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Thursday, May 26, 2011

Life In The Land Of The Unexpected

Ya know, at some point perhaps we should begin to expect the unexpected? Is it unexpectedness or a slow-learning problem amongst the economists?

Initial claims back to 424,000, last week's number revised from 409,000 to 414,000, four week MA 438,500. In a couple of more weeks we'll dump the one big number, but unfortunately the pace is remaining well above 400,000, and at this point this must be regarded as a threat to economic growth.

As for GDP, I get a chance to mock myself, because I expected Q1 second estimate to come in at least 2%, and instead it remains unexpectedly (to me and to others) at 1.8%. Highlights in html. Full release in pdf. This issue includes the first estimate of corporate profits, and (as expected by me), there was a minor technical margin problem:
Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $21.9 billion in the first quarter, compared with an increase of $38.2 billion in the fourth quarter. Current-production cash flow (net cash flow with inventory valuation adjustment) -- the internal funds available to corporations for investment -- decreased $11.0 billion in the first quarter, in contrast to an increase of $36.9 billion in the fourth.
See, this is why Mr. Packaging Guy ain't expanding, and this is why we are seeing some of this "unexpectedness", as well as some weakness in capital spending and durable orders. Less cash for businesses, less business, screaming on Capitol Hill about why greedy businesses are making so much money but not hiring, and proposals to raise their taxes to improve the economy. Bank loans get repaid from cash flow, so bankers who want to live have "Cash Flow" tattooed on their hearts.

Needless to say, the abrupt margin drop (-47.9 billion in one quarter) translates to increasing prices, which translates to a consumer cash flow problem. While Fed People are still wandering the nation talking about no signs of a wage-price spiral, we are most definitely seeing those signs. And consumer credit card lenders are already upping their risk assessments and cutting credit limits for some consumers. Gross Private Domestic Investment, the real driver of the economy, is really financed through cash flow, so don't expect GPDI to soar.

Ben, the aptly named Illusion of Prosperity has a song for you, and here is my comment:

PS: The very strong 5-year Treasury auction yesterday was not a good economic sign:
Demand for Treasuries is rising following an exceptionally strong $35 billion 5-year note auction where coverage of 3.20 is the best in 10 years of available data. At 1.813 percent, the auction stopped out two basis points below the one o'clock bid. A low dealer share of 44 percent offers confirmation of customer demand. These results will raise expectations for strength in tomorrow's $29 billion auction of 7-year notes.
However it does indicate that the market kind of likes the fact that Congress is not simply rolling over and adding another 2 trillion to the debt limit. Fight on, Congressional cutters! You are our last, faint hope.

I love the tactical facepalm picture! Hahaha!

I should be very ashamed that I love it, but I do.

Here are some charts I did based on your oil supplied vs. employment thoughts.
I guess the Treasuries aren't reading too much into the congressional special election results? I find it terrifying that Republicans stayed home on that one. The Democrat candidate made it specifically about Medicare cuts...
"Unexpected" trivia time.

Initial claims back to 424,000...

U.S. Jobless Claims Unexpectedly Climbed Last Week

Estimates in the Bloomberg survey of 47 economists ranged from 390,000 to 420,000.

Q: How many economists does it take to range bound a light bulb?

A: More than 47!
Sounds like a flight away from Europe on those 5-year notes. Will Congress see this as an excuse to spend more?
Here's a bonus employment chart.
Charles - I don't know. Yesterday the Senate rejected Obama's budget 97-0.

I think tempers are fraying a bit up there. But no one voted for it?
Who needs a budget when you can have emergency appropriations for everything.
The economic stats are depressing. The stock market saw new buying cme in today. Here's my take. Bad news is good news. Why? Because the traders all figure the Bernank will be forced to do QE-3. We know what QEs 1&2 did - supported stock prices and drove commodity prices up. Will he or won't he? Will he have mercy on the average consumer or Wall Street traders?Place your bets.

My word is easila. Short for ease until we lose it all?
Easila = the economic Godzilla-like monster created when bankers are ignorant of history!
employment data over the past ten years continues to disappoint those expecting the knowledge industries to create millions of new jobs instead are discovering they themselves are being replaced by software programs and higher valued computers. College grads are finding it difficult to find high value work and are now experiencing what skilled manufacturing labor has been going through since the early 90's.
Speaking of ignorance of history, I'm about half way through "CRISIS ECONOMICS" by Roubini and Mihm.

They start out with a history of financial crises going all the way back to the Tulip Mania of 1630 and briefly describe many other crises, defaults, sovereign bankruptcies, inflations, deflations, etc.

Invariably, the ingredients are pretty much the same. Loose money, weak or unobserved financial regulations, over enthusiastic demand for certain goods, over leveraging, and a general belief that "this time it's different."

Based on that they aver that the crisis of 2008 was very visible and predictable - except, as usual, few wanted to admit things had gone way too far. They point out the ending of Glass-Steagall as the beginning of the runup further point to Greenspan and Bernanke as being too loathe to take away the punch bowl, but when they did, it was with a vengeance. So, yes, more attention to history might have averted the crisis, but then maybe we are doomed to keep repeating the same mistakes because we are so arrogant as to believe history does not repeat and that "this time is different."

I have not gotten to their chapter that outlines their ideas for recovery. I wll make a guess that they will not endorse very heartily the present policies.

By the way, the EPA and National Wildlife Service are trying to get the Sand Dune Sage Lizard, a small reptile native to West Texas, declared endangered due to oil drilling in the Permian Basin. If successful, they will shut down 10%of our present domestic oil production. It will result in the loss of 10,000 jobs in the drilling industry there. IMO, this is not something the American people would accept easily if they knew what was going on.
Easila - the monster that destroys everything with quantitative ease.
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