SPG Trend Advisors Blog

The March monthly unemployment report was the latest in a series of positive economic reports that confirms an expansion in the economic recovery. Since late February, we have observed a perceptible pick-up in consumer spending since the end of the severe winter weather. We have noticed an increase in traffic in restaurants and malls and have heard firsthand of increased travel by consumers. This empirical data has been confirmed by reports from major retailers and cruise ship lines over the past two weeks of increased revenues in the month of March.  The spring thaw has unleashed pent up spending which we have expected would spur a real economic recovery when the unemployment situation improved. While we believe new job losses have peaked, we have stated in previous comments that the chronic level of long term unemployment and the suppressed level of wage and salary income growth would be depressants to increased consumer spending.  Despite repeated evidence that the level of long term unemployment is not improving, consumers are apparently satisfied with their financial conditions to allow an increase in discretionary spending.  Combined with a continued surge in factory orders from businesses and rising exports, we expect first quarter GDP to be a solid 3% based on a strong March performance and the second quarter could be even stronger with growth in the 4%-6% range based on:

1. A strong rebound in housing to take advantage of the extended home buyer tax credit set to expire in June. We  would not be surprised to see that credit extended again to compensate for the lost time in January and February due to harsh winter weather.

2. An increase in auto sales as replacement demand increases due to the extended age of the automobile fleet and the detrimental impact on cars from this winter’s weather.

3. Continued and broader increases in capital equipment orders from businesses that are seeing increased sales, pent-up demand for capital equipment and rising corporate profits.

4. Increasing exports to fast growing and recovering overseas economies.

5. Increased federal spending from the accelerated release of stimulus funds.

If our projections are correct, strong consumer spending in the second quarter will lead to an inventory replacement cycle in the third quarter and increased industrial production from building backlogs. We do not foresee a double dip recession in the second half of this year.

However, we do expect a slowdown in GDP growth in the second half because the current surge in consumer spending cannot be sustained under current employment and consumer income conditions. We expect the current increase in consumer spending will come from savings and reduced reduction in consumer debt. While that helps spending in the short term it is cause for concern longer term. We have consistently commented in our posted economic presentations that a consistent effort on the part of American consumers to save more and reduce debt results in a healthier, more consistent and more creditworthy consumer that can sustain an increasing level of economic growth. Thus, while the industrial sector and exports can keep economic growth going through this year, reduced federal subsidy programs and lower levels of consumer spending make the economic outlook for 2011 more difficult to predict. Furthermore, commodity and energy prices are already on the rise which will increase inflation going forward and we expect the Fed will have to raise interest rates by this summer. The confluence of rising prices and interest rates will put additional pressure on consumer incomes and spending.

So while the economy is improving, sustained recovery still needs permanent job creation and the absorption of the large pool of long term unemployed.

Morris R. Segall, CFA, CIC

Economic Trends business landscape, consumers, economics, GDP, government, March monthly unemployment report, trends, unemployment

Beginning with last week’s sudden increase in the discount rate by the Fed, the expanding product scandal at Toyota and Tuesday’s surprising decline in the consumer confidence index from the Conference Board, the news has been bad for the economy and bad for the equity markets.

While the increase in the discount rate was no surprise, given Chairman Bernanke’s prior comments signalling such a move was likely, the timing and manner of the increase was quite surprising and unsettling. For months the Fed and Chairman Bernanke have stated the economy was still quite fragile despite its recovery. Public statements repeatedly reaffirmed the highly accommodative Fed policy of low interest rates. So why did the Fed not wait for its March Board of Governors meeting to announce its increase in the Fed funds rate?  Why did the Fed wait until the stock and bond markets were closed last Thursday to make its announcement?  These actions have been uncharacteristic of Fed actions which have emphasized transparency. We believe the Fed action is another in a series of moves toward normalization of monetary policy and an effort to drain excess liquidity from the financial system. But we believe the nature of the Fed action was aimed more toward foreign investors than for domestic consumption. We believe the continuing rumblings of overseas discontent with current American monetary policy and the revelation of significant sales of U.S. Treasury holdings by China created enough unease in Washington to send a signal to foreign investors that the Fed was ready to move on excess liquidity concerns. Keep in mind the current backdrop of increasing sovereign debt risk in Europe and the Middle East. The rising concerns over the increasing national debt and credit ratings of the U.S. government and the ongoing auctions of U.S. Treasury notes and bonds that are running on average at $100 billion per month. If the Fed action was precipitated by foreign concerns, monetary policy may not be as dependent on the fragile state of the U.S. economy as the Fed has stated.

The unraveling of the Toyota product image as more and more product defects surface and the company’s response becomes more suspect will hurt Toyota manufacturing and sales in the U.S.  Of course this will benefit Ford and GM but the manufacturing, parts supplier and dealer networks of Toyota in the U.S. are important contributors to the U.S. economy and are not fully replicated by domestic manufacturers, particularly given the downsizing of Detroit in the recession. Toyota imports are important economic contributors to West Coast ports and domestic rail and truck volumes. The problems of Toyota are an important reminder of the vulnerability of brand image and customer brand loyalty and how vigilant company managements must be to maintain them. This will be a textbook case taught in business schools of how not to handle quality control and customer relations issues.

Tuesday’s unexpected steep decline in the Conference Board’s consumer confidence index for February is very disturbing.  After showing improvement as the economy recovered and the stock market moved higher the Conference Board index plunged to a reading of 46 from a level of 56.5 in January. The steep decline in the third quarter of economic recovery is not at all typical.  The reading of 46 is consistent with the low levels recorded in the depths of the recession last year.  More distubing are the subsector readings within the index.  The measure of responses indicating positive sentiment to  current conditions was less than 20%, a 27 year low. Almost 50% of respondents felt jobs were hard to get versus less than 5% of respondents who felt jobs were easy to get. Over 45% of respondents felt business conditions were poor. Sentiment readings on the near term outlook also fell significantly from January levels. In short, consumers are depressed currently due to ongoing unemployment and consumer income pressures and discouraged about meaningful improvement in the near term. This level of pessimism can be self fulfilling and act as depressants to consumer spending which must improve if the current economic recovery is to be sustained and expanded.

All of this will not be lost on the stock and commodity markets as witnessed by Tuesday’s declines.  Unless news from the consumer sector reverses, the equity and commodity markets will be hard pressed to rally further from current levels in the near term. Conversely, strong corporate earnings and a steady improvement in the manufacturing sector are providing support to the markets. We still believe the markets are vulnerable to correction in the near term but remain positive on equities and commodities intermediate-longer term. The signals coming from the Fed herald the end of zero interest rates and augur ill for the fixed income markets, particularly at the short end of the maturity spectrum.

Morris R. Segall, CFA, CIC

Economic Trends business landscape, Consumer Confidence, consumers, economics, economy, government, The Fed, Toyota

Today’s unemployment report for the month of January was revealing for what it did not tell us. That is, are we about to turn the corner on unemployment ?  The report showed a modest 20,000 loss in jobs in the month of January,  a virtual flat performance with the month of December, 2009. Of more note was a .3% drop in the stated unemployment rate from 10% to 9.7%, the lowest rate since last summer. However, as we commented in our blog article, “November Unemployment: Is this the Peak?“, December 4, 2009, the Labor Department made annual revisions to its monthly employment reports. As expected, the revisions show more job losses in 2009 than previously reported. According to the revised calculations, the economy lost over 600,000 more jobs in calendar 2009 than previously reported including a large downward revision of 65,000 lost jobs in the month of December, 2009 to a revised total of 150,000 lost jobs in that month. So a flat January job loss result with December is not a job improvement. We therefore are skeptical of the drop in the unemployment rate. In addition, the average workweek in January remains depressed at 33.9 hours and the civilian labor force participation rate in January continued to reflect historical lows below 65%. There are other important items in the January employment report. Goods producing industries, largely in construction, lost another 60,000 jobs bringing the total for the last three months to almost 150,000. Financial activities and transportation and warehousing sectors lost another 35,000 jobs in January on top of the almost 29,000 jobs lost in December. These are generally high wage jobs.  Finally, long term unemployed, those out of work 27 weeks and longer, continue to rise to a record 6.3 million in January. This is the chronic problem in the unemployment picture. While new job losses continue to diminish, continuing job losses continue to rise.  The increasing universe of long term unemployed will continue to suppress consumer spending and therefore an acceleration in the economic recovery.

The January unemployment report did contain some positives. The number of temporary help workers increased by another 50,000 in January and since September by nearly 250,000. While this number is being augmented by hiring for the U.S. Census this year, the recent five month trend augurs well for ultimate permanent job creation later this year. For the first time since the recession began, manufacturing added jobs in January, albeit a small number (11,000), but it is significant and supports the economic improvement in the factory sector which we noted in our recent “Economic and Capital Market Update“, February 1, 2010 on our website. We expect further improvement in manufacturing employment reflecting the upside momentum in factory orders, particularly in the technology sector.

All in all, the January monthly unemployment report while encouraging is still not conclusive evidence of a transition to meaningful job creation in the current economic recovery.

Morris R. Segall, CFA, CIC

Economic Trends business landscape, consumers, economic improvement, economics, economy, GDP, government, January Unemployment, Labor Department, politics, U.S. Census

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

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Ben Bernanke appears to be fighting for his life before Congress where several members from both major parties and one of the independents in the Senate are rejecting his reappointment as Chairman of the Federal Reserve Board for a second four year term.  The opponents of his reappointment blame Mr. Bernanke for aiding and abetting the excesses in the financial system that resulted in its meltdown and taxpayer bailouts of many of its institutions. In their zeal to lash out at the stewards of fiscal and monetary policy during the financial crisis of the past two years, the critics of Ben Bernanke fail to include one of the most culpable parties to the worst financial crisis since the Great Depression and that is Congress itself. From the enactment of the Bank Holding Company Act in 1956 and its subsequent amendments which allowed banks to buy non bank financial entities outside of the supervision of the Federal Reserve System, to the repeal of the Glass Steagall Act which had separated the commercial and non-commercial banking activities of banks in 1999, to the lax oversight of Fannie Mae and Freddie Mac, federally chartered institutions that were the backbone of mortgage securitizations and transactions which fed the lending bubble. For over 40 years the Congress has consistently enacted legislation that enabled banks and other lenders to engage in high risk activities OUTSIDE of the supervision of the Federal Reserve Board. So when the Fed complained that it was losing control of the financial system, Congress did nothing.

In our website article of December 7, 2007, “The Treasury Plan: Is This the Solution?“  we outlined our skepticism of the success of the Treasury plan of then Treasury Secretary, Henry Paulson, to effectively “dance around” the mortgage crisis by adjusting mortgage rates and terms in the hope of forestalling the inevitable losses from mortgage defaults. It was not until March, 2008 that the Federal Reserve forcefully attacked the loan loss problem by swapping Treasury paper for the problem debt held by mortgage lenders. The Fed subsequently expanded Discount Window facilities to both commercial and for the fist time, non-commercial banks like investment banks and brokerage firms so these firms could have liquidity. In fact in our ongoing economic presentations such as the ones  posted on our blog and website,  there is an entire section of slides and commentary entitled “The Government”s Response” to the severe credit crisis. It shows the leadership of the Fed in increasing the money supply, reducing interest rates and expanding its own balance sheet by purchasing the “toxic” assets of the banking system to provide it with liquidity necessary to keep the system afloat.  By most objective scutiny of the Federal Government’s handling of the credit crisis, including our own jaundiced view, if there is a hero in this debacle, it is Ben Bernanke who literally pulled out all the stops to keep the financial system in this country from totally collapsing, particularly after Henry Paulson triggered a system panic by allowing Lehman Bros. to fail. We may not have liked the bailouts of many of these instituions but as we have stated in prior commentaries, the country runs on credit and letting the banking system fail was just not an option.

If one wants to point a finger at the Fed for allowing the credit bubble to build, it needs to be pointed at Alan Greenspan who instead of musing on the illogical low level of interest rates in 2004-05 in the face of the real estate boom should have raised interest rates and loan reserve and capital requirements to slow the creation of credit. Upon succeeding Greenspan in January, 2006 Ben Bernanke’ s Fed started raising interest rates through the spring and into the summer of that year and held those higher rates until the recession began in late 2007.

We and other observers believe Ben Bernanke will be reappointed to another term after this current thrashing. He better be. A rejection of Ben Bernanke AND an ill advised replacing of the Federal Reserve as the nation’s principal regulator of monetary policy and the financial system, would create a loss of confidence in foreign bankers, creditors and traders and would depress our bond markets and exacerbate an already “free falling” U.S. dollar. The President needs to show leadership on this issue and strongly reaffirm his support for the reappointment of Ben Bernanke and not let Congress make him the “goat” of the recession. If Congress wants to assess blame for the financial mess, they should begin by looking in the mirror.

Morris R. Segall, CFA, CIC

Economic Trends Ben Bernanke, business landscape, Capital Markets, credit crisis, economics, economy, government, obama, treasury, trends, unemployment

Today’s unemployment data for November was a surprising loss of only 11,000 jobs, well below economists’ expectations of 100,000-150,000 jobs lost in the month. In addition, the unemployment rate for November declined unexpectedly to 10% from October’s 10.2%. Consensus expectations were for the unemployment rate in November to be flat at best with October’s cycle high. The Labor Dept. also revised downward previously reported job losses in September and October. Monthly job losses have been revised downward for each month since August by a total of over 200,000 jobs. Since August, monthly job losses have averaged below 200,000 versus over 300,000 average monthly losses in the May-July period. The decline in monthly job losses parallels the strong improvement in first time unemployment claims reported weekly. Since mid September, first time unemployment claims have fallen approximately 100,000 and are now running at approximately 450,000 for the last two weeks in November.

In isolating the areas of reduced job losses we note that healthcare continues to be the area of the economy that has consistently added workers during the recession. Since September, healthcare has added an additional 100,000 workers and nearly 900,000 workers since the recession began in December of 2007. Other areas of job improvement since September are: the federal government and state government education accounting for an increase in approximately 50,000 jobs; and professional and business services adding over 100,000 jobs largely in temporary help services.  Importantly, for the first time this year, the average workweek increased to 33.2 hours from a cycle low of 33.0 hours in October.  The average workweek improved more in the manufacturing sector expanding to 40.4 hours from 40.0 hours in September. This reflects the recurring order and shipment strength in the manufacturing sector since last summer.

Conversely, most other areas of the economy continued to record job losses including manufacturing, finance, construction, retail and wholesale trade and information services. While the Labor Dept. reports almost 41% of reporting industries are now hiring, a cycle high, that leaves nearly 60% that are not. The surge in temporary help jobs indicates businesses are wary of the economic recovery and are reticent to add to payrolls. Furthermore, the labor force has declined by over 100,000 workers since September indicating an increase in discouraged workers despite the improvement in the economy. The decline in the civilian labor force would also partly explain the decline in the unemployment rate in November. Another benchmark of employment in the weekly and monthly reports indicate no improvement in the numbers of long term unemployed and under-employed workers. In fact, the numbers of long term unemployed increased to over 9 million or 38% of total unemployed at the end of November, a record level.  In addition, while first time unemployment claims have declined sharply, they are still recording well above 400,000 claims per week. Finally, the response from consumers in recent surveys indicate jobs are hard to get by an overwhelming margin despite the economic improvement in the third and fourth quarters. These measures do not support the monthly improvement in employment reported by the Labor Dept. since August and we have repeatedly said so in our blog articles on the monthly employment reports going back to last July.

Nonetheless, if the monthly employment report from the Labor Dept. is indeed true and not distorted by seasonal adjustments and faulty assumptions that are part of this survey’s results, then  it would appear that unemployment in this cycle is peaking and job creation is virtually around the corner early next year. This would be well ahead of consensus expectations, including our own, in projecting a peak in unemployment and the transition to job creation in the middle and latter part of 2010, respectively. It is important to note that the Labor Dept. will be making final revisions to its 2009 monthly employment data in March of 2010. In its initial revision to 2009 monthly employment data in August, the Labor Dept. revealed that unemployment this year was actually almost 900,000 workers higher than originally reported. Similar revisions were made to monthly data in 2007 and 2008. With that as a background and the contradictory results of other unemployment data and surveys, we are skeptical the employment cycle is turning this strongly and this fast.

Morris R. Segall, CFA, CIC

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Yesterday’s second reading on the third quarter GDP showed a downward revision from the robust 3.5% preliminarily reported at the end of October. As November wore on expectations of the second and more definitive read on the third quarter was for a downward revision to the 3% level but no one was alarmed. It was considered more or less statistical.

After taking a look at the revisions from the preliminary report we are concerned for the following reasons:

1. Personal consumption was revised down from 3.4% growth to 2.9% with spending on goods dropping from 8.1% growth to 7.2%.
2. Business capital spending dropped from 11.5% growth  in  the preliminary report to 8.4% in the revision with large downward revisions in the growth of inventories and business structures.
3. Federal government spending growth was revised upward from  2.3%  to  3.1%.
4. Growth in final sales of domestic product was revised downward from 2.5% to 1.9%.

This revised mix of weakness in business and consumer spending with all of the federal government stimulus in the quarter is alarming and casts further doubt on the underlying strength in the economy as federal stimululs abates going into next year. Our assumption of 1%-3% GDP growth in the fourth quarter will need strong contributions in both consumer and business fixed investment from the revised third quarter levels. We detect an improved level of retail sales in the quarter but  will need to see sales results of “Black Friday” to see if that is true. A disappointment in this weekend’s sales will cause a shift in outlook for both the economy and particularly the capital markets which have been seeing the glass “half full” in November despite the warning signs in consumer sentiment, new home sales and continued high levels of unemployment. It is noteworthy that the market gains in November have been accompanied by low levels of trading volume, an ominous sign for sustained capital market gains.

In our previous website and blog articles on the preliminary third quarter GDP, we remained skeptical of the durability of the third quarter gains and said we would be watching fourth quarter economic data closely for future direction. With the downward revision in third quarter numbers, we will be even more vigilant to see if this economic recovery has “legs”.
Best wishes for a Happy Thanksgiving holiday and stay tuned.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, consumers, economics, future trends, GDP, global, government, recession, stimulas, unemployment

We recently updated our presentation on today’s economic landscape and what’s on the other side with some fresh data.  We hope you continue to find value in our slides:

Economic Trends 2009 economy, Capital Markets, economics, GDP, global, government, international, treasury, trends, unemployment

GDP for the third quarter comes in strong stimulated by the government but the details and other consumer economic data create doubts on sustainability and make the capital markets nervous. Continue reading this premium article at spgtrend.com.

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Economic Trends 2009 economy, Capital Markets, commodity markets, consumers, debt, depression, economics, GDP, unemployment

After reaching the 10,000 level last week, the Dow Jones Industrial Average stalled reflecting an overextended condition. Over the same period the U.S. Dollar and commodity prices, led by oil, moved to new lows and new highs, respectively, for this year. These trends are inconsistent with a rising stock market and something had to correct. Either commodities, driven recently by speculation, reversed course or the stock market would retreat under the downward pressure from a falling dollar and rising commodity prices. We have expected a correction in the stock market as it became overextended and vulnerable to softening economic data for the month of September. That correction may have started today with a nearly 100 point decline in the Dow that accelerated in the last hour of trading, reversing the recent trend of strengthening prices as the market closed. As expected, corporate earnings reported for the third quarter were a catalyst for the market “run up” in October. Analysts and investors took heart that earnings were better than expected, notwithstanding that expectations were quite low. However, the economic data on retail sales, factory orders, housing starts and consumer confidence measures for the month of September receded from the July and August increases. This faltering of economic growth is our main concern for extended stock market gains from current levels. We will continue to digest economic data for signs of the direction of the economy in the fourth quarter as government stimulus wanes.

The free fall of the U.S. dollar is now a chronic problem for international finance and capital markets. We noted in our September 8, 2008 website article, “Stocks, Recession and the Bail Out”, the adverse impact of the government’s stimulus programs on the U.S. dollar and the U.S. government balance sheet on international currency and credit markets. With the Dollar at record lows versus other international currencies, foreign governments will now put pressure on the U.S. to support the Dollar. They in turn will consider measures to restrain the rise in their currencies to protect the competitiveness of their export industries, including protectionist measures which we expected to be a reaction to the severe worldwide recession. Unfortunately, the U. S. economy is not strong enough to endure a rise in interest rates which would make the Dollar more attractive on international currency markets. So the Fed is in a quandry with no near term solutions to the falling Dollar given the weak U.S. economy and the massive federal deficits that have been incurred. As we have stated previously, a weak U.S. dollar is inflationary as imports become more expensive. Combined with the large increase in oil and other commodity prices, inflation becomes a problem despite the weak economy. Already manufacturers are reporting a rise in the cost of production inputs which most cannot pass on to customers. Gasoline prices have also risen and will negatively impact consumer discretionary spending.

The rise in oil and commodity prices are a reaction to the falling Dollar. They do not reflect current supply/demand conditions. So the more the Dollar declines, the more commodity prices increase. We believe commodity prices, including oil, are streched and will recede if U.S. economic growth weakens in the fourth quarter and/or the first half of next year. Longer term, gold, oil and other commodity prices will increase reflecting the longer term weakness in the U.S. Dollar and rising overseas demand, particularly from emerging industrial economies in Asia and Latin America, for raw materials. China is aggressively buying up raw material sources in Africa and Latin America, outbidding U.S. companies. This will also raise commodity prices on international markets, longer term.

In summary, capital markets, both bond and equity, here and overseas have had huge gains since the March lows as have commodity markets. We believe all of these asset classes are overextended and vulnerable to faltering economic data, particularly from the U.S. We remain vigilant to near term trends in the economy and price levels in capital and commodity markets. Longer term, a weak U.S. currency and rising commodity prices raise the specter of inflation which validates our commitment to gold, energy and other commodities in our strategic asset allocation model.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, Capital Markets, Commodity Prices, consumers, Dollar and Commodities, Dow, Dow Jones, Dow Jones Industrial Average, Economic Growth, economics, trends, Wall Street

Friday’s monthly employment report for September was bad. September job losses, per the Business Establishment series, was a -263,000, worse than analysts projected. Job losses were widespread between manufacturing, construction and a huge 147,000 loss in service sector jobs. The stated unemployment rate increased to 9.8%, another record level. The unofficial unemployment rate that includes underemployed and discouraged workers rose to 17%. The average workweek declined to a record low 33 hours and the employment to population ratio declined to a record low of 58.8%. That means less than 60% of the available working age population are employed in full time jobs. Unemployment rates increased in all demographic groups led by teenagers at a crushing 26% and minority groups in the low to mid teens. The unemployment rate for adult men escalated to over 10%. While these numbers have chronic economic implications they also have negative social impact as well and we are seeing it in an increase in crime, divorce, domestic violence and physical and psychological disorders. We wrote about the social and emotional toll of this recession in our website article of March 23rd, “ I am Mad as Hell…“. The scars from this growing and continued high level of unemployment will be felt long after the economy recovers.

As if the current level of unemployment were not distressing enough, the Labor Dept. announced that a preliminary estimate of its annual benchmark revision to the monthly unemployment data shows that private sector employment going back to March of this year is lower than originally reported by 855,000 jobs. In a previous blog article, “The July Employment Report…“, August 10, 2009, we stated that we believed recent monthly unemployment numbers would be revised downward when the annual revisions are made next March. The 855,000 increase in lost jobs is a PRELIMINARY estimate and we are expecting it to go higher when the final revisions are made next year.

Friday’s unemployment data on the heels of Thursday’s increase in first time unemployment claims is the latest in a string of weakening economic data last week. We stated in our last blog article, “The Economy, Capital Markets…“, October 1, 2009, that we are getting “uneasy about the underlying improvement in the economy”. Friday’s unemployment report is more unsettling and increases our unease.

To be sure we need to see more economic data for the month of September before making revisions to our economic and capital market outlooks. However, we are advising our capital markets clients to take some capital gains where tax considerations are not an issue and hold onto cash as a defensive measure. We still believe there was enough “pop” in the government stimulated economy in the third quarter to generate 3%+ GDP growth. But we are increasingly unsure about subsequent quarters as government stimulus wanes. If our fears are realized, equity markets here and abroad have considerable downside risk from current levels. As we have stated repeatedly in previous blog and website articles, there is no recovery without the consumer moving “goods off the shelves” on a continuing basis. Worsening levels of unemployment just keep postponing that development. Investors and businesses will need to be flexible and nimble in planning for next year. Stay tuned as we continue to analyze data and events over the remainder of this year.

Morris R. Segall, CFA, CIC

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Today the government released its third and final revision to the second quarter GDP numbers and shaved the 1% contraction to .7%. There were no major shifts in trends from the previous report but the positive direction of business fixed investment and consumer spending was aided by a surge in government spending, as expected. As we have stated previously, it appears the recession ended in the second quarter. Led by rising home and auto sales, positive trends in industrial production and retail sales continued through July.

The expectation was for these trends to continue through August and into September led by continued government stimulus and subsidy programs. However, August numbers for existing and new home sales declined in August from July levels and factory orders for durable goods in August were also unexpectedly down from July levels. This makes us uneasy about the underlying improvement in the economy. We have stated previously that government stimulus and subsidy programs, notably the “Cash for Clunkers” program and the tax credit for first time home buyers, were likely to spur positive GDP growth in the third and fourth quarters of this year. The question in our mind was what happens when those programs expire. Now we see that despite the positive demand stimulus from the government programs and the momentum of increased home sales and prices and auto sales in June and July, there was no follow through in August. And there should have been. The decline in factory orders is particularly disturbing because the positive trend in auto and home sales should be leading to a steady improvement in factory orders and production to replace goods sold.

The decline in many of the components of the factory orders report suggest that businesses are not ready to ready to begin a sustained capital spending uptrend. If they are not going to increase spending with government stimulus, what happens when that stimulus ends. It will be very important to see housing and business spending levels for September and the remainder of this year to gauge whether we are really in recovery or facing a downleg in the “W” shaped economic outlook we raised in our August 3rd blog entry, “Turning the Corner…“. While the “Clunker” program has expired we expect the current home buyer tax credit program to be extended into next year given the success of that program.

Today also marks the end of the third quarter and stock markets around the world concluded one of the most successful quarters in decades. The Dow Jones Industrial Average gained 15% in the quarter and overseas markets showed bigger increases including Europe and Japan as well as emerging markets. Fed by infusions of liquidity from central banks and the specter of worldwide economic recoveries, capital markets surged. In recent weeks, increased speculation and appetite for risk have reappeared in debt and banking transaction markets. Year to date the Dow is up 50% from its March lows. Overseas markets show comparable and greater gains. But at this point both bond and stock markets here and abroad are stretched and need further evidence of economic and corporate profit improvements to protect present gains and sustain additional appreciation. If the outlook for worldwide economic growth proves correct we believe worldwide debt markets are vulnerable to declines from higher interest rates next year from the current depressed levels. Here again, economic data over the remainder of this year will influence the direction of worldwide capital markets. If our concern over a “W” shaped economic outlook proves correct, expect a major correction in U.S. and overseas markets from current levels. We are watching developments closely.

In our blog entry, “Healthcare Reform and the Democrats…“, of August 6, we raised concerns over passage of the President’s healthcare proposal and the split in the Democratic Party that we felt would be the undoing of the President’s plan. Events since then have validated that concern and it now appears that for the same $1 trillion price tag Congress will pass a healthcare bill that omits a public option. This will leave the private healthcare and pharmaceutical industries intact and escaping significant third party competition. The political “fallout” is considerable. The President is wounded and his party is split. There is concern about Democratic Party losses in next year’s Congressional elections as the debate over healthcare reform has been framed as big government socialism versus libertarian, individual democracy. A perceived defeat of the President and a fractious Democratic Party will have international implications as both our allies and foes evaluate the strength of this President.

Speaking of geopolitics, this weekend’s victory of Angela Merkel in German elections lends further support to our contention that Europeans are turning to the political “right” (See our website article, “I am Mad as Hell…“, March 23, 2009). Running on a pro business, lower tax platform, Chancellor Merkel and a right of center, pro business party won nearly 50% of the popular vote. The long time Social Democratic Party garnered less than 25% of the popular vote, its worst defeat in postwar history. Angela Merkel joins Nicholas Sarkozy of France heading a center right European government and the victory of center right parties in this year’s European Parliament elections. Furthermore, it is widely believed Britons will elect a Conservative government in next year’s elections. The disillusionment of European voters with socialist governments is the direct result of the economic damage to those electorates from the recession and the increase in protectionist sentiments to protect domestic jobs and incomes.

Additionally, geopolitical events from Afghanistan to Honduras are hurting President Obama and his foreign policy agenda. The President is in danger of being viewed as impotent and more style than substance. While he remains very popular overseas, his policies and lack of forceful actions in the face of antagonistic behavior will erode his ability to lead a free world coalition against rising threats. We will publish on our website in the near future an in depth analysis of international events and the Obama foreign policy.

In summary, as we conclude the third quarter recent economic data is disquieting and if continued will threaten the outlook for economic recovery in the U.S. and the large gains in worldwide capital markets achieved to date. Overseas events also threaten to undermine the “honeymoon” in foreign affairs enjoyed by President Obama to date. We are not changing our intermediate and longer term positive economic and capital markets outlooks at this point but we are watching data and events over the next three months very carefully.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, Capital Markets, Cash for Clunkers, economics, Geopolitical, healthcare plan, trends, unemployment

It looks like it is all falling into place. Improved housing sales, increased factory orders and shipments, the “Cash for Clunkers” program moving autos off of dealer lots and stimulating increased automobile factory production and the best news of all, stock markets around the world are hitting 12 month highs. World central bankers, including our own Ben Bernanke, pronounce the recession over as GDP for the June quarters show positive growth in France, Germany, Japan and most of Asia. The capital markets buying the rumor are soaring fed by huge amounts of liquidity added to monetary systems by the world central banks as they embarked on economic bailout and stimulus programs. This past Friday’s U.S. stock market action has typified the recent ebullience among bankers and investors. The Dow Jones Industrial Average breached the 9500 level for the first time since last October buoyed by further good news in existing home sales and Ben Bernanke’s positive comments.

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Economic Trends 2009 economy, business landscape, Cash for Clunkers, consumers, economics, recession, trends

As I feared from the beginning, the future of President Obama’s proposals were going to be in the hands of conservative or “Blue Dog” Democrats largely from the south, west and midwest. Their opposition to the high costs of the plan and a large federal presence in the system was going to be the defeat of the President’s program, rather than the expected “knee jerk” Republican opposition. The Republicans are now a marginal party lacking numbers and influence in the Congress to pass or defeat any legislation. It now appears the “Blue Dogs” will win out and “water down” the President’s plan to the point where it will be largely a failure in terms of progressive healthcare reform. It will eliminate a federal entity to offer insurance in competition to the private insurance industry. It will exempt thousands of so called small businesses, even those with payrolls of $500,000. It will also extract higher health insurance premiums on low-middle income wage earners. And most egregiously, push more of the increased Medicaid burden on the states who are already facing massive budget deficits and have no money to pay for anything. As a result of the “Blue Dog” opposition, in conjunction with the negative statements from the Republicans and the propaganda from the healthcare industry, popular support for the President’s program has been seriously eroded and the fact that Congress will adjourn for the month of August without passing healthcare reform legislation will give the President’s opponents an entire month to erode popular support further and “gut” the pending bills in committees even more.

I fear the final result will be little if any real healthcare reform; increased premiums for insured’s, particularly if private insurance firms have to accept less healthy members; and a continued increase in uninsured people as businesses are exempt from providing mandatory healthcare coverage. The winners will be the insurance and pharmaceutical industries who will have “dodged” a bullet for massive healthcare overhaul and reform. The costs to them will be a fraction of what the President’s program would have cost them and they will make it up by charging higher prices to the public. The losers will be the public who will continue to pay more for an unworkable system and doctors who will get paid less in an effort to control healthcare costs. By the way, the cost saving from the current compromise plan agreed to by the Democrats in the House is  $100 billion, the amount we sunk into General Motors and Chrysler in a futile attempt to save them from bankruptcy. As I said in my previous piece, it would appear we are more prone to spending billions saving corporate America than insuring the health of the American public.

The Democratic Party offered the American public comprehensive healthcare reform in the last two elections and the American public gave the Democratic Party the electoral majority they needed to get it done. It appears the Democrats decided that was a promise they are not willing to keep.

Morris R. Segall

Recommended reading:

Turning the Corner: GDP, Housing and Cash for Clunkers

An Open Letter to Congress

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Economic Trends Blue Dog Democrats, democrats, economics, economy, healthcare plan, healthcare reform, obama, republicans

Friday’s news of the “less worse” second quarter GDP was received as another piece of good news by the stock market as further evidence of the end of the recession. It capped a week of improving economic news on housing. But the real economic sweetener that offers a tangible boost to the economy in the near term was the announcement on Friday that the government’s “Cash for Clunkers” program was extended by the House of Representatives and augmented by a further $2 Billion in government funds.

Of all of the various government schemes and bailout programs to stimulate the economy over the past two years, the government finally got it right with this one. We have stated repeatedly, the economy was not going to recover until the consumer started moving “goods off the shelves”. Well goods are moving off the shelves or rather cars are flying off of car dealers lots. OK  the U.S. government is buying the cars but the end result is dealers are emptying their inventories and will soon reorder from the factories as long as the government program is in force. The Senate needs to also approve the program’s extension or it will expire by the end of this week. We are optimistic the Senate will vote to continue the program before they adjourn this Friday. This will in turn start the manufacturing replacement cycle. The “Cash for Clunkers” program is expected to increase retail sales beginning in July, increase industrial production by the fourth quarter and even help factory employment due to the higher production rates. Higher auto production will have a widespread positive impact on manufacturing and distribution sectors. It is our belief this program will insure a positive growth in U.S. GDP in both the third and fourth quarters of this year. Now let’s be clear. This is artificial consumption and will deflate when this program expires which we assume will be at year end. We don’t think Congress will ante any more money for this when the current funding is used up. By that time, the rest of the economy may be starting to fill in the void .

To that end, we are seeing for the first time a trend of positive news on housing that would support our long standing forecast of a bottoming in the housing cycle in the second half of this year and obviously remove a major depressant to the economy. This past week both new and existing home sales rose for the third month in a row. And for the first time since the housing market imploded, home prices showed a monthly increase according to the widely followed Case-Shiller Home Price Index. In addition, inventories of existing and new homes are now getting down to normalized levels. Here again, the recovery process is not widespread and is largely centered in homes in the $150,000-$300,000 price range as home buyers take advantage of bargain prices, ample supply and willing sellers in the deflated housing market.

Lastly, the second quarter GDP was reported with a contraction of 1%. While this was better than consensus economic forecasts including our own, it is the first of three readings on the quarter and the one subject to the most revision as more data is processed over the next month. The second reading on the quarter will be reported at the end of August and will be more definitive. While the report was mixed with continuing depressants in consumer spending and business fixed investment, the quarter saw the beginnings of increased government spending which helped offset the weakness in consumption and business investment. Nonetheless, the quarter fulfilled our forecast of a decidedly “less worse” performance than the severe contraction of the first quarter. Importantly, the huge decline in business fixed investment appears to have bottomed in the second quarter and will not be the huge depressant on the economy going forward.

So for the following reasons we now believe the third and fourth quarters of this year will show positive growth though we are not forecasting an economy embarking on a full recovery. Unemployment is still too high and there is a great deal of unutilized production capacity that will keep private sector spending suppressed. However, the bulk of the government stimulus spending will hit the economy in the next four quarters providing a strong plus for GDP growth and exports are picking up from rising economic growth in Asia led by China. These pluses along with reduced minuses from consumption and business fixed investment should equate to positive GDP growth in the second half. The question is can the private sector recover on its own without the huge and finite pull of the federal government. The answer remains the level of unemployment and consumer incomes.

As the macro economic environment improves, the outlook for corporate profit growth also improves providing further stimulus to rising stock markets here and abroad. The likelihood of a sizable correction in the equity markets is diminishing the further we go through this year and into next. We have long been bullish on equities over the 2010-2012 period and increased equity allocations in our capital markets strategy this past spring once a bottom in the recession was perceptible. We have hit that bottom and reaffirm our longer term capital markets strategy of getting fully invested in U.S. and overseas equities with a strong allocation to commodities, including gold.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, Cash for Clunkers, consumers, economics, GDP, government, housing

In our July 5th blog entry, “June Employment Report–Green Shoots Fading“, we commented that a doubtful economic recovery expected in the third quarter and pessimistic earnings guidance from companies reporting second quarter earnings this month would in our opinion herald stock market corrections here and abroad near term. Since that posting the Dow Jones Industrial Average declined approximately 5% in the ensuing five trading sessions before rebounding on expectations of robust bank earnings to be reported this week. Indeed, Goldman Sachs reported a “blowout” quarter led by its investment banking activities. However the more significant earning news yesterday came from Intel that reported a surprisingly strong second quarter highlighted by a surge in revenues and unexpected expansion in gross margins from increased unit volumes of consumer products. Even more importantly, the company reestablished earnings guidance for the remainder of the current fiscal year as the outlook for its business became more visible and positive. This is the kind of earnings encouragement that is necessary to sustain the market recovery begun last March. To be sure, Intel’s business turn may be truly singular to itself and not indicative of a broader upturn in the technology sector but as a bellwhether in the industry and in the major market averages, the substantial improvement in Intel’s performance and outlook lead us to believe we are at or near the bottom of the earnings cycle for non-financial companies. Indeed, we feel Intel’s results signal the same kind of shift in corporate earnings we saw at the opposite end of the spectrum in early 2008 when we wrote our article, “GE, the Earnings Cycle and Food”, April 14, 2008. In that article, we noted the deterioration in GE’s first quarter 2008 earnings and the very negative implications for the rest of S & P 500 corporate earnings last year.

The Intel results reflect successful new product introductions, stringent cost control, inventory reduction and strong sales. The strong sales reflect strong demand for PC products from China and the U.S. aided in the latter by bargain selling prices by the company’s resellers and buying stimulus from accelerated write-offs offered by the Federal government. The higher sales volume and cost reductions allowed the company to record much expanded gross margins in the quarter despite lower average selling prices and lower unit margins on consumer products. This has been a theme of ours supporting a positive outlook for common stocks led higher by rapidly increasing corporate profits from increased gross margins from increased unit sales volume.

The new, improved visibility for increased unit sales, continued cost controls and tight inventory control is allowing the company to forecast improved gross margins for both the third and fourth quarters of the current fiscal year which may force analyst earnings forecasts to be raised. This is also reinforcing another of our themes for the recovery cycle, namely the pent up demand for computers that can only be deferred for so long before a new sales cycle begins. Currently, the new demand is coming in consumer products but the company expects business demand to pick up next year for the same reasons. Importantly, the higher end business products carry higher unit margins which should amplify Intel’s earnings when the economy recovers.

Thus, we are encouraged that the Intel earnings report contains the seeds of a bottoming in earnings in the technology sector and possibly other areas of Producers Durable Equipment sector, i.e. capital goods as pent up demand, bargain purchase prices, accelerated equipment write-offs and fast return on investment and increased productivity lead to a recovery in this sector. We expected this sector to be a leading element in the economic recovery forecasted for next year due to short lead times for purchase and profitable returns. The Intel earnings report and new guidance give us reason to believe in that forecast. And yet we still believe in our comments of July 5th that many companies will not have the positive guidance outlooks of Intel, i.e. consumer discretionary, real estate, transportation to name a few. In view of this and the continued weak near term economic environment, we still believe the capital markets are vulnerable near term to the downside as economic and corporate earnings remain weak. Neverthless, our intermediate and longer term outlooks are reinforced by the Intel results.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, business landscape, earnings report, economic, economic recovery, economics, GE, Intel, trends

Thursday’s release of June unemployment numbers has cast a pall over the economic recovery thesis for the second half of this year. The report was pervasively weak. The overall job loss reported of 467,000 was much higher than expected and the breadth of the job losses was even more disappointing. Every industry sector except healthcare saw
increased job losses in June than in May with striking increases in the Professional and Business services and Government sectors. The negative tone and implications of the June report sapped the stock market on Thursday, knocking the major market averages down almost 3% and leading market sectors like commodities down even more.

We believe the June employment report and the attending stock market reaction signal the beginning of the long awaited stock market corrections both here and abroad as the prevailing optimistic sentiment regarding the U.S. economy is now in doubt. This change in sentiment and the upcoming earnings guidance from companies reporting second quarter results this month are expected to put increased pressure on the elevated stock markets. We expect the capital market declines to be led by commodities, particularly energy, which have paced the market gains since March. The weakening economic outlook diminishes the recovery story for materials and energy given a protracted weak demand environment.

Our capital markets strategy of holding significant cash reserves in anticipation of market corrections, while the U.S. economic recovery was in doubt, should provide a cushion to near term market declines but more importantly, provide liquidity to invest in the market at lower prices. We are “bullish” on stocks over the 2010-2012 period and believe the stock market lows of this past March are the cycle lows for this recession. But the markets, particularly foreign stock markets have appreciated very much, very fast and needed confirmation of an economic recovery to stimulate an upsurge in corporate earnings to sustain the recent market strength. Failing that, the markets were in our opinion, fully valued. So we will watch the slope of market weakness to see where it lands but be prepared for at least a 5% to possibly 10% correction, particularly if corporate earnings guidance for the remainder of this year and the early part of next year is disappointing.

Morris R. Segall, CFA, CIC

Economic Trends business, economics, economy, employment report, unemployment

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  Part three discussed public anger.  Part four discussed the declining economy causes spiraling stress.  Today’s entry discusses the long-term implications for the recession:

We believe the current trends and developments have longer-term significance and implications for the U.S. and overseas countries, politically, socially and economically.  From an intermediate term economic outlook perspective, we believe the current recession will “bottom out” in the second or third quarters of this year. We believe the worst of the recession is now being experienced in the first quarter. We do not expect an economic recovery to be measurable until the fourth quarter of this year, at the earliest, and possibly the first half of next year.

Assuming a recovery from the current recession gets underway next year and builds through 2011, 2012 and 2013, we expect such a recovery to be cyclical and quite robust given the pent-up demand that is accruing from consumers and businesses over the past 5 quarters. The economic recovery will be led by the U.S and extend overseas late in 2010 and more pronounced in 2011, 2012 and 2013.

However, longer term, we see the following resulting implications from this recession:

1.       Americans will be more circumspect in assuming risk going forward. They will not embrace the unbridled use of credit as they have in the past. First, the availability and cost of credit in the future will restrict credit to consumers. Second, many consumers will eschew the use of credit to maintain lifestyle given the difficulty they have faced in meeting debt obligations.

2.       Americans will be more conservative in their investment programs after the cyclical rebound expected over the next 2-3 years in worldwide equity markets. For one thing, Americans will be older and less inclined to take risk with their remaining and/or rebuilt capital, particularly in retirement plans. Second, Americans’ faith in the equity markets has been shaken by two market declines of 50% in the past 9 years plus the scandals also attendant with these declines. We believe Americans will retreat to a more basic and conservative investment profile that emphasizes intrinsic and transparent value and predictable future prospects. In addition, we expect a more highly regulated environment for financial firms and capital markets which should result in less leveraged and speculative investment products and strategies.

3.       Americans will have to work longer before retiring as a result of the huge losses in savings, net worth and retirement accounts. However, many of the current generation of middle aged and senior workers will be suffering deteriorated health as a result of the current emotional and physical stress they are currently experiencing. These workers will have aged faster than otherwise due to the emotional and physical stresses of this recession. This will result in many workers having to retire earlier than planned which will add to the cost of Medicare, Medicaid, Social Security and private pension costs. These increased costs will be in addition to the enormous increase in Federal entitlement program costs from the retirement of the “Baby Boomer” generation of workers who begin to turn 65 in 2011 and will reach age 70 in 2016.

4.       As a result of the wealth and job destruction in this recession and the impending retirement of so many workers, the demand for increased government services to handle a burgeoning aging and retirement population will put enormous strain on the U.S. Federal budget. This will be in addition to the huge strain on Federal finances that is now being incurred from the massive “bailout” programs that are being initiated to stabilize the banking system and end the current recession. It is likely the annual Federal budget deficits will range from $500 billion to $1 trillion or more over the next 5 years.  Clearly this will put upward pressure on interest rates and price inflation in the U.S. and downward pressure on the U.S. Dollar in foreign currency markets. Indeed, we and other economists have raised the threats of these developments presently and they are already of concern to foreign governments and investors that own U.S. Treasury bonds.

5.       Unemployment in the U.S. will be historically high even with a cyclical economic recovery projected over the 2010-2013 period. There simply will be no job opportunities for many of the former Wall St. and banking managers, executives and traders and automobile and related managers and executives, particularly over the age of 50.

6.       The increasing population of aging and retired workers will not have the financial resources anticipated for this population segment at the beginning of this decade when the stock market bubble at that time had created so many retirement plan millionaires. As a result, the projected retirement population will live more frugally than earlier projected and will not be the economic stimulus many had planned on. Indeed, for the reasons stated previously, they will be more of a drain on the U.S. economy than help. In addition, they will not provide the spending for increased foreign imports or overseas travel as previously predicted.

7.       We expect international trade agreements to be less liberal here and abroad, as the infatuation with globalization becomes a casualty of the massive unemployment in the current recession.

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Economic Trends economics, economy, fears, politics, recession, social implications

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  Part three discussed public anger.  Today’s entry, part four, will discuss the ramifications of an even more insidious by-product of the recession: stress.

In addition to anger, the American public is emotionally stressed and physically debilitated.

After experiencing the heady and seemingly inexorable rise in consumer net worth and incomes from the expanding economy, rising stock markets and most importantly, the outlandish increase in real estate values over the 2003-2006 periods, the American consumer has seen his world literally come crashing down since the second half of 2007. It is estimated that the declines in housing values and the stock markets together over the last 5 quarters is more than $15 trillion or an entire year’s GDP.  As a result, the American consumer that exuded great confidence and risk tolerance has become stricken with fear.

In the article, “The Fed’s Conundrum,” April 5, 2007, we commented on what we felt was an increase in the fear factor for consumers, which was going to suppress consumer spending and appetite for risk, going forward. We based this on the increase in inflation at the time and the accelerating decline in the housing cycle underway, leading to increased mortgage foreclosures. In addition, as government statistics would later prove, job creation was peaking that spring.

Fear is something the American public doesn’t exhibit very often.  The post war period has been one of economic growth and a rising standard of living for Americans. To be sure, the American economy has experienced periodic and sometimes severe recessions, but they have been surpassed by longer and stronger growth periods.

Until this decade. The current recession is the second major economic downturn since 2000 and this recession is by far the most damaging and most pervasive in financial and social terms since the Great Depression of the 1930s. The loss of homes, jobs, net worth, financial security and retirement security has caused the American consumer to doubt his ability to survive and to doubt the American capitalist economic model.

In the current economic environment, Americans are full of worry.  A March 4, 2009 article in Advertising Age noted that prescriptions for sleeping pills and anti-depressants had escalated 7% and 15%, respectively, in 2008 despite a cutback in marketing for such drugs by pharmaceutical companies.

Based on the worsening economic climate in the first half of 2009, we would expect such numbers to increase. In the same Advertising Age article a poll by the National Sleep Foundation released on March 2, 2009, found over 30% of respondents said they are “losing sleep over the economy and their own financial situation”. The National Sleep Foundation Poll found an increase in sleeplessness and anxiety is leading to an increase in depression and a decrease in efficiency and productivity on the job.

Regional and local data particularly in cities hard hit by the recession indicate a dramatic increase in suicides, suicide attempts and calls to suicide hot lines. This emotional stress is taking its toll on the overall physical health of the country. We believe doctor visits for emotional or stress related physical illnesses have increased as well as absenteeism from work. The result is a significant increase in medical care costs for doctor visits and prescriptions as well as a decrease in overall worker productivity. In such an environment, people are more nervous and short-tempered, which often leads to increased aggressive behavior including violence. Witness the increase in mass shootings in the U.S. and shockingly in Europe as overstressed individuals react to the loss of their jobs and declines in their financial conditions. In addition, consumer outlooks for the future are negative.

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Economic Trends declining economy, economics, future trends, public unrest, recession, stress

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two discussed the first four trends and developments.  In part three, we will outline the next trend - public anger

5.  Public anger is also being aroused by the scandals related to the “bailouts” of many of this nation’s large, international conglomerates, particularly financial firms, and the recently disclosed large bonuses paid by both financial and non-financial firms that have received billions in taxpayer assistance. The “bailouts” and the executive bonuses have stoked the fires of smoldering public resentment at the widening gap between the increasingly rich executive class and the struggling middle class in this country.  See the slide below showing the disparity in real per capital income growth in the economic expansion of the 2002-2007 period and that of the economic expansion of the 1982-87 periods under President Reagan.

6.  Now also look at the slide below showing the trend in retail inflation over the 2005-2008 periods and the most recent six-month reporting period of February 2009.

While the collapse in commodity prices in the last six months has been a primary cause in inflation turning negative in the last six months, note the annual inflation increases in 2007 and 2008 and the continued increases in many non discretionary consumer expense categories such as utility charges, education and tuition and healthcare costs. Add to this data the fact that American workers have now experienced the second major declining stock market cycle of this decade with major market indices declining by 50% from peak to trough in 2001-02 and 2007-2009. Importantly, excesses and mismanagement of risk have caused the current stock market debacle by many of the nation’s financial institutions that have needed taxpayer assistance to stay afloat. It is little wonder, the American middle class is angry and they are reflecting their anger politically.

It began with the Congressional elections of 2006 when an angry American electorate gave a sitting Republican President and his party the worst political drubbing since the elections of 1964. This at a time when the American economy was humming and creating approximately 2 million new jobs annually in 2005 and 2006. It continued with the recent Presidential election of 2008 where the unlikely candidacy of a first term Senator from Illinois first surprisingly won the Democratic nomination, upsetting the presumed party favorite, and then led the Democratic Party to its most overwhelming victory since Lyndon Johnson defeated Barry Goldwater and the Republican Party in 1964. The 2006 and 2008 election results were a loud dissatisfaction on the part of the American electorate with the economic, social and political status quo. Their statement was clear, “They were mad as hell and not going to take it anymore”.  We have long noted this building anger among American voters and counseled candidates running for office in 2006 and 2008 that the American electorate was angry and wanted dramatic change.

We also felt that change was being translated in two very distinct demands. First, the inequities of the economic system that allowed excess and corruption by corporate CEO’s and politicians were unacceptable and needed to be reformed. Second, the middle class wanted the Federal government to do more to help them with the draining expenses of energy, healthcare, education and retirement necessities.  To their credit, the Democratic Party and Barack Obama, grasped voter dissatisfaction and embraced a populist agenda of job protection, increased government spending and tax reform to answer that dissatisfaction. American voters responded with a landslide victory for President Obama and the Democrats that now control both houses of Congress as well as the White House. But the intensifying recession since the end of the third quarter of last year has created more pain and suffering among American workers and consumers. President Obama’s stimulus programs highlighted by huge taxpayer financed “bailouts” of major financial institutions are wearing thin on the American public. Already angry American voters are now livid with the revelations of continued bonuses to failed executives and the failure of newly elected Democratic congressmen and senators and newly appointed officials within the Obama Administration to stop “politics as usual”. The embarrassing revelations and resulting voter backlash is forcing the President to adopt a defensive posture of trying to convince voters and congressional opponents of his program both within and outside of his party to support him. This is not the position the President wanted to be in within the first 100 days of his administration. The current recession belongs to the Democrats now and voters want to see tangible improvement from the Congress and this Administration.  Continued corporate excesses at the expense of taxpayers and middle class workers are only adding to the anger of the American public.

This anger is resulting in growing frustration and doubt about the current state of American capitalism. An angry electorate is an unpredictable one. Previously accepted beliefs regarding American social, political and economic behavior, attitudes and most importantly, demands, are being re-evaluated and adjusted by a citizenry whose ideals and aspirations are not being met.

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Economic Trends 2009 trends, anger, bailouts, economics, finance, future of economy, government, taxpayers

In a recent article published March 23 for SPGTrend.com subscribers, we examined the social and political toll of the current recession and their longer term impacts on the U.S and overseas economies.  Over the course of several blog posts, we will take you through the content of this piece and put what we’re going through into context.

In part one, we outlined an introduction for this series.  Part two will discuss the first four trends and developments that are unfolding:

1.       Social unrest in Russia, Eastern and Western Europe as rising unemployment and cutbacks in domestic government spending programs and consumer incomes. Of particular note are the

street demonstrations and strikes in Western Europe where we have not seen this type of reaction to economic distress since the Great Depression of the 1930’s. It speaks volumes about the level of angst and anger among foreign workers and consumers.

2.       This social unrest is creating political change. Governments in Latvia and Iceland have already collapsed and there is increasing pressure on the governments in Ireland, France and Great Britain to stop the bleeding in those economies. Even in Russia, discontent among the populace is being aimed at the current government, which had been quite popular last year.

3.        Worker protests abroad are leading to increased calls for expulsion of immigrant workers and protectionist measurers to protect domestic jobs and companies. Globalization has now become very unpopular in the advanced industrialized countries of Western Europe as they face the same erosion of their industrial base as we have suffered over the past decade.    There have been attacks on immigrant workers in Western Europe and Russia as frustrated and angry citizens fight for the shrinking job markets in their countries. In short, we see a movement to the political right as nationalist feelings replace the internationalist perspectives previously held overseas. This does not augur well for the future of the European Union and free trade policies.

4.       The rise in protectionism is also occurring here in the U.S. as shown by the recent rescission of long haul trucking privileges to Mexican companies that were hauling freight into the U.S. from Mexico. That freight must now be transported from the border by U.S. firms. Mexico responded by putting tariffs on a list of U.S. imports. This backlash against free trade agreements is putting pressure on government leaders who still champion globalization as desirable for U.S. economic growth. Policymakers in Washington and Fortune 500 companies that manufacture and trade overseas are finding themselves at odds with workers and consumers who are losing their jobs to lower cost foreign labor. With unemployment in this country effectively at 9% and going higher, American workers are “mad as hell and aren’t going to take it anymore”. Labor unions helped elect Barack Obama. They expect “payback”.  Importantly, Democrats in Congress and the President himself have pledged to re-evaluate America’s free trade agreements and policy. We expect some “pullback” from the liberal free trade policies of the last decade.

Next up, we’ll outline additional trends and provide context for where all of this is heading.  Don’t forget to subscribe to our blog to get the rest of this series.

Economic Trends economics, economy, future trends, international, macro, micro, monetary policy, political, social, social unrest

Like Alice’s plunge down the rabbit hole, the government’s proposed recovery strategy gets curiouser and curiouser every day!  Rather than helping the consumer to save, pay down his debt and get back into the game, we continue pumping money into faltering and distressed Fortune 1000 companies. Most of these wounded entities have pursued risky and inept business strategies and made ill-advised acquisitions in the last two years.  If BOA is choking on the debt from buying Countrywide Credit and Merrill Lynch, why shouldn’t it be forced to sell off assets to raise capital?   Capital One, already in trouble with underperforming credit card debt, has made two commercial bank acquisitions since 2005, the peak of the housing bubble.  Infusing taxpayer money into these large corporations on the premise that they are too big to fail is just not sound fiscal policy. Perhaps they shouldn’t have been allowed to “get too big to fail” in the merger and acquisition mania of 2005-07. At what point do we hold the senior managements and boards of directors and even the shareholders of these companies accountable for the disastrous decisions that now taxpayers are asked to pay for?  Remember, these are some of the biggest multi-national corporations in the world with supposedly the best managements, at least according to their paychecks. As the song says, “breaking up is hard to do” but we unwound the conglomerates created in the 1960’s in the recessions of 1973-74 and 1980-82. Divestiture raises capital and creates competition.

Rather than keeping banks and other industries on life support with more capital infusions, we should be:

• sending rebate checks to middle class taxpayers earning below $150,000 with an inducement to encourage saving and debt reduction;
• creating a graduated sales tax to help middle and lower income consumers;
• boosting tax revenue by instituting luxury consumption taxes on big-ticket items: luxury cars, boats, second homes, etc.;
• forcing troubled companies to raise capital by selling assets they have acquired;
• repealing the Alternative Minimum Tax for taxpayers earning less than $250,000 in taxable income;
• creating a “WPA” program for unemployed accountants, managers, IT programmers, administrators and researchers to oversee and manage the bailout money and stimulus programs.

The only worthwhile prescription to save struggling banks is for the Federal government to set up a “bad debt bank” to get nonperforming loans off the balance sheets (see our website article, “The Treasury Plan”, Dec. 7, 2007).  Banks won’t lend while they’re strangling on the paper that’s backing bad loans.  A “bad debt bank” will allow the U.S. to renegotiate bad loans, forestall foreclosures and hold bad assets for long-term resale. It’s the only way we’re going to free the banks and credit intermediaries to make new loans.

Now the President wants to curtail the tax deductions for charitable giving and mortgage interest on upper income taxpayers just as we are trying to stimulate housing and asking charities to do more in this recession.  Cutting back on deductions for mortgage interest and charitable donations would be disastrous!  Rather than raising revenue, the former would stop many upper income homebuyers in their tracks. The latter would be devastating for non-profit organizations.  Upper income taxpayers are the backbone of charitable giving.  If charities are expected to carry more of the social service costs during tough times, why cut their major source of giving?  If this pattern of penalizing the rich continues, expect America’s wealthy to move their assets to offshore tax havens and more taxpayers will create trusts to escape taxation altogether thus reducing rather than increasing tax revenues.

The litany of misdirected tactics goes on and on!  Another bank or industry bailout is just a waste of your money and mine. The Federal government is already the de-facto banking industry in this country given all the money invested in the industry and the widespread guarantees of deposits. Recovery of this recession was always going to take a long period of time until the consumer got his balance sheet back into creditworthy condition thus allowing him to “get back into the game”.  These bailout and stimulus programs are costly diversions from the underlying cure and they are now, along with the President’s ambitious spending budgets, creating concern among economists and international traders about the future creditworthiness of the U.S. government. We warned about this possibility in our website article of Sept. 8, 2008, “Stocks, Recession and the Bailout”.  Apparently we are not alone.

Morris R. Segall, CFA, CIC

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