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No Consensus About the Future

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As the election year progresses, we are exposed to wildly diverging predictions about the future of the American economy.  The Democrats are telling us that in President Obama’s capable hands, the American economy keeps improving every day – despite the constant efforts by Congressional Republicans to derail the Recovery Express.  On the other hand, the Republicans keep warning us that a second Obama term could crush the American economy with unrestrained spending on entitlement programs.  Meanwhile, in (what should be) the more sober arena of serious economics, there is a wide spectrum of expectations, motivated by concerns other than partisan politics.  Underlying all of these debates is a simple question:  How can one predict the future of the economy without an accurate understanding of what is happening in the present?  Before asking about where we are headed, it might be a good idea to get a grip on where we are now.  Nevertheless, exclusive fixation on past and present conditions can allow future developments to sneak up on us, if we are not watching.

Those who anticipate a less resilient economy consistently emphasize that the “rose-colored glasses crowd” has been basing its expectations on a review of lagging and concurrent economic indicators rather than an analysis of leading economic indicators.  One of the most prominent economists to emphasize this distinction is John Hussman of the Hussman Funds.  Hussman’s most recent Weekly Market Comment contains what has become a weekly reminder of the flawed analysis used by the optimists:

On the economy, our broad view is based on dozens of indicators and multiple methods, and the overall picture is much better described as a modest rebound within still-fragile conditions, rather than a recovery or a clear expansion.  The optimism of the economic consensus seems to largely reflect an over-extrapolation of weather-induced boosts to coincident and lagging economic indicators — particularly jobs data.  Recall that seasonal adjustments in the winter months presume significant layoffs in the retail sector and slow hiring elsewhere, and therefore add back “phantom” jobs to compensate.

Hussman’s kindred spirit, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), has been criticized for the predictiction he made last September that the United States would fall back into recession.  Nevertheless, the ECRI reaffirmed that position on March 15 with a website posting entitled, “Why Our Recession Call Stands”.  Again, note the emphasis on leading economic indicators – rather than concurrent and lagging economic indicators:

How about forward-looking indicators?  We find that year-over-year growth in ECRI’s Weekly Leading Index (WLI) remains in a cyclical downturn . . .  and, as of early March, is near its worst reading since July 2009.  Close observers of this index might be understandably surprised by this persistent weakness, since the WLI’s smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months.

Unlike the partisan political rhetoric about the economy, prognostication expressed by economists can be a bit more subtle.  In fact, many of the recent, upbeat commentaries have quite restrained and cautious.  Consider this piece from The Economist:

A year ago total bank loans were shrinking.  Now they are growing.  Loans to consumers have risen by 5% in the past year, which has accompanied healthy gains in car sales (see chart).  Mortgage lending was still contracting as of late 2011 but although house prices are still edging lower both sales and construction are rising.

*   *   *

At present just four states are reporting mid-year budget gaps, according to the National Conference of State Legislatures; this time last year, 15 did; the year before that, 36. State and local employment, which declined by 655,000 between August 2008 and last December – a fall of 3.3% – has actually edged up since.

*   *   *

Manufacturing employment, which declined almost continuously from 1998 through 2009, has since risen by nearly 4%, and the average length of time factories work is as high as at any time since 1945.  Since the end of the recession exports have risen by 39%, much faster than overall GDP.  Neither is as impressive as it sounds:  manufacturing employment remains a smaller share of the private workforce than in 2007, and imports have recently grown even faster than exports as global growth has faltered and the dollar has climbed.  Trade, which was a contributor to economic growth in the first years of recovery, has lately been a drag.

But economic recovery doesn’t have to wait for all of America’s imbalances to be corrected.  It only needs the process to advance far enough for the normal cyclical forces of employment, income and spending to take hold.  And though their grip may be tenuous, and a shock might yet dislodge it, it now seems that, at last, they have.

A great deal of enthusiastic commentary was published in reaction to the results from the recent round of bank stress tests, released by the Federal Reserve.  The stress test results revealed that 15 of the 19 banks tested could survive a stress scenario which included a peak unemployment rate of 13 percent, a 50 percent drop in equity prices, and a 21 percent decline in housing prices.  Time magazine published an important article on the Fed’s stress test results.  It was written by a gentleman named Christopher Matthews, who used to write for Forbes and the Financial Times.  (He is a bit younger than the host of Hardball.)  In a surprising departure from traditional, “mainstream media propaganda”, Mr. Matthews demonstrated a unique ability to look “behind the curtain” to give his readers a better idea of where we are now:

Christopher Whalen, a bank analyst and frequent critic of the big banks, penned an article in ZeroHedge questioning the assumptions, both by the Fed and the banks themselves, that went into the tests.  It’s well known that housing remains a thorn in the side of the big banks, and depressed real estate prices are the biggest risk to bank balance sheets.  The banks are making their own assumptions, however, with regards to the value of their real estate holdings, and Whalen is dubious of what the banks are reporting on their balance sheets. The Fed, he says, is happy to go along with this massaging of the data. He writes,

“The Fed does not want to believe that there is a problem with real estate. As my friend Tom Day wrote for PRMIA’s DC chapter yesterday:  ‘It remains hard to believe, on the face of it, that many of the more damaged balance sheets could, in fact, withstand another financial tsunami of the magnitude we have recenlty experienced and, to a large extent, continue to grapple with.’ ”

Even those that are more credulous are taking exception to the Fed’s decision to allow the banks to increase dividends and stock buybacks.  The Bloomberg editorial board wrote an opinion yesterday criticizing this decision:

 “Good as the stress tests were, they don’t mean the U.S. banking system is out of the woods.  Three major banks – Ally Financial Inc., Citigroup Inc. and SunTrust Banks Inc. – didn’t pass, and investors still don’t have much faith in the reported capital levels of many of the rest.  If the Fed wants the positive results of the stress tests to last, it should err on the side of caution in approving banks’ plans to pay dividends and buy back shares – moves that benefit shareholders but also deplete capital.”

So there’s still plenty for skeptics to read into Tuesday’s report.  For those who want to doubt the veracity of the banks’ bookkeeping, you can look to Whalen’s report.  For those who like to question the Fed’s decision making, Bloomberg’s argument is as good as any.  But at the same time, we all know from experience that things could be much worse, and Tuesday’s announcement appears to be another in a string of recent good news that, unfortunately, comes packaged with a few caveats.  When all is said and done, this most recent test may turn out to be another small, “I think I can” from the little recovery that could.

When mainstream publications such as Time and Bloomberg News present reasoned analysis about the economy, it should serve as reminder to political bloviators that the only audience for the partisan rhetoric consists of “low-information voters”.  The old paradigm – based on campaign funding payola from lobbyists combined with support from low-information voters – is being challenged by what Marshall McLuhan called “the electronic information environment”.  Let’s hope that sane economic policy prevails.


 

Time To Toss The Tool

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November 6, 2008

November 5 (the day after Election Day) left us with a nearly breathless Chris Matthews on MSNBC’s Hardball.  His guests included their correspondent, David Schuster, who had attended the election night speech by Barack Obama in Chicago’s Grant Park.  Schuster described the scene in Grant Park, immediately after the west coast results were announced at 11:00 p.m. (Eastern Time).  Strangers were hugging each other and crying.  This could have only happened in Chicago.  I had been in Grant Park on several occasions to celebrate many a Bulls championship, back in the day when Phil Jackson was coach and Michael Jordan defied the laws of gravity.  The post-championship celebration in Grant Park became a rite of summer:  the weather was just getting nice and Fourth of July was right around the corner.  I still return to Grant Park for the annual Independence Day fireworks show (that actually takes place on July 3) even though I now live a long way from there.  The consensual spirit of Chicago’s people brings life to the theories expressed by Carl Jung.  Myth, archetype and symbol hold important places in the collective soul of that community.

Chicago has its own approach to politics, as well.  The city’s history is rich with tales of “back alley” politics, giving rise to legendary figures and laying waste to contenders.  As a result, I can’t keep my mind off the subject of what might be in store for Senator Joe “The Tool” Lieberman of Connecticut.  The remark by Stephen Colbert during Indecision 2008 on Comedy Central, caught my attention.  After the announcement that Obama had won 64 percent of the vote in Connecticut, compared to McCain’s 35 percent, despite McCain’s unfailing support from The Tool, Colbert wondered:  “Where could the people of Connecticut have learned such disloyal behavior?”  As you may recall:  Lieberman was re-elected to the Senate in 2006 as an Independent candidate (after having lost the Democratic primary to Ned Lamot).  Although they were irked by The Tool’s mercenary act to preserve his own political skin, the Democrats struggled to keep Joe in their “Big Tent”.  The Senate Democratic Caucus (or Conference) currently consists of 49 regular Democrats and 2 Independents, one of whom is Joe “The Tool” Lieberman, who calls himself an “Independent Democrat”.  Prior to the 2008 election, the Democrats had been desperate to maintain their 51-percent majority in the Senate, so they did all they could to make sure The Tool was a happy camper.  All that changed when Barack Obama became the presumptive Democratic Presidential nominee.  Many commentators saw in Obama, not only a winner, but one with long enough coattails to bring more Democrats into the Senate.  The Tool realized that his betrayal of the Democrats could result in the loss of his many important appointments, should Obama get elected.  He had already “sold his soul” to Bush, Cheney and Rove in his quest for re-election.  At that point, he had no choice but to “go for broke” by endorsing John McCain.  However, The Tool went beyond that.  He spoke ill of Obama at the Republican Convention.  He followed McCain around throughout the Presidential campaign, giving rally speeches himself, in addition to serving as McCain’s “nodder” when McCain would question Obama’s patriotism.

It is now time for the Senate Democrats to throw The Tool under The Trash Talk Express, before it departs for that great bus barn in the sky.  It has been widely reported that The Tool is scheduled to meet with Senate Majority Leader Harry Reid, at some point this week.  My familiarity with Chicago politics leads me to believe that on his way to this meeting, The Tool will be alone in a dark alley.  He will reach a spot alongside a blue dumpster and that will be the signal.  Suddenly, Democratic Senators will step out from their positions, in the shadows, to surround him.  The Tool will be cut  … and he will be cut quite thoroughly.  He will be cut from the Senate Committee on Small Business and Entrepreneurship.  He will be cut from the Senate Committee on Homeland Security and Governmental Affairs (where he is Chairman).  He will be cut from the Senate Armed Services Committee.  He will be cut from the Senate Committee on Environment and Public Works, including its Subcommittees on: Clean Air and Nuclear Safety, Private Sector and Consumer Solutions to Global Warming and Wildlife Protection (where he is Chairman).  He will also be cut from the Subcommittee on Public Sector Solutions to Global Warming, Oversight, and Children’s Health Protection. He will be left, writhing on the back bench of the Senate.  “Backbenchers” have no influence to peddle  …  or, perhaps I should say:  They have difficulty raising campaign contributions.

The Tool assumed that by joining himself to McCain’s hip, he could secure the Vice-Presidential nomination or a high-level Cabinet appointment.  This must have appeared as his only route to avoid obscurity.  It didn’t work.

The Tool now has a “date with destiny” somewhere in a dark alley   .  .  .