The Big Picture | July 2003

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Still Different, but Showing Signs of Life

Thursday, July 31, 2003 | 10:51 AM

We’ve been fond of noting how different this economic cycle of recession and recovery has been. These discrepancies are particularly acute when comparing employment and productivity to prior cycles. We can add another factor to the list of historical differences: lackluster manufacturing activity. Now, we may be seeing signs of that sector finally waking up. The U.S. economy is showing “nascent signs of recovery in the manufacturing sector,” noted yesterday’s Fed Beige book. Add to that today’s 2Q Real GDP growth improving 2.4% (annual rate), with Capital spending up 6.9% (seasonally adjusted annual rate).

Is this the long awaited proof that the ailing manufacturing sector has finally begun to improve? It would be a welcome change. As the nearby chart illustrates, 18 months after the official end of the recession, Industrial Production remains anemic. Even the Fed noted “on balance, capital expenditures in the manufacturing sector remained weak.”

Any uptick in corporate spending is crucial to a sustainable recovery. It’s been quite apparent that the corporate sector, vis a vis the consumer and the government, has simply not been pulling its weight. The Feds have spending money as fast as they can, racking up record deficits in the process. Only the most vehement anti-Keynesian would object to deficit spending at this stage of the recovery. And, the Consumer continues to do their share, spending profligately, regardless of their ever increasing debt load.

What stands between us and a full-throated economic recovery is the legions of tight fisted corporate IT managers, CFOs, and budget committees who stubbornly refuse to believe their own CEO’s happy talk. Once these Scrooges start spreading their love, we expect consumer confidence to rise, employment to markedly improve, and tax receipts to climb. But they have to be willing to break open the “lock box” and start hiring and spending.

Those that do so may ultimately be rewarded. As Business Week recently noted, “a few gutsy companies think now is the time to grow.” Specifically mentioned were Washington Mutual, Intel, Verizon, Apple and Logitech as examples of firms “boosting spending on capital investments, research and development, and marketing. They're breaking into new markets, launching new products, and starting to think about deals. They're making acquisitions. They're even hiring . . .” Unfortunately, these firms are in the minority.

Sure, there is still too much excess capacity, little end user demand, and extremely limited pricing power. But sometimes, you just have to take one for the team.

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Industrial Production during Economic Expansions

Wednesday, July 30, 2003 | 11:37 AM

in Finance

post recession.gif
SOURCE: Chart of the Day

The average trend in industrial production during the first 24 months of every economic expansion from 1954 to 2000. For comparison, the chart also includes industrial production for the expansion that began in March 1991, as well as the current expansion that began in November 2001.

The chart shows the present anemic economic expansion. Chart of the Day notes that "industrial production is one of a handful of indicators that the NBER uses to date recessions and the overall trend has been down since July 2002."

This chart provokes thinking along two specific lines: First, this recovery is one of the most feeble post recessionary periods we've seen since WWII. Secondly, from a broader perspective, it confirms the overall trend of the country's economic base moving away from manufacturing and towards service oriented businesses. (See Not-so-Random Items below for a variety of articles on this topic).

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U.S. jobs jumping ship

Terror Futures Market

Wednesday, July 30, 2003 | 10:07 AM

in Current Affairs | Finance

Quote of the Day

“When I saw that article the other day about a market being established to bet on the probability of wars, terrorist attacks and assassinations, I dissed it completely out of hand as nonsense, incredible nonsense. All I could think of was what the blotter would look like. Let’s see. I’m short the Osama Bin Laden December ’04 calls, long 2 ambassadors to Middle East countries and have an Iraq/Iran swap on. I’m also considering some North Korea nuclear incident converts, but they’ve gotten away from me lately. “Get me a look at the East Coast Tunnels and Bridges puts, will you?”
Huh? It just could not be true. Nobody is that warped. Well, evidently, they are. Big time."

--an anonymous Bear Stearns analyst on the proposed Terror Futures Market (policyanalysismarket.org)

Top Line Versus Bottom Line Growth

Tuesday, July 29, 2003 | 01:47 PM

in Finance

With two thirds of the S&P500 and DJIA companies reporting earnings – and 66% reporting upside surprises – we thought it an opportune time to review what is driving the overall numbers. For many companies, there seems to be unsustainable factors helping them hit their targets. Is the glass half empty as the Bears are claiming, or is it half full, and sustainably so, as the Bulls have said?

Last quarter (Q1 2003), the SPX benefited from the dramatic one-time gains from the energy sector. A whopping 180% earning’s growth was tied to a short lived war-caused spike in the price of crude. Energy revenue grew 46%, versus expectations of 12% gains for Q2 ‘03.

One-offs are also seen helping other sectors this quarter. Manufacturing and Cyclical firms are reaping the benefits of the weak dollar as favorable currency translations have been helping those companies beat their numbers (see CAT, UTX, DOW, and DD). Finance firms have also benefited from events which may not be sustainable: The rally caused a spike in trading, helping both online brokers and traditional asset managers alike; Ultra low interest rates benefited banks, credit card issuers and mortgage lenders. In our opinion, if rates continue moving back towards historical norms, banks and traders will be hurt on both the top and bottom lines.

But the Bulls have some positives on their side. Barron’s reported that “Nasdaq short interest rose to another record in July, representing the reservoir of skepticism that keeps building.” That’s the wall of worry the market needs to climb. Barron’s also notes that “just-reported figures show the biggest drop in NYSE short-interest in a year.”

What we infer from this is that short interest – just like stocks – goes through its own form of rotation. Earlier in this rally, we saw evidence of market neutral players putting on a Nasdaq vs. SPX paired trade: Long hi beta momentum/lousy fundamental Nasdaq names, Short stodgy cyclicals with improving fundamentals.

That trade may be unwinding now. With signs of the economy improving, and the Nasdaq quite pricey, we may even see the trade reverse. The new paired trade is long cyclicals, short Nasdaq. That could give quality names a chance to catch up with the pricey runners which may be overdue for a pullback anyway.

Gradually improving economic fundamentals, and more attractive valuations support this rotation. Holders of expensive Nasdaq names are urged to tighten stops, and look towards quality SPX names for the next leg up.

Chart of the Week
The Dow Industrial Average has consolidated into an ascending triangle. We should expect continued consolidation within the 500 point trading range between 8950 and 9450.

6 Month Dow Industrials Average Chart
DJIA Chart.jpg
Source: Arms Advisory
A breakout above the top of the triangle bodes well for a measured move to about 10,100.

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Quote of the Day: “Is it so bad, then, to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood.”
-Ralph Waldo Emerson

The Danger of Dogma

Sunday, July 27, 2003 | 08:00 AM

in Current Affairs | Finance | Politics

There is an enormous intellectual danger in reaching a conclusion, and then working backwards from that point to justify that point. To wit, Professor Michael J. Boskin, an economist at Stanford, who claimed to have discovered a future cash horde of 12 trillion dollars that the government had somehow "overlooked."

Once the retiring Baby Boomers, "who spent decades making tax-free contributions to their I.R.A.'s and 401(k) plans" began paying taxes on those accounts, the windfall would save the government's future shortfall in Social Security and Medicare.

Or so Professor Boskin thought. But alas, his financial alchemy failed to turn dross into gold. It seems his assumptions for the returns were way too optimistic (sound familiar?). He also double-counted tax assets already on the Federal Government's books. And, he failed to consider that by the time the withdrawals would occur, the recipients would be in a much lower tax bracket. (Duh)

You must give credit to Professor Michael J. Boskin for identifying the error and making what must have been an unpleasant and embarrassing mea culpa. Also, credit the system of peer review, which almost instantly challenged his faulty assumptions, analysis and conclusions.

But recognize what was the underlying cause of the gaffe: Lack of objectivity; Biased research turns out not really to be research after all; It is a process of rationalization, as opposed to original thinking. This does not lend itself to finding scientific truths.

How difficult is economic forecasting? Its called the "Dismal Science" when its practiced by competent statisticians who operate without bias. That intellectually honest adherents working on behalf of large investment pools -- i.e., people with a good incentive to get it right regardless of the outcome -- find it exceedingly difficult to make accurate predictions. Call it the "folly of forecasting."

For those who slavishly adhere to a dogmatic yet faulty belief system, there's a different word for them and their mystical incantations: Propagandists.

NYT: It Looked Good on Paper

EXCERPT:

About six months ago, Professor Boskin, an economist at Stanford who was chairman of the Council of Economic Advisers under the first President George Bush, released a paper suggesting that the federal government had a bounty of $12 trillion coming that no one had bothered to count.

Baby boomers and others, who spent decades making tax-free contributions to their I.R.A.'s and 401(k) plans, would soon begin paying taxes on withdrawals from those accounts, Professor Boskin noted. The windfall from all that, he argued, would more than cover the deficits in Social Security and Medicare.

But now it appears that Professor Boskin fired a blank. On July 17, after his ideas were discussed on TV, he quietly notified his colleagues that his equations contained an error. Though he is busily overhauling his paper even now, his latest moment of fame may have already passed.

Download "It Looked Good on Paper" NYT pdf

Impatience at the Federal Reserve: The New Productivity Paradox and Fed Monetary Activism

Saturday, July 26, 2003 | 09:52 AM

in Current Affairs | Finance | Politics

Special Report: FOMC Meeting June 25, 2003

IntroductionOn June 25, 2003, the Federal Reserve announced they were cutting rates by 25 basis points; This 13th and (possibly) final cut was the most telegraphed easing since this rate cutting cycle began on March 20th, 2001.

Of the past 13 eases, today’s is the most difficult to justify, at least on a purely economic basis. Since the war in Iraq ended, consumer confidence has rebounded, retailing has improved and oil prices have come down. The Wall Street Journal noted that “Corporate bond issuance is booming, and mortgage-refinancing applications exceed the capacity available to handle them. Total commercial bank assets have climbed by 11% in the past year and bank profits have soared – a clear sign that the financial system is not starved of liquidity . . . Purchasing managers' indices are rising, deal-flow is improving again on Wall Street, corporate bond spreads have narrowed sharply, and the stock market is up.”

All this begs the question: Was this cut necessary? Considering the tax cuts, already low interest rates, weak dollar and increases in money supply, “putting an exclamation mark” on the end of this rate cutting cycle hardly seems necessary.

Our curiosity has gotten the better of us: What is it that is motivating the Fed?

Jobless Recovery?
The most obvious weakness in the economic rebound has been the employment picture. This has been a mostly jobless recovery, with unemployment still over 6.1%. The jobless numbers have stubbornly stayed over 400,000. Nine million people were unemployed in May, compared with 8.8 million in April.

Yet the Federal Reserve’s impatience with the employment picture is puzzling. The labor market is a lagging indicator; It’s usually the last part of the economy to show marked improvement in any recovery. “As long as employment doesn't collapse, the recovery will continue to gain strength. As it does, slowly jobs will be added and they will be the fuel that kicks the economy into a higher gear,” observed Bill Cheney, chief economist at John Hancock Financial Services in a CNN interview.

We agree. The Fed’s impatience is an enigma. Unless the system receives another external shock (i.e., war or terrorist attack), it’s reasonable to expect a slow but continuing recovery. Indeed, the possibility of a “shock event” is itself reason to keep some powder dry, just to be able to determinedly respond if such an untoward episode were to occur. This makes today’s cut all the more intriguing.

The New Productivity Paradox
In 1987, Nobel laureate Robert Solow famously observed: “You can see the computer age everywhere but in the productivity statistics.” Despite massive investment in IT infrastructure, productivity growth was nonexistent. At the time, this was known as the “Productivity Paradox.”

It’s not too difficult to see why productivity increases remained so elusive during that era. In 1987, PCs were klunky and awkward to use; Command codes via DOS were not the path to improved worker efficiency. As companies struggled to incorporate PCs into their workflow, they upset existing efficient routines. Firms had to create new infrastructures, hire consultants, and add IT staff. The subsequent integration was both painful and costly.

Productivity Spike in late ‘90s
Starting in 1995, non-farm worker productivity doubled. Looking back from our present vantage point, it’s easy to see the how a few incremental improvements added up to a massive increase. By 1995, most office applications had become standardized. New hires no longer had to learn a unique set of tools. The learning curve for existing workers dramatically flattened. With the introduction of Windows 95, DOS became buried under a graphical user interface (GUI). The tools themselves were getting better and easier to use.

Additionally, new workers had grown up using PCs; They required little if any formal training. Using computers was not a learned skill to these new hires; For new employees from the “Class of 1995” onwards, the PC was a tool internalized as much the telephone or pen and paper. Standardization – plus these new, highly computer literate workers – helped boost productivity dramatically.

Thus, the Productivity Paradox appeared to have been solved. Growth of U.S. productivity surged on an annual basis. Since 1995, labor force productivity has been increasing at an annual rate double that of the previous two decades. This “productivity feast” (as its been called by Greenspan) is the largest increase in non-farm business output per hour in 30 years.

Since 1995, Productivity has been increasing on an annual basis of about 2.25% per year. At the same time, the labor force itself has been growing at 1% per year.

That simple math of 1% + 2.25% lies at the heart of the “new Productivity Paradox:” As long as productivity continues to increase year after year at the present rate, the traditional notion of 3% GDP creating jobs no longer applies. Real GDP must increase at the annual rate of at least 3.25% per year just for the economy not to lose any more jobs.

The conservative American Enterprise Institute (AEI) noted that “right now, we're in a ‘jobless recovery’ – the economy is growing, but so is unemployment. The reason is that productivity is increasing. If new technologies enable each worker to produce more, the economy can grow without increasing the number of jobs.”

This simple revelation engenders a host of issues not publicly addressed by the Fed Chief. During the boom times, Greenspan lauded productivity as the source of all that was right in the world. Productivity increases got the credit for a myriad of positives: increased living standards, higher corporate profitability, boosted tax revenues, and better funded pension plans. At the time, it seemed that the benefits of technological induced efficiencies knew no bounds.

The Dark Side of Productivity
Since the stock market bubble popped, the markets have been confronting the dark side of productivity: Companies now need less laborers to produce even more goods and services; On a macro-economic level, less workers means less consumer spending, lowered tax receipts and weaker corporate profitability. Firms have little pricing power; The National Review noted that “productivity stemming from technology advances and applications also creates inexorably downward price pressures. Technology breakthroughs make it a lot cheaper to produce commodities, finished goods, and all manner of services.”

This new Productivity Paradox has the potential to cause significant dislocations in the labor market – one that might not be as easily solved as the last major shift. When the nation changed from a mostly manufacturing to a primarily service economy, it caused similar dislocations. The response by displaced workers was to retrain themselves for employment in other sectors, using the new tools of the trade. That response – learning how to use new technological based productivity tools – will not work at present. Indeed, it’s what’s to blame for these new productivity issues.

The jobs being lost presently via enhanced productivity will not be so easily replaced. Unlike the last seismic shift, there is no new “new economy” on the horizon to absorb newly displaced workers.

In order to stem the tide, one of two things needs to occur: Either GDP must improve dramatically, or productivity gains must tail off, if not outright reverse. Indicators suggest GDP is on the upswing (see below); But if neither of these occur, the U.S. may not start creating jobs for the next few quarters – if not years. Indeed, any backslide in the economy would see job losses resume at a disturbing pace.

The New Monetary Activism
Its hard to call a 13th rate cut “new;” Its only within the framework of the present environment that what was once a gradualist form of intervention has morphed into something much more radical. The Fed has subtly changed from being “social rate cutters” into “problem interventionists.” I suspect they are thinking: “We can stop anytime we want . . .”

The weak but improving economy certainly doesn’t demand further cuts. Its not as if there’s been a “ground swell of complaints about high interest rates or tight money,” observed the Wall Street Journal. The American Enterprise Institute similarly noted that “GDP growth will rise to 4 percent and probably overshoot to 5 percent for one or two quarters in 2004, in a long-awaited, normal cyclical recovery pattern, on the way to sustainable growth of 3.5 to 4 percent.” With the economy on the mend, GDP should start creating jobs over the next 24 months. Today’s 1/4 point cut reveals more about the Fed’s impatience than it does about the state of the economy.

Graphic: CPI change (since 1987)

Nor does the recent Fed jawboning about deflation ring true. Some strategists have taken to referring to the specter of falling prices as “the deflation ghost.” None other than former Federal Reserve Chairman Paul Volcker addressed the subject earlier this week. Speaking Monday at a forum on the state of the global economy at the London School of Economics, Volcker commented “If I were setting odds on deflation in the U.S., the probability wouldn't reach 0.1 percent. I see no prospect of real deflation like we had in the U.S. and other countries in the 1930s.” The widely respected Volcker’s comments effectively repudiated deflation as a factor in making further rate cuts.

With both deflation and economic recovery eliminated as possible reasons, the question remains: What else is left? The biggest issue of concern is unemployment and/or the job creation rate. But, as the AEI noted, GDP should hit a sustainable job-creating rate of 3.5 - 4% by 2005.

With so little evidence in favor of today’s cut, Fed watchers are left to philosophically wonder “why.” As we have pointed out in earlier reports, the Fed seems to be newly impatient, more concerned with the timing of their impact than their actual impact on the economy.

The Fed’s role has apparently changed from “cushioning the pain in a downturn, towards creating a new expansion cycle.” This is a radical change.

The new objectives of monetary policy, as well as the methodologies employed, reflect a newly radicalized Fed: “This policy cycle can arguably be seen as revealing a more powerful and preemptive use of fiscal and monetary stimulus than any prior post-World War II cycle,” observed Michael Englund, chief economist for MMS International Analysts. In a recent Business Weekarticle, Englund further added, “much of the economic stimulus in the pipeline is only now taking effect, as yields on longer-dated securities have just recently pulled back a significant degree, and a big portion of the combined tax cuts of the last three years is expected to kick in during June and July. All this is occurring while "real" interest rates (as adjusted for inflation) have fallen from cyclically firm levels to historic lows that now reflect extraordinarily depressed nominal levels overall.”

Indeed, this radically new monetary activism – and its broad intervention in the markets – is now in uncharted waters. “We have an amount of stimulus beyond anything I've heard of in history” were the not so subtle observations of former Fed Chief Paul Volcker.

Relationship between the Productivity Paradox and Monetary Activism
The economy has reached the point in the cyclical recovery where the Fed’s considerable economic stimulus is finally having an impact. All manners of economic activity have shown a modest rebound. And, much of the stimulus is still “in the pipeline.”

The biggest laggard remains employment – historically, the last data point to see a rise in any economic recovery. As the excesses of the bubble get worked off, employment should see a gradual improvement. But this development will be a function of time, not monetary policy. Indeed, some have argued that the extremely cheap cost of capital allows companies to “hang around,” instead of weakening to the point where the normal consolidation processes can occur.

The combination of this excess capacity and increased productivity suggests that employment will continue to lag the broader recovery, only gradually rising when GDP growth finally tops 3.25%. Barring unforeseen circumstances, that’s not likely to occur until later this year at the earliest, and more likely sometime in 2004. But it should happen eventually.

Hence, the Fed’s impatience and monetary activism appears to be unusually tied to the calendar. Unwilling to allow their already substantial stimulus to gradually work its way into the system, the Fed has opted to engage on a surprisingly activist agenda.

The most obvious event in 2004 possibly motivating the Fed’s latest intervention is the Presidential election.

CONCLUSION: The Dangers of Excessive Intervention
The Fed’s impatience and their surprisingly activist stance raise several danger signals:

First, rates will not stay this low indefinitely. What the Fed giveth, they must ultimately taketh away – and then some. “As always, the end result of excessive ease by the Fed will be higher rates in the years ahead” noted Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson.

Secondly, the question of the Fed’s focus also is subject to criticism. “If the Fed is going to underscore its commitment to anything, it shouldn't be to an interest rate. It should be to macroeconomic stability, which doesn't include fostering another asset bubble. The U.S. is still recovering from the last one,” noted Bloomberg columnist Caroline Baum.

Finally, the consideration of the Fed’s activities as it relates to the Democratic process is yet another issue. We are not so naïve to believe that the Fed is totally insulated from politics; Indeed, Greenspan has shown himself to be a rather astute politician. (One does not get to be the Fed Chief without at least a passing understanding of what it means to be a player in DC). However, the Fed’s activist stance smacks of partisanship:

David Gilmore, an economist at Foreign Exchange Analytics, details the overtly political factors in the Fed Chief’s actions: “President Bush gave the aging Greenspan an unexpected, early reappointment as chairman.” With an election less than 18 months away, “Bush is betting his generosity will get Greenspan on track for stimulating the economy by all means necessary” (emphasis ours). Timing, apparently, is everything.

Aggressive market interventionism is invariably accompanied by unintended consequences. We suspect that – eventually – the result of the Fed’s impatience will be felt long after the present Fed Chief has retired

In the 1960s, then Federal Reserve Board Chairman William McChesney Martin made the famous quip that it was the Fed's job "to take away the punch bowl just when the party is getting going." Alan Greenspan tends the economic bar differently: He is freely offering drinks to the already inebriated; We should not be surprised by the consequences.

Sources:
Central Bank Talk: Does it Matter and Why?
http://www.federalreserve.gov/boarddocs/speeches/2003/20030620/paper.pdf

Unemployment rises to 6.1%
Mark Gongloff, CNN/Money Staff Writer, June 6, 2003
http://money.cnn.com/2003/06/06/news/economy/jobs/index.htm

Solving the paradox, September 21, 2000
http://www.economist.com/displayStory.cfm?Story_ID=375522

Remarks by Chairman Alan Greenspan on Productivity, October 23, 2002
U.S. Department of Labor and American Enterprise Institute Conference, Washington, D.C.
http://www.federalreserve.gov/boarddocs/speeches/2002/20021023/default.htm

Seeing Tax Cuts as Stimulating
William Schneider, AEI, May 21, 2003
http://www.aei.org/news/newsID.17226,filter./news_detail.asp

Alan’s Eye Is on the Ball
Larry Kudlow, National Review, May 15, 2002, 8:45 a.m.
http://www.nationalreview.com/kudlow/kudlow051502.asp

Just Say No to Rate Cuts
Brian S. Wesbury, WSJ, June 23, 2003
http://online.wsj.com/article/0,,SB105633638463789300,00.html

Threefold Stimulus Means Strong Growth
John H. Makin, Resident Scholar, AEI Online (Washington)
Publication Date: July 1, 2003 (Posted Tuesday, June 17, 2003)
http://www.aei.org/publications/pubID.17730/pub_detail.asp

After Iraq: the state of the world economy
London School of Economics
Monday 23 June, 3-6.30pm
http://www.lse.ac.uk/Press/currentPressReleases/Fernando_Cardoso_tospeakatLSE.htm

Is Easing the Answer?
Michael Englund, Business Week JUNE 24, 2003
http://www.businessweek.com/investor/content/jun2003/pi20030623_9505.htm

Markets Writhe Around FOMC Meeting
Bill Fleckenstein, RealMoney.com, 06/24/2003 05:13 PM EDT
http://www.thestreet.com/p/rmoney/marketrap/10096058_3.html

Rate Cut Looking Like a Sure Thing
By John M. Berry, Washington Post, June 19, 2003; Page E01
http://www.washingtonpost.com/wp-dyn/articles/A10948-2003Jun18.html?nav=hptop_tb

Keynesian Greenspan
RUCHIR SHARMA, Wall Street Journal, June 24, 2003
Morgan Stanley Investment Management
http://online.wsj.com/article/0,,SB105640278322642600,00.html

Productivity surges; 'new economy' lives
Ron Scherer | Christian Science Monitor | May 08, 2002
http://www.csmonitor.com/2002/0508/p02s02-usec.html

How Weak is the Economy, Really?
Brian Wesbury, Chief Economist, Griffin, Kubik, Stephens & Thompson, June 23, 2003
http://www.gkst.com/

Long-Term Rates Still Haven't Gotten the Joke
Caroline Baum, Bloomberg , June 24, 2003
http://www.bloomberg.com/news/commentary/cbaum.html

Alan Greenspan: A Wild And Crazy Guy
Lawrence B. Lindsey, AEI Online (Washington), September 14, 1999
http://www.aei.org/publications/pubID.10824/pub_detail.asp

Threefold Stimulus Means Strong Growth
John H. Makin, June 17, 2003
http://www.aei.org/publications/pubID.17730/pub_detail.asp

Seeing Tax Cuts as Stimulating
William Schneider, AEI, May 21, 2003
http://www.aei.org/news/newsID.17226,filter./news_detail.asp

The Conference Board
http://www.tcb-indicators.org/us/LatestReleases/

Rate Cut Looking Like a Sure Thing
John M. Berry, Washington Post, June 19, 2003; Page E01
http://www.washingtonpost.com/wp-dyn/articles/A10948-2003Jun18.html?nav=hptop_tb

Fed's Next Interest-Rate Cut May Be Smaller Than Expected
Greg Ip, Wall Street Journal, June 20, 2003; Page 1
http://online.wsj.com/article/0,,SB105606474353678900,00.html?mod=article-outset-box

50-Pointer the Way to Go
David Gilmore, RealMoney.com, 06/19/2003
http://www.thestreet.com/p/rmoney/thebuckstopswhererm/10095030.html

Unemployment and Inflation charts courtesy of Washington Post
http://www.washingtonpost.com/wp-srv/business/images/greenspan_080602.html

Fed Fund Futures
http://www.cbot.com/cbot/ir/page/0,2869,444,00.html

Do we really need a rate cut? http://money.cnn.com/2003/06/09/news/economy/cut_downside/index.htm

Growth in the Post-Bubble Economy
http://www.frbsf.org/publications/economics/letter/2003/el2003-17.pdf

Mortgage rates stop downward spiral
http://money.cnn.com/2003/06/19/pf/yourhome/q_weekly_rates/index.htm

Fed man's hand
http://money.cnn.com/2003/06/20/markets/sun_lookahead/index.htm

Original docs here:
Download Word Doc
Download PDF

Robotic Nation

Saturday, July 26, 2003 | 09:09 AM

in Current Affairs | Finance | Web/Tech

Marshall Brain has put up an absolutely fascinating -- and economically scary -- piece titled Robotic Nation. After experiencing a self serve McDoanlds kiosk, he extrapolates that experience to its logical conclusion.

In Marshall's view, (or at least one possible logical conclusion), the ultimate end result is a mass wave of displacement of Humans. He expects "we are about to see a seismic shift in the American workforce. As a nation, we have no way to understand or handle the level of unemployment that we will see in our economy over the next several decades. These kiosks and self-service systems are the beginning of the robotic revolution."

In addition to the many other factors I've identified keeping job creation down -- productivity enhancements, globalization, excess capacity left over from the popped bubble -- you can now add replacement of workers by robotic/PCs to the mix.

Back on June 19th, I discussed the issue of how productivity paradoxically (" New Productivity Paradox ") is working against job creation. Total human replacement could be the ultimate Productivity enhancer.

Marshall doesn't really go into all the jobs the robot producing industry will create; They will obviously be greatly fewer in numbers but higher paying than the millions of low paying jobs they will be displacing.

Barron's calls President Bush a liar

Saturday, July 26, 2003 | 06:57 AM

in Media | Politics

I was stunned to read this in Alan Abelson's column today in Barron's. With humor and a gentle touch, Abelson clucks about the unnecessary dissembling -- leading up to the war, on economic matters, and on "theatrics."

When the conservative financial media start calling the President to task for lying, it has potentially far reaching implications -- for economic planning, for foreign diplomatic relations, and of course, for electoral politics.

The Prevaricator

". . . You would think, of course, that to describe someone as a prevaricating politician would be redundant, if only because perennial practice should make perfect. But even if the truth-slayer survives exposure during his many years feeding at the public trough and passes on to that big, smoke-filled room in the sky, his reputation remains at risk. And history is a hanging judge.
Nor, alas, has this fair land proved immune to civil servants at the highest level employing smoke and mirrors to obscure the truth. For shining examples, you don't have to go back any further than Lyndon Johnson, Richard Nixon and -- need we add? -- the Pinocchio President, himself, Bill Clinton. Now, it emerges, a seemingly reflexive redactor, George W. Bush, is striving mightily to prove himself worthy of this equivocative company.

Unlike his immediate predecessor, whose impulse toward evasion was manifest long before Monica, Mr. Bush ostensibly displayed a refreshing preference for openness early in his tenancy at the White House. But that engaging quality has gradually given way to something more familiar and less admirable. In the run-up to Iraq, in the confusions that followed our triumphant rout of Hussein & Gang, in his blatantly theatrical landing on the aircraft carrier, and in the treatment of the report, released last week, on 9/11, he has too often let "image" and politics trump probity.

That same regrettable aversion to the truth and reality when the truth and reality aren't lovely or convenient have been glaringly in evidence on the economic front, as well. Mr. Bush didn't cause the recession or the dismal lack of vibrancy in the economy. He had absolutely zilch to do with the punctured bubble at the root of the current economic malaise . . .

. . . Not the least of the troubles with prevaricating, whether spousal or political, as the investment banker learned and the president's softening poll ratings demonstrate, is the obvious one: It inexorably diminishes credibility. It fosters suspicion even when there's no reason to be suspicious, as witness the refusal of the locals to believe that the Hussein brothers were gone for good.

The tendency to duck and weave, to elide what's discouraging and exaggerate what's hopeful, in no way, as noted, distinguishes Mr. Bush from many of the more than two-score men who occupied the presidency before he did. But more's the pity. Even for an incorrigible cynic like us, who believes staunchly that the only way to look at an office holder is down, it would have been a nice change."

The complete editorial is available here, but requires a subscription.

This bears watching closely . . .

photos of Oday and Qusai

Friday, July 25, 2003 | 12:19 PM

in War/Defense

Graphic photos of Saddam Hussein’s two eldest sons, Oday and Qusai, are visible here

Meanwhile, rumors swirl of Saddams capture . . .

Random Items

Friday, July 25, 2003 | 10:40 AM

in Finance

What Bonds Are Saying
Ready to spend the child tax credit
Greenspan's Bond Comments Were Puzzling, to Say the Least
Microsoft's Patent Problem: In the biggest patent case ever, the tech giant is getting trounced.
First Praise, Now Hisses at S.E.C.

"Memo to Federal Reserve Board of Governors: Get a Life"

Friday, July 25, 2003 | 09:32 AM

in Finance

Snarky comments today from Bank of America:

"Memo to Federal Reserve Board of Governors: Get a Life" write analysts at Bank of America.

"The Fed speaks darkly of deflation and cuts the overnight rate, and then the 10-year yield rises 100 bps. A Fed governor warns of unwanted disinflation, and then inflation expectations rise in the TIPs market. Not for decades has the market faded the Fed with such abandon. When you have to stretch to find something to worry about, it's time to kick back and enjoy summer."

"Fed Says Rain? Bring The Sunblock"
Source: Dow Jones MARKET TALK

When Wall Street analysts start dissing the Fed Chair, its a sign that the Central Bank is losing influence and political support from their most important constituency . . .

9/11 Report

Thursday, July 24, 2003 | 09:40 PM

in Current Affairs

The long awaited (and partially redacted) report on the intelligence failures prior to 9/11 is finally out.

Text of the report.

61* (with an asterisk)

Thursday, July 24, 2003 | 12:12 PM

in Finance

Today’s Jobless Claims* number pleasantly surprised economists: Initial claims decreased by 29,000 to 386,000. The forecast was for an increase of 3,000 new claims.

We have been watching the employment figure closely. To the frustration of policy makers and economists (not to mention job seekers), this post recession period has lagged historical recovery patterns (see chart below). Indeed, job destruction has continued for more than 18 months since the beginning of the economic upturn dating to November 2001. The previous six recessions had all shown marked improvement in job creation over the same period.

In our view, this is yet another sign confirming that the present recession/recovery cycle is unique. The economy should be (historically) creating more jobs at this point. Post bubble excess capacity, competition from globalization, and the continued move away from manufacturing are nagging factors preventing the economy from really igniting, despite record levels of fiscal and monetary stimulus.

New hiring would increase consumer confidence, raise spending levels, improve tax receipts – in short, accelerate the recovery phase across the broad U.S. economy. Unfortunately, this economy has been stingy in putting Americans back to work.

At first blush, today’s numbers* appear encouraging. Upon closer review, they are less significant than perhaps the initial jump in SPX futures warrant. We would like to buy into the good news, except for that darn asterisk. Seasonally, July turns out to be one of the least reliable months for extrapolating employment data. Automobile (and other) plants shut down for retooling; Manufacturing factories close for summer vacations. DJ Newswires quoted a cautious Labor Department spokesman saying the jobs “numbers should be viewed with caution, however, because claims data tend to be volatile in July.”

We agree, and think investors should be wary about reading too much into one potentially aberrational report. July is a tough month to read: Consider the past 3 weeks: July 5 saw claims rise 89K, with the next week up 69K, and now a drop of 128K. That’s a lot of volatility for one month.

By the end of Summer, we should have a much better read on the Initial Jobless Claims. Once the signal to noise ratio of the data gets cleaned up, we should be able to ascertain with more confidence whether this economy is really delivering job growth.

Chart of the Week
The dark line shows the movement of employment from May 2000 to the present and the shaded line the average over the previous 6 recessions.

Payroll Employment

Chart Courtesy of NBER
(Source: Bureau of Labor Statistics, U.S. Department of Labor)

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F.C.C. Media Rule Blocked in House in a 400-to-21 Vote

Thursday, July 24, 2003 | 06:55 AM

in Media

Its enough to restore your faith in Democracy . . .

F.C.C. Media Rule Blocked in House in a 400-to-21 Vote
The lopsided vote suggests that even the threatened Presidential veto could be easily overridden.

Kudos to William Safire and Dan Gillmor for gettingout in front of this one.

See also the Washington Post (House Votes to Reverse Media Ownership Rules) and the Wall Street Journal (In Blow to FCC, House Votes To Limit Media Deregulation).

This now sets the stage for Michael Powell's not-so-graceful exit; He's gone by the end of the year. Consider what players may be plucked from the ravaged media moonscape as a replacement -- or does the White House go with moderate Republican and FCC member Kevin J. Martin as Chair?

Martin, you may recall, voted with the 2 Dems to provide the Baby Bells with substantial "unbundling" relief for lines utilizing fiber facilities, including no unbundling requirements for fiber-to-the-home loops or hybrid loops that utilize both fiber and cooper (The FCC also eliminated "line sharing" from unbundling requirements).

Martin is devloping a reputation for being a maverick; He voted against Chairman Powell on this issue. W is more of a team oriented manager, and Martin's independence is not likely to be rewarded with a promotion.

Stay Tuned!

Barron's

Thursday, July 24, 2003 | 06:43 AM

in Media

The Revenge of the Bond Ghouls (Monday's comments) was picked up by Barron's
(requires WSJ subscription).

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Wednesday, July 23, 2003 | 12:08 PM

in Media

Six Reasons to Take Your Profit
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Parallel Universes
Study: U.S. to hold onto tech lead
Worry less about the deficit

Quote of the Day:
"All writing is essentially bricks of plagiarism secured in place by
the mortar of original thinking."
- William Dukane

The Triumphant Return of the British

Tuesday, July 22, 2003 | 10:32 PM

in Current Affairs

A fascinating conversation was on Now with Bill Moyers last week; If by chance there's a rebroadcast made of it, be sure to catch it, as it was extraordinairy. You can see a full transcript of the interview
here (about a third of the way down the page), but it loses something in text.

Moyers interviewed two historians, both British, both living in the United States. Niall Ferguson teaches at New York University, and is a senior fellow at Oxford. His most recent book is EMPIRE: THE RISE AND DEMISE OF THE BRITISH WORLD ORDER AND THE LESSONS FOR GLOBAL POWER.

Simon Schama was the other guest. He teaches at Columbia University, and wrote the multi-volume A HISTORY OF BRITAIN, and is the star of the BBC television series of the same name.

There's something about the perspectives of two British academics, living in the US, watching history as it unfolds. They have a unique perspective -- they are not from, here, so they bring an outsider's perspective -- but just barely so. The English are outsiders, not in the way the Chinese or Russians or even the French are -- the Brits are just barely outsiders. They are enough removed so that they can see the forest for the trees, but not so distant as to view the US as an alien landsape.

Here are some of the highlights:

On the suspension of critical analysis in most of American politics in media today:

FERGUSON: I don't think there's enough competition between the newspapers in this country. One of the things that is very striking to me as a relative newcomer to the U.S., is the extraordinary dominance of a small number of broadsheet newspapers. And the small number of influential broadcasters.

But they don't compete with one another in the way that, for example, the broadsheet papers in London do. Ferociously for a very volatile readership. And they compete, partly by looking for scoops. And the best scoops of all are scoops that show the Prime Minister has misled the House of Commons.

Now there isn't the same competition here. And the NEW YORK TIMES, of course, embodies the problem. It's a complacent institution that grew so complacent it almost self-destructed by dropping journalistic standards through the floor.

SCHAMA: It's a kind of a church. You know the whole business of actually, you know spending page after page on the misdemeanors and crimes of one of its own staff was like, you know the story of the de-frocking of a cardinal or something. I don't want to know. Get on with your business.

FERGUSON: All of this was going on in the midst of a major political crisis in the Middle East and indeed in the world. Extraordinary.

On why Tony Blair is suffering so much more politically than George Bush:

MOYERS: But two thirds of Britain said in a recent poll that they believe Blair misled them. Most Americans, our surveys show, still believe Bush waged the war in good faith. How do you explain the difference in public attitudes?

FERGUSON: 9-11.

MOYERS: 9-11.

FERGUSON: Simple as that.

SCHAMA: Right.

FERGUSON: The British public has not has the experience that the public of the United States had in September 2001. And after 9-11, a great deal more slack was cut to the American government than has been cut for decades.

SCHAMA: But I would also say that when, Bill, you say, "Well, you know, large majority still believes the war was carried out in good faith," I don't disagree with that view. A distressingly large majority in the opinion poll I seem to remember reading, still believe that Iraqis were primarily responsible for 9-11, for the attack on the World Trade Center.

It wasn't exactly a hard sell to say, "Look, there is a connection between what we must do in Iraq and what happened to us on 9-11," a connection which still remains to be proven.

On the realities of rebuilding Iraq:

SCHAMA: America, as we've both said, is in terrible denial about what the time scale, the costs. You can't have run this kind of empire of political change on a kind of, you know, Wal-Mart basis. You can't… a tax cut empire is an oxymoron.

MOYERS: What do you mean you… we have a tax cut empire?

FERGUSON: Well, I think the point is that this whole thing has been done on the cheap. It seems to me that many, many people in this country have been deeply shocked by two pieces of news this week. One, that the cost of occupying Iraq currently runs at around about $4 billion a month. Two, that this year's federal government deficit is going to be going on for $500 billion. Now these figures are, by no means, unrelated. They tell us a very important story. Because if that is the cost of the military occupation of Iraq, what will the cost be of the economic reconstruction of Iraq? So far, nobody has put a figure on that in the administration. And if that isn't achieved, if there's no economic reconstruction in Iraq, then it will simply become a kind of God forsaken Haiti on the banks of the Tigris.

SCHAMA: I'll tell you why that hasn't happened, because it's actually a gigantic, you know, piece of schizophrenia going on in the current administration. Doing Iraq properly, democratically and economically, is a maximilist enterprise.

MOYERS: A what?

SCHAMA: A maximilist…It's a big government enterprise. There's a big… remember those words? Big government? . . . But, I mean, that's what it is. It requires people, money, commitment, for a long time on a large scale. That runs counter to every instinct in the present American administration, which is minimalist, which is no government is good government. I mean I don't know how you possibly square that circle.

On Afghanistan:

FERGUSON: My greatest concern is that the timeframe is unrealistically short, and the resources are not being committed to, quote unquote, "nation building." Let me give you an illustration of just how serious this problem is. We've all forgotten about Afghanistan. One and a half years on, we're supposed to be nation building in Afghanistan for one and a half years. Do you know how much money the American government has given to the government that it installed in Kabul? The answer is $500 million.

Now $500 million does not go very far when you're trying to transform a country like Afghanistan. And it seems to me that is a measure of the completely negligent way in which this government is approaching the project of nation building. It's criminally irresponsible. When Al Qaeda came from Afghanistan, it came from anarchy in Afghanistan to perpetrate the crime of 9-11. And yet, we're allowing Afghanistan to slide back into anarchy just one and a half years after military intervention. That…

On why WMD was hyped:

SCHAMA: I just find it… …inconceivable that actually if properly and honestly and truthfully and comprehensively educated about what this imperial burden means, it could ever be sold to the American electorate. There's something about Jeffersonian America, something about deep America in the heartlands, that does not want to be in that imperial position.

MOYERS: But we're a business society now. And business exists to spread, to grow. We're a commercial society. Doesn't that make a difference? When…

SCHAMA: Kellogg, Brown and Root cannot build a… It can build a road, it cannot build a democracy.

FERGUSON: Nor can Wal-Mart and that certainly grew a third. But it does seem to me that the project is not a wholly unrealistic one, despite admittedly, the lack of a firm basis in the American network foreign nation building for a quasi imperial project. It still seems to me to be absolutely crucial that the United States makes this work. If it's serious about the war against terror. Because terrorism breeds in failed states and situations of civil war. And in tyrannies and despotisms. And if we allow countries like Afghanistan and Iraq to remain failed states, and worst of all, worst of all to remain failed states with American military occupation as a kind of veneer of nation-building, then we'll end up with the worst of all worlds.

We'll end up with a situation which there are breeding grounds for terrorism, which nevertheless can be described as American colonies. It's an awful combination.

On the American Empire:

FERGUSON: The American economy is the biggest economy in the world. It accounts for around about 30 percent of world's GDP. Even under… even if it's very high, Great Britain's economy accounted for no more than 10 percent of world output. You're vastly richer than we ever were. Your military advantage are far greater over your rivals than Britain's ever was. It ought to be possible, surely, to successfully launch a Marshall Plan for Afghanistan, a Marshall Plan for Iraq. You did it for West Germany, you did it for western Europe after the Second World War with huge success. Also for Japan. American troops remain in those countries to this day. It's not as if America hasn't successfully brought about nation-building, transformation, democratization in rogue states in the past.

SCHAMA: Germany had a democratic parliamentary and constitutional past before the Third Reich. Iraq doesn't.

FERGUSON: Well, I don't think that that necessarily precludes a successful transition in Iraq. Iraq has not always been under Saddam Hussein. He's only been in power... was only in power from 1979 under British rule a constitutional monarchy which was not a model democracy. But nor was it a despotic planned economy. In fact it was a market economy.

MOYERS: What are the consequences of an imperial role for America on democracy at home?

SCHAMA: Well, I don't think they're necessarily baleful but I think they're not particularly auspicious. Again in terms of how you make it work fiscally. If you're going to commit the kind of resources actually, which go way beyond even, you know, five billion dollars, four billion dollars amount for what we're talking about. Obviously, and the deficit is just gonna become, you know, balloon astrally even by Ronald Reagan's standards.

Something has got to give. And we've already had a seriously degraded infrastructure. States... all the problem and pain has been shoved off on some states really. They're having real trouble fixing the potholes, paying the teachers, putting enough cops on the street, doing all that kind of thing. It's weird in a way because when you mention the Roman Empire, one thinks of there being a natural fit, a natural match between prosperity and power at home in Rome and the kind of projection of that prosperity, power, education, engineering abroad. Here we're, I think, in more painfully zero- sum game. The more we actually are prepared to transfer those resources the more the struggle to actually keep our sense of a well-managed society at home will be.

On entertainment spectacles and the "Wag the Dog" scenario:

FERGUSON: I think it was no coincidence that the movie GLADIATOR was such a hit when it came out, what was it? Last year? Russell Crowe's great line, "Are you not entertained?" seems to me very appropriate here. The American public is entertained. It's more entertained than any populace has ever been in all history. It's entertained by multiple television channels. By an endless stream of movies. By sports, more or less 24/7. And yet, while that entertainment goes on in the great coliseum of the American media, American soldiers are out there on the imperial borders, waging pretty thankless wars against the barbarians. Does anyone back home in the Coliseum give a damn about the guys on the front line? I don't know in the end whether that disjunction between entertainment at home and peripheral border wars is not a very Roman disjunction.

MOYERS: Empire is entertainment?

FERGUSON: Well, no. In a sense the entertainment is there to distract the populace from the Empire. To distract it from the problems of the imperial frontier.

On U.S. budgetary problems:

FERGUSON: This is the bottom line of American politics. In the end the real over-stretch that the American, quote unquote, "empire" faces is not the cost of policing Afghanistan and Iraq. It's not the over-stretch that my good friend Paul Kennedy predicted back in the 1980s. It's over-stretch at home. The over-stretch of the Medicare budget. Of the Social Security budget. As the "baby boomers" retire, there is going to be a hole in federal finances of the order of 44 trillion dollars. So I think the real problem is not actually got much to do with America's overseas adventures. It's got everything to do with domestic finance.

SCHAMA: We were sitting here at the beginning of summer, deep into the summer. This is the debate that we must actually have in the coming electoral campaign.

MOYERS: You are debating these issues in Britain. We're not debating these. How do you explain that?

FERGUSON: This is precisely what Tony Blair should have been saying this week. He should have been saying not, "We were right about WMD" and soaking up the applause like a pet poodle at a pet show. It seems to me what he should have been saying is, "Look, we've begun something here in Iraq, but how are we going to finish it? Are you in earnest about nation building, Mr. Bush? And if you are not, when are you going to get serious?"

Niall Ferguson co-wrote an article (with Laurence Kotlikoff) for the Financial Times (7/14/03) discussing many of the same issues; Its mirrored at NYU: The Fiscal Overstretch That Will Undermine An Empire

Now with Bill Moyers Niall Ferguson (New York University, senior fellow at Oxford), and Simon Schama (Columbia University)
http://www.pbs.org/now/transcript/transcript228_full.html
July 18, 2003

U.S. confirms Qusay, Uday killed in raid

Tuesday, July 22, 2003 | 04:39 PM

in Current Affairs

BAGHDAD, July 22 — The U.S. military said on Tuesday it had confirmed that the two sons of Saddam Hussein, Qusay and Uday, had been killed in a fierce gun-battle in northern Iraq.

''We're certain that Uday and Qusay were killed,'' Lieutenant General Ricardo Sanchez told a news conference in Baghdad. ''We've used multiple sources to identify the individuals.'

-U.S. confirms Qusay, Uday killed in raid

Photos are visible here

Revenge of the Bond Ghouls

Monday, July 21, 2003 | 02:02 PM

in Finance

Federal Reserve Chairman Alan Greenspan’s testimony to Congress last week gave traders of fixed income paper an excuse to dump Bonds (see chart), which they did with near reckless abandon, driving up yields as they locked in profits. Their actions led us to consider what future impact bond yields might have on both the economy and equity markets.

In our opinion, government treasuries with attractive yield could derail the equity rally; A 5+% riskless yield in the 30-year might pull flows away from equities and money market accounts. It might also endanger the economic recovery – specifically, new homes sales, existing homes sales, and re-financings. As this has been one of the few bright spots in the economy, it bears close monitoring over the next year.

What might cause a sustainable rise in interest rates? We identify 3 likely factors: 1) The re-issuance of the 30 year bond by the Treasury Department; 2) Strengthening of the economic recovery; 3) Technical Break down of Treasuries.

The Treasury Department’s decision to eliminate the 30-year bond in Fall 2001 caused an acceleration of the bond rally. The benefit of hindsight reveals Treasury’s presumption of continued budget surpluses as hopelessly optimistic. As we discussed in March, investors should expect Federal Budget deficits for at least the next 5 years, possibly longer. We believe patient government fixed income buyers will eventually see more attractive coupons.

The more curious hazard is the improving economy itself. To date, economic expansion has been anemic. If the jobless recovery maintains its present lackluster pace, the economy may sputter and fail. Employment numbers have been going south instead of improving. A recovery that fails to generate new jobs isn’t very much of a recovery at all.

On the other hand, if the pace picks up too rapidly, the Fed may have to resume its role of inflation fighter. If the Fed is forced to increase interest rates, it will hurt homes sales, refis and consumer spending. Thus, a too rapidly improving economy sows the seeds of its own destruction.

That’s the bind the Fed now finds itself in: The threat of deflation is fading, with inflation looking if not likely, than certainly more possible than was thought a mere two months ago. Rising rates in a slow growth, jobless recovery does not lend itself to a positive legacy for the Chairman. Equity investors must also be diligent rate watchers, as a continued rise could put their rally in jeopardy.

Chart of the Week:
Treasury yields have bounced off of their lows recently. After a 3 year Bull Market in government fixed income paper, with deflation fears fading, Traders have been locking in profits. If Bond sales continue, yield instruments may once again find a new round of buyers.

10-Year Treasury Note Rebound

Source: CNN/Money
The yield of the 10 Year Treasury note has gained nearly 25%, erasing the drop of the prior two months.

Random Items:
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Quote of the Day: "All you need in this life is ignorance and confidence and then success is sure." -Mark Twain

Revenge of the Bond Ghouls:
Download PDF
Word.doc

What Price Downloads?

Monday, July 21, 2003 | 11:46 AM

in Finance | Music

Charlie Wolf (of Needham & Company) did a terrific analysis of what is the ideal price for online music downloads, with a focus on Apple's iTunes Music Store.

You can see it here.

Recession Is Over; Jobs Aren't Trickling Down

Friday, July 18, 2003 | 02:49 PM

in Finance

Dan Altman over at NYT does a nice job explaining the weakness in the present economic recovery:
Recession Is Over; Jobs Aren't Trickling Down

You can get the full National Bureau of Economic Research report of the Business Cycle Dating Committee (PDF) here.

Here's the most important chart in the report:

(Source: Bureau of Labor Statistics, U.S. Department of Labor)

The dark line shows the movement of employment from May 2000 to the present and the shaded line the average over the previous 6 recessions. Note that in all previous post recession periods, employment started up immediately at the end of the recession. In the present environment, the US economy continues to shed jobs despite the general economic improvements.

Iran Samples Show Enriched Uranium

Friday, July 18, 2003 | 12:07 PM

in Current Affairs

This ain't good: Iran Samples Show Enriched Uranium

This shows the danger of hyping weak data, and politicizing intelligence. A very real and possibly imminent threat exists from Iran, and now, our crdibility has been compromised.

The law of unintended consequences always seems to have the last laugh . . .

The Greatest Financial Mess in World History

Friday, July 18, 2003 | 09:14 AM

in Finance

Its not that I agree with Russell (I don't), but when a guy that's been around forever, and has such a terrific track record, says stuff like this, it's well worth noting:

Quote of the day:

"The U.S. is heading for maybe the greatest financial mess in world history. The U.S. is far too extended financially, militarily and socially in the way of entitlements that we can't afford . . . As the bear's grip tightens on the economy, the first rush will be to accumulate dollars . . . But when the nation hits the wall of [the Federal Government's unfunded liabilities, estimated at more than $40 trillion], the dollar will start to unravel as the U.S. attempts to print its way out of disaster. That's when people will turn to gold."

-Richard Russell
July 6, 2003, CBS Marketwatch.com.

NOTE: Russell, aged 79, is known as the dean of the investment newsletter industry. He has been publishing his "Dow Theory Letters" since 1958. His stock market timing record is in first place (on a risk-adjusted basis) among all market timing newsletters tracked by the Hulbert Financial Digest.

Sailing through the Dog Days of Summer

Thursday, July 17, 2003 | 11:35 AM

in Finance

As we enter the historically weakest part of the year, lets review the factors presently impacting the markets:

Earnings News: The recent mix of good and bad news comes at the end of an extended rally. While the positives (INTC, GM, C, NXTL, CAT) are already “baked into the cake,” the negatives (NOK, F, LU, EMC, IBM) demonstrate that companies still retain the ability to surprise.

Internals: Have also been a mixed bag. Sell offs have been on fairly strong volume, with yesterday the 3rd day in a row where the markets could not hold its strong opening. New 30 day lows (see chart) are starting to tick up as "fatigue" sets in; Yet we continue to see the Market close off its lows.

Technicals: The NASDAQ has been the leader of the market, and remains the strongest index. Key support levels include 1678, 1602, and 1560. The Dow has been flirting with its uptrend, and could break through to the downside today. 9000 is psychological support, but the breakout level of 8725 remains key. Unlike the Dow, the SPX did break its uptrend line, and has some support at 975, and then 950. The SPX has been in a high “rolling churn” for the past month. Since mid-June, on relatively strong volume, it has failed to make fresh highs; As the Bulls start to exhaust their ammo, an intermediate top is forming; Look for the SPX to consolidate and make partial retracement of gains.

Bond Markets: Greenspan's testimony spooked the bond ghouls, indirectly threatening the equity rally. The Bond sell off made yields rise, thus making Fixed Income more attractive; If the 30 year produces a risk-free 5+%, expect to hear a giant sucking sound as the money market-to-equity funds flow morphs into a money market-to-Bond flow. After the big run up, asset rotation from big SPX holders (locking in profits) to the long Bond is also likely.

Crosscurrents: Previously, we've discussed the opposing forces roiling the market: Historic levels of government stimulus are fighting a weak yet improving economic backdrop. "Tide versus the Wind" is how sailors describe it. Ask anyone who's ever tacked against the wind what happens when the forces of nature are opposed to each other: You get a choppy ride without much progress. Investors should expect this bumpy ride within a trading channel for the rest of the Summer, as the powers that be do battle.

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Quote of the day: "The dissatisfaction of the masses is not based on economic deprivation but on a sense of ineffectuality. Not an increased standard of living, but more social power, is their fundamental goal. Because of their emotional orientation, they arise and act when a powerful leader-figure can coordinate them into a functioning unit rather than a chaotic mass of unformed elements." Philip K. Dick, Vulcan's Hammer (1956)

Barron's

Wednesday, July 16, 2003 | 06:29 PM

in Media

Barron's picked up Monday's comments; Check it out here
(requires WSJ subscription).

Lack of planning contributed to chaos in Iraq

Monday, July 14, 2003 | 11:56 PM

in War/Defense

An excellent article in the Kansas City Star explaining how a successfully planned and prosecuted war could devolve into such a poorly executed peace -- all due to the failure to consider all possible outcomes. (Apparently, War planners make the same mistakes that so many investors do: Fail to plan exit strategies for all contingencies).

You can see the full piece here: "Lack of planning contributed to chaos in Iraq." Its worth the read.

BTW, the current stories out of Iraq are consistent with the research we released in Mid March (prior to the war's start); You can download Not-So-Hidden Agenda: Strategic and Economic Assessments of U.S. led Invasion in the Middle East (A Pre War Analysis, March 19, 2003) in your favorite format here:
Download Word Doc file
Download PDF file

It Really is Different this Time . . .

Monday, July 14, 2003 | 12:07 PM

in Finance

Whenever this phrase is used to describe stocks, it signals that something bad is about to occur. We use the slogan instead to describe this very unusual macro-economic environment. Specifically, the shallow recession, and even shallower economic recovery, is unique in the post-war era.

What makes this cycle so exceptional? This is the first recession and recovery to be characterized by high productivity, continued job loss, and unchanged (read high) consumer spending. There simply are no parallels to this kind of environment since WWII. Every prior cycle since 1940 was during a period of low worker Productivity, with (mostly) decreased spending. Recoveries occur when hiring and spending increase. This is significant for the economy, the markets, and possibly the 2004 Presidential Elections.

The post-bubble, jobless recovery was caused by vast capital over-investment, creating excess capacity for businesses. Simultaneously, it put the tools of increased productivity into the hands of workers. The cure for this overcapacity is simply time: It takes years to grow into, and fully utilize all that excess capacity. What one hopes for from the government is that they simply don't muck things up too much with ill-advised interventions as we wait for normal levels of demand to return.

Contrary to this dour macro-economic news is the massive monetary and fiscal stimulus from the White House and the Fed. For the first time (in my memory at least), these new government policies are specifically targeting the equity markets as opposed to the broader economy.

Consider this: Dividend tax cuts have raised the value of stocks with yield; Capital gains tax cuts encourage greater speculation; Income tax cuts targeted to the highest income brackets encourages investment, rather than spending; The Federal Reserve rate cuts have made “cash trash,” forcing Money to flee Fixed Income Instruments and Money Market Accounts. It has rushed into equity markets simply because it has nowhere else to go.

Government’s expectations are that increased stock prices will raise consumer confidence and low rates generate yet another round of mortgage refis, putting cash into the hands of consumer, leading to additional spending. If spending picks up enough, Business IT and capital spending will also rise. Eventually, businesses start hiring again.

The experiment progresses: Fund managers dance to the music, pouring money into equities in order to stay competitive with their benchmarks. What remains to be seen is who will have a seat when the music finally stops.

Chart of the Week
“Policy has never been more stimulative in the U.S.,” notes The Bank Credit Analyst. “Massive monetary and fiscal ease, together with a lower dollar, should be successful in boosting growth and averting deflation.” The danger is that policymakers are “creating even bigger problems down the road in terms of increased leverage, greater financial excesses and a larger current account deficit,” observes BCA.

Household and Corporate Debt as a % of GDP

Household Debt.gif
Chart Courtesy of BCA Research

“Moreover, policymakers may have limited ammunition to deal with the next economic downturn” BCA notes. The “supercycle of rising debt and illiquidity” can only be avoided through increased inflation, a process that will not be a painless for the markets.

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Quote of the day: "An expert is a man who has made all the mistakes which can be made, in a very narrow field." -Niels Bohr

Looking forward to the Weekend

Sunday, July 13, 2003 | 07:13 AM

Should have a few posts between now and Monday . . .

Here's the first one: Broadband Price Increases? (Not so fast . . . )