Notes on the Economy|Part 5

Well just some odds and ends...
Private sector adds 130,0000 jobs in Jan., ADP says

For Clinton, Government as Economic Prod

No relief so far from corporate earnings S&P 500 companies faring worse than forecast; technology is a highlight

The Rise of Systemic Financial Risk MIT's Andrew Lo describes how one rogue trader can impact global markets.

DoJ interested in reviewing Microsoft-Yahoo deal: report

Google downgraded on increasing risk profile

Microsoft-Yahoo deal draws mixed reactions Size of proposed merger causes some concern among analysts

No relief so far from corporate earnings S&P 500 companies faring worse than forecast; technology is a highlight

Microsoft or Bust for Yahoo!

Microsoft hopes to join forces against Google

Yahoo shares stretch gains after Microsoft bid

The wrong prescription Commentary: Washington's stimulus won't help the economy

Notes on the Economy|Part 4

I am presently taking a course entitled "Macroeconomic Policy & Financial Markets" and in the first chapter of the Textbook it talks about dealing with all the clutter of news or how the information is provided in such disjointed and random patterns that any broader analysis of Macroeconomics is tough at best. So without further ado let me look at the chaff and see if any wheat is there...

Let me at least start off with some good news inU.S. Dec durable goods orders surge 5.2%! But of course employment in manufacturing may still be going down during this time. I can only hope that some day that Libs (like Thom Hartmann) understand that our manufacturing base is still on a long term upward trend and we produce more now than we ever have. It is only that employment in manufacturing has gone done. Just think what happened to all the farmers in our economy over the last 2 to 3 hundred years.

I expect this to be spun by some nihilists to say RECESSION:IMF sees severe U.S. slowdown, but no recession. Most indicators for the past 3 months have already indicated a slow down in the US economy. I did like this comment by Johnson:

The global economy will not be immune from the effects of a U.S. slowdown, the IMF said. "Reports of decoupling have been greatly exaggerated," Johnson said.

Yes the world is dreaming. And the nihilists here are praying hard that we lose power in any form possible, but just as long as it does not effect them.

Of course if the nihilists pray hard enough, maybe their wish will come true. Of course then they will blame someone else if that happens. Which brings us up to a nice little argument entitled Recession Worries Help Fuel Recession. I agree with the economic analysis but I disagree with his gun analogy. Benjamin starts out talking about crime reporting but then says getting guns does not make a person safer. While the later may be true that is comparing oranges and apples.

For a look at how the last theory looks in real life the following link is a good read (even if from just a CPA): Is the Downbeat Business Press Right About the Economy?

The following article points out some slowing that occurred over 2007 inU.S. GDP slows to 0.6% growth in fourth quarter. But this does count as a recession and even with strong head winds in the housing market we are still making ground forward. Anyway a short article so here it is:

The U.S. economy slowed sharply in the fourth quarter, growing at a 0.6% annual rate, the weakest growth since the economy was pulling out of recession in 2002, the Commerce Department reported Wednesday. The growth rate was lower than the 1.1% expected by economists. The economy grew at a 4.9% pace in the third quarter. Consumer spending and business investments slowed slightly in the fourth quarter. Investments in houses fell at the fastest rate in 26 years. Exports grew at a slower pace. For all of 2007, gross domestic product grew 2.2%, the slowest growth since 2002. GDP increased 2.9% in 2006.

Remember from my Dweeb of the Week and how PGL talked about the dangerous drug of tax and spend through the excuse of the Balanced Budget Multiplier. PGL also made this comment in the comments section:

2slug - you are correct. The impact of a $1 cut in government spending is larger than the impact of a $1 tax cut. Alas, my link did a better job of this history behind this theorem than the exposition of the theorem itself. So thank you for adding the exposition, which is a point I should have made more clearly.

I guess I understand the difference they are trying to point out that the marginal propensity for imports of consumers is higher than the government outlays. But that is just the first round in the multiplier and even there many national defense parts are contracted out also. There is also the effect that consumers would also save (MPS) part of the tax rebate but again we seem to be talking fractions and effects that may be minimal at best. I also question the impact statement. A $1 of less government spending will be a negative effect and $1 tax cut is a stimulus. Ultimately, this stimulus may be more psychological than anything else. Not to even say that is bad.

The following article seems to take a different approach to the tax cut debate Why Tax Rate Reductions Are More Stimulative Than Rebates: Lessons from 2001 and 2003. But I will have to wait to explore this article more in another post.

And now for something completely different...Societe Generale slammed by $7B fraud. In the end this may not affect the economy much but this does put into question France's regulatory agencies and Societe Generale for not paying more attention to what a bank was doing as well as a client. Luckily in our economies now, there will be steps taken to mitigate contagion effects on the economy/markets.

So far I think Ben Bernanke is doing as good as job as possible unlike someone at Motley Fool in Why Bernanke Was Wrong. Not sure what industry he works in, but I would just advise not to throw bricks in a glass house...


Links:
Robert Reich on the credit crisis

House Passes Economy Stimulus Package

Deal Reached on Tax Rebates for Stimulus

Stimulus deal announced by White House, House leaders

Close Nomination for Dweeb of the Week by Angry Bear

Well the following got me wondering,The Weak Economy and Presidential Politics: Could Someone Tell RUDY About the Balanced Budget Multiplier? Why would you tell a candidate about such a minor economic theory? In an open economy where much of consumer expenditures are import products, then even the basic Keynesian multiplier effect is in question. If it it hard to convince Liberals about the multiplier effect then what is the chance of them understanding the BBM? CATO states that about 35 cents are returned over the long term for a one dollar deficit spending through tax cuts. The CBO gives even less returns of about .7 cents for a dollar of deficit spending. So how much will a BBM increase income while not increasing inflation?

With all the recent talk about combating the supposed oncoming recession, Adam Nagourney ponders whose candidacies this will help most and suggests this will help Romney and Clinton. Why Romney? Well I guess the public thinks a business background means one makes great economic decisions (banging my head against the wall). And Senator Clinton was First Lady when Bill Clinton convened and actually listened to some very good economic advice (more on this later).

Well, I will be more comfortable with the economic decisions of a country from a business leader than say a career politician, housewife, doctor and especially a Lawyer for 35 years. Some careers can warp peoples perceptions of the economy. While I am sure Clinton had some good advisers, in 20/20 hindsight, he should have increased taxes more and done more to reduce the debt and not resisted the balanced budgets that the Republican Congress had presented.

Nagourney notes that some Republicans want fiscal stimulus in the form of tax cuts, while some Democrats want more government spending. Senator Obama’s call for tax rebates has me wondering whose nomination he is really seeking. As we talk about deficit financing, we should give Andrew Samwick some time at the microphone:

Forget the "stimulus" label, this is merely additional deficit spending. There is no discussion of repaying the money through higher taxes in the near term. Based on the President's remarks this morning, the deficit bill will be for about $150 billion. So this proposal is just another $150 billion of some future generations' resources that we will be using for our own consumption today. Why are we entitled to pass them this additional debt?

Yes, some good points that PGL and Samwick (Fiscal Stimulus? We Don't Need No ...). Which brings up my point when the economy was actually overheating with unemployment figures below 4% and the creations of bubbles that we faced in equities (Dot-Com bust) and housing Clinton should have raised the tax levels. As I have stated before, I think the Fed has very little ability to control bubbles but the US Federal Government does have the ability through taxes and incentives to head off some of the effects of bubbles.

Former Mayor Rudolph W. Guiliani of New York was more sketchy as he answered questions about how he would handle the financial upheaval. Addressing a reporter he knew from New York, he pointed to his experience as mayor in suggesting that he was prepared to handle the crisis, but offered no details on what he thought should be in a stimulus package, or what taxes should be cut. “Congress and the president should do a stimulus package and they should do a spending reduction package,” he said. “You’re familiar with that; we used to do that in New York.”

Cutting government spending is not demand stimulus. Of course, RUDY wants to cut taxes but does he not get the balanced budget multiplier, which basically says that if we cut government spending by the same amount as we reduce taxes, then aggregate demand will decline.

But how much is this effect going to be? There could also be a question whether a Fiscal Stimulus a good move now? I would doubt that it would be more that 1% effects. PGL also fails to understand Supply-Side Economics where the long-term effects of an over-bloated bureaucracy leads to lower long-term economic growth. Thus Rudy seems willing to take the short-term risk and shot for the long-term benefits.

OK, back to the Clinton era of Rubinomics where the policy dilemma was how to cut the deficit but also stimulate aggregate demand. One idea, which I’d hope someone might float, might be to accelerate government spending programs but not increase long-term government spending. We might also try to backload any tax increases. The idea would be to move the sum of private and public consumption forward as we promise to those who are making investment decisions that we will get our fiscal house in order and hopefully later increase national savings. That might actually encourage investment rather than crowd it out.

Yes, some good suggestions here. But I do have to question how much "crowding" out actually happens in our open economy?

Andrew Samwick is not alone in his disdain for fiscal stimulus as the primary tool for increasing aggregate demand as Greg Mankiw has had several excellent posts on why we should be relying more on monetary policy. Greg even found a 1994 quote from Paul Krugman:

When monetary expansion is ineffective, fiscal expansion...must take its place. Such a fiscal expansion can break the vicious circle of low spending and low incomes, "priming the pump" and getting the economy moving again. But remember this is no by any means an all-purpose policy recommendation; it is essentially a strategy of desperation, a dangerous drug to be prescribed only when the usual over-the-counter remedy of monetary policy has failed.

A dangerous drug indeed and if we took the medicine prescribed by Dr. RUDY, it would have the opposite of what is the desired effect.

I think we do rely more on Monetary Policies, but as Paul Krugman points out if that fails we should see if Fiscal Policies can help out. Of course what is worst is if Fiscal Policies and Monetary Policies are struggling in opposite directions, like in a row boat with both rowers facing each other. Now there are times when they may be faced in opposite directions as when stagflation appears in an economy as Reagan faced in the early 80s.

As far as the dangerous drug, I think an over-bloated government bureaucracy may be the most dangerous drug of all. And lastly, he may be right that we have gone to the well of Fiscal Stimulus too many times and not enough times of putting back what we took out. (I tried hard to not mix metaphors.) LOL.

Links:
Proposed Fiscal Stimulus: My View

Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations (Paperback) by Paul Krugman

Balanced budget

GICS Group Returns Last Week|01-22-08

We were wondering if anyone would be interested in such information?

This information we also have for Sectors (Higher Level), Industry and Sub-industry.


Misc Links:
Bernanke Hits the Panic Button

Bush Calls for $145 Billion Economy Plan

Bush Calls for $145 Billion Economic Aid Package

Notes on the Economy|Part 3

As I expected some negative reactions in sympathy to the other markets as the US markets opened. They had two turns at the apple of fear and it was bound to affect us. So U.S. stocks step back from large spiral downward Emergency Fed move helps, but doesn't completely reassure market and Wall St. nose-dives, Dow briefly off over 450 points+. Maybe good that I woke up at 7:30 PST time today to give the market some gyrations before looking at my portfolio. So some of my automatic trades were traded and then I was happy to sell for a profit as soon as I woke up. Overall I actually have an up day!

Paulson gets into the act: Paulson calls for swiftness in stimulus plan.

NEW YORK (MarketWatch) -- U.S. Treasury Secretary Hank Paulson said Tuesday he's moving to enact an economic stimulus plan "as soon as possible." He said he's optimistic that a plan can be carried out with Congress "long before winter turns to spring." Paulson called for swift, robust, broad-based and temporary fix for an immediate impact on the economy. Paulson said his team has been monitoring the global sell-off in stocks. Paulson said that looking ahead, unemployment remains low and that the "structure of our economy is sound and our long-term economic fundamentals are healthy."

Of course the big news is that: Fed cuts rates 75 basis points in emergency move.

With the move coming just eight days before the next scheduled meeting, "there can be no doubt that the timing of this morning's move is aimed at supporting global financial markets after yesterday's global equity meltdown," wrote Joshua Shapiro, economist for MFR Inc.
Some traders said the Fed's move sniffed of panic. "I think that there's an element of thinking that, if the Fed is so worried that it is cutting rates, then that is feeding into fears that the U.S. economy is in really bad shape," said David Page, a strategist at Investec Securities in London.
"I had no idea that back-stopping speculators and hedge funds was part of their mandate," wrote Barry Ritholtz, CEO of Fusion IQ. "All the Fed did was prevent a healthy capitulation" in the stock markets.

While this move seems pretty drastic, there was some talk of expecting a 3/4% drop in rates at the normal Fed's meeting. And also the article noted the actions of the Canadian Central Bank.

As expected, the Bank of Canada cut its key overnight rate by quarter percentage point to 4% at its regularly scheduled meeting.

I think this last article is worth noting also at Stock Futures Gyrate After Fed Move.

Dow Jones industrial futures, down more than 500 points, or more than 5 percent, before the Fed move, were fluctuating violently an hour before the start of trading, but improved to a level where they were down 206, or 1.70 percent, to 11,900.

The Fed move was unsurprising, given that world stock markets were falling precipitously the past two days, and that U.S. stocks had tumbled last week amid growing fears of a recession in the United States. Still, the markets are still quite anxious, not sure that even interest rate cuts will lift an economy slammed by an ongoing housing and credit crisis.

Yes, the world wide markets had two chances to create fear. And we only have to wait for the greed to set in sometime now. And banks are still feeling the PAIN:

Bank of America Corp. said its fourth-quarter earnings fell sharply amid credit losses and weak investment banking results. Profits at the bank declined to $268 million, or 5 cents per share, from $5.26 billion, or $1.16 per share, a year earlier.

Meanwhile, Wachovia Corp. said its fourth-quarter earnings fell 98 percent after the bank wrote down $1.7 billion in the value of certain portfolios and set aside $1.5 billion to cover bad loans. Earnings fell to $51 million, or 3 cents per share, from $2.3 billion, or $1.20 per share, a year earlier.

To end up with EPS of 5 and 3 cents sounds strangely like they planned how much to write off exactly-maybe expect more write-offs. No one wants to be unprofitable even for a quarter.

The following article did give me some thoughts on that the "Economy" created a self fulfilling prophesy. There was an expected recession so one was created even if we did not even experience it. Fed slashes key rate to 3.5%

The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, to 3.5 percent from 4.25 percent.

Well we have to wonder if as many "resets" on ARMs and other variable interest rate loans will now go into effect? Thus the fear of a housing/credit crisis lead to actions that may mitigate the harmful effects. We just have to hope that this did shake up those that should have known better. And of course as far as self-fulfilling prophesies CNN entitles this category of articles as Recession Watch 2008

Misc. Links:
Wall Street Mitigates the Pain

'Shortsighted' investment pros blew it: Poole Economy strong enough to avoid recession, St. Louis Fed chief says

Text of FOMC statement

Notes on the Economy|Part 2|Melissa...

I think it is always important to note that when looking at one day's performance we should take it with a grain of salt until we can confirm its biasness towards the overall direction of the economy. That being said let us look at some news today:
British shares in worst fall since Sept. 11 attacks FTSE 100 index drops 323 points as miners and banks weigh

The U.K. FTSE 100 index (UK:UKX: news, chart, profile) declined 5.5%, or 323.5 points, to 5,578.20, led by financials including the Royal Bank of Scotland (UK:RBS: news, chart, profile) , which dropped 8.2%, and mining giant BHP Billiton (UK:BLT) which fell 8.7%.

I do note it is interesting that their market took the biggest dive on what happened in the USA more than even their 7/7 and airline threats. It was also noted that other European Markets were down sharply with Economic fears cuff Asia; India, Hong Kong slide Recession fears spark heavy selling; Japan, China, South Korea also slump. And from the last link this interesting quote:

"The decoupling between the U.S. and Asian economies is still in progress. Though the U.S. growth rate has been declining, the growth of exports from Asia is steadily growing in double digits," said Yuihama.

I hear people talk about this supposed decoupling but we live in a global economy now and it is unlikely that any of the actors are going to suddenly be isolationist or enact autarkic policies as Jagdish explains how they fail miserably on all counts. If it worked then Cuba and North Korea would be the richest countries in the world. But I should still try to find out the exact way that some people are using this phrase and I am sure it is different than the common misperception of it is. Which brings me to a conversation that Loganthor and Melissa are having at Thom's.
Melissa:

Looks like the Europeans are NOT too impressed with Bush's tax package either.

Loganthor:

Not that I care what they think.

Just out of curiosity.... anybody in UK have any plan of their own on how to fix the US economy?

Melissa:

Why would they care about fixing the US economy in the UK, they have their own problems.

I believe what is happening in the UK, is that they are trying to remove themselves from US association, and move more towards stronger European unity. My own feeling is, is that they are not too far off from converting to the euro, of course that will be the kiss of death for the USD.

(Boy, I miss Ron, he could add so much to this conversation.)

If we are too stupid to figure it out ourselves, than I dare say we deserve the economic mess we are in.

Watch the US markets tomorrow, should be interesting (glad I don't have anything in this market at the moment).

Thanks Melissa for the kind words, but maybe this is for the better. I got tired of ren's BS and living under different set of rules. Now I no longer have to abide by rule 10 or any rule for that matter that the fascist Thom can devise.

As far as being impressed, we in the USA are not here to impress them. We have to do what is prudent in what we do. The US was just criticized for lowering interest rates that could lead to the exchange rate going against the US dollar and increasing inflation in the US. So like usual we will not be able to satisfy the naysayers or nihilists. But as I noted before in Random Notes on the Economy, I like the use of fiscal stimulus and monetary policy working together to avert a possible recession. It must be noted that Fiscal Policy has lost much of its ability to control the economy since of a more open economy now, but it would be good that both economic arms of the Government work in the same direction. But maybe this is not enough considering that we are probably constrained since we have gone to the well too many times and ran up too much of a bill to continue to only use Fiscal stimulus to an economy without also using the brakes when it is needed also. (Meaning raising taxes or revenues when the economy becomes overheated-especially with respect to sectors.)

But I can say without a doubt the EU and UK is concerned about the US economy and they have followed these goals for a long time. Including in 1987 when the US dollar fell by 40% (85-86), Europe quickly stepped in and with various nations prevented further declines.

Lastly, I am not sure why Melissa does not understand certain things that I have emphasized to her but she still holds some views about currencies that run against any knowledge of the subject. Even if the UK adopts the Euro it will really mean not much to the US Dollar. Maybe a slight reduction of reserves of dollars since they can rely more heavily on the central banks of Europe to overcome any shortfall in currencies. But this process of adopting the Euro is not just a flick of the switch and nothing has even hinted they are ready to have a hard peg to the Euro anytime soon. I already had linked to creation of monetary unions on my final exam.

Ultimately, yes Tuesday could be an interesting day in the market. But we do have another round of worldwide markets before the US opens up tomorrow morning. And another thread at Thom's is a link to the Canadian news talking about the Canadian market in: TSX plunges more than 600 points.

Weighing on the benchmark Canadian stock index on Monday was a big drop in the price of oil. The price for light sweet crude oil for February delivery was down $1.95 US a barrel at $88.62 US a barrel.

Gold prices also plunged $19.50 to $862.20 US an ounce.

Well what may be bad for Canadians may actually be good for the USA. And on a positive note, if the USA slows down growth then I guess we will be consuming less hydro-carbons.

Anyway, take care Melissa. I did want to ask if you are going to own a home in London or rent?

PS: Sue provided the following link at BBC concerning Global shares tumble on US fears.

Dominique Strauss-Kahn, the head of the International Monetary Fund, said the global economic situation was "serious" and that all countries in the world were suffering in the wake of a slowdown in US growth.

Well so much for being disconnected from the US markets.

The state of the US economy is crucial for many of Europe's and Asia's biggest companies because it is one of their biggest export markets.

Yes, not likely to be completely independent of the US ripples at least for the foreseeable future.
*******************************
Well now we are into the Tuesday market performances we have the following article: Asian stocks extends losses into a second day.

Hong Kong's Hang Seng Index slumped 6.2% to 22,347.02 in the early minutes, after tumbling 5.5% in the previous session. The Hang Seng China Enterprises Index plummeted 8.1% to 12,440.57.
Japan's Nikkei 225 average tumbled 3.9% to 12,800.90, while the broader Topix index skidded 3.5% to 1,248.61. Earlier in the day, the Nikkei dropped as low as 12,674.57 -- its lowest level since September 2005.
Australia's S&P/ASX 200 extended losses into the 12th straight session, slumping 5% to 5,303.70 and New Zealand's NZX 50 index lost 2.6% at 3,553.20, while South Korea's Kospi shed 3.9% at 1,617.23.
China's Shanghai Composite, which fell more than 5% in the previous session, sank 2.6% to 4,783.42, while Taiwan's Weighted index tumbled 5.6% to 7,658.71.

OK, now Indian news has hit the wires as in: India's Sensex tumbles 11.5% in early minutes, trade halted

Misc:
U.S. jobless rate jumps to 5% as payrolls grow 18,000

WASHINGTON (MarketWatch) - The unemployment rate shot up to 5% in December as job growth stalled, a sign that the U.S. economic slump has spread to the labor market. U.S. seasonally adjusted nonfarm payrolls rose by 18,000 in December, the weakest job growth since August 2003, according to a survey of thousands of businesses. Job growth was revised up by a total of 10,000 in November and October. Economists were expecting payrolls to increase about 58,000 in December. Private-sector payrolls fell by 13,000, the biggest decline in more than four years. A separate survey of households showed employment plunging by 436,000, marking the biggest decline in five years. The number of unemployed adults rose by 474,000, pushing the unemployment rate up to 5.0% from 4.7%.

Jobless rate jumps to 5% as payroll growth stalls December nonfarm payrolls rise 18,000, weakest gain in more than four years

Flipped out Even as teens shun work force, job opportunities await

Links to Thom's:
Canadian Stock Markets Down 500pts.

(Boy, I miss Ron, he could add so much to this conversation.)

Random Notes on the Economy|Part 1

Interesting words from our Fed chairman atStocks Fall After Fed Speech. Seems strange that someone from the Fed is talking about Macroeconomics in the short term to the Legislatures. Not that I do not think that the Federal Government should not be involved in such short term Macroeconomics, but just a little surprising.

For a more complete report on these issues let me turn to:Bernanke backs fiscal stimulus if quick.

Bernanke said that while fiscal stimulus measures could help give the economy a boost, it was essential not to compromise longer-term budget discipline. He also warned there was a danger in moving too slowly.

"Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving," he said, adding it should also be "explicitly temporary."

Being somewhat of a Keynesian Economist, I would have to agree with his analysis 100%.

This article does show some slowdown in one segment of the market Housing starts plunge 14% to 16-year low in Dec. But in reality this might be good thing to slowly reduce the buildup of total housing units so that the slump in total housing sales will adversely affect overall housing prices over the short term.

Tax Break Aimed at New Mortgages

U.S. weekly initial jobless claims fall 15,000 to 322,000