Mr. Peabody Economy

I have been on vacation for a few days, which explains the lack of posts, but I cannot get to sleep tonight, so I thought I would put in a quick word or two.

Today my daughter and son entered into their first turtle race. Their grandfather was kind enough to catch them a box turtle, Mr. Peabody, so named for his (or her) reaction to being picked up. The race consisted of five turtles being placed under a plastic clothes basket in the middle of a marked circle. The clothes basket is lifted and the first turtle to the circle line wins. Mr. Peabody took three rapid steps from where he started and then just stretched out his head for all to admire his pretty markings and wonderful progress. And there he stood and there he stayed until the end of the race. My kids took it all in stride.

I fear that our economy is acting a bit like Mr.Peabody. We had a lot of early stimulus, which got us off to a seemingly great start, for which we congratulated ourselves and looked around for others to do the same. Yet now that we have been through our initial stimulus and things are pretty much just as miserable as before for the vast majority of Americans, what next? It would seem, very little.

Now I am not saying the Administration is being complacent, just that there is little in the way of options. Sure we can do more stimulus, but when you scratch the surface, the only thing being spent is the stimulus and absent a few areas that make sense, like extending unemployment and health benefits, there is just so long you can stimulate some sectors. A longer broader cash-for-clunkers may generate more temporary sales, but you are simply front loading sales. As we saw in September, when the program stops, sales plummet. The same for the very costly first time home buyer's credit. There is just so much blood you can get out of a rock.

And that brings us to the real crux or two of the problem. People cannot spend what they do not earn (or are given) without incurring debt. The cash-for-clunkers and first time home buyer's programs gave people monetary incentive to incur debt and stop saving. While this might provide a minor jolt to one sector or another, it does not cure the underlying cause of our mess, which is too much debt. Too much debt is fixed by paying it down. And to pay it down over the long haul you need more pay, less spending or both. If tax revenues in the various states is any indicator - and it is a very good one - then that more pay thingy ain't happening.

http://news.yahoo.com/s/nm/20091009/pl_nm/us_usa_state_budgets

This makes sense given the unemployment figures and reduced hours for those still employed. So without more pay the only way to pay off debt is (a) for the government to pay it off for us (which just moves it to another balance sheet) or (b) to spend less and pay it down [I will ignore (c), the default option for this point.] On (a), unless you are a too-big-to-fail financial institution that supplied us with those folks running the Treasury and Fed, it seems the government has no interest in paying off your debt. So we go to (b) and the government does not like (b) either. Why, because saving and paying down debt means recession and recession bad, recession very bad. Government want good and good, according to the government, is more debt.

What the government needs to do, however, is not promote more spending and debt (though most measures to date seem to have that aim). It needs to focus on job growth, which includes investments in new technologies, like alternative fuels, climate change related technology, agricultural improvements, lower cost health care technologies and the like. These will be the new technologies of this century; technologies we can develop, patent and export. Technologies that can improve the world environment, reduce dependence on non-renewable energy supplies, reduce dependence on countries that generally do not like us, assist developing countries and provide America with a strong footing going forward. George Soros seems to have his head in the right place, investing a billion on clean alternative energy.

http://www.nakedcapitalism.com/2009/10/soros-to-put-1-billion-in-clean-energy.html

Imagine what the U.S. could have done with the $180 billion it used on AIG alone! I am not saying there are a lot of easy answers, but we need to start spending our money finding the tough to find answers. This is something that will take some time and we are looking for quick fixes. But let me tell you a secret - with our debt load there are no quick fixes. It is going to take a long time to get out of this mess. And even if it doesn't, what in the heck are we waiting for on investing in our future? We should have started more productive spending on these technologies years ago. Instead we are spending trillions that, I believe, is simply leading to a new bubble, and a much worse one at that.

Disclosures: I own stock in Valcent Technologies, a company focused on biodiesel from algae and alternative agricultural systems.

Future Office Space

I work in Manchester, NH in an old textile mill. At one point, Manchester was the top textile producing location in the U.S. and probably one of the largest producers in the world. That was over a hundred years ago. Today none of those mills are still operating as mills. Some have been torn down but most these days are converted into offices, stores, hotels and the like. Well it looks like China is about to create some future office space. Their textile mills seem to be running very low on business these days.

http://www.chinastakes.com/2009/10/xmas-season-orders-dont-bode-well-for-chinese-exporters.html

Disclosures: None

"Sobering" Indeed.

Obama referred to today's jobs data, a loss of 263,000 jobs (roughly 100,000 more than economists expected) as sobering. Well, I agree, but to say it was unexpected is to buy into those that thinks we are in recovery phase. To me we are in the lull before the storm. By the way, of over 80 economists surveyed, none, not one, predicted the number to be as high as 263,000. That reality is sobering.

http://www.google.com/hostednews/afp/article/ALeqM5jNat8FSYDU-6wVcrkdfTsuIylT4g

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTo1p6Los8CI

But if you really want something sobering, I suggest the following link. As the author points out, if you are expecting consumers to start spending more money for an economic rebound then you are sadly mistaken. They are already spending at very high (record) levels in terms of a percentage of personal income and as a percentage of GDP. And even that is not really lifting us out of this recession absent government support. Even though consumers are pretty much spending as much as they can, the economy is still struggling. So I don't expect things to improve from here.

http://www.financialsense.com/Market/panzner/2009/1001.html

And as this piece points out, we are in for a world of hurt due to the size of the private debt that has built up. We may do well in the short to medium term while government spending/stimulus props us up, but that will in time end and then we are all in for a world of hurt.

http://www.nakedcapitalism.com/2009/10/the-recession-is-over-but-the-depression-has-just-begun.html

Now I hate repeating myself so much, but let's consider the math and see where it leads us:

• the unemployment rate is nearing a two decade high;
• those with jobs are working the these least number of hours per week ever (roughly 33);
• adjusted for inflation, hourly wages are at their lowest in three decades;
• overall debt, government and private, is at record levels;
• foreclosures are mounting on both a residential and commercial level;
• there are an estimated 13 months worth of shadow inventory of houses, i.e. those that will be for sale but are being held off the market for one reason or another;
• When closing costs are considered, nearly 50% of all homes are under water on their mortgage;
• We have now reached a record in terms of unemployed people who are staying unemployed beyond their unemployment benefits;
• We also have a record in terms of job availability for the unemployed with job openings only there for one in six who are unemployed;
• Our economy is over two thirds reliant on consumer spending, which is a totally unsustainable model going forward;
• Financial companies have doubled their GDP contribution in the past decade or so, though it is now obvious that they are not adding any benefit to the economy; and
• I am tired of repeating all this bad news with seemingly no one paying attention.

Folks, I am not saying when the problems will sink in and take hold, but they have to at some point. At the very best, our economy will be stagnant for years to come, probably over a decade. More likely, in my opinion, we have a world of hurt on the way with the only question in my mind being when will this reality sink in? You tell me. Until then, with the market near record amounts since March 9, I am personally going to hunker down for a while and see what happens.

Disclosures: None.

Conspiracy Theories Abound!

Recently there has been a number of articles and blogs on Zero Hedge and some other conspiracy theory type blogs. I do not comment here either way, but I must admit it is a fun read. First, I link an NY Times article on Zero Hedge, a blog that came out of no where this year to be a cult favorite. Second, the first article quotes from Jim Chanos, of Kynikos Associates, which is the subject of a good bit of discussion at the second blog I link, which to me is a good bit more entertaining. Indeed, it has movie, or series, written all over it if it were not perhaps true or close to it.

First Link

http://nymag.com/guides/money/2009/59457/

Second Link

http://www.deepcapture.com/

If you are bored and want some entertainment, both are worth a few hour of fun reading. And imagine if half of what they say it true.

Disclosures: None.

I Don't Get This Math

Yes, the savings rate is up, but if you look at this chart, you will see it has a long way to go to get back to historic norms. With the wealth evaporation of the past two years, mounting job losses, aging baby boomers past their peak and other considerations, one has to wonder where the savings are coming from, even at this low level.

http://www.businessinsider.com/chart-of-the-day-personal-saving-rate-2009-9

Moreover, Bloomberg is reporting that consumer spending was up significantly in August. Indeed, the biggest jump since 2001 and not all of it was due to cash for clunkers.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSbaO.gu.aps

Yet first time unemployment claims were higher than expected last week and foreclosures - residential and commercial - are on the rise.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ak__6D.HTBQM

Finally, might I add that we as a country still have record amounts of debt.

http://blogs.reuters.com/rolfe-winkler/2009/09/30/krugman-and-the-pied-pipers-of-debt/

While on an individual level we have begun to deleverage (either through payment or default) on a government level we are increasing debt to dangerous levels. And there may be a limit to how long China and Japan will continue to fund our spending spree. Most Treasuries are now being bought by the Fed and foreign purchases were down 40% in the second quarter versus the first, so the government punch bowl may be taken away sooner than many expect.

There is something about this math that does not calculate for me. How can we make less, spend more and increase savings? The only answer I can think of is government stimulus. And government stimulus is not the same thing as an economy rebounding. And when that goes away we will see the recession in full bloom. Some view recession as a bad thing. While not dismissing the financial and other pain people will feel in a recession it unfortunately is the only cure for our excessive debt levels. It is a correction to many years of economically unsustainable spending on our part.

Disclosures: None.

The Sky is Falling!!

This is terrible, absolutely terrible!!! Compensation limitations may put Citigroup and Bank of America at a recruiting disadvantage. Oh my! I am not sure I will be able to sleep tonight!! Oh what will they do, what will they do?!

http://www.bloomberg.com/apps/news?pid=20601087&sid=av0Tkl_Q_pro

This Bodes Well!

Stocks are at their highest valuation in five years. Think about that a moment. Between two and five years ago we were in a roaring economy, or at least we thought. Things looked fantastic. Housing was booming, consumers were spending, businesses were opening left and right, yet the valuations on the stock market were less than they are today. Today we have housing continuing to struggle, consumers ramping up their savings rate, unemployment on the rise, commercial real estate beginning a long fall, foreclosures on the verge of an Alt-A explosion, and debt, on a government and individual level, still in record ranges. Yet we have the highest stock valuations in five years. Yep, that bodes well for the market.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ae0oGD7XmN9U

Disclosures: I have a number of put options.

The Voodoo that Feds Do

Okay, I just migrated away from my blog without saving an hour worth of work and it is all gone. So without all the verbage I had written, here are some well worth the read links about how the Fed is doing, and has for decades done, a terrible job and is in no small part responsible for the mess we are in, and is in no small part responsible for the new bubble we are seeking to build to get out of the last. I only hope they fail miserably so that we can suffer and take our medicine now. I for one do not want to put our mistakes on my children to deal with.

http://www.nakedcapitalism.com/2009/09/5324.html

http://www.calculatedriskblog.com/2009/09/fed-and-subprime-lendng-watchdog-that.html

To the Moon Alice!!

I think the market is taking off from here, not. Why not, let me count the ways:

• consumer debt, while a smidge lower than it was at the beginning of the year, is still near historic high;
• unemployment, while slowing, is going to go over 10%, perhaps 12%, and real unemployment is much higher, so this does not bode well for an economic recovery;
• commercial real estate is heading into the dumper big time. I need not link anything here if you are reading up on things, but daily there are articles on how hotels, malls and the like are suffering;
• residential real estate is reaching a bottom but, absent first time home buyer incentives, is still sucking wind. Builders still cannot hope to make money, especially if you include condos, which most stats do not include;
• the market has climbed to a very high P/E, even in good times. This glass is the more than half full society is bound to come back to Earth;
• there is a well known shadow inventory in the housing market. This is based on banks not foreclosing, homeowners not listing properties they would like to sell and the like. While official inventory is reduce down to less than eight months supply, we will see . . .; and
• the too big to fail banks still have significant toxic assets on their books. No one, including them, knows how much.

And so folks, I continue on the doom-and-gloom troop. I dare you, convince me I am wrong.

Disclosures: None.