Proof Most Don't Understand How Screwed Up the Economy Is

According to a recent poll, 79 percent were optimistic about the next four years under an Obama administration, a level of good will that exceeds that measured for any of the past five incoming presidents. And it cuts across party lines: 58 percent of the respondents who said they voted for John McCain in the general election, also said they were optimistic about the country in an Obama administration.

Here's what will really occur. The economy will have an early take off, fueled by Ben Bernanke money printing. Shortly after takeoff, the economy will hit a flock of geese (roaring inflation and a crashing dollar), shutting down all engines. But there will be no water to land on and Chesley B. 'Sully' Sullenberger III will not be at the controls. Instead, Ben "Helicopter" Bernanke will be at the controls.

Murphy versus Wenzel: It's On!

Bob Murphy has responded to my latest comments regarding our differing views on the direction of the economy.

I continue to believe that Bernanke's huge money drops will impact the economy to the degree that the official unemployment rate in 12 months will be lower than it is right now. Murphy expects the exact opposite. I note that Murphy expects some of the positive employment to come from the flaky government "stimulus" programs. I concur that it is questionable that the private sector employment label should be applied, if, say, it is "...a new job making solar panels...if it's dependent on massive subsidies." But, my whole point right along has been that the government will maneuver to make the official data look good. The real economy will be a mess.

Murphy predicts that there will be no net growth in real GDP during 2009. Again, expect the real economy to be a mess, but real GDP will turn positive no later than sometime during the second half of 2009. I will have to go out on a limb to say GDP will show net positive growth for 2009 in its entirety, and unemployment is a lagging indicator, but in the interest of making this competitive, write me in for even better than expected unemploymnet.

Murphy expects CPI(urban) to rise to at least 8% over the course of 2009. While I fully expect an upturn in inflation in '09 and inflation at all levels to hit double digit rates at some point in the future, I'm not sure that this will occur in 2009. Thus, to remain consistent in my total disagreement with Murphy, I am going to say that inflation in 2009 will not hit an annualized rate of 8% for any three month period or longer. Obviously, a one month jump of 1% would put inflation at a 12% annualized rate. This could happen, but I don't think in '09 we will see 8% annualized inflation over any three month period.

Bob, I think we need to wager something on this. How about if I am more accurate, you have to come up to D.C. and buy me dinner (My choice of restaurant), if you are more accurate, I have to buy you dinner in Nashville (Your choice of restaurant)?

Shop 'Til You Drop: The Retail Sales Picture

The headline retail sales spending number is down 8% in December according to MasterCard's Spending Pulse. However, taking the number apart, gives a slightly different story.

When gasoline sales (gasoline prices are down 40%, year-over-year) are excluded, the decline through Christmas Eve is only 4%. Since the price of oil is influenced, not only by retail gasoline demand, but also commercial and industrial use, this is a much more complicated number.

Now for the retail picture ex-gasoline. Bad weather on both coasts clearly had a negative impact on sales, but a more important factor is that between Thanksgiving and Christmas this year there were just 27 shopping days versus 32 in 2007, a difference of 16%. Unlike 2007, you have a very strong post-Christmas day shopping window Friday-Saturday-Sunday. Thus the number to watch is the number I posted earlier, January 8, when full December numbers are announced.
All this said, it was still a dismal Christmas season for retailers. The demand for cash is obviously very strong--people are very scared about the economy. However, this doesn't mean that the consumption-savings ratio is not readjusting towards consumption. If capital goods sales plummet faster than retail sales, and they are, the ratio is readjusting in favor of consumption. ABCT lives. What's going on is a downward readjustment of the price level at the same time as the consumption savings ratio is readjusted, with the added demand for cash acting as though the money supply is shrinking.

This is a once in a lifetime phenomena, equivalent to a Total Solar Eclipse. What makes this even more amazing is that you now also have the Fed aggressively printing money at record levels. It's almost as though the "Big One" earthquake hits Southern California on the same day as the Total Eclipse of the sun.

At some point the Fed money printing, what Bernanke is calling "quantitative (I'll say) money management", will overtake the desire to hold cash balances. Things will reverse and there will be a flight from cash. Thus, your money right now is worth more than it probably ever will again.

In other words, there are major discounts at most retailers---you will never see these type prices again, if Bernanke succeeds in his money printing--it's not a day to be reading blogs. It is the ultimate shop 'til you drop day. If there is something you need or want, today is the day to buy it. The price is likely never to be as low again.

Cash is king, probably only for about another week.

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The Fed versus Fear: A Status Report on the Economy

As I have noted in recent posts, any growth in the economy appears to be coming out of the consumer sector, with growth in revenues from live concert appearances and the astounding $805 million in payroll going to four New York Yankee players.

This strength in parts of the consumer sector, in an overall weak economy , falls in line with Austrian Business Cycle Theory. During a readjustment period in the economy, according to ABCT, the consumer-savings ratio readjusts itself to show greater strength in consumption versus savings (which would be reflected in capital goods purchases). But, how does this square with the likelihood that on January 8 when retailers report their sales for the month of December, they are likely to show a decline in sales in total of around 1 to 2%?

It squares because of other factors that occur during a readjustment period, in particular, the fear which leads many to hold on to cash. The spectacular growth in M1 is an indicator of just how much fear there is in the economy, as it has grown in recent months in excess of 30%. The desire to hold larger cash balances (as indicated by the growth in M1)in many ways has the same impact as a decrease in the money supply would have. A general deflation of prices occurs, which ultimately results in a lower overall price level. So what does this have to do with ABCT and the consumption-savings ratio. It means that if there is a strong demand to hold cash balances, which puts downward pressure on all prices, even if some consumer prices are falling, the consumption-savings ratio can still be readjusting in favor of consumption versus capital. It just means that even less spending is occurring in the capital goods sector and that prices are falling by larger amounts in the capital goods sector. And this is what is occurring, the prices of real estate and autos, for example, are dropping by much larger amounts than products in retail stores. This is also why we see dramatic declines in total sales in the housing and auto markets dropping by much larger amounts than the sales declines at retail stores. With this condition, the consumption-savings ratio is adjusting in favor of consumption.

All this being said, over the last two months the Fed as been increasing money supply (measured by M2 nsa) at double digit rates, which will again at some point push the consumption savings ratio in favor of savings (capital goods purchases).

Right now it is a battle between fear by the general public, which is holding on to additional cash, versus the Fed and its pumping of money. The Fed will eventually win this battle. It will mean a "recovery" (a movement towards the capital goods sector, i.e. the stock market, autos etc.) and overall climbing inflation, including that of consumer prices.

Although exact timing is always difficult, the recovery will occur much sooner than most expect. Certainly a lot sooner than those who are forecasting a decline in the economy that will last well into 2010. Indeed, any surprises in the economy will be on the upside. In the stock market, for example, we could very easily start with strong, very strong upside action immediately after January 1. Longer term, the Fed's mad money printing will result in record lows for the dollar, higher interest rates and very strong price inflation.

It's A "Man-Cession" in the Lipstick Economy...

says Mark J. Perry.

The U.S. recession has been a catastrophe for men, but merely a downturn for women. According to Friday's payrolls report, eight out of every 10 pink slips in the past year have gone to men.

Over the last year from November 2007 to November 2008, the U.S. economy lost 2.352 million jobs, and 82% of those losses were male jobs (1.932 million) and only 18% female jobs (430,000). Stated differently, for every female job lost, there were 4.5 males jobs lost over the last year. How does that compare to the last two recessions?

1. Between January 2001 and January 2002, there was a loss of 2.076 million jobs, and 57% of those jobs were held by males and 43% by females.

2. Between May 1990 and May 1991, there was a loss of 1.711 million jobs, and 70% were male jobs and 30% female jobs.

Obama Planning "Big Bang" Economic Intervention

This is very scary. FT reports:

US President-elect Barack Obama intends to push a comprehensive programme of social and economic reform beyond an immediate emergency stimulus package, Rahm Emanuel, the next White House chief of staff, indicated on Sunday.

Mr Emanuel brushed aside concerns that an Obama administration would risk taking on too much when it takes office in January. He said Mr Obama saw the financial meltdown as an historic opportunity to deliver the large-scale investments that Democrats had promised for years.

Tackling the meltdown would not entail delays in plans for far-reaching energy, healthcare and education reforms when all three were also in crisis, he said. “These are crises you can no longer afford to postpone [addressing].”...

Sunday’s comments also reinforce the impression that Mr Obama’s transition economic advisory board – which includes leading lights of the Clinton era, such as Lawrence Summers and Robert Rubin – is tilting heavily towards a “big bang” approach that would combine a short-term stimulus with large public investments to raise the longer-term US growth rate..

In contrast to 1992, when Mr Clinton postponed longer-term investments in favour of urgent budget deficit reduction, advisers to Mr Obama, including Mr Summers, who is tipped by some as his first Treasury secretary, are tilting towards investments. They emphasise that Mr Obama will stick to a medium-term goal of restoring fiscal discipline.

Since basic economics teaches that none of Obama's healthcare, energy and energy interventions will work, Obama is about to further muck up three key areas of the economy.

As for the calling an expanded government bureaucracy "investment", and then calling for "large scale investments", I wonder just how much of a private economy will be left.

Nothing comes for free. Again there is little to no talk about how these "investments" will be paid for. If Obama thinks he his just going to borrow the money and expand the deficit, he is counting on the Asians to be saps and buy the paper. Note to Obama, Asia is trying to figure out how to offload US paper.

Thus, it appears that in the first 100 days, Obama plans to muck up as many sectors of the economy as he can. He will crowd out the private sector with new government borrowing. This will result in much higher interest rates, higher inflation and a resumption of the collapse of the dollar.

Dell Sees Further Signs of Weak Tech Spending

Dell's customers are cutting back further on technology spending, the company said Tuesday.

"The company is seeing further softening in global end-user demand in the current quarter," it said.

-EPJ Newsdesk

Unemployment Rate Rises to 6.1%

The unemployment rate rose from 5.7 to 6.1 percent in August, and non- farm payroll employment continued to trend down (-84,000), according to the Labor Department.

In August, employment fell in manufacturing and employment services, while mining and
health care continued to add jobs. Average hourly earnings rose by 7 cents,
or 0.4 percent, over the month.

Over the past 12 months, the number of unemployed persons has increased by 2.2 million and the unemployment rate has risen by 1.4 percentage points, with most of the increase occurring over the past 4 months. Which happens to coincide with the period of Fed slowing of the money supply.

The job losses in August came in every sector, with manufacturing and business services the hardest hit.

In August, the unemployment rates for adult men (5.6 percent), adult women
(5.3 percent), whites (5.4 percent), blacks (10.6 percent), and Hispanics
(8.0 percent) rose, while the jobless rate for teenagers was little changed
at 18.9 percent. The unemployment rate for Asians was 4.4 percent in August,
not seasonally adjusted.

Conclusion: If the Fed continues its tight money policy, the unemployment number is lkely to continue to climb, perhaps to double digit levels.

Crashing Money Supply Numbers Signal Depression

It is now clear that Ben Bernanke has no clue as to how to control the money supply.

We have been commenting in recent weeks regarding the slowdown in money supply. It has been growing at approximately 2.5% (M2SA) over the last three months on an annualized basis, earlier this year it was growing at double digit rates. This is a dramatic downturn. The numbers out yesterday show no end to the money growth slowdown, in fact, three month annualized growth (M2SA) has dipped further to 2.2.%.

While there is a lot to be said for a no growth money supply that results in a recession to clear the system, the Fed doesn't believe this and neither does Bernanke. They are eternal money pumpers, who consistently want to prop up the economy and never have a recession. Thus, it is truly bizarre that they would allow money growth to collapse. They simply have their eye on the wrong ball. They are watching the Fed Funds rate and believe they are providing huge amounts of liquidity to the system because of the 2.0% Fed Funds target. But the fact that money supply at this target rate is not climbing suggests that the real interest rates must be lower.

Indeed, the actions of M1 suggest this is exactly the case. Since what is climbing is M1. Three month annualized M1SA is growing at 5.8%. And what is exploding is demand deposit money (a part of M1). Three month annualized demand deposits are growing at 9.5%. This suggests there is huge fear in the system, and depositors prefer keeping their money in demand deposits as opposed to M2 components such as saving accounts and retail money market funds, which are displaying no growth. Clearly, this situation tells you that depositors prefer what they perceive is safety over yield.

Only a much lower interest rate would reverse the current situation, or perhaps non-sterilized loans and purchases of bank collateral provided by those using the Term Auction Facility. If this isn't done soon then the economy and stock market will worsen by leaps and bounds, including a major eye opening stock market crash.

Q2 Growth Revised Upward to 3.3 Percent

The U.S. GDP grew at a solid 3.3 percent annual rate in the second quarter. This strong number won't last if the Fed keeps money growth in the 2.5% range.

GDP grew at a sluggish 0.9 percent rate in the first quarter after a 0.2 percent contraction in the final three months of 2007. The fourth quarter of last year was the weakest since July-September 2001, when the economy was in recession.

Bankruptcy Filings Surge 29%

Bankruptcy filings surged 29% in the 12 months that ended June 30, according to government figures released today.

Total filings rose to 967,831 from 751,056 a year earlier.

Business filings jumped more than 41% to 33,822 from 23,889 in the year-ago period. Personal filings totaled 934,009, up 28% from last year.

The data also showed that filings for Chapter 7 rose 36% to 615,748 in the 12 months that ended June 30.

Chapter 13 filings, which requires debtors to pay back their debts over time, rose 17% to 344,421 from 294,693 a year earlier.

Filings for Chapter 11 bankruptcy, which is designed for corporations or partnerships, rose more than 30% to 7,293.

Money Supply Watch: Moving Closer to Recession

After growng at near double digit rates, Fed money supply growth over recent months has slowed dramatically. Three month annualized M2NSA money growth is at 2.8%. If money growth remains this low we will be in a recession in no time.

How Are Interest Rates Going Down, While Money Supply Isn't Expanding?

Money market funds, the short-term cash alternatives, grew to $2.9 trillion in June, up from $2.1 trillion a year ago, according to Crane Data. Further, those funds, in turn, have more than tripled their holdings of Treasuries and other government debt while reducing the share of their portfolios invested in somewhat riskier corporate notes, according to Vikas Bajaj .

Felix Salmon notes:

Money-market funds have gone up by eight hundred billion dollars over the past year? Yikes. To put this in perspective, the total amount of Treasury bills outstanding, according to the most recent schedule of Federal debt, is $1.13 trillion. If the money-market funds are massively overweight Treasury bills, there can't be very many left over for anybody else.

Bernanke is in kind of a Catch-22 here. Because of the fear in the markets, the real short-term rates for safe paper are below the Fed Funds rate. Thus banks do no money borrowing from the Fed to put the money in T-Bills, since it is currently unprofitable. Thus, no money supply growth. At the same time, the lack of money supply growth weakens the economy even further, creating even more fear in the markets and pushing T-Bill rates even lower.

What Recession? Part 2

New orders at U.S. factories increased by 1.7 percent in June, according to the Commerce Department.

Further, factory orders in May were revised higher to show a 0.9 percent rise, previously reported as a 0.6 percent advance.

Orders for nondurable goods were up 2.5 percent in June. Non-defense capital goods orders excluding aircraft, viewed as a good proxy for business investment, rose 1.2 percent in June. Durable goods orders for costlier items meant to last three years or longer like washing machines and refrigerators rose 0.8 percent.

U.S. June Durable Goods Orders Up 0.8%

It continues to be a housing and banking crisis, not a full fledged recession.

Orders for U.S.-made durable goods surged in June, rising 0.8% on stronger demand for primary metals, machinery and electronics, the Commerce Department reported Friday. Excluding the 2.6% decrease in transportation goods, orders rose 2.0%, the sharpest gain since last December.

What happens from here will depend on Federal Reserve monetary policy. If the Fed adopts the stance of double digit money printing, as they did earlier this year, the economy will turn strong and inflation will soar. If the Fed continues on its no growth policy of the last two months, we are headed towards a depression.