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Wednesday, September 23, 2009


That's a real recovery. The ugliest little bug of recovery, but it is alive and growing.

The self-sustaining chunk of it is almost all in the lower 2/5ths of the population by income, and it is acutely sensitive to inflation, for one thing. We have to stagger through until next summer without dropping back for it to start forming a chrysalis, but hey, it could happen.

I seem to read nothing but articles state that CARS was a complete waste of money, but IMO, CARS pushed it over. Not only did it move a bunch of stuff around the country for a couple of months, but it also got some vehicles into hands of people who needed them to take up the (mostly lower-end) jobs which are opening up. A lot of people needed reliable transport to get those jobs.

Oh, I am so relieved.

I should point out that there are far more mechanisms by which this thing could be stomped flat than there are ways for it to shift into higher gear, so this could be the short leg of the W. A lot now depends on government policy.

I'm so excited. I'll explain later.

I wish I could share your belief in recovery but I'm
skeptical. The rise in the minimum wage did help,
but I believe it is going to hurt hiring for the holiday season. Once the Holiday season passes I think we
will see more retail stores fall along with more problems in CRE. The bad debt needs time to be
passed through the system.

Still with fever?
CF - yup. I feel absolutely physically awful. I might end up in the hospital this time.

But the recovery is real rather than fever-induced. It's coming off the ground and in the lower echelon of retail, it's broad-based, it is generating jobs, and it is real.

The problem is the higher-end is still falling, so this isn't going to look like much of a recovery. Also, this thing is pretty fragile and can be killed dead by any energy tax increases or renewed inflation.

In order to call it, I needed the following:
1) Evidence of boosted activity,
2) Evidence of positive feedback activity in the active segments,
3) Evidence of increased retail spending,
4) Evidence of slight increases in prices that are non-PPI related.

I have all four. Mind you, this is recovery from the ground up, and it is going to look punky in Greenwich. The drag from CRE, government spending cuts, and the higher-end income echelons is still substantial. Many areas will be cycling down depending on income and demographics. It's not going to look good from the point of statistics, but it is a positive feedback cycle.

The model that has predicted the rest of this doesn't give much chance for this to make it through the critical period, but that is due to likely inflation and government policy.

There's a chance, and that's all there is. In order to make that chance more of a probability, the government needs to throw in some major real stimulus over the next six months. Anything that will generate broad-based movement of goods will work. In the southern regions infrastructure would be optimal. In the northern regions maybe a $100 household federal voucher for appliance or household goods would be optimal.

It looks to me like CARS hit at exactly the right time. The older people are mostly through their donut holes on prescription coverage, the schools all moved back into session, there was a slight upward momentum from lower inventories, and deflation on basic needs stuff had hit levels that allowed lower income people to expand their spending patterns slightly.

At best, this will be a very slow recovery. At worst, government policy will be so awful that it will throw us back into a more intractable downturn. The lower state and local revenues are dictating a long slow contraction in state and local spending.

We still have formidable levels of malinvestment to be overcome.
Anon - the bad debt is awful, I grant you that. And no question, economic segments are still falling and will continue to fall for some time.

However we have entered a positive feedback cycle which appears to have the potential to slowly build.

If we make good policy choices, it can continue. If we don't, things get really bad. I am not saying it will continue - just that it could continue. This is the first sign in over 3 years that I have seen of a broad structural change that would support basic growth.

My guess is that the Fed will eff up here, but maybe not. They are going to let inflation gear up on some segments because they are so worried about the other dominoes, I think. That would be fatal. The other possibility is that taxes might be raised too high and will choke it off. You can't raise taxes or spending mandates (whatever you call them) on most of the population right now without creating an economic disaster. You probably won't be able to do that for years.
"(CARS) also got some vehicles into hands of people who needed them to take up the (mostly lower-end) jobs which are opening up"...not understanding this. CARS (AKA cash for clunkers) took hundreds of thousands of vehicles, many of them serviceable off the road. Surely it *increased* costs for those needing the most basic level of transportation.
MoM,if you are debating whether or not to see a doctor or go to the ER,SEE the darn doctor.I seriously considered going to the ER on sunday,decided to wait and see a doctor monday,and was told god loves fools like me or I would have had a stroke.my blood pressure spiked to 212/180 for no apparent reason,no changes in diet,exercise or stress level,It just spiked.Your skill set and contributions are not fungible,please get someone competent to check things out.
Tom - I sure hope your blood pressure wasn't correlated with reading my blog!

I'm not going to die if I can help it. Don't worry. Prayers would be good because I could use a little stimulus program here.

David - the only thing that really matters now is velocity. The other thing CARS did was dump a whole bunch of spare parts in the system. CARS did remove some reliable used vehicles, but it also was used to roll over some very unreliable clunker junkers.

Get better! That's an order.

I hope you are right about the recovery. I've been thinking that it seems a lot like 2004 lately. The stock market is rising and could easily have a few more years left in it.

Oil is behaving a bit lately too. It can't seem to hold $70 that well. Gold is looking pretty toppy to me, especially with the late night infomercials.

This would be great news. I'd have an easier time protecting my nest egg going forward. Heck, we might even be able to get those inflation adjusted I-Bond rates up from 0.1% that they are at now to something actually able to protect wealth. I'm looking to buy again by late 2010.

As for the W shaped recovery, that's my main concern. It took two recessions to kill off the last oil/gold bubble (early 1980s).

I am still not optimistic long-term though, but I'll take what I can get.

"I'm not going to die if I can help it. Don't worry. Prayers would be good because I could use a little stimulus program here."

Would laughter work? Will Ferrell is at it again.

Hopefully you can either laugh at it or laugh with it. Your choice!

Something Terrible Is Happening!

Let me relate a couple of items you might find interesting. My spouse is a state employee with
the Division of Medicaid. She tells me Medicaid
applications went through the roof this month.
Our State has not been hit hard yet by the downturn
compared to other states. Secondly, our state tax revenue is down 12% yoy. We are accelerating to
the downside.
What state?
MoM,you are in my prayers daily.And I can not find ANY reason for my blood pressure to spike,it was in a normal range a month ago.Happily the physician I saw is hard nosed and old school and had no problem prescribing effective meds that do not cost a fortune.Which is another place savings can be found,newer meds are sometimes no more effective,just more expensive and heavily marketed.I hope the honey arrived unbroken.
Tom - the honey made it to GA in style and composure. It sort of sat there snickering at the post office, claiming victory on all counts.

Heh. Isn't that always the way? The economy will turn out alright, as long as the fools in Washington would just not do anything for a while...

Unfortunately, there's still a government debt train wreck waiting for us somewhere out there...
had to pick a shape for a recovery it would be an internet recovery, i.e. WWW. Like Japan, this could go on for years.
Fboness - it WILL go on for years.

As some segments of the economy pick up, others will still be correcting. There is a severe imbalance between government spending and the size of the private economy which supports the government spending.

You are going to see the higher income echelons deeply impacted.

In the 80s, entire classes of private industry employees lost their jobs. The same will occur in education and government this time. It's a forced restructuring.

I'll post some tax data later.
"The same (job loss) will occur in education and government this time"

...yet these categories of people are Obama's core supporters, and he will do what he can to protect them. Probably won't be able to protect them totally, but he will tax people outside his core constituency without limit in order to protect those who are in his core constituency.
Hooray for green shoots!

Tom Stone,

The same thing happened to me a few years ago. I found out while at the dentist; mine routinely checks BP. Mine was 210/180, just like yours.

I'm now on five BP meds to get it down to normal. My doctor is good like yours. I can get four of them for $11/90 days, and the cost for the fifth declines monthly, and will soon be in that range.

You will discover that it's now very hard to raise a sweat or get your heart rate above 120 when exercising!
I know this isn't a stock market blog, but I gotta wonder if others are seeing the tepid recovery you are and that's leading to the swoon. IIRC, the market has discounted 4-6% GDP growth next year. If we have 1.0+/-0.5%, that might take some wind out of the market's sails. Until we started showing real growth everyone could rationalize the harder the fall, the bigger the bounce. (In fact I think that was the argument of Jim Grant of all people!) Now that the recovery is here and it is undeniably an "L" that's not going to be good for equity values. And a lot of expected growth seemed predicated on the "wealth effect" of increased equity values.

To simplify, the 2nd derivative rally is over. The first derivative has arrived and it's 0.

PS. MoM, you'll be in our household's thoughts and prayers.
A classic "buy the rumor, sell the news" rally.

To continue in the stock market vein, I think the market is also discounting an apparent increase in the willingness of the Democrat leadership to ram through a health-care bill in reconciliation. As MOM points out, such a bill would be devastating to consumer spending.

I'm not saying it's going to happen, but there's enough talk to get worried.
Allan - yeah, that's it, only you phrased it far more elegantly than the redneck. It's the higher level of culture.

It's not just that it's showing up as an "L". It's that the best it can be is an "L" with a tiny upward slope. The other possibility is a sideways Z tipped downwards, and no one wants that.

The recovery (such as it is) is in the bottom 40%. That would normally presage a quick movement past the 50% level, and then, birds chirping, bees humming, spring! ... and all of a sudden it would be fade to waves crashing rhythmically to shore in an orgasmic finale.

Now that's no longer plausible. Because of the late Labor Day, it will be hard to compare September WIET to the previous year, but August came in 7% below the previous year, and that was a comparison biased toward 2008.

You have bank lending dropping, oil/gas/diesel stockpiles all way above the high point of their five year average levels, Treasury yields trending down, and higher-end incomes have apparently were accidentally sent to the junkyard to be compacted with the clunkers.

At this point, even those (such as I) who generally are hostile to Keynesians are screaming "Pass the stimulus! And this time don't forget to spend some money in the real economy, doofuses!"

Because the credit losses are going to keep rolling down the pike, there is nothing we can do about the gov/private sector imbalance except grit our teeth and work it out, bank lending is dropping and inflation on needs items has already shown up like Jehovah's Witnesses sensing an interest.

This ain't purty. It is a relief to see signs of life, but the funnel cloud on the horizon is real too.
Mind you, this is recovery from the ground up,

Ground-up the only kind of recovery. The rest are redistribution schemes where you get ground up by the scheme.
You can't raise taxes or spending mandates (whatever you call them) on most of the population right now without creating an economic disaster. You probably won't be able to do that for years.

Stimulus is the same thing, yet you favor that. Sounds like a logic problem somewhere.
but it also was used to roll over some very unreliable clunker junkers

According to whom?

The point is whether it saved the person money in the long-term. From the reports I got, buyers were getting ripped off. With showrooms filled, dealers had zero incentive to move off the fictitious sticker price. A $3500 deal on a zero-value trade-in isn't do good when you could negotiate a $5K break on your own and sell the clunker to a junkyard for double sawbuck.

The only possible good CARS did was free up some yard space at Long Beach. But there were cheaper ways of doing that.
MoM, my momma is a red-neck. For some reason with me it didn't stick. :-)

Charles et al, I think the CfC was supposed to allow the dealers to clear out their inventory and pay back their bank loans. To my way of thinking this was confirmed when as soon as CfC ended, Toyota (the biggest CfC seller!) announced they were cutting production and closing NUMMI. (Wow, talk about flipping the bird, if only Ken Lewis showed such backbone.) And the ink wasn't even dry on that when GM announced they were calling back shifts.

Well, that's socialism for you... building cars because politically we need to keep unemployment in check. Where's Maggie when you need her?
MOM, I was wondering what you might think of this analysis:


...the Japanese may eventually be forced to sell some of their long-term bonds.

“That's much worse than not buying,” he said. “The other thing is, they're buying almost exclusively short-term debt. And that's what we are offering, because we can't sell the long-term debt. And you know, the history has been that people who borrow short term really get burned.”

This analysis seems to depend on the idea that the Treasury has shifted borrowing from long- to short-term bond sales because there isn't enough demand for long-term bonds at the desired rates. I have no way of telling if that's true.

It may be that short-term borrowing is a relatively smart thing to do here--if it tide the government over to a point where they can better get long-term financing. But it certainly reduces the Fed's flexibility....
Neil - in an environment in which just about every CB is pumping money into the market, who the heck wants long anything?

And we can yak about controlling inflationary expectations all we want, but the futures markets have oil at $150 a barrel out around 2015 still, I think. Figure that. Personally I think that is a deflationary signal for many asset types, because if basic costs rise (such as food), there will be less money left over for other stuff. Alternatively, one could flood money into the market and let other prices rise too match, but that means inflation in a big way, and it is not clear it will produce anything but an increasing shift toward a two-tier class structure. The social and political implications are quite remarkable.

When the Fed is buying the mortgages and T-bills to push rates low, of course no one's going to be buying long. Look at how T-bill yields are moving - everyone is ducking and weaving around short-term safety figuring they don't want to be caught long in a few years.

Japanese public debt is going to be at 200% of GDP soon. They haven't beaten their own deflation yet.

"Look at how T-bill yields are moving - everyone is ducking and weaving around short-term safety figuring they don't want to be caught long in a few years."

I hear that. I'm long long-term TIPS, but I feel very much the exception. I don't necessarily think I'm even on the right side of the trade either. Deflation could very well persist for a LONG time.

That said, being wrong won't really hurt my purchasing power if deflation does persist. In fact, TIPS do offer at least some deflation protection. The TIPS I buy from the government are guaranteed to have at least face value at maturity. In the meantime, I still earn interest. TIPS bought and held are therefore always better than cash buried and held, no matter what happens.

I've been bearish for over 5 years. That makes it easier for me to embrace long-term safety than some of the more recent "cyclical" bears. I know my saving and spending behaviors have permanently changed. I'm fairly sure my investing behaviors have permanently changed too.

My cash is not "waiting on the sidelines" as they like to say on CNBC. It's basically permanently parked there. I think of long-term TIPS and I-Bonds as permanent cash... flow. Hyperinflation would ruin me of course, but TIPS do offer at least some inflation protection. I'd be financially ruined slower than many.
...a deflationary signal for many asset types, because if basic costs rise (such as food), there will be less money left over for other stuff.

In other words, the same effect that Laffer was writing about in his WSJ opinion. Rather than specie currency (which no longer exists), people are shoveling money into energy and other tangible goods. The prices of other goods must fall in relative terms due to the overall deflationary effects of demographics and debt.

We have a fiat currency, so the Fed will have a choice, whether to keep overall prices high or allow them to deflate--but oil and metals prices will still be higher in relative terms.
CARS did remove some reliable used vehicles, but it also was used to roll over some very unreliable clunker junkers.

Hmmm. It's not just that it removed a lot of reliable cars from the market; it also seems to have pushed demand forward instead of increasing it (I hear reports of August and September car sales cratering).

*And* it encouraged people to take out car loans that will possibly leave them overleveraged. These selfsame people might not have bought a car, or might have bought used, or might have bought cheaper without the lure of $4500. For some percentage of those people, the extra financial load of the car payment will put them over the edge in the next twelve months.

It may have put some spare parts on the market, but no engines or engine parts and no transmissions, since these were required to be destroyed - and those are the most valuable parts of a junked car. Door panels and glass aren't that much stimulus, and I'd go so far as to say that destroying physical objects of economic value is never anything but economically destructive.

"...and I'd go so far as to say that destroying physical objects of economic value is never anything but economically destructive."

I agree with you. Our economy *appeared* to get a big boost due to Hurricane Katrina (2005). At the time I joked...

If one hurricane is good, just imagine how much prosperity could be generated if we could get a hurricane like that every day, in every city!

I guess the logic doesn't extrapolate all that well though. Go figure.
In a belated reply, Mississippi is the state.
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