I am a Hypocrite

Last year, while ranting on the waste of the government stimulus programs, I did a cash-for-clunkers deal, and I noted it at the time. Now I have publicly noted that I thought the program was a total waste of taxpayer money. Considering those who needed to buy anyway, the cost was way out of order in comparison to the benefit. Nonetheless, I had a clunker on its last leg and needed a car so I traded it in on a new car and took advantage of the program.

Now I realize that it is highly hypocritical of me to rant against the program and then utilize it, but I stand by my decision. And (Bill), here is why:

1. The primary stimulus target of the program was to support car companies, not consumers. Me using the program did just this.
2. A secondary objective of the program was to get gas guzzling old cars off the road and replace them with more fuel efficient vehicles. That I achieved. I sold an oil leaking, smoke spewing, 15 or so MPG 1995 Ford Explorer and replaced it with a new Mazda 3 that averaged around 29 MPG in mixed driving, nearly doubling my mileage.
3. I realize a potential third objective of the program was for those who could not afford a new car to be able to buy one. Now I consider this objective to be well down the list. Otherwise, if you were the government really trying to support consumers to get a car they need, you would not qualify the program with needing to have a gas guzzling clunker and needing to buy a new more efficient car. If the program were truly designed to help consumers in need it would have applied to any trade in and would have been available for obtaining used cars too. Indeed, if you want to help consumers in need, put an income limit on it. But no, it was not designed to benefit consumers - it was designed to help the auto manufacturers - and at a pretty big cost to taxpayers.

So if it was not worth the cost to us as taxpayers, why am I being a hypocrite and taking advantage of it, you ask? I can only say (a) I am helping to pay for it with tax dollars and this is pretty much the only stimulus I have seen potentially benefiting me, (b) someone is going to use it whether I do or not and (c) I am serving the primary and secondary purpose of the program, so why not.

Let me add that I more recently - as in today -traded in the car I got in the program. Actually I traded that in and sold another one with poor gas mileage and used both to get a good car that I can drive all year around that gets decent gas mileage. Am I serving the purpose of the cash-for-clunkers program? You decide. Personally, I like the few thousand that went to me much more than the hundreds of billions of dollars that went to the likes of Goldman, AIG and Washington Mutual. At least I used the money and put it back into the system. The financial instutitions, on the other hand, seem to be gaming the system and hoarding their dollars.

Disclosures: None.

Economists

Two days ago I did a post on an economist (PhD nonetheless) at the Richmond Fed ragging on bloggers. My one observation was that economists in today's less than normal economy often miss the mark. You can do this any day, but here are a few misses that I have seen just today:

First, manufacturing growth in China slowed more than econonmists expected:

http://noir.bloomberg.com/apps/news?pid=20601087&sid=aaqOeS4Rmf24&pos=2

Second, unemployment numbers out today exceeded economists' expectations.

http://www.marketwatch.com/story/jobless-claims-climb-13000-to-472000-2010-07-01

You can do one of these list daily and this is just with a few minutes by me reading headline news. These misses were not big but you can bank on big misses at least once a month.

What Happens Next . . .

The market is obvoiusly down this past month and especially this past few days. Now I recently read an expectation that fund managers would try to run up the market at the end of the month to prop up their second quarter stats - a bit of quarter end painting of the tape. If they tried they failed miserably. Alternatively, my preferred theory is that fund managers did not want to have to admit at quarter end to some of the poor performing stocks they bought so they sold them this past week to take them out of the portfolio for quarter's end. Now if they can actually get away with this quarter end BS one more thing is wrong with the system, but from what I have read they can do this and that is what I suspect explains part of the month end drop. Tomorrow will tell big time. If we have a big bounce - especially if there is no big positive market news - then we know the past few days were due in large part to issues having nothing to do with stock values. I hate that understanding the market carries all this baggage but it is what it is. If stocks stay in the doldrums, then it could be the recent down market is actually for once due to market sentiment.

Personally, I did not buy the reason for the market being up this morning or for it being down at the end. If the market is truly swayed by the factors Bloomberg is pointing to for intra-day swings, this is truly sad.



Disclosures: None.

Word Out to Economists - 2 + 2 = 4

I have been a bit entertained this week by bloggers taking shots at a piece put together by Kartik Athreya, a PhD in Economics who does work at the Richmond Fed. Now these shots are deserved as this PhD took shots first at a host of bloggers claiming they should not post on economics, in essence, because we know not what we are talking about. Mind you, these bloggers include the likes of Paul Krugman, a Nobel Prize winning economist, but, hey, this PhD seems to not care too much (I personally have a lot to say about Paul Krugman but not that he is not qualified to speak to the issues). Now I am an attorney and right up at the top of every one of my blog posts I note that I am not an economist, so I can appreciate up front someone not appreciating what I have to say. (Mind you, this guy never mentions me and I assume has never read my work, but let me imagine for a moment his piece is aimed at me.) Nonetheless, let's talk a moment about his piece.

First, let me note that his piece has - from what I have seen - gotten a rather universal trashing from the blogoshpere, including by those with economic credentials. Don't believe me, look, this is from "Economist's View" blog site:

http://economistsview.typepad.com/economistsview/2010/06/dont-let-fed-economists-tell-you-otherwise.html

They are not taking the PhD from Richmond lightly. I highly recommend following the links on this post as they show a lot of well known and respected blggers taking shots at this piece.

Second, and more importantly, I have no interest in studying the niceties of economic modeling and other specfics of this science as I really see no need to. I focus personally on a few macro aspects of our economy and so far they seem to be telling the story quite well. Now I expect in different economic times different focus may make sense but right now my focus does not seem to be too bad.

My focus, if you want to know, is debt. I simply cannot understand - in my itty bitty non-economist brain - how the world economy can do well when by-and-large the largest economies have for 10-20 years been built off of debt. This is where 2 + 2 comes in. Over the past two decades in the U.S. wages have been stagnate, yet spending has increased. This was largely enabled due to easy credit, in no small part due to folks borrowing against their home piggy bank. At this point most piggy banks are broken, many homes are under water, credit is dried up for all but the most credit worthy and the math has changed. Easy credit no longer leads to a stable or expanding economy, it leads to a long and sustained recession but, hopefully, not a depression. Perhaps an economist can explain to me why I am wrong why debt will not lead to a sustained downturn.

So let's look at the record. Did economists at the Fed predict the worst recession since the Great Depression in 2008? I saw it coming and posted about it but I am no economist. That was an easy hit, so let me look further. If you have read this blog you have seen me, on regular basis - including in the past week - astounded by economists not seeing what is happening. Lest you think I am full of bull, just look at today's headlines. Economists did not see the drop in comsumer confidnece that was announced today:

http://www.conference-board.org/press/pressdetail.cfm?pressid=3949

How can they not see this coming. How can they not see the real estate market falling off drastically after tax incentives ended in April? I ask myself weekly how can they not get it! I am not railing against all economists. My point simply is that this economy is not subject to models built on the past. So I suspect that PhD economists are no better in these times to predict where we are going than the average man on the street - and perhaps in some respects less qualified.

Disclosures: None

It Is In the Cards

I posted this morning briefly a piece by John Mauldin and noted it is a must read, which it is. One link in the piece I have since read is one of the more entertaining posts I have seen for a while.

http://www.thereformedbroker.com/2010/06/24/econ-gangs-of-new-york/

Reading it, I am with John Mauldin in the New Normalers gang following the folks at PIMCO. The way I think of it is a college student graduating and being given multiple credit cards (some years back that was the norm, not today). That student uses the cards to furnish his apartment, buy a new car, take some vacations and the like. This becomes this graduate's reality, his or her "normal," even though he or she does not yet have a job or perhaps has one paying not nearly enough to do all this fun stuff. Anyone can tell you this is not normal, it is living off debt. Well, that is exactly what this country - and apparently many others - has been doing for a decade or two.

So debt has over the past couple of decades become the new normal. That, in itself, is not normal. Living off debt is not normal or reality, it is problematic. Now I am not saying debt, in and of itself, is evil. It is a vital component to our economy on both a commercial and individual level. But we took debt to new extremes, on a personal, governmental and company level, and that cannot be sustained. Reality is not living off debt or building a life or country on debt. That folks, is fantasy!

And so I agree with the folks at PIMCO that we are returning to the new normal. I disagree a bit with the nomenclature, because what we have lived in was not normal, but I agree with the concept that the economy going forward will be significantly subdued compared to the past decade or so, which was built on debt and bubbles.

The new normal - or reality as I have called it - is not a bad thing. I realize for those losing jobs or struggling to get by this does not hold true, but on a general economic level for the country, reality is a pretty good thing I believe. Indeed, ignoring reality brought us to our current problems so a dose of reality should be a good thing.

What we have here is a good old fashion correction on a very grand scale. Corrections are called that for a reason; there is a problem and the markets naturally correct it. This correction is going to be long and painful, I suspect. The first dip was very fast and painful and I suspect the next dip which we are entering into will be equally painful but not nearly as fast. The last one took a lot of people by surprise, so the drop was fast and furious. This time I suspect the markets are somewhat ready for it so the drop will be slower, but I think no less severe in the long term. Unfortunately, it will also take a long time for us to come out of it for various reasons.

First, it is a correction and corrections take time especially when the problem being corrected took decades to build. In this case personal debt is still very high, despite saving rates rising to 4% last month (a promising sign in my book). I truly hope personal saving rates increase significantly. It will depress spending and GDP in the short term but it will also decrease debt and better prepare folks for the future. We can and will get through this but it will take, I fear, years of what most people would label a recession.

Second, the government has a big shovel and has been in this debt hole shoveling for the past two years increasing government debt and they are still shoveling. Governments in the EU are now realizing that they are simply digging a bigger hole by supplanting individual or corporate debt with government debt. The U.S. needs to put down its shovel (other than measures essential to avoid extreme problems or depression and measures aimed at helping those in need of necessities). It has not said it will yet, but the failure to pass an extension of unemployment benefits last week is a sure sign that a lot of additional stimulus is no longer in the cards. And so we will likely over time - at least after the coming elections - switch to an austerity bent. This will slow or negate stimulus, but in my book that is a good thing, with the qualifications noted above.

So I see a double-dip recession that will be long and painful but in the long term good for us if we simply let it happen with certain safety nets to avoid catastrophe. It will take several years to unfold and we will have a very subdued economy during that time, as will most of the world, but it is a correction and things will be better at the end. At the end, which could be a long time off, there is, I believe, light at the end of the tunnel. This is what I hope will happen as I fear that any other alternative will in fact be much worse.

Now we can all hope I am wrong and too pessimistic, and I hope that proves true. I truly do as I will and I have a load of realtives who have and will suffer the longer this continues.

Disclosures; None.

A MUST READ

I do not have time for a full post and do not need it as I am linking an important piece by John Mauldin that tells you a lot more than I ever could. Please read it. You may not understand all the stats - I didn't - but the message is pretty clear.

http://seekingalpha.com/article/211983-the-risk-of-recession?source=email