Economic Recovery: Determining the Undeterminable

By Brandon Clay

Ask five economists what the economy will do and you’re likely to get five different explanations. Unlike calculus which has right and wrong answers, economics is a combination of math, art, science, and divination. That’s why there’s so much disagreement. Where one economist’s tea leaves point up, the other economist’s pig entrails point down. Determining where we are in the cycle is just as questionable. Still, we humbly offer some thoughts for your consideration.

About a week ago, the official August unemployment report was released. According to the Bureau of Labor and Statistics (which many suggest under-reports the bad news), total unemployed including “marginally attached workers, plus total employed part time for economic reasons” has climbed to 16.8% – up 54% compared to last August. That means 1 in 6 Americans are either jobless or delivering pizzas to keep their refrigerators stocked.

Most of us feel the pain. That’s probably why consumers aren’t buying as many Starbucks Caramel Macchiatos or Whole Foods organic quail burgers. The spending contraction is real and sustainable. Our buying habits have been changed by our shrinking paychecks – both at home and in business. This will not abate anytime soon.

In addition to consumer problems, five more regional banks were closed on Friday (9/4/09), bringing the 2009 total to 89 and climbing. I don’t expect the JP Morgans (JPM) or Wells Fargos (WFC) of the industry to fail, but bad loans are still hurting smaller institutions. Time will tell how many other banks succumb to default risks.

These and other reasons are why one of those aforementioned five economists is reading negativity in his economic horoscope. NYU Stern Business School’s Nouirel Roubini said…

“I believe that the basic scenario is going to be one of a U-shaped economic recovery where growth is going to remain below trend … especially for the advanced economies, for at least 2 or 3 years…Within that U scenario I also see a small probability, but a rising probability, that if we don’t get the exit strategy right we could end up with a relapse in growth … a double-dip recession.”

But what about the market? Isn’t it pointing up to a recovery with its generous uptrend? I agree – it’s hard to argue with a chart. Since the early-summer doldrums, popular wisdom of “sell in May and go away” has proven bad advice. But need I remind you, dear student of the market, we just started September. Our dreaded October is a mere 3 weeks away. There are many days left in 2009. Determining what happens between now and then is a matter of conjecture, math, and tarot cards.

Comments

[untrusting ...:]

Why assume that rising stock market prices have anything to do with the economy? It is much more logical to assume that the stock market has much more to do with massive liquidity, unsustainably low interest rates, dominance of trading by a handful of big traders such as GS/JPM/HFT, lack of safe alternative investment options, dollar falling like a rock, etc. If the stock market current run-up truly had anything to do with the economy, fundamentals, valuations, or virtually any historic metric then it would probably long since have stopped rising. Remember, you can have a win streak at the casino with 25 blackjacks in a row too, but one can lose a bunch betting that it will be 26 in a row. You are playing against pros who have everything stacked in their favor, and they can and will pull the plug when it makes them more money to do so. Just as in the casino, the market house never loses, but you almost certainly will. At least in the casino, the player knows the house odds (assuming it's a non-rigged game), whereas in the market the odds are heavily in favor of the house and they can make the game move in whatever direction they choose and as fast as they choose.

Sep 13 07:39 PM

[rick12345:]

Unemployment has peaked and will start to fall from here. My guess is that GDP turned positive during August/September, while the jobless rate will show a reduction when the September/October readings' are released.
Anybody that would listen to an economist like Nouirel Roubini is destined to fail. People such as him cannot understand that risk drives a market higher, not frugality.

Sep 13 08:59 PM

[Hmm?!:]

Economics is not about the timing of economic cycles and especially not market timing.

All the economic principles are still very much intact, just as before the crisis.

Sep 14 12:24 AM

[ebworthen:]

"Happy Days are here again..." I feel like doing the can-can.

Just when Wall Street and those fooled by the media think everything is better and they sink their retirement back into the banks and insurance companies that robbed them of 30-40% of it...then...as the real players slowly sell off at low volume....then...then next leg down will come.

Yes, sell in May and go away, but not in uprecedented circumstances. Just as the collapse is unprecedented since the Great Depression, so too is the 50% rally in five months, the government stimulus, the free money borrowed from the future to be given to the same banks who squandered the savings, investments, and retirements of several generations.

Is their game over? Oh no. How can they make more money? Why...get the money from the average hard working citizen back into the casino. Drive up the market. Make them and their fund managers fear to miss out. "Blue light special on aisle 5! Free margarita's at the Keno bar! $2 Dollar blackjack and double odds!" Get the money back on the tables, then change decks, change the dice, close the Keno bar early.

Instead of crooks getting shackled and taken away or hung from lamposts we have Wells Fargo executives throwing parties in the Malibu beach home of a Madoff investor instead of selling it.

If that doesn't paint the picture of the corruption, and greed, and outright evil on Wall Street I don't know what does (perhaps John Thain's gold toilet and trashcan).

Sep 14 12:43 AM

[Moon Kil Woong:]

Summer vacation is over. That means less to almost no new home sales from now on. So count that positive seasonally spun statistic out as well as great numbers from chash for clunkers which got people to buy GDP counted new cars as they literally crushed non-GDP used cars into scrap metal or left them sitting on the used car lot because they wouldn't help make the economic numbers look right.

The good news is that we are all in the market eagerly waiting for the $100s of billions coming from the rest of the stimulus plan. I suspect that a lot of this has already been factored in. The real worry is not this fall but next fall should we find it unaffordable to run another $1 trillion in the hole from another bout of very poorly allocated deficit spending.

Because I would tend to bet against another rotten stimulus, a W shaped recovery makes more sense in my mind. We already had part of the upside on the W if you are willing to accept a very weak government manufactured bounce as good enough.

Sep 14 02:00 AM

[aarc:]

Yea right, why write an article with nothing in it?

OK, lets make some numbers instead of words and sentences picked out of daily news:

The job losses way back March to April 2009 was 742,000. That was the baddest month of the year.

The job loss as of Sept 4 for Aug 2009 was 213,000.

That was from -742k to -213k; a massive improvement meaning almost 530,000 employees did not lose their jobs as compared to March 2009. Of course, 213k lost their jobs anyway and is still bad but not as bad as before.

How much not bad as before? = 71% improvement over March. Just by comparing the bottom to recent data.

How about the SnP500. It was so bad in March 2009 it plunged down to 667 from the 1576 height. Armageddon was in the air at that time and the end of the United States as we know it was not so far behind.

Today SnP500 was able make it to 1048 tops as of Friday, Sept 11, 2009. Still very very bad as compared to 1576 of 2007 if you happen to buy stocks and whatnots way back 2005/6/7. But not as bad as 667 of March 2009.

How much not bad as before? = 57% improvement.

That is telling us something is wrong with the stock markets. The economy is improving; almost all economic indicators are going up or getting into positive territories and the major problem of massive job losses has gone from -742k a month to -213k with an improvement of 71%.

Using that yardstick alone; SnP should be at 1140 by now; add some more positive corporate earnings and expected 3+% for GDP next quarter; then it should be dwelling at the 1300 level - the period in US stock market history before everything came crushing down.

How about the housing problem, the credit crisis, the massive derivative toxic assets of 600 trillion or more, etc.? They had been there long before SnP went below 1300. So what is the problem?

The new problem was the next shoes to drop such as the death of american consumerism and the subsequent job losses and the rising unemployment that investors had been pricing in after the LEH collapse. So all those factors had already been priced into the markets.

What has not been priced in yet is the unexpected turn-around in the economy and the sudden reduction in job loses that was expected to persist above 500k for several months to come (if not years) and unemployment rate going into the 15 to 20 percent and perhaps even reaching the Great Depression level of 25%.

So, basically, during the massive downturn of 2008 to early 2009, the stock market was the leading indicator, or the "barometer" as they call it, plunging down at an unimaginable rate long before any economic indicator showed severe economic strains.

But during the subsequent bounce or recovery, the stock market is now the lagging indicator and is lagging the economy so badly investors are more intensively focusing on their fears rather than the most recent economic data. That is understandable, investors are so shell-shocked they can't help it including myself.

A catch up rally toward the 1150 level or more is needed in order to restore investor confidence. To prop up household net worths and to encourage sustainable consumer spending that can support the local industries and possibly start a new round of hirings.

All other being equal or rather stabilizing as they say; the housing problem, the credit crisis, the derivative crisis, and the unemployment rate will have to simmer a lot and will take take while corporate profits starts to improve not just by cost cutting but by revenue growth (from the bottom of course).

Going back to SnP 1576 will take a lot of time and cannot be achieved in just a year or two. More likely, it will take up to year 2014 before everything can become normal again or a 100% recovery can be achieved. For now, the SnP has made a 42% recovery of it's losses from the high of 1576 to the low of 667. Not bad, but not good either, specially to those still hurting the most with the sudden evaporation of their wealth or savings plunked into the stock markets during the boom years.

Some analysts have to compute how much recoveries had been achieved in other parts of economic indicators. I can't make that call since I'm not an economist.

It only involves basic arithmetic if you already got economic data way back July-Oct 2007 and compare them to the March low and then compare to present day/month data. That, I think, will help a lot of investors make the correct decision, whether it be to the downside or the upside.

Good luck.

Sep 14 02:35 AM

[Jeff Diercks:]

Very good points! I think you have to ask yourself if the economy is doing so well, then how come its leading indicator, copper (symbol JJC) is looking very tired? Over the last two weeks while the markets have moved higher, Copper has been slowly topping and moving lower. Its relative strength has also been on the decline since early August.

Unless this leading indicator can get itself straightened out soon, to me this is a warning flag that the party may be over!

Sep 14 08:42 AM

[MikeD71:]

The markets are delusional, and a "barometer" of nothing more than how well the smoke and mirrors campaign has gone. I am no longer looking to, or listening to "economists" and their, nearly always false predictions. We are in a period that has never been experienced before, and conventional thinking, or reviewing past recessions will not yield positive results. The DJIA could run to 12,000, and in the end...it won't mean a thing. I don't see any pleasant way out of this.

Sep 14 09:02 AM

[Popham:]

Far too many economic factors to consider.
The 'pundit armchair economists' only see their own math and science.
In our humble estimation, they have no idea of the more basic
problems of our fiscal condition than a monkey.
The large banks will soon be approaching fail-safe conditions again.
If people are unemployed, or their wallets are invaded by increased
basic living expenses and taxes, then their consumer spending goes down even further. This is easy; if we are not spending, then we are not generating a healthy economy, thereby causing the stock market
to degenerate.

Sep 14 09:03 AM

[cowboy4u:]

with a new round of forclosures coming in the next few months and people only paying the minimum payments and their monthly payments jumping to approx. $1,000 per month, more homes will be on the market and with the banks already carrying one million homes still on their books as to the price of what they lent the buyers, (shades of the japanese banks carrying their trophy buildings years ago) and never writing them down, the housing crisis will only get worse and real unemployment at more than 16%, it's 30% in detroit, how can things get better? People are saving more, not less which means lower tax revenue nationwide and more layoffs in the future and with protectionism on the rise with new tariffs being put in place, a worldwide trade war is getting near which helped set off the great depression during the 30's. Let's hope things get better but with trillion dollar debts in the future, a trillion dollars is a stack of $100 bills 67 miles high, how will our children ever pay for this and our grandchildren? enough said..let's hope someone comes to their senses in washington! God help us please!!!

Sep 14 09:23 AM

[Jan Paul:]

We have to remember that deep and long recession or depressions play out in waves. Look at how many times in the last 20 years they said Japan's economy had turned around, only to fall back again.

Look at the last "credit recession" (all since then have been "inventory recessions) which was in the 30's and the waves in it, including the waves in the stock market.

We are between "subprime" and "Alt-A, ARM" mortgage issues and have a full 2 years of those toxic loans ahead. In one extreme case, a 73 old widow had an over $300,000 loan with a payment of $98 a month. When it resets, because all that wasn't paid was added to principle, in part, it will reset to $3,500 a month and she and millions of other can't make payments even at zero interest.

Then add the coming problems in commercial loans and then tax revenues declining due to all those defaults. Cities and states are just now starting to do the layoffs and cuts in spending in earnest. That means not only layoff of city workers but, workers in businesses that depend on government spending from cities and states. They have to bring budgets back in line with tax revenues which continue to fall, whether it is a few unemployed added or a lot, each month.

However, regarding the stock market, "it's different this time." Well, yes and no. If there is a global economic recovery going on (the Baltic Dry Index questions this) then hundreds of companies in our market with overseas earnings will do much better than the mom and pop businesses on Main St. A decade ago the market basically depended only on our economy to drive it. Now, there are 2 billion middle class consumers (buying power, not standard of living necessarily) globally driving the global economy many companies operate in.

Also, if the dollar stays weak, then all those earning from overseas will be converted into devalued dollars and look even higher. The markets are priced for "dollars" and that may be disconnected from value and buying power at times. Right now, due to prices in our stores not rising, we are gaining buying power as well as price but, value (asset price of the company or book value) may be falling or only slightly rising as real estate continues to fall (that can vary greatly from company to company depending on what book value is based on).

Economic recovery in the U.S.? Not likely for years. Consumers were 70% of GDP and a return to norm, not fueled with debt, would be about 62% or over a 10% drop and that "new normal" is expected to last for decades. 78 million boomers have really cut spending as have about 37 million retirees or over 1/3 of our population in just those two groups.

What is interesting is that the people employed the most (boomers) have cut spending the most while other employed age brackets with the highest unemployment have been spending less, but not as much less as boomers.

Baltic Dry Index and article on global shipping

www.financialarmageddo...

Article on breakdown of employment by age bracket and spending trends with those groups.

www.financialarmageddo...

Article on widow with loan reset and a lot more on resets coming.

www.businessinsider.co...

Sep 14 09:44 AM

[Ferdinand E...:]

Hmm. I hardly know what to say about all this. But if you have a hot line to the new president tell him that the one of the best economics teachers in the world - ME - knows exactly what he should do. Tear up Waxman Markey, forget about health care for the time being, fire everybody in the executive suite at the Department of Energy except Dr Chu, close down the was in Iraq and Afghanistan by Christmas, and tell Ben and Larry to keep doing their thing. You can also tell him that if he doesn't listen to yours truly, he might be back on the great South Side of Chicago in a few years.

Sep 14 09:47 AM

[Mike from NYC:]

I don't know what to expect but I'm not very bullish. Unemployment is expected to increase and because of increased taxes and fees, disposable income is shrinking and forcing more and more consumers spend less. So far the only 'shoots' I see were from stimulus programs and they are basically over.

I think Wall Street, as it usually is, is over-optimistic, and disregards the new 'reality' facing America and Americans, namely the HUGE decrease in wealth, perceived or real, that Wall Street's greed and stupidity have caused to almost every American.

As I told many people, we will see a new 'Amerikan Ekonomy' as a result of the recession and the disappearing wealth. The fact that the recovery will once again be a 'jobless' recovery will add further stress to an already stressed economy.

Americans have been living in an illusionary economy for almost 20 years when trade deficits really started to perk up and our budget deficits started mounting (except for the late 90s when the budget deficit actually started to decline). The entry of China into the WTO and the rapid outsourcing of jobs and factories to China was evidenced in the last jobless recovery and will be profoundly evidenced during this recovery.

I will hope for the best, but I will be prepared for the worst.

Sep 14 10:21 AM

[thiazole:]

So are you admitting that you are losing the bet we had?

seekingalpha.com/user/...



On Sep 13 07:39 PM untrusting investor wrote:

> Why assume that rising stock market prices have anything to do with
> the economy? It is much more logical to assume that the stock market
> has much more to do with massive liquidity, unsustainably low interest
> rates, dominance of trading by a handful of big traders such as GS/JPM/HFT,
> lack of safe alternative investment options, dollar falling like
> a rock, etc. If the stock market current run-up truly had anything
> to do with the economy, fundamentals, valuations, or virtually any
> historic metric then it would probably long since have stopped rising.
> Remember, you can have a win streak at the casino with 25 blackjacks
> in a row too, but one can lose a bunch betting that it will be 26
> in a row. You are playing against pros who have everything stacked
> in their favor, and they can and will pull the plug when it makes
> them more money to do so. Just as in the casino, the market house
> never loses, but you almost certainly will. At least in the casino,
> the player knows the house odds (assuming it's a non-rigged game),
> whereas in the market the odds are heavily in favor of the house
> and they can make the game move in whatever direction they choose
> and as fast as they choose.

Sep 14 11:14 AM

[Ransome:]

Retirement funds giveth and algo traders taketh away.

Virtually no adjustments were made in retirement account fund balancing during the entire crash. No one buys value, stocks are micro traded or gobbled up by index funds. The market is not rational.

Sep 14 12:53 PM

[MSimon:]

Money is not wealth. Real wealth is food in storage, productive capacity, etc.

Sep 14 05:45 PM

[Erick Tippett:]

I agree with the comments of those who understand this is a
market determined by market mood and the skillful and adroit
machinations of seasoned traders expert in timing them. After
all that's how they make their living, they should be that good
at it! They have no doubt figured out already when this rally is
going to dry up, or if not will pick up the signals like ravenous wolves as and when the haunting hour approaches.

This economy has nothing to do with the markets in any manner
whatsoever!

Erick Tippett
Chicago, Illinois

Sep 14 06:56 PM

[globalview99:]

The reckoning: This market is all about the reckoning, that is, after 20+ years of a market disconnected from the real economy and riding financial bubbles, this market will endear itself to those who are investing on the basis of the real economy. This I call the reckoning between the real economy and the financial economy.

Right now the real economy is in the pits trying to stay afloat and not get pulled under by the financial economy which is on life support. But the market (which is still dominated by financial economy types) is surging on the basis of falsely perceived economic recovery based on artificial stumuli that is not sustainable. This is round 1; we'll see who wins.

If I'm right, the reckoning which will be a multi-year process will transfer an enormous amount of wealth from the financial economy traders to the real economy traders. The real economy traders will be the next economy's investors capitalizing a sustainable 21st Century Economy. This is economic democracy in action.

Sep 15 08:36 AM

[JAMES CARLINI:]

Let's stop fooling ourselves with looking at unemployment statistics that are MEANINGLESS. Some have fallen off the charts and others have gotten re-employed - but at a much lower rate of pay.

The real barometer is "underemployment" and that is not measured by any of the elite economists. If it was, they would be speaking in much dire tones.

The last 7-8 years the middle class has been decimated by a combination of job losses to outsourcing as well as the abuse of the H1B Visa program. People in IT and other industries have lost jobs in the $80-$120K range and have had to eventually accept lesser-paying jobs. ($35K-$50K - if they were lucky)

There is no mystique in why housing has crashed, credit cards are maxed out and new cars were not being bought - people do not have the income that they had before. Now it is starting to effect others in other industries and finally some are waking up to a phenonomen that has been rolling like a runaway Tsunami for several years which has not hit "their shore" yet.

Now it has, and some are in disbelief and some keep looking at charts. models, and other worthless historical data that doesn't fit what is happening today. DIfferent factors and different variables. This is NOT 1964 or 1981 or 1990.

Instead of trying to "fit" what is going on and explain it as similar to the "fill in the year" economy - realize it is something totally different.

Reminds me of a graduate economics course I was in in 1981and the professor could not relate the economy to what his models were because it really did not fit in any of the "classic charts".

Sep 15 12:18 PM

[trick:]

It is not a rally that is based on fundamentals. I don’t think consumption will really come back to justify current stock prices. We now have a high level optimism amongst investors. The solution for too much debt and consumption cannot be more debt and consumption.

The reasons I think stocks have rallied are: (generally speaking)

1) Relief that a total financial meltdown has been averted.

2) Investors have been cashed up and with cash yields so low, investors have been thinking dividend yields on equities don’t look so bad.

3) The weak dollar & inflation outlook – your charts say it all and equities can be a benefactor of this in the short term. The fact that the stock market and gold are going up simultaneously signals something is wrong.

4) Foreign markets have had a tremendous rally it is the strength in overseas markets that is dragging U.S. stocks along for the ride.

5) Money that is being printed is going into the stock market.

6) There has been a pick-up in consumption as people buy things they need, following 2008’s dramatic fall in consumption.

7) Firms have surprised on earnings but not sales. Cost cutting and free govt money has temporarily boosted earnings but is not sustainable.

8) A stronger stock market can be self-fulfilling to a degree, as higher stock prices increase consumer net worth and improve earnings for firms managing stocks for example.

Sep 15 06:09 PM