Monday, March 30, 2009

Sunday Night Economic Assessment

A big jump in consumer confidence & spending was implied last week as the Consumption Index surged, breaking out above the Production Index, and nearing its own highs since its Dec-2008 bottom... as consumers appeared to gain confidence as their ultimate "money supply" measure (the stock market) increased.

The Production Index, on the other hand, drifted lower early in the week before flattening the last 3 days... presumably in reaction to the previous weeks implied consumption. The Production Index remains above its February 13th recession-bottom, and given the sudden strength of the Consumption Index last week, should see renewed gains shortly, continuing the week economic recovery we appear to be in.

The best way to visualize the function of these two Indexes, is to visualize a dog on a leash, with the leash representing consumer spending, and the dog representing industrial production.

Wherever the leash goes, the dog will ultimately go. The dog may fall behind the leash and be dragged ahead, or the dog may run ahead of the leash and be held back by the leash, but ultimately the dog will go in the same general direction & speed of the leash.

It is the same way with consumption and production. If industrial production jumps ahead of consumer spending, then inventories build, clogging stores and warehouses, prompting purchasing managers to curtail orders, ultimately slowing production. If industrial production falls behind consumer spending, store inventories shrink, prompting purchasing managers to increase orders.

It is the consumer, the spender, that leads the way into and out of recessions, not industry. Industry serves the consumer (remember the old addage... "The consumer is always right"). It is the desire to profit off of increased sales, the desire to avoid carrying costs of increased inventories, and the desire to grow sales through increased quality & marketability, that will always drive industry.

Now, just for fun, lets throw a third element into our dog-leash analogy... a fire hydrant.
As the dog represents industrial production, and the leash represents consumer spending, the fire hydrant will represent capital inducements... items such as tax incentives, interest incentives, credit-offers, and the like.

As the dog sees the fire hydrant, it may want to run ahead (or to the side) towards the fire hydrant, or it might want to stop at the fire hydrant, or it might want to go back to the fire hydrant. But (in this analogy) the leash is pulled by a strong, irrisistable force, and although the dog may take interest in the fire hydrant, the leash still will control the dog.

So it is in industry. Companies may be induced by tax incentives and offers of credit made possible by bank bailouts. Productive capacity may even be saved momentarily through government bailouts. But unless demand increases, businesses cannot increase production. And if demand decreases, businesses will be forced to curtail production.

Business incentives have a place when demand is increasing rapidly, and are good at coaxing industry along to increasing productive capacity, but in this stage of the business-cycle incentives do little to reduce recession. They are long-term instruments which kick in only later on, when economic recovery kicks in to elevate production up toward productive capacity.

There is a real danger here. We are spending much time and rescources (at the governmental level) on bank and corporate bailouts and "stimulous" programs that ignore the consumer. All these may be well and good (I am neither criticizing or praising them) for other purposes.

But in terms of inducing consumer spending to lead us strongly out of recession, the only thing I can see (in a positive sence) is a stock market rally that is dulling consumer fear.

We have a tough quarter for earnings upon us as 1st quarter earnings reports start in a couple of weeks (will be worse than fourth-quarter 2008) and we are not far from being off 10% (year-over-year) on the Production Index.

The worry here is that poor 1st quarter earnings prompt a stock-market sell-off (removing the only real "stimulous" that is out there), pulling the legs out from under the stock markets. Then we get "lucky" (in the worst sence) and we just reach that "off 10%" number in GDP for the first quarter (meaning the word "depression" gets used 50,000 times on the nightly news).

In all we need either lots of luck (not good for a trader to rely upon), or we need for the government to get smart on consumer stimulous (less good for a trader to rely upon than luck). This is not an easy time to be a trader, and one has to be careful at what he does.

As a Christian, I can see more need for prayer right now than at any other time... both personally and for our country and world. We really are at a crossroads.


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.


Sunday, March 15, 2009

Sunday Night Economic Assessment

The Consumption Index gave up its optimism and came back down to just below the Production Index last week (in the context of its 28-day moving average), as US stock markets endured the emotional turmoil of investors bottoming-out the markets, and consumers endured the emotional bottoming out of their ultimate collective contemporary bank account... the stock market.

The Production index, pinned-down by the close proximity of the Consumption index, held nearly steady.

Overall, the recovery appears to remain intact from its December bottom, though fragile and in peril should the consumer be frightened off by further bad news.

At this point, everything is in the hands of the consumer. America has ample spare productive capacity, a large pool of readily-available labor ready for hire to service expansion, and the shelves of America's stores are well-stocked. All that is lacking is liquidity and confidence of the consumer.

Last week the news (as it appeared to me) was mostly positive... The markets put in a major bottom, a couple troubled companies found themselves well enough to be able to refuse further bailout monies, Congress was seen to be moving on its "Stimulus" package, and economic news looked supportive as well. We shall hope to see this reflect in the Consumption Index this week (Keep an eye on those Part 8 "Paperboard" numbers... hopefully they start rising quickly as the new week progresses... If the news can remain calming to the consumer.)


Monday, March 9, 2009

The Consumption Index broke out above the Production Index for the first time since late September last week (in the context of its 28-day moving average), continuing its trend implying strengthening of consumer spending since its December 30th recession-bottom.
With consumption above production, the Production Index played follow-the-leader, inching up to its highest point since its more-recent February 13th recession-bottom.
Within the past week, gas-flows into industrial facilities seemed oblivious to the stock-market carnage, with "Part-7" industrial flows rising above 22 BCF on Friday for the first time in weeks, hitting 22.37 BCF, the highest since December 17th's 22.68 BCF.
Gas flows into paperboard (cardboard) facilities, however, did fade with the markets briefly, suggesting that consumers are still taking their cues from equities, even while producers are taking their cues from consumers.
At this point it appears a recovery is still intact, though fragile and in peril should stocks continue to fall. At this point the stock market appears to be the tail that wags the consumers dog.
Part of the problem is that the US has become a country of two currencies. For our debts, we prefer to denominate our liabilities in cash. Mortgages, car loans, credit cards, and the like, we tie to the dollar. For our assets, however, we prefer to denominate in shares. Brokerage accounts, mutual funds, pensions, and retirement accounts have grown fat with equities, while we have shunned the dollar to foreign investors and the worlds central banks due to its poor, sub-inflation returns.
When equities collapse, the consumer sees it in their monthly statements. They see their account values decline, they feel poorer, they doubt their furures, they doubt their retirements. They therefore do the natural thing... they cut back, and conserve. For many, the stock market is THE money supply, and their money supply is falling.
If we can get a bottom to equities... I believe the recovery will rapidly accelerate. I believe the consumer is tired of cutting back and wants to spend. I believe as well that producers want to produce. The only thing holding them back is liquidity in the hands of spenders.
Best way out of this mess (In my opinion... if I ran the government) would be a payroll-tax holiday, on a week-by-week basis, weighted heavily towards the lower-income end, starting tomorrow, ending when the Industrial Index crossed 105. Bank-bailouts, pork-barrel spending programs (and the like) may be nice, but they won't get the job done quickly or purely. I would monitize the payments to keep the funds flowing to social security, unemployment, etc (I doubt the portrayal of the money supply as expanding). And I would begin an extensive review of the Federal-Reserve's money-supply methodologies and assumptions.

Sunday, March 1, 2009