New Heinz Ketchup Packet

HT: Cafe Hayek

The American Association of Individual Investors poll has also now flipped to show more bears than bulls.

Bullish 35%

Bearish 36.7%

Neutral 28.3%

It didn’t take much of a selloff to flip sentiment to bearish. Investors are nervous and itching to sell. That’s good news for contrarians with the guts to buy the dips.

• Employed rose by 541,000
• Unemployed fell by 430,000
• Labor Force rose by 111,000
• Employed part time due to economic reasons fell by 849,000
• Employed part time due to slack work or business conditions fell by 580,000
• Manufacturing jobs rose by 11,000
• Motor vehicles and parts employment rose 22,700
• Retail trade rose 42,100
• Professional and business services rose 44,000
• Temporary help rose 52,000
• Average weekly hours rose by 0.1
• Average hourly earnings up $0.04

The negatives

• Construction employment dropped by 75,000
• Transportation and warehousing dropped by 19,000
• December was revised from -85,000 to -150,000
• Benchmark revisions showed 617,000 more jobs lost over the last year

I have contended for some time that this recovery would surprise people for its strength. That isn’t based on some new fangled economic model but on common sense and history. When we’ve had deep recessions in the past, we’ve also had big recoveries and one thing I’ve learned in over 20 years of doing this is that it most likely isn’t different this time. This recovery is gaining steam and if you’ve been a seller over the last month on double dip fears I suspect you will be disappointed with that decision a few months from now. As Barry Ritholz put it:

Ask yourself what outcome would surprise the most people — the economy sliding in a double dip recession – or a stronger than anticipated recovery?

Reading through the comments on Barry’s site is quite the surreal experience. It almost seems as if the commenters are mad that there was good news. They look for reasons why it can’t be true. They blame the government for putting out bad numbers. Anything but acknowledge that the recovery is gaining steam and will be better than they expected.

One thing though; the recovery should be even stronger than it is. Based on the depth of the recession we should be getting some +7 or 8% GDP growth quarters. We might still get them but because of our debt levels and the fiscal policy uncertainty, I have my doubts. We’ll see.

The one thing that we do feel very comfortable stating is that equities as an asset class will outperform investment grade bonds of almost any stripe over the intermediate and longer term using January 2010 as our starting point, and we would be willing to take side bets on the near term. “An investment operation is one which upon thorough analysis promises safety of principal and a satisfactory return,” states value father?figure Benjamin Graham. It is extraordinarily difficult to argue that Treasury bonds fit that bill in almost any maturity, and the continuing contraction in spreads in the investment grade and the higher quality non?investment grade world have diminished their attraction as well.

On stimulus, fiscal and monetary:

There is a massive experiment being conducted around the globe in fiscal and monetary policy, the scale of which is simply unprecedented. Speaking first of our great nation, we have thrown money at admittedly very serious issues over the past year in forms and sizes that are unprecedented in scope. The spending, which includes any variety of guarantees, credit?backstopping, insurance, and the out and out torching of taxpayer dollars was hatched in the darkest nights of fear and political expediency, an environment which is not normally associated with wellreasoned strategic plans. It can be argued that it was necessary in some form, but it still left the sticky issues of what will follow and how it will play itself out, and, as articulated every week in a contradictory fashion by any number of branches and departments of our elected and appointed officials, there simply is no exit strategy to wean the patient off life support. Given the historical propensity of government officials in any political system to concoct elaborately incorrect plans to address financial issues, it does not seem like an outlandish statement to suggest that there is a very small chance that our federal officials will be able to neatly extricate the largest sum of money ever thrown at a non?military problem without some form of market instability. And we will make the brave leap and say that the direction of interest rates in this transition period is unlikely to be lower.

That is just a damn fine paragraph and some really clear thinking. Read the whole thing.

reed-conner-quarterly

Here’s a link to RCB’s website. I don’t have any business connections to RCB.

If Keynes were alive today, what would he think of President Obama’s fiscal policies?

He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It’s true that we’re stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.

Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future.

We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that’s gone.

….

The type of stimulus he advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending, as the source of durable job creation.

What would Keynes think of Obama’s stimulus plan?

It’s unbelievable that a man whose main theme was to smooth investment comes to be the proponent of redistributing income away from the people and companies who do the investing.

My advice on the stimulus plan was, don’t do it. Let’s look at the plan. First, a lot of the money was used to reduce the deficits of state and local governments by increasing the federal debt. It was simply money transferred from the federal government. The economic multiplier effect was zero. Second, the temporary tax cuts went to paying off credit cards and other debts, not spending that would have increased economic growth.

Ouch!

Wall Street analysts and financial pundits are struggling with a “conundrum,” declared the talking head on MSNBC this morning. Retail sales in stores open at least a year (”same-store sales”) posted an unexpected increase of 3.3 percent in January compared to a year earlier. Furthermore, labor productivity rose a seasonally adjusted 6.2 percent in the fourth quarter of 2009. This productivity improvement also exceeded expectations and implied a fall in per unit labor costs. Yet, on the same day as these statistics were released,an unanticipated and substantial rise of U.S. jobless claims was reported. The concurrence of these data presented the conundrum: Why are businesses not taking advantage of their rising sales and declining labor costs to increase employment and output and earn higher profits?

The answer, as Mises told us, is that entrepreneurs and workers only belatedly and painfully free themselves from the false and frenzied optimism fostered by the inflationary boom, especially one that turns into a runaway bubble. Once people finally do recover a sober view of reality, a deep and abiding pessimism sets in and makes entrepreneurs especially wary of embarking on new and seemingly profitable ventures. As Mises explained it:

“The process of readjustment, even in the absence of any new credit expansion, is delayed by the psychological effects of disappointment and frustration. People are slow to free themselves from the self-deception of delusive prosperity. Businessmen try to continue unprofitable projects; they shut their eyes to an insight that hurts. The workers delay reducing their claims to the level required by the state of the market; they want, if possible, to avoid lowering their standard of living and changing their occupation and their dwelling place. People are more discouraged the greater their optimism was in the days of the upswing. They have for the moment lost self-confidence and the spirit of enterprise to such an extent that they even fail to take advantage of good opportunities. . . . The recovery and the return to ‘normalcy’ can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more.”

Trillion dollar deficits, higher present and future tax bills, inflationary monetary policy and promiscuous bailouts to stabilize prices and wages are hardly the means to restoring the shattered confidence of entrepreneurs.

I would add that the pessimism of the President’s budget didn’t help any. His budget envisions high unemployment and large budget deficits for years. For President Obama morning in America never comes.

So, if you didn’t know it already, achieving the goal of doubling nominal exports depends upon exchange rate pass through, the extent of exchange rate depreciation, the rate of rest-of-world GDP growth, and the evolution of export supply (of both goods and services).

Mr. Chin doesn’t really address whether the goal is laudable, but he does say in the comments that he doesn’t advocate devaluing the dollar to accomplish the goal.

In his State of the Union address President Obama said this:

Third, we need to export more of our goods.  (Applause.)  Because the more products we make and sell to other countries, the more jobs we support right here in America.  (Applause.)  So tonight, we set a new goal:  We will double our exports over the next five years, an increase that will support two million jobs in America.  (Applause.)  To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.  (Applause.)

I am puzzled by this assertion that selling things to foreigners creates jobs. Doesn’t selling things to Americans create jobs too? Why does it matter where the buyer of a product resides? Is there something magical about goods crossing lines on a map that make them worth more to the company selling them?

Yes, we can probably accomplish the goal set forth by President Obama if we are willing to devalue the dollar, but is that something we should really be trying to do? The economic outcome from devaluing the dollar in the late 70s, late 80s and 00s wasn’t exactly ideal. Why would we want to repeat it? There is nothing special about exports and rising exports do not create any more jobs than rising domestic sales. President Obama needs to stop concentrating on the economy as if the US is in competition with other countries. It is our companies that are competing and economic policy needs to support them, not some mythical entity known as the US economy. So far President Obama has spent most of his time demonizing corporations and finding new and innovative ways to extract taxes from them. How does that make them more competitive? If he wants them to create jobs in the US maybe he should make it more profitable to do business here rather than all the countries with lower corporate tax rates.

Shattering fundraising records in Florida, the University of Miami has raised almost a billion and a half dollars in an aggressive, seven-year campaign that promises to propel UM into a more elite league of schools.

The university raised $1.4 billion, surpassing its own billion-dollar goal — an achievement that has coincided with a significant bounce in the school’s placement in various national rankings.

”No one in Florida had ever tried to raise this kind of money before, so there wasn’t any kind of competition to raising this kind of money,” UM President Donna Shalala said in an exclusive interview with The Miami Herald.

So imagine my surprise when I saw this in the Herald this morning:

The University of Miami announced Thursday it has been awarded $14.8 million in stimulus money to help it build a neuroscience and health annex at its Coral Gables campus.

The University of Miami is a private university. Annual tuition costs $36188. I can’t afford to send my child to school there, but I am forced to subsidize their building program? After they’ve raised over $1 billion? Really?

How does a debt crisis in Greece turn into a stock market selloff in the US? Could a default by Greece and/or Portugal be the end of the Euro common currency? That doesn’t seem likely; Greece and Portugal together represent roughly 3% of EU GDP. Could a default there cause investors to abandon the debt of other periphearl markets? I suppose that is more possible but bond yields don’t reflect a lot of fear at this point. Spain auctioned 3 year notes yesterday for a yield of just 2.63%. For that matter, Portugal’s bonds don’t show a lot of fear either with two year notes yielding 2.67%. Greece’s two year notes yield 6.44% which is high only when compared with other euro area bonds. Portugal did have problems selling some bills today; they sold 300 million euro at 1.38% when they wanted to sell 500 million euro.

The bottom line here is that there does not seem to be a lack of demand for government debt as long as the interest rate offered is reasonable based on the risk. Rates less than 10% do not, at least in my book, indicate severe stress. So again, how does this cause a selloff in US - and for that matter the world - stock markets?

I think there are a few things at work here. First of all, there are certainly hedge funds out there that have been borrowing in dollars and buying bonds denominated in other currencies, including the euro. And if you are a hedge fund doing that trade you are more likely to be holding the peripheral country debt since it offers a slightly higher yield than say, Germany. Undoubtedly, some of these funds are unwinding positions, selling euro denominated bonds and repaying dollar loans. That tends to put a bid under the dollar and a rising dollar is considered bad news. Why? Well, normally I don’t think it would make much difference, but since the crisis of late 2008, a rising dollar has been seen as risk avoidance and so traders sell risk assets when the dollar rises. Does it make sense? Not really, but traders only remember the recent past.

Another factor is the psychological one that comes with the potential for sovereign defaults. The Greek budget deficit is not that different as a % of GDP than the US, so I guess there are some who will look at this and wonder if the US is just as vulnerable. Of course that doesn’t really make much sense, but who said investors were rational?

I actually don’t think this correction has anything to do with Greece or Portugal. The problems with Greece are not new and even an actual default would have little effect on the US or Euro area economy. Furthermore, I don’t think most investors are even aware of the problems afflicting the PIGS. This selloff, like every correction or bear market, is about fear. If you bought anywhere near the bottom last year, what is your larger worry right now - protecting your profits or making more? There are a lot of people who believe that the recently announced 4th quarter GDP figures are as good as it will get in this recovery and if that is true, there is little reason to own stocks as they would appear fully, if not over, priced. Those people are the ones driving this selloff. They aren’t worried about Greece; they’re worried about the US economy.

And I think at least for the next year or so, they will be wrong. This economic recovery is just starting to gain steam. And like every other deep recession the last several decades, the rebound will be at least partially symetrical with the depth of the recession. It won’t happen because of anything the Obama administration does but rather in spite of it. They’ve done plenty of damage with the bailouts and stimulus packages but I don’t think they’ll be able to do much more. There is little appetite in Congress for more spending programs. Obama’s budget is DOA. No, this rebound will be robust - at least for the short term - for the same reason that every recovery from a deep recession is robust. Capitalist economies are amazingly resilient and while ours isn’t perfect, it is still pretty damn good.

So I don’t think this is the beginning of anything other than a correction. The Greeks and Portuguese will figure out what to do about their budgets. Either they’ll get their houses in order by themselves or the other members of the EU will force a solution on them or maybe the IMF will come in and make a loan in exchange for some fiscal discipline. But I fully expect it to be resolved short of default and the fear we are experiencing right now will be forgotten.