[chilefuturo] Fwd: Are We There Yet? - John Mauldin's Weekly E-Letter
- From: Carlos Contreras <clubcientifico@xxxxxxxxx>
- To: chilefuturo@xxxxxxxxxxxxx
- Date: Sat, 31 Jul 2010 17:34:40 -0400
amigos, les reenvío (supongo que eso no es ilegal) un análisis de un
destacado asesor en inversiones, el que advierte que la economía no va tan
bien y que estará peor. Como ven todas las esperanzas están en aumentar el
crecimiento pero precisamente es eso lo no puede ser debido a límites de
recursos importantes para el capitalismo.
saludos
---------- Forwarded message ----------
From: John Mauldin <wave@xxxxxxxxxxxxxxxxxxxxx>
Date: 2010/7/31
Subject: Are We There Yet? - John Mauldin's Weekly E-Letter
To: clubcientifico@xxxxxxxxx
This message was sent to clubcientifico@xxxxxxxxxx
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*Thoughts from the Frontline Weekly Newsletter*
Are We There Yet?
by John Mauldin
July 30, 2010
[image: Visit John's Home Page] <http://www.johnmauldin.com>
In this issue:
*Are We There Yet?
Driving with No Spare
A Muddle Through Economy
Absent a Policy Mistake
Maine and Turks, Etc.*
<http://ce.frontlinethoughts.com/CT00356901MjczMzA0.html>
"... [this economic condition] has been brought about by policies which the
majority of economists recommended and even urged governments to pursue. We
have indeed at the moment little cause for pride: as a profession we have
made a mess of things."
- Friedrich August von Hayek, Nobel Speech 2010 1974
Those of us who have taken young children on long road trips to somewhere
they wanted to go are familiar with the plaintive question "Are We There
Yet?" As a nation and indeed the developed world, it is not unreasonable to
be asking "Are We There Yet?" about the road to recovery. The NBER, those
self-appointed economists who are the official keepers of the score sheet of
recessions and recoveries, have yet to tell us we are out of recession. Yet
the economy is growing. Kind of. Today we look at the most recent data on
second-quarter US GDP (which came out this morning), and even though it is
backward-looking data, we'll see what we can discern that might help us
chart the direction of the future. And then, if there is time, I'll
highlight what is a very serious and growing problem for our state and local
governments. There is a lot to cover and so, with no "but firsts," let's
dive in.
Are We There Yet?
The economy of the US grew at a weaker than expected 2.4% in the second
quarter, but the first quarter was revised back up to 3.7% on the strength
of stronger-than-projected inventory rebuilding. But the recession years
were revised downward rather significantly for this late in the cycle. We
find now that the recession was worse than we thought, taking the economy
down a total of 4.1% during the recession. As of today, we are not quite
back to where we started, still down 1%. That means it is quite possible
that we could finish the year and still not be "there yet." (To see a 1%
rise in GDP we would need to see a 2% annualized rise for the rest of the
year. We'll look at that possibility in a few paragraphs.)
Let's look at a few charts courtesy of the Dismal Scientist, at
www.economy.com. First, recent GDP numbers:
[image: image001]
If this were an average recovery, the economy would be growing at a 6% rate
at this point, which pretty much says it all about our current 2.4% number.
Further, 2.5 years after the beginning of a recession, we are typically
already 8% higher than the prior high. This is a very tepid recovery,
indeed.
Now, let's look at the actual numbers.
[image: image002]
There is a category called "Final Real Sales" you can create by subtracting
the inventories number from the real GDP number. That reveals that final
real sales grew by 1.3% last quarter. This is against what is normally a 4%
number this far into a recovery. Is it any wonder that small businesses are
asking "When will we get there?"
Next, look at the contribution from fixed residential investment. It has
been negative or flat for six of the previous seven quarters. This time it
added 0.6% to last quarter's GDP. But the housing market is lousy. What
gives?
It seems that the housing tax credits induced home builders to increase
construction by an annualized 28% last quarter. That was in spite of there
being 18.9 million homes vacant in the US (an all-time high), and the number
of foreclosures rising by as much as 100% in some cities. (Hat tip: David
Rosenberg)
"Lenders are accelerating foreclosures as borrowers fall behind in mortgage
payments after the worst housing crash since the Great Depression. A record
269,962 US homes were seized in the second quarter, according to RealtyTrac
Inc. Foreclosures probably will top 1 million this year, the Irvine,
California-based data company said in a July 15 report." *(Daily Reckoning)*
Ownership rates are falling and heading back to more traditional levels.
Mortgage delinquencies are rising as the unemployment level stays
persistently high. It is my guess that residential real estate will not
contribute much if anything to GDP this quarter.
What about inventories? That has been a strength the last few years, adding
a lot to our national growth. But inventory-to-sales ratios are at an
8-month high, which suggests that businesses may back off from increasing
inventories at the recent pace.
Government spending? The bulk of the stimulus programs are going away in the
latter half of the year, especially those that benefited state and local
governments. Governments are slated to cut back spending or raise taxes by
almost 1% of GDP. As many as 500,000 government employees may lose their
jobs.
On a positive note, fixed nonresidential investments were the best they have
been in several years. Let's hope that businesses keep it up!
A Muddle Through Economy
All that being said, if we take away housing and project slower inventory
growth and less government spending, we could see the GDP number for this
quarter fall to the 1% range and stay there for the rest of the year. Even
the normally bullish Economy.com suggests that growth will be "sluggish" in
the last half of the year. All in all, the very definition of a Muddle
Through Economy.
Until we start to see a real rise in employment, it is hard to get too
enthusiastic. Everyone seems to be happy that initial claims have come down
from their highs. But they have gone sideways for almost a year. Let's look
at two charts. First, the last five years of initial claims.
[image: image003]
Then a chart (courtesy of Bill King) which shows that continuing claims are
at levels typically associated with recessions. This is not the stuff that
"V"-shaped recoveries are made of.
[image: image004]
Driving with No Spare
I was on CNBC and Fox this last Thursday to talk about deflation. On CNBC I
was side by side with my good friend Paul McCulley. It is no secret that
Paul is a rather liberal Democrat. He is all for increasing taxes on the
rich. This spring he told me at my conference that tax increases on the rich
do not have the same multiplier as those for everyone else, and so therefore
taking the Bush tax cuts away will not threaten the economy. I, of course,
think it will.
I called Paul up to chat before we went on together. I was quite surprised
to learn that he now thinks the Bush tax cuts should be extended for maybe
another two years.
Why? We are both concerned about an unwelcome bout of deflation stemming
from lack of final demand (as opposed to falling prices from increased
productivity). Look at the graph below. Notice that prior to the beginning
of the last recession inflation was running at a 4% clip and actually rose
to above 5% before falling to a minus 2% and then rising to almost 3%. Since
the beginning of the year, as the economy has softened, inflation has been
steadily falling and is now at 1%. If the economy continues to falter, one
would suspect that inflation could fall even lower.
[image: image005]
*If* the economy were to tip into a recession with inflation so very low (or
even near zero at the end of the year), the results could be very toxic. As
Paul's colleague and my friend Mohamed El-Erian writes, we are driving our
economic car without a spare tire. If we were to go into a deflationary
recession, there is not much that government could do. Our deficits are
already at dangerous levels, and a recession would mean that tax collections
would fall further. The Fed has some policy room, but it is of a variety
that has not been tried for a very long time. Frankly, we cannot be sure of
the unintended consequences.
One of the guest hosts on Fox informed me that double-dip recessions are
very rare things. And I agree. Absent a policy mistake it should not happen.
But increasing taxes to the level that is now contemplated, along with
spending cuts and tax increases at the state and local levels, is a very
dangerous experiment with the economy being as soft as it is.
Absent a Policy Mistake
The key words are "absent a policy mistake." If the economy is growing at 3%
and inflation is over 2%, if a majority thinks that taxes should be raised,
then so be it. We would survive. But raising taxes in January is an
experiment on our economic body without benefit of anesthesia.
Mark Haines (host at CNBC) rightly pointed out that there is a lot of
sentiment for reducing the deficit, and was I against reducing the deficit?
The answer is "no." But I want to do it with spending cuts and spending
freezes until the economy is more vigorous and inflation is above target
levels. And then let's see what Obama's tax commission comes up with in
December.
This is a variant on Pascal's
Wager<http://en.wikipedia.org/wiki/Pascal%27s_Wager>.
The losses are very large if we fall back into recession: Increased
unemployment on top of already high levels. Reduced tax receipts. A very
sick stock market. The world will suffer from our reduced demand. The cost
to prevent that outcome? We forego a few hundred billion in the next year
against the deficit.
One last thought. The correlation between CPI and M2 has risen to -.85 in
the last 15 or so years. M2 is continuing to fall, as is the velocity of
money. Just one more reason to wait until there is clear evidence of a real
recovery.
[image: image006]
Ok, one more last thought. One of the guys on Fox (you can't see who, in a
remote studio) said we shouldn't worry about inflation because corporate
profits are doing well. Really? That seems to be the bull argument
everywhere for everything. Look at the above chart. Corporate profits have
been rising as inflation and M2 have been falling, as bank lending is
imploding, as capacity utilization is at recession-era levels, unemployment
is outrageously high, savings rates are back up to 6% (see below), and
consumer spending is abnormally weak compared to what it should be after a
recession.
When those corporate profits start turning into jobs, when we can see
pricing power in the markets, then we can possibly say that there is a
correlation between profits and inflation.
Maine and Turks, Etc.
I fly to Minneapolis on Sunday for a speech on Monday morning, then back to
Dallas that afternoon. On Wednesday I fly with my youngest son, Trey (16),
to New York. Larry Kudlow is planning on working me into the show on
Wednesday, so watch or hit your record button. Then Trey and I are off to
Maine for the annual Shadow Fed fishing trip hosted by David Kotok. This
year Bloomberg will be covering it on Friday. Then it's back to NYC on
Sunday for some meetings, on to Washington DC for a Tuesday consulting gig
for the Defense Department, and then down to Miami and off for five days to
the Turks and Caicos with Barry Habib and his family.
I am still working on the book, and we will have a full rough draft in the
next few days. I am very happy with the way it is coming together.
Some of my readers know that every year for the last four years Trey has
caught more fish than I have. That is a little frustrating. This year, one
of my readers has sent me some special hi-tech lures. If they work, I will
give you a link. Maybe Dad can finally come into camp without Trey bragging
about how much better a fisherman he is (which is unfortunately true).
It is time to hit the send button. Have a great week.
Your hoping for lots of tight lines analyst,
John Mauldin
John@xxxxxxxxxxxxxxxxxxxxx <johnmauldin@xxxxxxxxxxxxxxxxxxxxx>
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