Yves Smith looks at the problem of how to handle the prospect of the financially weaker members of the European Union possibly defaulting. neither the PIIGS nor their colleague states want to take the steps they may need to take. Markets however are sending a clear message, “Do Something!” The risk goes beyond the direct damage from the potential losses from holding these countries debts. European banks are already shaky, with shaky assets and still a lot more leverage than is safe. I believe Europe’s bear market is likely back on.

European banks are shaky? How provincial of me not to mention our own banks. The coming wave of defaults in the Alt-A and Prime mortgage space are not getting enough attention, Yves helps out there as well. Not only are the losses coming (pretending loans are good only works until they actually default) but the banks are in for some serious lawsuits from all kinds of parties that bought the toxic loans. First in line are Freddie and Fannie. They will still lose at least 400 billion, but they’ll take a good chunk out of the banks hide on the way down.

the phrase “credit specialists at Citi” is not exactly the kind of thing which instills enormous confidence in analysts and investors these days

I think that is an understatement. They want to sell another fancy derivative designed to remove all risk if there is a systemic crisis when, of course, those supposed to pay up will certainly have the money to do so….Right?

Please imagine me banging my head against the keyboard. And no, the response of the Citi Spokesman doesn’t make me feel any different, in fact, it makes me feel worse.

The term liquidity is the pixie dust the financial commentariat uses to obscure what is really going on. I maintain, and have throughout the last few years, that our difficulties have not been a liquidity crisis (though many who had no business exposing themselves individually to liquidity drying up for them certain had a liquidity crisis) but a solvency crisis. David Merkel points out that liquidity always exists, it just goes where the marginal credit buyer  has gone. Where insolvency risk seems to be increasing, the marginal buyer can become very scarce and will provide it to areas seemingly exposed to less risk. At the end of the day it is solvency that is our problem, and until we solve that liquidity will go to those perceived to be least at risk. Right now that is the government and those they are backing.   Hence a credit crunch for much of the economy.

Speaking of credit, consumer credit has now declined for 11 straight months. A record, and by a long shot. (Click image for a larger version.)

In the “no big surprise department,” and paralleling the argument I made at the time, it has now been shown that the ban on short selling during the crisis did not help support prices and damaged stock market liquidity. In the no surprise at all department the biggest complainers turned out to have fundamental problems that short sellers were pointing out accurately (much better than our regulators.) The loudest complainer of all, Overstock.com and their bizarre CEO, Patrick Byrne. The upshot, they have been cooking their books for years, just like the short sellers were claiming.

Cross posted at The View from the Bluff

Technorati Tags Citibank, derivatives, Economics, Employment, finance, short selling

Click Image for Animation

Technorati Tags Economic Indicators, unemployment

Employment as measured by the “establishment survey,” was down by 190,000; and Many feel it is an improvement that we are not falling as fast.

Well, let us take a moment to look under the hood of these numbers. First, while the establishment survey was down 190k, the number of unemployed soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey is taken from large businesses while the household survey calls individual households. It is the household survey that sets the unemployment rate. The establishment survey of companies doesn’t count the self-employed and undercounts employees of small businesses. So the economic picture is probably worse than the headlines when it comes to jobs.

Let’s look at the establishment survey. The actual change in unemployment for October was 641,000, not 190,000 which is seasonally adjusted. The so-called birth-death ratio added 86,000. Who knows if that is a reasonable statistical adjustment. While we should adjust the number seasonally, in the real world the jobs were still lost.

The total (U-6) employment rate has climbed to a record high of 17.5%. This is complied by adding in those employed part time for economic reasons. Total job losses since the onset of the recession now are approximately 10.5 million.

From John Mauldin we get this report from Greg Weldon (www.weldononline.com). Greg points out one of the issues with just looking at unemployment, because if you have not looked for a job in four weeks they no longer count you as unemployed:

Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual ‘change’ in the underlying labor market situation … in which case, October’s figure of 817,000 represents the fourth LARGEST yet, behind last month’s (September’s) second largest figure of 1,021,000 … for a two-month combined figure of 1.838 million, in newly Unemployed, or no longer ‘in’ the Labor Force …

… the second LARGEST two-month total EVER posted, barely trailing the December-08/January-09 total 1.955 million.

Bottom line … basis this measure AND the ‘Total Unemployment Rate,’ we could conclude that not only is there NO ‘improvement’ in the labor market, but moreover, that it continues to DETERIORATE, intently.

Of course, unemployment is typically a lagging indicator, but not always. In a “balance sheet” recession where home price declines, rising defaults (yes they are still rising) credit losses, a wave of foreclosures as large or larger than the subprime tsunami and deleveraging are in motion, unemployment rising at the rate we are seeing now is likely to be a significant drag for years to come.

Looking back at 1982, which so many people told us was far worse than today could ever be, we see households dealing with similar “levels” of unemployment with more than three times the debt load and half the savings. Workers are finding it takes longer to find work than in 1982. The count of people jobless for six months or longer stands at a record 5.6 million.

There was a bright spot, though it is so early we might see it revised down or a statistical aberration. Temporary employment grew by 33,700 jobs, its third straight month of gains after steep losses earlier this year. Typically employers add temporary workers before hiring permanent ones.

The even uglier fact. Average hours worked still stands at 33, a record low. Two important things to be gleaned form that number:

1. The unemployment number is much lower than it otherwise would be because workers hours have been cut rather than jobs lost.
2. Hiring is likely to be slower than normal as early on we will see hours worked rise rather than bring in new employees.

So how are companies beating their estimates amidst all this gloom? First off, they always beat their estimates. They are not beating the estimates of a year ago, or six months ago, or even three months ago. They are beating the estimates which keep getting chopped almost until they are reported. The estimates six months out from now are unlikely to be met, but by then they will be reduced yet again.

Still, profits are better than many expected six months ago, even if they are worse than the analysts estimates from then as well. Why? John Forsyth gives us the skinny:

The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.

That is a recipe for deflation and slow growth if it doesn’t reverse. Profits can only be improved by cost cutting for so long, and the carnage amongst workers is made even worse.

Charts are courtesy of Barry Ritholtz. Also posted at The View From the Bluff.

Posted via email from Risk and Return’s Posterous

Technorati Tags economy, Employment, investing

Here is part I:

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Technorati Tags credit crisis, deflation, Economic Indicators, Economics, housing, Housing Market, Inflation, investing, markets, monetary policy, Risk, subprime

Click for larger version of charts.

Technorati Tags economy, Employment, New York Times

Technorati Tags consumer spending, Economic Indicators, Energy, Inflation, the economy

That is a pretty stunning collapse. Few things correlate with economic activity more than freight, and for rather obvious reasons.

While I have been very negative on the economy shorter term for some time, I will say I doubt this will be a particularly deep recession. On the other hand, I also expect it to be rather drawn out. Obviously I could easily be wrong on both counts.

I will repeat what I have said over and over, in a probabilistic world we cannot know the future, but we can say that the risks are rather high and we should all consider lowering the amount of risk we face. That means more cash in our savings accounts, more defense in your portfolios (if you are going to take risk, make it risk that doesn’t correlate with US financial markets) and reducing debt.

With both financial markets and housing prices I would be wary. Your situation may differ, but I keep hearing people say things must be attractive at this point. Housing is a much better deal than it was, etc.

That is exactly right, but I suspect that this also likely holds true. It is approximately 4 1/2 hours from Baton Rouge to Shreveport. Alexandria lies halfway between. When my children ask me how far we still have to go, while I undoubtedly have far less distance to go than when I started, I still have just as far to drive as I have already driven.

In many areas of the financial markets and housing things may be less expensive than they were, but they are still way too expensive and there is a lot more bad news coming down the pike.

Technorati Tags economy, freight, investing, markets

Global spending on IT goods and services is expected to grow … 6 per cent … according to Forrester Research … This represents a significant slowdown from 12 per cent growth last year.
…
“Our forecast is premised on a mild recession in the US economy in the first two or three quarters of 2008, caused by a shrinking housing sector and tapped-out consumers reining in their purchases due to higher interest rates, energy costs and consumer debt services. Anecdotally, we are hearing that this is beginning to filter through to chief information officers, and it is clear the level of caution is rising.” [Andrew Bartels, author of the Forrester report said]

Let us see how many legs this stool has.

Residential investment is not only not growing, but in free fall.

Non residential or commercial construction? Struggling.

Now technology may be slowing?

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Technorati Tags Housing Market, investment, residential investment, technology investment

Michael Dueker is a senior portfolio strategist at Russell and has an interesting model for predicting recessions which he discusses at Econbrowser.

Bottom line:

To get a handle on how unprecedented it would be for the economy to avoid recession in 2008, it is useful to look at the business cycle index produced by the Qual VAR model. The fourth chart shows the business cycle index for the entire sample period with forecasts for 2008 through 2011. The chart shows that the business cycle index has never dipped as close to zero as it is projected to do in 2008 without a recession. For this reason, it appears unlikely that the economy will escape the current slowdown without a recession.

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Technorati Tags economic forecasting, economic modeling, economy, recession, Russell Investments

Reactions:

Barry Rithotlz- Q4 GDP: El Stinko!

• Consumption slowed to 2% from 2.8% in Q3; I suspect that only partly reflects real growth, meaning its partly inflated by price rises;

• U.S. exports continue to increase: Up 3.9% for the Q. Overseas trade added nearly half a point to Q4 GDP;

• Overall, the US economy grew 2.2% for the full year 2007 — the slowest since 2002 (1.6%)

• Inventory build, which drove the 4.9% Q3 data, was totally absent. It sliced 1.25% from GDP, after adding nearly a point in Q3.

• Inflation remains sticky: Price index for personal consumption expenditures rose by 3.9% in Q4 after a tepid 1.8% in Q3. This was the second highest PCE # since 2001

• Q4 business spending rose 7.5%. Investment in structures went 15.8% higher (which seems an awful lot to me); Equipment/software purchases rose by 3.8%.

• Biz spending decelerated in the fourth quarter from Q3’s hotter 9.3%.

Calculated Risk:

Since PCE came in at only 2.0%, clearly there was a sharp slowdown in December, and the growth from the last month of Q3 to last month of Q4 was probably negative – suggesting a recession might have started in December.

Edit: The ADP employment data is also available this morning, showing nonfarm private employment grew by 130,000 in January, and without a downward revision, those numbers are definitely not recessionary.

More on those ADP Numbers.

Bespoke delves into historical US GDP numbers.

Real Time Economics notes the weakness was highly influenced by inventory liquidation.

Manufacturers however are feeling pessimistic.

Calculated Risk breaks down the impact of non residential investment.

Dean Baker pretty much chalks up the consumer spending necessary to keep the GDP positive to spending on flat screen TV’s!

Stefan Karlsson says that trade adjusted real GDP turned negative, and thus the recession is underway.

Nouriel Roubini agrees.

The Fed Cuts!

Written before the cut was announced, Yves Smith of Naked Capitalism notes the Fed was already nearing negative real interest rates, and by some measures was already there.

James Hamilton gives us his research on when to expect the rate cuts to affect the housing and mortgage markets. Blog partner Menzie looks at how this is supposed to help and sees it as a positive, but a muted one.

Real Time Economics jumps in with several posts:

• Greenspan doesn’t think central banks have the power to prevent a recession:
  • “Global forces can now override most anything that monetary and fiscal policy can do,” he said in an interview with Germany’s Die Ziet, published today. “Central banks have increasingly lost their capacity to influence” long term interest rates, he said. He added that the solution to bank vulnerability to exotic investments is to have “far higher capital.”
• Personally I am on Greenspan’s side here. The Fed is just not as important or as powerful as people think.
• The Federal Reserve’s lone dissenter about today’s rate cut was Richard Fisher.
• Finally we have a roundup of reactions from various economists.
• Worries about those pesky inflation expectations.
  • The Federal Reserve’s aggressive rate cuts in the last 10 days are having one unpleasant side effect: they’re boosting bond investors’ concern about inflation.

Investors reacted with enthusiasm, and then promptly collapsed. Actually, yesterdays charts were really bizarre. I expected the sell-off, but the market was strangely flat, then spikes up, then down.

Barry Ritholtz thought it was odd as well. Today was a different matter. A very strong day.

Errata

Credit default insurance has gotten much more expensive.

From Abnormal Returns I am copying this mini roundup on an issue that is finally getting substantial coverage these last few weeks:

More talk about the potential demise of the monoline bond insurers. (A Dash of Insight, Big Picture, FT Alphaville, naked capitalism)

Justin Wolfers has a question:

are those who are using the R-word suggesting that the “Great Moderation” is over, or simply that we are facing an especially unusual set of adverse business conditions? Or was there never any real change in the structure of the economy, and the last couple of decades have been simply a statistical fluke?

Who doesn’t own some of this stuff?

The company wrote off $275 million in investments in the quarter, which could rise to as much as $417 million, said Rebecca Goldsmith, a spokeswoman for the New York-based drugmaker …

“Some of the underlying collateral for the auction rate securities held by the company consists of sub-prime mortgages,” the company said today in a statement. If credit and capital markets continue to deteriorate, Bristol-Myers said, it “may incur additional impairments to its investment portfolio, which could negatively affect the company’s financial condition, cash flow and reported earnings.”

Fiscal Stimulus

Jason Furman vs Steven Landsburg on fiscal stimulus.

Alex Brill tells Greg Mankiw a secret behind the numbers.

Menzie Chinn gives her take.

Hat tip: As always, some of this is from Abnormal Returns. Even if not, go there.

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Technorati Tags credit, Data, Economics, Federal Reserve, fiscal policy, GDP, housing, monoline insurers, recession, stimulus

I really have little to add to my declaration of extreme discomfort.

H/T: Barry Ritholtz

Much more on this here.

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Technorati Tags debt crisis, economy, housing, youwalkaway.com

One earnings report to watch this week, though, is Harley-Davidson (HOG). It’s a solid company with a loyal customer base—I’m one of them actually—but, motorcycles are a luxury item. For every guy like me that rides practically every day, and uses a motorcycle as their primary transportation—there are about 10 guys that ride for maybe 2,000 miles a year. Or less. Those people are gonna stop riding—and buying—new motorcycles.

In fact, if the rumors are true, they already have, and Harley’s results for last quarter will be below analysts estimates. In the last year, Harley sold substantially fewer motorcycles than in 2006. Also, Harley’s stock has already lost about half of it’s value in the last year already, and disappointing earnings for last quarter won’t help.

The thing is, Harley is an interesting proxy for luxury buying. If Harley’s sales are looking bad on the 24th, when earnings are announced, that’s a pretty good indicator that consumers are shutting off buying non-essentials, a good indication of belt-tightening, and general economic cooling.

So what happened?

Revenue for the quarter was $1.39 billion compared to $1.50 billion in the year-ago quarter, a 7.7 percent decline. Net income for the quarter was $186.1 million compared to $252.4 million, down 26.3 percent versus the fourth quarter of 2006. Fourth quarter diluted earnings per share were $0.78, a 19.6 percent decrease compared to $0.97 in the fourth quarter of last year.

[...]

“Harley-Davidson managed through a weak U.S. economy during 2007,” said Jim Ziemer, Chief Executive Officer of Harley-Davidson, Inc. “As we announced in September, we reduced our wholesale motorcycle shipment plan for the fourth quarter, fulfilling our commitment to our dealers to ship fewer Harley-Davidson motorcycles than we expected our dealers worldwide to sell at retail during 2007,” said Ziemer.

[...]

Revenue from Harley-Davidson motorcycles was $1.12 billion, a decrease of $105.5 million or 8.6 percent versus the same period last year. Shipments of Harley-Davidson motorcycles totaled 81,206 units, a decrease of 11,642 units or 12.5 percent compared to last year’s fourth quarter.

[...]

U.S. retail sales of Harley-Davidson motorcycles decreased 14.2 percent for the quarter. The heavyweight motorcycle market in the U.S. decreased 9.0 percent for the same period.

[...]

For the full year of 2007, worldwide retail sales of Harley-Davidson motorcycles decreased 1.8 percent compared to the prior year. In the U.S., Harley-Davidson dealer retail sales decreased 6.2 percent for the full year; international retail sales increased by 13.7 percent. The U.S. heavyweight motorcycle market was down 5.0 percent for the full year of 2007.

To recap, miserable in the US, but offset to some degree by strong sales overseas. I think that meets Dale’s requirement for a bearish signal for the US economy. That was also at the low end of estimates. Yeah, it is getting whacked.

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Technorati Tags earnings, Economics, economy, Harley Davidson, HOG, investing, luxury goods, motorcycles, recession

China turned in yet another double digit year:

China’s economy grew by 11.4 per cent in 2007, the highest pace in 13 years, but the trend of decelerating exports to a slowing US recorded in the final two quarters is expected to be carried into moderating growth this year.

China’s economy has now grown at double-digit rates for five straight years, an achievement hailed by the government as a “hard won gain” of difficult policy decisions.

New York Insurance officials are pressuring banks to bail out the insurers:

Leading US banks are under pressure from New York state’s insurance regulator to provide as much as $15bn to support struggling bond insurers, people familiar with the matter said on Wednesday night.

I am not sure if that is the right move for the banks, but you have to think they are saying to themselves, “How lovely, we pay these guys to insure bonds, when they cannot pay us they want us to provide the money they need to pay us back. Just lovely.”

The Congress has passed a stimulus bill. Of course, when are the checks supposed to arrive? In June. Haven’t I spoken about the time issue before? I think I have. Yes.

Steven Dubner has a similar observation, and some support. Bruce Bartlett throws in this chart to illustrate history supports we skeptics (click image to enlarge)

Which goes to prove that recessions end and stimulus rarely appears until after they are over.

Are we in recession? Calculated Risk looks at a little covered set of data from the Philadelphia Federal Reserve Bank.

Bespoke compiles some data to help us understand how a Bear Market behaves. That is part of my next post, I have some thoughts on that as well.

I stand by the claim that as investors we should pretty much discount fiscal stimulus as a plus any time soon. Greg Mankiw doesn’t think things are bad enough for this to do much good in any case, and potentially is a long run negative.

Tyler Cowen discusses the law of unintended consequences:

Dubner and Levitt have an article in the NYTimes with three examples of the law of unintended consequences, the Americans with Disabilities Act made it more costly to hire people with disabilities and reduced their employment, ancient Jewish sabbatical law intended to help the poor has made them worse off, and the endangered species act has resulted in habitat destruction.

If it isn’t a law it is certainly a key risk factor.

Oh, and about that fraud, 7.1 Billion dollars worth by a single trader.

Which leads Barry Ritholtz to feel the Fed intervened for the wrong reasons. I lean his way on this. In fact, this kind of makes the point that he is right.

Hat tip: as always, some of this is from Abnormal Returns. Even if not, go there.

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Technorati Tags bond insurers, China, Federal Reserve, fiscal policy, fiscal stimulus, Links, recession

Dale Franks gives his rundown on what to look for going forward from the economy, and the implications for investors:

We’ve dropped off about 20% from the stock price highs of October, so we’re about due for a rally. Especially with the Fed obliging everyone with rate cuts. At this point, though, I’d look askance at any rallies in stock prices over the near term. bear markets, after all, have rallies too, which turn out to be fuel for a little hope before reversing in crushing disappointment. Don’t get sucked in by a bear-market rally, especially if the rally is sharp and quick. Chances are that it’ll just be a spike in a general downward trend for stock prices.

In fact, there were three rallies of 20% or more in the last bear market. Each hailed as the beginning of a new bull by the professional cheering class.

The highlight for me however is his own personal bellwether:

One earnings report to watch this week, though, is Harley-Davidson (HOG). It’s a solid company with a loyal customer base—I’m one of them actually—but, motorcycles are a luxury item. For every guy like me that rides practically every day, and uses a motorcycle as their primary transportation—there are about 10 guys that ride for maybe 2,000 miles a year. Or less. Those people are gonna stop riding—and buying—new motorcycles.

In fact, if the rumors are true, they already have, and Harley’s results for last quarter will be below analysts estimates. In the last year, Harley sold substantially fewer motorcycles than in 2006. Also, Harley’s stock has already lost about half of it’s value in the last year already, and disappointing earnings for last quarter won’t help.

The thing is, Harley is an interesting proxy for luxury buying. If Harley’s sales are looking bad on the 24th, when earnings are announced, that’s a pretty good indicator that consumers are shutting off buying non-essentials, a good indication of belt-tightening, and general economic cooling.

Dale also provides a list of what he is watching as far as the data on housing, employment, credit, etc.

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Technorati Tags bear market, consumer spending, Dale Franks, Economics, Federal Reserve, Harley Davidson, markets, motorcycles, Slackernomics, stocks

What does this mean for investors. Quite a number of things – none of which are particularly good over the long term:

1) Why Cut today? What was the motivation for today’s cut? Would waiting 7 days have done anything. other than allowing some of the excesses to get wrung out of the system?

2) Equity Market Dysfunction? Is it that the equity markets are not working properly? Likely not. Are rates too high? I doubt that’s the reason for any of our economic woes. Then what is it – are lowered equity prices a problem?

Globally, equity markets have been in the process of “Repricing Risk” – why is the Fed disrupting that? Further, there is now a recognition that S&P500 earnings were priced way too high – especially in the event of a European and Asian slow down. That lowered “E” in the P/E adjustment is also under way.

3) TANSTAAFL: The free lunch crowd (a/k/a Long & Wrong) has been chanting for Fed cuts. However, these are not with0out consequences, as Inflation remains a pernicious threat.

Here’s a question: What goes to $5 a gallon first – Milk or Gasoline? How about $6?

4) How Independent is the Fed? The Fed is supposed to be an independent entity, whose mission is a) price stability (inflation) and b) maximizing employment (growth).

However, today’s action reveals an apparent third obligatory goal – protecting investors and market prices. I had no idea that back-stopping speculators and hedge funds was part of their mandate…

5) Capitulation? The Market gapped 400 points, and is now climbing higher (off 300 as I type this). My second biggest concern is that the Fed merely delayed the inevitable. This market saving cut prevented a thorough, 5% wash out. In other words, all the Fed did was prevent a healthy capitulation.

6) Pushing on a String? My biggest fear is that we close down 500 points anyway. That would be the worst of all worlds: A compromised, political Fed, working on behalf of speculators, to the detriment of ordinary taxpayers, is proven to be a paper tiger. That scenario would but the “F” in Fugly.

7) Decoupling US Equities from Global Slowdown? Other markets were down much more than the US. But that makes sense, seeing as they have been a whole lot more than the US over the past 5 years . . .

Bill Gross echoes Barry and I:

“It’s a sad testament to think the Fed has to cut interest rates eight days in front of a meeting to salvage the equity markets. The U.S. economy is in a rather sad state of affairs in that it depends on housing and stock prices to keep going.”

-Bill Gross, founder and chief investment officer, Pacific Investment Management Co. (PIMCO)

Paul Desmond in the Wall Street Journal builds on the theme:

In many ways, this is what a classic bear market looks like: After a long period of exuberance, a downturn hits one part of the economy — in this case, the housing market and mortgage-backed securities. Eventually, that leads to broader losses, even for strong companies, and markets begin a prolonged grind downward. . .

The current market looks a lot like the beginning of past bear markets, such as the ones that began in 2000 and in the 1970s and 1987, said Paul Desmond, president of market-research firm Lowry’s Reports in North Palm Beach, Fla. First, the most troubled stocks decline — home builders and financial stocks in the current case — and then others gradually get hit, including small stocks, retailers, technology stocks, and foreign stocks. Finally even stocks of strong companies are affected.

What happens, Mr. Desmond says, is that trading volume and price movement get heavier and heavier for stocks that are declining, and lighter and lighter on the buying side, as more investors look for a way out. When the selling reaches a climax, the bear market is nearing an end, but Mr. Desmond says he doesn’t see any sign of a climax yet.

“We feel we have been in a bear market since July. Everything that we have seen since then has just been a progression, almost like a disease that you are monitoring and the disease is spreading,” he says. “We are still a long way from a major bottom.”

He is watching for a sign of panic selling, but says it hasn’t gotten to that point yet. “Everything we are seeing looks like a typical bear market,” he says.”

Update: Barry has two interviews with Paul:
Q&A: Paul Desmond of Lowry’s Reports
Part II — Q&A: Paul Desmond of Lowry’s Reports

Technorati Tags Barry Ritholtz, bear market, decoupling, Employment, equity markets, Federal Reserve, Inflation, interest rates, monetary policy, Paul Desmond, stocks

“We have counted $45 billion in construction projects in the area, by far a record number for the region,” Scott says. While other parts of the country struggle economically, the Capital Region is experiencing growth in part from its expanding petrochemical industry.

The film industry is also growing.

The recently released Louisiana Economic Outlook highlights:

• Overall, Louisiana should gain 37,200 jobs in 2008, a 1.9 percent growth rate, and a similar growth in 2009, the report said. It also predicts Baton Rouge will add 14,800 jobs in 2008 and 2009. Even though it is a 2 percent growth rate, it is not as heady as the roughly 20,000 jobs Baton Rouge added within 18 months of Hurricane Katrina.

• Population shifts in Louisiana will continue to aggravate labor shortages, with incentives emerging to keep older workers in the work force and more outsourcing and immigration encouraged. Shortages will be worst in the construction field.
• New Orleans will continue to add jobs at a rate of about 1,000 a month, a growth rate of about 2.4 percent, and the city’s economy will be buoyed by about $16 billion in planned projects.
• Lafayette will leverage an expanding energy economy and hospital and retail growth to create 6,300 new jobs over the next two years, making it one of the state’s hottest metro areas.
• Shreveport/Bossier City should gain 5,800 jobs during the two-year cycle, but a decision to make Barksdale Air Force Base the permanent home for the military’s cyberspace command could make the forecast “wildly too pessimistic” the Outlook authors said.
• Lake Charles is fully recovered, from a job standpoint, from the effects of Hurricane Rita, and will gain 2,800 jobs during the next two years. A $1.4 billion synthetic gas manufacturing plant could become the city’s largest single capital investment.
• High energy prices and shipbuilding activity also will boost Houma, where an expected 5,200 jobs will be created in 2008 and 2009. Oil prices will vary from $58 to $72 a barrel, the report predicts, though recent prices have spiked to the upper $80s.
• More modest growth is forecast in Alexandria (700 to 1,000 new jobs per year) and in Monroe (about 650 new jobs a year).
• Job growth of about 1.8 percent is predicted in the 35 or so mostly rural parishes, though growth will be stronger in St. Mary (energy, fabrication and casino growth); Tangipahoa (retail and service growth spillover from New Orleans) and Vernon (prospects for a potential 4,000-person brigade to be added to Fort Polk).

For a full summary, please click here (pdf).

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Technorati Tags Baton Rouge, business, Economics, economy, Employment, industry, jobs, Louisiana

Stock markets around the world plummeted Monday, prompted by pessimism about U.S. President George W. Bush’s plans to boost the U.S. economy.

Share prices in Asia, Europe and the Americas all plunged by significant amounts; Wall Street only avoided joining the tumble because U.S. markets were closed Monday for Martin Luther King Day.

Markets in Europe reacted with London’s FTSE 100 Index down 5.5 percent at 5,578.20; the CAC-40 in Paris down 6.8 percent to 4,744.15; and Frankfurt’s DAX dropping 7.2 percent to 6,790.19.

In Japan, the benchmark Nikkei 225 index closed on 13,325.954 points, a slide of 3.9 percent and its biggest dip in two years. Shanghai’s Composite index fell 5.1 percent.

Read the rest if you want to feel depressed.

This is probably a mix of the need for stimulus being a bad sign for the world economy, and a realization that the stimulus is also not going to be sufficient. I agree on both conclusions. My concerns over the economy have been expressed in no uncertain terms for some time, and I have given my reasons for doubting the efficacy of fiscal stimulus packages. Fiscal stimulus that relies on increasing spending is an especially false hope, except in rare circumstances. Tax packages that make the adjustments businesses and investors need to make less expensive can help, but to do so they would have to be substantial, and politically I doubt they will amount to much.

Interestingly, Paul Krugman has historically felt similarly. Unlike Paul, I doubt monetary policy can do much either.

An important thing to remember when we discuss the government stimulating the economy, is that the numbers involved are completely out of whack. Let us pretend that the government spending $145 billion actually subtracted not a whit from other people’s spending or investment. That it was all added spending in our economy that would not exist otherwise. This is frankly ridiculous, but let us for the sake of argument pretend it were true. Folks, when we are talking about a 13 trillion dollar economy, that seemingly large $145 billion seems awfully puny. Around 1%. That one percent is supposed to make a difference?

Of course, that is a completely unrealistic scenario, because in fact the government will borrow the money from somewhere, money that would largely have been spent or saved in another fashion anyway. Academic studies show large amounts of the stimulus will be used to pay down credit cards and other debt. Some will be saved. Whatever that is, it isn’t a stimulus.

Similarly, the Federal reserve, for all the sturm and drang in the papers over the massive liquidity injections, is similarly poorly positioned. They control approximately $30 to $40 billion in reserves. That is it. The amount of liquidity “injected” has been essentially nil. Almost all of it was just the federal reserve rolling over existing repurchase agreements with banks. They can attempt to lower interest rates, but that will have a long delayed impact. Politically the Fed and the government need to be seen doing something, but what they can do is vastly overrated.

I bring this up not to scold our politicians, or the Fed, but to emphasize that we as investors should not be fooled about such policies rescuing us if we are not appropriately positioned. Certainly we should be mindful of the last time investors were urged not to “fight the Fed.” Huge losses followed as many investors walked hand in hand with the Fed to interest rates as low as 1%. I chose to fight and I am glad I did.

The economy and markets may recover, but policy will not be the major determinant.

Other views:

Tyler Cowen points out that rebates don’t always accomplish what they are supposed to do.

Menzie Chen looks at business incentives.

James Hamilton makes his case against fiscal policy, and echoing my own thoughts thinks Bernanke was not giving the green light to it that many believe.

Paul Krugman has his own thoughts about what to do now.

Mark Thoma questions the efficacy of making tax cuts permanent.

Finally, via Abnormal Returns, Greg Mankiw asks great questions:

If some journalist out there talks to a member of the Federal Open Market Committee, here is the question I would ask:

If the economy now gets the fiscal stimulus being proposed (about 1 percent of GDP), does that mean that the Federal Reserve will cut interest rates less than it otherwise would?

My follow-up questions:

If the answer to the first question is No, then ask, Why the heck not? Monetary and fiscal policy are two tools available to increase the aggregate demand for goods and services. The goal here is to prop up demand sufficiently to maintain full employment without causing inflation. If the U.S. government is using fiscal policy more, it should use monetary policy less.

If the answer to the first question is Yes, then ask, How much higher will interest rates be kept as a result of the fiscal stimulus? And is it really better to have a fiscal stimulus and higher interest rates than a smaller deficit and lower interest rates?

More from Greg here, and here.

Update: Megan McCardle echoes my concerns:

As talk of stimulus plans grows, readers are asking for my thoughts. Which are: stimulus rarely works unless it is massive and very rapidly applied, and if it is massive and very rapid, it usually has much larger problems.

The difference between tax cuts and spending is irrelevant in theory. In practice, because so few people pay significant income tax, it has distributional effects. Since rich people seem to save more money than poor people, this blunts the effect of the stimulus. On the other hand, spending is generally much more distortionary than tax cuts, because the government picks what the money is spent on. One more reason not to like fiscal stimulus packages.

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Technorati Tags federal government, Federal Reserve, fiscal stimulus, monetary policy

I have to agree with Frederic Mishkin of the Fed:

I think there is too much focus on what decision will be made about the federal funds rate target at the next FOMC meeting. What is important for pricing most financial assets is the path of monetary policy, not the particular action taken at a single meeting.

One of the great myths of the market is the over-agency of the Federal Reserve. In reality, the Fed is much less powerful than is commonly believed.

I think some people have to believe that there’s some mysterious group that’s in charge and running things. Ron Paul even blames the Fed for higher oil prices.

Nobel Laureate, Edward Prescott, wrote in the Wall Street Journal:

I am not saying that there are no real costs to inflation — there certainly are. And if we get too much inflation we can exact high costs on an economy (witness Argentina as an example). However, I am talking here of the vast majority of industrialized countries who live in a low-inflation regime and who are in no danger of slipping into hyperinflation. It is simply impossible to make a grave mistake when we’re talking about movements of 25 basis points.

I would add that even if they do not make a mistake it is unlikely to change the outcome for investors in any dramatic fashion. The Fed is just not the main determinant of asset prices, nor is the yield level of treasuries.

That doesn’t mean the Fed hasn’t made mistakes which have contributed to our present woes. Milton Friedman’s old partner, Anna Schwartz, brings out the wood (via Greg Mankiw)

As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.

The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.

“They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,” she told The Sunday Telegraph. “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.

[...]

Her fame comes from a joint opus with Nobel laureate Milton Friedman: A Monetary History of the United States. It revolutionised thinking on the causes of the Great Depression when published in 1965. The book blamed the Fed for causing the slump. The bank failed to use its full bag of tricks to stop the implosion of the money stock, and turned a bust into calamity by raising rates.

“The book was a bombshell,” says British monetarist Tim Congdon. “Until then almost everybody thought the free-market system itself had failed in the 1930s. What Friedman-Schwartz say was that incompetent government bureaucrats at the Fed had caused the Depression.”

I guess restoring confidence that they won’t make things worse is better than nothing, but monetary policy in the range within which they operate will not be the answer, or the cause, for regulatory problems, investor and homeowner myopia and irresponsibility that has already occurred, or overvaluation.

“Steve Jobs is one powerful dude.” (Silicon Alley Insider) (From Abnormal Returns)

Mark Hulbert asks if we really want to assume that the bond market is wrong in betting that inflation will be below 2.5%?

Retail sales in December fell. Barry Ritholz points out:

Credit card debt turned up, the home ATM turned down, inflation was rampant, real income gains non-existent, the job market mediocre. On top of that, we had much higher prices for daily requirements like Food and Energy — and still, there was total denial about how healthy retail is.

How about a chart to back that up?

Obviously we don’t need to just worry about financials being rocked just by mortgages in the consumer space. Actually, I think corporate debt is going to be an issue as well, and of course the derivatives market, especially credit default swaps, are bound to become a major issue. Throw in all the insurers of this debt…I think we better move on.

Despite much wailing, the LBO loan market may not add much to Wall Street’s problems in the great scheme of things. See, I moved on. Million dollar losses seem so small now.

Meanwhile, in addition to the tens of billions evaporating from their earnings, banks such as Merrill and Citibank are busy diluting investor capital by selling huge chunks of ownership to overseas investors. Also read this followup. Probably the best their shareholders can ask for is to lose money and have future earnings sold to others. Better than bankruptcy I guess.

John Paulson bet against the housing market and cleaned up. Join the club John, though unfortunately our clients didn’t make quite the killing you did, but we are happy enough.

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Technorati Tags Alan Greenspan, Anna Schwartz, Barry Ritholtz, Ben Bernanke, Citibank, credit, debt, Economics, Edward Prescott, Federal Feserve, FOMC, Frederic Mishkin, Housing Market, Inflation, John Paulson, LBO, Merrill Lynch, Milton Friedman, monetary policy, mortgages, recession, Steve Jobs, subprime, Wall Street

Trying to get defensive? The Wall Street Journal notices some of the same things we have been talking about that make it difficult, while the New York Times picks up on another theme of ours, the relative attractiveness of growth stocks. I take issue with these statements:

defensive-minded value stocks

growth stocks, which are riskier and throw off less dividend income than value shares?

Value stocks are not necessarily less risky, nor a better value. Value investing may be less risky, value stocks however may or may not be a value. By most measures value stocks have never been so highly valued, especially relative to growth stocks. Nor can it be said value stocks are less volatile. Some are, some are not. I am a value investor, but growth stocks, especially high quality (low debt; high, stable profit margins) look like more of a value to me. The rest of the article supports that contention despite these clichés.

Barry Ritholtz looks at the markets and sees parallels with the “Five Stages of Grief.” I think he probably has that about right. He also points us to this interesting graphic on volatility (click on the image for a larger version.)

Source:
http://www.nytimes.com/imagepages/2008/01/05/business/20080106_soapbox_graphic.html

In looking this over one sees that despite the increase in volatility last year, it seemed much more volatile than it was because we were at historically low levels. I am a glass half empty guy on this. I think we will see volatility increase even more.

At Abnormal Returns the question is asked, how did you do last year?

If you can’t conduct this exercise, what are you doing? Surfing the investment blogosphere for stock tips or economic forecasts? Those will in all likelihood not make you a better investor in the coming year. Knowing how your mutual funds, ETFs, investment advisors, or your own individual stock picks did against a reasonable benchmark should tell you a great deal about your investment process.

Frankly, few people I meet have any idea how they did last year. Statements do not provide time weighted rates of return, and most investors I meet think they did better than they really did. James Picerno makes the point:

While such a goal [superior risk-adjusted returns] isn’t impossible, it’s devilishly difficult to achieve for the long run. Ironically, most investors probably have no clue just how difficult the task. Why? Because one can only recognize the depth of the challenge by routinely analyzing a living, breathing portfolio over the course of time. Daily analysis is ideal, although weekly or even monthly data will suffice over long periods. In any case, unless you’re crunching the numbers regularly, and comparing your results to a benchmark, it’s easy to overlook just how elusive successful investment strategy can be.

We make few changes in our portfolios once we set things in motion each year, but I dig into the details on a daily basis, and we discuss it at our weekly Investment Committee meeting in detail. The details of how and why performance is achieved are crucial in the decision about what comes next, and whether ones strategy is really properly aligned, or whether active risk management is really what one should be doing at all.

An area we will be discussing with great vigor at our yearly investment conference is the direction of the dollar. One of our more profitable themes has been the decline of the dollar. The New York Times finds many people have decided that theme may have run its course. I look forward to our own debate on this.

To finish up let us look at some suggested blog world reading. Steven at Value Blog Review lists his favorite investment blogs for the year, some of my favorites are included. The same goes for Steve Waldman’s list.

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Technorati Tags Dollar, Economics, exchange rate, finance, growth stocks, investing, returns, Risk, today's links, value stocks, volatility