Polar Vortex or Recession Redux?

The recovery that wasn’t a recovery may have come to an end, as the Bureau of Economic Analysis reported that gross domestic product dropped by 1% during the first quarter of 2014.

Even with the drop in GDP, lower housing sales and continued high unemployment, no one is saying the economic is in a recession.  Perhaps when a recovery is as insignificant as the one we’ve experienced for nearly five years, the distinction between recession and recovery is insignificant.

The economy was in sad shape five years ago and it’s in sad shape today, in spite of record stimulus spending, bond buying, and warm and fuzzy messages from the President, Congress and the Fed.

Quarter-to-Quarter-Changes-in-Real-GDP-Percent-Change_chartbuilder-1But fear not.  The bar is so low now, even a baby step over it will look like a high jump.  At least that’s the opinion of PNC Chief Economist Stuart Hoffman who wrote, “I believe this real GDP decline, mostly due to the polar vortex, coiled the ‘economic spring’ even tighter for a sharp snap-back (boing!) this quarter, where I have an above-consensus forecast for a 4.0% annualized rise in real GDP.”

In other words, bad news for the first quarter is good news for the second quarter.  Stop me if you’ve heard that story before.

Read more

Household Income Shows Troubling Outcome

Hold off on the victory dance.

The 2014 “Economic Report of the President” and many media reports indicate that the U.S. economy has finally recovered.  But has it?

One measure of economic health is household income.

Historically, America has prospered, as each generation typically has earned more inflation-adjusted income than the generation that preceded it.  The American Dream is not just to succeed yourself, but to provide your children with a better life.

A better life means more than money, of course, but money enables the next generation to do more, live more comfortably and worry less about making the mortgage payments.  Materialistic though it may be, it’s part of the American Dream.

So it’s alarming to see the drop in income that has taken place since 2007, when the financial crisis began.  Median household income has dropped from $56,000 to $51,017, which is a dip of nearly 10%.

We’ve had dips before, as the chart below shows, particularly during the “stagflation” years of the late ’70s and early ’80s.  But this has been the most dramatic drop in income in recent history.

When household income shrinks, some in the middle class risk sinking down to the lower class and those on the cusp of becoming middle class no longer are able to achieve that status.  As the lower class grows, government expenditures grow, resulting in higher taxes and even further erosion of discretionary income for those in the middle class.

When income decreases, consumers have less money to spend, so the economy stagnates and businesses grow at a slower rate.

The chart and the U.S. Census Bureau’s records do not yet go beyond 2012, so hopefully some of the lost income is now being recovered, but we won’t know for sure until new numbers are available.

On a positive note, though, the chart shows that income levels may have stopped plummeting.  According to the U.S. Census Bureau, “Real median household

Read more

Investing at a Profit Now a Sure Thing – For Some

Imagine being able to trade stocks and knowing that you will make a profit every day.

Of course, for the average investor, this is impossible.  But mega-banks aren’t average investors.

According to Jim Quinn of The Burning Platform, “JPMorgan experienced ZERO trading loss days in 2013.  Goldman Sachs, Morgan Stanley and most of the mega-banks have had virtually perfect daily trading results since 2010.  If they are all winning, who is losing?”

Banks like JPMorgan, Goldman Sachs and Morgan Stanley can, of course, attract the best and brightest traders, so you would expect above-average results from them.  But how does anyone manage to make it through an entire year without a single day in which trading losses take place?

Through legal theft … also known as high-frequency trading (HFT).  As we’ve previously reported, Michael Lewis’ new book “Flash Boys” shines a light on this dark side of Wall Street, pointing out that HFT enables Wall Street’s biggest players to buy shares at one price, then sell them to investors at a higher price in a practice known as front running.

Read more

Talking the Talk

When’s the last time you’ve heard anything about the sovereign debt crisis?

We’ve seen more activity in a tortoise than we’ve seen in Europe of late.  Maybe Vladimir Putin needs to invade Europe just to see if the cultured continent is still functioning.

Europe, though, has been quietly going about its business in much the same way as the U.S.  Bond yields have been at record lows and stock prices have been near record highs across the continent.  But, as in the U.S., just because the market is performing well, it doesn’t mean the economy is performing well.

The jobless rate in Greece is 26.7% and Spain is not far behind at 25.3%.  Overall, unemployment is at 11.8%.  In comparison, the U.S. rate is 6.3% … although the U-6 rate remains at 12.3%.Europe

Forward Guidance in Europe

Seemingly, the difference between Europe’s approach and the U.S. approach has been Europe’s reliance on forward guidance, which to date has propped up Europe’s markets.

There was talk about relying on forward guidance in the U.S. last year, but instead the Federal Reserve Board continued to buy bonds.  Talk about forward guidance is ironic, given that forward guidance is simply the act of talking … saying what you expect to do without actually doing much of anything.

Read more