Posts Tagged 'recession'

Stimulus vs. Spending and the need for Recessions

Over on dagblog, one of our writers DF posted an interesting post on the latest drama in our economic crisis called ‘Macroeconomics 101: Spending versus Stimulus, or ‘How I learned to stop worrying and love recession.” It basically discussed how silly some of the recent political commentary has been, particularly the claim by many Republican lawmakers that Obama’s stimulus package was full of programs that would do little to stimulate the economy. This is my response. I encourage everyone to read DF’s original post as there is also a fair amount of continued dialogue in the comment section.

So DF did a stellar job of getting to the heart of our economic crisis and the current debate over Obama’s planned stimulus package and spelling it out simply and effectively. I do, however, have some issues with his thesis.

Unlike DF, I believe there IS a difference between stimulus and pure spending, although where and how you draw that line is admittedly a subjective process. Stimulus is government spending that then encourages corporations and/or individuals to spend money of their own as well. Government spending by itself will certainly add to GDP, but without a stimulative component, it will have very little notable impact (the Consumer ‘C’ in GDP is almost 2/3ds of the total in the US) and certainly will be unlikely to reverse a recession.

Now you can have a legitimate debate about what types of policies are more stimulative than others, and that’s where things get subjective (for instance, giving people money, or tax refunds, would seem by its nature to be stimulative but that stimulus package last year ended up being nothing more than an ineffective short-term stopgap with most of the money going to shore up corroded balance sheets – not the worst thing in the world but not very stimulative).

And where I really disagree with you is that you seem to think government is in a better position to spend than consumers or corporations. With consumers, maybe you could argue the point, given how badly household balance sheets have gotten, but aside from the financial industry, corporate balance sheets are actually in very good health and they could probably invest a lot more capital in the system if they had confidence (and arguably lower tax rates).

Of course, any significant corporate investment also requires a free flowing credit system, which has been dramatically impaired because of our financial crisis. Resolving our toxic asset problem is at least as important as the passage of any stimulus package because not only would it allow credit to flow again (although hopefully in a more rational manner) it would also restore a bit of the confidence that is a necessary prerequisite for any lasting spending by consumers OR corporations.

But getting back to the government and its ability to help us spend our way out of this mess …. they’re in the worst shape of anybody to do the work! Obviously, the government CAN spend the money since they control the printing press, but that won’t mean it’s a good idea. At $1.2 trillion dollars (prior to any stimulus plan being passed), this year’s U.S. deficit alone equates to over $4000 per person in this country, and that exceeds the average credit card household debt of $3,235 (which you can easily argue is too high as well).

Increasing the deficit will only place a bigger burden on this country’s future generations – at some point, guess what, the Chinese and other foreign governments will stop wanting our debt because they’ll wake up and notice the crappy state of the balance sheet, and at that point, you will see and feel pain like you’ve never experienced.

If we are spending money on things that are needed, like long-decaying infrastructure or intriguing alternative energy technologies, then perhaps the additional onus on the country’s balance sheet will make sense. But I am very skeptical that we’ll be able to spend $800 billion without seeing much of it going to waste.

I guess when you get down to it, I have a problem with your main thesis

First, we all have to agree that a recession is what I’ve stated it is above and that this is an undesirable condition in which we all have a vested interest of avoiding.

Recessions are necessary parts of the free market business cycle. Sure, we’d love to avoid or shorten them, but it’s my belief that without them you can’t have the good times. The key in my opinion is to pursue policies and regulations that limit the extremes on both sides of the cycles, but unfortunately, we threw ourselves one big consumption and credit orgy over the past decade, and we must pay the piper.

We need to be very careful we don’t throw good money after bad, and make the problem even worse by sapping oomph from any eventual recovery or setting us up for a bigger, more painful fall later.

Predictions for ’09 (and a review of my ’08 calls) …

In my most recent question column earlier this week, I asked for readers’ predictions for the upcoming year … aside from Genghis bravely predicting that Obama would become POTUS, I didn’t get too many responses.

So I’m going to ask for your predictions again, while repeating some of the predictions I made and adding a couple of more, before I revisit some calls I made this year.

First, the predictions for 2009. I’m sticking mostly to economics, with a few foolish forays into other areas (I was going to make a call that Prophet would finish his Top 10 2008 Albums list next February, but I see now he’s picked up the pace):


  • Unemployment, now at 6.7%, surges past 9 percent and falls just short of double digits
  • Gold now at about $845-$850, revisits all-time highs at $1000 an ounce, probably later in the year
  • Obama puts alternative energy initiatives on back burner at first, but then gets more involved as light crude oil, now at about $36 a barrel, rebounds first to $55-60 in short-term and then approaches $90 sometime next year. Gas prices again become a political issue.
  • ‘Class’ replaces ‘race’ and ‘immigration’ as the next big battleground in America. We see several examples like the factory sit-in we saw a couple of weeks ago. At least one of these protests turn violent and leads to a fatality. Unemployment benefits get extended again, and numerous other populist measures, including foreclosure relief, get passed by Washington.
  • The market has another down year, probably more than 10%, but stages a pretty decent rally early in the year, with the Dow hitting 10,000 again. IPOs remain few and far between, but Facebook does end up pulling off one of the few big new public stock offerings of the year next fall. The stock does well in the short-term, leading to another mini-rally.


  • The Obama inauguration attracts more than 3 million visitors, and the combined TV audience for his speech exceeds that for the Super Bowl, drawing more than 100 million viewers. There is at least one announced assassination attempt that is thwarted.
  • Biden was right after all and some terrorist organization or rogue state tests Obama’s resolve by the summer. We have the first attack on U.S. soil since 9/11 and it’s possibly a multi-city attempt that mimics the chaotic action in Mumbai. (Please god I hope I’m wrong on this one).


  • The Panthers meet either the Patriots or the Colts in the Super Bowl and win it all.
  • The Red Wings win the Cup. The Celtics repeat. (These are huge guesses).
  • The Yankees win the division, but flame out in the first round of the playoffs. Girardi is fired by the end of October. The Angels get to the World Series and play the Dodgers in an all-SoCal World Series. Angels win. My beloved Cards come in 3rd place in the NL Central division, which the Brewers win.

So should anyone listen to me? Probably not. My track record this year for predicting events was so-so. I was generally dead-on with economic trends, as I have been very negative for over a year now. On February 11, before I started blogging, I wrote an email to Jim Cramer, stating that we are heading into a ‘severe economic downturn that will last longer than most people are predicting,’ adding:

We are still in the early throes of this current crisis. We still haven’t seen any bankruptcies. Foreclosures and defaults have been at a minimum. The job market has only just begun to show signs of strain. The pain will of course spread to the rest of the world, which is wallowing in our debt and weak dollar, causing a global slowdown. Much more damage will be done, many more shoes will drop.

In a July post on pessimism, I predicted 50% odds for a multiyear recession, and 10% chance for a depression, fairly bold but probably not high enough odds for either. When the Lehman bankruptcy occurred on Sept. 14, I warned this wouldn’t be the end of the story and a systemic collapse was possible. When the Treasury first presented its bailout plan, I said there would be bumps along the way and that other industries would quickly be lining up for money, including the car manufacturers.

When it came to the financial markets, the record was much more mixed. I probably made my best call of the year on July 4, calling oil a bubble about to pop on the exact day it hit its high price for the year ($140+). Despite talk of new rules against speculation and for offshore drilling, I also correctly pointed out that the main reason for oil’s fall would be a rapidly weakening global economy. However, in that same piece, I said there’d likely be one more big run higher and that oil was not going to be heading to $50 anytime soon (It’s now in the $30s. Oops).

My calls for short-term bottoms and tops in the stock market were generally correct, but often early by a matter of days or even weeks, which makes a huge difference if you actually wanted to trade on the information (which I would NEVER recommend, as you have probably realized by now I like to talk out my ass a lot).

For instance, on Oct. 8, I called for a short-term bottom in the market, but it didn’t start happening until the next week. In a follow-up post on the 13th, I thought the rally could have some legs (somewhat true) with the Dow possibly hitting 11,000 (way untrue), but that we would revisit our earlier lows ‘in the next few months, if not sooner’ (true) and that we’d hover around the Dow 8K-9K for a year or more (to be determined).

I didn’t make many political calls, but wasn’t so impressive here either. In July, I predicted an Obama victory and said ageism would prove to have a bigger impact than racism (hard to judge the latter call, but I think it was a pretty good one).

On Sept. 3rd, I said McCain’s Palin could backfire but was the only thing he could to generate even a trace of the excitement of the Obama campaign.

On Sept. 24th, I called McCain’s announcement that he was postponing his campaign to focus on the economy as ‘just silly’ and ‘annoyingly hyperbolic.’

When the bailout was being debated and strongly questioned in Congress, I said it would surely pass; It was vetoed. To be fair, after the bill was vetoed, I did correctly predict a new bailout proposal ‘very similar’ to the rejected one would pass.

And in sports, the only prediction I made was a hopeful and ultimately correct one that St. Louis Rams Head Coach Scott Linehan would be fired after the bye week. Unfortunately, Linehan’s firing didn’t lead to ‘watchable football’ as I had hoped.

OK, now it’s YOUR turn. Go out on a limb. Make some calls. Trust me, if you’re right, you’ll look like a genius, a seer, a visionary. And if you’re wrong, no one will remember (at least not ’til I revisit these predictions next year)

How The American Dream created this American nightmare …

You hear a lot of conservatives nowadays wanting to place blame for the country’s current economic crisis on the Community Reinvestment Act of 1977, which encouraged commercial banks to lend money to borrowers in low-income areas.

The implication is that the CRA, enacted and significantly expanded under two different Democratic administrations, led to the creation and proliferation of the risky subprime mortgages that have brought the U.S. banking system to the brink of collapse.

Never mind the fact that CRA-regulated commercial banks originated less than half the total subprime mortgages or that at least as much share of the blame for how things got out of hand has to be placed on the Republican-led repeal of the Glass-Steagall Act, which allowed investment banks and other less regulated institutions to engage in similarly risky lending (and to do so without the leverage restrictions placed on commercial banks).

But conservatives do have a point (even if it’s not the one they really intend to make): This country’s myopic focus on home ownership as the be-all and end-all of The American Dream did indeed help spawn the housing and credit bubble, and the CRA is just another in a long list of government policies that have encouraged home ownership as an important component of economic development and societal stability.

OK, maybe I’m just a bitter renter who’s trying to justify his lifestyle and puny net worth, but I do wonder … is home ownership really that important?

The National Association of Realtors certainly thinks so, and some of their rationale makes sense. For society as a whole, home ownership may in fact offer some advantages, as people who buy their homes are more likely to be invested in their communities and neighborhoods than renters. However, I would think these benefits have diminished over time as the nation has developed and become more settled.

Encouraging broad home ownership probably also acts as an alternative means of reducing income inequality in a capitalist economy, and at the same time instills in citizens the importance of private property rights, both of which lead to increased stability in our society. Given that our national savings rate is negative, home ownership also encourages people to invest and save funds they might otherwise not.

But that capital comes at a cost, an opportunity cost. Homes are static entities, non-productive investments. By themselves, homes don’t create anything of tangible value.

And homes are not particularly good investments, either. Robert Shiller did a hundred-year study and found that homes increased in value about 3% a year on average, not much more than the rate of inflation, with only a couple of temporary periods of dramatic outperformance.

Another study by two professors, Roger Ibbotson and Jack Clark Francis, found that housing increased in value about 8.6% a year from 1978 to 2004. Not bad, but not as good as commercial real estate at 9.5% and well behind stocks at 13.4%. (Granted, you can’t live in a stock).

The math gets a bit better when you account for the substitution costs of renting, but a lot worse when you include the other costs associated with home ownership – and there are plenty of them, such as mortgage interest, insurance, upkeep, refurbishing and property taxes. The WSJ estimated that a $300,000 house could end up costing an owner more than $1 million over 30 years. And that excludes the costs of buying and selling a home, which can add up to as much as 10% of the transaction value and make moving to a location that better suits one’s needs or skills a much more expensive prospect than it’d otherwise be.

A good trader friend of mine, who used to live in a rented NYC apartment, described his St. Louis home as a ‘money pit’ and usually wishes he was still renting.

Unlike with stocks, where diversification is possible and laudable, owning a home often requires a person putting almost of his or her eggs in one basket. And if you bought a home in the last couple of years, that’s a much smaller basket now.

Bottom line: Obviously, every locality is a bit different, but I think owning a home can make sense for people who plan on staying in the same place for about 5-10 years, or who enjoy the responsibilities of upkeep and maintenance (I, however, recoil at the prospect of lawn mowing and do-it-yourself repair projects).

But even in the best of scenarios, home ownership is rarely the best path to getting rich. And as we’ve found out in recent months, making it a key goal for a society – at the expense of other worthwhile goals and values – can lead to a rather unwise deployment of capital and some really nasty unintended consequences.

Ok, Here’s the rally … Now what??

OK, so I was a day or two late with my short-term bottom and violent rally call, but it’s party time on Wall Street today with the markets almost up more than double digit percentages.

So where do we go from here? Well, my prediction that we could get back close to Dow 11K will likely prove far too aggressive, but it’s very likely this will have at least some legs. There’s just too many people bearish and short for it not to last a bit longer (People who are short are at least not in the market will worry that we’ve seen the bottom and will fear missing out if the rally continues).

But also remember that V-type bottoms (where we sink dramatically only to immediately recover all that ground and then some, such that the price charts resemble the letter V) are very rare beasts.

In the short term, I think this rally could last a while but that the downtrend will remain in place and that we will revisit the lows from last week sometime in the next few months, if not sooner.

In the medium-term, if this winds up being just a normal recession, we have seen the lows and will probably start to move higher as much of the bad news and lowered profits have been discounted by the market. Remember, during your garden-variety recession, the stock market tends to do well since it begins to anticipate the recovery period.

Unfortunately, I think we are in for something far worse and we will likely meander in a range near the 8-9K level on the Dow for a year or more, and we could even end up breaching those lows from last week.

The problem is unless you’re an active trader or will need a lot of your invested money sometime in the near future, you should probably mostly sit tight and ride out the storm. I’ve said it many times, this could end up being economic Armageddon but it’s not the likeliest scenario and panicking or changing your long-term investment strategy won’t do much to help you.

Add some gold (or gold ETFs or gold stocks) to your portfolio if you’re really worried.

For an insightful, more positive take on the long-term prospects on the market, this provides some great analysis.

Pessimism doesn’t pay …

My dad is an eternal optimist, one of those turn-lemons-into-lemonade people. And yeah, it sometimes annoys the living shit out of me.

I am, after all, an in-the-long-run-we’re-all-dead type of guy, a devout half-empty man (I’d call myself an eternal pessimist, but I don’t believe anything lasts forever:) )

Clearly, if optimism is a genetic trait, it skipped a generation. In my life, I fear the worst. It’s what I do. A headache is a brain tumor. A bumpy plane ride, a crash landing. An abandoned suitcase, a ticking bomb. A lover’s quarrel, a relationship killer.

For a long time, I believed pessimism – in addition to providing the most efficient route to being pleasantly surprised – was also the more appropriate mindset for the modern world. You look around and see the Earth in peril. You see bad things happening to good people, and good things happening to bad people. You see a holy war in the Middle East that never ends, and social security reform in the U.S. that never begins.

You would think that this year, especially, pessimism would be the way to go, what with the U.S. economy teetering on collapse (I put the odds of a multi-year recession at about 50 percent, and of another depression at 10 percent).

But I’ve recently decided that dad was right all along. Pessimism doesn’t pay – literally. And here’s why:

1. Pessimism can actually help lead to the worst-case scenario…

Phil Gramm took a lot of criticism recently for suggesting the American media and public should stop whining about the economy, but negativity can absolutely contribute to, prolong, or intensify a recession. That’s why economists pay such close attention to consumer sentiment surveys – psychology matters. People who think the economy is turning south will act more cautiously, spending less and saving more, which ends up causing more weakness and creating a vicious circle.

A negative outlook can be self-fulfilling in other areas of life as well. I often find that people who dread bad things happening avoid taking the positive proactive measures that could prevent those things from happening, and even at times engage in destructive behavior that increases the likelihood of a bad outcome.

2. However, the worst-case scenario rarely happens…

This weekend, Congress decided to pass a housing bill that helps homeowners facing foreclosure restructure their mortgages and stay in their homes. The bill also has provisions to bail out Fannie Mae and Freddie Mac, the government-sponsored private entities that handle more than $5 trillion in mortgages and helped create the current mess by making loans that should have never been made in the first place.

In an election year, the housing bill was a political inevitability, and probably an economic necessity as well since Fannie and Freddie are indeed too large to fail. The bill has some decent aspects to it, such as the regulation forcing lenders to be clearer about the true costs of a mortgage, and it could help stabilize the moribund housing market.

But the bill is also a travesty because it encourages future risky behavior by reaffirming and institutionalizing the idea that the government will always be there to bail you out. As a recent article in The Economist noted, a government bailout is about privatizing profits and socializing losses, which sucks for people like me who continued to rent partly because I thought the market was overheated, and yet as a taxpayer will end up paying more than a fair share of the bailout costs.

The bill may be a bad one, but it also proves the point that in life, people facing dire outcomes can often rely on the support of loved ones, like friends and family (or a generous government), to help them avoid a bad situation or at least make a bad situation more manageable.

So usually, all that worrying and pessimism accomplishes nothing except for perhaps, say, preventing someone from buying a home in Manhattan that likely would have almost doubled in value by now (pessimism may not pay, but bitterness is groovy)!!!! …

3. And if the worst-case scenario actually does occur, you probably have other things to worry about … or you have nothing to worry about because you’re dead.

My grandfather always said he would never buy stocks because of what happened in the Great Depression. Meanwhile, for the rest of his lifetime, America never had another depression, and the stock market rose by thousands and thousands of percentage points. He basically guaranteed he’d never be rich just so he wouldn’t be desolate.

That’s why I tell almost everyone who has at least ten years to invest to put a nice chunk of their money in stocks or mutual funds. In the long run, the market should be one of the best places to put your money. Yeah, at some point, the American empire is going to come crumbling down, and/or the world will end, but you’re going to have a lot of other concerns if that happens.

I mean, if this current situation does become economic Armageddon, do you think that shoebox of cash under your mattress is really going to do much good? If the economy has gone to hell, those dollars probably won’t be worth much anyway, especially if this time inflation ends up being part of the problem. Sure, that money may buy some loaves of bread for a few more months, but life is still going to suck…

And the same is true in other areas of life. I mean, what’s the point in worrying excessively about nuclear weapons or terminal cancers when being correct basically means you’re dead???

As I see it, pessimists will always be right because eventually shit happens and everything good ends, but in the meantime, the optimists will be having all the fun. So i might as well bring my half-filled glass of lemonade and join the party.

You can’t force compassionate capitalism (or ‘My BuschInBev is fine. How’s your pikken?’)

As a native St. Louisan who always feels some sort of odd civic pride whenever those clever beer commercials end with a dude intoning ‘Anheuser-Busch, St. Louis, Missouri,’ I know I’m supposed to be upset about the recent acquisition by Belgium-based InBev. Yet I can’t muster any passion over the loss of the historic brewer and one of my hometown’s few remaining independent corporate behemoths (TWA, McDonnell Douglass, Ralston Purina all bit the dust long ago).

I mean, I know what’s eventually going to happen, and it’s not going to be pretty for St. Louis.  The brands will stay and the distribution network will remain mostly in place, because that’s the value in A-B, but nothing else will be sacred. Oh, InBev is saying all the right things about keeping the breweries open and the U.S. headquarters in St. Louis and all the jobs secure, but at some point the cost cuts will come, and then they’ll come again and again. At first, it will be easy targets like those Anheuser company perks (e.g. free cases of beer for employees) but eventually many jobs will be lost.

Cost-cutting, outsourcing, consolidation, restructurings: They’re all just part and parcel of the global economy nowadays, a competitive necessity. Of course, this means a lot of hard-working Americans are left in a lurch through no fault of their own, a fact which not surprisingly attracts a lot of attention from politicians in the midst of an election season (and a slumping economy, to boot).

Even less surprisingly, the politicians’ overall response to the situation has been woeful. You have short-sighted initiatives like fiscal stimulus checks and oil drilling hype. You have even more damaging scapegoating, with calls for increased protectionism and prosecution of short-sellers.

The best thing in Washington may just be the unending partisan bickering, which isn’t helpful but at least results in some good ol’ fashioned gridlock.

Alas, it’s going to get worse as the presidential candidates find success in appealing to the lowest common denominator. When the economy is weak, populism sells better than sex. But it won’t really solve anything.

You can’t force capitalism to be compassionate, especially when national borders no longer serve as a major barrier to economic development. Raise taxes or limit executive compensation or increase labor protections and businesses move overseas.

Even worse is when the government tries to get into the business of capitalism, as the result is bound to be a disaster like the sickening developments with Fannie Mae and Freddie Mac, government-sponsored mortgage lenders that will eventually require billions of dollars in a taxpayer-funded bailout.

I wish I had better answers, but this is not an easy dilemma to solve. How do you enjoy the productivity benefits of capitalism and open borders and yet maintain a desired level of societal stability and income equality (or at least not obscene disparity)?

My advice: Focus and invest a lot of money on education (and re-education of displaced workers).  Create tax incentives to encourage ‘good’ corporate behavior, like investment in local factories and workforces, as well as development of new technologies that could solve some of the nation’s problems (e.g alternative energy).

And perhaps most controversially, spend some money on programs designed to convince Americans that the lowest possible price isn’t the only thing to consider when making a purchase. The emerging ‘green’ industry has shown that consumers are willing to pay more if they think their dollars are making a difference so maybe, just maybe, compassion and capitalism can mix … as long as it’s not forced.

August 2016
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