Positive News About the Economy
A bit over a week ago, I forecast that we had passed the economic bottom and would soon be back on the way up. The IBD lists a number of reasons why I may be correct: (ht: Carpe Diem)
"¢ A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.
"¢ A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.
"¢ A back-to-back jump in retail sales ex autos, in both January and February.
"¢ A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.
"¢ A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.
"¢ An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.
"¢ A Housing Affordability Index that has hit an all-time high.
"¢ A two-month improvement in wholesale used-car prices, measured by the Manheim Index.
"¢ A rise in Monster's Employment Index in February, suggesting a turn in the job market may be around the corner.
"¢ A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.
"¢ A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.
"¢ A two-month rally in the Index of Leading Indicators.
"¢ A growing body of evidence that the "liquidity crunch" is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.
Of course, this makes the entire argument for the trillion dollar plus stimulus bill moot. If my company had started spending itself into debt to fight some sort of emergency, and then found the emergency did not exist, you can bet we would be spending every hour of the day to stop as much of that emergency spending as possible. Not so in Washington. Despite now forecasting an improving economy, and basing his budget on this being a milder-than-normal recession, Obama has not even suggested any roll-back in the massive spending and debt-creation program. Which just goes to prove that the "stimulus" bill had nothing to do with stimulus in the first place, but was a leftish spending plan sold based on panic, in exactly the same way the Bush administration sold the Patriot Act.
In fact, much of Obama's remaining legislative agenda (including nationalization of parts of the health care system and a Co2 cap-and-trade system) include what are effectively large tax increases that cannot realistically be passed in the depths of a recession. So expect a lot of talking up of the economy to prepare the way for these tax increases, not to mention the tax increases that will be necesary, but have not yet been proposed, to pay for the servicing of the huge debt and new spending we just took on.
One final prediction: As the economy improves enough for the average person to see the improvement, expect the Obama administration to be spinning like mad. Their first objective will be to take credit for the recovery. This is absurd, as it appears that the recovery will start long before the first dollar of spending occurs. The media may, however, let him get away with this. If it does not, his second story will be that the confidence exuded by the passing of the stimulus bill created the recovery. This is also absurd on its face, given the crash in equity prices after the stimulus bill was passed and the extreme general skepticism about the stimulus in poll numbers.
Postscript: By the way, I would argue the whole story of this stimulus bill is a microcosm of the climate debate. Extreme panic was generated based on a fear that their might be some possibility of a catastrophe (ie a second Great Depression) and that on the precautionary principle, we spent a trillion dollars just in case. Remember that in January, Obama said there will be - not might be - another 5 million job losses, a number we will come nowhere near.
As it turned out, there was never a realistic chance of a catastrophe, but the costs will remain, and all the while the panic over the issue was used as cover to pass a whole range of freedom-reducing initiatives. Naomi Klein was half right in the shock doctrine -- there are folks who use emergencies to successfully push for radical change, but it is almost always the forces of more government control who win out, not the supporters of laissez faire.
Update: A similar list here from Forbes.
morganovich:
the precautionary principle warns against itself.
what really frightens me is that the recovery that was coming anyway will be attributed to all this wild and expensive action and that we will learn the wrong lesson, making "massive stimulus" the knee jerk response from now on.
part of the reason this downturn was so harsh was that we never really let the one in 2000-2001 happen. recessions should be frequent and mild. attempting to circumvent the recessionary process just builds up more imbalances that make the damage much worse when it does come and leaves more people unprepared to deal with it.
March 18, 2009, 10:04 amMax:
Well, given the situation at the top 3 automobile companies, there is still a harsh drop to come. If they are not allowed to restructure themselves under bancruptcy law, this will be a harsh one (though again, a necessary one). I think the protection of the banks will also have drawbacks in the near future, because they never got rid of all their bad assets, because they still don't know their real worth (or will try to hope that the real worth is not so bad as it seems).
And I think there will be an encore of crisis for europe, because unlike the US markets are very slow to respond (welfare states). And both France and Germany really hinge their economies on exporting products. Since US citizens will likely buy less in the coming months, this will hit the markets in europe a lot and hard.
March 18, 2009, 11:31 amTXJim:
I hope you are right on this. It would be great if it holds up.
I am still not quite willing to stick my toes back in the water yet though. My thoughts are closer to what John Tamny says in this article:
Down Markets and Dumb Economic Myths
By John Tamny
Be it up markets or down markets, when stocks are moving powerfully in either direction lots of misinformation seeps into the public discussion. And with shares testing lows not seen since the ‘90s, it’s understandable that a number of wrongheaded assumptions would become conventional wisdom. The problem here is that a great deal of the ‘settled logic’ with regard to housing, recessions, the dollar, free trade, and debt has no basis in reality.
read the rest at:
March 18, 2009, 1:22 pmhttp://www.realclearmarkets.com/articles/2009/03/down_markets_and_dumb_market_m.html
Orthogonal Vision:
I'd be a bit cautious in calling the bottom. We nearing the end of a quarter and so most of bad news on earnings (from the last quarter) has already been announced. This tends to have stock purchasers looking a little further out in time (and be a little more optimistic). I'm also somewhat reluctant to rely on a bank's CEO claiming to have made money in the first two months. How much of this so called profit was merely due to government cash infusion offsetting losses? Also, what the status of all these toxic assets that were supposedly weighing down the banks' balance sheets? Did they just disappear?
Job growth will be key because housing is unlikely to rebound until foreclosures go back down.
I've been listening to the economist who works for the real estate agents' trade group claim since 2005 that the bottom of the housing market is only 6 months away (every 6 months!). I've yet to hear anyone who really understands the housing situation across the nation.
I see no real progress in dealing with the auto industry. Chrysler is still moribund and GM is still operating with the same team that lost $82B over the past four years. The only real difference I see 6 months from now is that Ford will then need bailout funds to stay alive. Construction is largely limited to government stimulus spending and a good chunk of that is offsetting normal state spending that has been curtailed due to declining state tax revenues. The yield curve may be upward sloping because we're financing the stimulus and bailouts with long term government bonds.
Europe is still a mess, will take longer to recover, and still has the potential of Eastern European banks taking down the rest of the continent. Protectionism is likley to only increase and so our export market is unlikely to recover.
I think we need to get through April to get a sense of 1st quarter earnings. Most the stock market's tanking in February and early March was due to earnings dropping off everyone's assumed range. Keep in mind that there have been major dividend cuts, especially by the banks. The banks are doing this to horde cash in order to pay back uncle Sam, but the core issue still remains - what is the status of all these toxic assets AND is the current rate of foreclosures making them worse?
March 18, 2009, 5:54 pmTXJim:
Ortho - With my two posts here I appear to be pimping Real Clear Markets but its only by coincidence. I have followed the commentary of these two authors for many years and find them to be insightful and almost always contrarian. Here is an article you may find useful:
Right now, the Fed is paying 1.00% interest on excess reserves (which are the vast majority of bank reserves right now). This is equivalent to offering banks one-day T-bills at an interest rate of 1.00%. The current yield curve for T-bills starts at 0.01% for 3 months, rises to 0.28% for 6 months, then to 0.50% for 12 months, and then reaches 0.92% for 24 months. Given this, it is clear that the interest rate the Fed is offering on bank reserves is far above market for a risk-free investment.
http://www.realclearmarkets.com/articles/2008/12/why_the_economy_is_in_a_tailsp.html
March 19, 2009, 8:25 pm