Another day another tariff. Ho hum.
The impact of the additional taxes are being felt by some and inevitably they will be felt by almost everyone.
These more than offset for individuals any benefit from the corporate tax relief they passed earlier this year.
The only slightly good thing about them is that they will to some extent reduce our annual deficit a bit, although the negative impact on the economy may actually offset that.
Similar to the claim that the positive impact of the tax reductions would pay for itself.
That didn't happen and isn't going to happen, but negative impacts do reduce tax receipts since people lose jobs and have to claim benefits.
We are still creating jobs and the economy is maintain the growth patterns established under the previous administration and what will tip the next recession is still uncertain.
Recessions happen periodically as trends start to reverse, jobs get lost, benefits get claimed and the economy goes negative for a number of quarters.
We have a lot of good things in the economy and to a certain extent, we have already absorbed the major reduction in income caused by the changes in our economy due to technology.
Still they do start out slowly sometimes until they pick up speed and I see a few signs that could be troubling.
Last quarters growth was due to a speed up in imports to avoid tariffs that will reduce future growth, just how much is uncertain.
Tariffs will impact growth.
Our immigration policies impact growth.
Interest rates impact growth.
Is any one of these enough? Maybe, maybe not, could be something else completely.
Time will tell.
Showing posts with label growth. Show all posts
Showing posts with label growth. Show all posts
Thursday, August 23, 2018
Friday, July 27, 2018
Growth
Last quarter was the best rate of growth in four years.
It should be noted that the administration four years ago was the Obama administration, the one that the current administration accuses of being bad for business.
That growth wasn't sustained for the whole year and this rate isn't likely to be either.
It was partly fueled by people trying to get ahead of the potential tariffs, meaning that certain deliveries were moved forward in time.
They aren't going to happen when they would have.
Growth is of course a good thing even if it is partly fueled by stealing from the future.
Some things are going to hurt growth, the most prevalent being the increase in cost from the tariffs.
Steel and Aluminum prices are up, good for those manufacturers, bad for everyone else.
The more we impose the more it will impact growth.
More significantly is where is the growth?
The problem with our economy has been high paying manufacturing jobs being replaced by lower paying service jobs.
The high paying service jobs are in areas that require significant expertise, not the sort of thing that many high school graduates would have.
Of course the economy here is still doing well but a young person has more and more problems trying to live in the area they grew up in.
Higher prices due to tariffs isn't going to help.
It should be noted that the administration four years ago was the Obama administration, the one that the current administration accuses of being bad for business.
That growth wasn't sustained for the whole year and this rate isn't likely to be either.
It was partly fueled by people trying to get ahead of the potential tariffs, meaning that certain deliveries were moved forward in time.
They aren't going to happen when they would have.
Growth is of course a good thing even if it is partly fueled by stealing from the future.
Some things are going to hurt growth, the most prevalent being the increase in cost from the tariffs.
Steel and Aluminum prices are up, good for those manufacturers, bad for everyone else.
The more we impose the more it will impact growth.
More significantly is where is the growth?
The problem with our economy has been high paying manufacturing jobs being replaced by lower paying service jobs.
The high paying service jobs are in areas that require significant expertise, not the sort of thing that many high school graduates would have.
Of course the economy here is still doing well but a young person has more and more problems trying to live in the area they grew up in.
Higher prices due to tariffs isn't going to help.
Saturday, July 21, 2018
Economics
Has the US economy improved because of the policies of the current administration?
Its easy enough to argue both sides of that, we have seen continued increased economic growth and reduced unemployment, but we were seeing those before the election.
The reduced business taxes and regulation reductions are providing some stimulus, but we see the increased deficits and tariffs as headwinds to future growth.
If you live in the fantasy world of this administration, he has turned the economy around. He is creating manufacturing and mining jobs and making America energy independent.
Of course the amount of truth in those statements is negligible but there is a little truth there.
His policies have started to hurt farmers as one of their biggest customers has made American products more expensive leading to lost sales.
His immigration policies have also led to labor shortages in certain seasonal industries.
We are seeing some increases in energy costs and those will have an impact.
If you simply look at trend lines since the great recession, the change between the two administrations is simply not dramatic.
Remember we had some pretty major stimulus, the tax cuts and the increased Government spending that should cause a growth spurt, and we see some impact, but of course that is really borrowed money since our deficit is so high.
We are seeing some interest rate increases which will slow growth a bit and while I doubt the congress can do anything at all short term, we see the administration trying to pass another tax break.
There is certainly no economic miracle and the long term impact seems negative, but short term there is some increased growth.
If you believe that the growth will become permanent and propel the economy, we may be able to pay for these cuts.
If not, well we have a growing debt problem to deal with.
If the interest rates go high enough it will be a disastrous issue.
Its easy enough to argue both sides of that, we have seen continued increased economic growth and reduced unemployment, but we were seeing those before the election.
The reduced business taxes and regulation reductions are providing some stimulus, but we see the increased deficits and tariffs as headwinds to future growth.
If you live in the fantasy world of this administration, he has turned the economy around. He is creating manufacturing and mining jobs and making America energy independent.
Of course the amount of truth in those statements is negligible but there is a little truth there.
His policies have started to hurt farmers as one of their biggest customers has made American products more expensive leading to lost sales.
His immigration policies have also led to labor shortages in certain seasonal industries.
We are seeing some increases in energy costs and those will have an impact.
If you simply look at trend lines since the great recession, the change between the two administrations is simply not dramatic.
Remember we had some pretty major stimulus, the tax cuts and the increased Government spending that should cause a growth spurt, and we see some impact, but of course that is really borrowed money since our deficit is so high.
We are seeing some interest rate increases which will slow growth a bit and while I doubt the congress can do anything at all short term, we see the administration trying to pass another tax break.
There is certainly no economic miracle and the long term impact seems negative, but short term there is some increased growth.
If you believe that the growth will become permanent and propel the economy, we may be able to pay for these cuts.
If not, well we have a growing debt problem to deal with.
If the interest rates go high enough it will be a disastrous issue.
Monday, June 25, 2018
Economic Tipping Point?
Outside of the contentiousness we see everywhere, on the surface things are continuing to be okay.
We have had a fairly steady recovery from the 2009 financial crisis which has continued through the current administration.
Structurally there hasn't been much change as current policies haven't revived much manufacturing or mining and the areas improving are little changed.
There are of course economic forces at work that is using the power of the unseen hand to determine where work is best performed based on being most efficient.
Government involvement in this process is normally futile and almost always is ineffective.
We now see the dontard trying to influence the economy via tariffs.
The original group were apparently to appease a few of his friends who wanted to reduce competition to some businesses that faced foreign competition.
However, he apparently is unaware that other countries set their own policies and were going to react.
We see China targeting specific areas that will hurt many of his supporters and the same from the EU.
His response is typical, he escalates and we seem unable to get the congress, which is populated by proponents of free trade to do anything.
So we see the beginning of the most likely event to cause a recession.
There are other troubling signs, but the disruption that might be caused by trade wars is probably the most serious.
Recessions are unfortunately part of the business process as every few years excesses are adjusted and we see a reduction in growth.
We are certainly due. However, as much as the recovery was criticized for being too slow, that may be why we have avoided one so far. The excesses weren't created, or at least not to the extent they normally are.
The retaliatory tariffs will likely lead to reduce exports and increased domestic prices and it may be the tipping point.
Time will tell.
We have had a fairly steady recovery from the 2009 financial crisis which has continued through the current administration.
Structurally there hasn't been much change as current policies haven't revived much manufacturing or mining and the areas improving are little changed.
There are of course economic forces at work that is using the power of the unseen hand to determine where work is best performed based on being most efficient.
Government involvement in this process is normally futile and almost always is ineffective.
We now see the dontard trying to influence the economy via tariffs.
The original group were apparently to appease a few of his friends who wanted to reduce competition to some businesses that faced foreign competition.
However, he apparently is unaware that other countries set their own policies and were going to react.
We see China targeting specific areas that will hurt many of his supporters and the same from the EU.
His response is typical, he escalates and we seem unable to get the congress, which is populated by proponents of free trade to do anything.
So we see the beginning of the most likely event to cause a recession.
There are other troubling signs, but the disruption that might be caused by trade wars is probably the most serious.
Recessions are unfortunately part of the business process as every few years excesses are adjusted and we see a reduction in growth.
We are certainly due. However, as much as the recovery was criticized for being too slow, that may be why we have avoided one so far. The excesses weren't created, or at least not to the extent they normally are.
The retaliatory tariffs will likely lead to reduce exports and increased domestic prices and it may be the tipping point.
Time will tell.
Monday, October 24, 2016
Boring Economics
One of the points being made in the current election is that the US Economy is not growing like it should.
The comparison made is to previous recessions and the bounce back that followed them. However, in an interesting article in the NY Times, the impact of demographics was brought into play.
Since the second world war, the number of productive workers in the workforce has tended to increase each year for a couple of reasons.
First as the baby boomers entered it it swelled its ranks.
We have seen a great increase in women working outside the home.
Now growth is simply the change in economic activity from one year to the next.
Increasing populations tend to increase growth because they each contribute to economic activity both as consumers (demand side) and workers (supply side).
As the population bulge cause by the baby boomers moved through the prime earning years, we saw some significant years of growth. Now we also saw some significant inflation and some analysis shows that in constant dollars growth has been somewhat lower than it appears.
In addition, we have had a series of recessions which reduce the average overall growth rate on a cumulative basis. To point to growth right after a recession or even right before one could be problematic considering some of that growth is easily wiped away.
However, while growth may not have been as high in the past as claimed the main point is that the demographics we face over the next period are not conducive to high growth rates unless we do in fact open the borders and bring in great numbers of younger people. This is unlikely so we are faced with some simple math.
As productive baby boomers leave the workforce, not all of them will be replaced since there are less new workers. This will depress growth.
To achieve real growth we need to increase the productivity of each worker to compensate for the loss of workers. Promises of growth being made ignore economic reality since we don't have enough available workers to achieve those levels.
Even now, the skilled jobs have trouble finding qualified candidates much of the time.
I warned you this would be boring.
The comparison made is to previous recessions and the bounce back that followed them. However, in an interesting article in the NY Times, the impact of demographics was brought into play.
Since the second world war, the number of productive workers in the workforce has tended to increase each year for a couple of reasons.
First as the baby boomers entered it it swelled its ranks.
We have seen a great increase in women working outside the home.
Now growth is simply the change in economic activity from one year to the next.
Increasing populations tend to increase growth because they each contribute to economic activity both as consumers (demand side) and workers (supply side).
As the population bulge cause by the baby boomers moved through the prime earning years, we saw some significant years of growth. Now we also saw some significant inflation and some analysis shows that in constant dollars growth has been somewhat lower than it appears.
In addition, we have had a series of recessions which reduce the average overall growth rate on a cumulative basis. To point to growth right after a recession or even right before one could be problematic considering some of that growth is easily wiped away.
However, while growth may not have been as high in the past as claimed the main point is that the demographics we face over the next period are not conducive to high growth rates unless we do in fact open the borders and bring in great numbers of younger people. This is unlikely so we are faced with some simple math.
As productive baby boomers leave the workforce, not all of them will be replaced since there are less new workers. This will depress growth.
To achieve real growth we need to increase the productivity of each worker to compensate for the loss of workers. Promises of growth being made ignore economic reality since we don't have enough available workers to achieve those levels.
Even now, the skilled jobs have trouble finding qualified candidates much of the time.
I warned you this would be boring.
Wednesday, January 13, 2010
Profits or Sales Growth?
In 2009 a fairly constant refrain heard as companies reported better than expected earnings was "but they are doing it on lower sales". Now as we kick off the first 2010 earnings season, Alcoa had higher sales but missed the profit estimate. This caused the market to have a small correction, although of course other factors were in play.
The objective of any business is to make money, otherwise it is a hobby. There have been many many cases of businesses that expanded so much on credit that ultimately they were forced into bankruptcy. Having more market share or sales without more profit is not a path to success.
Clearly the ideal company would grow both. The best way to do that of course is to make sure you have a secure business model and expand only when it is clearly justified. Some executives and companies start to think that bigger is better and do whatever they can to expand (including reducing margins). The strategy here is to become so large that competition becomes irrelevant and they can then increase margins. This strategy has a number of issues, and can lead to being over leveraged.
The contraction has left many companies smaller than they were. The ones that have adjusted to this and eliminated significant costs have profited and will continue to profit. Owning stock is owning a piece of a company, and if that company is making money, the share ultimately will reflect that. Profits are the goal.
The objective of any business is to make money, otherwise it is a hobby. There have been many many cases of businesses that expanded so much on credit that ultimately they were forced into bankruptcy. Having more market share or sales without more profit is not a path to success.
Clearly the ideal company would grow both. The best way to do that of course is to make sure you have a secure business model and expand only when it is clearly justified. Some executives and companies start to think that bigger is better and do whatever they can to expand (including reducing margins). The strategy here is to become so large that competition becomes irrelevant and they can then increase margins. This strategy has a number of issues, and can lead to being over leveraged.
The contraction has left many companies smaller than they were. The ones that have adjusted to this and eliminated significant costs have profited and will continue to profit. Owning stock is owning a piece of a company, and if that company is making money, the share ultimately will reflect that. Profits are the goal.
Sunday, September 27, 2009
Thoughts
What was depicted as the great recession with the potential to destroy the economic system of the United States, has turned out to simply be the collapse of another bubble with significant implications, but certainly not a great depression.
The collapse of the real estate bubble and the panic of 2008-2009 will go down as a painful period in economic history, but as always, it was not the country destroying event depicted by some.
I certainly don't want to minimize the pain felt by so many and it is clear that the next few years will determine if the country can stop looking for the next big thing or settle down into a pattern of long term growth. There is tremendous opportunity for real growth and prosperity both in the United States and the rest of the world as technological and scientific improvements improve the standard of living for all. The questions facing everyone, is can we harness these improvements and stop some of the short sided thinking that has been so costly.
If you simply think for a few minutes, there is, within the United States more than enough food, space, natural resources and energy to assure everyone here a secure lifestyle. What is not so certain is if we can be as wasteful as we have been and still thrive.
Further, the growing prosperity of many emerging markets and the possibility of further development will simply further provide opportunity. It is making wise choices and developing clean energy and a healthy attitude towards our world that will determine the future.
The collapse of the real estate bubble and the panic of 2008-2009 will go down as a painful period in economic history, but as always, it was not the country destroying event depicted by some.
I certainly don't want to minimize the pain felt by so many and it is clear that the next few years will determine if the country can stop looking for the next big thing or settle down into a pattern of long term growth. There is tremendous opportunity for real growth and prosperity both in the United States and the rest of the world as technological and scientific improvements improve the standard of living for all. The questions facing everyone, is can we harness these improvements and stop some of the short sided thinking that has been so costly.
If you simply think for a few minutes, there is, within the United States more than enough food, space, natural resources and energy to assure everyone here a secure lifestyle. What is not so certain is if we can be as wasteful as we have been and still thrive.
Further, the growing prosperity of many emerging markets and the possibility of further development will simply further provide opportunity. It is making wise choices and developing clean energy and a healthy attitude towards our world that will determine the future.
Tuesday, August 25, 2009
Recovery Start
As we see the stimulus start to kick in at a greater pace and the people who are still doing OK in the current economy start to feel that they are not in danger of falling off the cliff, we are seeing the start of economic growth.
This is just the start and as the growth continues it will start to build momentum. There is still a lot of skepticism about what happens after the stimulus runs its course, but much like a person who uses crutches to support a broken leg until he can walk again, the stimulus will start enough momentum to enable the economy to walk on its own.
As we start to see some increase in employment and housing prices, whether due to the stimulus or some other factor, it will feed upon itself much like the downward spiral fed upon itself.
If we somehow have a major disruption, this may change, but barring that it is clear that we have started the upswing and the next few months will be very interesting.
This is just the start and as the growth continues it will start to build momentum. There is still a lot of skepticism about what happens after the stimulus runs its course, but much like a person who uses crutches to support a broken leg until he can walk again, the stimulus will start enough momentum to enable the economy to walk on its own.
As we start to see some increase in employment and housing prices, whether due to the stimulus or some other factor, it will feed upon itself much like the downward spiral fed upon itself.
If we somehow have a major disruption, this may change, but barring that it is clear that we have started the upswing and the next few months will be very interesting.
Wednesday, August 19, 2009
What we need to do
It is pretty clear that there is a lot of nervousness in the stock market. While there are some pretty clear signs that the economy is going into a sort of recovery, there is a wide divergence of opinion over how strong that recovery will be.
I've talked in prior writings here about how the economy has made a semi permanent contraction of 15% or so and that the growth is not going to recover that amount anytime soon. Companies have adjusted to the reduced level of sales and have figured out how to be profitable at the lower levels. We will see some growth, but consumer spending has to start from the new base, and if anyone expects spending to jump to where it was two years ago anytime soon, they really need to look at the economics.
A lot of the credit that was available due to home equity is simply gone. A lot of that debt has also been liquidated in foreclosures and credit card defaults and this was the major adjustment that led us to where we are today. There are still more foreclosures and defaults to come, but most Americans are not going to abandon their homes. Most Americans are going to make a good faith effort to pay their debts. What has hopefully happened is that those who count on easy credit and lax standards to support an unsustainable lifestyle can no longer get credit.
In order to reduce unemployment we need to promote new growth industries, one of which is the renewable energy area. I see more and more promising information related to that area and as we reduce our need for foreign oil we will see wealth and jobs created in this country. This is potentially an explosive growth area, once we pass a critical point. For example, if we start to convert Semi to run on Natural Gas we will need to convert or manufacture the semis and build infrastructure to support them. If we start to see a great increase in the use of home solar due to incentives, we will need to manufacture the panels in mass (probably driving down the cost) and installing them on homes.
Another thing that will lead to sustainable growth is the steps necessary to make manufacturing economical in this country. I believe a change in our tax system to a consumption tax on all products sold here instead of the current system could go a long way towards accomplishing that. Now, this would only work it that system replaced at the very least the business taxes we impose, it can't be an add on tax. We can actually keep payroll taxes, especially if we gear them to paying for services specific to our citizens, such as social security, medicare, etc.
I believe the first growth area is going to gain steam at last but could be jeopardized by a return to cheap oil. I would suggest that oil be taxed to assure that its price does not fall below a level that keeps alternate energy competitive.
We are in the midst of a transition in our economy. A lot of the pain has already been felt, but we are not complete and there may be additional pain. However, if we don't learn from our mistakes and take the actions needed to create future growth and prosperity, we have only ourselves to blame.
I've talked in prior writings here about how the economy has made a semi permanent contraction of 15% or so and that the growth is not going to recover that amount anytime soon. Companies have adjusted to the reduced level of sales and have figured out how to be profitable at the lower levels. We will see some growth, but consumer spending has to start from the new base, and if anyone expects spending to jump to where it was two years ago anytime soon, they really need to look at the economics.
A lot of the credit that was available due to home equity is simply gone. A lot of that debt has also been liquidated in foreclosures and credit card defaults and this was the major adjustment that led us to where we are today. There are still more foreclosures and defaults to come, but most Americans are not going to abandon their homes. Most Americans are going to make a good faith effort to pay their debts. What has hopefully happened is that those who count on easy credit and lax standards to support an unsustainable lifestyle can no longer get credit.
In order to reduce unemployment we need to promote new growth industries, one of which is the renewable energy area. I see more and more promising information related to that area and as we reduce our need for foreign oil we will see wealth and jobs created in this country. This is potentially an explosive growth area, once we pass a critical point. For example, if we start to convert Semi to run on Natural Gas we will need to convert or manufacture the semis and build infrastructure to support them. If we start to see a great increase in the use of home solar due to incentives, we will need to manufacture the panels in mass (probably driving down the cost) and installing them on homes.
Another thing that will lead to sustainable growth is the steps necessary to make manufacturing economical in this country. I believe a change in our tax system to a consumption tax on all products sold here instead of the current system could go a long way towards accomplishing that. Now, this would only work it that system replaced at the very least the business taxes we impose, it can't be an add on tax. We can actually keep payroll taxes, especially if we gear them to paying for services specific to our citizens, such as social security, medicare, etc.
I believe the first growth area is going to gain steam at last but could be jeopardized by a return to cheap oil. I would suggest that oil be taxed to assure that its price does not fall below a level that keeps alternate energy competitive.
We are in the midst of a transition in our economy. A lot of the pain has already been felt, but we are not complete and there may be additional pain. However, if we don't learn from our mistakes and take the actions needed to create future growth and prosperity, we have only ourselves to blame.
Wednesday, August 5, 2009
Unemployment impact
How much will a high rate of unemployment impact the overall economy? The answer to that depends on two factors. First, assuming that the unemployed will have some sort of income, whether from Government, benefits, retirement funds or perhaps "off the books" work, that will offset the loss of employment income to some degree. Of course, the amount of Government aid they get impacts taxes. The second factor is the ability of businesses to be profitable if you subtract the loss in disposable income, the first factor, from the economy.
I haven't seen very much information on the actual reduction in income suffered by an unemployed individual, and anything I come up with here is clearly speculative, but lets assume they lose 2/3rds of their income. I actually think that between retirement funds, Government aid, part time work both on and off the books, they will actually do better than this but I need to use some number. Well, if we were to have a long term unemployment rate of 10%, and nothing else was to change, we would see a 6.6% decrease in disposable income from unemployment. Now of course, you have to subtract the unemployment rate that we had prior to the downturn and lets use 4%. So instead of 6.6% we have a net decrease of 4%. Clearly, a factor and there are other factors that may very well mitigate that impact but lets use that.
So if high unemployment led to a reduction in consumer spending of 4% what does that mean for the economy? I guess it depends on you view of what a recovery is going to look like. Considering other factors in the economy, such as loss in housing and equity wealth and increase in savings it would potentially lead to a smaller economy of about 15%.
Now if the economy was about to contract by 15%, this would be quite scary. However, the economy has already contracted by more than that and is now in fact starting to recover a bit. What we are seeing is company after company reporting earnings that support a contraction to a lower need for revenue in order to maintain profitability.
A number of analysts or bloggers seem to think that cost reduction is a one time event and try to discount it. However, when a company reduces cost by laying off workers or closing plants, this is an ongoing reduction. The savings keep on helping profitability. So if a company has adjusted its operations to be profitable at a certain reduction in revenue and revenue then grows, the improved profitability actually may lead to greatly increased profits.
So, as we watch what may very well be, at least initially, a jobless recovery, how bad is it for the economy? On an ongoing basis, I think it will lead to about a 4% reduction in economic activity and consumer spending. Without ignoring the individual devastation that losing a job can cause, from a purely economic impact it becomes a fairly minor overall factor in economic recovery.
I haven't seen very much information on the actual reduction in income suffered by an unemployed individual, and anything I come up with here is clearly speculative, but lets assume they lose 2/3rds of their income. I actually think that between retirement funds, Government aid, part time work both on and off the books, they will actually do better than this but I need to use some number. Well, if we were to have a long term unemployment rate of 10%, and nothing else was to change, we would see a 6.6% decrease in disposable income from unemployment. Now of course, you have to subtract the unemployment rate that we had prior to the downturn and lets use 4%. So instead of 6.6% we have a net decrease of 4%. Clearly, a factor and there are other factors that may very well mitigate that impact but lets use that.
So if high unemployment led to a reduction in consumer spending of 4% what does that mean for the economy? I guess it depends on you view of what a recovery is going to look like. Considering other factors in the economy, such as loss in housing and equity wealth and increase in savings it would potentially lead to a smaller economy of about 15%.
Now if the economy was about to contract by 15%, this would be quite scary. However, the economy has already contracted by more than that and is now in fact starting to recover a bit. What we are seeing is company after company reporting earnings that support a contraction to a lower need for revenue in order to maintain profitability.
A number of analysts or bloggers seem to think that cost reduction is a one time event and try to discount it. However, when a company reduces cost by laying off workers or closing plants, this is an ongoing reduction. The savings keep on helping profitability. So if a company has adjusted its operations to be profitable at a certain reduction in revenue and revenue then grows, the improved profitability actually may lead to greatly increased profits.
So, as we watch what may very well be, at least initially, a jobless recovery, how bad is it for the economy? On an ongoing basis, I think it will lead to about a 4% reduction in economic activity and consumer spending. Without ignoring the individual devastation that losing a job can cause, from a purely economic impact it becomes a fairly minor overall factor in economic recovery.
Monday, July 27, 2009
Smaller economy
There was a good documentary on CNBC last night called "House of Cards" that spelled out how the flow of credit led to the housing bubble. Of course the biggest issue in the whole process was the simple fact that the frenzy allowed people who normally would never qualify for a mortgage to get extremely large ones and encouraged people to pursue excessive life styles using the growth in housing prices.
Since the whole system was dependant on home prices rising ad infinitum, when they did stop going up, the bubble crashed. We have been seeing the aftermath of that for the last couple of years.
Now as far as housing prices go, the correction in prices is either over, or almost over in most parts of the country. This is obviously debatable, but one of the things driving average prices down is the re-establishment of the spread between the high end of the market and the low end. The initial crisis impacted to low end of the market dramatically. Now of course, in some states such as California, the low end of the market has valuations that are higher than the high end of the market elsewhere, but still, the first houses impacted were generally the low end of the market. This crash in prices increased the spread between entry level housing and higher levels of the market.
Now even as the real estate bottoms have started to stabilize, we are going to have a period where the higher end of the market will have to adjust down. I don't expect this to be as catastrophic as the price drops in the low end, but it will continue to feed the impression that housing is in trouble. Many of these houses are owned by people who don't necessarily have to sell. Also, in many cases they still have significant equity in these houses, so even when they sell at values lower than the peak, they are still ahead of the original basis.
What continues to be the most problematic aspect of the housing problem is the fact that so much of our economy was based on people spending paper wealth. I've shown statistics previously where the amount of discretionary income available has not changed dramatically. Now even if a larger percentage of this amount was diverted into savings, you would only have a small economic contraction. However, consumer spending in the bubble years was tremendously supplemented by housing wealth and that spending is simply not coming back anytime soon. That is why we need to adjust to an economy that has to be viable at about 85% of the prior levels.
This will lead to unemployment higher than it used to be, but not necessarily at an unsustainable level. We do have a chance to help the economy dramatically by investing heavily in the renewable energy area.
Since the whole system was dependant on home prices rising ad infinitum, when they did stop going up, the bubble crashed. We have been seeing the aftermath of that for the last couple of years.
Now as far as housing prices go, the correction in prices is either over, or almost over in most parts of the country. This is obviously debatable, but one of the things driving average prices down is the re-establishment of the spread between the high end of the market and the low end. The initial crisis impacted to low end of the market dramatically. Now of course, in some states such as California, the low end of the market has valuations that are higher than the high end of the market elsewhere, but still, the first houses impacted were generally the low end of the market. This crash in prices increased the spread between entry level housing and higher levels of the market.
Now even as the real estate bottoms have started to stabilize, we are going to have a period where the higher end of the market will have to adjust down. I don't expect this to be as catastrophic as the price drops in the low end, but it will continue to feed the impression that housing is in trouble. Many of these houses are owned by people who don't necessarily have to sell. Also, in many cases they still have significant equity in these houses, so even when they sell at values lower than the peak, they are still ahead of the original basis.
What continues to be the most problematic aspect of the housing problem is the fact that so much of our economy was based on people spending paper wealth. I've shown statistics previously where the amount of discretionary income available has not changed dramatically. Now even if a larger percentage of this amount was diverted into savings, you would only have a small economic contraction. However, consumer spending in the bubble years was tremendously supplemented by housing wealth and that spending is simply not coming back anytime soon. That is why we need to adjust to an economy that has to be viable at about 85% of the prior levels.
This will lead to unemployment higher than it used to be, but not necessarily at an unsustainable level. We do have a chance to help the economy dramatically by investing heavily in the renewable energy area.
Sunday, July 26, 2009
New economic base
Over the last two week (earnings season) we have heard many analysts make a comment similar to the following, "while earnings have beat estimates, revenue is down from last year and/or didn't hit the current estimate." This comment normally precedes a bearish statement along the lines of, well they can't cut costs forever and the economy is still weak.
What I think they are missing is the fact that the economy has contracted because of the great loss of consumer wealth and in comparison to the bubble days of 2007 it looks bad. However, assume you had a time machine and could go back to the economy of 7 years ago. Companies were certainly capable of making money and growing from that point. Now, if management has successfully resized to a level similar to one that existed seven years ago, what lies ahead?
Whether it is going to be this quarter, next quarter, or next year, I think everyone except a few people who believe Armageddon is coming, expect a recovery. Is it going to be a recovery that takes us back to 2007 levels in a matter of months? Probably not. However, if the economy and the agile companies have shrunk by 10-20% in reaction to recent events and we start to grow at 2-3%, that is still very bullish. Based on some assumptions I use it may take us until 2014 to regain 2007 levels, but so what? Companies can make money and are positioned to grow during those years from where they are now.
Take the auto industry. Near the peak they sold 16 million cars. If they shrink and retool to the point that they can be profitable selling 10 million cars, are they not a good investment? The fact that the industry was once bigger is simply a historical fact and certainly doesn't have much to do with current investment choices. Even more importantly, if they are profitable at that level and if over time demand goes up, they now actually have new growth potential. Yes, they are regrowing into areas they already occupied, but why does that matter?
If you accept that the economy has adjusted and is now smaller by some percentage, you need to make investment decisions based on the new reality, not some memories from a few years ago. The agility demonstrated by the managers of these companies is impressive and they have created new opportunities both for current earnings and for future growth. They seemed to adapt much faster than most of the commentators.
What I think they are missing is the fact that the economy has contracted because of the great loss of consumer wealth and in comparison to the bubble days of 2007 it looks bad. However, assume you had a time machine and could go back to the economy of 7 years ago. Companies were certainly capable of making money and growing from that point. Now, if management has successfully resized to a level similar to one that existed seven years ago, what lies ahead?
Whether it is going to be this quarter, next quarter, or next year, I think everyone except a few people who believe Armageddon is coming, expect a recovery. Is it going to be a recovery that takes us back to 2007 levels in a matter of months? Probably not. However, if the economy and the agile companies have shrunk by 10-20% in reaction to recent events and we start to grow at 2-3%, that is still very bullish. Based on some assumptions I use it may take us until 2014 to regain 2007 levels, but so what? Companies can make money and are positioned to grow during those years from where they are now.
Take the auto industry. Near the peak they sold 16 million cars. If they shrink and retool to the point that they can be profitable selling 10 million cars, are they not a good investment? The fact that the industry was once bigger is simply a historical fact and certainly doesn't have much to do with current investment choices. Even more importantly, if they are profitable at that level and if over time demand goes up, they now actually have new growth potential. Yes, they are regrowing into areas they already occupied, but why does that matter?
If you accept that the economy has adjusted and is now smaller by some percentage, you need to make investment decisions based on the new reality, not some memories from a few years ago. The agility demonstrated by the managers of these companies is impressive and they have created new opportunities both for current earnings and for future growth. They seemed to adapt much faster than most of the commentators.
Tuesday, July 21, 2009
Employment
One of the things being revealed during this earning season is how quickly companies shed payroll in order to preserve profits. Yes profits are down from last year but had companies continued historical patterns, they would have been much smaller and possibly non-existent. What they did differently was to shed employees at an unprecedented pace.
The question is why. Well, despite the fact that many companies like to say that employees are their greatest asset, in reality most don't feel that way. In fact if you consider the built in cost of an employees fringe benefits, the incremental cost of hiring or keeping an employee is out of proportion to increased production. Now, had this been viewed as a short downturn, companies may not have reduced payrolls as much, but with the "new depression" talk and the tremendous drops in assets, companies trim workforce and will rehire very slowly. Generally, technology has now become much cheaper than payroll.
In an earlier post I talked about the loss of jobs in retail, the most visible industry to most of us. This trend is not limited to that industry. In fact, the bad economy is a wonderful opportunity for many companies to shed payroll and invest in new technology to reduce ongoing payroll and increase profitability.
There is a saying that Generals always prepare to fight the last war. This propensity isn't restricted to Generals, it is also true of economists. It is almost inevitable that when you predict the future based on prior behavior, you will have problem predicting sudden change. The high cost of health care and pensions where they are still offered simply make full time, long term employees too expensive unless they are essential.
There will be some growth in employment in current industries when the recovery gets fully going, but it will not increase as quickly or as much as it has in the past. The only real way to reduce unemployment dramatically is to create one or more new growth industries.
The question is why. Well, despite the fact that many companies like to say that employees are their greatest asset, in reality most don't feel that way. In fact if you consider the built in cost of an employees fringe benefits, the incremental cost of hiring or keeping an employee is out of proportion to increased production. Now, had this been viewed as a short downturn, companies may not have reduced payrolls as much, but with the "new depression" talk and the tremendous drops in assets, companies trim workforce and will rehire very slowly. Generally, technology has now become much cheaper than payroll.
In an earlier post I talked about the loss of jobs in retail, the most visible industry to most of us. This trend is not limited to that industry. In fact, the bad economy is a wonderful opportunity for many companies to shed payroll and invest in new technology to reduce ongoing payroll and increase profitability.
There is a saying that Generals always prepare to fight the last war. This propensity isn't restricted to Generals, it is also true of economists. It is almost inevitable that when you predict the future based on prior behavior, you will have problem predicting sudden change. The high cost of health care and pensions where they are still offered simply make full time, long term employees too expensive unless they are essential.
There will be some growth in employment in current industries when the recovery gets fully going, but it will not increase as quickly or as much as it has in the past. The only real way to reduce unemployment dramatically is to create one or more new growth industries.
Friday, July 10, 2009
Thoughts about jobs and taxes
After the S&P dropped to the 666 level in March, it bounced back in April and May to the low 900s. Since then it has been flat to down going to the high 800s right now. This pattern comes very close to the pattern we saw in the early 1970s and if that example holds the S&P will have to drop to about 825 after which it should climb to around 11-1200.
Following that example further, after it reaches that level it will consolidate there for a number of years with variations of as much as 15-20% up and down. Two things characterized that period of stagflation, excess money and high unemployment. The reason for the high unemployment then was that we were transitioning from a manufacturing based economy to a more technological and service based one. Millions of jobs in industries that had dominated the US economy in the 50s and 60s effectively went elsewhere as it was cheaper to buy foreign items then to make them here. Eventually, the rise of high tech and service industries increased employment leading to increased consumption, rise in real estate values and adjustment in valuations to the money supply.
Now, looking at the next ten years in America we face similar problems. The remnants of the old industrial jobs are under fire again but also, we are seeing a direct challenge to tech and service jobs. It is clearly cheaper to manufacture almost everything overseas but services were at least local. However, as less and less services are performed in person, there really is no reason for service jobs to be local. Also, as more and more sales go on-line, even relatively low paying jobs in retail will be reduced. If I complete an on-line purchase, there is no need to deal with a person at all. Further, I have grown quite fond of the self service checkout at places like home depot and some grocery stores. Yes they have a person monitoring these by instead of 4 people, they only need one. These are jobs that are not coming back. Considering the long term hit to construction (which at least for now still has to be locally) there are millions of jobs going away that are not going to return.
Now, even if the service jobs go on-line, they could still be performed in this country if it made economic sense. Certainly not all jobs are going away but think about this for a second. If we have 100 million people looking for work and 95 million jobs we have a 5% unemployment rate. Assuming the number of people looking for work stays the same but 5 million jobs go overseas or simply disappear because technology replaces them (only 5%) we now have 100 million job seekers for 90 million jobs we now have a 10% unemployment rate.
So are we doomed to live with high unemployment? Until the next growth industry comes along to create jobs the answer is yes. There are some things we can do to mitigate the problem, make the relative cost of employment cheaper by centralizing health insurance cost (if you are going to pay it whether you have employees or not, it stops being a deterrent to hiring), but technology is not going to stop getting better and the trend towards on-line or self-service will continue.
I believe jobs can be created by invigorating the renewable energy industry and by providing funds to fix our aging infrastructure. Further, we need to make sure the cost of doing business in this country is not higher than it should be. I believe we should switch to a tax on consumption to even the playing field. If you sell product in this country you should pay a fair amount of tax.
Currently faced with massive deficits and an increasing national debt, we see our politicians scrambling to find more things to tax. I recently saw a proposal that would take the difference between income and savings and tax it. Generally, that is a better system than what we currently have, but still requires millions of returns to be filed. It really seems simpler to tax sales and do it strictly.
Following that example further, after it reaches that level it will consolidate there for a number of years with variations of as much as 15-20% up and down. Two things characterized that period of stagflation, excess money and high unemployment. The reason for the high unemployment then was that we were transitioning from a manufacturing based economy to a more technological and service based one. Millions of jobs in industries that had dominated the US economy in the 50s and 60s effectively went elsewhere as it was cheaper to buy foreign items then to make them here. Eventually, the rise of high tech and service industries increased employment leading to increased consumption, rise in real estate values and adjustment in valuations to the money supply.
Now, looking at the next ten years in America we face similar problems. The remnants of the old industrial jobs are under fire again but also, we are seeing a direct challenge to tech and service jobs. It is clearly cheaper to manufacture almost everything overseas but services were at least local. However, as less and less services are performed in person, there really is no reason for service jobs to be local. Also, as more and more sales go on-line, even relatively low paying jobs in retail will be reduced. If I complete an on-line purchase, there is no need to deal with a person at all. Further, I have grown quite fond of the self service checkout at places like home depot and some grocery stores. Yes they have a person monitoring these by instead of 4 people, they only need one. These are jobs that are not coming back. Considering the long term hit to construction (which at least for now still has to be locally) there are millions of jobs going away that are not going to return.
Now, even if the service jobs go on-line, they could still be performed in this country if it made economic sense. Certainly not all jobs are going away but think about this for a second. If we have 100 million people looking for work and 95 million jobs we have a 5% unemployment rate. Assuming the number of people looking for work stays the same but 5 million jobs go overseas or simply disappear because technology replaces them (only 5%) we now have 100 million job seekers for 90 million jobs we now have a 10% unemployment rate.
So are we doomed to live with high unemployment? Until the next growth industry comes along to create jobs the answer is yes. There are some things we can do to mitigate the problem, make the relative cost of employment cheaper by centralizing health insurance cost (if you are going to pay it whether you have employees or not, it stops being a deterrent to hiring), but technology is not going to stop getting better and the trend towards on-line or self-service will continue.
I believe jobs can be created by invigorating the renewable energy industry and by providing funds to fix our aging infrastructure. Further, we need to make sure the cost of doing business in this country is not higher than it should be. I believe we should switch to a tax on consumption to even the playing field. If you sell product in this country you should pay a fair amount of tax.
Currently faced with massive deficits and an increasing national debt, we see our politicians scrambling to find more things to tax. I recently saw a proposal that would take the difference between income and savings and tax it. Generally, that is a better system than what we currently have, but still requires millions of returns to be filed. It really seems simpler to tax sales and do it strictly.
Thursday, July 9, 2009
Thoughts on earnings
Where is the stock market headed, or maybe a better question is what should the S&P 500 be trading at? Generally the level is closely related to earnings and as earnings for the 500 have dropped since last year so has the market valuation. However, we are now in earnings season and as companies make announcements, the S&P is going to react.
There are a number of historical charts on the relationship between the S&P level and earnings. Generally the price/earnings ratio needs to provide a yield that is better than what you can get in US Treasuries since realistically, why take a risk if you are going to get less money than you would for not taking a risk? Right now this would require returns of at least 5% but that isn't enough of a premium so generally I think 7-8% is a better gauge. At 7.5% you would trade at 13.3 times earnings. Generally $55 is the current estimate for 2009 so the S&P lower limit would be in the 730 range. Now if you are will to accept the 5% return with the hope of future growth, the P/E ratio changes to 20 and we get an S&P at 1100. A more normal P/E ratio tends to be about 17 so a reasonable estimate is 935.
Now of course the estimate for earnings and whether it should be earnings from operations or GAAP earnings, (includes all accounting write-offs and additions) is the starting point. I prefer earnings from operations, since if you start using gains and losses from asset valuations, and other accounting requirements, you add a lot of individual company variability. I think those things are important is assessing the long term well being of individual companies, but distort the overall comparisons too much. As an aside, all those asset write-offs due to property and inventory valuations, may now actually be hidden assets if the valuations have any upside.
However at a P/E of 17 the return is around 6% (5.88) and it is fairly safe to say that the market want to get at least the treasury rate of about 4% plus protection against inflation. So if you expect inflation to be 1% we are back to a P/E of 20, at 2% 17, at 3% 14 etc.
So level of earning with return on treasuries and inflation expectations can give you a good estimate of where the S&P should be.
Concerning earnings, while revenue is down for most of the S&P companies we have seen aggressive cost cutting and inventory reductions (look at unemployment and commodities). This is likely to show some earning improvement despite the fact that the level of activity is reduced. Two things should be considered. I think companies need to adjust to a reduce level of consumer spending. This doesn't mean they can't be profitable, simply that they need to be profitable at a lower level of sales.
Growth will return, but barring an unexpected surge in real estate prices, consumers simply don't have the ability to spend like they used to. We also know that ugly reality has hit the baby boomer generation and that the comfortable retirement they envisioned from the equity in their homes and the gains in the stock market have vanished. They are now saving more and spending less. I don't expect this to change. However, if GM for example can be profitable selling 2 million cars a year, is it a bad investment? It won't be as big as it once was, nor will it employ as many people, but it may still be a good investment.
So I expect that we will continue to see earnings beat expectations because of the cost reductions, not revenue growth. In fact I believe what we saw from Alcoa may not be far from the norm, where the aggressive cost cutting allowed them to beat expectations, admittedly still losing money, by 30%.
It may seem a bit contradictory, but the cyclical industries hardest hit by the recession have had the best opportunity to do drastic cost cutting.
How will the Market react? Initial reaction to the Alcoa earnings is positive. I would think that as earning continue to beat estimates we will see the S&P go to the 935 level and possibly approach 1000. However, the naysayers will talk about a sluggish recovery with little job growth and reduced consumer spending. True enough, but if we accept that the economy isn't going to return to 2007 levels, have we recalibrated sufficiently to grow from where we are?
There are a number of historical charts on the relationship between the S&P level and earnings. Generally the price/earnings ratio needs to provide a yield that is better than what you can get in US Treasuries since realistically, why take a risk if you are going to get less money than you would for not taking a risk? Right now this would require returns of at least 5% but that isn't enough of a premium so generally I think 7-8% is a better gauge. At 7.5% you would trade at 13.3 times earnings. Generally $55 is the current estimate for 2009 so the S&P lower limit would be in the 730 range. Now if you are will to accept the 5% return with the hope of future growth, the P/E ratio changes to 20 and we get an S&P at 1100. A more normal P/E ratio tends to be about 17 so a reasonable estimate is 935.
Now of course the estimate for earnings and whether it should be earnings from operations or GAAP earnings, (includes all accounting write-offs and additions) is the starting point. I prefer earnings from operations, since if you start using gains and losses from asset valuations, and other accounting requirements, you add a lot of individual company variability. I think those things are important is assessing the long term well being of individual companies, but distort the overall comparisons too much. As an aside, all those asset write-offs due to property and inventory valuations, may now actually be hidden assets if the valuations have any upside.
However at a P/E of 17 the return is around 6% (5.88) and it is fairly safe to say that the market want to get at least the treasury rate of about 4% plus protection against inflation. So if you expect inflation to be 1% we are back to a P/E of 20, at 2% 17, at 3% 14 etc.
So level of earning with return on treasuries and inflation expectations can give you a good estimate of where the S&P should be.
Concerning earnings, while revenue is down for most of the S&P companies we have seen aggressive cost cutting and inventory reductions (look at unemployment and commodities). This is likely to show some earning improvement despite the fact that the level of activity is reduced. Two things should be considered. I think companies need to adjust to a reduce level of consumer spending. This doesn't mean they can't be profitable, simply that they need to be profitable at a lower level of sales.
Growth will return, but barring an unexpected surge in real estate prices, consumers simply don't have the ability to spend like they used to. We also know that ugly reality has hit the baby boomer generation and that the comfortable retirement they envisioned from the equity in their homes and the gains in the stock market have vanished. They are now saving more and spending less. I don't expect this to change. However, if GM for example can be profitable selling 2 million cars a year, is it a bad investment? It won't be as big as it once was, nor will it employ as many people, but it may still be a good investment.
So I expect that we will continue to see earnings beat expectations because of the cost reductions, not revenue growth. In fact I believe what we saw from Alcoa may not be far from the norm, where the aggressive cost cutting allowed them to beat expectations, admittedly still losing money, by 30%.
It may seem a bit contradictory, but the cyclical industries hardest hit by the recession have had the best opportunity to do drastic cost cutting.
How will the Market react? Initial reaction to the Alcoa earnings is positive. I would think that as earning continue to beat estimates we will see the S&P go to the 935 level and possibly approach 1000. However, the naysayers will talk about a sluggish recovery with little job growth and reduced consumer spending. True enough, but if we accept that the economy isn't going to return to 2007 levels, have we recalibrated sufficiently to grow from where we are?
Tuesday, July 7, 2009
Growth
Read a blog today that argued that there will be no real growth in the California economy for many years to come and by extension none in the US economy as a whole.
The argument centers around the fact that our two primary post war growth industries, housing and automobiles, are both unlikely to show any growth, and without that stimulus, overall growth will be stagnant. I agree that we need to adjust expectations in both of those industries, but think that it will take years to absorb excess housing, unless we simply raze much of it and reuse the land to grow biomass for bio fuels, I believe that the automotive industry has an opportunity to grow as we replace our current fossil based vehicles with vehicles that run on electricity, bio diesel or natural gas. In addition, the development of infrastructure to supply that fuel and delivery systems hold tremendous potential.
Further, while we have enough housing stock, I believe there is ample opportunity to incentivize energy remodeling that will sustain much of the construction industry. Use of solar panels to reduce electricity needs, better insulation, more efficient appliances and conversion of heating systems to more efficient ones can create jobs.
This growth is an offshoot of the need to develop a renewable energy imperative in this country and the development of industries to make it happen. Solar, wind and conversion of bio mass and/or coal into clean alternatives will reduce our balance of payment problems and create a tremendous number of jobs.
There isn't really a choice about this change in the long run, but if we continue to send wealth offshore only so we can borrow it back because it has a short term cost advantage, we, as a nation are being short sighted. The Government can influence this by reforming the way we collect taxes and while continuing to promote world trade, make sure American industries are not put at a disadvantage.
For those who see gloom and doom because of some of our current problems, that were exacerbated by those who failed to follow up on the initiatives from the 1970s, realize that this country has tremendous potential still and simply needs to reform our energy and tax profile to realize it.
Time to get started.
The argument centers around the fact that our two primary post war growth industries, housing and automobiles, are both unlikely to show any growth, and without that stimulus, overall growth will be stagnant. I agree that we need to adjust expectations in both of those industries, but think that it will take years to absorb excess housing, unless we simply raze much of it and reuse the land to grow biomass for bio fuels, I believe that the automotive industry has an opportunity to grow as we replace our current fossil based vehicles with vehicles that run on electricity, bio diesel or natural gas. In addition, the development of infrastructure to supply that fuel and delivery systems hold tremendous potential.
Further, while we have enough housing stock, I believe there is ample opportunity to incentivize energy remodeling that will sustain much of the construction industry. Use of solar panels to reduce electricity needs, better insulation, more efficient appliances and conversion of heating systems to more efficient ones can create jobs.
This growth is an offshoot of the need to develop a renewable energy imperative in this country and the development of industries to make it happen. Solar, wind and conversion of bio mass and/or coal into clean alternatives will reduce our balance of payment problems and create a tremendous number of jobs.
There isn't really a choice about this change in the long run, but if we continue to send wealth offshore only so we can borrow it back because it has a short term cost advantage, we, as a nation are being short sighted. The Government can influence this by reforming the way we collect taxes and while continuing to promote world trade, make sure American industries are not put at a disadvantage.
For those who see gloom and doom because of some of our current problems, that were exacerbated by those who failed to follow up on the initiatives from the 1970s, realize that this country has tremendous potential still and simply needs to reform our energy and tax profile to realize it.
Time to get started.
Sunday, June 28, 2009
Recovery vs Rebound
We all are aware that the economy has had a massive correction in which we had tremendous asset revaluations in housing and the stock market. There are sign that the bottoms have been reached and that we are looking at the end of the recession and the start of the recovery. However, some who hear this act as if the economy was about to rebound back to its former levels. This is extremely unlikely to happen and what we should expect is fairly slow growth.
The primary reason for this is that housing values have shrunk so much. I read a number of economic papers this weekend arguing over whether housing wealth impacted consumer spending. One study said it did not, but briefly acknowledged that while wealth in housing was somewhat locked, it was possible that there was a secondary effect related to borrowing against that wealth. With all due respect to the authors of that study, no one goes out and spends their houses. Spending has been directly related to growth in apparent wealth related to either refinancing, HELOCs or trading up. This money has fueled the consumer driven economy and unless housing prices were to rebound, it is not coming back.
There is another impact, but possibly one that will settle itself down. Some of the areas heavily impacted by the housing crisis were areas in Florida and Arizona, as well as California and Nevada. Now, as far as Florida and Arizona go, there has been a long range trend where retirees sold homes in the north and purchased homes and/or condos in those areas. This has slowed down tremendously because retirement rates are down and people feel that the prices for their northern homes are too low for them to sell. However, clearly the relative value of homes in much of the North has actually increased in comparison to homes in Florida and Arizona and when this gets marketed properly, assuming there are buyers for the Northern homes, we may see a resumption of that trend (retirees fueling home buying in Florida and Arizona).
Let me return to the main point I was making. Real estate values are widely depressed, but as always it has to do with location. However, the wealth lost is simply not coming back quickly. Now, for those who didn't actually lose their homes, this may be worse than it is for those who did.
Suppose you have a house that has been finance at the 80% level in an area that has seen prices drop by about 20%. Well at this point you have no equity but you are not underwater. Even if you go slightly underwater or maintain a small amount of equity, you cannot refinance and it will probably take a rebound in prices to a level above previous ones to be able to "mine" your home for spending or retirement money. Since this is probably unlikely for a number of years, the only available spending is discretionary earnings and other forms of credit. I could develop a mathematical formula for this, but trust me, it is a lot less available for spending.
Now suppose you lost a house or never had one. You, assuming you can get credit and a down payment have the opportunity to buy the same or similar house for a lot less and start off with say 20% in equity. Even a modest increase in price may provide you with a source for home equity loans or refinancing. However, it is not going to match prior spending levels when you consider the slow increase in housing prices and those who have lost their equity positions.
So, if we have lost x amount of housing wealth (equity) and therefore have lost the spending from loans associated with that amount the only way to replace it is by restoring that wealth. Well, I can find no scenario where that is going to happen quickly.
So, our consumer driven economy has no potential to "rebound". It will start to recover meaning that having reached a level of GDP significantly lower than it was, we will see it increase slightly. This growth will require adjustments to a reduced level of economic activity until we fix the energy sector and grow our renewable energy industry.
The primary reason for this is that housing values have shrunk so much. I read a number of economic papers this weekend arguing over whether housing wealth impacted consumer spending. One study said it did not, but briefly acknowledged that while wealth in housing was somewhat locked, it was possible that there was a secondary effect related to borrowing against that wealth. With all due respect to the authors of that study, no one goes out and spends their houses. Spending has been directly related to growth in apparent wealth related to either refinancing, HELOCs or trading up. This money has fueled the consumer driven economy and unless housing prices were to rebound, it is not coming back.
There is another impact, but possibly one that will settle itself down. Some of the areas heavily impacted by the housing crisis were areas in Florida and Arizona, as well as California and Nevada. Now, as far as Florida and Arizona go, there has been a long range trend where retirees sold homes in the north and purchased homes and/or condos in those areas. This has slowed down tremendously because retirement rates are down and people feel that the prices for their northern homes are too low for them to sell. However, clearly the relative value of homes in much of the North has actually increased in comparison to homes in Florida and Arizona and when this gets marketed properly, assuming there are buyers for the Northern homes, we may see a resumption of that trend (retirees fueling home buying in Florida and Arizona).
Let me return to the main point I was making. Real estate values are widely depressed, but as always it has to do with location. However, the wealth lost is simply not coming back quickly. Now, for those who didn't actually lose their homes, this may be worse than it is for those who did.
Suppose you have a house that has been finance at the 80% level in an area that has seen prices drop by about 20%. Well at this point you have no equity but you are not underwater. Even if you go slightly underwater or maintain a small amount of equity, you cannot refinance and it will probably take a rebound in prices to a level above previous ones to be able to "mine" your home for spending or retirement money. Since this is probably unlikely for a number of years, the only available spending is discretionary earnings and other forms of credit. I could develop a mathematical formula for this, but trust me, it is a lot less available for spending.
Now suppose you lost a house or never had one. You, assuming you can get credit and a down payment have the opportunity to buy the same or similar house for a lot less and start off with say 20% in equity. Even a modest increase in price may provide you with a source for home equity loans or refinancing. However, it is not going to match prior spending levels when you consider the slow increase in housing prices and those who have lost their equity positions.
So, if we have lost x amount of housing wealth (equity) and therefore have lost the spending from loans associated with that amount the only way to replace it is by restoring that wealth. Well, I can find no scenario where that is going to happen quickly.
So, our consumer driven economy has no potential to "rebound". It will start to recover meaning that having reached a level of GDP significantly lower than it was, we will see it increase slightly. This growth will require adjustments to a reduced level of economic activity until we fix the energy sector and grow our renewable energy industry.
Saturday, June 27, 2009
Climate bill?
The House today narrowly passed the Climate Bill. This bill is basically an attempt to reduce environmental pollution by putting a cap on hot house gas emissions and taxing anyone who exceeds the limits. Ultimately any costs will be passed on the the American taxpayer although it includes some provisions designed to help lo income consumers.
There is tremendous opposition to this bill and its chances in the Senate are far from certain. The question has to be whether the cost to reduce carbon emissions is less that the cost of buying carbon credits. Effectively, if you can reduce your emissions, you get a cap credit that you can sell. Like everything else some will benefit and some won't. It also raises the question as to whether it will have a net impact of more jobs or less jobs. As constituted it seems to do a number of things that I don't think are beneficial for the economy.
First, it penalizes coal, one of our greatest resources. Now I understand that we would like to reduce hot house gas emissions and coal is potentially the worst offender, but I think the legislation should have been drafted to help reduce reliance on foreign oil to a greater extent. If you really would like a cleaner energy future, the best way to go would be to tax foreign oil and use that money to subsidize conversion of electric plants to natural gas, and using coal to produce synthetic oil. Ultimately we do need to move to renewable energy and the policies should be geared that way, but it is pretty unlikely that wind and solar will ever be at a stage where they do not need a backup generating capacity for, well, cloudy or calm days.
Second, it has a ton of concessions designed to win votes that twist the bill into a bit of a political nightmare. Some of these aren't even fully disclosed right now. All bills like this have compromises but the desire to pass this was so intense and its chances so slim that the concessions reached epic proportions.
It is a sad thing in this country that we can't achieve a meeting of the minds on what seem fairly clear and common issues. The great majority of Americans would like to reduce environmental contamination and would like to reduce reliance on foreign oil. I don't have confidence that this bill does either of those things very well and is therefore flawed from the outset. However, instead of taking the time to craft a bill that accomplishes those two objectives, with a clear additional objective of creating a renewable energy growth industry in this country, politicians tie themselves up a belief that if they don't accomplish something right now, they may never be able to.
When some of our leading environmental groups oppose the bill, you have to believe it has real problems, lets hope it fails and we rethink the approach.
There is tremendous opposition to this bill and its chances in the Senate are far from certain. The question has to be whether the cost to reduce carbon emissions is less that the cost of buying carbon credits. Effectively, if you can reduce your emissions, you get a cap credit that you can sell. Like everything else some will benefit and some won't. It also raises the question as to whether it will have a net impact of more jobs or less jobs. As constituted it seems to do a number of things that I don't think are beneficial for the economy.
First, it penalizes coal, one of our greatest resources. Now I understand that we would like to reduce hot house gas emissions and coal is potentially the worst offender, but I think the legislation should have been drafted to help reduce reliance on foreign oil to a greater extent. If you really would like a cleaner energy future, the best way to go would be to tax foreign oil and use that money to subsidize conversion of electric plants to natural gas, and using coal to produce synthetic oil. Ultimately we do need to move to renewable energy and the policies should be geared that way, but it is pretty unlikely that wind and solar will ever be at a stage where they do not need a backup generating capacity for, well, cloudy or calm days.
Second, it has a ton of concessions designed to win votes that twist the bill into a bit of a political nightmare. Some of these aren't even fully disclosed right now. All bills like this have compromises but the desire to pass this was so intense and its chances so slim that the concessions reached epic proportions.
It is a sad thing in this country that we can't achieve a meeting of the minds on what seem fairly clear and common issues. The great majority of Americans would like to reduce environmental contamination and would like to reduce reliance on foreign oil. I don't have confidence that this bill does either of those things very well and is therefore flawed from the outset. However, instead of taking the time to craft a bill that accomplishes those two objectives, with a clear additional objective of creating a renewable energy growth industry in this country, politicians tie themselves up a belief that if they don't accomplish something right now, they may never be able to.
When some of our leading environmental groups oppose the bill, you have to believe it has real problems, lets hope it fails and we rethink the approach.
Sunday, June 21, 2009
Stimulating growth
Right now the economy is faced with a significant conflict. In general demand for most products is down, a deflationary factor while the amount of money in circulation is greatly increased, an inflationary factor.
If you focus on the demand aspect you may very well predict negative growth, deflation and massive unemployment.
If you focus on the money supply you may very well predict high inflation.
Of course you can't have both deflation and inflation, so should we average the two and come out just about right? Would seem unlikely but it does seem that the weak economy will resist the inflationary pressures for a while.
However, the only real way to eventually avoid economic collapse is to grow the economy. There are, and have been a number of challenges facing the economy that have been developing. Perhaps the most serious is the aging of the population. If we assume that the baby boomer generation is going to start, or has already started, to leave the workforce in great numbers, then the demographics tell us that less and less workers will have to support more and more retirees.
This demographic to a large extent drives the medicare finance problem. it also drives the social security problem. These systems were designed as pay-as-you-go systems meaning that the amount collected each year pays for the benefits of the folks collecting benefits. Now if you have more and more people collecting benefits and less people paying into the system, it is pretty obvious that the burden will at some point become untenable.
Of course the recent loss in value of baby boomer assets in real estate and many retirement accounts may slow the number of retirements, and the added stress may reduce the numbers somewhat, but it isn't a long term solution.
The best solution to this problem would be to somehow create massive growth followed by a increase in jobs. Additional jobs would be filled either by these very boomers, immigrants or by exporting the jobs. Recently the last of these options has been the more common, and that creates the big issue related to taxation. We rely on income and corporate taxes in this country and if we export jobs, we lose the income tax portion. Now it is unlikely we are going to start imposing income taxes on workers in other countries, so if we are going to continue this practice we really need to consider switching from an income tax to a consumption tax. Then every product sold in this country would pick up a fair share of the tax burden, no matter where the workers were.
Now without going off on a tax discussion, where is this growth going to come from. Generally, a single growth industry is enough to drive the economy if it is indeed robust enough. As that industry creates jobs, those people increase demand in other areas, driving an upward spiral of growth.
It would seem that a massive effort to switch to renewable resources in this country has the most potential. It would create jobs in this country, inspire new technology and construction and improve the balance of payments.
If you look at the recent economic crisis, it had a lot of fundamental reasons, massive debt and inflated asset values, but perhaps the most critical and the one that actually drove the start of the collapse was our dependence on foreign energy and the massive balance of trade issue that creates. You never really can solve a problem if you don't address the root cause and I firmly believe the root cause is fairly obvious and its time we solved it.
If you focus on the demand aspect you may very well predict negative growth, deflation and massive unemployment.
If you focus on the money supply you may very well predict high inflation.
Of course you can't have both deflation and inflation, so should we average the two and come out just about right? Would seem unlikely but it does seem that the weak economy will resist the inflationary pressures for a while.
However, the only real way to eventually avoid economic collapse is to grow the economy. There are, and have been a number of challenges facing the economy that have been developing. Perhaps the most serious is the aging of the population. If we assume that the baby boomer generation is going to start, or has already started, to leave the workforce in great numbers, then the demographics tell us that less and less workers will have to support more and more retirees.
This demographic to a large extent drives the medicare finance problem. it also drives the social security problem. These systems were designed as pay-as-you-go systems meaning that the amount collected each year pays for the benefits of the folks collecting benefits. Now if you have more and more people collecting benefits and less people paying into the system, it is pretty obvious that the burden will at some point become untenable.
Of course the recent loss in value of baby boomer assets in real estate and many retirement accounts may slow the number of retirements, and the added stress may reduce the numbers somewhat, but it isn't a long term solution.
The best solution to this problem would be to somehow create massive growth followed by a increase in jobs. Additional jobs would be filled either by these very boomers, immigrants or by exporting the jobs. Recently the last of these options has been the more common, and that creates the big issue related to taxation. We rely on income and corporate taxes in this country and if we export jobs, we lose the income tax portion. Now it is unlikely we are going to start imposing income taxes on workers in other countries, so if we are going to continue this practice we really need to consider switching from an income tax to a consumption tax. Then every product sold in this country would pick up a fair share of the tax burden, no matter where the workers were.
Now without going off on a tax discussion, where is this growth going to come from. Generally, a single growth industry is enough to drive the economy if it is indeed robust enough. As that industry creates jobs, those people increase demand in other areas, driving an upward spiral of growth.
It would seem that a massive effort to switch to renewable resources in this country has the most potential. It would create jobs in this country, inspire new technology and construction and improve the balance of payments.
If you look at the recent economic crisis, it had a lot of fundamental reasons, massive debt and inflated asset values, but perhaps the most critical and the one that actually drove the start of the collapse was our dependence on foreign energy and the massive balance of trade issue that creates. You never really can solve a problem if you don't address the root cause and I firmly believe the root cause is fairly obvious and its time we solved it.
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