I find it interesting that the term “Green Shoots” seems to have been eradicated in any official government comments regarding the economy. I am not sure why this is so, as the term itself seems rather innocuous.
There must be a reason for its demise, however…
SPX at 907.07 as this post is written
For those who didn’t read Ben Bernanke’s Commencement Address to The Boston College School of Law on May 22, I would like to highlight a few passages. I found the passages below informative and telling; I will let them speak for themselves, and might refer back to them in future posts.
The entire speech can be found here:
http://www.federalreserve.gov/newsevents/speech/bernanke20090522a.htm
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“Instead, I’d like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy. The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming. Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.”
also:
“The financial crisis that began in August 2007 is the most severe since the Great Depression, and it has been the principal cause of the global recession that began last fall. Battling that crisis and trying to mitigate its effect on the U.S. and global economies has dominated my waking hours now for some 21 months. My colleagues at the Fed and I have been called on to take many tough decisions, including adopting extraordinary and unprecedented policy measures to address the crisis.”
also:
“At the same time, because I appreciate the role of chance and contingency in human events, I try to be appropriately realistic about my own capabilities. I know there is much that I don’t know. I consequently try to be attentive to all points of view, to work collaboratively, and to involve as many smart people in policy decisions as possible. Fortunately, my colleagues and the staff at the Federal Reserve are outstanding. And indeed, many of them have demonstrated their own breadth and flexibility, moving well beyond their previous training and experience to tackle a wide range of novel and daunting issues, usually with great success.”
also:
“You are lucky also to be living and studying in the United States. There is a lot of pessimistic talk now about the future of America’s economy and its role in the world. Such talk accompanies every period of economic weakness. The United States endured a decade-long Great Depression and returned to prosperity and global leadership. When I graduated from college in 1975, and from graduate school in 1979, the economy was sputtering, gas prices and inflation were high, and pessimism–malaise, President Carter called it–was rampant. The U.S. economy subsequently entered more than two decades of growth and prosperity. The economy will recover–it has too many fundamental strengths to be kept down for too long–and the mood will brighten.”
SPX at 908.7 as this post is written
I get the feeling that many people believe that we will get many opportunities to resolve The Financial Crisis and the associated economic difficulties now present. In other words, should the already enacted interventions, stimulus plans, bailouts, etc. not work, we as a nation won’t be limited in our number of potential efforts and will be able to roll out still more at later dates.
I think, unfortunately, that this will not be the case. I believe that we have a limited time “window” in which we can resolve The Financial/Economic Crisis, and should we not do so, it will be resolved for us. I don’t believe that most Americans would find the latter alternative to be satisfactory, pleasing, or acceptable.
Disclaimer with this post: Please see the Special Comment found here, if you haven’t already seen it:
http://www.economicgreenfield.com/a-special-note/
SPX at 912.12 as this post is written
Much has been written in the financial press about the possibility of impending inflation, or even hyperinflation. These possibilities are discussed as being likely due to the “loose” monetary policy that has been enacted to combat The Financial Crisis.
If one were to believe that inflation has or will soon “breakout,” one would probably expect gold to perform strongly. At around the current 930 level, gold has “held its own” over the last year, but certainly hasn’t put in what might be called a strong performance, all things considered.
One measure that I follow is the ratio of HUI (an index of gold stocks) to that of the physical metal itself. One theory, perhaps the predominant one, is that the gold stocks should move, or at least verify, the price movements of the physical gold itself. Looking at the weekly chart (seen below) over the last 10 years seems to indicate that although gold has been relatively buoyant over the last year, the gold stocks, as seen by the HUI Index, have lagged since early 2008. One interpretation of this is that the gold stocks are not confirming the move in gold, meaning that gold may soon head down, which could indicate that inflation fears are overstated.
The inflation/reflation/deflation issue is critical to The Financial Crisis. Most people with an opinion on the matter think that deflation isn’t a major threat. While the HUI:Gold ratio is only one measure that can be used, it is important to see what it is indicating at the moment with regard to the inflation/reflation/deflation issue.
Chart courtesy of StockCharts.com
I’m sure everyone has seen the various charts depicting the stock market during The Great Depression to that of our recent period.
The comparisons that I have seen show a definite visual resemblance, and perhaps that is what is attracting such attention, as these charts have proven very popular.
From my perspective, I think that any resemblance is more happenstance than anything else. I don’t expect The Financial Crisis to ”play out” like The Great Depression, either in the stock market or fundamentally via the economy.
SPX at 923.72 as this post is written
I found this on David H. Smith’s “The Grayling” blog. I found it to be very informative and interesting. While it can be easy to dismiss this as one state’s woes, I think this type of analysis applied to all states would be an interesting exercise, as I’m sure the trends indicated have been happening more frequently than one would like to see:
http://www.the-grayling.com/2009/05/new-jersey-sorry-state.html#links
SPX at 946.21 as this post is written
I am posting a letter from Guy Haselmann, as I believe it is very well-written and illustrates how actions can promote an Economic Brownfield environment. My comments will follow the letter:
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To the Editor, May 6, 2009
The Obama administration is creating the next future crisis. Their handling of the Chrysler situation is irresponsible, injudicious, and will have monstrous ramifications. The President libelously scolded investment managers who owned Chrysler bonds for not taking the government’s “deal”. Some fund managers have even gotten death threats. Obama said the managers should “sacrifice like everyone else” and be “patriotic”. Personally, I find this outrageous. Let me explain.
A buyer of a corporate bond is really just a lender of money to the company, who in return for his money receives a “fair” interest rate from the company. Bonds are safer than stocks, and therefore lower yielding, because if the company runs into problems the bond holder gets paid back first. All investors understand that there is a clearly identifiable capital structure which dictates an investor’s priority position to getting paid back.
Anyone who lends money expects to be paid back. But, realizing there is the chance of default, a lender charges a certain interest rate that, in theory, compensates for the risk. In a corporate bankruptcy, there are often plenty of assets left that can be sold to pay back lenders (bond holders) in the order of their capital position, so while the common stock maybe worthless bondholders typically get some money back.
Investors, such as hedge fund and pension managers, bought Chrysler Bonds on behalf of their clients. Every investment manager has a fiduciary responsibility to protect and invest their client’s money to the best of their ability. The hedge fund manager did not accept the administration’s “deal”, plain and simply, because it was unfair, as they could have received much more in bankruptcy court.
Obama abused his power. He had no right to “steal” money from bondholders, and in turn, give it to the labor unions and then call the managers selfish. From what I have seen, hedge fund managers are typically some of the most philanthropic people in society. If you gave your money to a financial advisor, and rather than preserving your capital in a time of crisis, the advisor decided to “be patriotic” by giving it to a labor union, how would you feel? Would you be angry?
The Bush administration did something similar by stripping away the assets assigned to the senior secured bond holders of Washington Mutual, and then giving those assets to J.P. Morgan to help facilitate their takeover of the company. This horrendous decision served to exacerbate the financial turbulence last September. The decision turned the capital structure upside down, i.e., the common stock maintained value, while the senior most lenders were wiped-out. It resulted in a chaotic and broken financial market place.
Most market pundits blame the failure of Lehman brothers as the tipping point of market upheaval. I believe that the ignoring of Delaware corporate law and the decimation of the priority of the capital stack was the true catalyst which destroyed market liquidity, accelerated selling pressures, and made the rules of investing too unpredictable for rational investors.
The precedent being set by government will have unintended consequences and serve to change the behavior of bond investors going forward and ultimately cause a crisis of significant proportion. You see, trillions of dollars of corporate, municipal and sovereign debt will mature and need to be rolled-over (re-issued) in the next several years. By changing the rules of investing and instilling questions as to the true state of the hierarchy of the capital structure pay back, investors will forever price risks differently. Rather than demanding, say, a 6% yield for a corporate bond, an investor may now demand 16%. Such a re-pricing will make debt servicing prohibitively too expensive for many businesses to raise capital and consequently have a deep negative effect on the broader economy. Unfortunately, those most in need of funds will be unable obtain them.
The ultimate result of the Chrysler mess will mean bankruptcy for many smaller businesses, an economy that cannot grow as fast as desired, and a less efficient capital market and one which has wider spreads between borrowers of different credit quality. Any person or company without impeccable credit will now find it difficult to find a loan at a reasonable rate. And tragically, if foreign investors start to question the depth and safety of our capital markets, September 2008 will look like a mere hiccup.
Guy Haselmann, CAIA
Principal, Gregoire Capital LLC
http://www.thealternativepress.com/letters.asp?ID=207
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My comments:
This letter illustrates how actions and policy decisions can create an Economic Brownfield. Our economy has been dependent upon cheap and plentiful credit for years; and with the onset of The Financial Crisis, this need has only grown more acute. Actions (both already taken as well as contemplated) that restrict credit and/or make it more expensive will make an environment that makes it harder for businesses to exist and prosper.
During times of stress, like those presently encountered, it is easier to lose track of the “bigger picture,” i.e. what type of environment (Economic Greenfield v. Economic Brownfield) is being promoted by various decisions.
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As background on the Economic Greenfield v Economic Brownfield topic, here is my article “America’s Economic Future – ‘Greenfield’ or ‘Brownfield’?”
SPX at 944.96 as this post is written
I will comment frequently on Ben Bernanke, due to his position, but perhaps more importantly, because of his stated theories, beliefs, and ideologies. It seems to me that the handling of The Financial Crisis certainly has the “fingerprints” of Ben Bernanke all over it. In fact, I believe that perhaps no other person’s ideologies have ever played such an outsized role in the U.S. economy (and various other global economies) than those of Ben Bernanke. In my opinion, the U.S. economy (and many financial markets) since The Financial Crisis, can be viewed as an ideologically-levered extension of Ben Bernanke’s beliefs and understandings.
Is this a good thing? It gets back to two central themes of this blog; are we heading toward Sustainable Prosperity? And will America’s Economic Future be one of an Economic Greenfield or Economic Brownfield?
As for me, I will let my writings speak for themselves with regard to our handling of The Financial Crisis. As one can guess, I do respect his background, and believe that he has an exceedingly difficult position; but I don’t necessarily concur with many of his theories, interpretations, or actions.
SPX at 939.35 as this post is written
It seems as if more and more economic forecasters believe that the economy will progressively get better by year-end, but that employment will lag considerably. Often the “jobless recovery” theme is either overtly mentioned or at least hinted.
Can such a “jobless recovery” exist, given the current level of indebtedness at the personal, municipal, state and national levels?
I have never been fond of the concept of “jobless recovery” as I think it is a euphemism.
SPX at 944 as this post is written
John Taylor wrote the following article “Exploding Debt Threatens America”:
http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html?nclick_check=1
Although I don’t agree with some of his figures and reasoning, the central point is important: This debt level is a serious problem.
It also illustrates the difficulty of ridding ourselves of this level of indebtedness.
These issues will likely get greater attention now that sovereign debt levels are coming under renewed scrutiny.
Furthermore, a question that should be asked is whether amassing ever-greater deficits and debt levels is compatible with the concept of sustainable prosperity.
I’ve been meaning to write an article about our national debt, as I think the topic deserves much greater discussion.
SPX at 944.37 as this post is written