Saturday, February 27, 2010
Blah, Hiss, Spit
In general, when sharply different methods trying to assess the same thing come up with very similar results it tends to increase one's confidence in these results. I prefer my method, since it has a lot of history behind it. But I am startled by the close correspondence of Consumer Metrics.
The remaining question is whether we can avoid a second contraction in the second half. We could if energy prices reversed sharply. Maybe. And we could if for some reason all of those who have money on the sidelines decided to spend it, but that's not happening.
However if Congress doesn't pass more than a 30 day extension of unemployment benefits, I don't think we have much of a chance of avoiding a second half contraction. In part, our problem IS confidence. People who are working or have money in the bank and relatively comfortable personal positions tend to moderate their spending based on confidence factors, and one of the factors driving confidence is the position of those close to them. If, for example, a retired couple is very worried about one of their children losing unemployment, you can be quite assured that the couple won't be spending much on themselves. They'll reserve it.
There were two structural employment bumps and one temporary (Census). The two structural were production (inventory cycle) and low-end retail, especially the growth in store hours. There is not a huge amount more in either, and throughout 2010 the state and local fiscal problems driving reductions in state and local employment and spending, plus large corporate restructuring, will slowly pare away at employment. Against that, you have retirements, which somewhat offset the trend.
What I am seeing in the grocery stores is pretty frightening. It's depression-like, quite similar to the later 70s. It's the marker of reduced living standards for a large number of people, and it's not going to clear up quickly. It has gapped down in a major way over the last month. I am pretty jittery. One ugly emerging pattern is a disproportionate decline in counties with a high percentage of government employment. We'll see if that holds.
I also have a miserable virus, probably fed by all the snow shoveling I did this week. I'm going to take a few days down.
The remaining question is whether we can avoid a second contraction in the second half. We could if energy prices reversed sharply. Maybe.
I have this "sinking" suspicion/opinion that energy prices will fall, but the timing won't help the mood. Deflation will fill the headlines again.
It took two recessions to make people think twice about heavily leveraging their commodity exposure in the late 1970s. The first one wasn't good enough.
So many people seem so convinced that heavy inflation is on the way, that China cannot stumble, and that commodities are therefore a sure thing.
Copper is back to pre-crash levels, as if nothing at all has changed.
I remain deflationary. I could be wrong of course.
I sold TIP (treasury inflation protected bond fund) in November and buried cash has actually outperformed it. Some still expect 12% returns going forward. I'm not one of them.
The real yield on the 5-Year TIPS is just 0.2%. It's scraping bottom. If change ever happens, up is the only direction possible. Deflation could be that change. Real yields hit 4% in late 2008.
It is going to be very difficult, nay impossible, in my view, to avoid a deflationary spell. As things stand, there doesn't seem to any reasonably probable event that can help us evade that possibility.
I wish you a speedy recovery from the viral infection.
Pity we don't have one.
too many conflicts going on to make oil go down. I think you are wrong here until July when the double dip recession is clear to all. My 2 cents.
I wouldn't claim to know when oil might drop in price again. I can say that I would not buy and hold oil at these prices though.
Have you been watching my wife and I? (lol) Our daughter will not lose her job as she is self employed. Her business has held up remarkably well, considering the economy. However, a few bad months could put her behind the eight ball. If she cannot make her mortgage payment we will be there as a backstop. This will not last forever. We're prepared to help if necessary as things scrape along the bottom. (And glad we're able to do it.)
What really irritates me is that it need not be this way. If Obama and company would just institute some business friendly policies (no healthcare reform, no cap and trade, making the Bush tax rates permanent, drill, drill, drill, etc.) this country would be headed toward recovery.
Since I do read Mish, I had seen these charts. Interestingly, the Conference Board leading indicators are still trending up, but they are heavily influenced by the stock and financial markets. They also give strong significance to the inventory rebuild. A lot of people are seeing the end of this recession based on the Conference Board's 9.8% up trend in leading indicators. I expect we will continue to see economic statistics that are both "unexpected" and "surprising" to the downside.
Seen on PJTV: there is now a YouTube rap video on Hayek vs. Keynes. Google can find it. I'm not a rap fan but it's pretty good.
The problem is that Keynes has been taught as gospel for so long it is hard to see what it would take to overturn his thinking.
Links to this post: