Archive for July, 2012

GDP Doesn’t Stand For Great DePression

Saturday, July 28th, 2012

Measuring growth in Gross Domestic Product (GDP) is like taking the economy’s temperature.

The annualized growth rate of 1.5% at the end of the second quarter – which is a sliver above the projected 1.4% rate – indicates that the patient is still alive, but barely.

The economy is not quite on life support, but compare that growth rate with cumulative growth in the three years following previous recessions.  For the four recessions in the ‘60s, ‘70s and ‘80s, the cumulative growth fell between 15% and 20%.  For the most recent recession, the cumulative growth rate for three years is just 7.13%, according to The Wall Street Journal.

As the chart shows, post-recession growth was lower than the +16% cumulative rate of other modern-day recessions, and even well below the 9% growth rate of 2001.  That’s in spite of extensive government efforts, including the $814 billion economic stimulus program, two rounds of quantitative easing, Operation Twist and other efforts … or could these government programs have possibly slowed economic growth?

“In addition to years of negative real interest rates courtesy of the Fed, federal borrowing has grown at about three times the rate typical for postwar recoveries,” according to The Wall Street Journal.  “In other words, Washington already has unleashed far more firepower on the downturn than usual and received scant bang for its buck.”

In addition, 2010 GDP was revised from 3.0% to 2.4%, while Q3 2011 GDP was revised from 3.0% to 4.1%, according to, “indicating that the slowdown we are experiencing is in fact far worse than previously expected.”

Typically, the farther the economy falls, the greater the recovery in GDP growth, so the current recovery should have been stronger than other recent recoveries.

Under the Rule of Monetary Policy

Given overall economic conditions, it’s no surprise that profits are softening, too.  Facebook’s first quarterly report, for example, was underwhelming and did not cheer holders of its stock.

But some are cheered by this news, because they believe it will force the Federal Reserve Board to take action yet again and give us another round of quantitative easing (QE3).

It’s not a good sign when the market is moved by monetary policy, but by market fundamentals.

Over Fed

Friday, July 20th, 2012

To QE3 or not to QE3?  That is the question the Federal Reserve Board has been pondering for months … or at least Fed observers think it’s being pondered.

But, as we’ve said before, if the first two rounds of quantitative easing did little to boost the economy, why would a third round help?  In fact, each successive round of Fed action has had less of an impact than the one before it.

Quantitative easing is the printing of money by the government to buy bonds, which is supposed to stimulate consumer spending.  It hasn’t worked, because consumers are still broke and many have maxed out their credit cards.

The Fed also tried Operation Twist, which involved selling short-term bonds and using the funds to buy longer-term bonds, also had little impact.  Operation Twist, which might have been called QE 2½, was supposed to lower long-term interest rates to stimulate borrowing and investment, but it also has had little impact.

As Frank Barbera of Sierra Investment Management put it in his white paper, “Reflections on Slowing Global Growth,” “most of the liquidity created by QE1 and 2 did not find its way into the real economy, but instead ended up right back on the books of banks as excess reserves, with banks actually contracting their loan portfolios.”

Helping banks build excess reserves was, of course, not the goal of QE 1 and 2.

The one positive aspect of quantitative easing is that each round gives the stock market a temporary boost, but the impact is like that of chocolate, which creates a temporary boost, but makes the consumer more lethargic afterward.

Ray Dalio of Bridgewater Securities expressed concern that “there are no more tools in the tool kit of fiscal and monetary policy to help kick the can down the road.”

The problem with kicking the can down the road is that, at some point, the road ends.

Dancing With A Cow

Tuesday, July 17th, 2012

While Europe’s sovereign debt crisis has beaten down the U.S. stock market, it has helped the bond market.

Because the European bond market is in such poor shape, U.S. bonds are a relatively healthy investment.  Investors have been buying U.S. bonds, because they look good relative to European debt.  But that’s like dancing with a cow because your only other option is a pig.

U.S. yields are at record lows, even though U.S. debt has now reached $15.9 trillion, up from $9 trillion in 2007.  The 10-year Treasury yield, which has averaged 4.88% over the past two decades, hit a record low of 1.44% on June 1, down from its high for the year of 2.4% percent on March 20.

Regardless, the cow may be turning into a pig.  Robert Auwaerter, head of Vanguard Group’s fixed-income group, predicted that unless the U.S. gets its debt under control within the next four years, U.S. bonds will become about as popular as the bonds of the five European countries that have seen borrowing costs soar as investors boycotted their bonds.

What Bloomberg called a Treasuries Doomsday isn’t on the Mayan calendar, but it could be as grim as those end-of-days predictions, at least from a financial perspective.  If yields were to rise back to 3.8% by December 2014, which is their average for the past decade, investors would realize loses of 10.8%.

Demand for U.S. bonds has enabled the Federal Reserve Board to keep borrowing costs low, and President Obama and Congress to fund a budget deficit that’s forecast to exceed $1 trillion for the fourth straight year.

However, Auwaerter said, “In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough.’ ”

An Anorexic Recovery

Tuesday, July 17th, 2012

If we could put the recovery of the past few years on a scale, it would be the thinnest in history.  Recently, though, it has become downright anorexic.

Goldman Sachs announced today that it is revising down its estimate for second quarter gross domestic product growth to just +1.1%.

Retail sales were expected to gain 0.2% in June, compared with a year ago, but could not even manage that anemic gain and instead declined 0.5%.  It was the third consecutive month of decline for the retail sector.  Food and beverages, clothing and non-store retailers posted modest gains for the month.

About the only consolation we can take from these numbers is that at least we’re not Europe, which is in another recession.

A Step in the Right Direction?

Wednesday, July 11th, 2012

An unemployment rate above 8% is no longer news – it’s been above 8% for 41 months, which is the longest streak since the Great Depression.

However, during the Clinton Administration the federal government narrowed the definition of unemployment.  Add back in those who have given up looking for work or who are underemployed in temporary or part-time jobs and the unemployment rate becomes 14.9%.

That’s not as bad as Spain, Greece or Italy.  But it’s certainly not good news.

Yet President Obama called it “a step in the right direction.”

It’s true that the economy added about 90,000 jobs in June, up from just 77,000 new jobs in May, but the U.S. labor force grew by 189,000 people, or twice the number of jobs created.  Overall, the official unemployment rate remained unchanged at 8.2%.

Job creation at this rate is a “step in the right direction,” only if your intent is to step off of a cliff.

What Recovery?

Wednesday, July 11th, 2012

Maybe we should be used to high unemployment … but now the bad news on jobs is coupled with queasiness about corporate earnings.

The latest earnings season began with the S&P 500 dropping 1% yesterday.  It has dropped 2.5% over the past four trading days.  The Dow Jones Industrial Average was down 0.8%

Based on estimates compiled by Bloomberg analysts, profits for S&P 500 companies fell 1.8 percent in the second quarter, marking the first decline since 2009.  More troubling, though, is that the drop is likely part of a trend.  What can we expect in the third and fourth quarters?

Finally – U.S. Drags Down European Market … Japan Falls, Too

Wednesday, July 11th, 2012

We’ve been writing about Europe dragging down the U.S. stock market for more than a year now.  We, of course, take no satisfaction in it, but it’s kind of a “man bites dog” story to report that U.S. jobs data moved European markets lower at the end of last week.

Germany was down 1.9%, Spain was down 1.5% and the UK market was flat.

Meanwhile, while bailouts all the rage in Europe and the U.S., debt-laden, over-spending Japan is intent on joining in the fun.  Japan’s Finance Minister suggested the government could run out of money as soon as October if a bond bill is not passed.  Japanese stocks fell in response.