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

After playing politics with Ben Bernanke’s nomination in the wake of last Tuesday’s election loss in Massachusetts, the Democrats with help from the stock market on Friday, thought better of their populist pandering on Monday and began to rally around the beleaguered Fed Chairman. Criticism began late Friday with the stock market selloff and built up over the weekend. In our blog article of December 8, 2009, “Ben Bernanke: Hero or Goat“, we warned of the market ramifications of politicizing the Fed and its Chairman’s reappointment process. Congress got the message over the weekend and will now probably vote to reappoint Ben Bernanke.

Friday’s stock market sell off culminated a week that saw the market decline over 500 points and erased the gains accrued in the first two weeks of the year. After rising virtually non stop since its lows in early March of last year, the stock market entered 2010 strectched and overdue for a correction. Last week’s market decline could be the beginning of such a correction. Despite good news on corporate earnings and sound fiscal action on the part of the Chinese government to curb speculation in their economy, stocks sold off reversing their pattern of seeing the “glass half full” on virtually all economic and corporate news. It remains to be seen if this new pattern of stock price decline will revert to the short lived selloffs of last year or develop into a long overdue correction. Such a correction would be good for the stock and commodity markets longer term. The latter have been particularly ebullient over the last year with outsized gains that are ripe for profit taking.

In a couple of days we will get our first look at the fourth quarter GDP. Consensus estimates are for growth of 4%-5%. In our blog article, “Third Quarter GDP Revised Down“, November 25, 2009, we stated “strong contributions in consumer spending and business fixed investment would be needed from downwardly revised third  quarter GDP levels”.  After watching numbers “see saw” in housing, unemployment and retail sales in the fourth quarter, we believe fourth quarter GDP will be within consensus estimates led by large gains in business fixed investment, notably machinery and equipment, and government spending with a solid contribution from personal consumption and a positive contribution from net exports. Since the third quarter of last year the manufacturing sector is the strongest part of the economy with factory orders and shipments maintaining their recovery from depressed recession levels. However, the strength in fourth quarter economic data is not expected to be sustained in the first quarter of this year. Post holiday retail and housing sales are expected to dip leaving economic growth to the government and industrial sectors. Economic growth is still dependent on government stimulus in the face of continued high levels of unemployment and the improvement in unemployment is still the key to sustained economic recovery. At this time we do not expect a “double dip” recession when government stimulus ends in the second half of this year but the visibility of economic growth is clouded by the stimulus programs which have distorted the normal trends of economic recovery and have resulted in a “sawtooth” pattern of economic data since the recession ended in the third quarter of last year. We expect that to continue until the private sector can sustain this recovery on its own.

Morris R. Segall, CFA, CIC

Economic Trends Ben Bernanke, economy, employment report, GDP, government, stock market, trends, unemployment

Tuesday’s  stunning victory in Massachusetts by Republican Scott Brown to fill the Senate seat of the late Ted Kennedy is undeniable evidence of the failure of the Democratic Party and President Obama to capitalize on their voter mandate in 2008. In what should have been a year of great accomplishment with passage of landmark legislation in healthcare, the environment and economic reform the President marks his inaugural anniversary with no great success in his domestic agenda and his party losing its super majority in the Senate. Coupled with recent Republican victories in gubernatorial elections in New Jersey and Virginia and the retirement of several leading Democrats in the Senate, the Democratic Party is firmly on the defensive with low voter approval ratings and the object of intense voter anger. We have been commenting on building voter anger in our website articles (See “Long Term Outlook“, October 8, 2006, “The Election“, November 17, 2008 and “I am Mad as Hell…”, March 23, 2009) and it has now reached a fever pitch exacerbated by the severe recession. We repeat the mantra we have stated since 2006, “an angry electorate is an unpredictable electorate”.  A more detailed review and analysis of the domestic political environment and its implications will be covered in an upcoming website article. For now, we make the following observations:

1. The President must take responsibility for his party’s decline and his program failures. The President is an eloquent speaker but he does not follow the speeches with forceful actions. We commented in our July and August blog articles on the failure of the President’s healthcare initiative BECAUSE of splits within the Democratic Party. With all of the political capital expended by the President on healthcare, his failure to unify his own party and rally public support on this issue have been fatal. The election of Scott Brown in Massachusetts and the decline in public approval have made the President’s healthcare initiative all but dead.

2. Likewise, the loss of the Massachusetts Senate seat will now slow if not halt the President’s initiatives on carbon taxation, immigration, financial system regulation and other major agenda items that encompass higher taxes and increased federal government presence.

3. The anger in the electorate and the failures of the President and the Democratic Party have now resurrected the Republican opposition and make them a credible threat to unseat Democrats in this year’s Congressional elections. Faced with public anger and reelection, Democrats in Congress will be less inclined to support the President. Significant losses by the Democrats in the House and Senate will likely result in legislative gridlock for the remainder of President Obama’s term. The President would increasingly look like a one term president. This will prevent solutions to the major socio-economic issues we face in the next decade and cloud our longer term economic outlook. This will however alleviate increased regulation of business and provide a more benign environment for the stock market in the shorter term.

4. This latest political setback for President Obama will not go unnoticed overseas. A president already viewed as weak and unsuccessful overseas (See our recent website article, “The Obama Foreign Policy“, January 7, 2010), will be weakened further if he cannot control his own political party and win the public debates on domestic policy.  It will be harder to get agreements from allies and concessions from adversaries particularly if the president looks like a one termer.

Tuesday’s Senate election in Massachusetts has altered the domestic political landscape and thus the economic outlook for the next two years. Its repercussions will be felt not only here in the U.S. but around the world as well.

Morris R. Segall

Economic Trends Democratic Party, democrats, economy, Election, government, Massachusetts, Massachusetts Senate, political, politics, President Obama, Republican Party, republicans, Scott Brown, Ted Kennedy

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, Add new tag, business landscape, Capital Markets, consumers, crisis, debt, economic, economics, employment report, future trends, GDP, government, recession, unemployment

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

Economic Trends consumers, debt, economic, economics, economy, employment report, GDP, government, recession, trends, unemployment

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

On Friday, the Labor Department reported the monthly employment situation report for the month of July. The Establishment Survey, the one most widely used as the benchmark for measuring monthly job creation showed nonfarm payroll employment declined by 247,000 in the month of July, a number better than widely held forecasts. It is the lowest level of monthly job losses since last August before the massive economic declines in the fourth quarter of last year and the first quarter of this year. It is also two thirds lower than the peak level of monthly job losses recorded in January of this year at over 740,000. With a number this low, naturally job losses in most major industry sectors measured by the survey saw significant declines in job losses from the surprisingly weak June levels. The exception was retail trade which saw job losses in this category double from 21,000 in June to 44,000 in July reflecting the continued poor consumer spending environment. Nonetheless, economists and financial commentators viewed the dramatic improvement in the monthly numbers as further evidence of the recession’s end and imminent economic recovery. To be sure, we concur the huge decline in monthly job losses reported since March’s 652,000 follows the general trend in first time unemployment claims which peaked at 674,000 in late March and has declined to 550,000 as of August 1st and signifies a peaking in new job destruction in this cycle and fortifies other economic data suggesting the recession has bottomed.

However, as we have written in previous posts, “Current Economic News Needs a Dose of Reality“, May 15th, 2009, the dramatically improved job loss numbers in the government’s Establishment Survey continues to be at odds with other government employment reports and empirical data we are getting from job seekers and businesses. Inconsistencies include:

1. While job losses in July measured 247,000 and a 9.4% unemployment rate, the civilian  labor force saw over 400,000 people leave it in July versus June and over 570,000 since May. The civilian labor force participation rate in July fell to 65.5%, matching the lowest level of worker participation in this cycle in March of this year.

2. While monthly job losses per the Establishment Survey have declined from 652,000 in March to 247,000 in July, first time unemployment claims, representing new job layoffs, have declined from 674,000 to 550,000 over the same period. A figure twice as high as the establishment survey estimate.

3. The number of unemployed workers including discouraged workers and part time workers who cannot get full time employment continued to increase in July. The number of people leaving or not in the work force increased substantially (over 1 million people) in July reflecting discouragement with finding gainful employment. This is consistent with the empirical information we hear from job seekers who say jobs are very hard to land and employers who tell us they are still not hiring and will have to lay off more workers if sales do not pick up.

4. The average work week increased by .1% to 33.1, the second lowest work week during the entire recession. We will see if the recent three month trend of monthly job losses per the Establishment Survey of approximately 330,000 is accurate. We continue to believe these recent numbers are vulnerable to downward revision when the Labor
Department makes it annual benchmark revisions next March. For now, the consensus is taking the numbers at face value.

There was another very important economic announcement on Friday. The Federal Reserve released its report on Consumer Credit for the month of June and for the fourth consecutive quarter, consumer credit declined. Consumer credit contracted at nearly a 5% annual rate in June, nearly double the 2.6% annual rate of decline in May. Since its peak in the third quarter of 2008, consumer credit outstanding has declined 3% or over $75 billion at the end of June, 2009. Most of this decline has occurred in revolving credit, i.e. credit cards. Since the third quarter of 2008, revolving credit has declined 6% or over $55 billion. Clearly consumers are continuing to pay down their debt in an attempt to de-leverage their balance sheets. Combined with a continued high savings rate in excess of 4% at the end of the second quarter, it is clear American consumers are paying down debt and increasing their liquidity. These trends and the existing high levels of unemployment continue to suppress consumer spending.

The government is artificially creating increased consumer spending and retail sales via its “Cash for Clunkers” program and the other stimulus package spending that will be impacting the economy over the next four quarters. However without job creation rather than “less worse” job destruction, a sustained consumer led spending increase is unlikely. In fact, to the extent the government creates consumer spending near term, it could result in deflated consumer spending longer term when the government stimulus ends. The key to a real economic recovery continues to be the revival and return of the consumer, with a job and the financial capacity and creditworthiness to spend. The consumer led us into the recession. He will have to lead us out. Recovery in this cycle was always going to be a long stretch in re-liquifying and de-leveraging the consumer so he could “get back in the game”. He is doing just that but the loss of his job is making those tasks longer and more difficult. While these trends hurt the economy in the short term, they will help sustain the recovery in the longer term.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, Cash for Clunkers, consumer credit, economic, employment report, Establishment Survey, Federal Reserve, government, unemployment

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

Dear members of Congress,

I am writing to you regarding the current debate on President Obama’s national healthcare plan. As you may know I head an economic and capital markets research and consulting firm. My firm and our affiliate, Sage Policy Group, engage in economic and public policy analysis and ideas. Healthcare is one of several policy issues we have and are currently studying.

I have been involved in either administering or participating in private sector insurance programs for most of my 25 year corporate career. More recently, I have had to engage both the public insurance program of Medicare and the private hospital and insurance industry as a result of chronically ill parents who are both incapacitated. As a result, I have developed a keen understanding and awareness of the mortally broken and dysfunctional healthcare system currently in place in our country. After opposing the Clinton healthcare plan over 10 years ago I have come to the realization that comprehensive and affordable healthcare for most Americans must be built around a Federal entity.

The present system based on the private insurance and drug industries has not contained healthcare costs and has not increased the number of insured Americans. To the contrary, medical insurance costs are skyrocketing, even in the midst of this great recession. Many businesses report medical insurance plan increases in 2008 and 2009 well in excess of 20% and employees in those plans are facing higher deductibles and increased insurance premium and co-insurance payments, in some cases of nearly 50%. This at a time when American workers are facing historic unemployment and reduced “take home” pay from wage and salary reductions and fewer hours worked. Seniors on Medicare are now facing exorbitant costs for required drugs as they hit the “doughnut” hole in prescription drug coverage. While the costs of medical insurance and drugs go up, the reimbursements to doctors and hospitals are being reduced causing doctors to either leave practice or refuse to accept private insurance and Medicare patients. The increase in uninsured Americans forces them to seek medical treatment at hospital emergency rooms overwhelming those facilities. Likewise the increase in our aging population is now overwhelming acute care hospitals and nursing home facilities that are facing chronic shortages of trained personnel to care for an increasingly sick patient population. And the costs of hospitalization and nursing home care are crushing. Hospital and related services costs have increased nearly 8% in the six months ended this past May according to the Government’s CPI report.

So after decades of trying to fix America’s healthcare system and control escalating costs what is wrong? What’s wrong is we are asking FOR PROFIT companies that are primarily focused on increasing earnings and shareholder value and paying bonuses to its senior managers for doing so, to make less money by reducing its prices and accepting less than totally healthy insured’s that will “eat” into their profits. Critics of national healthcare raise the alarms of out of control costs, rationed and inefficient treatment in a federal system. Healthcare is already rationed if you are not on a corporate healthcare plan and if you have the misfortune of going to an emergency room and waiting for a physician for up to 12 hours, you will see firsthand the inefficiency of healthcare in today’s environment. This system is broken and will collapse entirely under the weight of the impending case load of the baby boomers. There are national crises that inure properly to the Federal government for solution.

It is now time to recognize the failures of the present system and move boldly toward a federal government health insurance program offering and administering, preferably under a single payor system, comprehensive, diagnostic and wellness programs to all Americans. It is also time to rectify the injustice in the Medicare prescription drug program and eliminate the so called “doughnut hole” in prescription drug coverage for seniors that forces many seniors to either skip their medications or have to choose between their medications and other necessities. But the cost of such a comprehensive federal program you say. How will we pay for it? What will it do to the federal deficit? How can it be run efficiently with some cost effectiveness?

No one is more cognizant of the erosion of U.S. finances than we. We have been warning our clients and audiences since last September when we first raised the specter of the long term cost to our currency and balance sheet from the huge bailout spending programs to resuscitate our economy. Now on top of that spending are ambitious spending programs of the President for energy independence, healthcare and education. The costs of huge federal deficits which we have projected in excess of $2 trillion this fiscal year and nearly that much in fiscal 2010 are already being felt in the currency and bond markets. The costs of such deficits will have to be borne by all of us, consumers and business, in the form of higher taxes and fees. We will also have to be creative in charging for increased government services on a means testing basis including higher co-payment terms for health insurance for those that can afford it. And don’t let the recent spate of propaganda from some medical authorities convince you there are no healthcare cost savings from wellness programs. You and I both know that just isn’t so.

We believe the American public has endorsed an increased federal presence in their lives with the election of a Democratic Congress in 2006 and the sweeping victory of President Obama in 2008 on a populist platform. We believe Americans are willing to pay higher taxes for increased government services and assistance in healthcare, education and energy which are draining middle class incomes and threaten our standard of living. If the U.S. government can spend billions on bailing out GM, AIG, credit card, banks, investment and insurance firms, what is our economic future and public health worth?  Therefore, I ask you to support the President’s proposal for a strong, comprehensive federal insurance program including a payor system. By the way, such a program would be an enormous help to the thousands of unemployed white collar managers, professionals, and administrators who have been especially hard hit in this recession. You might look at a federal health insurance program as the equivalent of the WPA program under President Roosevelt in terms of putting people back to work and helping to resuscitate the economy. Furthermore, this pool of highly experienced managers and professionals is one of the reasons I believe you can implement a large federal healthcare program successfully.

Sincerely,

Morris R. Segall

President

msegall@spgtrend.com

Economic Trends government, healthcare, healthcare plan, insurance, medical insurance, Medicare, obama

I continue to be surprised at the over-optimism of the mainstream financial press and government spokespeople on the current economic environment which is leading to increased forecasts of economic recovery beginning as early as this year’s third quarter.

Headlines indicating some economic improvement from higher consumer sentiment readings, a guarded optimistic reading on the economy from the Federal Reserve Open Market Committee this past week, a marginal improvement in the rate of economic decline in this year’s first quarter GDP and an impressive growth in the Advance report on Manufacturers Factory Orders for May were used as the basis for this continued optimism and a reversal in the stock market slide of the week before.

So once again I must put the facts on the table:

1. The fractional improvement in first quarter from -5.7% to -5.5% was entirely due to a smaller reduction in business inventories. In fact, consumer spending was actually reduced from a 1.3% gain to .95% thus shading the contribution from consumer improvement.

2. The strong improvement in Manufacturers Factory Orders in May is up only 1.5%, excluding transportation (primarily commercial aircraft), from the severely depressed level of March and is down 23% from May, 2008 levels. More importantly, the book/bill ratio of orders versus shipments in May was 95% versus approximately 96% in March and April. Thus non-transportation factory orders are no better and in some respects worse than they were at the end of depressed first quarter levels.

3. The Federal Reserve statement, while expressing guarded optimism that the worst of the economic contraction was behind us, kept interest rates at essentially 0% because the economy is still functioning at a depressed level.

4. On Friday, the government reported a surge in consumer incomes in May of 1.4% fed largely by government social security stimulus checks. On the other hand, consumer spending in May increased only .3% and the personal savings rate increased to 6.9%, a 15 year high. This low level of spending and the further increase in consumer savings on top of already historically high levels tells us the consumer is still very much concerned about the current economic environment, refuting his statements on consumer surveys, and is not ready to start pulling us out of recession by a surge in spending.

In our blog posting, “Beware Over-Exuberant Reactions to this Week’s Economic News,” (May 28, 2009), we stated “the second and third quarters of this year will be “less worse” than the first quarter but not an end to the recession”. We characterize the current economic environment as the bottom of an “L”. We have been projecting second quarter GDP to contract 2%-3% but with the continued weakness in consumer spending through May, GDP contraction in Q2 could reach 4%. Furthermore, we see little evidence that consumer spending will miraculously turn higher in Q3, particularly with continued high levels of unemployment which we expect will go higher over the summer spurred by layoffs from GM and Chrysler. Thus at this juncture, we expect Q3 GDP to be in a range of 0% to down 2%-3% depending on the level of U.S. government spending in the quarter. This is well below the 1%-3% growth in third quarter GDP many economists are currently projecting. If we are right, stock markets here and around the world are setting themselves up for a material correction from the elevated levels achieved this week.

An economic recovery will occur and we still believe it is largely a 2010 event but the continuation of the current economic torpor is pushing the recovery further into next year. We continue to be vigilant for real indications of a sustainable improvement in consumer spending which is a prerequisite to any recovery from this recession.

Morris R. Segall, CFA, CIC

Economic Trends 2009 economy, business landscape, consumers, economy, government, slowdown

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.  Part five discussed the long-term implications for the recession.  And now we will wrap up this series with some concluding thoughts:

We expect the U.S. recession to end later this year and gradually begin recovery next year and accelerate through 2011, 2012 and 2013. The U.S. recovery will stimulate the export dependent economies overseas and they will recover accordingly.

After a strong cyclical recovery, the U.S. will settle into a stagflationary economic cycle characterized by a secular high level of unemployment, lower worker productivity, a resumption of higher energy, food and commodity inflation and slower consumer income growth and spending.

High deficits, increased entitlement spending, increased interest rates and a depreciated currency will deteriorate U.S. government finances.

Emerging markets overseas in Eastern Europe, Asia and Latin America will again pace future long-term economic growth.

Americans will shift politically to the left as they become more dependent on government spending for basic needs and income.

Populations in mature industrialized economies will shift politically to the right as they become more nationalistic to protect jobs, companies and existing social welfare programs. They will also be less inclined to pursue free trade in the future.

Free trade will still be important to emerging industrialized economies as they continue to pursue export oriented economic growth and employment. This will increase tensions between the mature economies such as Western Europe, Japan and the U.S. and the emerging economies of Asia, Latin America and Eastern Europe.

From a capital markets standpoint, we remain defensive in the short term as we look for evidence of an economic bottoming. However, we would prepare to emphasize common stocks, particularly large cap and NASDAQ U.S. stocks to participate in a bottoming in the recession and subsequent economic recoveries here and abroad. We would also increase our positions in gold and other commodities as the world economies reflate and commodity prices increase. Concomitantly, we would avoid bonds as they will see a shift in cash to stocks and an increase in interest rates in an economic recovery.  Please contact us with any questions regarding this article and for specific recommendations on your investment program.

Economic Trends economic, economy, government, investment, NASDQ, recession, recovery, stocks

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.

Be sure to subscribe to receieve part 4 in this series.

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

Today the Federal Open Market Committee voted to increase the stimulus to the credit markets by keeping the Fed Funds rate in a 0%-.25% target range. In addition they voted to have the Fed purchase:

• Up to $300 billion of long-term Treasury securities
• Another $100 billion of U.S. Government Agency debt making a total of $200 billion
• An additional $750 billion of mortgage backed securities making a total of $1.25 trillion

In addition the Open Market Committee voted to launch the Treasury’s TALF program to purchase consumer and business asset backed securities. This program will start at $200 billion but could expand to a $1 trillion.

The Fed’s actions are based on what the Open Market Committee states are continued recessionary pressures in the U.S. economy. With today’s actions, the balance sheet of the Federal Reserve is estimated to have expanded to approximately $3 trillion. This compares to assets of less than $1 trillion six months ago. It would seem the Fed is throwing in the towel on a recession bottom in 2009.

This compares to Chairman Ben Bernanke’s testimony on February 14th before the U.S. Senate Banking Committee in which he forecast an end to the recession by the end of this year. Clearly there is some disconnect between the Fed’s current actions and the Federal Reserve Chairman’s outlook.

Indeed, the most recent economic data released this month and recent corporate announcements from several large banks indicate there is some hope the pace of economic and earnings contraction may be slowing. We have communicated to our clients and audiences that we felt the worst of the current recession would be felt in the first quarter of this year. If we and Chairman Bernanke are correct, today’s Fed actions are too much at the wrong time and will have negative consequences intermediate-longer term. We warned in our last blog posting, “Is There a Plan Here?” the increasing concern among international creditors about the future creditworthiness of the U.S. government given the outsized spending of the current bailout programs. It is noteworthy that the Chinese government just last week expressed misgivings about their large holdings of U.S. Treasury debt and further purchases going forward. Today’s massive new spending by the Fed will cause further alarm in international financial circles. While today’s announcement of Fed purchases of long term Treasuries suppressed interest rates on government debt and provided fresh fodder for further stock market gains, it is important to note today’s large decline in the value of the U.S. Dollar in currency future markets and the simultaneous large increase in the price of gold futures in commodity markets.

The Federal Open Market Committee is preoccupied with deflation as a result of the current recession. Yet the price of oil has moved to nearly $50 per barrel from approximately $35 per barrel a month ago. In addition the most recent reports on consumer prices for January and February show an annualized rate of inflation of 2.5% excluding food and fuel and inflation and rates much higher in key non discretionary spending categories. The recent rise in energy and service prices belie a chronic deflationary environment or outlook. The unbridled U.S. government and Federal Reserve spending on the multitude of stimulus and bailout programs has been rejected by our overseas trading and financial partners despite this government’s pleas for more foreign government stimulus spending. These governments are afraid of the inflationary bubbles and sovereign balance sheet erosions that will result from such unfettered spending. So the Treasury Dept. and the Fed plot their own course of uncapped spending as their answer to the current credit and economic dilemmas.

Speaking of dilemmas, President Obama is feeling the heat on what is clearly a botched bailout of AIG and an erosion of confidence amongst economists and politicians in Treasury Secretary Geithner. The public is angry and very stressed over the recession. The economy is President’s Obama’s and the Democratic Party’s problem now and the public wants to see results from the hodgepodge programs the government is implementing. The current scandals regarding executive bonuses and the perceived inadequacies of the Treasury leadership will in our opinion start to erode the President’s poll numbers adding a further difficulty to the current social and economic environment.

Morris R. Segall, CFA, CIC

Economic Trends bailout, banking system, economy, government, The new Fed actions, their implications and political fallout, treasury

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

Economic Trends collapse, economics, economy, failure, future, government, plan, recession, tax, world

Economic Trends climate, depression, economic, economy, global, government, international, recession, slowdown, strategy, survival, trends

The government needs to invest in new industries that actually will re-employ the increasing number of unemployed. That includes energy, biotech, and agriculture.  For example, there is a 25,000 person shortage in technicians for wind farms. We can cross-train unemployed factory workers, including unemployed auto workers, to be wind farm turbine technicians. Those jobs pay $25 per hour.

If the government is going to spend another trillion dollars they should do a massive consumer rebate program with the emphasis on consumers paying down debt and getting current on their financial obligations, including mortgage, credit card and auto loans. If the consumer gets current on his debts, the financial system won’t have to write down consumer debt obligations.

The recession and credit crisis cannot end until the consumer is made financially sound and creditworthy again. Pumping dollars into banks, credit card companies, insurance companies and auto companies will not solve the recession until the consumer starts spending and begins to move goods off retailers’ shelves.

Economic Trends economy, government, investing, unemployment

In my next article on the website regarding the economy and the government bailout measures I will postulate the following.

1.    The recession and credit crisis cannot end until the consumer is made financially sound and creditworthy again. Pumping dollars into banks, credit card companies, insurance cos. and auto cos. will not solve the recession until the consumer starts spending and begins to move goods off retailers’ shelves.

2.    That can’t happen as long as the consumer is losing his job (this Friday’s unemployment numbers will be between 300,000-400,000 lost jobs largely from white collar positions and an unemployment rate approaching 7%).

3.    If the government is going to spend another trillion dollars they should do a massive consumer rebate program with the emphasis on consumers paying down debt and getting current on their financial obligations, including mortgage, credit card and auto loans. If the consumer gets current on his debts, the financial system won’t have to write down consumer debt obligations.

4.    The government needs to invest in new industries that actually will re-employ the increasing number of unemployed. That includes energy, biotech, agriculture. Please see our PowerPoint slide presentations that highlight industries that we believe offer growth opportunities. For example, there is a 25,000 person shortage in technicians for wind farms. We can cross train unemployed factory workers including unemployed auto workers to be wind farm turbine technicians. Those jobs pay $25 per hour.

5.    We need to go back to removing bad debts from the books of banks and other credit intermediaries AND giving those institutions capital infusions to essentially take them back whole to where they were almost 2 years ago. At that point they will be in a position to lend again and in conjunction with the previous steps 3 and 4, we can create the environment for renewed consumer spending and lending.

6.    The government steps so far have been uneven and have not gotten to the root of the problems. In addition, the recession has spread overseas so there is not outlet of demand coming from exports. Please re-review our articles on the website under the ECONOMY category. There are predictions in those articles going back to last January that are relevant to today’s circumstances, including the prediction of onset of the current recession and the failure of the government bailout proposals

Economic Trends bailout, debt, government