In his radio address on Thursday, President Obama said the program, designed to stimulate auto sales and production and get gas guzzlers off the road, had “been successful beyond anybody’s imagination. And we’re now slightly victims of success because the thing happened so quick, there was so much more demand than anybody expected, that dealers were overwhelmed with applications.”

What the President discovered was that if you offer people a financial incentive to do something - especially something they were going to do anyway - you’ll get lots of takers. 700,000 cars were purchased during the program and I’m sure some of them would not have happened without the subsidy. How many? I have no idea but the cost of the incremental sales was surely more than the $4500 offered by the program per car. The bottom line is that the program may have had a minor - very minor - positive impact on the economy but it is hard to calculate.

To me the most egregious element of the program was its effect on the poor since it was bound to raise the price of perfectly serviceable used cars. Here’s what I said in a post entitled, Broken Clunkers:

One last thing to consider is the effect on the poor. While politicians like to pose as defenders of the poor, this is just another program that does the opposite. At least some fraction of those clunkers being destroyed were potential cheap transportation for the working poor. Now the market for low priced older cars will face a lack of supply and the prices of the remaining “clunkers” will rise. If the goal was to eliminate cheap transportation for the poor and force them onto public transportation, well, then the clunkers program is a rousing success. If the goal was to create economic growth, then not so much.

So how much of an effect did this program have on the price of used cars? The recently released July Consumer Price Index shows a 17% rise in the price of used cars and trucks in the last year. I don’t know the average cost of a used car but a 17% rise in price probably priced at least a few people out of the freedom provided by a car. It may have prevented them from getting to a new job or kept them on public transportation when they could be home with their families. So my question is this: Was President Obama and the other politicians who pushed this program just too ignorant to anticipate this very obvious result? Or did they just not care? Strangely, I hope its the former….

Update: Jeff Jacoby has a good article on the same subject at Boston.com

In more news that surprised absolutely no one new home sales also fell last month to a 276,000 annual rate. Inventory rose to 9.1 months but that is mostly a function of the very slow sales pace. As I’ve said many times this rate of sales cannot continue indefinitely. Of course, I’m assuming the nativists don’t manage to scare off all new immigration and that the drop in the birth rate reported last week is just temporary. In more normal times we see well over 1 million new households each year and those folks have to live somewhere. Eventually the pace of new construction will have to rise. Not yet apparently, but eventually.

Considering the pace of new and existing home sales it also wasn’t surprising to learn that durable goods orders, ex-transportation, were down in July. About the only thing I could find that was positive was that in the transportation sector motor vehicles were up 5.3%. A major disappointment was the non defense capital goods orders excluding aircraft (which as we’ve pointed out before is a good proxy for capital spending) which fell 8%. Recessions, and this one was no exception, are caused by a drop in investment. Recovery for the economy as whole requires more investment (hopefully in something besides houses this time around); the best I can say about this report is that it is very volatile and one month doesn’t make a trend.

Even amidst all the bad news every week, there are always hints of sunshine. Last week, mortgage applications offered a glimmer of hope. Purchase applications rose 0.6% but more importantly refinance applications continued their spike, up 5.7%. One of the reasons the Fed is now reinvesting the proceeds of their MBS portfolio in Treasuries is that the prepayment rate has been higher than expected. Low rates are having the desired effect.

Two other decent reports were jobless claims and corporate profits. Claims fell 31,000 to 473k in a reversal of the weird seasonal spike last week (see this blog post). That is still way too high and I won’t be even vaguely comfortable until new claims fall below 400k but at least we’re back under 500k. Corporate profits were up 37.7% year over year in the second quarter and are now approaching the all time high as a percentage of GDP that so many others said we’d never see again. I’d also say it is good news that financial industry profits actually fell fractionally quarter to quarter while non financial profits rose by a healthy 8% from the first quarter. I can’t think of much that is more important than a rebalancing of the economy away from the finance sector.

The corporate profits data was released as part of the GDP revision which lowered growth to 1.6% for the second quarter from the previously reported 2.4%. The revision lower was due to the worse than expected trade deficit but the good news is that real final sales were revised higher to 4.3%. That is a major improvement from the first quarter’s 1.3% rate. What that means is that contrary to the first quarter, second quarter growth was more about final sales and less about inventory rebuilding.

Sentiment about the economy is also reflected in the markets and various surveys. The American Association of Individual Investors poll shows bulls falling to 20.7% while bears number 49.5%. That’s about as negative as this survey ever gets and matches up pretty well with the March ‘09 bottom. We also know that US equity mutual funds have seen a steady outflow which continued last month to the tune of $12.37 billion according to Morningstar. The total for this year is a whopping $28.35 billion which already exceeds last year’s total. Meanwhile, these same investors continue to swamp bond funds of all kinds with new money. I don’t want to be too harsh but mutual fund investors do not have - to put it nicely - a very inspiring track record. In fact Trim Tabs, the mutual fund research company, has published research that shows ETF equity flows are a great contrary indicator. Short the market when ETF inflows are above normal and get long when the outflows are more than normal and you outperform the S&P by a hefty margin.

The point is that sentiment is just about as negative as it gets and for long term investors that has to mean there are some bargains around. Now as others have pointed out, valuations are not at secular bear market, single digit lows but with interest rates this low that isn’t exactly surprising. And again, as others have also pointed out, the quality of much of the S&P 500 earnings have to be questioned. The habit of using “operating earnings” that excludes all kinds of bad stuff that companies want you to believe are one time in nature is one that makes valuing stocks more difficult. But with sentiment this negative, investors need to at least be looking for long term buys. There are plenty of companies with no reason to cook the books that offer dividends - which can’t be faked - at rates higher than bond yields. And by the way, dividends can go up while most bond coupons are fixed. What are the alternatives? Joining the herd buying bonds?

On that note by the way, Bernanke’s speech Friday at Jackson Hole could be read as a bit of a warning to those bond buyers. Bernanke seemed, at least to me, to kind of draw a line in the sand saying that the Fed would “be vigilant and proactive in addressing significant further disinflation”. With core inflation approaching 1% that doesn’t provide much cushion for new bond buyers. If the Fed is determined to prevent core inflation from falling below 1% I would take them at their word. If you own Treasuries in a fund or individually, you might want to take a gander at what happened to Treasury rates the last time the Fed engaged the QE lever:

As you can see the 10 year Treasury yield rose pretty dramatically in early 2009 when the Fed announced the initial QE program. A similar move now would lop roughly 10% off a 10 year Treasury holder. A fund with longer maturities would take a bigger haircut. I also don’t think owning corporates would give you much cover either. In March 2009 spreads were a lot wider so corporates were able to rally even as Treasuries sold off. That probably won’t happen again.

Friday’s action might mark the nadir of negative sentiment for the US economy and stock market. Bernanke has now told us that he won’t let deflation happen - and I think that is a promise he has to and can keep - and that means a further expansion of the balance sheet if need be. What that means to me is that real assets are a buy. Bernanke just put a floor under commodity prices and probably emerging market stocks. Many of the emerging markets, along with Australia and Canada, are resource rich and high commodity prices are a boon. US stocks will probably rally too if Bernanke keeps his promise but you might get more bang for your depreciated buck in other, more foreign markets.

If you’d like to receive this free weekly commentary by email, click here.

Weekly Chart Review, click here.

Grab the resuscitation paddles. The American consumer has lost the will to shop. Haven’t you heard? Jolts of stimulus cash are needed to get sales registers ringing again and restore lost jobs.

Don’t believe it. Such logic was used to justify programs like the “cash for clunkers” incentive, which expired a year ago, and additional cash perks for home buyers, which ran out in April. Judging by data reported by the Bureau of Labor Statistics, the programs failed to produce a surge of home-building and car-making jobs.

The two charts below suggest why. The first shows our supposed crisis of frugality. Consumers do one of two things with their after-tax income. They spend or save. The first chart shows the portion they’ve saved since 2000. Notice how the trend has risen menacingly since 2007. Judging by this chart, today’s rate seems abnormal.

Hough then shows a short term and long term chart of savings:

I’ve pointed this out before but it bears repeating. The recession was not caused by a lack of consumer spending. The negative change in GDP was a result of the collapse in investment spending. And investment is a function - obviously - of savings. You can’t invest if you haven’t first saved. So the increase in the savings rate back to a more normal rate is required for a real recovery. The paradox of saving the Keynesians so lament  and want to prevent is the source of recovery.

One other point about Hough’s comment about consumers either saving or spending their after tax income. That is true but it should also be noted that all income is spent even if it is saved. One person’s saving is another person’s spending. If a saver buys a bond, he is lending money to a company which will spend the proceeds on something. If a saver puts his money in a savings account, the bank will lend it to someone who wants to spend it. Well, that last one is working so well right now but you get the point. Unless the saver puts his money in a coffee can and buries it in the back yard, it will be spent by someone.

We’re not witnessing a bond bubble in the making, we’re living in a statist nightmare.

The future, however, is not written in stone, and there is little reason—in my view—to expect that the current state of affairs is going to go on forever. But you have to be an optimist to venture outside the safe haven of ultra-low Treasury yields that only the pessimists are content to receive. Today’s bond market will prove to be a bubble if and when the people take back control of government from the statists currently occupying the White House and running Congress. I believe they will, come November. If you don’t, then go out and buy some of those Treasury bonds; you’ll have plenty of company.

As I said yesterday about the current extremely bearish sentiment:

Being a contrarian, which means nothing more than being an investor, is not easy. It takes guts to buy when everyone else is selling and to sell when everyone else is buying. But it is absolutely necessary for long term investing success.

I have also pointed to the election as a potential game changer but I suspect the market will move well ahead of the election. Ever hear the old Wall Street adage about buying the rumor and selling the news? If the market rallies substantially before the election the actual event may be disappointing. Will a takeover of the Senate be baked in the pre-election market? If it is and it doesn’t happen that could engender a bit of buyer’s remorse. For that matter, even if the Republicans retake both houses of Congress, what will they be able to actually accomplish? Unless, Obama does a Clinton pivot to the political center - and maybe even if he does - the result is gridlock. That was a fine outcome in the 90s but may not be sufficient today.

On the other hand, I would also repeat something else I’ve said recently:

I have said many times and continue to believe that the politicians have only marginal impacts on the economy. When it comes to government effects, the Fed has a much greater impact than anything that comes out of Congress or the White House. And that is true for whichever party happens to be in power. But the greatest impact of all is the natural resilience of our semi-capitalist economy. It isn’t perfect by a long shot and it sure isn’t lassez faire, but it is about as good as you’ll find anywhere in the world.

We need good economic policy that affects real growth but more important is a stable monetary policy. Given that stable framework, the natural resilience of the economy will get us through. After all, the US economy has endured and prospered with higher tax rates and more oppressive regulatory regimes. So unless the election somehow awakens a new understanding of economics on the part of Ben Bernanke and his banker loving pals at the Fed, the election doesn’t change much.

I am not a bond market fan right now and I think the sentiment is sufficiently negative that stock buyers today are likely to be rewarded. A positive change in real economic policy would surely help but I don’t put a lot of faith in the ability of the Republican Party to deliver. In the short term however, anticipation of a change in control of Congress may be enough to rally the market.

Industrial production is increasing at a very fast rate, with no signs of any slowdown. Most global economies also are experiencing a rapid recovery in industrial production. This is a good indication that the cutback in production that occurred in the wake of the financial crisis was sufficient to allow a substantial inventory drawdown. Now, with demand and confidence slowly returning, production must ramp up to avoid continued inventory drawdowns. Rising production supports increased confidence, leading to a virtuous cycle that all but guarantees further gains.

Check out the entire post.

Brian Wesbury, the perma bull in residence at First Trust, points out that non seasonally adjusted claims are actually making new lows right now and there is a big spread between the two series:

Digging deeper into the report we noticed that the non-seasonally adjusted data tells an even more optimistic story.  The actual number of claims – the raw data – fell to 380,935, the lowest level since Septmeber 2008, when the financial panic was just beginning.  This is a very encouraging sign.  It suggests that the underlying labor market is healthier than seasonally-adjusted data make it appear.  Moreover, given the pattern of seasonal adjustments, we expect a decline in “seasonally-adjusted” claims to under 400,000 by early October.

I’ve been accused of being a perma bull myself so naturally I find this an interesting data point to support my view that the economy isn’t as bad as the recent data (and probably not as good as the data in the spring). All we can do is wait and see if things improve over the coming weeks but it wouldn’t be a surprise.

One interesting thing about this, if it turns out to be true, is that it could be seen as validating President Obama’s economic approach. There seems little likelihood that the data will improve quickly enough to change the prospects of the Democrats in the midterms but if the data does improve you can bet the President and his team will be trumpeting it from the roof tops. And that won’t make it any more true. I have said many times and continue to believe that the politicians have only marginal impacts on the economy. When it comes to government effects, the Fed has a much greater impact than anything that comes out of Congress or the White House. And that is true for whichever party happens to be in power. But the greatest impact of all is the natural resilience of our semi-capitalist economy. It isn’t perfect by a long shot and it sure isn’t lassez faire, but it is about as good as you’ll find anywhere in the world.

From an investment standpoint the “market” is expecting bad data right now and so the potential for surprises is likely to the upside. Better than expected economic data has the potential to cause outsized moves to the upside as shorts would be forced to cover. Shorts should be careful out there.

Right now, the vast majority of my research efforts are concentrated on the stock markets of the world. Specifically, stock markets that others are shunning are where I expect to find the most compelling bargains. Those markets would include not only the US but also Europe and Japan. Generally, emerging markets are not unloved or unappreciated by investors and while I maintain investments in them because I think the trend has more to go, the companies there aren’t all that interesting from a micro view. From a macro standpoint, their economies are performing well but that is already baked in the cake so to speak. From this point it will take unexpectedly positive news to move those markets higher and while that is possible - heck maybe even probable - it isn’t the same as finding great investments that are cheap on an absolute basis.

Just being a contrarian isn’t enough to be a good investor though. Cheap investments can get cheaper and dear ones more dear. What a good investor is looking for is a market, sector or investment that is absolutely cheap and on the verge of a positive catalyst. One way to find such investments is to look for positive price action in the wake of demonstrably bad news. A great example is the action in home builder stocks this week. The news on the housing market this week was truly awful. Both existing and new home sales fell precipitously, down 27.2% and 12.4% respectively. Inventories of both also rose. Obviously that isn’t good news for home builders and yet the stocks have not reacted negatively. In fact, the stocks rose after the release of both reports and are considerably higher than their lows of last year:

The same could be said of the stock market as a whole. The economic news has been absolutely brutal over the last few weeks and yet the market is still well above the recent lows set in early July and actually closed higher today in the wake of the awful news on housing and durable goods orders.

(By the way, I’m no technician but that pattern in the S&P 500 chart looks suspiciously like an inverted head and shoulders patter.)

We also have evidence that the sentiment is reaching some kind of extreme:

NEW YORK (MarketWatch) — Investors are scared–really, really scared.

That’s what our latest MoneyShow.com Investors’ Sentiment indicator tells us, in big, bold, red letters:

HELP!

Our most recent survey of the active, mainly self-directed investors who use MoneyShow.com showed the highest bearish ratings we’ve ever seen–far greater than back in February 2009, just before the market bottomed. Read MoneyShow’s “Investors Aren’t Believers.”

And now, with stocks still 64% off their lows, our usually composed and confident audience, who have kept their eyes on the long-term prize through the worst the markets threw at them, appears finally to have succumbed — or is it capitulated? — to the baser instincts of the reptilian brain.

I would call it “fight or flight,” but after a scary European debt crisis, the flash crash, and a steady drip, drip, drip of dreary economic news, there’s not much fight left in them.

Only 7% of the 657 people who responded to our survey (conducted between Aug. 13 and Aug. 17) expect the Standard & Poor’s 500 index /quotes/comstock/21z!i1:in\x (SPX 1,055, +3.46, +0.33%) to rise by more than 10% by the end of 2010, while another 26% thinks it will rise, but by less than 10%.

So, only 33% of those surveyed could be called “bulls”–a huge drop from the 47% who held those views in May or the 57% who were optimistic in May 2009. Read MoneyShow’s “Steady as She Goes.”

Meanwhile, though the ranks of the very bearish (those who look for stocks to fall by more than 10% by Dec. 31) have remained even at 18%, the percentage of those polled who believe the market will fall but by less than 10% has leaped to 24%.

So, not only is that 42% bearishness the highest since we started polling investors three years ago, it also marks the first time the bears have outgunned the bulls — and by a comfortable 42% to 33% — in the history of our survey.

This survey also records the highest levels of neutrality — 25% — we’ve ever seen. So, one out of every four investors polled thinks the market is going nowhere. (The survey has a 95% confidence level, with a margin of error of four percentage points either way.)

As a contrarian it is often the case that you must make a decision to buy even when the reason for doing so is not obvious. I don’t know what will turn around the housing market but I do know that home sales aren’t going to zero and so the recent drop means we have to be closer to the bottom than we were before. Is this the absolute bottom in home builder stocks? I have no idea but I do know that the companies that have survived this bust will be stronger - a lot stronger - for having done so. Any builder that is not in bankruptcy at this point is doing something right. I will certainly be able to narrow it down with more research and I think the odds of finding something that is a real bargain are very high.

The market as a whole also seems to be trying to find a bottom. We know that individual investors have basically bailed out of the market as US equity mutual fund outflows have been steady for two years. We also know that those same investors have been buying bond funds with an even greater gusto than they are selling equity funds. To me it seems obvious - very obvious - that investors should be looking for stocks, sectors or other risk markets to buy and should be much more interested in selling bonds than buying them. Does that mean this is the exact bottom? Probably not but do you think Warren Buffet worried about that when he was accumulating big positions in Coca Cola and other big blue chips in the 1970s?

Being a contrarian, which means nothing more than being an investor, is not easy. It takes guts to buy when everyone else is selling and to sell when everyone else is buying. But it is absolutely necessary for long term investing success.

The new rules apply to all store and merchant gift cards, as well as cards for general use, such as a Visa gift card. These rules include:

* Limits on expiration dates The money on your gift card will be good for at least five years from the date the card is purchased. Money added or loaded on to the card must also be good for at least five years.

* Replacement cards. If your gift card expires and there is unspent money, you can request a replacement card at no charge.

* Fees. The law bans dormancy, inactivity and service fees on gift cards unless there has not been any activity for twelve months and the issuer clearly discloses all fees on the packaging. In those cases, consumers can only be charged one fee per month. Last month, Congress passed legislation to extend the effective date for the disclosure requirement until January 31, 2011, for cards issued prior to April 1, 2010.

Are we so god damned helpless that we need politicians to protect us from the evils gift cards? How sad that we can’t even take responsibility for something so simple. Personal responsibility? What the hell is that?

This story is not well known in the US and apparently not in China either. We are attempting to force the same “remedy” for our bi-lateral trade deficit with China. We have threatened to impose tariffs unless they force the Yuan higher and they have grudgingly obliged to some degree. It should not surprise anyone given the Japanese experience that the trade deficit is higher now than when we first forced the revaluation on China. I can’t help but wonder as well what effect the revaluation of the Yuan had on the world economy. Did Chinese deflation (a rising Yuan) cause the financial crisis?

All this is a lead in to this excellent article about the Japanese episode and the parallels with the current Chinese sequel:

The following is certain. If similarly high performing countries see their exchange rates go nuts all across 100% ranges, lots of industries will find themselves burned and ask for redress. If redress is granted, a fly enters the ointment of an otherwise well-functioning economy. In Japan’s case, it became enough to stall the greatest economic success story of the twentieth century.

So China’s now number 2. And yet the most recent macroeconomic policy move to come from the place was to submit to American hectoring and delink the yuan from the dollar. The yuan has duly appreciated by, what, some 15% since the Americans started complaining about it a few years ago. This sounds all too familiar. The US refuses to grow up in terms of its obligations to steer the world toward a stable, convertible currency system, as its lessers only oblige its immaturity.

Here’s Scott Sumner’s response:

A COUNTRY’S current account balance is the difference between its domestic saving and domestic investment. Thus the only way the US can reduce its current account deficit would be to invest less or save more. Should we try to reduce the deficit, and if so, what policies would be most effective?

It is not immediately obvious why US policymakers should be concerned with a current account deficit. Australia has had large current account surpluses for many decades, and yet by some measures has the best performing macroeconomy since 1991 (among Western developed countries). On the other hand, the deficit may in some way reflect flaws in America’s current policy regime. For instance, we may invest too much or save too little because of market failures, or distortionary fiscal policies.

I don’t see any reason to believe that America invests too much, although we obviously were allocating too much capital into housing during the middle of the decade. The most likely policy failure is that we save too little. But why shouldn’t the free market produce the optimal amount of saving? One answer is that we don’t have a free market in saving. All sorts of government policies strongly discourage saving. These include taxes on capital, Social Security, unemployment compensation, college aid programmes, government health insurance (as well as government-subsidised private health insurance.)

If we do save too little, what can we do about it? Some have argued that the US government should engage in some sort of “industrial policy” to boost exports. Unfortunately, these sorts of policies generally make an economy less efficient. It is true that some policies may be able to boost economic efficiency by correcting for market failures—e.g. carbon taxes. But even an efficient industrial policy is unlikely to significantly impact the current account deficit, as it would have only a tiny effect on America’s savings rate.

A much more effective way of boosting America’s saving rate would be to adopt the sort of fiscal regime used in Singapore. First, we should sharply cut, or preferably eliminate, all taxes on capital. A progressive consumption tax (and carbon tax) should be implemented to replace the lost revenue. Second, we should replace our social insurance programmes with mandatory self-insurance. Individuals would be required to place a share of their incomes into private accounts that could be used for retirement, health care, and unemployment. For individuals with low incomes, the private contributions would be heavily subsidised by the government.

If we moved to a high forced-saving/low tax regime, we could generate higher levels of saving and faster economic growth. There is no guarantee that it would shrink the current account deficit—after all, the faster growth might also boost investment. But it would at least assure that the current account deficit reflected underlying public preferences, not highly counterproductive (anti-saving) fiscal policies.

That is a thoughtful, sensible policy recommendation…..and it has zero chance of being enacted.