The Risk of Recession
by ilene - June 26th, 2010 4:53 pm
The Risk of Recession
Courtesy of John Mauldin at Thoughts From The Frontline
We are halfway through the year (where did the time go?) and it is time to make some predictions about the last half of the year. This week we look at what the leading indicators are telling us, size up a new indicator, drop in on banking data, and do a whole lot more.
Quickly, I will be on Larry Kudlow’s show next Tuesday, which is at 7 pm Eastern. Larry has promised that we will spend some quality time on some of the current issues facing us. See you there! And now, let’s jump in.
The Risk of Recession
I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession.
This was not based on data, but rather on research which shows that tax
If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession – at least the way I see it.
I was asked at my recent speech in Milan, what sorts of things could make me wrong? There are a few. First, it could be that tax increases and cuts don’t matter. Some very smart people (like Paul McCulley) feel that tax increases on the wealthy don’t really figure into Romer’s analysis.
Or maybe bank lending starts to pick up and the economy is actually growing at 3-4% by the end of the year – although the chart below…
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DiggYou Should Be Careful What You Wish For
by ilene - June 19th, 2010 4:05 am
You Should Be Careful What You Wish For
Courtesy of John Mauldin, Thoughts From The Frontline
Everyone" is upset with the level of fiscal deficits being run by nearly every developed country. And with much justification. The levels of fiscal deficits are unsustainable and threaten to bring many countries to the desperate situation that Greece now finds itself in. We must balance the budget is the cry of fiscal conservatives.
But there are unseen consequences in moving both too fast or too slow in the effort to get the deficits under control. Today we look at them as we explore what a fine mess we have gotten ourselves into. (I am working without internet today so the letter will be shorter with fewer references than normal.)
GDP = C + I + G + (X-M)
We have discussed the above equation before, but let’s look at it again from a different angle. Basically, the equation is another accounting identity. GDP (Gross Domestic Product) for a given country is the total of Consumption (personal and business) plus Investments plus Government spending plus exports minus imports.
The Keynesians argue that when there is a drop in C due to a recession that the G must rise to offset the drop. That was at the heart of the argument for stimulus packages in so many countries. And there is no doubt that stimulus did help keep a very deep recession from turning into an even deeper depression. One can legitimately argue about the size of the stimulus, or about the nature of the spending, but it is difficult to argue that it did not have an effect.
Now, of course, the hope is that a recovery will allow C to begin to rise…
The Frog in the Frying Pan
by ilene - June 12th, 2010 2:41 pm
The Frog in the Frying Pan
Courtesy of John Mauldin at Thoughts from the Frontline
The Frog in the Frying Pan
Three Structural Changes
The Economy Won’t Produce Enough Jobs
The End Game
Like an Army But with No Discipline
Tonight I am in Venice, but I have arranged for a special edition of Thoughts from the Frontline, written by Jonathan Tepper of Variant Perception, a research firm in London. I have been corresponding with Jonathan for some time, and we have had some solid, and lately quite frequent, conversations. I am very impressed with this young man, whose perceptions and insights I find quite thoughtful. We are working hard together to finish a book that will be called The End Game, which we hope to have out this fall. It deals with the end of the debt supercycle in the developed world and the consequences for economies around the globe. Depending on where you live, the investment implications can be very different. The book will be very global in scope, and our intention is to make it so simple even a politician can understand. In countries all over the world, difficult choices lie ahead. We hope to give people a framework for making those choices and understanding the consequences. Our situation is not pretty, but ignoring those choices would be the worst choice of all.
The Frog in the Frying Pan
"My best guess is that we’ll have a continued recovery, but it won’t feel terrific. Even though technically we’ll be in recovery and the economy will be growing, unemployment will still be high for a while and that means that a lot of people will be under financial stress,"
Benjamin Bernanke, Chairman of the Federal Reserve in a Q&A at the Woodrow Wilson International Center for Scholars
After the dot com bust, John Mauldin wrote frequently about "the Muddle Through Economy," where the economy would indeed be growing, but that growth would be below the long-term trend. The Muddle Through Economy would be more susceptible to recession. It would be an economy that would move forward burdened with the heavy baggage of old problems while facing the strong headwinds of new challenges. Mauldin’s description of the world was accurate then, and it is even more accurate now.
The current recovery from the Great Recession has surprised to the upside, given the…
Six Impossible Things
by ilene - May 29th, 2010 2:18 pm
Six Impossible Things
Courtesy of John Mauldin
Six Impossible Things
Delta Force
Reduce your Deficits!
Pity the Greeks
Should the US Bail Out European Banks?
Italy at Last!
Alice laughed. "There’s no use trying," she said" One can’t believe impossible things."
"I daresay you haven’t had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast."
- From Through the Looking Glass by Lewis Carroll
Economists and policy makers seem to want to believe impossible things in regards to the current debt crisis percolating throughout the world. And believing in them, they are adopting policies that will result in, well, tragedy. Today we address what passes for wisdom among the political crowd and see where we are headed, especially in Europe.
I am reminded of the great line from the movie, The Princess Bride. Vizzini is the short bad guy who is trying to get away from Westley and every thing he attempts does not work. Westley just keeps on coming. At each failed attempt, Vizzini mutters, "Inconceivable." Finally, Vizzini has just cut the rope and The Dread Pirate Roberts (Westley) is still climbing up the cliff.
Vizzini: HE DIDN’T FALL? INCONCEIVABLE.
Inigo Montoya: You keep using that word. I do not think it means what you think it means.
European leaders keep telling us that the break-up of the eurozone is inconceivable. I do not think they know what that word really means. Let’s see if I can explain the problem so that even a politician can understand.
But first, and quickly. We have transcribed the speeches from my recent 7th Annual Strategic Investment Conference I put on with my US partners Altegris Investments. To say they were awesome is somewhat of an understatement. If you have registered for my free accredited investment letter, you should already have gotten a link or will get one soon to the speeches. David Rosenberg, Dr. Lacy Hunt, Paul McCulley, Niall Ferguson, Jon Sundt, Jason Cummins, Gary Shilling and your humble analyst. That is a world class line-up.
If you are an accredited investor (basically $1.5 million net worth) and have not yet signed up for my letter, then go to www.accreditedinvestor.ws and do so now. One…
The Case for a Fed Rate Hike
by ilene - May 22nd, 2010 4:57 pm
John calls the article "the case for a fed rate hike" but I don’t think he made the case. Maybe someone could enlighten me? – Ilene
The Case for a Fed Rate Hike
Courtesy of John Mauldin, at Thoughts from the Frontline
Employment Is Turning the Corner
The Headwinds of Money Supply
Who Stole the Inflation?
The Fed Is On Hold
An Inverted Yield Curve?
LA, Vancouver, San Francisco, and a First Often Wrong, Seldom in Doubt
Everywhere there are arguments that we are in a "V"-shaped recovery. And there are signs that in fact that is the case. Today we will look at some of those, and then take up the topic of when the Fed will raise rates. We open the case and look at the evidence. Is there enough to come to a real conviction? I think there is. (And at the end of the letter I mention two conferences I am speaking at in the next few months, in Vancouver and San Francisco.)
Additionally, we are working on a MAJOR revision of the letter. There will be a lot more ways for you to interact with me and each other. A lot more information and capabilities. We are excited. It should be here by the fall. Tiffani and I think you are really going to like it. And now to the letter.
Employment Is Turning the Corner
There is a little-known employment report that the BLS (Bureau of Labor Statistics) releases late in the month that is a summary of the employment reports from the 50 states. Of late, this number has been higher than the federal government survey. Adding the states together, we find that 412,200 jobs (non-seasonally adjusted) were created in April, higher than the establishment survey (which for whatever reason gets the headlines) and more in line with the household survey, which showed an employment gain of 550,000 (seasonally adjusted).
I think it is well established by now that I am not a fan of the birth/death employment estimates in the establishment survey. That is where the BLS estimates the number of new jobs created by the birth or death of new businesses. It is often a significant portion of the jobs survey and it is a seasonally adjusted guess. There really is no alternative but to make this estimate, but…
The Center Cannot Hold
by ilene - May 8th, 2010 12:18 pm
The Center Cannot Hold
Courtesy of John Mauldin, Thoughts from the Frontline
The Risks from Fiscal Imbalances
The Challenge for Central Banks
Bang, Indeed!
The Center Cannot Hold
A Decent Employment Report
Montreal and New York and Italy
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
- William Butler Yeats
Last week we focused on the first half of a paper by the Bank of International Settlements, discussing what they characterized as the need for "Drastic measures … to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability." As I noted, you don’t often see the term drastic measures in a staid economic paper from the BIS. This week we will look at the conclusion of that paper, and then turn our discussion to the fallout from the problems they discuss, initially in Europe but coming soon to a country near you.
But first, what a week in the markets! I’m sure more than a few investors felt like they had a severe case of whiplash. We will discuss the volatility a little more below.
First, a very quick three-paragraph commercial. In the current market environment, there are managers who have not done well and then there are money managers who have done very well. My partners around the world would be happy to show you some of the managers they have on their platforms that we think are appropriate for the current environment. If you are an accredited investor (basically a net worth over $1.5 million) and would like to look at hedge-fund and other alternative-fund managers (such as commodity traders) I suggest you go to www.accreditedinvestor.ws and sign up; and someone from Altegris Investments in La Jolla will call you if you are a US citizen. Or you’ll get a call from Absolute Return Partners in London if you are in Europe (they also work with non-accredited investors). If you are in South Africa, then someone from Plexus Asset Management will ring.…
The Future of Public Debt
by ilene - May 1st, 2010 8:41 pm
The Future of Public Debt
Courtesy of John Mauldin at Thoughts From The Frontline
There Had to Be a Short
How Should Our Institutions Invest?
The Future Of Public Debt
The Future Public Debt Trajectory
Debt Projections
Montreal, New York, Connecticut, and Italy
Everyone and their brother intuitively knows that the current government fiscal deficits in the developed world are unsustainable. They have to be brought under control, but that requires some short-term pain. Today we look at a rather remarkable piece of research from the Bank of International Settlements (BIS) on what the fiscal crisis may morph into in the future, how much pain will be needed, and what will happen if various countries stay on their present courses. Some countries could end up paying north of 20% of GDP just on the interest to serve their debt, within just 30 years.
Of course, the markets will not allow that to happen, long before it ever gets to that level. And what makes this important is that this is not some wild-eyed blogger, it’s the BIS, a fairly sober crowd of capable economists. We will pay some attention. Then I’ll throw in another few paragraphs about Goldman.
But first, I want to bring a very worthy cause to your attention. For my Strategic Investment Conference last weekend, Jon Sundt and I bought some mighty fine wine for our guests. That of course, is to be expected. But each of those bottles also bought a wheelchair for someone in a most needy part of the world. Here’s the story.
Gordon Homes at Lookout Ridge Winery in Napa Valley has gotten five cult winemakers to create special wines for him. These are winemakers whose production is sold out well in advance – they’re the all-stars of wine (like Screaming Eagle). And while they can’t sell them from their own wineries, they blend these special signature wines for Lookout Ridge.
Each bottle sells for $100, well below what it would take to get one of these cult artists’ bottles – even if you could get them. And then Lookout Ridge donates the entire amount to buying a wheelchair for someone who can’t afford one in a less-developed country. Attendees at our conference bought enough to send 200 chairs to people desperate for mobility all over the world. Part of it was, I am sure,…
JOHN MAULDIN: 40% CORRECTION COMING
by ilene - April 14th, 2010 7:39 pm
JOHN MAULDIN: 40% CORRECTION COMING
Courtesy of The Pragmatic Capitalist
John Mauldin, president of Millennium Wave Advisors LLC talks about the potential for a recession in 2011 and a 40% decline. I can’t recall too many market calls from Mr. Mauldin (or perhaps I haven’t been paying close enough attention), but this is a bold one:
Reform We Can Believe In
by ilene - April 10th, 2010 6:14 pm
Reform We Can Believe In
Courtesy of John Mauldin at Thoughts from the Frontline
It’s Time for Reform We Can Believe In
The Fed Must Be Independent
Credit Default Swaps Threaten the System
Too Big To Fail Must Go
And This Thing About Leverage
What Happens If We Do Nothing?
New York, Media, and La Jolla
Casey Stengel, manager of the hapless 1962 New York Mets, once famously asked, after an especially dismal outing, "Can’t anybody here play this game?" This week I ask, after months of worse than no progress, "Can’t anybody here even spell financial reform, let alone get it done?" We are in danger of experiencing another credit crisis, but one that could be even worse, as the tools to fight it may be lacking when we need them. With attacks on the independence of the Fed, no regulation of derivatives, and allowing banks to be too big to fail, we risk a repeat of the credit crisis. The bank lobbyists are winning and it’s time for those of us in the cheap seats to get outraged. (And while this letter focuses on the US and financial reform, the principles are the same in Europe and elsewhere, as I will note at the end. We are risking way too much in the name of allowing large private profits.) And with no "but first," let’s jump right in.
Last Monday I had lunch with Richard Fisher, president of the Federal Reserve Bank of Dallas. Mr. Fisher is a remarkably nice guy and is very clear about where he stands on the issues. My pressing question was whether the Fed would actually accommodate the federal government if it continued to run massive deficits and turn on the printing press. Fisher was clear that such a move would be a mistake, and he thought there would be little sentiment among the various branch presidents to become the enabler of a dysfunctional Congress.
But that brought up a topic that he was quite passionate about, and that is what he sees as an attack on the independence of the Fed. There are bills in Congress that would take away or threaten the current independence of the Fed.
I recognize that the Fed is not completely independent. Even Greenspan said so this past week: "There’s a presumption that …
John Mauldin – Great Guest, Must Listen to This….
by ilene - April 2nd, 2010 11:20 am
John Mauldin – Great Guest, Must Listen to This….
Courtesy of Andrew Horowitz of The Disciplined Investor
John Mauldin was the recent guest on The Disciplined Investor Podcast. A great deal of insight in this episode….
Click HERE to listen….
John Mauldin is a Fort Worth, Texas businessman, now living in Uptown Dallas, and the father of seven children, ranging from ages 13 through 30, five of whom are adopted.
He was Chief Executive Officer of the American Bureau of Economic Research, Inc., a publisher of newsletters and books on various investment topics, from 1982 to 1987. He was one of the founders of Adopting Children Together Inc., the largest adoption support group in Texas. He currently serves on the board of directors of The International Reconciliation Coalition and the International Children’s Relief Fund. He is also a member of the Knights of Malta, and has served on the Executive Committee of the Republican Party of Texas.
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