New post at Seeking Alpha:
Gilead Sinks on Merck-Idenix Deal, in which I argue Gilead is not very threatened and remains undervalued. I am overweight in Gilead, and in for the long run, but if you don't own Gilead it is worth a look. My best guess is that the cash keeps rolling in from Hepatitis C cures, and GILD is up another 50% or so over the next year or so, and even that will leave it at a lower P/E.
I am not going to cover it, but I bought an incredibly tiny amount of Opexa Therapeutics (OPXA) on May 29. I already own Biogen Idec (BIIB), so I know a bit about multiple sclerosis. Opexa has a totally different approach, an immunological one, and results are mixed so far, but a Phase II trial is underway. The results are not due until 2016, and then usually even with positive data a Phase III trial would be needed. So it is both a long shot and a long term investment.
I think the market overall is fairly valued on a current basis, which means about 1/2 of stocks are overvalued and 1/2 undervalued. So it is a stock-picker's market. On the other hand, I believe the economy has years of expansion ahead of it, so in 3 to 5 years I expect the market to be up. In that case, even an index fund would do more for your savings than CDs or bonds. We are not in a stock market bubble yet, but if one appears, sell into it (most people buy into bubbles, that is why they are bubbles).
What stocks are overvalued or undervalued is a matter of opinion. I tend to look two to three years out, so I include the value of biotechnology pipelines.
Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts
Tuesday, June 10, 2014
Friday, April 11, 2014
Even Republicans Won't Deal With Debt
Republican politicians like to rant against taxes and blame all taxation on Democratic politicians. So you would think that Republicans in the federal House of Representatives would present a balanced budget.
Why did the House Republicans pass a budget this week, written by Paul Ryan, that would not balance the budget (barring an economic miracle) until 2024, a decade from now?
It is not just politics as usual, even though everyone knew this budget bill, which passed 219 to 205, won't become law. It will die in the Democrat-controlled Senate, and in any case President Barack Obama won't sign it.
Take a step back and look at the bigger picture, both economic and historical. Deficit financing did not become a regular part of the American economy until the Great Depression. In 1933 progressives of both parties (Democrat and Republican), led by Franklin Delano Roosevelt, tried "pump priming," getting the economy headed back to normal by government deficit spending. Soon income tax rates were raised too. But what really ran up a deficit, and revitalized the economy, was World War II.
After World War II the U.S. had an unprecedented amount of debt, but we were the only industrialized nation that had not been devastated by the war. More important, both parties had seen what a little economic heroin could do for politicians. So while conservatives talked of balanced budgets, they became rare even in years when the economy was booming.
Now tax rates are far lower than they were from 1935 until 1980. Republicans can take most, but not all, of the credit for that. But if anything Republicans have been worse than Democrats about spending taxpayer dollars.
Ryan's budget advocates cutting back on payments for food stamps, health care, education and transportation. But it does not cut back on military and homeland security spending, or on subsidies and tax breaks for corporations and the rich. It does not prioritize dealing with the national debt. The Democrats will say its domestic spending cuts amputate important programs, but in fact Ryan's cuts are band-aid sized cuts. They are meant not to antagonize too many senior voters, just mostly the type of people who vote Democrat, if they can get a valid voter ID card.
Ryan's budget tries to please Tea Party Republicans with the smell of budget cuts without alienating the big defense corporations or too many middle class voters.
And in his heart-of-hearts, Ryan may worry that without the deficit spending his plan envisions, the economy might stall, which would reduce tax collections, increase the deficit, and make it harder for him to reward his sponsors with government contracts.
Then there is the over $17 trillion dollars of federal debt. Currently the Treasury and the Federal Reserve are pretending they are keeping interest rates low to stimulate the economy, but the rates are way under what they have been historically in a growing economy with well less than 7% unemployment and no overall inflation. The main result of the low interest rates is that the government can finance its debt cheaply. Since that is the main result, that is the real purpose.
Normal interest rates are about 5%. 10% of $17 trillion is $1.7 trillion. 5% is half of that, so $0.85 trillion. Per year, in interest alone. A trillion is a thousand billions, and a billion is a thousand millions. So take my word for it, as valueless as the dollar has become since the Great Depression, and as large a the economy has become, we are talking a high-magnitude earthquake-like impact on the federal budget and on the economy if interest rates normalize. If we actually had an old-fashioned strong economy interest rates could easily climb above 5%, if we had free markets or the Fed were to do its job of keeping inflation under control.
Folly begets folly, and investors around the world see U.S. debt as a safe thing right now. Just a switch in that attitude, which would result in investors refusing to buy bonds until interest rates were higher (like 5% on 10 year bonds), would throw the U.S. into bankruptcy.
Its kind of like global warming. You have politicians who are in denial, and you have politicians who see the problem, but are not willing to act on something decades away. Only the debt crisis is probably well less than a decade away. It could start any time, and the longer it takes, the worse it will be.
The problem may be fixable. Democrats and Republicans alike would have to give up quite a bit. Each party uses federal money, or exemptions from taxes, to buy campaign donations and votes. Each party would have to give up much of its gravy train. And each could do that, without harming the economy overall.
Homeland security spending is nearly a complete waste. Cut that budget by 90%. Cut the military budget by 50%. And yes, it would take toughter-than-Ryan cuts in food stamps and education subsidies. Cut payments to health-care organizations and doctors, focusing on high-cost low-benefit drugs, diagnostic procedures, and surgeries. Raise the IRS budget, double it, and have them go after tax shirkers at all levels.
What, cut education subsidies? Yes, cut them. I support public schools, and I served on a public school board for 8 years, and I was the most liberal member of a liberal board. But I also saw the details of how federal money is doled out. Cut the money in half, remove the red tape by 100%, and let the school boards micromanage how to best educate their pupils. Some will screw up, many will be mired in mediocrity, but most will do better with half the money.
Alternatively taxes on the rich, and in fact on individuals making $50,000 a year or more, will soon need to be doubled. That is right, doubled. Read my lips: doubled. With no exemptions for capital gains, dividends, or inheritances. Even small inheritances.
Or we could do some combination of severe spending cuts and severe tax increases.
I imagine I have alienated just about everyone by pointing out the problem and the only ways it can be solved. I know plenty of people who get food stamps and never worry about how that food is really being paid for. I know soldiers and veterans, and I know people who make plenty of money and consider themselves over-taxed even after they take their tax breaks. No one likes to hear the nation is sick, and they all have to take some medicine.
So as an analyst, my prediction is the federal government is not going to act any better than heroin addicts would act (I've known some of them too). It will continue to borrow money until no one will lend it money.
Then it will either collapse in agony or go out and hit someone over the head and take the money it needs for its addiction. And blow off its creditors. Federal bonds will be payable only in more federal bonds.
Disclaimer: I am registered to vote in California, but with no political party.
Why did the House Republicans pass a budget this week, written by Paul Ryan, that would not balance the budget (barring an economic miracle) until 2024, a decade from now?
It is not just politics as usual, even though everyone knew this budget bill, which passed 219 to 205, won't become law. It will die in the Democrat-controlled Senate, and in any case President Barack Obama won't sign it.
Take a step back and look at the bigger picture, both economic and historical. Deficit financing did not become a regular part of the American economy until the Great Depression. In 1933 progressives of both parties (Democrat and Republican), led by Franklin Delano Roosevelt, tried "pump priming," getting the economy headed back to normal by government deficit spending. Soon income tax rates were raised too. But what really ran up a deficit, and revitalized the economy, was World War II.
After World War II the U.S. had an unprecedented amount of debt, but we were the only industrialized nation that had not been devastated by the war. More important, both parties had seen what a little economic heroin could do for politicians. So while conservatives talked of balanced budgets, they became rare even in years when the economy was booming.
Now tax rates are far lower than they were from 1935 until 1980. Republicans can take most, but not all, of the credit for that. But if anything Republicans have been worse than Democrats about spending taxpayer dollars.
Ryan's budget advocates cutting back on payments for food stamps, health care, education and transportation. But it does not cut back on military and homeland security spending, or on subsidies and tax breaks for corporations and the rich. It does not prioritize dealing with the national debt. The Democrats will say its domestic spending cuts amputate important programs, but in fact Ryan's cuts are band-aid sized cuts. They are meant not to antagonize too many senior voters, just mostly the type of people who vote Democrat, if they can get a valid voter ID card.
Ryan's budget tries to please Tea Party Republicans with the smell of budget cuts without alienating the big defense corporations or too many middle class voters.
And in his heart-of-hearts, Ryan may worry that without the deficit spending his plan envisions, the economy might stall, which would reduce tax collections, increase the deficit, and make it harder for him to reward his sponsors with government contracts.
Then there is the over $17 trillion dollars of federal debt. Currently the Treasury and the Federal Reserve are pretending they are keeping interest rates low to stimulate the economy, but the rates are way under what they have been historically in a growing economy with well less than 7% unemployment and no overall inflation. The main result of the low interest rates is that the government can finance its debt cheaply. Since that is the main result, that is the real purpose.
Normal interest rates are about 5%. 10% of $17 trillion is $1.7 trillion. 5% is half of that, so $0.85 trillion. Per year, in interest alone. A trillion is a thousand billions, and a billion is a thousand millions. So take my word for it, as valueless as the dollar has become since the Great Depression, and as large a the economy has become, we are talking a high-magnitude earthquake-like impact on the federal budget and on the economy if interest rates normalize. If we actually had an old-fashioned strong economy interest rates could easily climb above 5%, if we had free markets or the Fed were to do its job of keeping inflation under control.
Folly begets folly, and investors around the world see U.S. debt as a safe thing right now. Just a switch in that attitude, which would result in investors refusing to buy bonds until interest rates were higher (like 5% on 10 year bonds), would throw the U.S. into bankruptcy.
Its kind of like global warming. You have politicians who are in denial, and you have politicians who see the problem, but are not willing to act on something decades away. Only the debt crisis is probably well less than a decade away. It could start any time, and the longer it takes, the worse it will be.
The problem may be fixable. Democrats and Republicans alike would have to give up quite a bit. Each party uses federal money, or exemptions from taxes, to buy campaign donations and votes. Each party would have to give up much of its gravy train. And each could do that, without harming the economy overall.
Homeland security spending is nearly a complete waste. Cut that budget by 90%. Cut the military budget by 50%. And yes, it would take toughter-than-Ryan cuts in food stamps and education subsidies. Cut payments to health-care organizations and doctors, focusing on high-cost low-benefit drugs, diagnostic procedures, and surgeries. Raise the IRS budget, double it, and have them go after tax shirkers at all levels.
What, cut education subsidies? Yes, cut them. I support public schools, and I served on a public school board for 8 years, and I was the most liberal member of a liberal board. But I also saw the details of how federal money is doled out. Cut the money in half, remove the red tape by 100%, and let the school boards micromanage how to best educate their pupils. Some will screw up, many will be mired in mediocrity, but most will do better with half the money.
Alternatively taxes on the rich, and in fact on individuals making $50,000 a year or more, will soon need to be doubled. That is right, doubled. Read my lips: doubled. With no exemptions for capital gains, dividends, or inheritances. Even small inheritances.
Or we could do some combination of severe spending cuts and severe tax increases.
I imagine I have alienated just about everyone by pointing out the problem and the only ways it can be solved. I know plenty of people who get food stamps and never worry about how that food is really being paid for. I know soldiers and veterans, and I know people who make plenty of money and consider themselves over-taxed even after they take their tax breaks. No one likes to hear the nation is sick, and they all have to take some medicine.
So as an analyst, my prediction is the federal government is not going to act any better than heroin addicts would act (I've known some of them too). It will continue to borrow money until no one will lend it money.
Then it will either collapse in agony or go out and hit someone over the head and take the money it needs for its addiction. And blow off its creditors. Federal bonds will be payable only in more federal bonds.
Disclaimer: I am registered to vote in California, but with no political party.
Saturday, December 31, 2011
2012 U.S. Economic Outlook
Of course a wise person will hedge his or her bets ...
In 2011 the U.S. economy took everything that nature and venal politicians could throw at it and still managed to grow overall. It could have been a banner year, but the tsunami in Japan, the politics of Washington, high oil prices due to Libya, the Euro crisis, and finally flooding in Thailand all took a toll.
I think the most likely scenario for the U.S. economy in 2012 is moderately strong growth. I don't think turmoil in Europe will hurt the profits of very many American companies; the worst effects will come from converting the Euro to dollars for multinationals, if they have substantial European sales and the dollar continues to strengthen. Keep in mind that the alarmist view of Europe may not pan out, in which case a rising Euro could have the opposite effect.
2011 was also the year in which almost every professional economist in the U.S. predicted a new recession, which did not happen, despite the best efforts of Congress. Where do they find these guys?
In fact, I would hazard that strong U.S. economic growth is now more likely than another recession, in 2012. Demand is out there: consumer demand for autos and housing, which are big economic drivers, is strong. Credit is a constraining factor, but there is still plenty of stimulus from the Fed and the deficit.
We are clearly in the virtuous cycle where demand leads to more employment and profits, which in turn creates more demand. It might even give bankers and other major capitalists enough confidence to invest in expansion. I'm not advocating going back to bubble days, but there is as much danger in being too cautious as there is in pretending there is no such thing as a risky investment or loan.
That should mean the stock market is heading up, but stocks are bought by by individuals, one decision at a time. Companies with the best track records for generating profits are already attracting investors. It is hard to find an overvalued stock today, although I could name a few. Undervalued stocks are plentiful, just pick a flavor, do thorough research, and avoid the wooden nickels.
Will the bond market fall? It should, but it won't as long as enough people are willing to accept almost no returns on their capital, as long as the capital is preserved and reasonably liquid. Once the bond market starts falling, if the economy is getting strong, watch out. Get out quick, while the getting is still good.
The gold bubble seems to have popped. I never liked gold as an asset (See The Gold Bubble [November 18, 2009]), but enough fools bidding on a Beanie Baby can make it seem valuable, until the auction fever dies. Gold has no intrinsic value. It just sits there, useless. Its price depends on the whims of jewelry consumers and irrational investors.
It would be helpful if the price of petroleum came down, but oil prices are geopolitical, for the most part set where the dictator of Saudi Arabia wants them set.
Inflation is dead in the U.S. for the moment, but high prices for agricultural commodities are giving some state economies a good boost. Wages will remain dead in the water until more unemployed workers are soaked up, so I don't intend to worry about inflation until 2013.
The main fly in the ointment is potential political suicide. Most investors know that the national deficit needs to be brought under control. The best way to do that is to freeze or even reduce federal expenditures, then allow for economic growth to increase tax revenues to the point the budget is balanced, and then start reducing the deficit. Counter-cyclical federal budgets were a major key to U.S. economic success ever since the Great Depression. Deficit spending during booms is as stupid as cutbacks during recessions. In no case does a train wreck in Washington help the situation.
Investors and the nation (and its government) need a long term outlook. It will take years to get to a balanced budget, and perhaps decades to significantly reduce the national debt. That takes planning and discipline. The Communist Party of China could accomplish that. Could we do it? Sure, we could. Will we? Only if long term, public-spirited investors insist on it.
Here's an outside opinion: the U.S. could become the driver of the global economy again in 2012, for the first time since 2006. We are still a big, rich, creative, and occasionally hard-working nation. Our natural direction is up.
In 2011 the U.S. economy took everything that nature and venal politicians could throw at it and still managed to grow overall. It could have been a banner year, but the tsunami in Japan, the politics of Washington, high oil prices due to Libya, the Euro crisis, and finally flooding in Thailand all took a toll.
I think the most likely scenario for the U.S. economy in 2012 is moderately strong growth. I don't think turmoil in Europe will hurt the profits of very many American companies; the worst effects will come from converting the Euro to dollars for multinationals, if they have substantial European sales and the dollar continues to strengthen. Keep in mind that the alarmist view of Europe may not pan out, in which case a rising Euro could have the opposite effect.
2011 was also the year in which almost every professional economist in the U.S. predicted a new recession, which did not happen, despite the best efforts of Congress. Where do they find these guys?
In fact, I would hazard that strong U.S. economic growth is now more likely than another recession, in 2012. Demand is out there: consumer demand for autos and housing, which are big economic drivers, is strong. Credit is a constraining factor, but there is still plenty of stimulus from the Fed and the deficit.
We are clearly in the virtuous cycle where demand leads to more employment and profits, which in turn creates more demand. It might even give bankers and other major capitalists enough confidence to invest in expansion. I'm not advocating going back to bubble days, but there is as much danger in being too cautious as there is in pretending there is no such thing as a risky investment or loan.
That should mean the stock market is heading up, but stocks are bought by by individuals, one decision at a time. Companies with the best track records for generating profits are already attracting investors. It is hard to find an overvalued stock today, although I could name a few. Undervalued stocks are plentiful, just pick a flavor, do thorough research, and avoid the wooden nickels.
Will the bond market fall? It should, but it won't as long as enough people are willing to accept almost no returns on their capital, as long as the capital is preserved and reasonably liquid. Once the bond market starts falling, if the economy is getting strong, watch out. Get out quick, while the getting is still good.
The gold bubble seems to have popped. I never liked gold as an asset (See The Gold Bubble [November 18, 2009]), but enough fools bidding on a Beanie Baby can make it seem valuable, until the auction fever dies. Gold has no intrinsic value. It just sits there, useless. Its price depends on the whims of jewelry consumers and irrational investors.
It would be helpful if the price of petroleum came down, but oil prices are geopolitical, for the most part set where the dictator of Saudi Arabia wants them set.
Inflation is dead in the U.S. for the moment, but high prices for agricultural commodities are giving some state economies a good boost. Wages will remain dead in the water until more unemployed workers are soaked up, so I don't intend to worry about inflation until 2013.
The main fly in the ointment is potential political suicide. Most investors know that the national deficit needs to be brought under control. The best way to do that is to freeze or even reduce federal expenditures, then allow for economic growth to increase tax revenues to the point the budget is balanced, and then start reducing the deficit. Counter-cyclical federal budgets were a major key to U.S. economic success ever since the Great Depression. Deficit spending during booms is as stupid as cutbacks during recessions. In no case does a train wreck in Washington help the situation.
Investors and the nation (and its government) need a long term outlook. It will take years to get to a balanced budget, and perhaps decades to significantly reduce the national debt. That takes planning and discipline. The Communist Party of China could accomplish that. Could we do it? Sure, we could. Will we? Only if long term, public-spirited investors insist on it.
Here's an outside opinion: the U.S. could become the driver of the global economy again in 2012, for the first time since 2006. We are still a big, rich, creative, and occasionally hard-working nation. Our natural direction is up.
Tuesday, August 2, 2011
Plenty of Stimulus
I do not like the details of the debt ceiling deal signed into law by President Barack Obama today. I'll mention my reasons later. What I want to point out to investors and decision makers is that there is still plentiful stimulus in the new economic plan. Let's call it the new Two Year Plan.
The federal government, for the remainder of 2011 and 2012, is still going to create a lot of debt, which strangely is the same as creating a lot of money. Tax revenues will still be less than expenditures by over 2 trillion dollars in the next two years, unless the economy starts growing a lot faster.
Note that the Federal Reserve is keeping the interest rates it charges member banks near zero. That, in a normal recession, would be very stimulating in and of itself.
So why is the economy not growing faster?
People want simple, one variable solutions [we need more government spending, or we need less government spending, or deregulation, or ...] but in fact we are looking at a complex, multiple-variable problem.
If all those variables could be wrapped into one, I would say they relate to lack of confidence. There are many indicators of lack of confidence. One is the historically low price-to-earnings ratio in the stock market versus the historically low interest rates in the bond market. It is pretty easy to make 2 to 10 times as much return on your capital (or savings, if you prefer to think like a consumer) in the stock market today as in the bond market. Take fear out of the equation and funds would flow from bonds to stocks. Stocks would go up, and interest paid on bonds would climb as well. All investors would feel wealthier (except maybe those who were heavily in long-term bonds), and would spend more freely. That would help revive the consumer segment of the economy.
But that is easier said than done. The bond holders are the same people, in their tens of millions, who sold their stocks in 2008, at the bottom of the market, and effectively traded them for bonds. They are a fearful lot, easily stampeded.
We see a lack of confidence in bank lending practices. We see it in deferred purchasing of houses. The demand for housing is huge; interest rates and house prices are both low. But fear holds people pack.
The fear is not irrational, it is simply not analyzed. Bad things happened to a lot of people starting in 2007. Everyone who has a job today knows someone, maybe many people, who lost their jobs, homes, and even families. Almost everyone wants to minimize risk, even if that means substantially diminishing long-term opportunities (like buying houses and stocks cheap).
Sadly, the business men and women of America are hiding with the frightened steers rather than boldly leading us out of the recession. Every CEO wants the other CEOs to hire first, increasing demand, so that it will be safer to hire. Some even continue to lay off employees when they are running profitable companies, like Cisco's John Chambers, because they are not able to inspire investors with visions of future profits. Once a proud leader, John has become a harried, frightened little rabbit of a CEO.
U.S. executives, and their political mouth pieces, complain about taxes and regulations and high labor costs in the U.S. What, business was supposed to be easy? I agree that there are unnecessary regulations, but they are not what is stopping business expansion. Second rate CEOs are stopping business expansion. We still have some hard-charging leaders who can build up businesses (look at the biotechnology sector), but most contemporary CEO's are too effete to get their hands dirty doing real work.
The fact is the business climate in the U.S. and internationally is quite good now. Is anyone besides me embarrassed that a bunch of Communists in China are kicking our collective, free-market behinds? Do we want to have to admit that all our post-World War II free-market individualist posturing was not based on our outstanding individual capabilities, but on the fact that in World War II all of our competitors factories were bombed out of commission? China, at the end of World War II, had an economy they would have been ashamed of in the Middle Ages. They did not get to where they are now by slacking and refusing to deal with challenges.
What don't I like about the debt ceiling deal? I don't like the bloated military and homeland security budget, which we simply cannot afford. But mainly I don't like the fact that they could have come to the exact same decision a month ago. Congress and President Obama, Republicans and Tea Party and Democrats, basically killed economic expansion in the month of July.
The President, Congress, and other national leaders need to focus on restoring confidence. We need to reassure people that have jobs that they will keep them, and those that are looking that their search will end soon. We need for people to feel they can buy a home or replace some old appliance. We need to show the old American can-do business spirit of innovation. We also need to cooperate with each other to find solutions. We need to expand the pie, not fight over the crumbs.
There is plenty of stimulus. There is plenty of money being created. It needs to go into productive uses, not into the federal bond market.
The federal government, for the remainder of 2011 and 2012, is still going to create a lot of debt, which strangely is the same as creating a lot of money. Tax revenues will still be less than expenditures by over 2 trillion dollars in the next two years, unless the economy starts growing a lot faster.
Note that the Federal Reserve is keeping the interest rates it charges member banks near zero. That, in a normal recession, would be very stimulating in and of itself.
So why is the economy not growing faster?
People want simple, one variable solutions [we need more government spending, or we need less government spending, or deregulation, or ...] but in fact we are looking at a complex, multiple-variable problem.
If all those variables could be wrapped into one, I would say they relate to lack of confidence. There are many indicators of lack of confidence. One is the historically low price-to-earnings ratio in the stock market versus the historically low interest rates in the bond market. It is pretty easy to make 2 to 10 times as much return on your capital (or savings, if you prefer to think like a consumer) in the stock market today as in the bond market. Take fear out of the equation and funds would flow from bonds to stocks. Stocks would go up, and interest paid on bonds would climb as well. All investors would feel wealthier (except maybe those who were heavily in long-term bonds), and would spend more freely. That would help revive the consumer segment of the economy.
But that is easier said than done. The bond holders are the same people, in their tens of millions, who sold their stocks in 2008, at the bottom of the market, and effectively traded them for bonds. They are a fearful lot, easily stampeded.
We see a lack of confidence in bank lending practices. We see it in deferred purchasing of houses. The demand for housing is huge; interest rates and house prices are both low. But fear holds people pack.
The fear is not irrational, it is simply not analyzed. Bad things happened to a lot of people starting in 2007. Everyone who has a job today knows someone, maybe many people, who lost their jobs, homes, and even families. Almost everyone wants to minimize risk, even if that means substantially diminishing long-term opportunities (like buying houses and stocks cheap).
Sadly, the business men and women of America are hiding with the frightened steers rather than boldly leading us out of the recession. Every CEO wants the other CEOs to hire first, increasing demand, so that it will be safer to hire. Some even continue to lay off employees when they are running profitable companies, like Cisco's John Chambers, because they are not able to inspire investors with visions of future profits. Once a proud leader, John has become a harried, frightened little rabbit of a CEO.
U.S. executives, and their political mouth pieces, complain about taxes and regulations and high labor costs in the U.S. What, business was supposed to be easy? I agree that there are unnecessary regulations, but they are not what is stopping business expansion. Second rate CEOs are stopping business expansion. We still have some hard-charging leaders who can build up businesses (look at the biotechnology sector), but most contemporary CEO's are too effete to get their hands dirty doing real work.
The fact is the business climate in the U.S. and internationally is quite good now. Is anyone besides me embarrassed that a bunch of Communists in China are kicking our collective, free-market behinds? Do we want to have to admit that all our post-World War II free-market individualist posturing was not based on our outstanding individual capabilities, but on the fact that in World War II all of our competitors factories were bombed out of commission? China, at the end of World War II, had an economy they would have been ashamed of in the Middle Ages. They did not get to where they are now by slacking and refusing to deal with challenges.
What don't I like about the debt ceiling deal? I don't like the bloated military and homeland security budget, which we simply cannot afford. But mainly I don't like the fact that they could have come to the exact same decision a month ago. Congress and President Obama, Republicans and Tea Party and Democrats, basically killed economic expansion in the month of July.
The President, Congress, and other national leaders need to focus on restoring confidence. We need to reassure people that have jobs that they will keep them, and those that are looking that their search will end soon. We need for people to feel they can buy a home or replace some old appliance. We need to show the old American can-do business spirit of innovation. We also need to cooperate with each other to find solutions. We need to expand the pie, not fight over the crumbs.
There is plenty of stimulus. There is plenty of money being created. It needs to go into productive uses, not into the federal bond market.
Thursday, April 7, 2011
ECB Good, Federal Reserve Bad
Today the European Central Bank (ECB) announced it was raising its interest rates from 1% to 1.25%. Given that the European economy, particularly the economies of Greece, Italy, Spain, Portugal, and Ireland, are supposed to be in poor shape, that may seem like a dramatic tightening of the screws. It is not. Interest rates are still very low in Europe. Any shortage of credit, or of takers, is not due to interest rates being too high. 1.25% should provide good support to further economic expansion.
In contrast in the United States of America the Federal Reserve Board (the Fed) recently left its benchmark interest rate at zero. That is right, 0%. I admit I would like to borrow some money at 0% interest, but the Fed alone lends to its member banks. The same people who charge you 15% to 35% interest on credit cards. This unprecedented low American interest rate did not make much sense even during the Panic of 2008. 0.25% or 0.5% would have been just as supportive to the economy and the banking system.
We are now in a pretty ordinary recession, except the prices of certain commodities have spiked due to global demand and limited supplies. The Fed's public argument is that the low rates are because a lot of Americans are out of work. One thing I know, the Fed does not care about the type of Americans who are out of work, unless they are banking CEOs. They are keeping interest rates low for the benefit of the banks, of the federal government (it keeps interest on the national debt low), and for large corporations that can currently borrow vast sums of money at huge rates. In my role as analyst I have not seen much corporate borrowing used for industrial or work force expansion. It is typically used to buy back stocks or mergers.
The dangers of these unprecedented low interest rates are so clear that even a few Fed board members have pointed them out. They can lead both to inflation and to more asset bubbles. We certainly already have a gold and silver bubble. Bubbles were the problem in the first place. New bubbles do not a sound economy make.
Meanwhile, ordinary savers are suffering from low interest rates. Retired people are having to eat their principle because they are getting almost no interest from CDs and bonds. The Fed says there is no inflation, but if your main discretionary expenses are gas and food, there is a lot of inflation. Other recessions were not met with such low rates.
Since 1952 the Fed had set interest rates below 2% for only a few brief periods, before 2008. [See Federal Reserve rate history] Given that the Fed should manage for the long term (not acting like Wall Street traders who can't see beyond the current quarter), the Fed's rate should already be at 2%.
Given that (at least in free market theory) private loan rates should be set by supply and demand, that should not budge rates for housing. Anyway, low interest rates have failed to provide an incentive for people to buy homes. Homes are seen as a bad investment; people want easy money, not assets that are taxed yearly (with real estate taxes) and need to be repaired regularly.
The Fed are cowards. They don't want to tick off Wall Street or Congress (Republicans want low rates for their business friends, Democrats because they don't understand economics). 2% is very supportive of economic expansion. If we had already gotten there gradually (or were near there like the ECB is now), then further gradual adjustments could be made, up or down, depending on the genuine need for credit for economic expansion, or on the danger of inflation.
If I were the President (fat chance) I'd fire the bums on the Federal Reserve and hire some people who can actually do the job.
Saturday, January 1, 2011
2010 Economic Analysis & Forecast
For once I am basically in agreement with most mainstream economists on what is ahead in 2011.
We are still in the virtuous cycle ramp that follows an economic downturn. Most of the differences between economists are about the strength of the ramp and what particular sectors will lead and lag the economy as a whole. Wild cards include possible actions by the Federal government, the Federal Reserve, and bankers in China and Europe. Double wild cards include natural catastrophes and military incidents.
Leading the trend both globally and in the United States will be manufacturing. This could be more than a bounce-back in the U.S. because it is an increasingly attractive place to do manufacturing now that wages are closer to the global norm. People forget that losing factories to China has not destroyed as many jobs in the past century as advances in information technology and automation have destroyed. I expect increased demand in the U.S. and globally for U.S. products, and the beginnings of a round of capital investment in new and expanded U.S. manufacturing facilities.
Lagging the trend will be the housing and general construction market, which in turn creates demand for wood products, metals, and etc. However, there is very, very little new housing stock in existence right now, in a nation that typically adds over 3 million people each year. Also, a lot of people are overcrowded. College and high school graduates from the past few years are dying to get a job and move away from mom & pop. Even if people who gain employment enter the housing rental market (instead of buying houses), this will make landlords happy and more willing to buy up existing housing stocks. I don't expect a price boom in 2011, but building new houses (and apartments) is going to start looking attractive in some specific markets as the year goes on. If banks gain confidence, we could get back to a normal balance between buyers and sellers by the end of the year. However, predicting timing is difficult because the decisions are driven by diverse buyers' mental states.
Bonds should fall (resulting in higher interest rates), but that is dependent on Fed action and risk assessments by bond holders. The stock market should rise because return on investment, at least in the next few years, should be a lot better than investments in bonds or real estate. In the stock market, however, it will be more important to look for companies with long-term growth prospects, rather than just growth due to bouncing back from the recession.
The national debt is going to grow by leaps and bounds because even strong economic growth won't generate enough tax revenue to cover the spendthrift ways of the Democratic Party and Republican Party. The 2011 budget is already shot and 2012 is an election year, so expect the new Congress of 2013 to contend with a tidal wave of debt.
Jobs should be more plentiful in 2011, but employers will still be able to pick the best workers and offer relatively low wages. This is good (for the economy, not for the unemployed) because low-productivity workers are a drag on businesses. Good workers help generate the profits that are needed to expand, and which eventually force companies to hire and try to train less reliable workers. The unemployment rate should drop by a percent or two, but will remain brutally high for the least employable citizens.
The Federal Reserve should have already raised interest rates to the 2% level, but I expect them to keep rates near 0% for the entire year, because they have a proven record of irresponsibility and incompetence. Or perhaps I should say they are competent at serving their fellow bankers, but not at their mission of maintaining relatively even economic growth. Why say rates should rise even with continuing high unemployment? Because any rate under 4% will support economic growth, and having to raise rates rapidly later on will lead to bad decision making or even panic.
People at every level are looking for opportunities, and 2012 will be a good year for many.
We are still in the virtuous cycle ramp that follows an economic downturn. Most of the differences between economists are about the strength of the ramp and what particular sectors will lead and lag the economy as a whole. Wild cards include possible actions by the Federal government, the Federal Reserve, and bankers in China and Europe. Double wild cards include natural catastrophes and military incidents.
Leading the trend both globally and in the United States will be manufacturing. This could be more than a bounce-back in the U.S. because it is an increasingly attractive place to do manufacturing now that wages are closer to the global norm. People forget that losing factories to China has not destroyed as many jobs in the past century as advances in information technology and automation have destroyed. I expect increased demand in the U.S. and globally for U.S. products, and the beginnings of a round of capital investment in new and expanded U.S. manufacturing facilities.
Lagging the trend will be the housing and general construction market, which in turn creates demand for wood products, metals, and etc. However, there is very, very little new housing stock in existence right now, in a nation that typically adds over 3 million people each year. Also, a lot of people are overcrowded. College and high school graduates from the past few years are dying to get a job and move away from mom & pop. Even if people who gain employment enter the housing rental market (instead of buying houses), this will make landlords happy and more willing to buy up existing housing stocks. I don't expect a price boom in 2011, but building new houses (and apartments) is going to start looking attractive in some specific markets as the year goes on. If banks gain confidence, we could get back to a normal balance between buyers and sellers by the end of the year. However, predicting timing is difficult because the decisions are driven by diverse buyers' mental states.
Bonds should fall (resulting in higher interest rates), but that is dependent on Fed action and risk assessments by bond holders. The stock market should rise because return on investment, at least in the next few years, should be a lot better than investments in bonds or real estate. In the stock market, however, it will be more important to look for companies with long-term growth prospects, rather than just growth due to bouncing back from the recession.
The national debt is going to grow by leaps and bounds because even strong economic growth won't generate enough tax revenue to cover the spendthrift ways of the Democratic Party and Republican Party. The 2011 budget is already shot and 2012 is an election year, so expect the new Congress of 2013 to contend with a tidal wave of debt.
Jobs should be more plentiful in 2011, but employers will still be able to pick the best workers and offer relatively low wages. This is good (for the economy, not for the unemployed) because low-productivity workers are a drag on businesses. Good workers help generate the profits that are needed to expand, and which eventually force companies to hire and try to train less reliable workers. The unemployment rate should drop by a percent or two, but will remain brutally high for the least employable citizens.
The Federal Reserve should have already raised interest rates to the 2% level, but I expect them to keep rates near 0% for the entire year, because they have a proven record of irresponsibility and incompetence. Or perhaps I should say they are competent at serving their fellow bankers, but not at their mission of maintaining relatively even economic growth. Why say rates should rise even with continuing high unemployment? Because any rate under 4% will support economic growth, and having to raise rates rapidly later on will lead to bad decision making or even panic.
People at every level are looking for opportunities, and 2012 will be a good year for many.
Tuesday, November 30, 2010
Springtime Economy Cold Spells
Divorced from nature, human minds often make simplistic assumptions about the future. The most common one is that today's trend is tomorrow's trend. That is the kind of thinking that creates financial bubbles.
Think about the season of spring. I know that can be difficult as we enter winter in the northern hemisphere, but it is just a metaphor anyway. So think, perhaps, of last spring. It does not come on all at once, despite being driven by the steady progression of the sun to longer days. There are cycles of cold and warmth.
We may speak of winter returning, but we know as the weeks pass the snow and ice will melt and we will get more frequent warm spells. We even change our definition of warmth. In late winter a warm day may include a night time freeze. In late spring a warm day may miss freezing by 20 degrees.
Development of spring into summer is uneven across geographies. Once state may be having a late winter storm while another has a summer-like day.
So too it is with macroeconomics. We have been through a fairly severe global recession, but it is already summer in China and India. Within the American economy one sector may advance while another remains flat or even declines a bit. In particular in 2010 we saw reduced government spending, but despite that the economy did not collapse. The economy warmed up a fair amount in 2010 despite dire predictions of catastrophe in Europe and a double dip in the U.S. And despite a still-weak housing construction sector.
There are all sorts of signs that the economy is in recovery. That may not be any consolation to those frozen in an unemployed or even homeless status, but it important for investors to see the overall picture accurately. A lot of people panicked and lost a lot of their savings in 2008 when they sold stocks at the bottom of the market. If they had held on, they would be in far better shape now.
Another economic winter will come, to be sure, but we have not even hit late spring yet, much less summer. The way to prepare for winter is to lay aside your winter supplies during the summer, rather than acting as if summer will never end.
2011 should be a good year for the American economy. That does not mean it will be a good year for every single person, or for every business, or every business sector. But hopefully we have, collectively, learned something about the wise use of credit and the need to produce real goods and services in a global economy. Bidding up the prices of things that already exist, be they Beanie Babies or houses, is not a real economic advance.
Stocks can be bid up too high too, but that was not the problem during the latest bubble. Stock prices should reflect the earnings potential of the companies involved. The more profitable companies are, the higher their stock prices should be. The main danger is getting talked into investing in companies that are not profitable, or are obviously going to become unprofitable as the economy changes.
Spring is in the air. Wise investors can hear the birds singing and the wheat and corn sprouting in the fields. If you don't sow, you can't harvest. People who are 100% in bonds should be seriously thinking of rebalancing their portfolios to include stocks again. The value of low interest bonds tends to melt away during the hot days of summer. Better to own CDs at a credit union than bonds once interest rates start rising. And beware the current line of bull about investing in foreign stock funds. Many nations have even less regulation and transparency that the United States. A good rule for investing is don't do it if you don't know what you are doing. There is plenty of risk involved even when you know what you are doing.
See also: Virtuous Economic Cycle Components [September 15, 2010]
Think about the season of spring. I know that can be difficult as we enter winter in the northern hemisphere, but it is just a metaphor anyway. So think, perhaps, of last spring. It does not come on all at once, despite being driven by the steady progression of the sun to longer days. There are cycles of cold and warmth.
We may speak of winter returning, but we know as the weeks pass the snow and ice will melt and we will get more frequent warm spells. We even change our definition of warmth. In late winter a warm day may include a night time freeze. In late spring a warm day may miss freezing by 20 degrees.
Development of spring into summer is uneven across geographies. Once state may be having a late winter storm while another has a summer-like day.
So too it is with macroeconomics. We have been through a fairly severe global recession, but it is already summer in China and India. Within the American economy one sector may advance while another remains flat or even declines a bit. In particular in 2010 we saw reduced government spending, but despite that the economy did not collapse. The economy warmed up a fair amount in 2010 despite dire predictions of catastrophe in Europe and a double dip in the U.S. And despite a still-weak housing construction sector.
There are all sorts of signs that the economy is in recovery. That may not be any consolation to those frozen in an unemployed or even homeless status, but it important for investors to see the overall picture accurately. A lot of people panicked and lost a lot of their savings in 2008 when they sold stocks at the bottom of the market. If they had held on, they would be in far better shape now.
Another economic winter will come, to be sure, but we have not even hit late spring yet, much less summer. The way to prepare for winter is to lay aside your winter supplies during the summer, rather than acting as if summer will never end.
2011 should be a good year for the American economy. That does not mean it will be a good year for every single person, or for every business, or every business sector. But hopefully we have, collectively, learned something about the wise use of credit and the need to produce real goods and services in a global economy. Bidding up the prices of things that already exist, be they Beanie Babies or houses, is not a real economic advance.
Stocks can be bid up too high too, but that was not the problem during the latest bubble. Stock prices should reflect the earnings potential of the companies involved. The more profitable companies are, the higher their stock prices should be. The main danger is getting talked into investing in companies that are not profitable, or are obviously going to become unprofitable as the economy changes.
Spring is in the air. Wise investors can hear the birds singing and the wheat and corn sprouting in the fields. If you don't sow, you can't harvest. People who are 100% in bonds should be seriously thinking of rebalancing their portfolios to include stocks again. The value of low interest bonds tends to melt away during the hot days of summer. Better to own CDs at a credit union than bonds once interest rates start rising. And beware the current line of bull about investing in foreign stock funds. Many nations have even less regulation and transparency that the United States. A good rule for investing is don't do it if you don't know what you are doing. There is plenty of risk involved even when you know what you are doing.
See also: Virtuous Economic Cycle Components [September 15, 2010]
Tuesday, September 21, 2010
Federal Reserve Behind the Curve?
A wise investor always keeps in mind the spectrum of risk. For any given investment there is a spectrum of likelihoods, including unforeseeable events that could bring an upside or downside. With bonds, of course, you have a lot less complexity than with stocks, and with Federal bonds you have less complexity than with corporate bonds. Typically, however, while bonds limit some downside risks, they also limit the upside.
The economy (whether defined as the United States or as global) has an astonishing number of variables at play at any given moment. The decision makers at the Federal Reserve have considerable experience in the banking sector, but typically have little experience in manufacturing or, for instance, in the black market economy (which is mainly services performed by individuals who do not report their income to the government). Their collective record for steering the economy in the past two decades is dreadful; if they were drivers, they would have had their licenses taken away.
The history of the United States, and other nations, is replete with instances of false booms based on excessive credit and speculation. Real economic growth does require a degree of credit, but it is mainly based on savings and profits that are then redirected to new growth opportunities. Americans are now saving, which is good. They should save considerably more, but in aggregate won't be able to until employment returns to "normal" levels. Judging from price-to-earnings (P/E) ratios, American businesses are generating profits and mostly don't need much in the way of credit to keep up a modest pace of expansion.
Today's Federal Reserve statement (September 21, 2010) gives the impression that the economy is still growing, but at a slower pace than earlier in the year. Of course. Aside from the inventory restocking bounce that always follows a recession, we had a lot of reluctance to anticipate growing demand because of the "double dip" howling of the wolfpack. But there was no double dip, not even during the Euro freeze.
Growth is growth, and it will speed up and slow down from month to month and sector to sector. What the Federal Reserve won't admit is that its zero-interest rate policy is not doing much more for the economy than, say, a 2% interest rate policy would do. It is helping the banks (recall that the Fed does not represent the people, but is all too much like a bank collusion mechanism), but they aren't lending much. When they do lend, it is often on credit cards at ridiculously high interest rates. Which at least encourage consumers to save rather than spend.
The fed could easily start raising interest rates now, showing some confidence, and normalising the situation. At 0.25% today, maybe 0.5% after the holidays, working towards whatever is appropriate by the end of 2011, probably at least 2%. If the recovery is slower than I expect, rates should still go up gradually to at least 1.5%, which is very, very accomodative.
The Federal Reserve can't make a recovery. That will be built by the people themselves, as it always has been. There is a lot of work that needs doing, notably repairing millions of homes that have been damaged by thieves and neglect during the past 3 years. Schools are overcrowded due to teacher layoffs. American services and manufacturing are becoming more competitive with China because of rapidly increasing wages in China. This does require capital as well as person-power; the banks could play a part.
We know what the banks will do. When it stops raining, they will start handing out their supply of umbrellas.
Today's Federal Reserve decision to leave interest rates near 0% may be politically popular, and popular with Wall Street banks, but it is not a responsible decision given the data available.
The economy (whether defined as the United States or as global) has an astonishing number of variables at play at any given moment. The decision makers at the Federal Reserve have considerable experience in the banking sector, but typically have little experience in manufacturing or, for instance, in the black market economy (which is mainly services performed by individuals who do not report their income to the government). Their collective record for steering the economy in the past two decades is dreadful; if they were drivers, they would have had their licenses taken away.
The history of the United States, and other nations, is replete with instances of false booms based on excessive credit and speculation. Real economic growth does require a degree of credit, but it is mainly based on savings and profits that are then redirected to new growth opportunities. Americans are now saving, which is good. They should save considerably more, but in aggregate won't be able to until employment returns to "normal" levels. Judging from price-to-earnings (P/E) ratios, American businesses are generating profits and mostly don't need much in the way of credit to keep up a modest pace of expansion.
Today's Federal Reserve statement (September 21, 2010) gives the impression that the economy is still growing, but at a slower pace than earlier in the year. Of course. Aside from the inventory restocking bounce that always follows a recession, we had a lot of reluctance to anticipate growing demand because of the "double dip" howling of the wolfpack. But there was no double dip, not even during the Euro freeze.
Growth is growth, and it will speed up and slow down from month to month and sector to sector. What the Federal Reserve won't admit is that its zero-interest rate policy is not doing much more for the economy than, say, a 2% interest rate policy would do. It is helping the banks (recall that the Fed does not represent the people, but is all too much like a bank collusion mechanism), but they aren't lending much. When they do lend, it is often on credit cards at ridiculously high interest rates. Which at least encourage consumers to save rather than spend.
The fed could easily start raising interest rates now, showing some confidence, and normalising the situation. At 0.25% today, maybe 0.5% after the holidays, working towards whatever is appropriate by the end of 2011, probably at least 2%. If the recovery is slower than I expect, rates should still go up gradually to at least 1.5%, which is very, very accomodative.
The Federal Reserve can't make a recovery. That will be built by the people themselves, as it always has been. There is a lot of work that needs doing, notably repairing millions of homes that have been damaged by thieves and neglect during the past 3 years. Schools are overcrowded due to teacher layoffs. American services and manufacturing are becoming more competitive with China because of rapidly increasing wages in China. This does require capital as well as person-power; the banks could play a part.
We know what the banks will do. When it stops raining, they will start handing out their supply of umbrellas.
Today's Federal Reserve decision to leave interest rates near 0% may be politically popular, and popular with Wall Street banks, but it is not a responsible decision given the data available.
Wednesday, September 15, 2010
Virtuous Economic Cycle Components
After a severe recession there are going to be some very damaged sectors of an economy. They don't all spring back at once. Some lead, some lag the general upturn. While past upturns offer patterns that may be repeated, the economy is a complex beast, so it is not surprising if details differ in each cycle.
In 2009 the stock market indexes hit bottom, then had a good climb. In 2010 so far we have been up and down a number of times, ending around flat today after a good start to September. Not knowing history, one might theorize that the stock market should have a damping effect on economic cycles (not dipping as deeply, not rising as quickly). This would be because a common theory is that stocks are about future value. So stock prices should take into account long-term returns, which should in turn take into account the cycles of growth and recession that characterize capitalist economies.
But, in just one for-instance, in early 2009 the stock market averages dipped far more, as a percentage, than GDP. Same in the 2001 crash. But in 2001 the fall came mainly because leading up to 2000 investors forgot to take into account that the profitability of the companies' would drop when a recession took hold. The Federal Reserve failed in its duty to dampen a bubble because big egos mistakenly believed, and told the mass of investors, that cycles were over, to be replaced by more-or-less steady economic growth.
At its bottom in 2009 the stock market was suffering from the opposite delusion: that the economy would never recover. I would argue that in 2007, with the exception of the banking sector, most stocks had in fact priced in the entire economic cycle. The commodity sector had not, and of course housing prices and loans against housing had not. Many people lost all or much of their retirement investments not because they had invested badly, but because they panicked and sold near the bottom.
The big price swings in stocks are because they are auction markets. They are efficient at matching buyers with sellers, but they overprice and underprice securities when there is a deficit of one party or the other.
Today housing, both used housing stock and the building of new housing, is still weak. There are still some pockets of vacuum where people pretend there are loans that will be repaid; there is still turbulence. But the economy can suffer a fair amount of turbulence without crashing.
Demand continues to pick up despite the fact that we are no longer seeing net stimulus from the government sector. Some sectors of the economy are showing strength, notably agriculture and export-oriented industry. Those who are employed are much more confident of keeping their jobs than they were a year ago. They also, on the whole, have paid down their debts and are in a much better position to shop more without getting themselves into trouble. So I would expect that as the employed spend more retailers will be encouraged to do more hiring.
That is the thing about the virtuous part of the cycle. More hiring means more retail sales, and less of a drain on government for unemployment compensation and the like. More retail sales means more manufacturing. And in turn more hiring.
In 2011 we can expect people who have huddled together in houses and apartments to save money to begin to feel secure enough to venture out on their own. That means more rental income (if not increased rents or housing prices, at first) and, after all these many years, the absorption of excess housing stock.
All these processes take time. The stock market is an important part of this cycle. People spend more when their stocks are up. Those who own stocks represent a disproportionate part of the spending equation. If investors are so cautious that stocks take another dive, that will slow down the natural upswing. If the market moves up smartly in the near term, that will accelerate the recovery.
In 2009 the stock market indexes hit bottom, then had a good climb. In 2010 so far we have been up and down a number of times, ending around flat today after a good start to September. Not knowing history, one might theorize that the stock market should have a damping effect on economic cycles (not dipping as deeply, not rising as quickly). This would be because a common theory is that stocks are about future value. So stock prices should take into account long-term returns, which should in turn take into account the cycles of growth and recession that characterize capitalist economies.
But, in just one for-instance, in early 2009 the stock market averages dipped far more, as a percentage, than GDP. Same in the 2001 crash. But in 2001 the fall came mainly because leading up to 2000 investors forgot to take into account that the profitability of the companies' would drop when a recession took hold. The Federal Reserve failed in its duty to dampen a bubble because big egos mistakenly believed, and told the mass of investors, that cycles were over, to be replaced by more-or-less steady economic growth.
At its bottom in 2009 the stock market was suffering from the opposite delusion: that the economy would never recover. I would argue that in 2007, with the exception of the banking sector, most stocks had in fact priced in the entire economic cycle. The commodity sector had not, and of course housing prices and loans against housing had not. Many people lost all or much of their retirement investments not because they had invested badly, but because they panicked and sold near the bottom.
The big price swings in stocks are because they are auction markets. They are efficient at matching buyers with sellers, but they overprice and underprice securities when there is a deficit of one party or the other.
Today housing, both used housing stock and the building of new housing, is still weak. There are still some pockets of vacuum where people pretend there are loans that will be repaid; there is still turbulence. But the economy can suffer a fair amount of turbulence without crashing.
Demand continues to pick up despite the fact that we are no longer seeing net stimulus from the government sector. Some sectors of the economy are showing strength, notably agriculture and export-oriented industry. Those who are employed are much more confident of keeping their jobs than they were a year ago. They also, on the whole, have paid down their debts and are in a much better position to shop more without getting themselves into trouble. So I would expect that as the employed spend more retailers will be encouraged to do more hiring.
That is the thing about the virtuous part of the cycle. More hiring means more retail sales, and less of a drain on government for unemployment compensation and the like. More retail sales means more manufacturing. And in turn more hiring.
In 2011 we can expect people who have huddled together in houses and apartments to save money to begin to feel secure enough to venture out on their own. That means more rental income (if not increased rents or housing prices, at first) and, after all these many years, the absorption of excess housing stock.
All these processes take time. The stock market is an important part of this cycle. People spend more when their stocks are up. Those who own stocks represent a disproportionate part of the spending equation. If investors are so cautious that stocks take another dive, that will slow down the natural upswing. If the market moves up smartly in the near term, that will accelerate the recovery.
Wednesday, September 1, 2010
The Recession is Dead!
The Recession is Dead. Deceased. Finished. Kaput. Terminated. Over.
For six months or so a variety of interests have tried to revive the Recession. They have, purposefully or not, driven bonds up, stocks down, and generally scared a lot of people. They, using the broadcast media, have urged people to not buy homes. They have urged employers to not hire more employees. They have been responsible for a lot of human misery.
Certainly selected facts were woven into the Double Dip recession scenario. The thing about recessions, especially the bigger, gnarlier recessions, is that they are complex. There are cycles within cycles. There are healthy economic sectors and geographic areas, and unhealthy ones. There are leading indicators and lagging indicators.
As much as pundits tried to scare everyone this summer, apparently in August there was enough demand for manufacturing to expand in the United States, and at a good clip. According to the Institute for Supply Management August 2010 report, we just had the 13th consecutive month of growth in manufacturing. It isn't all gung ho: 11 industrial sectors expanded in August, 5 shrank, and two were flat. That just means there is still room for improvement.
Put that in your cup of tea. Yes, there are a lot of people who want to sell their homes. Yes, people in general are more frugal than a few years ago, as they ought to be. Sure, the banks are still scalawags. On the other hand, global demand for U.S. goods is booming. The agriculture sector is strong. Retail is recovering. Hotels are starting to fill up again. Many companies actually are hiring. Of course some businesses continue to fail and to lay off workers; that happens even during booms.
The recession is dead. We are now in an up cycle. So buy what you need, and hire who you need to hire. Borrow what you need to borrow. After all, interest rates probably won't stay this low all that much longer.
There will always be business cycles, but hopefully individuals and businesses have learned a lesson from the causes of the latest recession that will stick in their minds. Hopefully most of us will borrow less and produce more. We will look for long term gains, not quick steals. We will think about investments carefully and avoid a herd mentality. And we will not be conned by banks, bureaucrats, or politicians.
For six months or so a variety of interests have tried to revive the Recession. They have, purposefully or not, driven bonds up, stocks down, and generally scared a lot of people. They, using the broadcast media, have urged people to not buy homes. They have urged employers to not hire more employees. They have been responsible for a lot of human misery.
Certainly selected facts were woven into the Double Dip recession scenario. The thing about recessions, especially the bigger, gnarlier recessions, is that they are complex. There are cycles within cycles. There are healthy economic sectors and geographic areas, and unhealthy ones. There are leading indicators and lagging indicators.
As much as pundits tried to scare everyone this summer, apparently in August there was enough demand for manufacturing to expand in the United States, and at a good clip. According to the Institute for Supply Management August 2010 report, we just had the 13th consecutive month of growth in manufacturing. It isn't all gung ho: 11 industrial sectors expanded in August, 5 shrank, and two were flat. That just means there is still room for improvement.
Put that in your cup of tea. Yes, there are a lot of people who want to sell their homes. Yes, people in general are more frugal than a few years ago, as they ought to be. Sure, the banks are still scalawags. On the other hand, global demand for U.S. goods is booming. The agriculture sector is strong. Retail is recovering. Hotels are starting to fill up again. Many companies actually are hiring. Of course some businesses continue to fail and to lay off workers; that happens even during booms.
The recession is dead. We are now in an up cycle. So buy what you need, and hire who you need to hire. Borrow what you need to borrow. After all, interest rates probably won't stay this low all that much longer.
There will always be business cycles, but hopefully individuals and businesses have learned a lesson from the causes of the latest recession that will stick in their minds. Hopefully most of us will borrow less and produce more. We will look for long term gains, not quick steals. We will think about investments carefully and avoid a herd mentality. And we will not be conned by banks, bureaucrats, or politicians.
Wednesday, August 25, 2010
Little New Housing Available in the U.S.
According to the gloomy financial news stories out today (for instance New Home Sales Drop to Record Low at CNN) the annually adjusted rate of new home sales in July 2010 was only 276,000, relaying data from the Commerce Department new housing report. (If not seasonally adjusted, that is 23,000 homes sold per month)
The sky is falling. Or maybe it isn't. The inventory of new homes was 210,000 or so at the end of July. This is in contrast to the vast inventory of used homes for sale.
Suppose that for, whatever reason, the U.S. economy begins to normalise this fall. That would return the annual new home sales rate to about 600,000.
Which means all of the current inventory would disappear at a rate of 50,000 homes per month, less however many homes per month could be built.
Another way to think about it is in terms of new homes per population unit. Divide the nation into 100 markets of 3 million persons per market. Divide the inventory into 100 parts. You end up with 2,100 new homes available for every 3 million people. Or 2.1 homes per 3000 people. Or 0.7 homes per 1000 people.
Sure, we could slide back into recession. But counting all the downside risks without looking at the upside risks is as foolish as investing by looking at only the upside.
Even the used housing inventory, as vast as it looks at the moment, would not amount to much if the economy started reviving.
In June many American business executives caught the I Don't Do Greek panic and paused in hiring and other expansion plans for July. But in talking with a variety of CEOs, or hearing them on analyst conference calls, most saw little impact on their actual sales in Europe. A couple said they did well in Germany, which turned out to predict the recent Good German economic statistics.
Panic, or even lack of confidence, can cause or exacerbate a recession. Good leaders don't panic, because it leads to poor long-term decision making. Predicting whether business leaders as a whole will panic is not easy art. A good assumption is that there are both downside risks and upside opportunities in the situation.
August numbers will be skewed by vacations. Watch the September numbers closely. If consumer demand and industrial production start rising again in the U.S., you won't have long to buy up stocks at low prices or scarce assets like cheap, newly built houses.
The sky is falling. Or maybe it isn't. The inventory of new homes was 210,000 or so at the end of July. This is in contrast to the vast inventory of used homes for sale.
Suppose that for, whatever reason, the U.S. economy begins to normalise this fall. That would return the annual new home sales rate to about 600,000.
Which means all of the current inventory would disappear at a rate of 50,000 homes per month, less however many homes per month could be built.
Another way to think about it is in terms of new homes per population unit. Divide the nation into 100 markets of 3 million persons per market. Divide the inventory into 100 parts. You end up with 2,100 new homes available for every 3 million people. Or 2.1 homes per 3000 people. Or 0.7 homes per 1000 people.
Sure, we could slide back into recession. But counting all the downside risks without looking at the upside risks is as foolish as investing by looking at only the upside.
Even the used housing inventory, as vast as it looks at the moment, would not amount to much if the economy started reviving.
In June many American business executives caught the I Don't Do Greek panic and paused in hiring and other expansion plans for July. But in talking with a variety of CEOs, or hearing them on analyst conference calls, most saw little impact on their actual sales in Europe. A couple said they did well in Germany, which turned out to predict the recent Good German economic statistics.
Panic, or even lack of confidence, can cause or exacerbate a recession. Good leaders don't panic, because it leads to poor long-term decision making. Predicting whether business leaders as a whole will panic is not easy art. A good assumption is that there are both downside risks and upside opportunities in the situation.
August numbers will be skewed by vacations. Watch the September numbers closely. If consumer demand and industrial production start rising again in the U.S., you won't have long to buy up stocks at low prices or scarce assets like cheap, newly built houses.
Friday, August 6, 2010
Back from Vacation
My vacation this year involved attending the marriage of my step son Evan on Whidbey Island near Seattle. Jan and I drove there with our dog, Hugo, staying at a La Quinta in Eugene, Oregon both coming and going. It is great that the hotel was dog friendly, and Hugo was a well behaved guest who liked walking in the part adjoining the hotel.
From Highway 1 all the way to Whidbey we saw roads being repaired, so I think the government infrastructure stimilus money is still, or maybe finally, at work. Hopefully the private industry workers improving the roads at public expense will also help revive consumer spending. We rented a house near the shore for a week and bought most of our provisions on the island, so maybe we helped the local economy there, while detracting from our home locale.
That said, I missed an important 10 days of economic reports. Jan had rented an Internet-free house; between that and the wedding preparations all I did was check my email and a few quarter results press releases for my clients.
Now I am back and starting to go over quarter results for the stocks I follow in the blog and at OpenIcon. The backlog list is: AKAM, CELG, DNDN, ONYX, HNSN, TTM, and MCHP. Next week we also have HILL and NVDA.
For me this is really homework: analyst conferences sometimes add insight to the numbers released, and sometimes don't. As usual I will post my analyst conference summaries at OpenIcon and post my commentary in this blog.
I have a few things to say about the economy, too, but first I want to catch up on business results.
From Highway 1 all the way to Whidbey we saw roads being repaired, so I think the government infrastructure stimilus money is still, or maybe finally, at work. Hopefully the private industry workers improving the roads at public expense will also help revive consumer spending. We rented a house near the shore for a week and bought most of our provisions on the island, so maybe we helped the local economy there, while detracting from our home locale.
That said, I missed an important 10 days of economic reports. Jan had rented an Internet-free house; between that and the wedding preparations all I did was check my email and a few quarter results press releases for my clients.
Now I am back and starting to go over quarter results for the stocks I follow in the blog and at OpenIcon. The backlog list is: AKAM, CELG, DNDN, ONYX, HNSN, TTM, and MCHP. Next week we also have HILL and NVDA.
For me this is really homework: analyst conferences sometimes add insight to the numbers released, and sometimes don't. As usual I will post my analyst conference summaries at OpenIcon and post my commentary in this blog.
I have a few things to say about the economy, too, but first I want to catch up on business results.
Friday, June 4, 2010
Bonds versus Stocks
Ordinary investors are still not alert to the danger of buying bonds. The potential to get negative returns from bonds, even when the issuing entities remain healthy, is well-known in theory. However, the long bull market in bonds, corresponding to the gradual decrease in inflation during the last several decades, has led to forgetfulness. That is why I wrote Bonds, Danger! on April 4, 2010.
Since then a number of articles have appeared reminding investors of this issue. But the recent Greek bond and Euro mini-crisis caused bond interest rates to drop, and prices to rise, yet again. In a double contradiction, this kind of sovereign debt crisis reminds us of the danger of bond defaults. Even the U.S. government could default on its bonds.
Today there was a very good CNN Money article on this issue, Bonds: Avoid the Next Great Bubble by Paul J. Lim. You should read it, unless you already understand this issue.
It is funny that the Greek bond crisis (it was a crisis for Greek; its effect on the global economy was mainly psychological) would cause people to dump stocks and buy bonds.
In military history it is a truism that, all other things being equal, the generals who fight the previous war lose. Apparently using the latest economic weapons, like mortgage derivatives, does not guarantee success either. It is important to know what has changed and what has not changed. Bonds were safe in the recent past, but they are not now. Stocks of good, profitable, growing companies are safer because they are a better value right now.
The theory that you should balance your portfolio between stocks and bonds is a good one. In a bull stock market it forces you to sell some of your stocks and buy bonds. In a bear stock market it should also force you to sell some of your bonds and buy stocks. The problem is that in a bull market there is incentive to delay selling stocks, and in a bear market there is an incentive to stay in bonds. So most investors wait until what would have been a smart move becomes a stupid one.
All that said, I'd rather be mainly in stocks than in bonds right now. The main risk to stocks is another macroeconomic downturn. There are two risks to bonds: the risk from rising interest rates and the risk that an economic collapse could cause bond defaults.
There is also the psychological risk with stocks. If you need to sell your stocks today, so sorry, you are going to get a bad price for them, or at least for all but a select few. There are not enough buyers in the market to price most stocks appropriately. This situation could continue for some time. But if the companies you own are profitable, and if you are investing long term, this should not be a problem. My companies, anyway, are earning good profits and socking away cash. The ones that are not paying a dividend could pay one. They can also use their cash to buy back stock, or to expand their business. A profitable company with growing profits can be worth a lot more than today's auction price would indicate. That is how you prosper: buy value for less cash than it is worth. [I also own more speculative companies that have not yet earned a profit, like Dendreon. That is a whole different category, not suitable to ordinary investors.]
Could I be wrong? Of course! An atomic war could start tomorrow. But atomic war has been a possibility every single day of my life. I prefer to bet on high probability events, like the continuing global economic recovery. Within that recovery some companies will be winners, some losers. That is why I like technology companies with global reach. Greeks may be buying less electronic devices right now, but they are more than compensated by Chinese and Indians buying more electronic devices.
Since then a number of articles have appeared reminding investors of this issue. But the recent Greek bond and Euro mini-crisis caused bond interest rates to drop, and prices to rise, yet again. In a double contradiction, this kind of sovereign debt crisis reminds us of the danger of bond defaults. Even the U.S. government could default on its bonds.
Today there was a very good CNN Money article on this issue, Bonds: Avoid the Next Great Bubble by Paul J. Lim. You should read it, unless you already understand this issue.
It is funny that the Greek bond crisis (it was a crisis for Greek; its effect on the global economy was mainly psychological) would cause people to dump stocks and buy bonds.
In military history it is a truism that, all other things being equal, the generals who fight the previous war lose. Apparently using the latest economic weapons, like mortgage derivatives, does not guarantee success either. It is important to know what has changed and what has not changed. Bonds were safe in the recent past, but they are not now. Stocks of good, profitable, growing companies are safer because they are a better value right now.
The theory that you should balance your portfolio between stocks and bonds is a good one. In a bull stock market it forces you to sell some of your stocks and buy bonds. In a bear stock market it should also force you to sell some of your bonds and buy stocks. The problem is that in a bull market there is incentive to delay selling stocks, and in a bear market there is an incentive to stay in bonds. So most investors wait until what would have been a smart move becomes a stupid one.
All that said, I'd rather be mainly in stocks than in bonds right now. The main risk to stocks is another macroeconomic downturn. There are two risks to bonds: the risk from rising interest rates and the risk that an economic collapse could cause bond defaults.
There is also the psychological risk with stocks. If you need to sell your stocks today, so sorry, you are going to get a bad price for them, or at least for all but a select few. There are not enough buyers in the market to price most stocks appropriately. This situation could continue for some time. But if the companies you own are profitable, and if you are investing long term, this should not be a problem. My companies, anyway, are earning good profits and socking away cash. The ones that are not paying a dividend could pay one. They can also use their cash to buy back stock, or to expand their business. A profitable company with growing profits can be worth a lot more than today's auction price would indicate. That is how you prosper: buy value for less cash than it is worth. [I also own more speculative companies that have not yet earned a profit, like Dendreon. That is a whole different category, not suitable to ordinary investors.]
Could I be wrong? Of course! An atomic war could start tomorrow. But atomic war has been a possibility every single day of my life. I prefer to bet on high probability events, like the continuing global economic recovery. Within that recovery some companies will be winners, some losers. That is why I like technology companies with global reach. Greeks may be buying less electronic devices right now, but they are more than compensated by Chinese and Indians buying more electronic devices.
Monday, September 14, 2009
To The Federal Reserve: Start Raising Interest Rates
The Federal Reserve should have set its "federal funds" rate at 0.25% at its last meeting. Unless there is a marked reversal in the economy, it should raise the rate to 1% in steps.
Confidence in the Federal Reserve is near zero at this point. We have had two major asset bubbles in less than a decade. While there were other reasons for the bubbles, the main reason the bubbles grew to catastrophic proportions was the failure of the Federal Reserve to raise rates quickly in response to the bubbles. True, there should have been better oversight of the mortgage industry and the derivatives based on it. But when an economy as a whole inflates unreasonably, it is the money supply and interest rates that need to be controlled.
The Board of Governors of the Federal Reserve current policy is to "maintain the target range for the federal funds rate at 0 to 1/4 percent." [See August 12, 2009 Federal Reserve meeting release]
One of the causes of the crash of 2008 was inadequate consumer savings. Because most consumers had little of no savings, when credit was reduced they had little or no ability to keep consuming.
Since the Fed lowered interest rates to deal with the crash it should have prevented, those who did save by putting deposits in CDs and saving accounts have been severly punished. True, they may be happy that they were not invested in stocks or speculating in real estate, but as time passes the punishment becomes more real. It must be particularly gauling to get a notice that you credit card interest rate has been raised to over 20% from the same bank at the same time your CD renewal rate is lowered to 0.5%.
There is something obviously corrupt, and diverging from free market pricing doctrines, when the Fed is lending to banks (at the discount rate) without charging interest, and the banks are turning around and charging over 20% interest to the citizens of the United State.
But if you can, forget about justice for a moment. Consider the economic implications of the Fed's current policy. Money costs nothing to those borrowing directly from the Fed. What are the chances that free money will be allocated in an economically efficient manner? Zero, the same as the interest rate.
The biggest problem, however, is that the Fed is signaling that it does not care about inflation. With global supplies of oil, grain, and other basic commodities likely to tighten quickly once the global economy starts expanding, the danger of inflation from commodities alone is high. In addition, the Federal deficit and debt are huge indicators of potential inflation.
It is unlikely that a Fed funds rate of 1% would derail a recovery, even if such a rate had been announced in August. Putting 1% gradually into place is no danger at all. The danger is that the Fed will, yet again, get behind the curve and then be forced to overreact. The even greater danger is that the Fed will get behind the curve and then fail to ever catch up without causing a crash, as happened in 1999 and 2007.
Even if the economic recover is gradual, there is no reason to have rates below 3% by the end of 2010. High interest rates reward savings. That is not just putting money in a savings account. That is thrift, doing things efficiently, doing without waste or luxury. High interest rates also punish borrowing, which is associated with economic inefficiency and waste.
You can let the Federal Reserve know what you think at Federal Reserve Feedback.
Confidence in the Federal Reserve is near zero at this point. We have had two major asset bubbles in less than a decade. While there were other reasons for the bubbles, the main reason the bubbles grew to catastrophic proportions was the failure of the Federal Reserve to raise rates quickly in response to the bubbles. True, there should have been better oversight of the mortgage industry and the derivatives based on it. But when an economy as a whole inflates unreasonably, it is the money supply and interest rates that need to be controlled.
The Board of Governors of the Federal Reserve current policy is to "maintain the target range for the federal funds rate at 0 to 1/4 percent." [See August 12, 2009 Federal Reserve meeting release]
One of the causes of the crash of 2008 was inadequate consumer savings. Because most consumers had little of no savings, when credit was reduced they had little or no ability to keep consuming.
Since the Fed lowered interest rates to deal with the crash it should have prevented, those who did save by putting deposits in CDs and saving accounts have been severly punished. True, they may be happy that they were not invested in stocks or speculating in real estate, but as time passes the punishment becomes more real. It must be particularly gauling to get a notice that you credit card interest rate has been raised to over 20% from the same bank at the same time your CD renewal rate is lowered to 0.5%.
There is something obviously corrupt, and diverging from free market pricing doctrines, when the Fed is lending to banks (at the discount rate) without charging interest, and the banks are turning around and charging over 20% interest to the citizens of the United State.
But if you can, forget about justice for a moment. Consider the economic implications of the Fed's current policy. Money costs nothing to those borrowing directly from the Fed. What are the chances that free money will be allocated in an economically efficient manner? Zero, the same as the interest rate.
The biggest problem, however, is that the Fed is signaling that it does not care about inflation. With global supplies of oil, grain, and other basic commodities likely to tighten quickly once the global economy starts expanding, the danger of inflation from commodities alone is high. In addition, the Federal deficit and debt are huge indicators of potential inflation.
It is unlikely that a Fed funds rate of 1% would derail a recovery, even if such a rate had been announced in August. Putting 1% gradually into place is no danger at all. The danger is that the Fed will, yet again, get behind the curve and then be forced to overreact. The even greater danger is that the Fed will get behind the curve and then fail to ever catch up without causing a crash, as happened in 1999 and 2007.
Even if the economic recover is gradual, there is no reason to have rates below 3% by the end of 2010. High interest rates reward savings. That is not just putting money in a savings account. That is thrift, doing things efficiently, doing without waste or luxury. High interest rates also punish borrowing, which is associated with economic inefficiency and waste.
You can let the Federal Reserve know what you think at Federal Reserve Feedback.
Tuesday, June 9, 2009
The Oil Price Oscillator
Most Americans have noticed gasoline prices have been jacked up for the summer driving season. Those who read the financial pages know there is a glut of oil and gasoline available. If the corporations that set pricing keep prices up, and demand remains low, the glut will still be there in September.
But if there is an economic recovery, either in the U.S. or globally, the current glut will work down to normal levels and then to shortages. Prices will get jacked up further at the pump. And that, in turn, should moderate any economic upswing. It might even bring consumer consumption of everything but gasoline crashing back down.
It is very possible that we are in a period of oil prices being the primary oscillator for the economy. That is, when oil prices are up, the economy will slow, stall, and then decline. Oil prices will then fall by a greater percentage than the economy as a whole. Which only allows the economy to repeat the cycle.
This is a limits-to-growth scenario. It assumes the economy can only grow so much without more oil as an input, because the price of oil determines how much of the economic pie is left for everything else.
Over time, oil prices should become less of a controlling factor. We have already seen some of this. The shift from low mile-per-gallon SUVs to smaller cars and hybrids is just one example of how the shift could take place in the long run.
Some economists and analysts will get out their spread sheets and try to make numeric predictions about exactly how oil and gasoline prices will affect the economy in the short run. When dealing with something as complex as the economy, using a rule of thumb is more honest than pretending you can predict with finer granularity. There are too many other factors affecting the macroeconomy, ranging from how the Federal Reserve sets interest rates to billions of one time decisions by individuals that are small in themselves but in aggregate create macroeconomic trends.
But if there is an economic recovery, either in the U.S. or globally, the current glut will work down to normal levels and then to shortages. Prices will get jacked up further at the pump. And that, in turn, should moderate any economic upswing. It might even bring consumer consumption of everything but gasoline crashing back down.
It is very possible that we are in a period of oil prices being the primary oscillator for the economy. That is, when oil prices are up, the economy will slow, stall, and then decline. Oil prices will then fall by a greater percentage than the economy as a whole. Which only allows the economy to repeat the cycle.
This is a limits-to-growth scenario. It assumes the economy can only grow so much without more oil as an input, because the price of oil determines how much of the economic pie is left for everything else.
Over time, oil prices should become less of a controlling factor. We have already seen some of this. The shift from low mile-per-gallon SUVs to smaller cars and hybrids is just one example of how the shift could take place in the long run.
Some economists and analysts will get out their spread sheets and try to make numeric predictions about exactly how oil and gasoline prices will affect the economy in the short run. When dealing with something as complex as the economy, using a rule of thumb is more honest than pretending you can predict with finer granularity. There are too many other factors affecting the macroeconomy, ranging from how the Federal Reserve sets interest rates to billions of one time decisions by individuals that are small in themselves but in aggregate create macroeconomic trends.
Wednesday, April 8, 2009
Inventory Corrections and Short Memories
My wife's business actually sells widgets. It is a micro-business, not even receiving her full time attention. She has no employees. And she just might be seeing, on a micro scale, the turn around of the American and global economies.
She makes jewelry. Most of what she sells she designed and is made specially for her by foundries. She packages the pieces and sells them wholesale to non-profit groups that use them either as fundraisers or for reward gifts. A good number of retail stores also buy from her. Almost everything she sells wholesales for $4 each. See her jewelry site.
When the faux-Depression panic hit last fall she noticed many of her customers ordered less than they had in the past, or not at all. Worried that she might get stuck with a bunch of inventory, she curtailed orders to her suppliers. We discussed it. I voted for keeping a good inventory because it is a microbusiness; the inventory value is pretty small, so the real risk is not having enough to keep customers happy when they do order. Her vote, the one that counts, was to do minimal reorders. Only reorder when actually out of an item. This can be a problem because is can take 6 weeks to get the foundry to fill an order for more parts.
Here we are in April, and she is complaining that all her money is going to be used to restock her inventory. She has almost lost large orders because of not having enough items in stock.
So now the foundries - she uses an American pewter specialist and an American glass blower - have orders from her. These are small businesses too, so even at her scale, that has an impact. They seem pleased to get the orders.
The economic statistics keepers tell us that business inventories have declined a lot since 2007. The question seeing these aggragate statistics does not answer is: are inventories low or high? Of course some businesses did not cut inventories enough, and may still be still cutting. Others must be finding themselves in the same position as my wife: they were too careful, too cautious. They need to restock.
With unemployment still growing, we can't be sure that we won't need another round of inventory cuts. But there are scattered reports that some of the companies that laid off people early are understaffed. For a while that will mean overtime expenses, but eventually it makes more sense to start hiring again.
I went to the birthday party of a retail store in Gualala (California) last Saturday. It was having a 40% off sale, that day only. The stuff there is what I call luxury items, optional items. Thrifty people don't shop there. I expected a gloomy party where people ate free food and drank free champaign and nothing much sold. Instead there was a line of women snaking through the store. They were clutching items they had been desiring for months. The platters of cheese and cupcakes were almost ignored. The demand is there; people who have not lost their jobs are looking for an excuse to spend.
More than 8% of the workers in America may be unemployed, but senior citizens are mostly just fine. Most followed the advice of conservative financial planners and got out of risky investments as they aged. Their CD's may not pay high interest rates these days, but the money is there to be spent if they want to.
I think American consumers have shown more restraint than they are capable of in the long run. I am all for thrift and restraint. I think you should avoid buying things on credit. But there are still plenty of American families with strong balance sheets, and there are more of them after a year of restraint.
I think we are going to see good consumer demand from March, and growing demand in April and May, taking the unemployment rate into consideration. Retail stores will be among the first to rehire, and in many areas new housing construction looks like it is on the agenda.
We could have avoided this down cycle by being less exuberant in the up cycle, but that is not the American way. We party hard and we crash hard. We are happy to leave it to the Fed and Congress to try to balance things out.
We have short memories. We forgot the tech bubble and jumped into the housing bubble. We'll forget this economic lesson in a few years as well.
Buy low, sell high. It is great for the professional investor, but we know what the masses will do. They sold when they were scared, when the market was low. Then they won't buy back in until they feel they are missing the new party.
She makes jewelry. Most of what she sells she designed and is made specially for her by foundries. She packages the pieces and sells them wholesale to non-profit groups that use them either as fundraisers or for reward gifts. A good number of retail stores also buy from her. Almost everything she sells wholesales for $4 each. See her jewelry site.
When the faux-Depression panic hit last fall she noticed many of her customers ordered less than they had in the past, or not at all. Worried that she might get stuck with a bunch of inventory, she curtailed orders to her suppliers. We discussed it. I voted for keeping a good inventory because it is a microbusiness; the inventory value is pretty small, so the real risk is not having enough to keep customers happy when they do order. Her vote, the one that counts, was to do minimal reorders. Only reorder when actually out of an item. This can be a problem because is can take 6 weeks to get the foundry to fill an order for more parts.
Here we are in April, and she is complaining that all her money is going to be used to restock her inventory. She has almost lost large orders because of not having enough items in stock.
So now the foundries - she uses an American pewter specialist and an American glass blower - have orders from her. These are small businesses too, so even at her scale, that has an impact. They seem pleased to get the orders.
The economic statistics keepers tell us that business inventories have declined a lot since 2007. The question seeing these aggragate statistics does not answer is: are inventories low or high? Of course some businesses did not cut inventories enough, and may still be still cutting. Others must be finding themselves in the same position as my wife: they were too careful, too cautious. They need to restock.
With unemployment still growing, we can't be sure that we won't need another round of inventory cuts. But there are scattered reports that some of the companies that laid off people early are understaffed. For a while that will mean overtime expenses, but eventually it makes more sense to start hiring again.
I went to the birthday party of a retail store in Gualala (California) last Saturday. It was having a 40% off sale, that day only. The stuff there is what I call luxury items, optional items. Thrifty people don't shop there. I expected a gloomy party where people ate free food and drank free champaign and nothing much sold. Instead there was a line of women snaking through the store. They were clutching items they had been desiring for months. The platters of cheese and cupcakes were almost ignored. The demand is there; people who have not lost their jobs are looking for an excuse to spend.
More than 8% of the workers in America may be unemployed, but senior citizens are mostly just fine. Most followed the advice of conservative financial planners and got out of risky investments as they aged. Their CD's may not pay high interest rates these days, but the money is there to be spent if they want to.
I think American consumers have shown more restraint than they are capable of in the long run. I am all for thrift and restraint. I think you should avoid buying things on credit. But there are still plenty of American families with strong balance sheets, and there are more of them after a year of restraint.
I think we are going to see good consumer demand from March, and growing demand in April and May, taking the unemployment rate into consideration. Retail stores will be among the first to rehire, and in many areas new housing construction looks like it is on the agenda.
We could have avoided this down cycle by being less exuberant in the up cycle, but that is not the American way. We party hard and we crash hard. We are happy to leave it to the Fed and Congress to try to balance things out.
We have short memories. We forgot the tech bubble and jumped into the housing bubble. We'll forget this economic lesson in a few years as well.
Buy low, sell high. It is great for the professional investor, but we know what the masses will do. They sold when they were scared, when the market was low. Then they won't buy back in until they feel they are missing the new party.
Thursday, March 12, 2009
Have We Hit Bottom Yet?
What every investor wants to know: have we hit bottom yet? Business people want to know that too. Should we lay off more people, buy that new ERP software, or cut that dividend?
Smart people will use a cover your bets approach. We have already seen a number of worst-case scenarios starting in 2007.
Typically, in the post-Depression recessions, the stock market averages started recovering before the rest of the economy. Stock markets are believed to be forward looking. But that may not be the case this time.
There are a number of differences between this recession and prior post-New Deal down cycles, and a number of similarities. Sorting them out may not tell them if we are at a bottom yet, but they can help us understand how to get our footing once there is a bottom.
Fortunately, many major corporations were cash rich going into this downturn, and are well-positioned to weather anything thrown at them short of the collapse of civilization. Some are taking advantage of their cash positions to buy assets cheap, which is what I believe investors with cash coming in should be doing right now.
Most people who are losing their jobs are getting unemployment compensation. More than any other New Deal reform, this tends to put the brakes on recessions.
The big obvious problems, of course, are banks and housing. The Federal Reserve System was set up to deal with banking credit cycle issues. Unfortunately the Fed is run by people, and in particular it was run for a long time by a certifiable idiot, Alan Greenspan. Alan drank the Free Markets are God kool-aid. If free markets were not sometimes a problem, we would not have needed the Federal Reserve in the first place. Free markets are not magic. They have their own mechanics, and don't care too much about human beings.
It is a tribute to the resiliancy of capitalism, the safety valves and safety nets of socialism that have been grafted onto it in the United States, and the good sense of most business persons that the crew of the likes of Alan Greenspan, Robert Rubin, Bill Clinton, George W. Bush, et al, actually did so little damage to our economy.
I am glad the American people, as a whole, started saving more money in 2008. Even though it hurt the holiday shopping season, even though it hurt the auction prices of some of my stocks. It was the right thing to do. Shopping on credit that has to be paid at high rates of interest is no way to run a family economic unit, and no way to run an economy. Lowered household debt as we go into 2010 will mean people will be paying less interest, and have more actual money of their own to shop with. I just hope we all remember this lesson.
Housing remains an interesting dilemma. As far as I can tell, there is no longer a surplus of housing in the U.S. as a whole, though some areas remain overbuilt, like the central California valley. If the banking system starts functioning in a healthy manner, surplus of houses for sale right now will shrink throughout 2009. In 2010 new home construction will become necessary in at least some areas. That in itself should get the economy back to normal.
But I don't feel the bottom under my feet yet. One more part of the down cycle has not really kicked in, and it could force us further out into the stormy seas. This is the bankruptcy cascade. Businesses can fall like houses of cards when this cycle starts. A business that seems solvent, with plenty of receivables to use to cover its payables, can be put in jeapardy if its receivables disappear in customer bankruptcies.
On the other hand, this is also a healthy, important part of business consolidation. Week, poorly managed businesses with insufficient profit margins or cash reserves get punished. Well-capitalized companies get a licking, for sure, but they can then pick up any paying customers of the losers and enter a new expansion cycle.
This is a stock pickers market. If you are in index funds, you are a fool. The only stocks worth buying now are those with large cash reserves built from profitable business practices. Those cash reserves stand for conservative management. They represent past profits, and they are the ticket to future profits.
Today Gilead (GILD) [I own Gilead stock] announced it will buy CV Therapeutics (CVTX). Gilead is your prototypical well-managed company. Even after it buys CV, it will have a huge cash balance. That's the way to do it.
Keep diversified!
Smart people will use a cover your bets approach. We have already seen a number of worst-case scenarios starting in 2007.
Typically, in the post-Depression recessions, the stock market averages started recovering before the rest of the economy. Stock markets are believed to be forward looking. But that may not be the case this time.
There are a number of differences between this recession and prior post-New Deal down cycles, and a number of similarities. Sorting them out may not tell them if we are at a bottom yet, but they can help us understand how to get our footing once there is a bottom.
Fortunately, many major corporations were cash rich going into this downturn, and are well-positioned to weather anything thrown at them short of the collapse of civilization. Some are taking advantage of their cash positions to buy assets cheap, which is what I believe investors with cash coming in should be doing right now.
Most people who are losing their jobs are getting unemployment compensation. More than any other New Deal reform, this tends to put the brakes on recessions.
The big obvious problems, of course, are banks and housing. The Federal Reserve System was set up to deal with banking credit cycle issues. Unfortunately the Fed is run by people, and in particular it was run for a long time by a certifiable idiot, Alan Greenspan. Alan drank the Free Markets are God kool-aid. If free markets were not sometimes a problem, we would not have needed the Federal Reserve in the first place. Free markets are not magic. They have their own mechanics, and don't care too much about human beings.
It is a tribute to the resiliancy of capitalism, the safety valves and safety nets of socialism that have been grafted onto it in the United States, and the good sense of most business persons that the crew of the likes of Alan Greenspan, Robert Rubin, Bill Clinton, George W. Bush, et al, actually did so little damage to our economy.
I am glad the American people, as a whole, started saving more money in 2008. Even though it hurt the holiday shopping season, even though it hurt the auction prices of some of my stocks. It was the right thing to do. Shopping on credit that has to be paid at high rates of interest is no way to run a family economic unit, and no way to run an economy. Lowered household debt as we go into 2010 will mean people will be paying less interest, and have more actual money of their own to shop with. I just hope we all remember this lesson.
Housing remains an interesting dilemma. As far as I can tell, there is no longer a surplus of housing in the U.S. as a whole, though some areas remain overbuilt, like the central California valley. If the banking system starts functioning in a healthy manner, surplus of houses for sale right now will shrink throughout 2009. In 2010 new home construction will become necessary in at least some areas. That in itself should get the economy back to normal.
But I don't feel the bottom under my feet yet. One more part of the down cycle has not really kicked in, and it could force us further out into the stormy seas. This is the bankruptcy cascade. Businesses can fall like houses of cards when this cycle starts. A business that seems solvent, with plenty of receivables to use to cover its payables, can be put in jeapardy if its receivables disappear in customer bankruptcies.
On the other hand, this is also a healthy, important part of business consolidation. Week, poorly managed businesses with insufficient profit margins or cash reserves get punished. Well-capitalized companies get a licking, for sure, but they can then pick up any paying customers of the losers and enter a new expansion cycle.
This is a stock pickers market. If you are in index funds, you are a fool. The only stocks worth buying now are those with large cash reserves built from profitable business practices. Those cash reserves stand for conservative management. They represent past profits, and they are the ticket to future profits.
Today Gilead (GILD) [I own Gilead stock] announced it will buy CV Therapeutics (CVTX). Gilead is your prototypical well-managed company. Even after it buys CV, it will have a huge cash balance. That's the way to do it.
Keep diversified!
Monday, November 17, 2008
A Best Case Economic Forecast
What am I doing saying this recession might be shallow and short? After all, I'm known as a doom and gloom kind of analyst. Does a company have a flaw it is hiding? It is my job to find it. I warned investors of the Internet stock bubble back in 1999, I even resisted my wife's plea to buy more California real estate in 2003-2005. I called oil prices a bubble in March this year (See Oil Bubble to Burst, March 11, 2008).
On the happy side, I do sometimes conclude that a particular stock may make more money than other investors think (Stocks covered by William Meyers). So I am doing this rosy economic forecast as an exercise. It is not a prediction.
It is always good to look at history before acting too certain of the trends based on current details. In American history the economy has gone back and forth between expansion and recession dozens of times. While there are non-American historic examples of total economic collapse, they are almost always due to wars, not to peaceful economic activity. So the question is not whether the nation will come out of a recession, but how deep it will be and how long it will last.
The current consensus is: deep and long.
The questions that needs to be asked are: what feeds the downward spiral, what breaks the down trend, and what starts a new upward spiral.
How did we get here? What broke the upward spiral of 2002-2006? What started us down?
It is generally accepted that the stock market was not to blame. We had a typical crisis of over production, concentrated in one sector. This was combined with a price bubble in the same sector, housing. After housing prices peaked and investors started trying to find real home owner types to unload their investments on, it became obvious to increasing numbers of potential homeowners that: 1. houses were not necessarily a good short-term investments and 2. by delaying making a purchase, they could save money.
The downward spiral of house prices corresponded with layoffs in the housing and real-estate industry. The rest of the economy was immune for a while, and if the finance crisis had not hit probably would have pulled us through without a recession. Aggravating the situation, however, was a bout of inflation, notably in the price of gasoline. This summer we saw the credit markets dry up as the bright-greedy-boys were forced to deleverage their bets. All this could have been prevented if Alan Greenspan, as Federal Reserve chair back in 2004, had paid more attention to the real economy and had spent less time kneeling in adoration at the great god Free Markets.
Now we have declining consumer spending, increasing unemployment, and a slowing world economy. The Fed is giving banks extremely-low interest rate loans but the banks are not lowering interest rates to the rest of us. Yesterday the sharks at Citibank even announced they were raising interest rates for their credit card customers.
Let me show you how to get a rosy scenario out of that.
First, Americans are saving more. Don't think of that as someone putting $100 a month into a credit union savings account at 3% interest. Think of it as millions of people who are lowering their credit card balances by $100 to $500 per month, and who are paying 20% a month in interest and fees. At our high end, after only four months a family has $2000 less in credit card debt than they would have had otherwise. Just from that $2000 in "savings" they are now going to save $400 per year in ineterest for the rest of their lives, money that would have gone to CitiGreedyCard. They have effectively given themselves a large raise.
Likewise, suppose a family realizes it now costs less to buy a home, in the long run, than to rent. Instead of buying a McMansion they buy something reasonable, a home built back in the 20th century. They start paying off their new 30 year mortgage. They build equity, remembering the lessons of 2007, and never touch that equity. Pretty soon rents have gone up, but they have that same monthly mortgage payment. Life looks good, and they have more cash to save or spend.
Throw some fuel on the fire: lower gas prices. While they are no lower than a year ago, and so won't really help, at least they are not sucking the blood out of the American consumer like they did for the past year.
The soup is looking good now. The Federal Reserve is trying to pump at least enough credit into the economy to allow people who are credit worthy to get mortgages on the homes they want. Unemployed people are milling around in large numbers, eager to find productive jobs.
As best as I can guestimate, we don't even have excess housing stock, on the whole, in the United States today. Every year many houses are lost to fire and other construction. Every year more immigrants arrive (want to solve the housing crisis in a few months? Let anyone on the immigrant waiting list who has the money to buy a house into the country immediately). The home construction industry has slowed way down lately, so as soon as mortgages can be obtained easily, the glut of new, empty housing should dry up in a few months [except in the Central Valley of California and a few other truly over-built areas].
Given all this, we could still see a thawing in the economy in time for Holiday shopping, although I would expect even a rosy scenario would have a flat period into 2009 before an actual expansion resumes.
Heck, maybe I'm not Mr. Gloom and Doom after all. Maybe I am just being realistic.
In any case, all investments (and not investing, too) carry risks, so ...
Keep diversified.
On the happy side, I do sometimes conclude that a particular stock may make more money than other investors think (Stocks covered by William Meyers). So I am doing this rosy economic forecast as an exercise. It is not a prediction.
It is always good to look at history before acting too certain of the trends based on current details. In American history the economy has gone back and forth between expansion and recession dozens of times. While there are non-American historic examples of total economic collapse, they are almost always due to wars, not to peaceful economic activity. So the question is not whether the nation will come out of a recession, but how deep it will be and how long it will last.
The current consensus is: deep and long.
The questions that needs to be asked are: what feeds the downward spiral, what breaks the down trend, and what starts a new upward spiral.
How did we get here? What broke the upward spiral of 2002-2006? What started us down?
It is generally accepted that the stock market was not to blame. We had a typical crisis of over production, concentrated in one sector. This was combined with a price bubble in the same sector, housing. After housing prices peaked and investors started trying to find real home owner types to unload their investments on, it became obvious to increasing numbers of potential homeowners that: 1. houses were not necessarily a good short-term investments and 2. by delaying making a purchase, they could save money.
The downward spiral of house prices corresponded with layoffs in the housing and real-estate industry. The rest of the economy was immune for a while, and if the finance crisis had not hit probably would have pulled us through without a recession. Aggravating the situation, however, was a bout of inflation, notably in the price of gasoline. This summer we saw the credit markets dry up as the bright-greedy-boys were forced to deleverage their bets. All this could have been prevented if Alan Greenspan, as Federal Reserve chair back in 2004, had paid more attention to the real economy and had spent less time kneeling in adoration at the great god Free Markets.
Now we have declining consumer spending, increasing unemployment, and a slowing world economy. The Fed is giving banks extremely-low interest rate loans but the banks are not lowering interest rates to the rest of us. Yesterday the sharks at Citibank even announced they were raising interest rates for their credit card customers.
Let me show you how to get a rosy scenario out of that.
First, Americans are saving more. Don't think of that as someone putting $100 a month into a credit union savings account at 3% interest. Think of it as millions of people who are lowering their credit card balances by $100 to $500 per month, and who are paying 20% a month in interest and fees. At our high end, after only four months a family has $2000 less in credit card debt than they would have had otherwise. Just from that $2000 in "savings" they are now going to save $400 per year in ineterest for the rest of their lives, money that would have gone to CitiGreedyCard. They have effectively given themselves a large raise.
Likewise, suppose a family realizes it now costs less to buy a home, in the long run, than to rent. Instead of buying a McMansion they buy something reasonable, a home built back in the 20th century. They start paying off their new 30 year mortgage. They build equity, remembering the lessons of 2007, and never touch that equity. Pretty soon rents have gone up, but they have that same monthly mortgage payment. Life looks good, and they have more cash to save or spend.
Throw some fuel on the fire: lower gas prices. While they are no lower than a year ago, and so won't really help, at least they are not sucking the blood out of the American consumer like they did for the past year.
The soup is looking good now. The Federal Reserve is trying to pump at least enough credit into the economy to allow people who are credit worthy to get mortgages on the homes they want. Unemployed people are milling around in large numbers, eager to find productive jobs.
As best as I can guestimate, we don't even have excess housing stock, on the whole, in the United States today. Every year many houses are lost to fire and other construction. Every year more immigrants arrive (want to solve the housing crisis in a few months? Let anyone on the immigrant waiting list who has the money to buy a house into the country immediately). The home construction industry has slowed way down lately, so as soon as mortgages can be obtained easily, the glut of new, empty housing should dry up in a few months [except in the Central Valley of California and a few other truly over-built areas].
Given all this, we could still see a thawing in the economy in time for Holiday shopping, although I would expect even a rosy scenario would have a flat period into 2009 before an actual expansion resumes.
Heck, maybe I'm not Mr. Gloom and Doom after all. Maybe I am just being realistic.
In any case, all investments (and not investing, too) carry risks, so ...
Keep diversified.
Tuesday, October 14, 2008
Rackable Systems (RACK) Hit by Economy
Rackable Systems issued a press release yesterday (October 13, 2008) stating customer purchases slowed down in September. This should not be a surprise; we will be hearing a lot of such statements in the coming weeks. In theory, since this is a known issue, stock prices have already tanked enough to more than compensate for it. Instead, just as Rackable (RACK) has had a major price hit today, we will probably see more individual hits corresponding with September quarter earnings announcements going forward.
Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.
Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.
I am a long term investor in Rackable Systems.
For more details, see
My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008
www.rackable.com
Rackable released quite a bit of good news along with the bad, and it bears looking at. They signed up 25 new customers in the quarter. Their customers are all large corporations that need energy efficient, powerful, and managable datacenters, so 25 is a very good number. New generations of products are available for Q4. This is on top of the deals with IBM and NetApp from earlier in the year.
Opportunities and dangers abound for Rackable. As the leader in designing energy-efficient large scale server systems, it must compete with much larger players like IBM, Dell, HP and Sun, who have all been improving the energy efficiency of their systems. Rackable has plenty of cash on its balance sheets, almost $200 million at the end of Q2, and it is highly focussed on its niche. Its annual sales guidance is now $275 to $300 million, scaled back from above $350 million. It has been losing money on a GAAP basis but stayed in the break-even range on a cash basis. All in all, with a market capitalization today of $224 million, it seems undervalued even by current market standards.
I am a long term investor in Rackable Systems.
For more details, see
My Rackable Systems (RACK) analyst conference summary for Q2 2008
Rackable Systems press release of October 12, 2008
www.rackable.com
Friday, October 10, 2008
America For Sale
This week we are seeing the largest turnover in the ownership of American corporations since the Great Depression.
We know who the people (and institutions) that are selling undervalued stocks are. They are people who are panicking, and people who have no choice because the stocks they are selling are their only source of cash to pay their debts on losses in mortgage-related securities.
But who is buying? Every sale requires a buyer. I don't have the best vantage point, but it sure looks to me like it is mainly petroleum cash coming into the market. I don't mean commodities investors fleeing the popping oil bubble (which I first wrote about back in Oil Bubble to Burst, on March 11, 2008). I mean the actual oil producers, mainly Arab nations, that have accumulated vast amounts of dollars (and Euros) that had not yet been invested.
Back in the 1980's we worried that the Japanese would end up owning the United States. They bought into U.S corporations, but mainly they bought land and buildings. In the short run they created a mini-bubble and got hurt, but those that kept their American real estate did well long-term.
Do I care that Arabs are going to own substantial portions of America's economy? No, it is part of the global economy. Only a few decades ago U.S. corporations owned much of Arabian oil production. The Arabs are not just lucky to have a lot of oil. They have worked hard, for decades, to develop their production capacity and their financial knowledge. They know the oil will run out eventually, so they are investing much of their returns, rather than spending them (not that they don't have plenty to spend, too).
Americans, as a whole, have been way too busy spending money and way too careless about making it. I think most Americans work reasonably hard, they just don't worry about the future enough to be bothered to save or invest. Some of us save, but we are more than balanced by the spendthrifts.
Today it looks like the future belongs to the Arabs, and maybe the Indians and Chinese. These United States of America are probably good for a comeback, but only if we create an economy that is not dependent on giving credit to spendthrifts to keep going.
We know who the people (and institutions) that are selling undervalued stocks are. They are people who are panicking, and people who have no choice because the stocks they are selling are their only source of cash to pay their debts on losses in mortgage-related securities.
But who is buying? Every sale requires a buyer. I don't have the best vantage point, but it sure looks to me like it is mainly petroleum cash coming into the market. I don't mean commodities investors fleeing the popping oil bubble (which I first wrote about back in Oil Bubble to Burst, on March 11, 2008). I mean the actual oil producers, mainly Arab nations, that have accumulated vast amounts of dollars (and Euros) that had not yet been invested.
Back in the 1980's we worried that the Japanese would end up owning the United States. They bought into U.S corporations, but mainly they bought land and buildings. In the short run they created a mini-bubble and got hurt, but those that kept their American real estate did well long-term.
Do I care that Arabs are going to own substantial portions of America's economy? No, it is part of the global economy. Only a few decades ago U.S. corporations owned much of Arabian oil production. The Arabs are not just lucky to have a lot of oil. They have worked hard, for decades, to develop their production capacity and their financial knowledge. They know the oil will run out eventually, so they are investing much of their returns, rather than spending them (not that they don't have plenty to spend, too).
Americans, as a whole, have been way too busy spending money and way too careless about making it. I think most Americans work reasonably hard, they just don't worry about the future enough to be bothered to save or invest. Some of us save, but we are more than balanced by the spendthrifts.
Today it looks like the future belongs to the Arabs, and maybe the Indians and Chinese. These United States of America are probably good for a comeback, but only if we create an economy that is not dependent on giving credit to spendthrifts to keep going.
Subscribe to:
Posts (Atom)
