsidizes increased consumption is a "bad" idea. Public spending that invests in re-vitalizing the capital base (infrastructure, new inventions and innovations, education, healthcare, etc.) could put us back on the vanished Golden Path. To re-prove that fundamental argument we've created a composite chart from one of Paul's essays that shows how the economy was doing during the GD; the main point here is that a recovery was underway until the triumphal return of economic orthodoxies (at least of the time) caused budget tightening and the return of Phase II. Coupled with the really abysmal monetary policies of the time...well we'd really not want to try and dig our way out of this by starting WWIV, the strategy we defaulted to last time we were in a mess this serious ! Here's one more sad and dangerous set of facts for you on the international front. The rest of the world is actually in worse trouble now than the US. And is by and large facing more discombobulated policy responses, Europe in particular. In fact the only two countries where the leadership is stepping up to the plate are China and the US. Europe looks set to dis-coordinate itself into a disaster and Japan is in worse shape. So either we make this work or kaboom !

Monetary Situation

Speaking of credit markets, monetary politcy and central bank fixes take a look at this composite chart which shows the behavior of key interest rates from Jan08 to now and YtD. The rates charted include the TED spread, the 3Mo Treasure (IRX) and the 10Yr Treasury (TNX). TED is the different between Libor and IRX. Notice how rough it was last year leading to the catatstrophic levels reached in the Sep/Oct timeframes and how "repaired" it got as disaster was averted. While the wheels got kept on the wagon it's still wobbly and in fact started wobbling worse earlier this year but again appears to be improving. We're a long way away from having restored credit markets; in fact we're still in the Triage and emergency field medical care stage. Hopefully the upcoming Treasury plans will be the equivalent of getting to the MASH, in combination with the Fed's huge quantitative easing program and special facilities like TALF designed to credit flowing to consumers and small businesses again. Then we can start working on re-engineering the architecture of the entire set of regulatory frameworks (one of the most interesting essays excepted below is on by Sec. Paulson calling for just that. Stop and think about that...ex-GS CEO, ex Rep. Sec....lightening rod and he says it needs major re-constructive surgery...wow !).

The Peasants are Revolting

Let's close by re-iterating our starting point with some personal ancecdotes. Talking to my friends and neighbors for months now they're still in denial and shock but moving rapidly toward anger. In fact two close friends, both experienced executives of long standing, who pay some attention but not a lot to financial and economic affairs both went out of their way to share their feelings with me recently. Or more accurately chose me to vent their outrage out. If two business executives of decades of experience and fairly conservative in their outlook at that PO'd think how the populace in general feels. Like we said the Monthy Python clip is not really humorous in these circumstances. And all to many of the pundits are wanting to weigh the witch against the duck and burn here if she fails the test (to really get both the joke and the indictment you have to watch the clip). But you should be watching the political news just as much as the economic news...it's NOW as important for the market and economic outlook.

UPDATEs: One of the truly startling things (cf. the excerpt on the revival of Ayn Rand's popularity) is the combination of near criminal malfeasance, utter social and political tone-deafness and willingness to sacrifice the public trust (with the attendent violation of implicit fiduciary responsibilities and breaking the Social Contract) that Financial executives specifically and many executives in general are still committed to (committed...now there's a word !). The world is changing, the peasants are about to burn down the castle and they appear to be still planning the next dinner party. Check out this post from

Bob Sutton: Oblivious Rich Assholes

Seth Godin:The myth of big salaries (it's all marketing)

Tim Walker: “It’s going to take some patience.”

Breaker, Breaker. We got us a convoy !

Continue reading "Burn the Witches: Private Outrage, Public Policy and Butterfly Effects (Updates)" »

Posted by dblwyo at 06:38 PM | Permalink | Comments (0)

Another tumultuous week or more in the markets, the economy, the public policy arenas and the general public (do the words, "kill all the financiers, the devil will know his own" as a paraphrase of several historical quotes ring any bells ? People are very angry and justifiably so. We're going to come back to Technology while we review the markets, economic and business situations and use that as a set up for a follow-on post on the public policy and that anger. Which, however justified, is also very dangerous. The readings reflect the agenda of course but start off with a little history review by sampling and excerpting some previous posts from Jun08 to Feb09. Partly on the "told ya so" but mostly to hold ourselves accountable AND to see how past prognostications held up. It's called back-testing and, on the whole, we under-estimated the depth of the breakdown BUT called the trends, outlooks and structural weaknesses pretty well. In other words we didn't drink our own koolaid as much as we should have. But hopefully that history review strengthens our arguments here !?

Start with the Markets

We've got a lot of ground and want to minimize space so the graphics will be a little shrunken (click to enlarge). The UR sub-chart shows a 5Day intra-day chart and the impact of the Fed's $1T quantitative easing this week....which had disappeared by COB Friday ! The biggest policy move the Fed has undertaken in generations peters out in a trading day !! Now IOHO the markets are/were in a bear market sucker's rally and had reached the end of the upward in any case. The UL corner is a 3Mo daily chart and uses some more technical indicators to map this out. Notice that the Slow Stochastic at top (the sine wave indicator) calls these turning points very well. Super-imposed over the recent down and up cycle is a natural rythm indicator, the Fibbonacci (using naturally occurring patterns in number theory and nature but widely recognized by traders so self-reinforcing) that shows the Fed uptick failing around 800 and the bear rally faded and returning around the magic 775. The question then becomes if this doesn't break back above 800 on re-testing where away from there ?

Look at Economic Realities

A friend reminded us of another famous Warren quote: "in the short-run markets vote but in the long-run they weigh". In other words Mr. Market is more a giddy adolescent going with the popular opinions but in the long-run adult sobrieties return (particularly if the mandantory 12-step programs are working right) and judgments based on best interpretations of fundamentals rules. And by fundamentals, in these circumstances in particular, we mean economic fundamentals at a cyclic, structural and policy-driven timeframe. One such deep reality is Employment, the engine that drives Consumption which in turn drives the Economy. In the RH chart the depth and duration of the Employment downturn is compared across the post-War cycles. Obviously we're exploring dangerous new ground, and extrapolating by curve-matching, are very earlier in what promises to be a steep and long downturn. The LH charts look at long-term trends back to 1980 and a key measure is net new job creation in the aggregate; that is jobs created > 150K/month. This was a weak and jobless recovery because organic growth never took off but as you can see net new jobs is as abysmal as it's been in nearly 30 years !! (NB: this means the Administration is right btw - unless we get thru this downturn AND get back on a sounder strategic foundation the economy will just continue to weaken). We won't dive into but will point you to this chart borrowed from CalculatedRisk for the Strategic Housing Outlook. Don't expect that to repair anytime soon either.

Back to Markets: LT Refresh and Review

The joint answer on Markets, both from a technicals and fundamentals basis, is that seeing a 4-handle on the market should NOT come as a surprise. A point we re-made as recently as March 1rst but have been raising for some time (cf. the history review). We consider that highly likely no matter what happens but containing and repairing the damage and then returning to growth depends on three critical factors: 1) repairing the credit markets and re-factoring the Finance Industry, 2) re-stimulating the Economy and 3) re-factoring the the foundations of the Economy onto new long-term sources of growth.(Disruption vs Innovation: Change, Response, Resilience) If you look back at the first market chart and consider the bottom half what you see is a bear-market process that worked out from Oct07 to Sep08 (not shown) that then imploded as the credit markets broke down. Then a new equilibrium was reached (the "Tradeable Box") that was broken earlier this month when the real economic realities sank in. We're not convinced that it's sunk in very deeply however...hence the 4-handle warning.

Naked Swimgers: Business Principles vs. Performance

We left the Freudian typo in the header because our fingers led us from the intended "naked-swimmers" to "naked-swingers"; as in people who substitute immediate gratification for long-term value-creation based on principle. In the final two readings section we have a few excerpts on basic principles of business management and leadership that have been left in the closet, so-to-speak, for years. Now we're going to find out who the good companies are who've been following them or those who're good enough to self-repair. The two key blog posts are from our e-friends Seth Godin and Bob Sutton. Seth sketches the critical concept of 1) focus on value-creation and 2) the execution plan to make it happen while Bob adds 3) make sure the company is the kind of place people want to work for where people are treated with respect and held accountable for their performance in a fair and just environment. That's how you get high-performance in bad times ! (Aholes, Shirkers and Performance: a Draft People Principles Policy)The sad and really....really dangerous parts of this are that many executives were caught flat-footed and ill-prepared and are now shell-shocked and slow to respond. They're scrambling to catch up to a dangerous situation, still don't get it and the "enemies" decision-curve is faster and tighter than theirs. (Good Boats, Good Captains: Applying the Investment Mantra for Profit, WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize)

The two most critically important readings are the excerpts from Paul Kasriel of Northern Trust in recent Econtrarian essays. The first tells us what really went on with economic growth and public policy in 1929-39 while the latter debunks (destroys) the mythologies of savings, thrift and long-term economic performance. Your take-aways should be 1) stimulative fiscal policy is a survival necessity but 2) if we can lay the foundations of long-term growth properly then, as Consumers shift from Spenders (Swingers) to Savers we'll fund a healthy growth path like we haven't seen since the 1950s !!!

Continue reading "History Review to Look Ahead: Markets, Economy & Business Trifecta" »

Posted by dblwyo at 08:10 AM | Permalink | Comments (0)

If you're not officially familiar with the Sailor's Prayer let us introduce you: "Oh Lord, Your Ocean is soBig and My Boat is so Small, Please Protect Me". Of course no sailor in their right minds goes out in a leaky, badly equipped boat without checking the weather, the charts and the season. In contrast to an enormous of business and policy decision-makers who seem to have done all that. Apparently, despite our best efforts and lots more by folks who're well-known, we're sailing in a fog in a leaky boat with a bad engine and there's major storms only we can't see them. For that you get thrown out of the Mariner's union if God himself doesn't take a more direct and just revenge, as appears all too likely to happen. Judging from last Fri.'s GDP revisions and Mon.'s market reactions we're sailing with a bunch of deaf, blind and...oh never mind...you take the points.

Finding Our Way: Geo-politics, Economy, Industry and Company

Our 3-factor mantra has been revised to include Geo-politics as the driving 4th factor and if you don't think that's the current most important factor we have a boat we'd like to see you. To be a smart sailor you need to pay close attention to all four factors. And we've organized the readings around that argument and in reverse of our normal order. Below you'll find a survey of the policy situation, then readings on the state of the World Economy (which continues to deteriorate more rapidly and severely than that of the US and then some big picture stuff on the US Economy. We won't go into excruciating details on the policy and geo-political situaitions but instead - now that they are no longer seperable - refer you to a couple of major posts on our Current Affairs blog (The Devil's Advocates: Dancing Dimagogues vs Economic Policy (Update), To Boldly Go Where We Must: Speech, Budget and Dr. Noes). As usual our focus is on understanding and analysis, not on opinions but if you find yourselves disagreeing with the assessments because they appear to disagree with your own political opinions that's fine; we simply urge you to think where, why and how. Because if the politicians around the world don't get all this right we're all deep in the kimchi. The ginormous graphic isn't intended to be either an eye-test or set new records, even for us on complexity. Rather the goal is to create a kind of decision-making ideograph that shows how all the four factors play together from Geo-politics in the upper left, to the economy in the upper right to deep industry trends in the lower right to business performance concerns in the lower left. The first things are not ones that executives by and large control but MUST be aware of, in the same way a sailor monitors the weather, currents & tides, seasonal factors and iceberg warnings as well as the charts looking for rocks and shoals. Enterprise capabilities on the other hand are in their control but at this point they're going to sail with whatever boat they've got or can patch up so the real question is how good are they ? We'll pick that up but spend the rest of our time here on the context.

World Economy: Trade and other Problems

One can only characterize the implosion of world trade as shocking and be even more in "awe" at the impacts on imports and exports and the effects on various domestic economies from Japan to Indonesia to India, China or Russia as well as Eastern Europe. As you review the readings you'll find that re-coupliing is here with a vengence and the Asian and European economies are feeling the brunt of it since they were so heavily dependent on trade. Manufacturing is collapsing worldwide and Eastern Europe is imploding, making our sub-prime problems like a fight in the playground sandbox. That alone threatens to undermine major European financial institutions and could potentially destroy the EU. Think about that for a minute. In response we have an increasing backlash against globalization, albeit an inadvertent one, as every nation looks to it's own interests first. Not necessarily looking to harm others but not cooperating in joint policy either. It's no accident that the new Director Nat'l Inteligence or the new CIA Director have publicly spoken up about the worldwide economic situation being the single biggest immediate threat to National Security. At the end of the day we're looking at serious risks of social instability and political breakdowns in many of the Emerged countries. China for example is estimated to have some 20 million migrant manufacturing workers out of jobs ! At the same time they are, btw, using their vast reserves to invest around the world in a major and Buffett-like shopping spree. Whatever happens the world of the next ten years is NOT going to look like that we've known for the last ten...or even 30 ! Think of it as a shift from Chess to Go except it's now in multiple dimensions and too many of the players still think it's Tic-Tac-Toe.

US Economic Situation

 The recent GDP revisions don't radically alter our prior examinations of the nature and structure of the business cyle. More like they simply reinforce things we've been saying now for many months. So instead of repeating slightly updated and modified cycle charts we want to re-visit and do a major update of the GDP component charts we haven't looked at in a long time. If you recall these they're built on looking the contribution of each major component's YoY change to the YoY change in the total GDP. So for example Consumer Durables subtracted $142B from GDP this last quarter after revisions. You can see the progressive drop in consumer spending working it's way across all three major components. The second sub-chart is a running total so in the aggregate the impact of consumption was about -$170B, helped slightly by Services which is nonetheless dropping rapidly. MUCH more importantly, and as we tried to warn people last summer and repeatedly, Investment is way down and Capex in particular is going in the tank. Worse the strong dollar is having the impact we anticipated with a serious drop in Net Exports, even though Imports are dropping rapidly. Even the US is not immune to the realities of a world trade collapse. The only thing really helping to hold things together is government spending. So at the end of the day we come full circle. The basic economy is sufferring an organic breakdown and the engine is seizing up worldwide. The only source of demand to keep the engine turning over and hopefully get it running on it's own again is public spending.

And if you were wondering why the markets re-tanked instead of bottoming and bouncing it's because so many were in denial and having trouble maintaining that posture. Over the weekend the NYT did a nice little survey of eleven experts from Roach to Roubini and we've given you the URL along with some specific pointers and Roubini directly.

THIS DOWNTURN IS GOING TO GO ON LONGER THAN ANYBODY IS YET PREPARED FOR, BE DEEPER AND RUNS SERIOUS FURTHER DOWNSIDE RISKS UNLESS PUBLIC POLICY IS EFFECTIVE.

Continue reading "Oh Lord, Your Ocean's So Big, My Boat So Small: Storm Sailing Redux" »

Posted by dblwyo at 06:51 PM | Permalink | Comments (0)

You ever feel lie you're shouting at the wind, or screaming at the tide to go out when it clearly wants to come in ? Over the last year or so we've often felt like the oceanographer vacationing in Thailand who saw the tides suddenly surge out, and knowing that was the immediate indicator of a tsunami, screamed at the vacationing beachcombers to run. Only to be ignored. In the last several posts (State of the World: Crisis Metastasis, Strains and Fault Line,Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???)we've tried to focus on the "Big Picture" economically and take it down to issues of business performance. Judging from what we're still seeing and hearing though the wave is a 100' crest, racing for the shore and everybody's still standing around going OMG, will you look at that ! Our new mantra is Policy-Economy-Industry-Company, from the old E-I-C which took a predictable policy environment for granted. In case you didn't notice the biggest post-WW2 economic package was put together in three weeks and a major new set of regulatory principles for salvaging the Finance Industry was announced. We'll dive into the details some other time but both are enormously better than the punditocracy would have you think, or the political opposition for that matter. Later we can talk about self-interested expediency at the expense of the public good. But this not just a top-down macro-driven environment, it is a meta-topdown environment utterly dependent for the next several years on the efficacy, efficiency and timliness of worldwide public policy. You'd better hope "they" get it somewhat right or be prepared to kiss it goodbye.

Economic Situation

 The readings after the break provide more interesting excerpts on the US and World Economies; as we mentioned in our last integrated post it's not just the US facing the worst post-war downturn. In actual point of fact the rest of the world is in much worse shape, getting worser faster and the threat of socio-political breakage is exponentiating. Just as a reminder here's the US economic situation composite chart we put up in our previous post on the subject, and rather than re-review it in detail we simply suggest you compare the current situation to equivalent periods in prior downturns. Then ask how much farther the downturn will have to proceed to be proportionately equivalent. A lot, right ? Well also just for "fun" here's the latest world economic outlook from the IMF chart and the key chart from Davos on major geo-political risk factors. Just refresh yourselves a little bit or go re-read the earlier post. A drink or three might be in order. Are there any questions - go back to the Four Factor chart and ask yourself how you'd grade the situation in each quadrant ? How 'bout and D- for the things we've just talked about ?

Which leads to the question of business performance. If you're headed in stormy weather and rough seas you'd best be prepared to sail in tough conditions, swim or drown. As we mentioned (Survivor: Search for the Next "Blue Chips" (UPDATE)) the general reaction seems to be to default to the D-position. Hard to breath water, don't you know !

Business Outlook: Performance vs Malfeasances

 Our central theme on this blog is business performance and what it takes to develop and deliver it. You can see that worked out in individual company posts, in industry analysis - most recently with the easiest whipping boy the FinInd (Rescue, Recover, Re-Design, Re-Build: Finance Industry Futures) and in multiple deep dives on analyzing performance factors. Running thruout every single one of those posts is our BizzXceleration Blueprint for how to play Bizzball, in one form or another. From the simple to the more complex to the company specific. We even went and mapped ( Masterclass: Buffett on Investing and Business Analysis)our approach the best post-war value investor of our lifetimes. So as you skim the excerpts in the business section bear in mind that the tsunami's headed in and the survivors are not going to be random.

Readings

 Specifically we start the business section off we a column from Jim Jubak proposing his own, consistent, approach to screening for performers and follow that with several readings on the general business situation. One is about the extension of Moneyball to Basketball and how it's impacted the Houston Rockets that serves as a good template, followed by a great Seth Godin post on the self-inflicted suicide of the Music Industry for failing to re-think itself. That's complemented by two "financial readings" that tell you what the flotsam and jetsam will be; one on a wave of bad debt and bankruptcies which are just beginning and another on the dawning realization that profits will stay in the crapper for a long time (Wow, Deja Vu', All Over Again ! Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???). That's followed by a pair of complementary stories about improving the focus on Customer Service as an immediate way to get some air. Finally there are some specific stories about Tesco (adapting well), the Pharma Industry (a badly broken R&D model that's destroyed their business model and they're scrambling just not well) and the trials and tribulations of Dow Chemical who was "blindsided" by the credit crunch and downturn which destroyed two major transformative deals. Frankly we think in the context we and others have been talking about both were built on the proverbial House of Cards and "they should have seen it coming".

Well if we can only throw back one Starfish at a time it's still a saved starfish.

UPDATES:

1) Japan's leadership is in political crisis and apparently completely unable to pull together the requisite policy actions and strategies to address their problems.

2) Eastern Europe's excessive external debts and mounting economic crisis is threatening Western Europe's financial system with systemic risks; think of it as sovereign sub-prime.

3) The Investment Community continues to look for the best of it and refuses to face the brutal realities of the situation. This is, in it's implications for lack of grasp, valuations, flat-footedness and shell-shock both exemplar of all that's bad about executive reaction AND a major warning sign for market and business outlooks !

Continue reading "Time, and Past to Play Bizzball: Economy to Business Performance (UPDATEs)" »

Posted by dblwyo at 04:07 PM | Permalink | Comments (0)

Well with last week's GDP release and today's Employment numbers it seems like a good time to dive into the painful economic data. Which, despite the Street's blowing it off, is about as bad as you think it is. In some ways, and more importantly, it's not just US data we need to pay attention. After listening to a bunch of the Davos sessions online we need to pay attention to a lot more: the world economic situation and outlook for one thing. For example the IMF just issued revised world outlooks, and that's after dropping them severely in Nov. after the regular Oct. release, they're anticipating worldwide growth this year of 0.5% ! With risks mounting and assuming worldwide efforts to repair the credit mechanisms AND stimulate all the economies. Much more importantly are a couple of other factors that were very clearly highlighted at Davos: 1) the rest of the world is getting hurt worse than the US, 2) the necessary institutions aren't in good shape in comparison and are coming increasing strains, 3) there is a building backlash from various populations that that threaten those institutions and 4) the likelihood of serious socio-political instabilities is rising rapidly. If this all comes to pass don't say you weren't given a major heads up - though unfortunately outside of Davos there doesn't seem to be much attention being paid. The bottom line here is that our own domestic economic problems may in fact be the least of our worries.

US Domestic Economic Situation

Let's start by looking at the domestic economy with this composite three-part chart - which we had to extend back to '60/'65 so you could see how bad it's getting; and hopefully just by eye-balling the charts can see where it's headed. Dr. Doom II, Nouriel Roubini, has a pretty strong case. The top part shows YoY changes in real GDP, Consumption and Retail Sales. Think of Sales as the ugly, diseases 800 lb. canary because it's dropped more than at any time since 1960. How's that for loud chirping ? The second chart shows one of our favorite indicators - the sum of the change in Real Wages and Employment. Which, as you can see, has been a superb leading indicator of changes in Consumption. Since the economy is 71% consumption that's the engine that drives everything else. The small ray of light is that W+E actually upticked a bit as the result of the drop in inflation caused by the drop in oil prices. The bad news, which you can see in the third part, is that it's a developing race between Employment declines and real wage increase. With the latter not to get much better while the former will continue to deteriorate big time. In fact employment is a lagging variable and is likely to get worse for the next 18 months, thereby swamping any positive benefits from wages. Which are also likely to start dropping. The conclusion - this is the worst downturn we've seen since the end of WW2 and it's headed further South before it bottoms out. You'd better hope that stimulus package passes and it works.

World Economic Outlook

Shifting gears let's look at the IMB World Economic Outlook. As you can see the Developed economies have actually been performing poorly for some time but now the impacts are being felt in the Developing ones as well. Even with the admittedly optimistic outlook for 2010 world growth is not projected to get any more than 3% at best in '10. An outlook which the IMF admits is full of downside risk. The Developing economies are expected to pull out 5.5% at best as a result. That varies by country and if you're curious about any one in particular you can go to the IMF web site and use their online Data Mapper to dig into their outlooks - which go out to 2013. As we discussed in an earlier post (Re-coupled Vengence: From Downturn to Implosion Risks ?) they are far from sanguine. In that post you'll find the IMF address plus charts out to 2013 AND a discussion of the geo-poitical risk factors which are escalating as we sit here !

Risk Factors

One of the sessions was on risk factors and management and it was one of the best, if bluntest, we listened to. A key chart from the report is shown at right and makes interesting browsing, calling for careful attention. The chart maps severity vs. likelihood and covers a wide variety of risks from economic to geo-political to environmental. We were amused to see, despite all the rhetoric, that global warning is serious but well down the list on both dimensions. Not a laughing matter at all are the top two clusters. In fact the most severe risk is the continuing risk of asset price collapses - when we keep talking about the threat to Western Civilization it turns out that we weren't kidding and a very high-powered team agrees (btw their session URL is in the readings - we highly recommend watching it, preferably strong drink in hand). Interestingly in light of our prior comments the other two biggest risks are a jump in energy prices if/when the economy recovers (because of under-investment (  Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions,New (Old ?) Frontiers in the Oil Markets: the Return of Geo-Politics)) and escalating protectionism in the developed world, though protectionism in the developing world is also a serious risk as well. Like we said institutional support for this world crisis doesn't exist, another major theme heard in almost every session. The upcoming G-20 session in April is mission-critical. Almost as fascinating the next cluster of serious risks a rapidly slowing Chinese economy, threats to the world food supply and widespread fiscal crisii ! Brace yourselves - let's hope it turns out only as bad as it looks and not as bad as it could be. We're so far beyond decoupling or even recoupling and into a vicious feedback loop that could bring a lot of things down.

Readings

The readings excerpts are broken up into three sections - the first contains readings on the US and World economic outlook, an extract from the Risk Report which'll take you to the whole thing (the executive summary is well worth a second drink or three at least) and StratFor's latest take on Russia's strategic objective. In this close-coupled world we need everybody to act as responsible stakeholders, which the Japanese and Chinese are doing, as well as the Europeans. The Russians appear to be playing by the old rules, which is particularly sad given the evolving death symptoms of their socionomy. Unfortunately (how sad to have to say that and mean it !) not in enough time to prevent their disrupting the world system, particularly in Central Asia, as their recent actions with regard to the Kyrgyzstan air-field show.

The second section surveys the US institutional responses from Round III of the financial rescue packages which Sec. Geithner is beavering away as we talk, to some dissections of the poitical status and technical content of the stimulus package (there's a URL link to a recent Rose interview with Leonhardt, Welch, Feldstein, etc. we highly recommend). And the final section surveys and samples what's going on around the world, including examples of other countries putting their own massive stimulii in place. Unfortuantely, and not thru necessarily deliberate policy, the protectionist drawbridges are being drawn up by the financial crisis. Which in turn has emasculated worldwide investment flows, badly damaged the developing world and that will, in turn reflect back on the developed world. Welcome to coupling with a vengence !

Continue reading "State of the World: Crisis Metastasis, Strains and Fault Line" »

Posted by dblwyo at 01:08 PM | Permalink | Comments (3)

We've spent a bunch of time on the US economic outlook and the news, as you'd expect, continues to move from bad to worse. We say that because it's no longer necessary to use a fine-tooth comb to sort out the downturn as we did earlier this year, e.g. with the High-Frequency Indicators (which is one reason we haven't posted on them in a while). Now it's all pretty obvious. Let's shift gears to the rest of the world. Back in the day we laughed and poo-pooed the de-coupled these because it ignored two things. The nature of business cycles and their international linkages plus the relative size of economies. The argument for example that Chinese domestic consumption would become the new engine of worldwide economic growth is and will be species beyond credibility for decades to come. Making it shows the shallowness of the analysts involved grasp. But that's no longer the problem. Accelerating worldwide downturns are. Worse, especially given the speed, depth and likely duration of this downturn on a worldwide basis we're rapidly moving out of mundane considerations like millions of people out of work and into strategic geo-politics. As in social-political collapse as a rising risk factor.

Developed Economies

 The IMF recently issued it's bi-annual World Economic Outlook in October and immediately issued another major revision that took the forecasts down in November. Think about that for a bit. This is an organization that thinks in terms of decades and 2X per year updates are rapid turn-around. The accompanying graphic shows their l.t. outlook thru 2013 for the developed economies as a whole and the specifics for the US, Japan and Germany with growth rates of 2.5, 2.3, 1.7 and 1.7% respectively. That's after an intermediate term recovery and then another wind-down. You really need to think about what that means for the long-term outlook for Employment, earnings and valuations. You'll find plenty of more detailed ammo for this barrage in the readings on several key countries. So much for the European schadenfreude that this was "just" a US problem.

Developing Countries

They also issued outlooks for the Developing Economies which have also been revised downward though not as extensively. The estimates for the BRICs, et.al. being much more problematic because of data and analysis shortfalls. However evern what appear to be good numbers aren't. In China for example anything below 8% starts to loose ground to the necessary new job creation which is the under-pinning of the social bargain the Communist Party has implicitly struck with the populace. Dissent has been rising for several years and increased rapidly over the last. Yet these numbers may be far too sanguine, to say the least. Several estimates for China are ranging downward toward 5%, or even 0%. At those growth rates one must ask serious questions about the stability of the Chinese socionomic system. India and Brazil are going to experience similar downturns but it's likely their socio-political sytems are somewhat more robust and resilient. Russia on the other hand is in the process of committing demographic and economic suicide. Instead of using their recent energy and commodity based riches to invest in education, infrastructure and new productive capacity it's instead been squandered on geo-political adventurism. One has to assess the risks for a Russian implosion over the next decade as high and rising as a result.Take a careful look at the accompany chart and the readings below and ask yourselves if the world is prepared for the rapidly developing strains. And bear in mind how coupled things are. For example dropping US consumer demand has decimated Chinese exports which has, in turn, curtailed German and Japanese exports to China. China btw has  been Japan's largest trading partner over the last several years. Or think about Australian, New Zealand and Brazil agricultural and commodity exports to China. Poof. OUCH !!

Geo-political Implications

 Like we said there are many readings excerpted below that highlight the overall outlook and specific country and regional news and information. Inclued are the addresses for the IMF WEO from Oct and Nov plus the associated databases. We particularly call your attention to the Data Mapper tool with which you can do your own explorations. But the readings start with two recent US government strategic assessments. The first is the Joint Operating Environment from US Forces Command and the other is Global Trends 2025 from the National Intelligence Council. Summaries of which are also excerpted. Based on these extremely well-received, broadly built and widely published studies the consensus of our policy-makers is that a jaundiced view of the stresses and strains for the world system is going to be appropriate for a long time to come. In fact it's rather fair to compare the period we've been in and will be facing to the immediate post-WW2 environment where an entire new world system had to be architected. We seem to be in much better shape in that we aren't facing an exinstential threat to our existence ala the USSR AND our decision-makers are more broadly aware of this shared view, rather than operating blind. Nonetheless if you skim these reports, which we strongly urge you to do, and then compare them to the accompanying graphic as a blueprint you'll find that each line item gets a check for high stress.

Continue reading "Re-coupled Vengence: From Downturn to Implosion Risks ?" »

Posted by dblwyo at 07:23 PM | Permalink | Comments (1)

Welcome back to the New Year. In case you haven't noticed we've taken a bit of a hiatus - partly due to laziness and other workloads but also from a reluctance to put up the economic news, which is unrelievedly bad across the bad. Which doesn't mean we haven't been following and collecting the news as is our wont - just that we chose to exercise some holiday spirit and postpone posting. But the time is at hand. After the break you'll find our usual collection, largish this time of course, covering the strategic outlook, Housing in particular (though looking back to Oct clippings which were "merely" confirmed by the abysmal November data and the continuation of the cliff-diving) and some key indicators. The later in particular indicate that not only is the credit crunch continuing but it's metastasizing into other areas, e.g. consumer credit, and will worsen in '09. And employment will similarly follow the normal lag structure and is starting off its' own cliff. While we discuss this more below some of the prior posts lay out a similar story with other charts you may want to refer back to (It's Back: Welcome to the Downturn for Real,Storm Flags Flying: State of the Evolving Downturn,Fragilities Exposed: Downturn, World Economy and Re-Balancing,Let the Triage Begin: Business Performance vs "Stupid Is").

Economic Outlook: Expectations vs Realities

Two of the saddest and most dangerous memes running around, IOHO, are the fact that so many have been caught so flat-footed and still don't see the tsunami wave cresting, nor the ones behind it. The consequences for ill-prepared businessess were the heart of our Forest Gump post ("Stupid Is"). And second the gap between the consensus surveys and what's likely to happen. The "Blue Chip" surveys talk to very competent finance industry economists who suffer from a major defect - they're prisoners of models that presume normal cyclic downturns and recoveries. Well this is anything but normal, partly because of the credit problems and partly because of accumulated problems in the core economy. Instead of consensus we'd point you instead at folks who addin some seroius judgment like Noural Roubini or Paul Kasriel instead of relying on flawed mis-speification of their models. We've tried to capture as much of this as we can manage in the accompanying graphic which combines a long-term look back at GDP, Consumption and Investment with prior graphics on the Business Cycle and a conceptual depiction of where we're at in the cycle.

Credit Crisis and Outlook

A key part of the problem is that Consumers make their spending decisions on the basis of likely future income plus wealth. The primary indicators of future income are changes in Employment plus Real Wages. The latter took a slight bump up because of the sharp downturn in Inflation but the former is just beginning to tip over rapidly and severely. So the W+E delta is still negative ! Which forbodes very poorly for future spending. A major consequence of declining income and dropping expectations is an accelerating drop in consumer spending. Which will in turn further slow the economy and worsen credit conditions. And then of course there's Housing where we still have a long way to go in reaching the bottom of the price declines. Until/unless we perform the same sort of surgery on mortgage valuations for all the toxic garbage that's still on those books this slow unwinding will continue to infect the system. If you'd like a graphic analogy consider this a case of severe combat wounds where gangrene has set in and is no longer treatable by anti-biotics. Which leaves us no alternative but surgery ! OUCH indeed. The accompanying graphic tries to conceptually illustrate the resultant negative feedbacks that in process - a vicious cycle if you will. And as the Business Cycle graphic shows as Consumer spending declines businesses will further restrict their hiring and reduce their capital spending. Not that either was very good at any time in the last ten yars !!

Wealth Destruction

On the wealth side that's even worse as you can see in the accompanying graphic. US consumers have experience the greatest decline in their net worths in the post-war period. $Trillions of wealth in assets and housing have been "destroyed". Of course that's a problematical argument since much of that percieved wealth was artificially created by bad credit decisions and leverage. On the other hand it was the foundation for holding up consumer spending so Voila', here we are in yet another vicious feedback loop. In the longturn the over-consuming US public is likely to undergo a major shift in spending habits because cheap and easily available credit will be reduced in availability. And because we're likely to shift to a more savings oriented, frugal and fearful outlook. Which is a good thing in the long-run because people are reminded that economic stabilities and growth are outcomes not givens. Unless, as Keynes observed, "we're all dead" before we reach a happy new equilibrium. The net long-term result will be reduced growth in consumer demand and a very slow and difficult recovery.

The bottom line of which is that both '09 and '10 are likely to see continuations of the downturn followed by an extended period of slow growth. In fact the IMF just recently revised it's October World Economic Outlook and foresees US growth. In fact after peaking at 3.1% in 2011 they are prognisticating a very weak rate of 2.3% growth in 2013 !! In other words this won't be a very robust recovery, it'll take a while and will likely be followed by a period of sustained low growth. Just FYI we need 3.3-3.5%/year for reaching full potential where unemployment doesn't rise. That means that for the next five years the IMF anticipates the US growing at less than potential - with all that implies about employment, consumption and socio-political pressures.

Continue reading "Plowing Old Ground: New/Old Economic Outlooks" »

Posted by dblwyo at 07:53 AM | Permalink | Comments (0)

As we're all coming to realize and grasp this evolving downturn is going to be longer and more severe than has been anticipated (t's Back: Welcome to the Downturn for Real, Storm Flags Flying: State of the Evolving Downturn). And it's coupled with the most severe breakdown and evolving re-structuring of credit markets and the Finance Industry since the 1930s. After all when you have a strongly conservative Republican administration calling for a major regulatory overhaul with the charge being led by an ex-CEO of Goldman Sachs the world is indeed changing. Another meme that has long bitten the dust is the "de-coupling" notion where the US economy wasn't the engine. Instead we're rapidly moving beyond "re-coupling" back to the future where Europe and Japan are accelerating into their own more severe downturns themselves; which are moving faster than the schadenfreudish were thinking as little as a few weeks ago. The final notion that's biting the dust, big time, is that the emerging markets aren't going to get hurt.

The Re-Balancing of the World 

In fact they're already hurting, the pain is likely to get worse and as it does structural fragilities and weaknesses are being exposed, tested and run a risk of failure.(Commandos mop up last of Mumbai militants ) But there's something likely to emerge out of this even more profound. As investors and stakeholders you should care about the metastasizing worldwide downturn in any case. But four factors will take this out of the realm of the "ordinary" and change the structural patterns we've gotten used to in the last several years, essentially since China's accession to the WTO. First declining import demand, especially for oil and consumer goods, will severely damage the economies of the emerging countries. Second, albeit on an individual basis, each of the major BRICs has internal economic problems that are being exacerbated. Third these strains will threaten the socionomic stability of several of the BRICs, particularly (in order) Russia, China and India. Brazil seems to be as exposed but has pursued a more balanced development strategy but will nonetheless be strained. And fourth - there will emerge a major re-balancing of the nature of the world economy which will impact us all for a long time. Our chosen proxy for beginning to grasp these changes is the market indices for the major bricks. The accompanying chart shows the US, Brazil (Bovespa), China (Shanghai) and Russia for the last five years. Notice that they all are now, largely, popped bubbles but there are vast differences. Brazil has held onto some serious gains while China really hasn't and Russia is back where it was three years ago with worse to come.

Differential Impacts

After the break the readings provide a decent survey of the worldwide economic news from the last couple of weeks - not necessarily the most current but the most recent is simply worse and worsening. In the developed world (the G8-1, now that Russia is a pariah) Europe and Japan are entering severe downturns rapidly, the world's major central banks have abruptly shifted policy and started trying to pump up their respective economies and both are trying to pull together significant stimulus packages. In Europe that last is proving difficult because of coordination problems.

Russia despite its' posturings was entirely dependent on oil and commodity revenues which are dropping rapidly and dramatically. The same impacts will occur for the major oil-exporting countries which means that the ME and Gulf countries are rapidly shifting into low gear or possibly worse. The accompany chart of long-term oil prices from a month ago highlights the l.t. trend and our guesstimated target prices. The great irony here is that we had an enormous runup in prices because supply exceeded demand, real prices were low and, as a result, the industries seriously under-invested in capital expansion and capacity growth in the '90s. When globalization took off we abruptly shifted into demand being greater than supply and a whole raft of new projects were scheduled to come on line to grow capacity. At $85/barrel most of the non-traditional alternatives are uneconomic - which means that they're suffering. At $55/barrel much of the expanded production from existing fields and the development of new ones is halted. The end result is that in 2-3 years we will return to shortfall conditions and start the whole vicious cycle all over again.

The situation in China is vastly different. First off they built an export-led economy and as developed country consumers and other developing countries cut back they are being hurt. Beyond that growth led to rapidly growing costs in the major exporting regions and low to non-existent profits. As a result many previously profitable exporters are going out of business and laying off vast numbers of workers. While Chinese growth may drop to "only" 7-8% in the next couple of years you need to recall that they must have growth of 6-7% to stay even with labor force growth and shifts of the rural framing population into more modern jobs. Without that safety the stability of the country comes under increasing strain. At a third level the recent product quality problems combined with rising costs is changing the economics of Chinese exporters drastically and causing foreign investors to shift new investments to other regions and countries. The bloom is really off the rose. India, as the recent terrorist attacks show, is experiencing similar problems. Brazil has a more balanced economy as well as being relative energy independent and not dependent on commodity exports as much; though it's exports of agricultural products and iron ore are dropping and the agricultural sector can't finance itself because of the credit crisis. All in all not a pretty picture.

The final "big picture" shift will be that the US and other developed countries will be shifting from over-consumption to an increased emphasis on saving. Which means that long-term structural demand for exporters from the BRICs will, at best, not grow at the same rates. That will have profound impacts not only on these domestic economies but on worldwide capital flows. Please read Will Dollar Lose Global Reserve Currency Status? for a fuller discussion of this critical long-term shift and, more importantly, really think about it. The world as we grew to know will NOT be the same after we get thru this current collections of crisis. And, as Brad Setser says, if you read nothing else read the World Bank's most recent quarterly report on China for a fuller appreciation (If you only read one thing on China this fall …).

Continue reading "Fragilities Exposed: Downturn, World Economy and Re-Balancing" »

Posted by dblwyo at 03:20 AM | Permalink | Comments (0)

In some ways it almost seems moot to review the economic data - one of the things we constantly examine for its' own sake AND because it defines the context for business performance - given that all the things we habitually talk about are now showing up in the headlines. We should also note that this is, to a large extent, becoming a macro-topdown driven business environment. In other words this tsunamic surge is one of the two most important things that businesses need to be concerned with. The other major concern is the number of businesses caught flat-footed, ill-prepared and as a result are about to do some really stupid things reactively rather than because they've thought it thru. As Warren said - we're going to find out who's been swimming naked (a lot we guess); and we're then going to find out who's smart enough and fast enough to get back under the water or find a suit. The good news, such as it is, is that this downturn will be longer and deeper than anybody is preparing for yet BUT IT WON'T BE ANOTHER DEPRESSION. Sailors have something called the Beaufort Scale to help them report, analyze and prepare for storms. Right now we're headed into a Force 7 storm and will likely to be in a Force 10 ultimately. But not a Force 12+. Look it up - the descriptions are pretty apt IOHO.

Retail Sales

There's lots of economic data we could review but we're going to focus on a critical one - real retail sales (hattip WSJ btw - first they started using YoY data and then they started using real YoY data. Outstanding). You'll find after the break a rather extensive collection of readings on the that and other current economic data. In the first panel the monthly data back to Jan00 shows what we've been warning about for months, but only if you really focus on the inflation-adjusted data. The slowmotion slowdown is clear but crossing the tipping point to a downturn began shows up in late '07 in the real data but only in Q3 for the nominal. The second panel shows quarterly data YoY back to '92 and mostly reinforces that message with an additional caveat/observation,  really important one. We're now well below the worst prior downturns since '90 and headed lower.

Strategic Situation

To come back to the economic Beaufort Scale take a look at this graphic which shows five alternative pathways that we could take. The "purple" one was the fantasies of a short, shallow downturn being floated last winter and even spring by the business press and CNBC talking heads which is now deader than a doornail. The important thing to note though is that the economic data at the time told us it was nonsense but everybody ignored it. The other dead alternative is the catastrophic downturn - though admittedly there's still some chance of a tipover if something real goes kablooie. By and large we think that's been avoided though when Paulson panicked in Sep. he had damm good reason. What we're really debating is the yellow vs black lines with a region of uncertainty between them.

There are two key critical factors (which are extensively covered in the reading excerpts after the break).

1. Credit Markets - can we keep the wheels on the wagon and begin to unfreeze credit. While it's slowly creaking back into motion it's still not doing very well. On the other hand we'd have to say that compared to what happened and what could have we're actually doing wonderfully well.

2. Fiscal Policy - everybody forgets that this last downturn was shallow only because the Housing ATM let mortgage equity subsidize consumption. For the record we all benefited from the financial legerdemain besides just the direct beneficiaries. Otherwise we'd have had a much more severe, longer-lasting downturn in '01. Especially coming off the collapse of the Tech Bubble. That could have triggered a depression in itself. The ATM kicked in $300B/quarter or more for several years so a multi-year $600-800B stimulus package is not out of line to get the economy back on track.

In other words keep your eye on the new econ team and what gets thru Congress, hopefully asap. All our lives depend on it. 

Continue reading "Storm Flags Flying: State of the Evolving Downturn" »

Posted by dblwyo at 05:59 PM | Permalink | Comments (1)

Well time to pick up the discussion on the state of the economy; and if you've been playing along with us here last Friday's GDP numbers are no particular surprise. You may recall our mentioning (graphically) the slowmotion slowdown devolving into a tipping point turnover ?? We won't review those posts but will dive right into these and try and sketch things out for you. But first a little light relief - instead of Apocalypse Now we bring you Collapse Now with Col. Ben taking the role of Col. Duval. The dual problem with that sort of black humor is we've been warning about the situation for so long our innate reaction is "so what" but judging from the casual strangers we find weeping in airports 98% of the population is beyond surprised.

Which leads us right to the charts and numbers. First off the bad news - in our judgment this recession which we're really starting to enter will be longer and deeper than anticipated by almost everybody. Worse, some joking aside, most folks - especially business decision-makers - are getting caught more flat-footed than they should be. Think of it as Darwinian filtration in action except it'll take a lot of innocents with the idioten.

Q3 GDP Results

 Starting with the basics this charts shows YoY changes in GDP, Consumption (PCE) and Employment back to 1980 and there's a lot of nuanced information buried in it. Have a drink and let's talk. Normally we don't run back this far as it's hard to see that Consumption went in the tank at this scale. But that immediately sets up our next point about the length and duration of the on-coming recession. Notice that the slowmotion slowdown tipped over in Q407 for Consumption but GDP had been holding up and has now followed over the cliff. Further notice that, as long advertised, Employment took a long time to build, peaked quick and low compared to prior recoveries and has been deteriorating for quite a while. And we're still early days yet - in our judgment this will be drawn out and deeper than anticipated.

Business Decelerations

If you look at harbingers of future growth, i.e. business spending it's just beginning to tip over; which is what you'd normally expect give the lags between different parts of the business cycle. The 800lb. canary here is Industrial Production which has tipped over rather quickly and abruptly - based on the most recent data. Now aggregate investment has been dropping for a while because of problems with Real Estate and Housing; what this tells us is that capital spending (& hiring) are about to slow; perhaps sharply in the months ahead.

Future Demand

You may recall our mentioning occasionally that the best indicator of future demand was the sum of the changes in real wages and employment. On this chart you can see how closely PCE is correlated with W+E and how consumption drives the economy. Now take a look at how the W+E curve is doing - looks like an Acapulco cliff diver to me. Now put the pieces together - if future consumer demand is about to take one in the neck AND employment has yet to really turn over what does that tell us about the future path of the economy ?

The answer is left as a take-home exercise of the student (HINT: can you spell longer and deeper ?). As usual if you care to continue reading you'll find an eclectic set of excerpts on the state of the economy that highlight some of these points. And perhaps might serve to crib your answers from if we haven't been clear enough.

The good news, btw and it is indeed good, is that while this will be worse than anything we've seen since 1980 we don't expect it to significantly worse than that or 1975. In other words we've been here before. And this most certainly is not the beginnings of another Great Depression. Someday we'll post those charts for compare and contrast but trust us - when aggregate GDP drops by over 25% in three years and when it takes almost a decade for aggregate growth to get back to breakeven a few measley % points of downturn are nothing. 

Continue reading "It's Back: Welcome to the Downturn for Real" »

Posted by dblwyo at 11:19 PM | Permalink | Comments (0)

After arresting its' precipitous collapse on the backs of coordinated worldwide policy interventions

the markets gave up those gains and seems schizophrenic and paranoid. As it should be. Schizoid because it hasn't got a clear picture of where the economy is headed and paranoid because it suspects, correctly, that we're just seeing the start of the pain. What's stunningly surprising to us is how badly this economic pain, which has been clearly visible in the data and charts for a long-time, was anticipated. And how badly prepared almost everybody is. Including supposedly deeply informed observers, not just the usual talking heads. On the other hand there are some deeply informed observers who have been sounding the appropriate alarms for some time and who have, on balance, proven correct time and again. The accompanying Rose interviews are worth your time to put a lot of this in perspective. There are several questions that you, and most, should have in mind.

Policy, Economy, Markets, Outlook 

1. Intervention - will the coordinated interventions stop the collapse ? We'd almost say absolutely but nothing is guaranteed. That said this is a pretty complete toolkit, it's worked before and the level of international collaboration is unprecedented. All of this is stark contrast to the situation in the '30s where policy-makers did everything completely wrong.

2. Economy - which doesn't mean we aren't in for some protracted pain. This is likely to go on for two years and lead to a weak economy for a considerable time after that. It is likely to be as severe as the downturn in 1980 at least. Unemployment might rise to 8% or more...but then again back in the day that was an improvement.

3. Markets - still aren't adequately adjusted to reality but are getting there. We're likely to see a bear rally if the credit markets return to normal. There are certainly plenty of talking heads who are still too complacent. But then the pain, as the deeper economic realities sink into the headlines, are liable to lead to a market decline lasting thru '09 and into '10.

Take another look at the conceptual graphic of the Business Cycle - it's intended to help you frame the situation. This is like watching a giant wave build up offshore - the surprise is not that it turns into huge surf crashing on the beech. The surprise is the folks standing there watching it believing it won't happen. 

Alternatives and Liklihoods 

The world has changed in many ways and there are going to be new long-term structural shifts as consumers shift into saving more, financial industry de-leveraging continues to work out and companies adjust to this brave new world. Get over it. Or better put the sooner you get over it and re-orient yourself the better able you'll be to cope. But one way or another you will get over it. MUCH easier said than done I know full well. Hopefully by sorting the chaos, filtering and giving you some tools to help turn it into real information we'll all find some ground to stand on.

People can cope with emergencies and surprises, even the most drastic, when they have some clear understanding of what's going on. And some framework to make their decisions around. Right now many are still in shock and numb fugue as the result of the near-collapse of the markets. If we can get them stabilized then we will fight thru this.

The chart shows four alternative scenarios for GDP future growth paths. NONE of them is anywhere near as bad as the Great Depression, which would be completely off the chart. What the recent policy actions do is make it highly likely that the worst two won't come to pass. What we want is to get as close to the better two as possible. Which in turn is going to be dependent on government fiscal policy and continued support of the markets. The difference is going to lie between returning to the sustained malaise of the '70s or pulling ourselves up by our bootstraps ala the '80s - only this time with some good sense instead of voodoo economics and self-delusion.

Continue reading "As Ye Sow...Policy vs Economy vs Markets" »

Posted by dblwyo at 09:26 AM | Permalink | Comments (0)

I haven't drawn attention to the fact that we run two blogs - this one business and economics and another on public affairs. Now that we're in a position where it's difficult, to say the least to seperate the two and we're headed into tonight's last debate let me point you at the following excerpt (if you follow the URL pointer you can see the entire thing along with the accompanying readings that compare and contrast the two candidates approachs and economic teams).

This builds on the short paragraph in our last post here by sketching in some detail what we think a total, integrated and comprehensive economic strategy should be.

Populist Panderings, the Candidates and Real Solutions

Comprehensive & Strategic Economic Program

Given all that what should we be doing - and therefore what should be looking for in tonight's debate. Well two things. One as close to this outline as possible and two minimal populist pandering, bearing in mind "nobody can handle the truth". That said in both his acceptance speech and the last debate Barry basically walked right down our reccy's while Johnboy appears to be improvising as he goes and throwing out one offs - not an integrated program. You might/ought/should invest the time to listen to this interview very carefully - from the guy who's called it for three years now !

Nouriel Roubini, New York University, Economics Professor Nouriel Roubini, an economist who predicted the depth and magnitude of the current financial situation before the decline of Bear Sterns, discusses the indicators he saw and his recommendations for stemming the financial downturn.

Step 1: Get Credit Flowing Again - we've been discussing this almost exclusively for the last several posts. While it's still very early days yet we think that the basic elements are in place and being acted on as rapidly as possible.

Step 2: "FIX" Housing - we're not going to get the economy back on it's feet while Housing continues to drag so much. At the same time too many people bought too many houses for unsupportable prices with funny money. Until prices come down significantly MORE it won't start self-correcting. In other words we need for the homeowners and the lenders to take another 15% haircut, write it off and re-negotiate the loans to something more sensible. And it'll need a serious institutional framework.

Step 3: Major Fiscal Stimulus - the last so-called recovery was put together on the Housing ATM and was pumping $500-700B/year into the economy at least. The economy will fall into a major serious recession unless we stimulate it and that stimulus needs to be of the same order of magnitude. This also needs to be quick, targeted and temporary - not another political boondoggle (fat chance I know but....). Tax cuts won't do it. On the other hand the impact on the deficit is irrelevant for a lot of reasons (still be low as a % of GDP, worse w/o stimulus). Things like extended unemployment benefits, more rebates, and direct spending programs fit the bill. Lots of very...y good economists like Larry Summers have tabled excellent proposals (btw - Barry's econ team is non-pareil and Larry's on it. See below). 

Step 4: Infrastructure Investment -the US has let it's electrical, waterway and transportation infrastructures deteriorate to the point of...well never mind. A massive decade long infrastructure rebuilding project would see us get new electrical grids, new highways and transportation systems and possibly new power plants and alternative energy supplies. This would have the benefit of providing enormous fiscal stimulus, i.e. creating jobs and making a major long-term investment for things we know how to do. BtW - major sidebar. The long boom of the '80s and '90s was primarily built around two things. Supply side is utter nonsense. Reagan got it going the old-fashioned way with deficit spending and Clinton got lucky and also cut the defense budget. Bingo, that's it.

Step 5: Strategic Investment (Energy, Biosystems, Materials) - we need new industries and we need to get off of our oil dependencies. There's things we can do in each and both. For example by increasing conservation as well as mandating enormously higher mileage thru better materials and engineering we could get a huge jump for the next ten years. Then we need to build new power plants, particularly nuclear, we need to open up our own offshore deepwater to oil exploration and we need more refineries. That all togeter takes us into the next decade. Beyond that we need some major alternatives - and don't believe 'em. We don't have the knowledge or technology do magic yet. For example we should really be heavily emphasizing coal but need major new technology not the Rube Goldberg fixes running around. So a concerted national effort (does the word Manhattan Project ring any bells) to create major new energy sources and technologies would stimulate the economy, create new industries and provide us several paths to the future.

Combine that we major parallel investments in new life sciences and materials, both because they offer the best hopes for the Next Big Things and because they are synergistic with energy investments. For example if we pie-in-the-sky about Fusion we need the new materials for the reactor vessels. Or new lightweight composites for high-temperature turbines. Similarly new bio-sciences offer up their own benefits not least of which is designed alternative energy crops as well as way to control and manage environmental problems. The real beauty of this is that it doesn't take a lot now because it's all at early stages.

Step 6 - Education Investment: the decline in average income is due more to natural evolutionary shifts in the kinds of labor demanded by an increasingly technical economy. When the US Economy really started on its' accelerated path after the turn of the 19thC few know that a key ingredient was the widespread development of high-schools and the resultant upgrading of the skills and knowledge of the population. Education is the co-dependent imperative along with creating new industries IMHO. (Readings(Education): the Single Most Important Domestic Policy Issue) 

Posted by dblwyo at 07:12 PM | Permalink | Comments (0)

Back in the day the winter after first getting my driver's license my mom was over-joyed to let me drive myself and little brother to our ski lessons, which were 90min away up a rather steep, single-lane (albeit interstate quality) road. Though officially only having a few months my summer jobs had been on a golf course where I'd been driving for over a year so technically my skills were pretty decent. Coming back home on the steepest and iciest corner my teenaged lack of judgment led to a spinout with the rear wheel hanging over the edge of a 3,000' droppoff and no guard rails. The rescue package should put the wheels back on our kiddy wagons but we still have some steep and icy curves with scary dropoffs to negotiate. After we manage that feat of legerdemain the road is still headed down. It would appear that after almost a year of denial of those facts the realities are fast sinking in, in the markets (both credit and equity), policy makers and politicians and the consumer.How else does one read the final passage and the subsequent market drop ? BtW - on Mon. when the bill failed the markets tanked at the exact moment and on Fri. when the bill passed they reversed again and re-tanked. Welcome to the jungle. Let's talk about mapping, navigating and surviving the trip.

Economic Situation and Outlook

The economic news has been un-relievedly bad with  a major downward revision in GDP,  surprisingly bad  employment numbers, scary revisions to durable goods orders and so forth. Worse the consumer is really beginning to pull in their horns, as we've long expected. We won't review all the data in detail but a quik skim of the Economic Data archive might be worth your time, just to look at the headlines and charts if nothing else. As you can see from the accompanying chart Real Retail Sales is negative and has been for some time, having cross that tipping point earlier this year. Both it and Real Consumption are in fact already worse than '01 in YoY terms and would appear to be headed lower than in either '80 or '75. That tells us this is likely to be a more severe and longer-lasting recession than any we've seen in over 25+ years. Sorry for the bad news but if you've been in denial all this time we think it better to look at the unvarnished truth and try to move on to acceptance.

As for Employment and GDP, both of which are lower frequency numbers and lagging ones as well they too will be navigating those steep and icy roads. Just to reinforce out argument we're bypassing the monthly, s.t. data and show the YoY quarterly changes back to 1980 where you can see Employment turning more sharply down in the top sub-chart. In the middle we compare Employment, Hours Worked and Unemployment. The latter is showing a particular sharp and steep rise, increasing almost 30% YoY. No wonder the markets are tanking - they should be. It's now commonly recognized that this has been the weakest "recovery" in a very long time. That's because after the implosion of the Tech Boom we never got back to self-sustaining organic growth. In fact in the last sub-chart you can see that net of the 450K jobs/quarter needed to breakeven, we're actually "in the hole" on net new job creation almost 5 million jobs. A weak recovery indeed. Which means there's no pent up consumer demand waiting in the wings since it was held up by the Housing ATM and MEW above where it should have fallen. This will make the downturn worse before we start re-building toward a recovery.

Politics and Politicians

More than anything this last three weeks are a pragmatic lesson in how the sausage-making factory works. The answer is not very well at all when a Rep. dominated House put the entire economy at risk for self-serving purposes. Make no mistake about this - key public servants like Bernanke and  Paulson more than did their duty, the Senate did o.k., the two Presidential candidates demonstrated a caution that is NOT true leadership but the House conservatives were, in the services of their ideological shibboleths, the proximate trigger of this last week's implosions. And they in turn were driven by the sheeple. Who were, in turn, driven by a perfectly natural spirit of revenge. We like to think of this as the peasants in pursuit of the monster burning down the village instead. Now we need to put out that conflagration before it destroys the whole forest. We covered some of this ground in the prior post (The People's Choices: Rescue vs Revenge) but if you want to understand the social biology of peasants the key article to read is this one:Animal Instincts: Main Street Seeks Revenge on Wall Street.

After the break you'll find a lot more on the economic data and outlook, the rescue package and the continuing crisis in the credit markets - which is not repairing itself so far and is instead continuing to be a major drag, and on the politics of pandering. The consequences, we have to say, are now obvious. 

Continue reading "Wheels Back on the Wagon ? Still Headed for Icy Curves" »

Posted by dblwyo at 09:17 AM | Permalink | Comments (0)

Well the news has just been swirling of late but the reason, aside from that, that we've postponed another post is that most of it's been political, rather than economic or business or markets. Yet that political news has dominated the other three categories. We'd be a little surprised if by this time you don't know that the Rescue Package didn't pass the House, that it largely didn't pass thru the failure of the House Republicans to get enough votes, and that they failed to accomplish that - beyond ideological principles - because the overwhelming major of the electorate doesn't support this. Houston we have a problem. Now there's a wide variety of good news, other than the amusement factor, in all this. First, and perhaps most importantly, the equity markets seem to believe something will get done though the credit markets are still in deep trouble. Second, oddly enough, today's economics news was pretty bad. IN particular the drop in auto sales was spectacular and that was mostly due to consumer confidence and credit conditions. Third, the biggest problem is that people don't believe this administration, that this is a problem or that it affects them. Which means that between the market almost crashing and today's sales figures a little more light might be dawning. At the end of the day we get to learn yet another lesson in strategic business planning that we've talked about before. The socio-political context really matters, it defines your ecology, you can't control it but you can deal with it. (Strategy, Context and Awareness: Sub-prime Lessons,WRFest 23FEb08(Business Strategy): What the Future May Hold ?) In fact so many major companies were convinced the package would pass they neglected to speak up not wanting to get tarred and feathered - hopefully we'll be able to chalk this up to painful lessons rather than bitter mistakes. Given our focus we won't go into the details of the political Kabuki nor the popular reactions but to our point, you might benefit from consulting these other posts (Calm Down: the Fat Lady Ain't Sung, Yet., Marketing Elephant Pills: Struggling to Explain the Rescue).

After the break you'll find our usual survey of selected relevent news with a caveat - this is all from today. We won't put up more econ charts to bring home our major arguments about the economic situation having just reviewed it in a prior post (Managing the Lizard Brain: Beyond Crisis and Kabukit to Realities). And we've also previously put up the discussion and chart characterizing the implosion in the credit markets by looking at the huge drop in the 3Mo Treasuries. If you'd like to scare yourself again here's the chart. But we would like to look at the market chart for the last three months. Monday certainly stands out (our only regret personally is that we'd bailed out of down-leveraged positions a week earlier in anticipation of the package passing. BtW - don't presume it goes this time either !!).

The thing we'd really like to draw your attention to is the expanding funnel of doom - when a system starts getting bad behavior amplified by external forces (technically a positive feedback loop otherwise a vicious cycle with a bad end) it shakes itself to collapse. Whether it's a turbine with a broken governor or the Classical Maya civilization pushing it's look. Go visit the natives of Easter Island if you want some firsthand stories. Notice that the swings were getting wilder and wilder but driving harder on the downside. So how would you interpret that ? And oh yeah, be sure you check out the 3Mo Treasury chart. 

Right now the markets have calmed down but if Hank Paulson had headed out to get drunk like any normal person Monday night instead of not only heading back to the office but immediately marshaling the troops that'd been all she wrote. It might be time for you to write and express your views to your elected representative. Even if you're investing in inverse funds you still have to have markets to play in after all :) ! 

Continue reading "The People's Choices: Rescue vs Revenge" »

Posted by dblwyo at 06:50 PM | Permalink | Comments (1)

The original plan was to put up a post over the weekend looking beyond the rescue package but as the news ebbed and flowed we got distracted more than a bit. And still headed into today with a relatively benign outlook which turned out to be mis-placed. There's been a change of plan since instead of containing the breakout from Stalingrad we've had an ideologically motivated sit-down strike on the part of the troops who're now sulking in their tents. So rather than our normal longish analytical post along with excerpts, charts, etc. we're going to focus on Steve Perslstein's latest column from the Washington Post which is as short, pithy, direct, accurate and honest a description, in ordinary English, as we've read. We've got a lot more to say but we're simply going to start here and pick up more tomorrow, depending on how tonight's drinking goes. BtW - how's your food, water, ammo, fuel and liquor stocks doing ? After you read Mr. Pearstein's elegantly direct assessment we also suggest you consult John Mauldin's latest newsletter for a more detailed explanation: Who's Afraid of a Big, Bad Bailout?

They Just Don't Get It

Oy vey.

That is the technical economic term that best sums up a day in which the House of Representatives refuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders from both parties, Wachovia is taken over in a deal that will have the government potentially owning 10 percent of Citigroup, a few European banks fail, the Federal Reserve and other central banks are forced to inject an additional $300 billion into the global banking system, the Dow Jones industrial average plunges 777 points, and investors everywhere rush to the safety of gold and short-term Treasury bills. The basic problem here is that too many people don't understand the seriousness of the situation. Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system. Politicians worry less about preventing a financial meltdown than about ideology, partisan posturing and teaching people a lesson. Financiers have yet to own up publicly to their own greed, arrogance and incompetence. And leaders of foreign governments still think that this is an American problem and that they have no need to mount similar rescue efforts in their own countries. In the coming weeks and months, all of these people will come to understand how deep the hole really is and how we're all in it together. They'll come to understand that the giant sucking sound they hear is of a massive deleveraging of the global economy and the global financial system as households and governments, businesses and investment funds adjust to living in a world with less debt and more inflation.

And they will come around, reluctantly, to the understanding that the only way to get out of these situations is to have governments all around the world borrow gobs of money and effectively nationalize large swaths of the financial system so it can be restructured, recapitalized, reformed and returned to private ownership once the crisis has passed and the economy has gotten back on its feet.

In the next few weeks, the center of attention here in the United States will shift from the Congress and an exhausted Treasury to the Federal Deposit Insurance Corp., which will now have to rescue any number of failing banks, either by taking them over directly or managing their transfer into stronger hands. It will also shift back to the Federal Reserve and other central banks, which will have to step up their efforts to maintain liquidity in money markets and prevent the credit crunch from taking down hedge funds, businesses, and state and local governments.

These will, alas, be only holding actions. Restoring real stability to financial markets will require the kind of systemic approach and extraordinary government interventions that the public has refused to authorize and finance. In better times, the public might have put aside its reluctance in response to the strong and unified recommendation of political and business leaders. But it is a measure of how little trust remains in both Washington and Wall Street that voters are willing to risk a serious hit to their wealth and income rather than follow their lead.

Posted by dblwyo at 09:49 PM | Permalink | Comments (0)

Not sure about you but re-fighting Stalingrad and watching the Kabuki dancing of the political poseurs is wearing on my nerves. Call it the triumph of the lizard-brained. That's not a pejorative btw but a technically accurate description of how our brains are wired. The neuro-stack is Lizard-brain (ancient), Monkey (very....y old), and "Modern" (the part we think is new, in charge but who's primary purpose is to rationalize the primitive decisions already reached by Mr. Lizard and Madam Monkey). Of course James told us all that over a 100+ years ago and it's been confirmed by modern cognitive neuro-sciences and brain-scanning. For as simple a summary of where we're at that's relatively non-technical check this other post:This is a Rescue, Not A Bailout: And It's Your Life . And for my complete archives laying out the genesis and evolution of this crisis try a quick skim of these two archives:CreditMktsCrisis,Fed & Credit. You might be surprised at how much information has accumulated that's turning out prescient but grossly under-emphasized. That is, I didn't see it blowing up this bad either. Instead we'd like to remind you that beyond today's credit crisis du jour are a host of real economic problems, including a Housing market that has at least two years before recovery from excess and mounting inventories. And a real economy that we warned sometime back was in an accelerating downturn and was now crossing the tipping point all on it's own. (Be Afraid, Very Afraid: Five Things to Know About the Economy) Summarized in the accompanying table which dates from around Feb (we think). (Filtering the Non-Linearities: Sorting the Risk Factors) Take a minute and read it because you'll notice that there's a lot still qued up to be worked thru. A lot indeed. The point here is not to celebrate my own prescience but to highlight the fact that that the machinery available here allows one to be prescient within divine gifts of insight. So instead we're going to focus on recent economics news, which you'll find summarized and excerpted after the break. The two must-skim readings are Mark Faber's outlook which captures our own exactly and the huge warning shot from the Chinese government that it's lost all confidence in US investments. If you don't think that's critically important you need to educate yourself as to what happens if they start drawing down the flow of funds that have kept interest rates low.

First, a little sidetrip back to the crisis. As you no doubt know Th. saw the collapse of Rescue Package talks with more political posturing by some very mistaken Republican ideologs. Fortunately for all of us the markets, including the credit markets, are retaining their strong belief in a package getting passed. Given that short-term credit conditions are turning into a disaster area and already beginning to seriously crimp business and the economy that's amazing and good news. 

The top sub-chart is a short-term SP500 chart that shows us how resilient the markets were, even rising to positive territory today. On a day when many of us were expecting a 300 point drop. We may get a relief rally next week if the bill is passed as promised over the weekend. If you haven't already down so...sell into this and get out. There will be a major downturn in the works.

As you can see looking at the slightly longer-term and second sub-chart which shows the real trend in place. Our anticipation is that as soon as we get past this little excitement, presuming we do, that economic realities will slowly sink in and a real recession will start showing up. Which it hasn't as yet. We're not even down 20% as yet and typically downturns get you 30% and this is likely to be worse. Beyond that, as one of the excerpts points out and we've been saying, earnings expecations have moved from unreal to surreal. We're not sure what the analysts are smoking but we'd like some. So what is the economic news - all of which was bad this week and last, though we spent more time on the crisis than on that big picture ?

Economic Assessments and Outlook

Consumer Spending: Real consumer expenditures are slowing rapidly and are as low now as in '01 and dropping while real retail sales have been declining since Nov07 and recently started dropping faster and have been negative since Jan. Probably a good thing that these YoY numbers aren't reported as people would really get scared. Oh yeah - auto sales continues in the tank and we don't think the industry is prepared for how deep and long this downturn will be. When shorting is restored there's money to be made betting on some BK's in Detroit.

Investment: the next item up moving around the business cycle circle of life is investment. Which as you recall lags consumer spending because it's driven by it. The drop in New Home Sales continues though the good news is the decrease appears to be flattening off at -35% YoY ! Think about that for a minute. Afterwards notice that Industrial Production is headed over into the tank and the recent MtM headlines were a -4.5%. On our charts the downturn has been visible for months. New capital goods orders look much better until you notice that they went in the thank last summer and ask why they picked up ? The answer was a weak...k dollar and exports. A boon soon to be taken away. BtW that decline means that Tech spending is going to take it in the neck (Tech Trends II (Analysis): What're the Drivers and Outlooks).

Future Demand: the main drivers of future demand are growth in real wages and employment. Well guess what real wages have been dropping, not quite like a rock and we're now in our seventh month of employment declines. The net result is their sum is tipping over as well. And we're just started into the real downturn which is NOT visible yet because of normal cyclic patterns. Something that repeatedly escapes the pundits, talking heads and the MSM. We're starting to see some glimmers, e.g. Faber's got it right and more and more of the financial economist community is starting to see the world the way we've been seeing it for months. Halleluah - at long last. At least from an intellectual perspective. From a painful experiences to come perspective not so good. 

Wrapping Up

We'll leave you with this fascinating little chart that looks at some alternative extrapolations of GDP growth over the next ten years. The first is a mild downturn that's the best case we see, the 2nd a more severe downturn if the credit crisis worsens and the third is if it gets really bad, the package doesn't work too well and we catch the no-growth Japanese diseases. Factor these into your planning. We think we're being realistic and have deliberately ignored the Big-D scenario having a desire to keep our dinners down.

Continue reading "Managing the Lizard Brain: Beyond Crisis and Kabukit to Realities" »

Posted by dblwyo at 07:04 PM | Permalink | Comments (2)

It's probably time for a little update, especially now that the Dow is down nearly a 1,000 points, the crisis appears to be metastasizing, panic is in the air and blood not quite, other than figuratively, in the streets. Of course there's a lot of figurative blood and people's livelihoods and futures at stake here. And if one goes abroad ripple and local effects have cause food riots and other unrests so figurative isn't totally accurate on a worldwide basis. Now as you may have noticed thruout all the sturm und drang we've tried to let others focus on the immediate while continuing to wrap the flow of events in a strategic context and link them to wider structural concerns. (Continuing Confusions & Crisis: Teetering Giants to Credit to Housing,Keeping Your Head: Understand the Crisis, Navigate the Crisis ?)Which we intend to continue, and so in that spirit our headline. Let me explain.

Between Stalingrad and Kursk 

Just in case you're not a history buff let alone a military history nut like some people the high tide of the Axis advances could arguably be said to be the battles of Midway, El Alamein and the Battle of Stalingrad, still one of the most horrific in history and accurately portrayed we think in the 2001 movie Enemy at the Gate. That could be called, as Churchill did, the end of the beginning. Several months later and after long preparations on both sides the Battle of Kursk was fought and it was THE turning point on the Eastern Front because the Soviets were able to trap a major German offensive thru superior intelligence and strategy, stop it and then reverse it with their own major - and successful - counter-offensive that took away the strategic initiative from the Germans for the rest of the war.

Part of our reasons for thinking we're beyond Stalingrad is that for the 5th or 6th time in a week we've read a major MSM media article that lines up with our thinking and also represents a broader consensus of emerging opinion and understanding. Two of the biggest problems we've faced so far are a lack of grasp of how deep and widespread this overall problem is and pronounced denial in many quarters that either it existed, it applied to the firm in question - that's pretty well resolved in the last two weeks, we'd say - or that it was over and a bottom could be called. The first step in treatment is moving from denial to acceptence, or standing up and saying, "Hi, my name is Mr. Market and I'm a debtoholic". Of course there's treatment and treatment and shuddering thru to expiration with the DT's qualifies as a fix, if not a cure. :)

As you may have noticed we rather like longer posts with pictures and readings to beat a point, or points, to death. After the break you'll find a collection worth your time that samples some key issues and events: the AIG case and why it was so important (the Jubak vidclip is the best simple explanation), the immediate consequences for business in terms of credit contraction and further economic slowing, the ecological shifts in the Finance Industry (when an ecology changes suddenly whole species die out), macroeconomic implications and, finally, deep and major structural reform and recovery of the regulatory framework. With the initial idea of forming an updated version of the Resolution Trust Corporation. And idea that makes sense, is workable, will be challenging, is probably necessary and has the backing of serious political players and some of the most renowned wise elders in the country. Think of it as the pre-planning and intelligence gathering for Kursk and a step we heartily endorse. In fact sidebaring to political implications - this is an acid test for candidate screening IOHO.

Now as it happens, and part of what encourages us, is that none of the readings covers a topic or situation that we haven't been talking about for months. Aside from proving we're not completely nuts it means that a broad view of what we see as the structural breakdowns, systemic risks and necessary correctives is emerging and building rapidly into a common view. Hallaluah ! THAT's the first step indeed. So we won't bother to repeat any of the earlier pictures but strongly urge you to at least read the excerpts. And it also lets us sidestep in a way to focus on the markets outlook. On the other hand given the last two weeks where all this agita has come together in screaming headlines and apparent worldwide market collapses a few stock market charts might be in order to help you get a sense, at least ours, of where things might be headed :) ! 

Market Perspectives: Short to Long-term

 Let's start with some relatively immediate history - a composite chart that looks at the last five days combined with the last three months. The last three days opened with gaps downward which was and wasn't surprising. But chatting along with the trader geeks, a fun and knowledgeable bunch of guys btw and a good place to learn (Matt Trivisonno’s Blog), we all agreed Tu. night that We. was do for a bump up. Boy were we surprised. Now as it happens everybody was well positioned or put themselves there, did very well yesterday and had a great time. After all for these guys volatility is their friend. And their surprise was several orders of magnitude less than that of the general population or the financial community for that matter. Largely because they don't let believes get in the way of seeing the facts as they are. The 3Mo chart at the bottom would suggest a new downtrend is being established and, since it was busted, has farther to run. What I think we're seeing is the emergence of a new view of things that's replacing the old denial sentiment. This is why using the market as a gauge of general attitudes is important. If true it bodes well for the future.

But like I said "we" trader-geeks (I'm only a lurker and occasional commenter, not a contributor) were surprised and this next composite chart perfectly illustrates why. The whole theory of technical analysis is that patterns emerge and tend to repeat because of statistics and internal market forces. If for no other reasons than so many market participants use them in one form or another that they constitute a significant part of the market :) ! One pattern is the tendency to follow certain natural long-term and rhythmic, almost wave-like patterns, where a major advance is followed up by a retreat to a certain level. And if that level is breached then on to the next and so on. It works pretty well until it doesn't. We've been in a cyclical bull market since ~'02 that turns out to be part of a larger, longer bear. That market ran up from the trough in '02 to the fall of '07 and as of Tu. night had fallen back 50% of the way - one of those natural stopping points and the reason we all expected, given no change in sentiment, to see a week-long bounce back up to 1220-1230. Which we started to see but boy did it fade. If it had worked out we'd have gotten the bottom chart which shows where the bounce up might have been, possibly back up to 1270 or so at my most optimistic. But that didn't happen ! And the next level down is/was the 68% level, cause a close of 1156 blow right thru that 50% line. You sense a theme emerging here ? I hope so.

Let's try and drive some more nails home by taking a really long-term view so you can see the stagnant market we've been living in since ~'99 or so. This composite chart shows the SP500 from 1950 to now adjusted and unadjusted for inlfation on top and adjusted compared to GDP on bottom. There's a whole wealth of socionomic history embedded in those charts. But first notice that the market's been flat over the period we mentioned unless you adjust in which case it's never been as good. To look at the top you'd think we'd had a real bubble but looking at the bottom a complementary story emerges. The economy drove the markets right along until '75 when all our past sins caught up with us and the markets seriously under-performed until they started to play catch up in '95...two decades of malaise to pay down the excesses (fiscal, monetary, social and otherwise) of the '60s and early '70s ! Think of it. Now where we go from here needs more discussion but with major structural changes in Finance, an economy likely to be in malaise for a couple of years and below potential for several after that we certainly don't anticipate a return to the boom years. Which means you really need to re-think your standard model of investment planning btw. The old buyem n ridem model is dead as a doornail but nobody's telling anybody yet. (Bears of the Apocalypse I: Long-term Market Performance Perspectives,Bears of the Apocalypse II (LT Econ): Who's Fault is this Mess ?)

Summary and Perspectives

Before Kursk there was a lot of work to do and an RTC initiative would, if put in place be the pre-positioning to fight it. What we're in is basically a plumbing repair job where some broken pipes need replacing, some kinked ones needs straightening, a couple of new pumps need to be added and then a whole bunch of de-clogging of the septic messes needs to be done. Before we all catch something from it. But the Fed and the Treasury are doing a great job with the hands they were dealt and the tools they've got or been able to build. But we need to rip out and replace all the plumbing as soon as we've got the immediate problems far enough under control. And to keep beating the metaphors to death it's the plumbing that helps make the house livable but it ain't the house, the economy is. And there's a lot of repair work needed there as well. Major repair, reconstruction, additions and new developments IOHO ! Some more things to think about for this election.

Continue reading "Between Stalingrad and Kursk: Not Quite the Beginning of the End" »

Posted by dblwyo at 02:15 AM | Permalink | Comments (0)

O.K. time to move on, at least in a sense. The LEH collapse crisis continues, has received continuing press coverage (pick - WSJ, FT, AP, Yahoo, Bloomi, Reuters.....) and pretty good blog coverage (CalculatedRisk, BigPic of course) and we've provided some running updates. And the MER, AIG, WhamU (WM) sagas are boiling along merrily in the not to distant background. This is going to be an interesting week - got water, first aid and ammo stocked up ? As is our wont we're going to wrap this moment to moment agita in some other news and some really big picture context. After the break there's a bunch of excerpts starting with another good WSJ story on the metastasis of this whole mess (this is, to our intellectual delight and investment chagrin) about the fifth major MSM story that gets it right.

This is IOHO the most important few things to take away from this you need to think about and internalize:

1. This is continuing and is systemic, that is everything's tied together into an ecological system that is under-going widespread pressure. Now we're not talking mass extinction here but continuing serious to severe problems.

2. Most of the key financial, business and market players continue to lurch from surprise to surprise having substituted their decades of experience and the derived rules of thumb for thinking when the structural patterns have changed. The MSM major stores are very good indicators that those broken mental models of reality are getting shaken and stirred but not replaced. That's dangerous.

3. This is unnecessary. Many key outside players (Roubini, Feldstein, Krugman, Rogoff, Hartzius,....) have been sounding warnings since this time last year. Fortunately both the Fed and the Treasury after initial periods of fugue when they were under-estimating the severity have been proactive, insightful, ballsy and fast. And are basing their actions not on immediate invention but on several years of worrying about this sort of breakdown so they've been better prepared than most.

4. And it doesn't mean one can't "dance of top of the turbulent waves" by following good business practice. It just means that most chose kookaid and self-delusion over discipline. As the excerpts on Berkshire's Clayton Homes, who live by selling modular homes to sub-prime borrowers, and Harvard Endowment's continued superior performance prove. Dare we re-mention all the stuff we've been throwing up on good business performance, again ? (Using the Palantir: Beyond Fear to Performance and Returns) .

In addition to the WSJ strategic overview the next section reviews the next set of emerging problems that are cropping up as, for example, commercial loans deteriorate, junk bond spreads climb again, the demand for Fed Window borrowings goes up among regional banks - who've been avoiding it because of the stigma of distress. And this is going to go on for a while. What these stories tell us is that while we've ONLY been living thru the consequences of the fallout from sub-prime and the associated de-leveraging in the financial markets that other major credit problems are about to accelerate. Thereby moving us into a set of "feedback loops" between deteriorating economic conditions, tightening credit, more bank losses and a further weakening. Associated graphics from prior posts are embedded with the excerpts btw.

In addition to those problems, which could be described as the 2nd level consequences of the first big "rock in the pond" from sub-prime we're about to see two more big boulders rock over and create more tsuanmic waves. Commercial Real Estate is beginning to turn down and with it the associated loan losses are rising as well. And we're moving beyond sub-prime to the onset of major problems with resets in the Alt-A markets which will lead to more down-pressures in Housing sales and prices. Again things that STILL aren't being widely factored in in general, though obviously a lot of good people have been sounding warning bells for some time. So be forewarned about more ripples spreading out from those as well.

Continue reading "Continuing Confusions & Crisis: Teetering Giants to Credit to Housing" »

Posted by dblwyo at 09:50 AM | Permalink | Comments (0)

Let's weave the some of the rest of the story into this growing tapestry. We started with Plunge Protection Team's rather predictable, long-predicted and necessary efforts to rescure Frannie which naturally led to a discussion of markets. BtW the rescue and/or re-engineering of Frannie has been in the cards and on the national policy agenda for years, literally, but not acted on until a crisis has allowed the people who know better to do something. And from the markets we're naturally led to the economy, rather the reverse of our usual order. Yet revealing all the same. There are more than five things about the economy for you to know but five is a re-memorable number and spans the range. 1) The Frannie rescue was vital, though you wouldn't think so from the number of conspiracy theorists ranting in the blogosphere or in the MSM. We found, finally, some balanced discussion and included it in the readings besides our own. But, 2) the rescue doesn't save Housing from a further downturn nor prevent a recession; instead it lets the market machinery keep working and the normal cyclic recession proceed (again nicely covered in the readings with some stuff you need to pay attention to).

Which leads to 3) the Employment report last Friday which was very weak and in conjunction with a proper understanding of the GDP tells us that we are indeed crossing the tipping p