Economic Woes
A dear friend of mine recently wrote the following to a group of us noting factual concerns with the state of the economy. His name and others have been changed in the interest of anonymity. Thank you.
“Well, in light of the dreary economic reports we received today, the idea that the Fed is pumping more money in to the system and seems to be on track for an additional 75 basis point cut in the interest rates, and on the back end of President Bush’s top advisor saying we are headed towards “negative growth” (I’m guessing he was just hoping that most Americans wouldn’t associate negative growth with recession) I thought I would take 2 minutes to give my version of the state of the economy. It is a blizzard in Cincinnati, and I needed an outlet for my recent thoughts on the economy. To be completely honest, what I figure is that I am by far the least intelligent person on this email so I figure I would just become more enlightened with your reactions to my first grade knowledge of the economy. Okay, so if you just lay out the “facts” as they stand before us before we digest them they are as follows (I think):
· increased inflationary concerns
· “negative growth” possibly for a second quarter in a row
· a dollar that is on a seemingly endless downward spiral – to never before seen levels
· commodities including oil, gold, wheat, etc. that – due to our dollar problems – are rising to never before seen levels
· we are shedding jobs – maybe shedding isn’t the right term to use – but today’s jobs reports didn’t help
· decreasing wages for factory workers
· increasing exports (due to the dollar problems)
· the US is still operating in a trade deficit
· we can’t seem to even rely on municipal bonds to trade appropriately – and an $800m in revenue company - Ambac – (very much considered a small company) – is controlling the stock market and the fate of the world’s economy. Since when did the fact that a company of that size secured $1.5b in capital become “big news”? I understand the idea of the purpose they serve, but do they really serve as the “backbone” of our economy.
· The S&P 500 is down almost 11% in the current year
· A credit crunch that is causing financial institutions to take enormous write-downs (mainly due to Sarbanes-Oxley)
So, what does all of this mean (this is what I am relying on you for). Here is my basic understanding of what this means to us:
· Well, lets see – on the surface a weak dollar will increase our exports which will effectively increase demand for our products, causing a shift right in the demand curve. Combined with lower wages, this is a boon to manufacturing. But wait, oil and commodities are increasing at an intense rate – which would certainly offset the decrease in wages – and possibly raise input prices overall – causing a shift left in the supply curve.
o If I understand that correctly, if you factor in the shift right in the demand curve and a shift left in the supply curve – you effectively produce the same quantity at a higher price – is that right? I guess that leads to the inflation problem we are currently seeing
· Given our current inflation problems and the weakening dollar – is it the right thing to do to be lowering the interest rates and pumping money in to the system? I don’t know much, but I thought lower rates, more capital would continue to decrease the value of the dollar and push inflation even higher. Can we not just freeze the interest rates and ride this out and see where we go from here. I heard an unbelievable line today from my favorite new TV personality – Larry Kudlow – “monetary policy is like sex – the initial few moments of the act are extremely exciting, but the full effects and backlash will not be felt for another nine months”. I realize one of the points of lowering the rates is to encourage more lending, and hopefully more spending in the economy. I think also, the hope is this will trickle down to the housing sector problem – causing lower mortgage rates – however as we have seen, the mortgage rates are not falling, nor are they tied to, the fed funds rate. While they fell this week – last week they were at four month highs. Banks have reversed fields and instead of being predatory lenders they have become very picky about who they lend to and at what rates. So, I ask you, why are we continuing to lower the rates in the face of inflationary concerns and a weaker dollar. I read that the only thing keeping the dollar viable is that it is the basis for 80% of the daily transactions around the world – if it weren’t for this, we would be the peso.
· My final question/point before I end this worthless dissertation – is simply to say that I fully understand that the stagflation problems of prior decades were much different and much worse than what we are facing today. The recession was worse, inflation was much worse – it was a different time. But, each day I start to hear more and more that makes me feel like we are experiencing “minor stagflation” – I mean truthfully, we are now officially showing negative economic growth and high inflationary concerns. Is this a bigger issue than people are making it? I will end with another fantastic quote I heard, made famous by Ronald Reagen, when discussing the release of poor economic reports: “You’ve shown me the manure….now where is the horse.”
My comments follow in the attached comments to this post…
March 7th, 2008 at 2:31 pm
I am encouraged by your commentary and your recollection of facts and
relevant issues that must be addressed. I will add my
commentary once i have had the privilege of more thoroughly reviewing
your contentions and well thought out questions; I love this stuff. I
think my response and addition to the conversation at the current
time, an afternoon of a cold, dreary and rainy day in Washington, as
Congress once again puts its hand into something it has absolutely NO
business in, nor a clue of what is actually going on in many of these
cases, CEO Compensation, will be to note the overarching principle of
UNCERTAINTY.
March 7th, 2008 at 2:33 pm
On the CEO compensation note, let me just say that Congress will effectively
make some new rule or regulation that will once again confirm my
desire NOT to be CEO or CFO of a publicly-traded company. I know I am
just one of many ambitious young individuals like y’all who have
crossed that off the list of long-term goals because, for as much as I
read and study the financial markets, which is all i effing do, there
is just no upside to getting crapped on constantly as the leader of a
publicly-traded corporation. I would rather be a trader or I-banker
on the street, make a lot of money (and not by screwing the
institution paying me to gamble with other people’s money all day
long, thank you Jerome) and have all the same toys without ever
worrying whether I signed for someone elses work when there is simply
no way for me to efficiently verify the merits of the work in any
cost-conscious way. I swear this is the short email I will produce in
response to your commentary. So, in that vein, I will digress
until I am able to consider how best to respond in a concise manner to
y’all. Let’s put this out there, I think that we can all agree that
much of the “action” on and off the street in the past few weeks can
be attributed to one word….uncertainty.
This is what I will base my forthcoming conculsions on. The
uncertainty surrounding Congressional action in lieu of the subprime
fallout; uncertainty in terms of the institutions being able to
withstand margin calls left and right and no doubt the wave of work
the plaintiffs bar will be egaging in, and already is as suits against
almost every major financial institution have been initiated;
uncertainty in the Fed’s action, which will presumably be more
dramatic given the crap numbers that have recently come out
(recession); uncertainty in the markets given that what was an 80%
chance of having a Dem in the whitehouse in 2009 is now 60%, still more
than likely; the almost certainty that the taxcuts will expire as they
are set to in the new term because no matter what there will be a MORE
democratic Congress in place, and the taxes may actually increase
after the cuts expire…really smart Hil-Bama to raise taxes in a
slowed economy.
Yes, go ahead Hil-Bama, screw with the taxes and watch more corporations
and jobs go overseas, screw with NAFTA, which took 9 years to negotiate,
and you can really kiss all those OHIO manufacturing jobs goodbye,
mandate social security and screw the young people who don’t need to
pay high insurance bills right now because they are healthy, but will
if theres a mandate (that’s us), and take corporate profits, they
don’t need them, especially the pharmaceutical industry because its
actually cheap to research and develop new life saving drugs (I think
we know how much it costs these companies to get one working drug
through the FDA.)
So, in conclusion, for now, suffice it to say that the word of the day is uncertainty. Everything is being priced in for the future,
as per Larry Kudlow’s comment, 9 months out, when the election is
over, when the recession fallout is taking place and litigation
expenses are throught the roof, when the Fed figures out what the hell
they’re doing (notice the pop in the market this morning despite the
crap jobs number because the realization that the Fed will go more
than 50 points in the near term), and when Americans wake up the day
after the election in November and (most likely) say to themselves, “What just happened?”
March 7th, 2008 at 2:31 pm
I know the economy is looking bad, but I have to question some of your points.
*the dollar is in a seamingly endless downward spiral?
Well, I think we could all sit and figure out its end, it will stop around its true valuation. A drop like this is just a reset.
*commodity prices rising because of weak dollar?
If commodities are rising a weak dollar is not the main reason. Ethanol, oil costs, horrible federal agriculture policy, and increased world demand are just a few of the larger explanations.
*decreasing wages for factory workers?
While on a micro scale this might be talking point, I don’t understand its relevance in a macro evaluation. Factory wages have been over inflated for years (that is why foreign companies have become more competitive), and in an evolving economy isn’t this necessary?
*Last question: Still operating in trade deficit?
Yes. But that doesn’t add to your point. It actually points opposite of your facts regarding the weak dollar.
All of this to say, great letter. I know I question some points, but if everybody thought as much about the economy as this…….I might feel less uncertain.