Economic Stress Maximal 9 Months After Bernanke Espied Green Shoots

This is one long horticultural pregnancy. It was March 15, 2009 that Fed Chairman Bernanke lowered himself by going on commercial TV (60 Minutes) and said, among other things:

" . . .And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back."

The AP reports that US economic stress hit a peak in Dec.:

Weakness in Western energy-producing states helped raise the average U.S. county's economic stress in December to its highest point since The Associated Press began analyzing conditions in more than 3,100 U.S. counties in October 2007. . .

Economic strains in the final month of last year were evident throughout the nation. Foreclosure and bankruptcy rates rose even as the national unemployment rate held steady. The spillover to Western states was inevitable, some economists say.

"It's hard to stay above water when much of the rest of the country is going down around you," Sean Snaith, an economist at the University of Central Florida, said of those states.

Granted it is now February, but the AP goes on to point out that the prior trough was in fact March 2009, the very month of the green shoots interview:

The AP's Economic Stress Index found that the average county's score in December was 10.8. That's a sharp jump from the 10.2 reading in November. The previous worst reading since the recession began in December 2007 was 10.3 in March 2009.

Leading economic indicators have been pointing upward for quite some time. However, we live in the real world of coincident indicators, which when adjusted for economic Viagra have been slow to join the party.

The U. S. economy appears to be following the post-credit crisis historical pattern of below-trend growth. It is essential to understand that the various forward-looking economic indicators rely heavily on monetary measures such as the steepness of the yield curve (long rates much higher than short rates being historically a good predictor of growth). What has happened here is that short rates have collapsed. Allegedly we are in the 3rd quarter of post-recession recovery, and we see 1-month T-bill rates at around 0.00%. Huh?

On an absolute basis, the 10-year Treasury rate around 3.6% is very low, but I do not think that the forward-looking economic indicators take that into account. Some intelligent institutions and money managers are willing to accept this "low" yield year after year till 2020. Under the deep freeze conditions where instantaneous money carries no cost to borrow, how can we expect the yield curve to tell us much about future growth? Perhaps we really should look at absolute rates, not just spreads between money rates of different durations.

I believe that the administration took its eye off the economic ball last year. It passed a "stimulus" bill that was weighted largely to depression-type relief for the states (Medicaid, unemployment benefits, etc.), a one-off tax cut of the useless type that was tried in 2008, and some roads programs etc., and then went off on its to-date fruitless but distracting efforts on cap and trade and healthcare reform. From a small business perspective, these proposed changes were large enough to further inhibit hiring, and given the poor economy, hunkering down/cutting costs was an easy choice to make.

If policy now focuses on the economy first, second and third from a domestic priority standpoint, the administration will do well to signal that 2010 is a year of incremental change if any at all regarding momentous long-term societal changes of the type that were proposed last year.

It is assumed at EBR that all the money printing, cyclical factors and population growth are likely to lead to significant percentage growth for a while because it is off of a very depressed base, if Washington goes off into a corner on the above-mentioned domestic policy initiatives and sucks its thumb.

However, so many mistakes have been made in economic policy over the past decade that a return to policies that encourage thrift and equity buildup rather than the doubling down (or quadrupling down) on the issuance of debt, the reversal of increasing unfunded liabilities, and the like is an important part of creating a long-term scenario for a virtuous economic cycle. Until then, more stop-start financial market action is a base case (see Jobs Will Grow in 2010, But Then What?), and the markets will reflect that by discounting the growth cycle. This discounting may already have begun even as the real world economic conditions continue to trough rather than peak, as should be the case.

In retrospect it may be clear whether the markets have already done this discounting. What is clear is that the traders and the deficit spenders continue to have excessive power over the real economy. The great economic failure of Barack Obama continues to be that he was elected with Goldman Sachs etc. dollars behind him and had no intention from the start of instituting real change that we could believe in regarding the cause of the economic ills to which he was heir.

Copyright (C) Long Lake LLC 2010

Thursday Night Market Update: How Long Can Wage Weakness Be Ignored?

Per TrimTabs (subscription) tonight (July 23), the Treasury Department of the United States-- hardly a "bear" reporter--reports a worsening of a marvelous proxy for wages, namely wage withholdings. Click on picture to enlarge.

This is consistent with UPS, which said Thursday that July's business was not improved over June's. This after two full years of Fed easing!

Starting with Volcker's easing in 1980 (to elect his patron Jimmy Carter) and then in 1982 (after keeping tight money long enough to ruin Reagan in the 1982 midterm election), the macro financial game of leverage was easy. All the authorities had to do was just keep money flowing as long-term rates dropped and the underlying real economy weakened out of sight of the populace. This game began to end after the 2001 recession and has changed this cycle. Sweden has gone to negative interest rates for savers. The true lack of economic vigor--the "hollowing out of America"--is plain for all to see. Thus the increasingly jobless recoveries after the 1990-91 and then the 2001 recessions, and the horrible jobs performance in this decade's expansion and then the current economic downturn.

The sea of liquidity has pushed "investors" into all sorts of speculative "investments". The idea that Ford Motor Co. ("F") has a stock market value of $20 Billion with a tangible net worth of
negative $18 B, no prospect of operating profits any time soon, intense competition from the government-sponsored GM and Chrysler as well as the non-unionized Japanese and other transplants and imports, is ridiculous.

The flailing and failing "evil empire" known as Microsoft has collapsing sales and earnings, yet the stock has soared in the low-quality rally of the past several months. MSFT has about $210 billion of stock "value" embedded in its price over and above its cash and other tangible book value. It sells for more than 4X sales per share, 10X tangible book, and is in decline. Rather than paying a nominal dividend, it should rather be paying out 7%; should spin off its money-losing new ventures for whatever value the market will give it, and go into a semi-run-off mode.
But that would not suit management's interests, so it will not do that.

Meanwhile, Rasmussenreports.com and Gallup.com each document a sustained increase in "wrong track" sentiment from the populace, increasing fear of rising Federal deficits, some worsening in the views of the economy: these in the face of a stock market that has put the bears on the run.

Probably the worse stock news is that "sensible" consumer-oriented stocks that pay rising dividends, have rising earnings and reasonable P/E's and will certainly be around 10 years from now, MCD and WMT, and that were last year's only 2 Dow winners, are acting very poorly. Anyone who believes in the general stock market because of the "golden cross" of the 50 day moving average above the 200 day ma should look at the chart of MCD in that regard: so far, the golden cross has been a sell signal, not a buy signal; this despite a far better financial performance than the stock market's constituent companies.

Meanwhile, Bloomberg has reported that Swiss gold vaults are full to overflowing; gold may be over-owned, at least temporarily. Yours truly monetizes his "GLD" gold holdings by selling covered calls and is short puts. Income first, prospective capital gains last is the watchword for the future, so EBR believes.

On a global basis, the US economy and stock market are laggards this year. Let's see how our market responds should the gamblers who are gunning the Chinese stock market take a breather. Assuming TrimTabs is presenting the Treasury facts accurately, the risks are to the downside, as Nouriel Roubini has been saying. "Green shoots" may already have withered.

A gambler in the US might just want to buy "TLT", which is an ETF that provides ownership of the long T-bond. Talk about an out-of-favor asset, down 25% in price since December 2008!

Copyright (C) Long Lake LLC 2009

Roubini More Bearish

As the news of the day across most countries is downbeat, Nouriel Roubini weighs in with an updated opinion. He had been making slightly more positive comments, but in U.S. Job Report Suggests that Green Shoots are Mostly Yellow Weeds, suffice it so say that not only does he suggest as before that the green shoots of Ben Bernanke may be turning to yellow weeds, he suggests they may devolve further into brown manure. He foresees significant deflationary pressures for over a year, and then, happy fellow, he foresees sufficient deficit spending by the Feds and debt monetization (money printing) by the Fed that intermediate and longer-term Treasury yields will head upward by late 2010.

The ECRI has been pounding the table (their own words) for economic recovery soon. Those such as Roubini and David Rosenberg who "got it right" prospectively are unreservedly bearish. Both views may be correct if a very weak technical recovery comes soon but, as Roubini forecasted months ago, it will be so weak that it still feels to most people like a recession.

Treasuries may have some significant upside in price if a financial disaster occurs. Gold still looks to be a steady Eddie safe play, but would be better bought under $900/ounce than at current prices. Deflationary anxiety as occurred last fall will cause fundamentally-based plus forced selling of gold.

Coyright (C) Long Lake LLC 2009

Where Are the Green Shoots?

Despite the strong signals for economic growth from the Leading Indicators, it is disconcerting to find consumer confidence down in May (Conference Board today), as well as the following:

Restaurant Industry Outlook Softened in May as Restaurant Performance Index Posted First Decline in Five Months

The outlook for the restaurant industry was dampened somewhat in May, as the National Restaurant Association’s comprehensive index of restaurant activity registered its first decline in five months. The Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 98.3 in May, down 0.3 percent from April and its 19th consecutive month below 100.

“With the performance of the current situation indicators holding relatively steady in May, the RPI’s decline was the result of restaurant operators’ dampened outlook for each of the four forward-looking indicators,” said Hudson Riehle, senior vice president of Research and Information Services for the Association. “

AND:

Bad news out of the Chicago Fed on the Midwest Manufacturing Index

The Chicago Fed Midwest Manufacturing Index (CFMMI) declined 3.1% in May, to a seasonally
adjusted level of 78.2 (2002 = 100). Revised data show the index was down 1.4% in April, to
80.7. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG)
was down 1.0% in May. Regional output in May declined 24.4% from a year earlier—lower
than the 15.2% decrease in national output.

Past is not prologue. Cycles turn. However, it sure looks as if too many business trends are flat to down so far into an economic downturn and despite an almost uncountable number of Fed and Federal programs.

Whither prices of financial assets if the expected recovery is below expectations?

Today's price action, with stocks and gold down and Treasuries flat, may tell that tale.

Copyright (C) Long Lake LLC 2009

Uninspiring Stability Breaking Out All Over?

We reported very recently that a GE Vice President reported no green shoots hanging around GE's neighborhood. Yesterday, Warren Buffett gave an interview to GE's subsidiary network CNBC stating that he receives daily updates on about 70 businesses, that the economy in the U. S. is in "shambles", and that there is no economic improvement visible. He did express optimism that on a 10-year basis, the stock market will beat the Treasury bond market. Uncle Warren said he has NO fear of deflation, just inflation on a 2-year horizon and beyond.

EBR believes that Mr. Buffett is making the wrong comparison between stocks and Treasury bonds. One buys Treasuries for security, not to "beat" stocks. The correct comparison is between stocks and corporate bonds. On that basis, corporate bonds are strong competition for stocks on a risk-reward basis.

Further in the anti-green shoots meme, we can point to Mervyn King, head of the Bank of England, who is bearish on the U. K. economy; the American Automobile Association, which has downgraded its estimate of the number of drivers to hit the roads this season; Johnson Redbook, which recorded below expectation retail sales, and others. On the other hand, Nouriel Roubini appears to grudgingly accept that matters are "stabilizing". For him, that's wildly bullish. And of course, the ECRI has "pounded the table" that recovery is certain this summer.

I feel like a religious agnostic. I can believe that all points of view and predictions are correct, but just not all at the same time. Inflation? For sure, but when. Bonds: they make sense with slack in the economy and perhaps chastened consumers for years to come. Cash: sounds good; keeps your powder dry to jump in the correct direction. Gold: for sure, but too many true believers have kept it churning. Stocks: primarily as income vehicles to compete with cash; and, the right tech stocks, which sat out the last cycle, are due to have their day.

One good rule of life: the future is more like today and yesterday than one thinks. If GE, Berkshire Hathaway and the Bank of England see no green shoots growing, why should tomorrow suddenly burst out with wild and crazy growth or sudden inflation? Anything is possible, but I wouldn't bet on it.

Copyright (C) Long Lake LLC 2009

Economic Reports from the Front Lines

Today, your intrepid blogger braved drizzly Beverly Hills skies and had breakfast with the founder of a medium-sized chain of jewelry stores in the Southern California region. Did this gentleman, who had long since given his stock to his descendants, see green shoots? More no than yes, unfortunately. To wit: Last year the company had become unprofitable. Their long-time bank pulled their line of credit for that reason only. The company had minimal need for short-term debt, financed their needs out of the founding family's pocket temporarily, and found a new bank. The old bank that stiffed them had a separate asset management division, which had no clue that it was about to lose a long-time client. (It would be good if these divisions communicated!) Anyway, enough employees were fired or otherwise had hours reduced so that the company is profitable again. The bad news is that sales still stink, probably down 15% from two years ago. Two major competitors have gone bankrupt in the past year or so, so all other things being equal, business should be up as migration to the survivors has occurred, and it is not noticeably up.

Furthermore, Beverly Hills and nearby less tony areas have immense amounts of high-profile empty commercial storefront for lease. It's a severe situation, and commercial real estate is a lagging indicator, suggesting worse to come. It was hard to look at all the rentable commercial space and not expect a prolonged time return to the prior peak level of economic activity.

Moving back to the home (Florida) front, a report from a banker with a major lender is that there are no green shoots. None. Refi activity has recently shrunk to near zero with the pop up in mortgage rates; home sales are horrible, and home prices are eroding. Other personal sources in California and Florida report no green shoots visible yet, either.

Perhaps other regions are more buoyant.

That's a quick report from the front lines. Here's a comment from one of the largest corporations in the known universe, General Electric, from Bloomberg.com, in GE Vice Chair Rice Sees No ‘Green Shoots’ in Orders:

General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

It is more than 3 months since Dr. Bernanke green-shooted (green-shot?). The stock market has responded with a major bull move. Yet the economist David Rosenberg points out that more than all the up-indicators in the Leading Economic Indicators were financial ones; the real-world indicators actually were slightly down in May. If Paul Krugman is correct that the U. S. is in a liquidity trap, then the financial indicators will overstate the future response of the real economy. Furthermore, both the LEI and the ECRI's indicators take rising commodity prices as positive signs. I question whether a rise in the price of oil is a positive leading economic indicator. Perhaps it was in the days when the U. S., Western Europe and Japan were the only importers of oil that counted. To the extent that the rise in oil price and that of other commodities relates to China using oil and the other commodities for its internal growth, it would appear that this is a positive leading indicator for Chinese GDP and a negative indicator for U. S. GDP.

One final observation: Much as the Street likes to speculate on the future with various indicators, the action of the Dow Jones post the 1932-3 bottom(s) in the market correlated closely with one variable: dividend payments. As companies resumed or increased dividend payouts after the Crash, stock prices rose; when dividends were cut after the 1937 recession, stock prices fell apace. In other words, investors need not neglect the facts they see around them. All the rest is guesswork about the future; and in the other direction, an over-reliance on historical precedent can also lead one seriously astray.

With many markets balanced between their 12-month high and low points, and with several sitting by their declining 200-day moving averages which are now intersecting with their rising 50-day ma's, there is lots to follow fundamentally and technically: a rare time of equilibrium in a variety of ways. Lots of pots a-boiling.

Copyright (C) Long Lake LLC 2009

More "No Green Shoots" Evidence From the Real World

Manpower Inc., a temporary help company with a large U. S. operation, has unpleasant news, as reported in the MarketWatch story:

Jun 9, 2009, 12:01 a.m. EST
Employers' hiring plans stuck in negative territory
Third-quarter outlook unchanged from second quarter's record low: Manpower

Here are excerpts:

Employers' hiring plans for the third quarter didn't budge from their record-low second-quarter outlook, according to Manpower's latest Employment Outlook Survey.

A net -2% percent of employers said they plan to hire in the upcoming third quarter, flat from the -2% who said they would hire in the second quarter, on a seasonally adjusted basis, according to the Milwaukee-based firm's survey of 28,000 U.S. companies. (The second-quarter outlook was revised down to -2% from -1%.)

The survey's previous low point was in 1982, when a net 1% of firms planned to hire in the third quarter.

A year ago, a seasonally adjusted net 12% of firms said they would hire in the third quarter. The Manpower survey measures the percentage of firms planning to hire minus those intending layoffs. Manpower doesn't measure the number of jobs. . .

"We are seeing some stabilization from an outlook perspective. To me, stabilization right now is pretty good news," said Jeffrey Joerres, chairman and chief executive of Manpower Inc. "For a while, every quarter seemed to have gotten worse and this one at least is leveling off."

DoctoRx here. I beg to differ with Mr. Joerres. Stabilization in what is the longest economic downturn since the one that began in 1929 is pretty bad, not pretty good. It stinks, in fact. There was a tax cut last year, one this year, "stimulus" here and much more coming, money printing and credit extension by government on a vast scale, and the best we can get is a bottoming process?

The weight of the actual evidence, rather than hopes, is that the U. S. economy is following the Roubini script: a prolonged bottoming process. This may change, but a good rule of investing is not to expect rapid trend changes. Thus in the 1990s, tech was hot both in the business world and in the investment arena; expecting those trends to change (which was rational) cost a lot of people a lot of money. Investing on the basis of one's fervent hopes for a strong economy to rise out of this poor one may be equally rational and ultimately correct, but early.

Copyright (C) Long Lake LLC 2009

From Berkshire Hathaway: Think Emergency Room, not Green Shoots; and Other Reports the Green Shooters Would Prefer You Not Know About

Here are some news items you may find interesting.

First, from Bloomberg.com, Japan’s Factory Output Surges 5.2% as Recession Eases (Update1). Beyond the info contained in the title, here's the most newsworthy part of the article:

Still, even as overseas shipments start to rise on a month-on-month basis, Japan is exporting a little more than half as much as last year and producing about a third less. That has saddled manufacturers with factories and workers they no longer need.

Nippon Steel Corp., the country’s biggest mill, is running at half capacity . . .

Next, courtesy of Calculated Risk's notice, ATA Truck Tonnage Index Fell Another 2.2 Percent in April:

ATA Chief Economist Bob Costello said truck tonnage is getting hit from both the recession and the massive inventory correction that the supply chain is currently undergoing. "While most key economic indicators are decreasing at a slower rate, the year-over-year contractions in truck tonnage accelerated because businesses are right-sizing their inventories, which means fewer truck shipments," Costello said. "The absolute dollar value of inventories has fallen, but sales have decreased as much or more, which means that inventories are still too high for the current level of sales. Until this correction is complete, freight will be tough for motor carriers." Costello added that truck freight has yet to hit bottom and it could be a few more months before this occurs. (Emph. added)

Third, from the head of Berkshire Hathaway's Mid-American Energy and HomeServices of America subsidiaries, also courtesy CR's attention, MidAmerican's Sokol sees US housing staying weak:

"As we look at the economy, I have to be honest: we're not seeing the green shoots," Sokol said . . ." (Emph added)

"We think the official statistics of 10 to 12 months' backlog is actually nearly twice that amount . . ."

"There is an enormous shadow backlog of about-to-be foreclosed homes and of individuals who need to sell but have time, and there are already six (for sale) signs on their block," he said.

Assuming the economy does not worsen, he said: "It will be be mid-2011 before we see a balancing of the existing home sales market." He defined "balanced" as a six-month backlog.

Fourth, courtesy of Mish, consider "Mr. Mortgage", who had extensive comments today on the jump up in mortgage rates due to the bear market in Treasuries, in Potential Consequences of 5.5% Mortgage Rates:

With respect to yesterday’s in the mortgage market — yes, it is as bad as you can imagine. No call can be made on the near-term, however, until we see where this settles out over the next week of so. If rates do stay in the mid 5%’s, the mortgage and housing market will encounter a sizable stumble. . .

The consequences of 5.5% rates are enormous. Because of capacity issues and the long time line to actually fund a loan in this market, very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone. . .

A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lenders without a rate lock. . . Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.

DoctoRx here again. Those readers who know me know that I'm generally a cheerful guy and an optimist. I was once also in the non-fiction business of treating patients who may have had illnesses and who when ill were not guaranteed to get better no matter how hard I and the rest of the medical team tried and how much cardiac stimulus or chemo we applied. The same is true of the stock market and may be true of the economy if the doctors of the economy apply the wrong treatment, even if it is thought to be the right stuff at the time. To go back to Mr. Sokol from Berkshire Hathaway:

It took us 11 years to get into this mess where it is. (Ed. That refers to housing specifically.) We went into the emergency room last fall and by January the banking system and economy generally were in intensive care, and we'd expect it to stay there for some time," Sokol said.

How much do you trust the medical teams attending the sick, bleeding U. S. and global economies?

Copyright (C) Long Lake LLC 2009