Saturday, December 3, 2016

Trickle-down economics still doesn’t work

The Bureau of Economic Analysis elevated its estimate of third quarter GDP from 2.9% to 3.2% last week. They intend the decimal points to give an illusion of accuracy when they know there is a lot of slack in the numbers. Corporate profits rose in the third quarter on a year-over-year basis 2.8%, the first rise in profits in five quarters.

Tossed with expectations about Trump’s spending and tax cuts we should have a salad that promises improving health for the economy. It should end business cycles and bear markets, except for the fact that we have seen similar scenarios before. Mainstream economists gathered around the casket of the business cycle in the late 1990s, just before the recession of 2001. Bear markets are wedded to recessions for the most part, so the death of business cycles would mean the death of bears, too.

If that sounds too good to be true, then join me in looking into the numbers a little more closely. The Bureau of Economic Analysis (BEA) explains the jump in GDP this way:
The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and federal government spending, that were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased...
Considering job gains, wage increases and low debt levels, Bloomberg quoted Russell Price, senior economist at Ameriprise Financial Inc. in Detroit on the topic:
Growth is going to remain heavily reliant on the consumer, but consumers are in very good position to lead that charge...Overall, it’s an encouraging sign for the path ahead.

Monday, November 28, 2016

Goldman Sachs rains on Trump honeymoon

Traditionally, a new president enjoys a “honeymoon” period during his first few months in office but it seems that Goldman Sachs doesn’t like tradition. The investment bank tried to puncture the euphoria in the stock market over Donald Trump’s victory by issuing a sober forecast of what the US can expect from his regime next year. Their conclusion:
The prediction comes as part of the team’s annual not about the top ten market themes for 2017. Theme No. 1: Utter disappointment.
Actually, the theme was closer to “more of the same.” GS thinks stocks are pricey already and the economy won’t improve enough for profits to relieve some of the altitude in valuations. They are probably right and things might actually get worse if we get the long overdue recession.

Saturday, November 19, 2016

Trump proposes welfare for Mexican immigrants

Last week the Dow index hit records highs largely on the assumption that a Trump presidency will mean massive new spending on infrastructure to shock the economy back to life like a paramedic putting the paddles on a patient whose heart has quit. That’s sad because it reveals how Keynesian and medieval the economic thinking of too many investors has become.

Bush allocated $800 billion to jolt the economy after the Great Recession. Can anyone tell me what we got for it? Of course, the medieval economists counter with “The economy would have been worse without it.” But they don’t know that. They have no data on what might have been, and for a field that is supposed to be data driven they make a lot of decisions based solely on their imagination.

Yes, they have the new-Keynesian models that “prove” the spending helped, but what do you expect from math models constructed with the assumption that state spending drives the economy?

Friday, November 11, 2016

Economics Trumps polling

One of the big news stories today is how the national polls got the results of the presidential election so wrong.

Part of their problem was the demonization of Trump by the media. When media bias turns a policy or person into the instantiation of evil as they did with Trump, those who favor that policy or candidate will not want to side with that “evil” when answering poll questions. So they tell pollsters what they think people want to hear.

One older lady told me she planned to vote for Trump but asked me not to tell anyone. I read about a rabid Clinton supporter who wrote that his mother had promised him she wouldn’t vote in this election because she didn’t like either candidate. But when he wasn’t looking she slipped out and voted for Trump. The media shot themselves in the foot on this one.

Back in July I wrote a post on economic models that were Trumpeting a win for the Republican candidate or modestly admitting the outcome was too close to call. The accuracy of those models showed that people consider the economy their most important issue.

Sunday, November 6, 2016

Investors are becoming aggressively passive

Last week the Wall Street Journal ran several articles on the tectonic shift in investing from actively managed funds to passive index funds. In “The Dying Business of Actively Picking Stocks,” the Journal reported that “Over the three years ended Aug. 31, investors added nearly $ 1.3 trillion to passive mutual funds and their brethren— passive exchange- traded funds— while draining more than a quarter trillion from active funds, according to Morningstar Inc.”

Even Warren Buffet jabbed a knife between the ribs of active fund managers by stashing his wife’s inheritance in an index fund. One active manager proclaimed passive investing to be worse than Marxism for the future of capitalism.

The standard charges against actively managed funds are that only a few outperform indexes like the S&P 500 and they charge higher fees, says the Wall Street Journal.

Sunday, October 30, 2016

Trump's tariffs could sink Washington

Politicians have figured out that bashing China is a good way to attract vote. That’s why Donald Trump is doing it. It appeals to people who work and see jobs lost to cheaper products made across the Pacific. Hillary can’t appeal to those people because most of her constituency doesn’t work at all or works in government jobs that don’t compete with anyone anywhere.

But if Trump becomes president, as is likely, and he succeeds in raising tariffs on Chinese imports, he could destroy the federal government here’s why:

The federal government is spending about a trillion dollars per year more than what it takes in through taxes. That means it must borrow a trillion dollars. Who has that kind of money? The American people don’t because we don’t save enough and if we did we certainly wouldn’t loan it to that deadbeat Uncle Sam. Europe doesn’t have the savings. Japan has some but not enough. So most of what the federal government borrows comes from China.

Now the federal government requires US dollars, not Chinese yuan (officially the renminbi, but who can pronounce that?) No one can spend yuan in the US. Chinese save about 30% of their income, but in yuan. How can they get the dollars to loan to the US? They do it by selling stuff to US consumers for dollars. They sell those dollars to the Chinese government for yuan they can use in China to buy more Chinese made Cadillacs and ride their bullet trains. The Chinese government then uses those dollars to buy US debt and fund the US federal government deficit.

Tuesday, October 25, 2016

Caterpillar needed the Austrian business-cycle theory

Caterpillar is facing its fourth year of declining sales, the longest in its history. It expects total revenue this year to be 39% below its peak in 2012 and profits will be down 68%. Its stock is now 25% below its peak. Through the first six months of 2016, the company’s overall revenue was down 21% from the same period in last year.

CEO Doug Oberhelman is stepping down, but when he took the reins in 2010 the world, especially China, couldn’t get enough metals. Prices were soaring and everyone thought the good times would last. That’s the first mistake most investors and businessmen make – linear forecasting instead of thinking in terms of cycles. Oberhelman should have understood cycles after working for Caterpillar for 35 years. The capital goods sector is the most volatile in the business cycle. But he didn’t understand them. Caterpillar’s problems began when it invested heavily at the peak of a cycle according to an article in the Wall Street Journal: