Recession

[msj]

US economic growth during Q2 was better than expected....3.3 percent. Any hopes for that Great Depression or even a serious recession are fading fast. Meanwhile, Germany is tanking in Europe, and Canada is feeling the burn.

http://biz.yahoo.com/ap/080828/economy.html

For those who believe the inflation rate was 1.2% for the quarter, then sure, real growth has been revised upwards.

For those of us who don't smoke the dope, well we know better....

[msj]

Some more information on the laughable state of statistics in the USA:

Credible commentators are now talking about this more and more calling GDP the "Gross Deceptive Pap" rather than what it used to be - a bona fide measurement of economic activity known as Gross Domestic Product.

I don't think it is a coincidence that the credibility gap is widening at the same time that one measure of inflation - the CPI - tells us that US inflation was running at 8% for Q2 2008 while the inflation deflator used to measure real GDP came in at 1.33%.

Interesting - with GDP being reported as 3.3% and the inflation deflator at 1.3% this means that nominal GDP came in at ~4.6% ish. Use CPI and it comes in negative at around -3.4% ish. Measure things like they did in the bad old days (i.e. make it comparable to how it was measured prior to 1984) then we are looking at -2.4%.

But it gets better: in the same report the government tells us that profit in the financial sector soared 27% in Q2 2008.

That's right, all those write downs we saw in the second quarter by Merrill Lynch, Indymac, WaMu, et al - no, none of that happened.

[msj]

And yet another reason I don't buy the government reported statistics on "real" GDP:

August New Home Sales: Lowest August Since 1982

[August1991]

And yet another reason I don't buy the government reported statistics on "real" GDP:

August New Home Sales: Lowest August Since 1982

Housing starts are a traditional leading indicator. This indicator has been down for the last three years or so.

At the same time, North American society is undergoing social change. Baby boomers are retiring or dying and they are selling their principal residence, often retiring to a secondary residence unless they sell both and move to a condo.

I don't think that we will use housing starts/sales as a reliable leading indicator for the next decade or so. Here's a quote that may seem terrifying unless you realize that "multi-family starts" refers to condos built for retiring seniors.

U.S. housing starts, an index looking at the number of homes being built, fell to their lowest level in 17 years in the August report, but economists say that, while the monthly decline was steeper than anticipated by markets, a drop in construction is a precondition for the housing sector to stabilize.

The U.S. Department of Commerce report showed starts fell 6.2% to an annualized pace of 895k, down from 954k in the prior month. Building permits, an index looking at plans to construct new homes in the coming months, fell by an even steeper 8.9% in the month, pushing the annual pace down to 854k from July's 937k.

Ian Shepherdson, chief U.S. economist from HFE, said the decline, while "undoubtedly grim," isn't as bad as it appears because of how volatile the multi-family unit is. "Multi-family starts and permits rose ahead of new building codes in NYC effective July 1 and the steep declines since then represents a give-back of those gains," he added.

The decline in multi-family starts was a whopping 15.1% in the month, compared to a 1.9% decline in single-family units, which represent four-fifths of the sector.

Link

Boomers (retirees) are driving markets as they have always done. In the past few years, they have apparently decided not to buy condos. Why? In the US, they expected to get more for their house and they are now holding on to it and waiting.

But it gets better: in the same report the government tells us that profit in the financial sector soared 27% in Q2 2008.

And you want government bureaucrats to increase regulation of the financial sector. Edited September 26, 2008 by August1991

[bush_cheney2004]

....I don't think that we will use housing starts/sales as a reliable leading indicator for the next decade or so. Here's a quote that may seem terrifying unless you realize that "multi-family starts" refers to condos built for retiring seniors.

That's a very good point....funny how the doomsayers embrace antiquated metrics when it serves their purpose but reject them when it does not (e.g. real GDP).

[msj]

Housing starts are a traditional leading indicator. This indicator has been down for the last three years or so.

At the same time, North American society is undergoing social change. Baby boomers are retiring or dying and they are selling their principal residence, often retiring to a secondary residence unless they sell both and move to a condo.

I don't think that we will use housing starts/sales as a reliable leading indicator for the next decade or so. Here's a quote that may seem terrifying unless you realize that "multi-family starts" refers to condos built for retiring seniors.

Link

Boomers (retirees) are driving markets as they have always done. In the past few years, they have apparently decided not to buy condos. Why? In the US, they expected to get more for their house and they are now holding on to it and waiting.

I'm not talking about "North America."

I'm talking about the US which still has significant population growth due to immigration and young people having babies.

Even with population growth since 1982 the numbers are as bad as ever.

Now, if you want to throw in your spin and expect anyone to believe it the least you can do is provide some numbers on how many baby boomers are retiring/dying and how this affects residential investment and/or starts.

And while you're at it - take a look at the condo markets in California and Florida over the past couple of years....

But, I suppose you will continue to come up with excuses for such poor statistics.

Car sales being in the toilet are due to baby boomers retiring and/or dying so they are deciding not to buy a new car every four or five years....

Regardless of the reason it still has the same effect on the economy - less jobs, less economic activity, etc.

The question is how much of it is related to the actual changes in demographics and how much of it is due to the credit crisis which was based on an unsustainable credit bubble which has been bursting since Aug/2007.

And you want government bureaucrats to increase regulation of the financial sector.

No, I want smart regulation which comes from informed politicians. Informed politicians make informed policies when the voters/taxpayers are properly informed to vote for the right candidate in the first place.

It's a vicious circle that the US finds itself in - which is obvious in that deregulation has led to this crisis and the government is stepping in with pure socialism as the solution.

I'd take smart regulation (regulated capitalism) over bailouts (crony capitalism/socialism) any day.

[August1991]

I know the numbers have been bad for the past few years but nevertheless the US economy has continued to generate real wealth. So far, this is barely a recession.

I happen to think that Americans' ability to generate real wealth is the key question before Bush and the Congress.

No, I want smart regulation which comes from informed politicians. Informed politicians make informed policies when the voters/taxpayers are properly informed to vote for the right candidate in the first place.

It's a vicious circle that the US finds itself in - which is obvious in that deregulation has led to this crisis and the government is stepping in with pure socialism as the solution.

I'd take smart regulation (regulated capitalism) over bailouts (crony capitalism/socialism) any day.

msj, what is the practical difference between "smart regulation" and "crony capitalism"?

"Informed politicians"? Obama and McCain survived through a competitive process. Are they "informed"?

----

I don't think that deregulation has provoked this panic. I'm fearful that this panic, as in 1929, will provoke calls for more regulation, more criticism of capitalism, more desire for sound money, more criticsm of government deficits and debt, more desire for restrictions on trade and then, we may find ourselves in a depression like the 1930s.

Rather, think of this. Technical changes have radically changed financial markets in the past 20 years. Computers have moved banks from horses to cars. In 1980, we went to a teller to get cash. Now we go to an ATM, and we pay bills online. Traders can see the price of an option to better gauge the price of a share. Active futures markets exist.

With such technological innovation, is it any wonder that the US financial system is undergoing fundamental change? Like napster, mp3 files or limewire, many traders were three steps ahead of government regulators. Government regulations try to keep old corporations in place and delay the inevitable. The State wants stability and security. Yet, that's not life at all.

Nevertheless, a banking system relies on trust and confidence. The ultimate arbiter of trust/confidence in a civilized society is a legitimate State. The State issues our money, and guarantees our bank paper. Governments can collect taxes.

In this crisis, the US government is in a difficult position: should it support an industry if it is critical to the State's confidence?

Edited September 26, 2008 by August1991

[msj]

I know the numbers have been bad for the past few years but nevertheless the US economy has continued to generate real wealth. So far, this is barely a recession.

I happen to think that Americans' ability to generate real wealth is the key question before Bush and the Congress.

msj, what is the practical difference between "smart regulation" and "crony capitalism"?

"Informed politicians"? Obama and McCain survived through a competitive process. Are they "informed"?

----

I don't think that deregulation has provoked this panic. I'm fearful that this panic, as in 1929, will provoke calls for more regulation, more criticism of capitalism, more desire for sound money, more criticsm of government deficits and debt, more desire for restrictions on trade and then, we may find ourselves in a depression like the 1930s.

Rather, think of this. Technical changes have radically changed financial markets in the past 20 years. Computers have moved banks from horses to cars. In 1980, we went to a teller to get cash. Now we go to an ATM, and we pay bills online. Traders can see the price of an option to better gauge the price of a share. Active futures markets exist.

With such technological innovation, is it any wonder that the US financial system is undergoing fundamental change? Like napster, mp3 files or limewire, many traders were three steps ahead of government regulators. Government regulations try to keep old corporations in place and delay the inevitable. The State wants stability and security. Yet, that's not life at all.

Nevertheless, a banking system relies on trust and confidence. The ultimate arbiter of trust/confidence in a civilized society is a legitimate State. The State issues our money, and guarantees our bank paper. Governments can collect taxes.

In this crisis, the US government is in a difficult position: should it support an industry if it is critical to the State's confidence?

I'm not going to argue regulation with someone who does not understand that one of the problems has been the lack of regulation in the derivatives market (for which Warren Buffett has called for regulation) as opposed to investment gurus knowing how to use email and spreadsheets.

Regulations are always in place to some extent and the extent that such regulations can allow the free flow of capital while preventing the government from socializing companies is, hopefully, going to be the preferred way in the future rather than allowing "capitalists" to play with fire and have the government allow the taxpayers to get burned.

If you want to see in what ways that the system should be improved then I recommend you look into Barry Ritholtz, Warren Buffett (letters to shareholders), Nouriel Roubini, Calculated Risk and others I have mentioned in past postings - they have all provided insightful and detailed articles on the real causes and some of the solutions to preventing a future re-occurrence of this mess.

[August1991]

I'm not going to argue regulation with someone who does not understand that one of the problems has been the lack of regulation in the derivatives market (for which Warren Buffett has called for regulation) as opposed to investment gurus knowing how to use email and spreadsheets.

...

If you want to see in what ways that the system should be improved then I recommend you look into Barry Ritholtz, Warren Buffett (letters to shareholders), Nouriel Roubini, Calculated Risk and others I have mentioned in past postings - they have all provided insightful and detailed articles on the real causes and some of the solutions to preventing a future re-occurrence of this mess.

Markets in derivatives are by nature self-regulating.

From what I can gather, your references (eg. Roubini and Calculated Risk) are doom-and-gloom experts with big egos. They typically predict the end of civilization unless Governments adopt their specific proposed policies.

This does not strike me as the Scientific Method. Rather, they seem to me like Tycho Brahe who was wedded to a particular belief. I prefer to read people like Galileo Galilei who have an open mind, and a space for reasonable doubt.

Occasionally, a genius like Einstein, Newton, Keynes, Smith comes along and radically improves on previous thought.

Your references, msj, just state the obvious from a particular perspective: impending doom. msj, how is your portfolio organized? Are you in GICs like me?

[msj]

Markets in derivatives are by nature self-regulating.

From what I can gather, your references (eg. Roubini and Calculated Risk) are doom-and-gloom experts with big egos. They typically predict the end of civilization unless Governments adopt their specific proposed policies.

This does not strike me as the Scientific Method. Rather, they seem to me like Tycho Brahe who was wedded to a particular belief. I prefer to read people like Galileo Galilei who have an open mind, and a space for reasonable doubt.

Occasionally, a genius like Einstein, Newton, Keynes, Smith comes along and radically improves on previous thought.

Your references, msj, just state the obvious from a particular perspective: impending doom. msj, how is your portfolio organized? Are you in GICs like me?

1) Calculated Risk and Roubini have been right about this mess. That is not doom and gloom.

It is called realism.

Too many people are unable to tell the difference which is common enough. Obviously you are one of them.

2) Economics rarely employs the "scientific method" because it is, at best, a social science. This is why the mathematical economists who ridiculed Roubini for the past four or five years are now dizzy from their heads spinning.

[msj]

Well, vehicle sales aren't looking too good.

Even when one tries to adjust, somewhat, for the retirement factor, vehicle sales are approaching 1981-82 levels.

Also should point out that non-residential construction is turning negative.

But I'm sure all of this can be explained away by someone, somewhere, and somehow.

[August1991]

But I'm sure all of this can be explained away by someone, somewhere, and somehow.

Canada's GDP grew more than three times as fast in July as economists had predicted, thanks to gushing oil and gas production, Statistics Canada said Tuesday.

The country's national statistical agency said gross domestic product jumped by 0.7 per cent in July compared with June, a much better performance than the 0.2 per cent private sector growth economists had been forecasting.

CBC

Then again, the road you see in the rearview might look very good just before you arrive at the washed out bridge.

[msj]

CBC

Then again, the road you see in the rearview might look very good just before you arrive at the washed out bridge.

Strange, I link to US statistics and you give me a story from the CBC about Canada.

I really don't see how the two are related - I never bought the "decoupling" argument as mentioned in this thread a long time ago.

When things look bad change the topic? Is this the "somehow?"

Now, lets try to look at the US economy in the near past: Real GDP likely fell in Q3

[August1991]

Strange, I link to US statistics and you give me a story from the CBC about Canada.

Well, we are in the Canada/US Relations category.

So far, if this is a recession, it's a strange one. The problem is not the past, it's the future.

The US suffered the collapse of a housing bubble and banks (encouraged by government goading) lent too much money to too many people for mortgages. Now, this lousy financial paper is clogging up the financial system and causing a liquidity crisis. The liquidity crisis in turn could - potentially - provoke a severe depression. The Fed can overcome short-run liquidity problems and organize buy-outs of insolvent banks but eventually, until house prices rise, this crappy mortgage paper will have to be dealt with.

Having the US government set-up an agency to buy up all this lousy financial paper involves even more government intervention but at this point, do you have a better solution?

It is the government loan guarantees (eg. Freddie Mac and Fannie Mae, ie. too much government intervention) that is ostensibly the cause of the original problem but that's rather irrelevant now except as an academic exercise.

[msj]

Well, we are in the Canada/US Relations category.

So far, if this is a recession, it's a strange one. The problem is not the past, it's the future.

The US suffered the collapse of a housing bubble and banks (encouraged by government goading) lent too much money to too many people for mortgages. Now, this lousy financial paper is clogging up the financial system and causing a liquidity crisis. The liquidity crisis in turn could - potentially - provoke a severe depression. The Fed can overcome short-run liquidity problems and organize buy-outs of insolvent banks but eventually, until house prices rise, this crappy mortgage paper will have to be dealt with.

Having the US government set-up an agency to buy up all this lousy financial paper involves even more government intervention but at this point, do you have a better solution?

It is the government loan guarantees (eg. Freddie Mac and Fannie Mae, ie. too much government intervention) that is ostensibly the cause of the original problem but that's rather irrelevant now except as an academic exercise.

It is the type of government intervention that is the problem: easy money caused the credit bubble which has led us to this now (amongst other related causes).

When easy Al came to the rescue with easy money that was poor government intervention.

When the government selectively bails out firms, that is poor government interventions.

The choice is either follow the Swedish model from the early 1990's or to not bother with any bail out package and get on with proper regulation (and proper regulation should happen with or without a bail out package).

I am already on record on what form those regulations should take and you can find those posts for yourself.

I will add that banning short selling and trying to ease accounting rules (FASB 157 - once again, I'm not linking to something that I have already linked to in the past) does not help the situation.

They look like policies that Pakistan and Japan would come up with (Pakistan in that they have behaved in the same way to prevent the equivalent of free speech in financial markets and Japan in that by trying to change accounting rules the US is trying to buy time for their banks to earn their way out of this crisis which, hopefully, will not lead to any "lost decades").

This is a complex crisis and there are no easy solutions. Putting in stupid regulations does not help the situation.

The best way is to do the right thing - ensure that financial markets are properly regulated and transparent. The market will take care of the rest.

[msj]

Well, we are in the Canada/US Relations category.

So far, if this is a recession, it's a strange one. The problem is not the past, it's the future.

Well, given that the past leads up to the present and the future it would seem logical to conclude that the past is, at least, part of the problem.

History may not repeat but it certainly rhymes....

Some people are better at feeling the rhythm than others which is why for some this recession is "strange" while for others it is not so strange.

[August1991]

The best way is to do the right thing - ensure that financial markets are properly regulated and transparent. The market will take care of the rest.

That is a very naive statement. When it comes to US financial markets, there is almost no way that they can be "properly regulated".

To use your Pakistan metaphor, it is like Trotsky complaining that Stalin didn't do the right thing and so true communism was never tried.

As to your suggestion of the Swedish model for the bail out, there have been umpteen bail outs around the globe and many various styles and approaches (typically involving the IMF since the government itself was often insolvent). Different strokes for different folks. I don't think the Swedish model would work in teh US because US governments are squeamish about owning anything. Correct me if I'm wrong but the last time the government bought a corporation was when Nixon nationalized passenger rail service and created Amtrak.

Taking an equity position may work in Sweden but in the US, this move would concentrate too much power in the Administration hands. Sweden is one small country and if the government owns its banks, who cares? If the US federal government owns American banks, it's an entirely different story.

In Canada, the CPP/QPP has a large fund that invests in equity market. In world terms, they're small players. If the US social security had a similar fund, it would be a brontosaurus in the living room.

For those curious, here's a description of the Swedish model:

A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar?

It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent.

NYT

What works in Canada or Sweden might work in Arkansas or even California, but it might not work in the US.

We Canadians get all the benefits of being American without any of the responsabilities. Canada is like a family, teh US is like a village.

[msj]

That is a very naive statement. When it comes to US financial markets, there is almost no way that they can be "properly regulated".

To use your Pakistan metaphor, it is like Trotsky complaining that Stalin didn't do the right thing and so true communism was never tried.

As to your suggestion of the Swedish model for the bail out, there have been umpteen bail outs around the globe and many various styles and approaches (typically involving the IMF since the government itself was often insolvent). Different strokes for different folks. I don't think the Swedish model would work in teh US because US governments are squeamish about owning anything. Correct me if I'm wrong but the last time the government bought a corporation was when Nixon nationalized passenger rail service and created Amtrak.

Taking an equity position may work in Sweden but in the US, this move would concentrate too much power in the Administration hands. Sweden is one small country and if the government owns its banks, who cares? If the US federal government owns American banks, it's an entirely different story.

In Canada, the CPP/QPP has a large fund that invests in equity market. In world terms, they're small players. If the US social security had a similar fund, it would be a brontosaurus in the living room.

For those curious, here's a description of the Swedish model:NYT

What works in Canada or Sweden might work in Arkansas or even California, but it might not work in the US.

We Canadians get all the benefits of being American without any of the responsabilities. Canada is like a family, teh US is like a village.

The US has an 80% stake in AIG which is ownership.

The US is the "ownership" society. Too bad people don't realize that you don't own anything if you can't keep you payments current.

As for various bail out models: I prefer to read about their success and failure rather than speculate too much about their details and potential success/failure in a forum where my words will just be twisted somehow by someone.

As for regulation - the US economy already has regulations throughout the economy.

It is a matter of what regulations are needed and what aren't.

[msj]

Well, the adjustment process is well under way.

Can't help but agree with the linked article - I would rather be in the current economic environment (i.e. closer to the bottom) than where we were in 2005 (where for most people ignorance was bliss - granted, it appears to have been ignorant bliss for many people up until September but that's another matter).

[Murray B.]

In the USA, a recession is usually defined as two or more consecutive quarters of negative growth in GDP, the last being in 2001. It was mild as recessions go, and largely avoided by Canada.

But who is measuring the GDP? Is this a case of the government writing their own report card? It is difficult to get a real grasp of what is going on from one measure. An old farmers trick was to fill the car with purple gas and then slide a tube of regular gas down the filler neck. If they were stopped and checked the sample tested okay.

Back when "the gipper" was president the market crashed a little and I remember that they said it was a "jobless recovery" that followed. Isn't that an oxymoron or is it just me?

Dollars are just paper and it is what they can be traded for that give them value. What does the U.S. produce in the U.S.A. to give value to the currency?

Actually, It seems that things ain't been right since the '74 (caused by environmentalists) recession. Things hve been pretty much going downhill since then.

[bush_cheney2004]

But who is measuring the GDP? Is this a case of the government writing their own report card? It is difficult to get a real grasp of what is going on from one measure. An old farmers trick was to fill the car with purple gas and then slide a tube of regular gas down the filler neck. If they were stopped and checked the sample tested okay.

US GDP is measured by many government and independent sources. The "official" analysis comes from the NBER.

Back when "the gipper" was president the market crashed a little and I remember that they said it was a "jobless recovery" that followed. Isn't that an oxymoron or is it just me?

Employment is only one indicator, and it is a lagging one at that.

Dollars are just paper and it is what they can be traded for that give them value. What does the U.S. produce in the U.S.A. to give value to the currency?

US currency is backed by the full faith of the government (and real tax base). It has never defaulted. The USA has a very diversified economy and is the largest in the world. The single state of California had a higher GDP than the entire nation of Canada.

Actually, It seems that things ain't been right since the '74 (caused by environmentalists) recession. Things hve been pretty much going downhill since then.

There is no "right". Some people think times have been far worse before. We even get to watch the new "Depression" unfold on wide screen high-definition televisions.

Edited October 12, 2008 by bush_cheney2004

[GostHacked]

US currency is backed by the full faith of the government (and real tax base). It has never defaulted.

I think I'd rather have money backed by something more tangeble, like gold. Not much worth in money if is it all on faith.

[bush_cheney2004]

I think I'd rather have money backed by something more tangeble, like gold. Not much worth in money if is it all on faith.

US currency was backed by gold prior to 1971. This did not prevent economic roller coaster rides or inflation.

[Smallc]

I think I'd rather have money backed by something more tangeble, like gold. Not much worth in money if is it all on faith.

Why is Gold, something that is no more useful than money, something that is traded on a futures market and as a result has a non static value, more tangible.

[bush_cheney2004]

Why is Gold, something that is no more useful than money, something that is traded on a futures market and as a result has a non static value, more tangible.

It's not, but some people cling to such notions. Using such logic, platinum would be even better.

Gold peaked at about $850 in 1980 after the Soviets "invaded" Afghanistan; gold would have to reach over $2000 US to equal that level in today's dollars. Since 1980, gold has been a terrible investment compared to other options.