RSS Feed
Twitter
Facebook
Email
HomeThe Future of America
Posted by Larry Doyle on May 29th, 2009 2:19 PM |
On this historic day in which the government of the United States of America is on the doorstep of taking a majority equity stake in General Motors, I thought it may be prudent to address manufacturing in America.
To that end, former Clinton administration Secretary of Labor Robert Reich provides highly insightful commentary at Wall Street Pit: The Future of Manufacturing, GM, and American Workers (part I).
As we wonder what the future of our automotive manufacturing industry may look like as well as manufacturing in general, I strongly recommend we take Reich’s words to heart. Let’s take a round trip as we review the dynamics of the Industrial Revolution and the road ahead:
What’s the Administration’s specific aim in bailing out GM? I’ll give you my theory later.
For now, though, some background. First and most broadly, it doesn’t make sense for America to try to maintain or enlarge manufacturing as a portion of the economy. Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad–something I don’t recommend–we’d still be losing manufacturing jobs. That’s mainly because of technology.
When we think of manufacturing jobs, we tend to imagine old-time assembly lines populated by millions of blue-collar workers who had well-paying jobs with good benefits. But that picture no longer describes most manufacturing. I recently toured a U.S. factory containing two employees and 400 computerized robots.
The two live people sat in front of computer screens and instructed the robots. In a few years this factory won’t have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots.Factory jobs are vanishing all over the world. Even China is losing them. The Chinese are doing more manufacturing than ever, but they’re also becoming far more efficient at it. They’ve shuttered most of the old state-run factories. Their new factories are chock full of automated and computerized machines. As a result, they don’t need as many manufacturing workers as before.
Economists at Alliance Capital Management took a look at employment trends in twenty large economies and found that between 1995 and 2002–before the asset bubble and subsequent bust–twenty-two million manufacturing jobs disappeared. The United States wasn’t even the biggest loser. We lost about 11% of our manufacturing jobs in that period, but the Japanese lost 16% of theirs. Even developing nations lost factory jobs: Brazil suffered a 20% decline, and China had a 15% drop.
I’m fairly certain this message is not one commonly promoted by our media. I believe we strictly hear how our manufacturing jobs are purely shipped overseas and especially to developing countries. (more…)
Sense on Cents Economic Review: Red Light, Green Light
Posted by Larry Doyle on May 28th, 2009 11:09 AM |
We had some very interesting economic reports released this morning. The data and its interpretation provide serious “grist for the mill.” On that note, let’s sharpen the stone and get to work.
1. Durable Goods: rose 1.9% versus a consensus expectation of a rise of .5%. Much of the increase was due to strong orders in the automotive and defense industries. Green light, green shoot, call it what you want. This report is much stronger than expected, so get back in there and BUY, BUY, BUY. Actually, hold on . . .
Do we expect to see growth in the automotive industry going forward? This industry is and will continue to be downsized. Do we think Barack is looking to grow our defense budget? Most assuredly not.
As much as market analysts, media mavens, and government officials are spinning this report in a very positive fashion, let’s dig deeper.
Last month’s Durable Goods Orders were revised lower from an initial reading of -.8% to -2.1%. Red light!! Additionally, given the volatile nature of orders in the transportation sector, economists look at Durable Goods excluding transportation. How did that do?
Wow!! Another green light. Durable Goods excluding transportation orders rose .8% versus an expectation of -.3%. Much stronger than expected. How about revisions to last month’s numbers? Uh-oh!! Last month this report reflected a decline of -.6% and this was revised to a -2.7%!!! Red light!!
So for those who think we’re making progress on this front, put it in the context of “take three steps back and two steps forward!!” (more…)
The Stakes Are Raised
Posted by Larry Doyle on May 28th, 2009 7:46 AM |
The move higher in rates and lower in the U.S. dollar is nothing more than the market response to Ben Bernanke, Tim Geithner, and ultimately Barack Obama for the cards that they have already shown.
Managing one’s personal business and finances is anything but a game, but the manner in which Wall Street and Washington address economic and financial issues incorporates many aspects of “game theory.” As such, we need to adapt our own thought process and financial management accordingly.
Our leaders in Washington have shown many cards, including:
1. $780 billion Stimulus
2. proposed $3.5 trillion budget
3. multiple trillions in backstops to the financial industry (Sense on Cents’ link to Subsidyscope provides a wealth of info)
4. a trillion dollar plus commitment to quantitative easing targeted over a 6 month time horizon.
Be mindful that the “Washington wizards” are at the “table” and “playing the game” with borrowed funds. Each of us is also in the “game” whether we know it or not. We, along with foreign participants, are funding the window from which the wizards have to get the cash to stay in the game. The move higher in interest rates on the long end of our yield curve is nothing more than market participants (investors) “raising” the stakes on the “wizards.” (more…)
Are We There Yet? “Aftermath of Economic Crises” Revisited
Posted by Larry Doyle on May 27th, 2009 3:25 PM |
Are we there yet? What parent does not hear those words ringing in their ears? Well, in regard to our economic trail, let’s revisit an insightful piece of economic analysis put forth by Professor Kenneth Rogoff of Harvard and Professor Carmen Reinhart of the University of Maryland.
I initially reviewed Rogoff’s and Reinhart’s treatise in my January piece, “Time, Why You Punish Me?” Let’s revisit and review if we’re there yet, and if not just how much further we may have to drive. I wrote at the time:
In the midst of ongoing reading and research, I was fortunate to come across a presentation prepared by Professor Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland, entitled “Aftermath of Economic Crises”
This work reviews a total of 18 banking crises which led to economic recessions since WW II. They put particular emphasis on 5 of these crises: Spain in 1977, Norway 1987, Finland 1991, Sweden 1991, Japan 1992. Each of the crises they studied share three characteristics:
1. Asset Market Collapse
Housing price declines averaged 35% over a 6 year timeframe. Equity price collapses averaged 55% over three and a half years.
Our housing markets are widely divergent with the major metropolitan cities within CA, AZ, NV, FL, and MI down anywhere from 25-35% over the last 12 months and down approximately 10-15% the year before that. Other markets have held up much better and are down approximately 10-15% in the last year. The national average declined 19% in the last year.
Our equity markets are currently 40% off the highs having declined slightly north of 50% at the March lows. (more…)
Full Throttle
Posted by Larry Doyle on May 27th, 2009 11:28 AM |
To say that we are in the economic fight of our lives would be a gross understatement. While we are feeding ammo into all our weaponry on the main deck, are we remiss in keeping a close eye on what is happening “in the engine room”?
Let’s go into the control room on the main deck and scope things out. On one wing, we see the plans to combat the problems in the commercial real estate market have suffered a setback. Bloomberg reconnaissance provides details: Top Rated Commercial Mortgage Debt May Face Cuts:
The highest-graded bonds backed by commercial mortgages may be cut by Standard & Poor’s, potentially rendering the securities ineligible for a $1 trillion U.S. program to jumpstart lending.
As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut.
“We believe these transactions are characterized by increasingly more aggressive underwriting than prior vintages,” S&P said. “Furthermore, recent-vintage CMBS, particularly those issued since 2006, were originated during a time of peak rents and values,” and may be more affected by falling rents.
Cutting the ratings would exclude the securities from the Federal Reserve’s program to bolster credit markets by financing the purchase of older commercial real-estate debt. To be eligible for the program, collateral can’t carry a rating below AAA from any rating firm.
This development is a MAJOR setback in our economic battle. An overhang of office space and underperforming real estate properties will be a significant drag not only on earnings for holders of the loans but also on the economies where these properties are located. (more…)
Change, Change, Change
Posted by Larry Doyle on May 26th, 2009 7:46 AM |
How are we as a nation handling the changes going on in our country?
Change is stressful, especially when the change is involuntary. The ability to adapt to change is critically important in order to minimize the stress, maximize the opportunities, and move forward in life. The ability to adapt to change and prosper from it is the premise for one of my recommended books in the Sense on Cents Reading Room, Who Moved My Cheese?: An Amazing Way to Deal with Change in Your Work and in Your Life by Spencer Johnson, M.D.
I first read this book in early 2001 prompted by the merger of Chase Manhattan and JP Morgan. Dare I say the changes ongoing in our economy and world render the merger of two large banks rather pedestrian. That said, the lessons in Johnson’s book apply to professional and personal situations. I have recommended this book often.
I was reminded of Johnson’s Who Moved My Cheese? this morning when reading an article in the Financial Times, When Austerity Does Not Come Easily:
When the global economic crisis first hit, it was natural to assume that the poorer and more recent democracies would be most vulnerable to a political backlash.
But perhaps we are looking for trouble in the wrong places. It could be that it will be the richer democracies, such as Britain and the US, that find it most difficult to adapt to the politics of austerity.
While this message is neither pleasant nor easily broached, I truly appreciate it and commend Gideon Rachman for writing about it. In regard to change, our country needs to initially understand, willingly accept, hopefully embrace, and then boldly move forward. I think we are still in the very early stages of the “initially understand” phase.
While the Obama administration has put forth large measures and grand programs under the guise of change, I view many of these measures as “more of the same.” That is, inflated government spending and bureaucracy to facilitate living beyond our means. The simple fact is, a country, corporation, municipality, or individual that perpetually lives with an excessive and growing debt burden is postponing and potentially eliminating the chance for real prosperity.
Market analysts, media mavens, and government officials regularly call for an end to our recession in 2009 and a return to “normal.” I view this time in dramatically different fashion. I believe we are experiencing not only an economic test, but also a test of national character. (more…)
Let’s Cross the Pond and Revisit The Weakest Link
Posted by Larry Doyle on May 23rd, 2009 2:27 PM |
The Washington Post is running a lead article today about the concern that the European Union in general, and the United Kingdom specifically, may derail the global recovery. Let’s cross “the pond.”
European Slump May Stall Global Rebound
Some countries, such as Ireland, are so cash-strapped that they’ve raised taxes in the middle of a deep recession, making things worse. In addition, European leaders have only recently signaled their willingness to conduct broad, systematic stress tests on their financial institutions, similar to the ones on major U.S. banks already concluded by the Treasury Department.
This is not news. Nothing of substance has dramatically changed in Western or Eastern Europe from my writing, The Weakest Link and The Weakest Link Is Weakening in late February and early March.
The media, government officials, and market pundits have been been attempting to talk the economy up more than the actual reality would dictate. The equity markets rebounded from an oversold condition in early March. For short term traders and those focused on technical analysis, I hope you caught the move. For those focused on the long term fundamentals of the economy, the risks remain very high.
While, WaPo and other media outlets may voice concerns now or report developments as new, the “strains in the European chain” remain very real. Along these lines, I had written on April 30th in my April 2009 Market Review: Brave New World:
I believe it is a question of when – not if – in terms of a major European country defaulting on its debt and requiring a rescue from the EU and/or IMF.
The Washington Post should be a little more rigorous in terms of checking their facts. They report:
While U.S. banks have already written down about half the estimated $1.1 trillion in troubled loans and toxic assets on their books, Europe’s financial institutions have thus far written down less than 25 percent of their $1.4 trillion in bad debts related to the crisis, according to a report from the International Monetary Fund.
In actuality, the IMF has forecasted that U.S. banks have upwards of $2.8 trillion in troubled loans and toxic assets and have written down approximately 40-45% of it. That’s bad reporting. At least the reporter is diligent enough to highlight that Western Europe’s major concerns relate to the financial exposure to Eastern Europe. Although, this is not new news, they report:
Many major Western European banks are also heavily invested in hard-hit Eastern Europe, where the risk of a fresh wave of corporate and consumer defaults is considerable.
With all due respect, tell us something we don’t know.
LD
In Speaking with the New York State Society of CPAs
Posted by Larry Doyle on May 19th, 2009 12:22 PM |
I spoke to the CFO’s Committee of the New York State Society of CPAs this morning. I thoroughly enjoyed the engagement with a very responsive and inquisitive audience.
My presentation was well received. I addressed a number of issues, including the current state of the economy, debt levels, banks, the Uncle Sam economy, regulation, and my outlook.
A number of individuals offered how they were not fully aware of the potential losses within the Federal Home Loan Banks along with ongoing losses at Freddie and Fannie (LD: death by a thousand cuts at all of these institutions). Another individual questioned how the Federal Reserve can continue to buy up MBS at these rate levels without assuming real long term risks in the process (LD: they can’t). Other questions addressed issues within the commercial real estate space (LD: a buyer’s market which will get cheaper) and the potential success of the TALF and PPIP (LD: moderate success at best, with some managers making huge returns on certain deals). It was an engaging dialogue and I thoroughly enjoyed it.
My greatest takeaway revolved around the disappointment within the audience on the regulatory front. A number of individuals anticipated an increase in demand for accounting services consistent with real regulatory changes. As with any industry connected to finance, accounting has lost a number of jobs. The expectation of increased opportunities given new and stronger regulations were highly anticipated. Regrettably the message from Washington as asserted by a society spokesman is that in regard to regulatory changes “the pedal is off the metal.”
Given the very nature of their job, other CFOs in the audience also voiced their disappointment with that development. One CFO went so far as to inquire where the “profiles in courage” are today in our government and regulatory bodies.
It would appear that both Wall Street and Washington seem more focused on cosmetic changes without tackling the hard issues. Our markets will ultimately price the subsequent risks accordingly.
LD
The Most Critical Economic Statistic
Posted by Larry Doyle on May 19th, 2009 6:37 AM |
Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?
Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies. Now, mind you a delinquency does not mean that the loan has defaulted and been foreclosed upon. A delinquency is merely a late payment. Typically loans are classified as 30 day, 60 day, or 90 day delinquent. There is a very high correlation between delinquent loans and those that default.
Loans become delinquent for a whole host of fairly typical reasons. That said, in this economy the nature and array of reasons are growing. As a result, the ability of lenders to forecast and manage delinquencies is increasingly more challenging. Lenders will typically increase reserves as loans become more delinquent in anticipation of a natural rate of default.
Loan delinquencies will often occur even before unemployment hits or sales falter. As individuals or companies feel increasingly squeezed, the monthly loan payment becomes more difficult to make and delinquency results. (more…)
Sense on Cents On Economy and Markets: Lets Look Back to Look Forward
Posted by Larry Doyle on May 23rd, 2009 8:50 AM |
The developments in our global economy are so large in scale that it is of paramount importance to develop a macro view. David Swensen, Yale’s head of investments and widely regarded as the top portfolio manager within college and university endowments worldwide, says as much in an interview reported by Bloomberg:
I concur. In that spirit, let’s look back at my outlook from last October so that we can more clearly look forward as we navigate the economic landscape.
Excerpts, with current commentary, from The Economy – What Lies Ahead (originally published October 14, 2008):
I still maintain this premise. The move down in the economy last Fall led to an initial move lower in rates on government bonds. Our central bank and other central banks have subsequently supported the economy via quantitative easing (central bank purchasing of government and mortgage-related assets). That said, we are now entering the stage where the global demand for credit is swamping investors’ and central banks’ ability to provide it and rates are moving higher. I believe this move to higher rates, especially in the government and mortgage sectors, will continue. Rates for municipal and corporate bonds should also be forced higher although not as much.
I continue to believe we will experience stagflation. Comments by Bill Gross of Pimco highlighting the potential likelihood of the United States losing its implied AAA credit rating adds fuel to this fire.
Individuals, corporations, and governments still need to delever (pay down debts) and will be forced to sell assets in the process. As such, while I think selected sectors of the equity market may hold up, I remain concerned about the overall market. I think the U.S. dollar and other currencies of overlevered (big fiscal deficits) nations will suffer. These developments are inflationary. To defend one’s portfolio from inflation, gaining exposure to TIPS (Treasury Inflation Protected Securities) is prudent. Mr Swensen addresses this point in the aforementioned interview.
While rates on CDs and other short term deposits have come down, I still believe it is prudent to remain defensively positioned at this juncture. As the liquidity needs increase – and they are – opportunities will develop in a wide array of markets. While it may be prudent to buy short term bonds of highly rated companies, I still think people should keep plenty of dry powder. Within equities, companies with pricing power (ability to increase prices in an inflationary environment) will outperform.
I very much believe this and maintain this viewpoint.
I also maintain this premise. I believe we will experience double digit unemployment this year given the problems in the automotive (production, parts, and dealers), and municipal sectors (forced cuts as tax revenues plummet. California is the poster child!!). Retail sales will remain low keeping domestic production and imports also depressed.
Please share your thoughts and opinions. Each and everyday is a microcosm, but we need to maintain the macro view as we navigate the economic landscape!!
LD
Tags: are rates headed higher?, Bill Gross comments on U.S. credit rating, currency values, David Swensen interview, David Swensen on economy, david Swensen on markets, David Swensen on outlook for economy, david Swenseon of Yale on investing, delevering process what does it mean?, economic outlook, financial asset deflation, hard asset inflation, hard good inflation, keeping powder dry, liquidity needs, long term interest rates, macroeconomic outlook, macroeconomic view, market outlook, outlook for interest rates, outlook for retail sales, outlook on unemployment, outook for long term interest rates, Pimco, rates are headed up, relaxation of mark to market, Sense on Cents view of economy and markets, stagflation, Swensen on credit, Swensen on global economy, Swensen on monetary policy, TIPS, Treasury inflation Protected Securities, Unemployment, unemployment outlook, what does relaxation of mark to market mean?, what happens in delevering?, where are interest rates headed, where should I invest?, where to put money?, why will unemployment increase?, Yale's Swensen on economy
Posted in Economy, General | 5 Comments »