Archive for April, 2010

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The April Wall Street Journal Economic Forecast Survey

Friday, April 16th, 2010

The April Wall Street Journal Economic Forecast Survey contained a couple items of interest.

First, an interesting quote in the survey:

“”The Fed dropped the funds rate to near zero due to a fast and sharp decline in economy. Having avoided a 1930s-type scenario, is a 0% policy rate still justified?” said Joseph Carson of AllianceBernstein. “We criticize banks for offering teaser rates to buy homes, but the Fed is offering a teaser rate for the entire economy.”

Second, to the question “What effect will the overhaul have on the growth of nationwide health-care costs over the next 10 years compared to what would have occurred without it?” – only 15% indicated it will slow cost growth.

Also, for those unaware, about the survey:

“The Wall Street Journal surveys a group of 56 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted every month. Once a year, economists are ranked on how well their forecasts have fared.”

Otherwise, the detail indicates little change in economist expectations among major economic measures such as 10-Year Treasury Yield, GDP, CPI, etc.   This continues a many-months trend of little changes in economic expectations.  There was, however, a notable change in the expectation of the price of Crude Oil, with the new year-end price forecast of $82.94 vs. the previous month’s year-end forecast of $79.52.

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with the consensus estimates and much of the commentary in these forecast surveys.

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NFIB Small Business Optimism – A Few Comments

Thursday, April 15th, 2010

On April 13, the NFIB put out a notable press release.

Although the entire press release is worth reading, here are some notable excerpts:

“The March reading is very low and headed in the wrong direction,” said Bill Dunkelberg, NFIB chief economist. “Something isn’t sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.”

also:

“Plans to make capital expenditures over the next few months fell one point to 19 percent, three points above the 35-year record low.”

also:

“The net percent of all owners (seasonally adjusted) reporting higher nominal sales in the past three months improved 1 point to a net negative 25 percent. Widespread price cutting continued to contribute to reports of lower nominal sales.”

also:

““What small businesses need most are increased sales, giving them a reason to hire and make capital expenditures and borrow to support those activities,” said Dunkelberg.”

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The lack of increased revenues during our current phase of the purported recovery is very disconcerting.   I have previously written of this condition among larger firms, the most recent post of which was on January 29.

Another widespread facet which is disconcerting is the amount of discounting and pricing pressures.

In aggregate, many firms are finding this economic environment to be challenging, if not exceedingly so.  Of course, this stands in stark contrast to such economic measures such as strong GDP growth and robust financial markets.

I believe that many firms will continue to face very challenging conditions, and many will ultimately fail, unfortunately.  I base this belief on a number of factors including my overall economic assessment as well as business-specific factors.

Early in 2009 I wrote an article about the extreme conditions businesses are being subjected to and how they can adapt.  The article is titled “The Value of Business Analysis During This Economic Malaise.”

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Tax Increases – Cumulative Impact

Wednesday, April 14th, 2010

It strongly appears as if many taxes will increase at all levels (Federal, State, Local) in the near future.

We, as a nation, are in a quandary as taxation needs to increase if we hope to narrow deficits and debt; yet at the same time the adverse economic effects of these increases may be large, quite pernicious, and difficult to forecast.

I’ve previously commented upon various complex facets of the taxation situation given our current economic situation.  This can be seen in the February 23 post (“Tax Increases And Our Economic Situation – Follow Up“) and the “America’s Trojan Horse” article.

One would hope that some upper-level policy maker would be assessing the impact of having so many tax increases coming “online” at once.  The cumulative potential tax increases will likely be outsized and potentially staggering.

Of course, it is conventional economic wisdom that tax increases should not be done during a time of economic weakness.  This thinking is supported by research on the economic suppression caused by increased taxation (tax multipliers).

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BusinessWeek Article: “The Case For More Stimulus”

Tuesday, April 13th, 2010

The April 19 BusinessWeek has a story titled “The Case for More Stimulus,” along with this interesting accompanying chart (pdf), “Stimulus That Makes a Difference.”

Of course, those familiar with this blog know that I tend to disagree with this type of article on various fronts.

One question (among many) that supporters of further stimulus should be asking is if stimulus is working (and there is solid evidence it is not, as seen in many of my blog posts), then why is further stimulus necessary?

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Food Stamps

Monday, April 12th, 2010

I came upon some statistics with regard to food stamps.  The program is called “Supplemental Nutrition Assistance Program,” or SNAP.

The figures are impressively large, unfortunately.  As well, the growth rates are brisk.

Here is a table showing the Number of People Participating; as of January the figure is 39,430,724 up 22.4% from year-ago levels.

Here is a table showing the Number of Households Participating.

Of course, what is particularly disconcerting is not only the extent of participation in these programs, but the fact that this is yet another notable statistic that is getting worse well after the purported end of the recession.

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Asset Bubble Speech By William C. Dudley

Thursday, April 8th, 2010

Yesterday William C. Dudley, President and CEO of The Federal Reserve Bank of New York, gave a speech titled “Asset Bubbles and the Implications for Central Bank Policy.”

Although there are many parts of this speech with which I disagree, I found this speech noteworthy and interesting.

I could make exhaustive comments about many parts of this speech.  However, for now, I will comment on two aspects:

This speech continues the trend of other Federal Reserve (as well as a general widespread perception) statements that imply that there is an institutional belief at The Federal Reserve that there are no asset price bubbles in existence now, or at least not in the United States.  Dudley does say that “I am going to be a bit of a heretic and argue that there is little doubt that asset bubbles exist and that they occur fairly frequently.”  However, he does not name any that are currently in existence – he just talks of those in the past.

Our societal inability to spot and prevent asset bubbles is problematical.  As I have stated before, there are many bubbles in existence now, and they represent a grave danger to our economic system.

Another interesting statement that Dudley makes is the following, which is very noteworthy not only to investors but to others (including policy makers) as well:

“…a bias toward optimism may also play an important role. Studies have found that most people believe that they are above average in terms of their acumen, be it as investors, car drivers or in other activities.5 This overconfidence may cause some people to keep investing in the asset, even when they are skeptical about its valuation because they are overly confident that they will anticipate the end of the bubble and be able to get out in time.”

Dudley’s speech also references a 2008 speech by Frederic Mishkin of which I may comment upon later.

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The Threat Of Rising Interest Rates

Tuesday, April 6th, 2010

As seen on the following 10-year daily chart, the 10-Year Treasury Yield has been rising as of late:


chart courtesy of StockCharts.com

There is very little general expectation for a significant rise in interest rates.  In fact, the average economist forecast (as seen for the March 2010 Wall Street Journal Economist Survey) for the 10-Year Treasury Yield for December 31, 2010 is 4.24%.

I believe that there is high potential for interest rates to rise faster than expected, and the economic implications of such, should it happen, can hardly be understated.

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.  These falling interest rates are seen in the 20-year monthly chart shown below:


chart courtesy of StockCharts.com

Of course, a significant rise in interest rates would have adverse effects on many different economic areas, and would likely serve to impair and/or derail any hopes of an economic recovery.  Some areas that would be impacted by rising interest rates would include: real estate, all facets of lending, the bond market, corporate profitability, etc.  The list is virtually endless.

Furthermore, consumer spending would likely be impaired, as would the government’s ability to rather cheaply (and easily) fund the outsized deficits and debts.  As well, the government’s ability to “stimulate” the economy through deficit spending could largely be impeded.

I’ve previous mentioned (in a December 2nd post) that I believe that U.S. Treasuries are in a “bubble.”  While some have expressed the same view, it doesn’t appear as if there is recognition of the perilousness of such a condition.

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Productivity – A Few Comments

Monday, April 5th, 2010

Over the years, the topic of productivity has often been mentioned.

I’ve had thoughts on the matter for years.  An example is this “Letter To The Editor” I wrote concerning a BusinessWeek story back in 1995 (3rd letter down).

Here is a March 31 Washington Post story on productivity. As the article says, “One of the great surprises of the economic downturn that began 27 months ago is this: Businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.

That means high-level gains in productivity…”

Of course, increasing productivity is often a favorable situation to businesses.  However, it can also be a misconstrued statistic, as rising productivity can have various side effects that are less than desirable.

My issue with coverage of the issue is that increasing productivity is often hailed unequivocably as a favorable occurrence, with no discussion as to the negative side effects.

Here is a simple example:  A high-level employee who, because of extensive layoffs at his firm, is now forced to perform entry-level tasks critical to the firm because if he doesn’t perform them, no one else will.  Of course, the firm is more “productive” after the layoffs because it is maintaining sales with fewer employees – but obviously having a high-level employee doing entry-level work is inefficient.  As well, think of all of the responsibilities and activities this high-level employee has to put off or ignore at his higher level so he can perform the entry-level tasks – as well as other deleterious issues arising from this gain in productivity.

I could write extensively about productivity, as it is complex, very important and far-reaching in many ways to what is currently happening in American business…

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Stock Market Capitalization As A % Of GDP

Thursday, April 1st, 2010

Recent statistics indicate that the stock market capitalization as a percentage of GDP appears to again be over 100%.

This is an elevated level from a historical perspective.

I’ve written of this metric before in an article titled “Does Warren Buffett’s Market Metric Still Apply?”

I feel that for many reasons this is an important gauge of stock market valuations.

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