We are starting to hit the period of time when the stimulus package is going to start having a bigger impact. Whether the stimulus was properly targeted or implemented speedily enough, there will be many projects kicking off now that will show some improvement in employment.
Also, with GM and Chrysler out of bankruptcy and some increased demand in the auto sector, we can expect to see a small bounce as the auto companies and their suppliers start working on the fall lines.
Also, as many of the companies have cut to the bone in order to preserve profits, I would think that the production for the Christmas season has to create some jobs in manufacturing as well.
We also see a bit of a rush to get houses started so they qualify for Government credits and we should see a small uptick in construction employment.
All of this indicates that we are either at the top or very near the top of our unemployment curve.
Now many analysts are predicting unemployment to continue to grow into early next year, and if retailer's overstock for Christmas we may have a subsequent problem, but assuming they gear u for a modest but profitable season we should start to see the stability in employment that we need to renew GDP growth.
Housing is a tougher problem, but I do think that a larger number of people who have moved in with parents and/or relatives and have been saving, will with an improved employment outlook, use that savings to invest in some of the most affordable housing they will probably see in their lifetimes.
Starting to smell more and more like recovery.
Showing posts with label recovery economics. Show all posts
Showing posts with label recovery economics. Show all posts
Monday, July 20, 2009
Thursday, July 16, 2009
The near term future
One of the things that is at the very least interesting is how short investor memories tend to be. After the March lows, we saw the Market climbed about 40%. In the beginning of June, we had a pause and a consolidation correction of about 5%. This type of pause is nearly inevitable since a certain number of investors are going to take profits, other investors don't want to buy at "inflated" prices and of course we always have our bearish friends who expect a total collapse at all times.
Now, many, many analysts predicted such a correction but as it was happening we sort of had panic in the streets. Even in the most persistent bull markets, there are pauses and dips along the way. Now when prices are going down and at the same time news comes out that disappoints a bit, such as the unemployment report, we have pundits ready to declare that everything is bad again and its probably time to buy lots of canned goods and dig a hole.
Naturally, the pause, consolidation, correction came to an end and with a bit of positive earnings reports the market rise has resumed. Now, based on my comparison to the early 70s and where I think earnings will be, I see a fairly rapid rise for the S&P to between 1100-1200. I don't think the economy is good enough to pass that level at this time and in fact, I would expect a bit of a correction near that level followed by a long period of range based training.
Now, my comparison to the 1970s and earning expectations are fairly speculative. I would say that once we get to the 1100 level, without a jump start we will see the market trade in a range of +/- 10%. The economy is still troubled and we need to get the next growth industry kicking in and we need to reform our tax system, or we face a fairly long period of stagflation, high unemployment and price increases.
Now, many, many analysts predicted such a correction but as it was happening we sort of had panic in the streets. Even in the most persistent bull markets, there are pauses and dips along the way. Now when prices are going down and at the same time news comes out that disappoints a bit, such as the unemployment report, we have pundits ready to declare that everything is bad again and its probably time to buy lots of canned goods and dig a hole.
Naturally, the pause, consolidation, correction came to an end and with a bit of positive earnings reports the market rise has resumed. Now, based on my comparison to the early 70s and where I think earnings will be, I see a fairly rapid rise for the S&P to between 1100-1200. I don't think the economy is good enough to pass that level at this time and in fact, I would expect a bit of a correction near that level followed by a long period of range based training.
Now, my comparison to the 1970s and earning expectations are fairly speculative. I would say that once we get to the 1100 level, without a jump start we will see the market trade in a range of +/- 10%. The economy is still troubled and we need to get the next growth industry kicking in and we need to reform our tax system, or we face a fairly long period of stagflation, high unemployment and price increases.
Tuesday, June 30, 2009
Citizen Obligations
I was reading comments on an application called stocktwits yesterday. The discussion concerned a specific investment and one person questioned how buying that investment helped the US Economy or was patriotic. The response was that the US Economy and patriotism wasn't their concern and that the Government should take care of those things.
In general, investment decisions normally have very little to do with Patriotism but you do have to wonder if there is any limit to greed. Yesterday Bernie Madoff got sentenced to 150 years in jail because he was greedy and proud. I really do think that he lost control of his Ponzi scheme at some point and it escalated beyond his control. He was too proud to admit that his greed was ruining hundreds of people and continued up until the last minute bilking unsuspecting investors out of their money.
So, consider a situation where a lot of money could be made but it would decimate the economy and cause tremendous hardship to millions of people? Is the fact that one or a small number of investors or speculators could get rich offset any obligation they have to their fellow citizens? I can pretty much guarantee that most active investors would feel that they should grasp the opportunity. Certainly to pass on this opportunity would only work if everyone also passed on it, otherwise you wouldn't make the money and end up as one of the losers.
There is some speculation that when Lehman went bankrupt and hedge funds and active investors sold all the bank stock they had and shorted all the bank stock they didn't have it precipitated the collapse in the stock market that wiped out the retirement funds of millions. There is some current controversy over whether the uptick rule should be re-instated (requires that a short sale must be made after an uptick in price). It certainly would have crimped a lot of the short selling, and it may have provided the retail investor time to adjust. Now, many of the short sales weren't printed because their were no buyers and the price simply plummeted. As usual the most money was made by the quickest.
Now, the collapse in the economy was a national and world disaster. We are still feeling the consequences and I wouldn't suggest that anyone should have been buying bank stocks in that time frame since it wouldn't have done any good. However, is there any limit?
In reading posts on financial networks, there are a group of posters who really seem to want the economy to collapse. They probably see that a lot more money can be made in a sudden collapse than in a slow recovery. Of course the desire for the economy to collapse isn't going to have any impact on what it actually does, but you wonder about those who wish for millions to suffer so they can benefit. Of course they argue that if they own property, or invest in the economy, they should sell everything and save what they can because Armageddon is coming.
There is a difference between preparing for Armageddon and trying to make it happen.
In general, investment decisions normally have very little to do with Patriotism but you do have to wonder if there is any limit to greed. Yesterday Bernie Madoff got sentenced to 150 years in jail because he was greedy and proud. I really do think that he lost control of his Ponzi scheme at some point and it escalated beyond his control. He was too proud to admit that his greed was ruining hundreds of people and continued up until the last minute bilking unsuspecting investors out of their money.
So, consider a situation where a lot of money could be made but it would decimate the economy and cause tremendous hardship to millions of people? Is the fact that one or a small number of investors or speculators could get rich offset any obligation they have to their fellow citizens? I can pretty much guarantee that most active investors would feel that they should grasp the opportunity. Certainly to pass on this opportunity would only work if everyone also passed on it, otherwise you wouldn't make the money and end up as one of the losers.
There is some speculation that when Lehman went bankrupt and hedge funds and active investors sold all the bank stock they had and shorted all the bank stock they didn't have it precipitated the collapse in the stock market that wiped out the retirement funds of millions. There is some current controversy over whether the uptick rule should be re-instated (requires that a short sale must be made after an uptick in price). It certainly would have crimped a lot of the short selling, and it may have provided the retail investor time to adjust. Now, many of the short sales weren't printed because their were no buyers and the price simply plummeted. As usual the most money was made by the quickest.
Now, the collapse in the economy was a national and world disaster. We are still feeling the consequences and I wouldn't suggest that anyone should have been buying bank stocks in that time frame since it wouldn't have done any good. However, is there any limit?
In reading posts on financial networks, there are a group of posters who really seem to want the economy to collapse. They probably see that a lot more money can be made in a sudden collapse than in a slow recovery. Of course the desire for the economy to collapse isn't going to have any impact on what it actually does, but you wonder about those who wish for millions to suffer so they can benefit. Of course they argue that if they own property, or invest in the economy, they should sell everything and save what they can because Armageddon is coming.
There is a difference between preparing for Armageddon and trying to make it happen.
Monday, June 29, 2009
Recovery formula
There are two things that need to happen for a real recovery to take place in the US Economy. The first requires that housing prices stabilize and start to increase and the second is that we need to create jobs.
The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.
Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.
The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.
Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.
The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.
Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.
The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.
Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.
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.
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