Monday, March 23, 2009

Sunday Night Economic Assessment

The paperboard-derived Consumption Index continued to back away from the Production Index last week (in the context of its 28-day moving average), in spite of seemingly good news from the Federal Reserve(from a newscast-standpoint) , and an improving stock market.

From a paperboard-perspective, the Federal Reserves good-intentions appeared not too-well received, as scheduled natural gas flows into cardboard plants (assumed indicative of production) strengthened over the weekend (before the Fed's announcement) then rolled over and died shortly therafter (with the stock markets).

Perhaps consumers were looking beyond the Fed's intentions and saw the cause... and got scared. Paperboard (cardboard) natural gas deliveries are very volitile (I assume to parrallel the emotionalism of the consumer... and consumer spending), as opposed to the more stayed industrial-derived Production Index.

The Production Index, in contrast to the Consumption Index, continued its fragile assent (in context of its 28-day moving average), keeping us in recovery for the moment, though it too (in its dailies) weakened after the Fed announcement.

Clearly, from what I am seeing, we are in the midst of two recessions... a "Banking Recession" and a "Consumer Recession". It is not one... but two recessions.

On the banking side, several institutions overextended themselves on both risk and leverage... loading up on what have come to be known as "Toxic loans" to the tune of 1000%, 2000%, 3000% (& more) of equity. When the economy rolled over, these institutions found themselves in the same straits as a trader would find himself in upon going out 200% on margin and falling into a bear market.

On the consumer side, many cash-strapped consumers have increasingly leaned upon credit cards and debt in general as well to further their standard of living. And when the economy rolled over for these folks, sharp spending curtailments (sometimes even default) became inevitable. The consumer side is in danger of a vicious downward spiril, where lower spending kills corporate sales, killing corporate profits, causing layoffs, ending wages when unemployment runs out, tightening family budgets, lowering family spending, killing corpotate sales, killing corporate profits, causing layoffs,... etc,etc,etc.

Both of these recessions... banking and consumer... have to be addressed.

On the banking side, I see one serious error being made by many in that the US government is being blamed (or even blaming itself) for the failure of these institutions, because it allowed them the freedom of over-leveraging (or overextending themselves), or because individual elements within the banking industry were persuaded into higher risk loans.

If I as a trader, max out on margin and loose my shirt, it is not the governments fault for allowing me to use margin. And if someone in government makes persuading comments to invest in some company (of which I don't understand), and I invest in that company without doing my research, it is not the governments fault. It is my own fault for my own lack of research. It is my own fault for lack of wisdom.

Are we bailing out troubled banks? Or are we bailing out foolish business plans, inept management teams, and bloated egoes... to the tune of eventual trillions of dollars. Would we be better off rather to take these eventual trillions of dollars and invest in (expand the capital of) our most profitable, well-run banks instead?

On the consumer side, are we going back to "trickle-down" economics, of 20 years ago, though of the "Democratic" flavor... (give the stimulous to the special interest groups, the power-brokers, the firms behind the campaign-contributions & lobbyists... and letting it "trickle-down" to the consumer)?

If we make the wrong choices, this could indeed be a very, very long recession.