It's Still The Economy, Stupid

Friday, November 14, 2003  

News bites

Retail sales fell 0.3% in October. September sales were revised downward to -0.4%. Producer prices rose 0.8% in October, while PPI inflation over the year stayed at 3.4%. Industrial production growth slowed to 0.2% in October from 0.4% in September. The dollar suffered its worst week in six months versus the Euro, with the latter rising as high as $1.179 in today's trading. And the outlook for municipal bonds across the board next year is "grim".

All signs are pointing to slower growth in the fourth quarter, as well as a downward revision to third quarter GDP numbers. As the recent U.S. credit surge has boosted foreign economies. Australia and England have already raised interest rates. New Zealand is raising interest rates soon. Rising inflation, a falling dollar and rest-of-the-world boom sure makes some things look pretty interesting. Of course, the standard disclaimer applies - I don't want to get caught up in one of these things.

posted by Teddy | 11:19 AM |

Thursday, November 13, 2003  

Useful Advice

Bill Fleckenstein still writes a useful column (possibly the only one) over at MSN Money. His philosophy of investing is highly correlated with mine as an economist, and offers up many useful nuggets this go around.

In the investing business, it's very easy to misjudge things and then find yourself in a situation where something you expected to happen didn't happen or happened in a way different from what you expected. That is, you were wrong.

Being wrong in this business comes with the territory. The real trick in the investment business is making sure that your mistakes don't kill you.

So I'll be the first to admit that even with the strong monthly data coming out - I didn't see third quarter GDP or such strong job growth coming. However...

Readers of my daily Market Rap column know that I stand behind my motto: "Often wrong, never in doubt." I have a lot of conviction, but I make plenty of mistakes. So, when you factor what I think into what you think, you should factor in the possibility that I might be wrong, and then consider how you will deal with that.

What I'm not in doubt about is that the U.S. economy is in the final stages of a mammoth Credit Bubble that will result in a massive loss of wealth for many Americans. How the bubble will pop and when (if it hasn't already) is subject to debate. From my contrarian bent, the best investments for Americans over this period will be the worst ones the past decade: raw materials and other currencies, the worst will be the best ones now: U.S. stocks, long bonds and housing.

Investing is a complicated subject even when done right. None of us has all the answers, and we all make mistakes.

Despite my being constructive last spring, the present surge in the market has been bigger and better than I imagined. But I really couldnĂ‚’t care less that the market is going up and I didn't catch it. The risk/reward has been all wrong, in my opinion (even though it has worked).

It's as if you've been playing poker and continually drawn to an inside straight. Odds say you lose, but if you do it and win, you'll have made money even if the risk/reward was poor. And that's been the story with the stock market.

Just like you can make loads of money from a credit bubble. That's why they're so attractive! But like stocks the economy is cyclical. It doesn't go straight up or straight down. The most money can be made by buying low and selling high. But in any case the main thing is to make sure mistakes don't kill you.

In a booming economy, it's not wise to spend all your cash and rack up mountains of debt, because as soon as the worm turns you will be horribly exposed. It's also not wise to assume just because the indicators are better - things are all clear from here on out. Recessions correct imbalances (just as booms perpetuate them). If the main imbalances of the 1990s boom were too much capital investment, asset bubbles, massive trade deficits, overconsumption, then a successful recession would mean correction of these imbalances, not the opposite. That many of these imbalances actually are getting worse - well, I'm not the only one that is concerned.

That doesn't mean the market can't rally, though I'd remind people we're still about 25% below the levels of March 2000. It also doesn't mean the economy can't grow. It just means sustainable growth will be elusive from here on out. A lot of people were kicking themselves for not selling their stocks in 2000 when the writing was on the wall. They will be kicking themselves again for not selling when this rally ends too. They'll be kicking themselves for not refinancing when interest rates rise to 9% (odds of that happening in the next 30 years, all but certain). They'll be kicking themselves for not selling their house when prices top out someday. Those people will be wrong too, but a 50% drop in home prices means different things to those that own the house free and clear and those who just assumed 80-15-5 mortgages for 40 years. To the former it's a nuisance, to the latter it's crippling. Our problem is we have an entire generation of individuals who will be paying off their mortgages, cars, and credit cards well after retirement age. The assumption is the economy will recover and housing bubble won't burst and the Fed can fix everything. The reality is we'll see.

posted by Teddy | 10:12 AM |

The more things change...

The trade deficit widened to $41.3 billion in September. Wal-mart, where pretty much everything is made in China and they treat their workers accordingly, made $2.3 billion in just three months. Oh, but that was just not enough for some people.

In the land of billions of profits and $8 an hour wages, some people are understandably upset.

These three multi-billion dollar supermarket chains, who are currently crying poverty, earned over eight billion dollars in net profit in the last five years alone. That would have been impossible without the hundreds of thousands of workers who make their stores run.

The companies claim that since Wal-Mart is moving in to the supermarket business they have to cut their costs in order to compete. They are trying to divide the working class by claiming that the grocery workers are overpaid. If we are to believe the companies it seems every grocery worker is making about seventeen dollars an hour. But the vast majority of grocery workers are part-time, and the average worker is taking home about $1,300 a month. One of the main victories these workers have won over decades of struggle is a decent health care package.

The conventional wisdom is that since the economy is soft, labor should just shut up and be happy they have a job. However, the opposite is true. It is increasingly transparent that employers are using the economy as leverage to extract concessions. During the Great Depression, in fact, unions won their greatest increase in living standards - keeping wages constant while prices fell - which left a generation of economists wringing their hands about "sticky wages". Funny nobody every complains about "sticky profits".

There's one news network that says they are fair and balanced, but there are many definitions of fairness - it is one thing to be fair and present both sides of an issue. It is another thing to recognize the (un)fairness inherent in this:

There are those who say that in times of economic trouble everybody needs to give in a little. But in a country where the 400 richest individuals are worth $955 billion dollars I think what we need is a little bit more taking by those on the bottom.

Meanwhile, jobless claims rose to 366,000 last week. Last week's estimate was also revised up to 353,000.

At work, I'm currently filling out my health insurance election forms. I'm comparatively lucky that my employer pays a big chunk of the cost of health insurance. Still, the three plans I have to choose from will run me around $185 a month, up from the $150 that I'm paying now. That works out to $420 this year I'll have to devote to health insurance rather than other things this year. When my wife left her last job in 2000, we were on COBRA for a couple months and that ran me around $300 a month. Today, it would be around $500 a month. As it is, after the last experience my wife has moved to my insurance and we'll have no such break this time. This cannot be said about the 2.6 million others that have lost jobs in the past three years. It goes without saying that George W. Bush knows nothing about these types of things, and cares even less.

posted by Teddy | 8:29 AM |