THE FAILURE OF CAPITALISTS TO ACT LIKE CAPITALISTS
by ilene - July 3rd, 2010 12:02 am
THE FAILURE OF CAPITALISTS TO ACT LIKE CAPITALISTS
Courtesy of The Pragmatic Capitalist
Yesterday’s discussion regarding Jeff Gundlach’s opinion that the US economy would default raised an excellent question from a reader. In the article I mentioned that private sector net savings are government deficit. Steve Randy Waldman at Interfluidity (in a far more detailed look) beautifully described what I was trying to communicate: net household financial income = current account surplus + government deficit + Δbusiness non-financial assets. The question from the reader was this: if the above equation is true then where is all the private sector surplus? This question was masterfully answered by Rob Parenteau the other day on Naked Capitalism. His conclusion:
“Remember the global savings glut you keep hearing about from Greenspan, Bernanke, Rajan, and other prominent neoliberals? Turns out it is a corporate savings glut. There is a glut of profits, and these profits are not being reinvested in tangible plant and equipment. Companies, ostensibly under the guise of maximizing shareholder value, would much rather pay their inside looters in management handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment.
What we have here, in other words, is a failure of capitalists to act as capitalists (emphasis added).”
This fact was best portrayed yesterday by Edward Harrison who writes the excellent Credit Writedowns website. Edward showed us just how much hoarding is going on at the corporate level:
I pulled a quick and dirty scan of some of the corporations with very high cash balances. As you can see most of the world’s largest corporations are flush with cash. They are literally hoarding billions. The problem of course, from an economic perspective is that these corporations, are in many ways, effectively debiting the system by not spending their retained earnings. Many of these companies have simply been amassing cash for years on end. Think paradox of thrift at a time when the consumer is struggling with an unbearable debt load. Not exactly a recipe for economic growth….
The conundrum…
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DiggTen Reasons Why This Has Been A Weak Recovery
by ilene - June 17th, 2010 11:58 pm
Ten Reasons Why This Has Been A Weak Recovery
Courtesy of Edward Harrison at Credit Writedowns
Comstock Partners latest weekly note called "Why it’s Still A Secular Bear Market" is in line with my view of the economy and market. They see the core issue as a longer-term deleveraging that cannot be solved by fiscal and monetary stimulus. I have said that this likely means lower inflation-adjusted stock prices when the stimulus-induced recovery fades. This is a view they also hold.
However, they also provide ten specific reasons why we should see the recovery as already under attack.
- While May retail sales were up 8% from the early 2009 low they are still 4.4% below the peak reached 2 1/2 years ago in November 2007. By way of comparison, over the last 43 years retail sales have seldom declined at all, even in recessions.
- May industrial production (IP) was 8.1%% over its June 2009 trough, but still 7.9% below the late 2007 peak. At its current level, IP is still where it was over 10 years ago in early 2000.. Never since the 1930’s depression has IP failed to exceed a level attained 10 years earlier.
- New orders for durable goods in April were up 21% from the low of March 2009, but still 22% below the top in December 2007. In fact new orders are at the same level as in late 1999, over ten years ago.
- Initial weekly unemployment claims steadily declined from 651,000 in March 2009 to 477,000 by Mid-November, but have been range-bound with no improvement in the last 6 ½ months. Furthermore the current number of claims is still in recession territory.
- April new home sales were up 14.8% from a month earlier and are up a seemingly robust 48% since the low. However, the current number is still a whopping 64% below the 2005 monthly peak. Prior to the current recession the last time new home sales were this low was in February 1991.
- Existing home sales in April were up 27% from the low in late 2008, but still 20% below the peak in late 2005. We also note that both new and existing home sales were boosted by the homebuyers tax credit that has already expired, and that the housing market has weakened considerably since that time.
- May vehicle sales of 11.6 million annualized were up
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Hosed in Canada; Housing Crash is a Given
by ilene - May 31st, 2010 12:26 am
Hosed in Canada; Housing Crash is a Given
Courtesy of Mish
Inquiring mind may be interested in an email from Robert Clegg at the University of Calgary regarding housing prices in Canada vs. disposable income.
Robert writes …
Mish, I love your blog and read it daily. I came across this article with respect to Canada’s housing bubble. The articles states, " Canadians are spending more and more of their disposable income on housing. In Toronto, 44% of disposable income goes to housing and in Vancouver the figure is a whopping 68%. The trend is likely not sustainable."
Imagine, 68% of your disposable income being spent on housing costs with the remaining disposable income likely being spent on their favorite Top Ramen and KD dinners. This is insane as well as unsustainable. It’s funny that many Canadians seems to think that the 49th parallel has magically created immunity from a housing bust that in their minds is exclusive to the United States. I can’t tell you how many times friends and acquaintances say that Canada’s banks are sound and there was no sub-prime lending and it just can’t happen here. I’m quick to remind them that the loss of one income from a two income family will in essence convert a low credit risk to a poor credit risk akin to that of a sub-prime borrower real fast. Now, multiply this my hundreds of thousands if not millions of borrows and we too have a major problem in Canada no different from that of the US. Wishful thinking really. The proof’s in the pudding and this puddings going to bring a dose of reality to those that are living in fantasy land, way beyond their means and who apparently have missed the global financial crisis that’s been gaining traction and intensity since August 2007.
We’re not only "Hosers" in Canada but we’re royally Hosed as well!!
Robert Clegg, JD, LL.M
Ombudsman, University of Calgary
Calgary, Alberta
Is Canada’s housing bubble about to burst?
Here is the article to which Robert Clegg referred: Is Canada’s housing bubble about to burst?
Canadians are spending more and more of their disposable income on housing. In Toronto, 44% of disposable income goes to housing and in Vancouver the figure is a whopping 68%. The trend is likely not sustainable.
The federal government imposed tighter mortgage
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The Problem with “Tax The Rich”: It Won’t Work
by ilene - May 28th, 2010 11:18 pm
The Problem with "Tax The Rich": It Won’t Work
Courtesy of Charles Hugh Smith Of Two Minds
Many observers conclude our fiscal problems could be solved if only we "taxed the rich." There are structural reasons why this won’t solve our fiscal profligacy.
Calls to increase taxes on the rich are highly popular with people who are not rich. This is understandable; those of us who do pay income taxes naturally feel we already pay enough and some wealthier person could cough up a few more bucks without undue sacrifice.
And of course those who pay no Federal income tax at all--about half the populace--are also in favor of unnamed "rich people" paying more, though since they have no "skin in the game" because they pay no Federal income taxes, their views are somewhat detached from the entire debate.
As I took great pains to document in Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010), the bottom 60% of U.S. households pay essentially no Federal income taxes while the top earners pay most of the taxes already:
After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.
The top 20% paid 68.7% of all Federal taxes: Income taxes, Social Security and Medicare, excise and corporate taxes. The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.
Here are the source documents:
Historical Effective Federal Tax Rates, 1979 – 20065.
Nearly half of US households escape fed income tax .
A number of commentators have noted that the incomes of the super-wealthy (which I define as the top 1% who own most of the productive assets of the nation) have risen even more than their taxes. They also note that the Social Security tax of 7.65% (employee and employer each pay 7.65%) is regressive, as those making $500,000 a year only pay tax on the first $108,000 of income: 47% Of American Families Pay No Income Tax! Really?
So we have to be careful not to say that half of all wage earners don’t pay any tax whatsoever. On the other hand, as I documented in Will Delinquencies Trigger a New American Revolution? (April 7, 2008),…
What’s Wrong With Expecting a 28,000,000 Dow?
by ilene - May 20th, 2010 6:16 pm
What’s Wrong With Expecting a 28,000,000 Dow?
Courtesy of Jr. Deputy Accountant
Listen, it’s not THAT unrealistic, look at the Dow from March 2009 to now! It’s a miracle!
Schwarzenegger economic adviser David Crane writes about the bizarre situation in WSJ saying in 1999, then governor Gray Davis signed into law a bill that made looting California legal and gave state pensioners quite a boost in income based on completely unrealistic projections of fund performance (you know, the sort of stuff prospectuses warn about).
WC Varones shares a bit of CalPERS math (via WSJ):
What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.
Hahahahahahahahaha a 28,000,000 Dow by 2099! Now that’s funny.
F%$k schools, f&*k roads, f*%k social services, as long as our state employees are taken care of, what the hell do we need the rest of that sh*t for?!
See also: Mish’s Social Unrest Spreads to Slovenia and Spain; Images Around the Globe; US Not Immune to Protests
PARTS OF THIS MARKET ARE LOOKING IRRATIONAL
by ilene - April 16th, 2010 4:49 pm
PARTS OF THIS MARKET ARE LOOKING IRRATIONAL
Courtesy of The Pragmatic Capitalist
I haven’t thought the 75%+ rally was particularly irrational over the course of the last 12 months. Surprised by the strength? Absolutely. But irrational, no. As of late, we’ve begun to see signs that the consumer is back, but the equity action implies that the consumer is not only back, but ready to break records. In late 2006 I wrote a letter that said:
“So here we sit with a relatively healthy economy, signs of inflation and record housing prices. Sounds pretty good, right? Not so fast. The markets could certainly move higher if housing doesn’t collapse, but we see very few scenarios in which that can happen. When the housing market slows consumers will spend less and businesses will begin to suffer. The US economy will then fall into a recession and European and Asian countries will quickly follow suit as the world’s greatest consumers wilt under the environment of low liquidity and higher debt….The credit driven housing bubble remains the greatest risk to the equity markets at this time.”
I said the market was due for a potentially crippling recession as the yield curve inverted, consumer balance sheets were turned upside down, and a housing bubble was brewing. Just days before the market crashed in 2008 I said the market had all the ingredients for a crash. In late 2008 I said the market had overreacted and would likely revert towards the mean in 2009 for a total return of 18%.
The day before the market bottom in March 2009 I said government intervention would likely generate an equity rally. But I did not come close to predicting that we were on the precipice of a 75% 12 month move. Not even close. On the other hand, I have never thought the move was particularly irrational and didn’t fight the tape through 2009.
I was very constructive on the market heading into 2010 and maintained that stimulus, strong earnings and an accommodative Fed would result in higher stock prices in H1. I point this out not because I am trying to toot my own horn or gloss over my many imperfections (many can be emphasized), but overall I have been able to not only foresee the macro mechanics driving the market, but have also done a fine job translating that into…
New York Sales Tax Receipts In Unprecedented Collapse
by ilene - February 23rd, 2010 8:25 am
New York Sales Tax Receipts In Unprecedented Collapse
Courtesy of Joe Weisenthal at Clusterstock/Business Insider
It’s a good thing Wall Street bonuses rebounded in 2009 because otherwise the State of New York would be totally screwed.
Yesterday the Comptroller released its survey of the state’s sales tax receipts — a proxy for consumer spending that shows a trend opposite to Wall Street.
Counties across New York State, including New York City, saw one of the sharpest declines in sales tax collections on record, according to a report released by State Comptroller Thomas P. DiNapoli. The report, which compares 2009 to 2008 collections, found a 5.9 decrease in collections statewide. Only four counties saw an increase but these numbers were primarily due to administrative and technical adjustments, not better economic performance.
“This is yet another sign that the Great Recession is having a continuing impact on our communities across New York,” said DiNapoli. “These numbers are sobering. Fortunately, many local governments have taken sometimes painful budgetary steps to stave off disaster. It’s a struggle, but all levels of government have to make every taxpayer dime count.”
Among the report’s findings:
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Fifty-three of New York’s 57 counties outside of New York City saw a sales tax decline and many of these counties share sales tax revenues with their municipalities;
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The largest decline occurred in the Lower Hudson Valley, at 8.4 percent;
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In state fiscal year 2009-10, the state’s sales tax base (value of all goods and services subject to the sales tax) shrank by 7.1 percent;
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Among New York’s counties, Westchester saw the steepest drop at 10.3 percent;
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The Mohawk Valley region saw the smallest downturn at 2.5 percent;
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Only Oneida, Chautauqua, Schuyler and Seneca counties saw increases, but this growth was mostly attributable to factors other than economic growth; and
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According to the New York State Association of Counties, most counties prudently budgeted little or no growth in their sales tax revenues for 2010.
A few charts exemplify the trouble the state faced:
Source: http://www.osc.state.ny.us/
And here’s a breakdown by notable region:
Source: http://www.osc.state.ny.us/
At the same trime, Comptroller DiNapoli warned of a $2 billion budget shortfall for the current year.
Another Big Disconnect
by ilene - February 20th, 2010 4:15 pm
Another Big Disconnect
Courtesy of Michael Panzner at Financial Armageddon
In "Not Entirely Stuck in the 70′s," W.C. Varones highlights a disturbing graphic from the Wall Street Journalthat illustrates another big disconnect: the divergence between what ordinary Americans are taking in and what Washington is throwing around:
I hope you love your government 3.5 times as much as you did in 1970, because that’s how much more they are spending, even adjusted for inflation.
The Next Problem
by ilene - February 15th, 2010 11:52 am
The Next Problem
Courtesy of James Kwak at The Baseline Scenario
p>There has been a lot of talk about the financial crisis over the past year and a half, and I obviously think that will remain an important subject, at least until we have a truly reformed financial system. Preventing the next financial crisis should be high on our society’s priority list. But as the months and years wear on, I suspect we will see more articles like Don Peck’s recent 8,000-word article in The Atlantic, “How a New Jobless Era Will Transform America.”
Peck’s article is not about what caused the recent crash and recession, but what its societal consequences will be. And the article is almost unremittingly bleak. Even before 2008, we had already lived through a decade of stagnant median income and sluggish job growth; the recession pushed some unemployment levels, such as the underemployment rate (people out of work, working part-time for economic reasons, or too discouraged to look for work) to levels not seen since the Great Depression. It’s not particularly clear where growth will come from, as manufacturing remains in decline, services are becoming increasingly outsourceable, and other countries take the lead in the most plausible major new industry (alternative energy). According to Nobel laureate Edmund Phelps, “the new floor for unemployment is likely to be between 6.5 percent and 7.5 percent (for several reasons, including “a financial industry that for a generation has focused its talent and resources not on funding business innovation, but on proprietary trading, regulatory arbitrage, and arcane financial engineering”).
The societal implications that Peck sees are worse than the mere numbers would imply. Young people who graduate into recessions never catch up with cohorts around them that graduate into better economic conditions, partly due to risk aversion, partly because they move up more slowly and get tagged as underperformers. Unemployment also changes people:
“Krysia Mossakowski, a sociologist at the University of Miami, has found that in young adults, long bouts of unemployment provoke long-lasting changes in behavior and mental health. ‘Some people say, “Oh, well, they’re young, they’re in and out of the workforce, so unemployment shouldn’t matter much psychologically,”‘Mossakowski told me. ‘But that isn’t true.’”
The effects of unemployment go beyond, and last longer than, not having money.
“Andrew Oswald, an economist at the University of Warwick,
…
Ignore anyone who tells you that debt levels don’t matter.
by ilene - February 13th, 2010 5:02 pm
Guest author David Merkel discusses a topic we touched on the other day, via Tim Iacono’s article questioning L. Randall Wray’s essay on why government debt doesn’t matter. L. Randall’s argument seemed like a smoker’s defense of his habit on the basis of not having died yet. David’s article takes a longer term perspective. - Ilene
Ignore anyone who tells you that debt levels don’t matter.
Courtesy of David Merkel at The Aleph Blog
Debt levels in an economy matter. They matter a lot. An economy that is financed primarily by debt can be like a chain of dominoes. If one fixed claim fails, and it is large enough, many other fixed claims that rely on the first claim could fail as well, triggering a chain of failures. This is a reason why a fiat-money credit-based economy must limit leverage particularly in financial institutions.
Why financial institutions? They borrow and lend. They also lend to other financial institutions. A big move in the value of some assets can make many banks insolvent, and perhaps banks that lent to other banks. The banks should have equity bases more than sufficient to absorb losses at a 99% probability level. That means that leverage should be a lot lower than it is now.
Economies are more stable when they limit fixed claims and encourage financing via equity rather than debt. Imagine what the economy would be like if interest was not deductible from taxable income, but dividends were deductible.
- People would save money to buy homes, and would put more money down when they borrowed.
- Corporations would lower their debt-to-equity ratios, and would pay more dividends.
- Fewer people and corporations would go broke.
Pretty good, but in the short run, the economy would probably grow slower. The debt bonanza from 1984-2006 pushed our economy to grow faster than it should have, where people and firms took more chances by borrowing more, and making the overall economy less resilient. Debt-based economies lose resilience.
What was worse, the Federal Reserve in the Greenspan and Bernanke years facilitated the debt increases because the Fed never took away the stimulus fast enough, and offered stimulus too rapidly. This led to a culture of unbridled debt and risk-taking. If only:
- Greenspan had been silent when the crash hit in October 1987.
- Greenspan had not given
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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