Posts Tagged ‘Economy’

The Economy Is Booming – For the Repo Man

Friday, August 22nd, 2014

“Credit is a sacred trust, it’s what our free society is founded on. Do you think they give a damn about their bills in Russia?”                                                                                                                                                 Bud in “Repo Man”

The good news for the economy is that consumers are buying more.  The bad news is that they’re not paying for what they buy.

The Urban Institute found that more than a third of Americans are not only in debt, but are being chased down by debt collectors.  Debt collectors are, of course, a last resort; they’re used when all else fails and the debtor is more than 180 days past due.  When a consumer goes six months without paying a bill, it’s a good sign the person either has no intention of paying or is unable to pay.

Yet about 77 million Americans – 35% of adults with a credit file – have debt in collections.  They owe an average of $5,178, which doesn’t sound like much, but keep in mind that’s debt that’s gone into collection, not total household debt.  It does not include mortgage debt, but does include credit card, medical and utility debt.

Consumer creditThe average American household has $15,480 in credit card debt alone and consumer debt totals $11.74 trillion.  Add in federal debt, corporate debt, state government debt, municipal debt and the debt of other countries and it’s a wonder that anyone anywhere is still solvent.

You may recall the cheering that took place in 2009, when consumer debt levels decreased.  But, as the chart shows, that was a small mogul on a steep and steadily rising mountain of IOUs.

(more…)

It’s a Mad, Mad, Mad, Mad World

Friday, August 8th, 2014

Isn’t summer supposed to be the time when life slows down and the world takes a vacation?

That may be the case for some of us, but the despots of the world are working overtime.  Consider just a few of the world crises taking place this summer:

  • Russia’s conflict with Ukraine continues.  The downing of Malaysian Airlines Flight 17 by pro-Russian rebels has done little to stop it.
  • Hamas is fighting with Israel over Gaza.  A cease fire is in place, but Hamas has shown little respect for previous cease fires and it is unlikely that this crisis has ended.
  • Muslim terrorists known as ISIS are making inroads in Iraq.  It’s reached the point where President Obama has reversed his policy and announced that U.S. military airstrikes will take place “if necessary.”
  • Syrian leader Bashar al-Assad continues to slaughter his people, while the country’s conflict threatens to spill over into Lebanon.
  • The newly inaugurated Libyan parliament has called for a cease fire and threatened to act against warring militias that continue fighting.
  • Al-Qaeda-linked sect Boko Haram continues to hold more than 200 schoolgirls captive in Nigeria.
  • Iran is developing nuclear weapons, although the U.S. State Department said U.S. and Iranian officials had a “constructive discussion” this week about Iran’s nuclear program.  There’s some conjecture that, even if Iran were to agree to halt its nuclear development program, it could outsource the program to North Korea.

    Gaza today.

    Gaza today.

Remember the end of the Cold War, the resulting “peace dividend” and the economic growth of the ’90s?  Remember life before the financial crisis?  Much has happened since then and most of it has not been good.

(more…)

Bad News – The Economy May be Recovering

Friday, August 1st, 2014

“This is what it sounds like when doves cry.”

                                                                    Prince

Imagine this.  After more than five years of mediocre economic growth and a quarter of “negative growth,” the economy grew at a rate of 4.0% in the second quarter.

At least that’s what the Bureau of Economic Analysis (BEA) said.  The BEA previously estimated that the economy shrank by 2.9% during the first quarter, but has readjusted its analysis and now says that the economy shrank by 2.1% in the first quarter.Inventory

From 2.9% “negative growth” to 4.0% positive growth is a swing of nearly 7% in a span of just three months.

That’s quite a swing … but do you believe it?  After all, Q1 growth was reported at -1%, -2.9% and finally -2.1%, so how much confidence should we have in the BEA’s first report for Q2?

Meteorologists are often criticized for erring on the weather, but they’re forecasting.  The BEA is trying to tell us what happened more than a month ago – and still can’t get it right.

(more…)

Only a Half Trillion Dollars

Thursday, July 24th, 2014

It’s a sign of how much trouble we’re in when a budget deficit of a half trillion dollars seems like fiscal restraint.

It is progress, given that annual budget deficits were running above $1 trillion a year throughout President Obama’s first term and have been as high as $1.4 trillion.  And it could have been worse.  Recall the effort made by President Obama to stop the automatic spending cuts that took place when sequestration was adopted.

But a half trillion dollars is still a mountain of money.  It helps to give the number some context.CBO Chart

To reach a half trillion dollars, you would have to spend $8 per second beginning with the year 0 and continue spending through today.  If you had a stack of $1 bills adding up to $500 billion and were able to put them one on top of another, the stack would be 34,000 miles high.

(more…)

The QE Apocalypse

Friday, July 11th, 2014

The end is near.

The Federal Reserve Board has now put a date on the quantitative easing apocalypse, letting us know that bond buying will end in October – unless the central bank changes its mind, of course.

The October ending is not unexpected.  The Fed has been cutting back bond purchases by $10 billion a month since last year and it doesn’t take a math wizard to figure out that there will be nothing left to taper post-October.

Yet this news, reported in the just-released minutes to last month’s meeting of the Federal Open Market Committee, is being treated as a revelation.  It was, for example, the lead story in The Wall Street Journal, which typically doesn’t lead with news that was discussed last year and made official at a meeting that took place a month ago. Portugal

The real news, though, is what wasn’t discussed – the end of near-zero interest rates.  As a result, rather than pushing yields up and bond prices down, release of the meeting minutes had the opposite impact.

(more…)

Sprinkling the Fairy Dust of Illusory Riches

Thursday, July 3rd, 2014

When the Bank for International Settlements (BIS) calls central bank market rigging “the fairy dust of illusory riches,” it’s time to pay attention.

The BIS is the central banks’ central bank.  Its role is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

To provide the statement with some context, and to alert you about what else you can expect from central banks moving forward, we provide a summary of other key points made in this year’s BIS annual report, which is appropriately titled, “In Search of a New Compass.”Compass

First, there’s recognition that easy money policy has gone far enough.  That’s self-evident, but of special interest when you consider the source.  BIS notes that despite a pickup in economic growth, the world economy “has not shaken off its dependence on monetary stimulus.  Monetary policy is still struggling to normalize after so many years of extraordinary accommodation.”

(more…)

Prozac Nation

Friday, June 27th, 2014

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.

(more…)

The Market’s Missing Mojo

Friday, June 20th, 2014

Easy money policy has its share of side effects.  The stock market continues to hit new highs, thanks to the Fed, but the level of risk that investors and taxpayers are exposed to also may be close to new highs.

The market for U.S. Treasuries, as one example, is a “risk on” market.  As Bloomberg put it, “Just because U.S. Treasuries look more and more stable doesn’t mean they are.”

Some may mistake a lack of volatility for low risk, but the lack of volatility appears to be the result of less liquidity, not lower risk, as the Fed has purchased trillions of dollars in bonds and banks are pulling back from debt trading. Bubble PE_0

Before the financial crisis, lower volatility resulted in more trading, but in this case trading volume has dropped.

“What’s happening instead,” Bloomberg reported, “is unprecedented central-bank stimulus has sent everyone into the same risk-on bets, while it’s also becoming more difficult to trade as banks shore up their balance sheets in the face of new regulations.”

(more…)

Mario the Magnificent

Friday, June 6th, 2014

It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.

Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting.  With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain.  The ECB’s target rate of inflation is just under 2%.

Mario Draghi

Mario Draghi

Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month.  Apparently, as long as someone is following easy money policies, the markets are happy.

The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds).  That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.

(more…)

Polar Vortex or Recession Redux?

Friday, May 30th, 2014

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.

(more…)