Redstate

After all, the US Treasury keeps issuing new debt every three months, and that's the basic pump for money creation around the world.

The question is, will it stay parked in risk-free securities, or will it get put to work in the real-world economy? And that depends on the sentiment and feelings of a rather small number of men, namely the ones who run the world's large portfolios.

I think there's no question that the US is headed for years of slow growth, but that's irrespective of the climate in the financial world. What you have to ask is whether we slow down enough to slam the brakes on the developing nations (which produce largely for export to us). If that happens, then earnings of American companies will be hit hard.

I am only just beginning to learn my finance and economics so if you could answer this for me:
"Is a reccession a period of slow growth or a period of genuine shrinkage (is that the right word?)?"

If it's just slow growth, you could argue that that's where we are now. After all, we appear to be at a point where our economy really has no more UP to go. The reported growth is always about 1% a month, which, iirc, is the same % at which our working age population is growing.

As a side note, the above suggests to me that everyone who wants a good job Has a good job. So why do we still have 4% unemployment? What's wrong with these people?

"It's a book about a man who doesn't know he's about to die, and then dies...
...But if the man does know he's going to die and dies anyway. Dies, dies willing, knowing he can stop it, then...
Well, isn't that the type of man you want to keep alive?"
Karen Eiffel, Stranger Than Fiction

As you may have gathered from my posting history, I don't give economists a lot of credit for understanding the real world. Their discipline is all about formulating theories, and then testing them by regression analysis with historical data that are usually incomplete and uneven.

So having said that, I'll quote the definition of a recession that you'll get in Economics 101: two consecutive quarters of lower output. Of course, even economists are well aware of how inadequate this definition is.

Journalists and politicians seem to define "recession" in practical terms as "any kind of news that can be spun as negative for a protracted period of time." Do with that definition what you will.

There are several problems with defining a "recession" in terms of output across the economy. First, it often happens that some industrial sectors will have their cycles out of sync with others. And this seems to be quite a bit more true now than in past decades. For example, the homebuilding market is now in a deep slump. You'll find that homebuilders are making a whole lot less money and investing a lot less than they were a few years ago. The financial industry also looks set to fall off a cliff, as fee income from investment banking dries up in the face of what looks like an incipient commercial credit crunch.

Meantime, other sectors are booming. The Federal Reserve, which now actively manages the banking system through several policy levers (the least important of which is the overnight discount rate), has a lot to do with all this. In past decades, recessions were secular slowdowns in business activity that resulted in massive pain and suffering as people were laid off their manufacturing jobs. That doesn't really happen any more.

Manufacturing has been in a protracted downward trend. The auto industry has their issues. Its about as good as it is ever going to get for the airlines and its not that great. Publishing sector continues to decline. Healthcare sector continues to grow, but hospitals (like HCA) and other providers profits are getting hit by uninsured costs.

I haven't seen recent retail industry growth #s- maybe that's still booming- but is there anything else left at this point with positive momentum, other than perhaps the US consumer?

There are plenty of good earnings stories out there. US manufacturing is in the process of dying, not declining, so the capital devoted to it (what little there is) is just being redeployed. The US auto industry is very strong as long as you leave out Ford and GM. (Toyota and Honda make many of their cars here.) Airliners are stellar, as you say. Advertising/media/branding/strategy is not doing badly. Defense is in good shape.

Recessions ain't what they used to be, and again, I have an unproven hunch that this is due to the Federal Reserve.

So why do we still have 4% unemployment?

Short answer: there's always going to be some unemployment. Some businesses will go under and/or lay off employees, even in the strongest economy; it's just the way the market works. In fact, 4 percent unemployment used to be the old goal for 'full' employment. In the 1980s and 1990s, that goal was ridiculed for being way too *low*; it was thought then that we might never see unemployment as low as 4 percent again. Some economists conjectured that we might never see unemployment below 5 percent again in our lifetimes. Given that context, the current unemployment rate of 4.4-4.5 percent is very low.

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(Formerly known as bee) / Internet member since 1987
Member of the Surreality-Based Community

Right. And at a certain point if unemployment gets too low, the Fed starts worrying about inflation and raises interest rates.

As a side note, I recall in the late 1990s there were some economists (e.g., Lester Thurow) arguing that, in light of the global economy, the Fed needed to change it's historical view of how low unemployment can go without sparking inflation. I don't know where the Fed stands on this matter today.

than "why do we have 4% unemployment?" is "what is the level of underemployment, and what is its impact on the economy?" There have been a number of discussions of late about globalization, outsourcing and offshoring. Those activities are leading to losses of high-paying jobs that require more than a high-school diploma. The situation is well-beyond the loss of manufacturing sector jobs that have historically required little/no education and low levels of "manual labor skill" (e.g. piece labor, etc., as opposed to jobs like auto manufacturing that require high degrees of "manual labor skill"). What has happened to those who have lost high-skill, higher-education jobs? Have they been able to find equally lucrative jobs? Are they unemployed, or have they been forced to take service jobs that do not pay as well?

I'm not familiar with statistical analysis of the underemployed. I believe this has as much or more impact on the economic standing of the USA than the unemployment rate. The implication has always been that those whose jobs are lost to overseas competition need merely to "retrain and get educated." Well, don't look now, but education is no longer a way to ensure a good job. The only way to assure yourself that you won't get offshored is to take a job that requires face-to-face contact with your "customer."

a guarantee of a good job.
Oh, and the vast majority of those high-skill/higher-education jobs of which you speak are service industry. The service industry employment has always been very fluid because you must continue your education even after grabbing that prized position or else you need to retrain and find another job. There's more to it than just that, but the bottom line is that you appear to be basing your position on the idea that these high-education/high-skill jobs are steady when, in the vast majority of cases, they never have been...

"It's a book about a man who doesn't know he's about to die, and then dies...
...But if the man does know he's going to die and dies anyway. Dies, dies willing, knowing he can stop it, then...
Well, isn't that the type of man you want to keep alive?"
Karen Eiffel, Stranger Than Fiction

that there is a certain percentage of the employment base that is considered "employed" but are only in those jobs because there was nothing else available. They once held much higher-paying jobs but they disappeared for whatever reason. I believe the "service economy" is driving people into lower-paying jobs because of factors such as offshoring. I'd be happy to be proven wrong on that.

And I'm well-aware of the training requirements. I'm part of it. I provide training (sometimes, just depends on what I'm doing that week). I'm in the high-tech service industry. I see all of this first-hand, every day. And many of these jobs HAVE been steady for the last 20-30 years. The emergence of technology that enables offshoring of service jobs has changed the landscape profoundly. It is no longer minimum wage assembly line work that is offshored - it is now $50K or greater tech consulting, programming, system administration, medical analysis, you name it - just about anything that does not require you to shake hands with someone.

Is that you would end up with people who have degrees in Women's Studies but work as cashiers at Target being counted as "underemployed," when, in fact, they are not. Because of our stupid system of financing higher education, there are plenty of people out there with pointless degrees that they never had a shot of putting to use in real life anyway.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

went straight into a low-paying job. I'm referring to the unemployed who were were unemployed, but were forced to move from a high-paying job into a lower-paying one because of unavailability of an equivalent position. I believe that unemployment statistics are artificially low because of this effect. I am personally aware of a number of people that this has happened to.

For us common folks, it's time to be in cash or short the market - some nice put action today, but I tend to stay away from rollercoaster days.

Really shouldn't try to time the market. Invest in quality, fairly priced companies, watch them, and stick with it over the long haul. All IMO of course.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

I agree. Dollar cost averaging would be better to try than timing.

Hooray!

As should be abundantly clear to everyone by now, the stock market is the tail and the bond market is the dog. And unlike Bill Clinton, the tail isn't wagging this dog.

Almost all of the activity in the stock market is computer-driven at this point. And the computer programs will generally all run the same way. The stock market will see-saw as people cover shorts and look for bargains, but the real action is somewhere else.

And keep in mind that the cash stock market is perhaps only 15% of the total trading that depends on the value of stocks. The rest is derivatives.

until we get to 20% down (and then I'm buying like a madman). But 500 points down from 14,000 is only 3.5% (though we're down another 150 or so as I write, but I'm being whipsawed today!). And if BCS turns out to be another LTC, the Fed will probably step in again. And you don't want to be in cash when/if that happens.

Is this another fake-out like Feb/Mar was? Who knows.

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The CIA has better politicians than it has spies - Fred Thompson

I can only speak for myself. Others may have a very different opinion. But it generally seems to me that what Congress does regarding tax cuts or other aspects of fiscal policy just doesn't matter all that much. Markets are vastly bigger and more powerful than governments. If we should come into a regime when Congress seeks to burden the US economy by overtaxing income and capital gains, investors will just put money to work in other countries. To a very large extent, that's already true. And as far as the stock markets are concerned, most of the larger US public companies already are getting most of their earnings growth from overseas.

The US is now a slow-growth economy. (Not as bad as Japan, thank God.) Given the politics of the moment, which seem to be moving leftward, I can't imagine that changing. But that doesn't leave you out as an investor.

You need to consult a good investment professional, ideally one who charges you a flat fee rather than trading commissions. Find someone who is well-recommended by your family and friends. Ultimately, the Federal Reserve will continue to inflate the global economy by printing money every year. You want to make sure you're invested in asset classes that benefit from the inflation. Beyond that I won't say because I don't give investment advice.

you have the right to sleep at night, unperturbed by your investments.

...but what you mention here does make sense. I know some of the people I talk too, seem to think this is all far to complicated to grasp. I actually find it fascinating. It is mind boggling to know that investment markets are that large and powerful. It is also reassuring too. However, it accounts for the herd mentality. The global economy is a better indicator than our government's policy.

I will keep a watch on this in the news.

Wubbies World, MSgt, USAF (Retired):
public static void main(String[] args) {
System.out.println("An argument is a sequence of statements aimed at demonstrating the truth of an assertion.); }

...but rather to preserve your purchasing power. At the end of the day that means staying ahead of inflation.

It also means you have to avoid trading or trying to time the markets. Otherwise you'll be like a kernel of corn in a threshing machine. The daily motions of stock and derivatives markets have extremely little to do with the actual underlying values of businesses themselves. Rather, they are almost entirely computer-driven, and seek to benefit mostly from volatility or from changes in volatility. You don't have the time, the knowledge, or the capital to play that game and you'll get skinned if you try.

As I said, find a good fee-based investment advisor. Put your money to work for the long-term, stay diversified, and don't sweat the near-term gyrations.

I know that one of the primary industrial applications for the middle of the US Treasury yield curve is in constructing hedges for mortgage products. Leave that aside for the moment.

The last several days have seen an enormous rush into Treasury securities, and (presumably) out of other asset classes. And of course, that depresses the yield curve.

I'm not someone who believes that yield curves or any other artifact of financial analysis predict recessions. (Financial economists still have no clue why the yield curve is even shaped the way it is on any given day.)

However, I do believe strongly that business activity slows when credit for expansion is unavailable, less-available, or unreasonably priced, as I said in my post.

To the extent that liquidity gets parked in US Treasuries, that makes it less available for business expansion. (I've long argued that LBO activity creates business expansion because it frees business managers to be more aggressive and target long-term rather than short-term growth.) If this starts happening in developing economies, then I would expect a recession. If the US Treasury market starts falling again, then I would infer that the reverse is happening. The yield curve is raw data, not a leading indicator.

Now it may simply be that a lot of chickens are coming home to roost now. I've been hearing stories of deteriorating credit quality in China for a good 18 months now, long before the recent round of news stories of food-price inflation. If there is a recession, it just might be the good old-fashioned overheating-induced variety.

The LTCM situation hit its crisis phase when a lot of different asset classes started behaving irrationally all at once. It was a brief and temporary situation, but it resulting in massive and simultaneous flight out of many asset classes.

As everyone knows (and as John Meriwether said at the time), if LTCM had received forbearance on their margin calls, enough to hold out for about two more months, they would have ended the year about flat. (The portfolio that was sold to the consortium of counterparties for ten cents on the dollar in October had regained much of its value by December.)

The situation also exposed that a great many people around the world were playing nearly the same bets that Long-Term was. That meant that when they decided to exit, they all did so at once, creating chaos.

Also, the swaps, spreads and other derivatives that LTCM and the others dealt in were illiquid and rarely marked-to-market. That made them vulnerable to sudden re-valuations based on panic.

I'm concerned that all of these factors are at work to some degree in the asset-backed world. Now Bear Stearns was right smack in the middle of the situation back in 1998, and they know quite a bit about marking to market and making aggressive margin calls. Bear Stearns itself is at no risk of collapse. What is a potential concern is other people playing the same game may not be as well situated.

We're not going to get a flaming meltdown of the kind that looked imminent in late September 1998. But there could be a lot of similar dislocations, in slow motion.

Would they have been flat had the Fed not cut rates? Would the Fed have cut rates anyways without LTCM blowing up?

___________________________________
The CIA has better politicians than it has spies - Fred Thompson

...the guys from the New York Fed basically told LTCM's major counterparties to sit together in a room until they had a deal to either liquefy Long-Term or buy it out. Jon Corzine (then Goldman's co-CEO) did a lot to make the deal happen, and Bear was the holdout. (Bear had the greatest exposure since they had been clearing Long-Term's trades.)

Basically, the Fed's role was to convince a bunch of sharks to take their time before they devoured their lunch, and avoid a much bigger mess.

...But I fear you may be on to something.

Forget about the stock market - I foresee an extremely volatile political environment approaching. They'll start by trying to stage a coup (impeachment), but if the Dems get in there (either by legitimate, or illegitimate, means), and then the economy goes south, and/or we start getting hit by terrorist strikes...

We'll let's just say that I'm starting to have no idea where we'll be politically in 5-10 years from now.

A marxist economic agenda advanced by the Democrats is one of the reasons that gives me hope about the GOP in 2008.

IF they (Dems) win the White House, I pray they're not stupid enough to try and ram through tax increases (right off the bat, they're talking about income, cap gains, dividends, and private equity), but then I would be kidding myself. Their platform of high taxes is going to bring our great economy to its knees.

“.....women and minorities hardest hit”

That actually raises an interesting question: How smart is Al-Qaeda?

Unfortunately I think they are pretty smart, especially considering they are a bunch of cave-dwelling medieval psychopaths.

They actually (perhaps unintentionally) timed the 9-11 attack perfectly, we were just dipping into a recession as a result of the post Y2K/Tech bubble contraction in capital spending. The timing of the 9-11 attack (and whoever was responsible for the anthrax attack) couldn't have been timed better to exacerbate the economic impact of an already negative trend (fortunately by recession standards it still didn't turn out that bad).

But if I was al-Qaeda and I was clicking on the CNBC website right now, I might think to myself "boy, the US economy is starting to teeter. Setting off a dirty bomb in Manhattan, DC, LA, wherever could be just the thing to push the US economy over the edge into a nasty recession."

Growth in Europe is expected to outpace ours this year. China for another. China's inflation alone this year is going to be bigger than our nominal growth.

Since you're a chartist, what did you buy or sell today?

If you have a way to prove for 100% certain that tax cuts increase GDP growth, I'm all ears.

or even know, so I'm going to ask.

Does the $/Euro exchange rate play into that at all (yeah we grew faster, but the value of the dollar dropped so much that we're about even)?

___________________________________
The CIA has better politicians than it has spies - Fred Thompson

But here's how I'm unpacking what the Commerce Dept reported (and I'm happy to hear counterarguments):

Nominal growth in Q2 of 3.4% annualized. Q1 was revised to 0.6% annualized. Inflation about 1.4%, not low but not brutal either. Projected growth in Q4'07 to be 2.2%, revised down from closer to 3%. I'll assume for now that Q3 will be like Q4.

Work it out across four quarters, subtract inflation, and I get real growth of somewhere in the neighborhood of 0.8% for the full year. About in line with population growth.

I don't know if that impresses you, but it doesn't impress me.

The most interesting thing in the report, though, is that most of the US growth is coming in export sectors. The rest of the world (including Europe but excluding Japan) is growing like crazy, and we're shipping products and services to them. I really like that trend.

It only makes sense to compare Euro growth to US growth in dollar terms if you're investing in Europe, in a dollar-denominated account. Maybe that's what you had in mind. If you're just comparing nominal or real growth rates, then the currency doesn't matter. On that basis, Europe is projected to beat us this year.

And in any case, short-term interest rates do more to influence relative currency values than anything else I can think of. And interest rates in Europe are on the rise, while ours are most likely neutral at this point.

I doubt that the US GDP can outpace European growth with the subprime crap thats hitting the fan this year. However, lets call it divergence with what I'm observing over at the economic stats that are posted at forexfactory.com over the last three months and what is striking are the unemployment numbers 7.2-1% for the Eurozone and 4.5% for the USA. Anemic consumer #s for spending in the Eurozone and fairly strong and surprising consumer spending numbers for the USA on a month to month and quarter to quarter basis.
A brief scan through the days' reports showed not as bad real estate investment over the last quarter, which is probably the most critical aspect for the American economy.

other countries diversifying out of the USD and speculation that bond rates differentials will narrow. In March, futures rates showed high probability of three rate cuts in 2007 for the USD and prospective rate increases for the Eurozone.

Up to last week there was a zero chance of a rate cut. Now a key bond rate has gone under 4.93% which was the old resistance line in a range bound situation for about six out of the last 9 months.
With an serious concerns over the equity markets, the carry trade will more than likely strengthen the USD across the board with the major currencies, since people are reducing their risks.

Every time that bloomberg mentions option volatilities on the yen being high or that people hedged their bets with record premiums on the yen then I position myself for long yen purchases until the turmoil passes.
Put options on housing should pay off handsomely for a while also.

As for the GDP growth, as a result of tax cuts, there's a long history of 96/102 quarters of growth, since Reagan's presidency. Under the economy in IBDeditorials, under Bush IIs legacy on the economy, theres a good graph that shows the stark contrast between before and after GDP at the moment that the tax cuts were passed, which I specified the numbers above. So anecdotal, yes, proof? Thats up to you to decide.