FedUpUSA

Archive for June 29th, 2010

By Paul Vigna

Just in case you’re still hung over from the weekend, the Dallas Fed has a bucket of cold water for you. The regional bank came out with its June manufacturing survey this morning, and as bad as the numbers are, and they are bad, the comments are even worse.

The general business activity index fell to negative 4 from 2.9, the company outlook index fell to negative 2.8 from 19.6. The production index fell to negative 1.9 from 20.8 in May; capacity utilization fell to positive 2.7 from 18.7 in May. New orders fell to negative 8.2 from 15.8 in May. Go all the way down the line, the numbers are all down from a month ago. But even more so than the numbers, the comments from businesses surveyed are the real tell here, and it seems to me the Fed wouldn’t have any reason to cherry pick especially bad comments, so this is probably a pretty good take on where things stand.

You really need to read the whole thing to get the total picture:

Comments from Survey Respondents
These comments were selected from respondents’ completed surveys and have been edited for publication.

Wood Product Manufacturing
After skyrocketing in February through April, the North American lumber market has collapsed, indicative of the slowdown at U.S. job sites. Small and medium businesses here in “the trenches” are hurting every bit as much as last year. Much of the downturn is a result of the stimulus ending and the typical midyear slowdown that occurs in the building and construction industry.

Paper Manufacturing
A third price increase on linerboard is a possibility within the next couple of months. If this occurs, it will cause a major uproar with our customers. They will all be going out for bids, causing margins to erode.

Chemical Manufacturing
We are not optimistic about the next couple years.  There are too many negative factors in the world of finance right now.

Plastics and Rubber Products Manufacturing
As a business, we are just trying to hold on until the upturn comes.

The availability of skilled technicians and toolmakers is scarce, particularly in the 20- to 40-year-old age group.

Nonmetallic Mineral Product Manufacturing
Housing activity has had some pullback with the expiration of the home-buyer tax credit. The recovery will be lengthy and slow in coming, and it will be subject to improved employment levels and an upturn in the credit markets.

Fabricated Metal Product Manufacturing
After two consecutive months of increased activity, we have seen a dramatic drop in new business, with no backlog for July and beyond. We are having considerable trouble with our bank; although we are not in default and are making all payments, the bank has not executed a loan facility renewal after almost 90 days past our renewal date. There is a high degree of uncertainty in the marketplace, with owners and their designated contractors and design engineers seeing a dramatic reluctance to initiate planned projects, both maintenance and capital expenditure.

We have yet to see any evidence in Texas or across the country of an economic recovery.

Overall business has improved. There seems to be more onshoring of manufacturing due to risk control, inventory management and short lead times. Increased business expenses created by state tax increases are causing pressure on cost competitiveness. It is still very challenging to obtain financing for capital expenditure and growth.

Economic activity remains tenuous for building materials manufacturers.  Financing and demand for capital goods will determine the strength of the recovery as it relates to construction.

Machinery Manufacturing
We are quite concerned about the trends in general business activity. It feels like we are slowing down, not speeding up. I don’t see much that is encouraging at this point.

Our outlook for the next six months has improved due to our company broadening its product offerings, not necessarily due to improved economic conditions.

Demand for capital goods in the food service industry remains at a very low level.

Computer and Electronic Product Manufacturing
Right now business looks steady, but we’re stepping lightly.

Furniture and Related Product Manufacturing
Business has worsened this month. Retail activity has gone down, damaging the hope for improvement among retailers.

Beverage and Tobacco Product Manufacturing
2009 was great, but the wheels came off a little bit in the first quarter of 2010. The second quarter has been better, but not great.

MarketTalk

The economic crisis has ushered in the end of a generation long bull market.  Most average investors ignore the fact that heavy market volatility is a sign of an unhealthy stock market.  The stock market since the lows reached in 2009 has been on an unstoppable bull run.  Yet the real economy where most Americans work and spend money has not reflected any of this irrational exuberance.  The S&P 500 has rallied 53 percent from the lows reached in early 2009 and that is including the current retracement back.  On Tuesday the stock market pulled back on data showing consumer confidence plunging from what analysts had expected.  Outside of Wall Street the economy is walking on eggshells.

If we look at S&P 500 data we find that we have entered into a new era:

The above chart highlights milestones for the S&P 500 dating back to 1968.  For the S&P 500 to double from 100 to 200, it took a slow 17 years.  From 200 to 400 it took 6 years, an incredibly quick jump.  Another 6 years after that and the S&P 500 was riding high at 800.  From 1997 to 2007 the S&P 500 went from 800 to 1,576 in the intraday high that is now far in the past.  It almost doubled yet again in a 10 year horizon.  Yet that trend has been broken.  The S&P 500 is now back to 1,041 and has pulled back to levels seen in 1998.  Does anyone really see the S&P 500 going to 2,000 any time soon?

“The stock market needs to reflect the underlying health and productivity of the overall economy and not simply the gambling penchant of Wall Street banks.”

Most of America is dealing with the new austerity that is being thrust on them from an unforgiving economy and a government that seems to be preoccupied with helping out the financial industry before setting things right with the average worker.  In other words, the middle class is being thrown to the wolves in this crisis.  The government is serving the interest of big money at the detriment of the middle class.

If we look at the volatility of the S&P 500 over the past 22 years we’ll notice two different stories.  From 1988 to 2000, the stock market enjoyed a once in a lifetime bull run.  There were virtually no negative years and some incredible year over year gains.  Keep in mind that we are looking at a 12 year timeframe on a tiny chart but this is over a decade of mental conditioning here.  If we look from 2000 to our present day, the massive amount of volatility has sent the S&P 500 to levels seen in 1998:

2008 was the worst stock market year since the Great Depression.  That is how bad that one year turned out for investors.  This large amount of volatility simply reflects a weak real economy and the recent stock market run to the peak of the mountain was super charged by taxpayer money going into large investment banks who in return went into the stock market and gambled your hard earned money.  Clearly it hasn’t done much for consumer confidence, aiding in the foreclosure crisis, or bringing jobs back.  What then did all this money really accomplish?

If we look at the VIX which looks at option trading volume and is a good sign of volatility we also see this recent stock market reshuffling:

What we can gather from all this volatility is a new paradigm has arrived.  Most popular financial books that hype compound interest always focus on a convenient 7 to 10 percent annualized gain in the stock market.  That may have been the case from 1968 to 2000 but that isn’t the case anymore.  What are you going to invest in when U.S. Treasuries are barely offering any interest and bank accounts are offering rates of 0.01 percent on savings accounts?  Your mattress would rival some of these rates.

The stock market right now is one large casino.  No real reform has taken place and that is why we see no real changes in the economy yet trillions of dollars funneled into a financial abyss.  Someone got this money but clearly it wasn’t the middle class.  The public was told that money was going to go to shore up the housing market (didn’t happen) and to keep lending to the public going (didn’t happen).  So what did happen was that big investment banks used taxpayer money and gambled to bolster their own profits.  That was basically the smoke and mirrors campaign that we have gone through.

The middle class is largely a casualty of this all.  9 out of the top 10 jobs in this country are in low paying service sector work.  We hear this rhetoric about a double dip but the middle and working class never got out of the first dip to begin with.  Who is this double dip for?  Wall Street gamblers who have funneled taxpayer money into the casino?  Must be nice for their 53 percent rally but sadly none of that is reflected in the real economy.  If we want to be happy about gambling why not talk about the person who just won the lottery last night.   Wall Street certainly won the lottery here at the expense of the taxpayers.  The collapse of consumer confidence is merely a reflection of what most of us already know.  The real economy has never recovered.

This is the end of a generational bull run just like the 1920s came crashing down with the Great Depression.  Unlike that time, we have allowed the banks and Wall Street to continue to pollute our real economy with their gambling schemes.  Can you believe that no real reform has taken place?  No wonder why average Americans are displeased with both political parties and are furious at Wall Street.

My Budget360

By Karl Denninger

By Karl Denninger

Big states with dismal budget short falls like California and New York have been making the news for the last couple of years.  Yet the problems with state budget deficits go beyond the big and mighty.  The banking system has been stabilized at a very high cost to average Americans but state budget deficits reflect a deeper underlying problem.  States generate revenue through a variety of taxes; these show up through payroll taxes, sales taxes, property taxes, and other fees.  As a metric for the economy, these are a good way of measuring the health of economic activity.  Looking at current massive budget deficits states are mired in expenses with revenues falling.  For the next fiscal year of 2011 states will face a combined $112 billion in budget short falls.  California’s current budget deficit is $19 billion (current plus next fiscal year).  But things can and may get worse.

A recent survey compares this recession with the previous recession:

Source:  CBPP

As of this year we are facing a deeply painful year for states.  This will be the worst on record if 2011 doesn’t come in close contention.  How is it that the rhetoric has shifted to recovery while states are facing deep and pervasive gaps in their funding?  A large part of the so-called recovery has been directed to the banking sector.  That is clear.  Unemployment and underemployment is pervasively high and when we look at the top job sectors, 9 out of 10 are in low paying service sector jobs.  Last month we added over 400,000 jobs but the vast majority were temporary Census positions.  This is not a true recovery and state budgets reflect this.

Why is the above gap occurring?  Take for example the collapse in housing prices.  States adjusted revenue projections to assume higher assessments and thus believed that bubble level prices were the new norm.  Take for example in California where property taxes can range from 1 to 1.5 percent of the assessed value of a home.  We’ll use a $500,000 home as an example.  Initially, this home would bring the state $5,000 per year at the low end in revenue.  The bubble pops and that home now sells for $250,000.  Only $2,500 comes into state coffers yet the state was expecting that funding to come in at a much higher level.  That is one facet of the problem.  Then you throw in pervasive unemployment that is taxing the system and you can see why state budget gaps are so wide and profound.

The state budget gaps are largely a reflection of a struggling working and middle class.  Sales taxes have fallen in many states as people have cut back and started applying a level of austerity to their lives.  Less spending obviously means less money coming in.  To show how widespread this problem is, all but four states with small populations have budget gaps:

Now I know some will only see the gaps and talk about closing them at any cost.  Yet some forget what this will mean to the overall economy and the so-called recovery.  At this point, take for example the mortgage market, 95+ percent of all mortgages originated are government backed.  The last month of employment gains were largely all (90+ percent) from government hiring.  The current economy is largely supported by massive government spending.  The problem is how we allocated the money.  We have funneled too much money to the banking sector with little tangible results outside of Wall Street.  As states cut deeper into their budgets, federal support is lagging and focusing more on helping out Wall Street.  What this will mean is larger cuts and a drag on the overall economy going forward.

Going forward we know that there are only two ways to balance the gaps.  More cuts or higher taxes and both hurt the economy.  The issue so far is that states have gone after low hanging fruit.  There are hundreds of state workers making high six-figures with fantastic pension plans and lifelong employment with little economic yield and these are not the people losing their jobs.  They are going after janitors, repair workers, young teachers, and other easy targets that do little to balance the bigger line items.  Penny wise but absolutely pound foolish.  Below is from the CBPP:

“Expenditure cuts are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.

Tax increases also remove demand from the economy by reducing the amount of money people have to spend — though to the extent these increases are on upper-income residents, that effect is minimized because much of the money comes from savings and so does not diminish economic activity. At the state level, a balanced approach to closing deficits — raising taxes along with enacting budget cuts — is needed to close state budget gaps in order to maintain important services while minimizing harmful effects on the economy.”

Even after the Recovery Act, large budget deficits will remain:

So combining budget gaps for 2011 and 2012 will result in budget shortfalls of $260 billion combined.  This is an incredible amount of money.  Even a modest recovery will have a hard time making that up and we have yet to see a recovery for working and middle class Americans.  The recovery to many is largely lost in the trillions of dollars funneled to a banking sector that is merely concerned about shoring up their balance sheets.

If we look at a map of state tax collections, 34 states saw declines in the first quarter of 2010:

Source:  Rockefeller Institute of Government

What this means is there are two recoveries going on.  A real one for Wall Street and the investment banks and a phantom one for working and middle class Americans.  I wouldn’t even call it a recovery for the investment banks since they are simply stealing taxpayer money and calling it turning a profit.  State budget gaps are merely a reflection of what we already know and that is the economy has yet to actually recover.

My Budget360

By Justin Lahart

On Tuesday last week, customers at Deb’s Books in Cullman, Ala. started coming in and calling with an odd request: They wanted copies of “The Road to Serfdom,” a book economist Friedrich Hayek wrote over 65 years ago.

Customers at Schuler Books and Music, in Grand Rapids, Mich. were also looking Hayek’s book. Same with the Book Shop in Green Valley, Ariz. On Amazon, it shot to number one where it remained for a week. The reason: Fox News television host Glenn Beck, whose recommendations have lately had an Oprah Winfrey-like effect on book sales, had just devoted a section of his show to the Road to Serfdom.

But Mr. Hayek’s book is no beach read. Rather, it’s dense polemic against socialism that argues that centralized planning by the government will inevitably lead to an oppressive state. Mr. Hayek wrote it while living in England in the early 1940s out of concern that a shift toward collectivism there would give rise to something akin to Nazism.

Even before Mr. Beck’s show, there was a surge in interest in Mr. Hayek, a Nobel-prize winner who died in 1992.

A member of the so-called Austrian school of economics, Mr. Hayek believed that the economy was simply too complex for the government to attempt to manage its ups and downs. He argued that economist John Maynard Keynes’s recommendation that government spend money to allay an economic downturn could actually make the downturn worse, as well as lead to an inflation problem later.

With many people angry over the financial crisis, the recession and the government’s large-scale response to both of those things, Mr. Hayek’s ideas are striking a chord. Late last year George Mason University economist Russell Roberts helped put together a rap video that pitted Mr. Keynes against Mr. Hayek that so far has garnered over a million hits on YouTube.

“Your focus on spending is pushing on thread,” Mr. Hayek inveighs against a hung over Mr. Keynes. “In the long run, my friend, it’s your theory that’s dead.”

Mr. Roberts, a libertarian who runs the economics blog Café Hayek with colleague Donald Boudreaux, says he’s encourage by the renewed interest in Mr. Hayek.

“There’s been very large growth in government and very large growth in the deficit – it’s alarming,” he says. “I don’t know if we’re on the road to serfdom but we may be on the road to Greece, which is scary enough.”

Among most academic economists, however, Mr. Hayek’s ideas about how economy responds to government intervention have held little sway. His major contribution to the field has been the idea that prices convey crucial information about supply and demand, and that government attempts to manage prices – like the price controls put in place by the Soviet Union and its satellites – lead to the overproduction of some items, while others end up in short supply.

It wasn’t a Soviet-era breadline, but the Road to Serfdom has run into some supply and demand problems. The rush of orders caught Hayek publisher The University of Chicago Press short of copies, and it had to resort to print-on-demand services offered by Amazon and Ingram Content Group to fill the gap. That cuts into profitability, says director Garrett Kiely, but not as much as the orders the publisher would have lost if people had to wait for the book. He anticipates that as many as 120,000 copies of the Road to Serfdom will be sold this year, up from about 27,000 last year, and 7000 to 8000 a year before the financial crisis struck in fall 2008.

The Elkhart Public Library, in Elkhart, Ind., has just one copy of the Road to Serfdom and nine holds on it for people waiting in line to read it. It’s ordered another one and would have ordered two, except that recent cuts in the library’s funding mean that it can’t buy as many books in response to reader demand as it used to.

The Road to Serfdom doesn’t earn many accolades from the mainstream academic economists. “Two-thirds of a century after the book got written, hindsight con?rms how inaccurate its innuendo about the future turned out to be,” wrote the late Paul Samuelson in an article published in 2009.

Sweden and its Scandinavian neighbors are among the most socialistic countries in the world, as Mr. Hayek defined them, Mr. Samuelson pointed out. “Where are their horror camps?” he wrote. “Have the vilest elements risen there to absolute power? When reports are compiled on ‘measurable unhappiness,’ do places like Sweden, Denmark, Finland and Norway best epitomize serfdoms? No. Of course not.”

Still, Mr. Hayek’s book taps into a centuries-old distrust of government – and intellectual authority figures like Mr. Samuelson – in America that has been rekindled by anger over recession and the view that elites have been too-little punished while others have paid dearly.

“A lot of people are pretty angry,” says Deb’s Books owner Deb Laslie, who can recite a litany of books that Glenn Beck has recommended because her customers immediately come in looking for them. She’s also been selling a lot of copies of the Declaration of Independence and the Constitution.

“If anything good can come out of all this, it’s that people are becoming more educated,” she says. “I think that’s a good thing.”

The Wall Street Journal