The Economy

[MichaelB]

Quote:

Originally Posted by Bestwifeever But going straight to old people's memories of the Depression (colored by time, of course) seemed to be a little alarmist imho. The whole paper is already full of ways to beat the poor economy and how businesses are coping--I guess those weren't pulling in enough readers, that's all.

Did you see Hussman's weekly commentary today?

Hussman Funds - Weekly Market Comment: The Stock Market is Not in "Uncharted Territory" - November 17, 2008
The Stock Market is Not in "Uncharted Territory"

Quote:

One of the fallacies about the recent financial turbulence is that the markets are in “uncharted territory” and that there are no historical precedents for the volatility, panic, or economic uncertainty that we've observed. To make statements like this is to admit that one has not examined historical evidence prior to the 1990's. The fact is that we've observed similar panics throughout market history. This decline has been deeper and more rapid than most, but that is largely a reflection of the rich valuation and overbought condition that characterized the market in 2007 (see the July 16, 2007 comment – A Who's Who of Awful Times to Invest). If we seriously deem it necessary to talk about the Great Depression, fine. Even the Great Depression can be adequately used as a precedent for current conditions provided that one recognizes that the market's valuation during the Depression didn't fall to the levels we currently observe until 1931 when the rate of unemployment was already 15%. Sure, if U.S. unemployment is headed to 25%, as it did in the Great Depression, then stock prices might fall in half even from here, as they did by 1932. But this is important – even if stock prices were to fall further, it would not be because of earnings losses that would permanently impair the fundamental value of U.S. companies. Rather, if further losses emerge, it will be because of increases in risk premiums that will be associated with extremely high subsequent returns. Indeed, even though unemployment shot to 25% in 1932, the S&P 500 more than doubled in the year following the 1932 Depression low, and tripled off of that low within less than three years. ...

[shoe]

If the economy is that awful, obviously the people in NE Ohio haven't been told. DH and I went out to dinner Saturday night at a local Italian restaurant. When we arrived at 5 there were 4 other couples. By 6, there wasn't one empty table and I counted 15 people waiting for a table. The hotel where my son and son-in-law worked, closed the reservation office and both were out of a job. Both had new ones before the old ones had ended. The malls are packed, and there are lines outside the theaters. Sure food prices have risen and the retirement account is down but other than that..I haven't noticed!

[MichaelB]

Quote:

Originally Posted by Nords Hey hey hey, let's lay off the media so that they can talk the stock market down another 20-30%. I have my eye on bargain-priced shares that just keep getting better & better!

Jeez ... another 30% down and I'd take out a mortgage just to buy more stock. I'm not even sure I could wait for the whole 30%.

Michael

[Frugality_of_Apathy]

Quote:

Originally Posted by Independent Keynes explained that recessions are partially the result of self-fulfilling prophecies. If people think things are going to get worse, they stop spending and start saving, that decreases consumer demand, businesses lay off workers, etc.

Keynesian explanations always strike me professional superstition. I'm suprised anyone here supports it as the central tenant is to keep inflation relatively high so that people won't save their money. His thinking that if people were forced to spend their money then people would be forced to produce and by using the government to ply interest rates lower we would soon reach full employment.

Well Keynesian economics became the dominant theory in the mid 40's when unemployment was 1.2% in an attempt to bring that guy down to zero. Well in the nearly 70 keynes has been leading the pack we've seen booms, busts and stagflation, but we've never seen unemployment drop below 2.9% even when cooking the books saying anyone who hasn't found a job in 6 months obviously doesn't want one so they don't count as unemployed anymore.

Inflating our way out of trouble only works so long as we've got more credit to draw off of. Just like you can keep on maxing out credit cards and using them to pay off each other right up till the point that noone will give you any more credit cards.

[aenlighten]

But there is little evidence consumer sentiment affects consumer behavior. At best it seems more reactive, which is also what I would make of the media. Oil country is still doing well even with prices off. Little else is. During the last six years about 1-1.5% of gdp has been due to mortgage equity extraction that is gone, and about another 1% was the housing industry, also gone. It would be nice if there were some replacement industry, but for a considerable time the only growing industries have been those funded largely or in part by government. Industry has focused more on reducing costs than innovating and on international rather than domestic growth. Government has viewed trade imbalances as a free lunch. Finance has focused on schemes rather than strategies. These aren't easy things to fix but pretending they don't exist isn't a start.

[Rustic23]

We were in the mall in Dallas this past weekend. It was as crowded as the day after Thanksgiving. Parking lot was full. Could it be that consumer confidence is down the tubes 'for the other guy'. i.e. 'I think the economy is in the toilet, but I'm ok'

[harley]

Quote:

Originally Posted by Rustic23 Several years ago there was a TV story about 'Sharks in the Water'. The jest of the story was that sharks had been seen on the east coast. It showed a condensed two weeks of stories on the national news. Talking heads warning of 'SHARKS IN THE WATER' and going on to tell people of the threat. Only thing is that there were not more sightings than normal. Just more hype.

I've got a friend who flies one of those planes over the beach, the ones that pull the advertising banners. He said that if the tourists could see all the sharks in the water just a short ways outside the swim zone, they'd never go back in. He doesn't usually tell people, because he depends on the tourist economy. My point being, ignorance is bliss. It might be that way with the economy too. Too much attention is detrimental.

Disclaimer: Afaik, nobody has ever been attacked by a shark at the beach in Ocean City MD or it's neighbors.

[tangomonster]

Hmmmm.....I think you guys are right...that maybe too much attention is detrimental----maybe we should ignore economic news the way we would a two-year old having a tantrum in public so that he could just "get over" his tantrum and move on to more civilized behavior......

I made the mistake of going on to the Motley Fool website and found this:

The Biggest Threat to Our Economy

Basically, it said that:

What are we shifting away from? A lot of things, but one of the biggies is a fierce economic cycle that fueled the past decade. It went something like this:

• We needed ultra-low interest rates after 9/11.
• Those low rates fed insatiable demand for housing (real estate was especially attractive, because investors' fingers had just been burned by the dot-com bubble, so stocks were taboo).
• Rising home values led to a surge in consumer spending -- funded by debt, of course.
• Spending sprees led to massive trade deficits.
• Massive trade deficits led to massive capital inflows by foreign investors.
• Massive capital inflows kept interest rates low.
• Hey, hey ... low interest rates? We're back to square one!
• Repeat cycle until wealthy.

So:

Things might start to spin in reverse. Events could go something like this:

• Lower home and stock prices leads to less consumer spending.
• Less consumer spending leads to smaller trade deficits.
• Smaller trade deficits lead to less foreign capital inflows.
• Less foreign capital inflows lead to higher interest rates.
• Higher interest rates cause property and stock values to plunge.
• Plunging values leads to less consumer spending.
• Less consumer spending ... haven't we been here before?
• Repeat cycle until broke.

That's one of the biggest threats to our economy today: the possibility of being sucked into another self-reinforcing cycle like we were in the past last decade. Only this time, it'll drive us unreasonably poorer, rather than unreasonably richer.


Does anyone agree? Or is this too much doom and gloom?

[Rustic23]

Tango,
I think you have missed the point. Report current economic news, but, leave off the scare tactics that are put there just to sell their product. There is a big difference in a 5/6% unemployment rate and a 26% unemployment rate of the grate depression. There is a big difference between the current loss of stock value and the 89% loss in the great depression. While I am sure there are some, I have seen no reputable economist say we are in threat of a 'great depression'. In fact most say a 10% unemployment rate may be the top.

[clifp]

Quote:

Originally Posted by harley I've got a friend who flies one of those planes over the beach, the ones that pull the advertising banners. He said that if the tourists could see all the sharks in the water just a short ways outside the swim zone, they'd never go back in. He doesn't usually tell people, because he depends on the tourist economy. My point being, ignorance is bliss. It might be that way with the economy too. Too much attention is detrimental.

I think this is an important point. There is a fine line between not enough information and overwhelming people. My mom, 83, grew up during the depression and she was lamenting the constant stream of bad news. She remembers know the depression was a bad time, but they didn't hear about it constantly, sure there was the news on the radio, but that was interspersed with music, and serial dramas.

I suspect that 80-90% of Americans (and more importantly non-financial journalist) have only a dim understanding of basic investing concepts like the relationship between interest rates and bond prices or stock P/E ratios.
Now they are hearing about esoteric financial products like CDS, and CDO, and that there are trillions of dollars of these things out there. We need hundreds of billions of dollars if not trillions of dollars in bailout, while simultaneously watching their 401K plummet. The doom and gloomers are getting a lot of media attention, and the great depression is mentioned in every discussion of the economy.

I have a very good grasp of economic and investment concepts and I am worried, so I can only imagine how scared those people with only a vague understanding feel. The folks that I know especially the young ones who work for the government or in the military, are mostly blissful ignorant about the situation. They don't have investments and have secure jobs. People like boards members have a good sense of history and we are worried but determined. I am concerned that media is going to incite panic for the folks who are mostly but not completely ignorant.

But FDR was right the only thing we have to Fear is Fear itself.

[riskadverse]

/rant on:
I think the media is under reporting the severity of the problems with our economy, not because they want to, but rather they do not yet comprehend how bad it is going to be. I think Bush, Paulson, Bernanke, the congress, and Obama are underestimating the severity as well. I think "early retirement" along with "buy and hold" are no longer viable concepts for the average Joe. Look forward to the era of the $10 BigMac and $5 Coke.
/rant off:

[Texarkandy]

Quote:

Originally Posted by clifp ...... I suspect that 80-90% of Americans (and more importantly non-financial journalist) have only a dim understanding of basic investing concepts like .....

What 80-90% of Americans can understand quite well is the figure on the bottom line of their quarterly 401k statement - & for many people that shocker is all that's required to make them start snapping their wallets shut.

[Rustic23]

Texarkandy,
I agree with you statement, however, with consumer spending one of the major pillars of the economy, isn't it the wrong thing to do if they want to see their 401k go up?

[ziggy29]

Quote:

Originally Posted by Rustic23 Texarkandy, I agree with you statement, however, with consumer spending one of the major pillars of the economy, isn't it the wrong thing to do if they want to see their 401k go up?

Yeah, but I think the Tragedy of the Commons comes into play here. "We could recover if everyone else opens their wallets again, but I'm going to keep mine shut."

[harley]

Quote:

Originally Posted by riskadverse I think "early retirement" along with "buy and hold" are no longer viable concepts for the average Joe. Look forward to the era of the $10 BigMac and $5 Coke.

ER was never a viable concept for the "average" Joe. Buy and hold not being viable, I wonder what you've got to back that up. It was viable even during the great depression. You may have to hold a while, but unless you're forecasting the end of the American Empire, I don't see how things won't recover. If you're 25, a 10 year recovery might seem impossibly long. Personally, I hope it's more like 2 or 5. If you're 55, you've seen this before and wouldn't be saying buy and hold is dead.

[TromboneAl]

Quote:

and wonder how much worse it would have been if they had CNBC and 24-hour cable news.

The other side of the coin is that the recovery will probably be that much better when the news media hypes the fast rise of the market.

[Geoffrey]

I think we're giving the media too much credit . . . as for myself, I'm not convinced that media hype plays much of a role in whether the market goes up, down or sideways. I suspect the real movers and shakers in the market are fairly immune to media hype.

[clifp]

Quote:

Originally Posted by TromboneAl The other side of the coin is that the recovery will probably be that much better when the news media hypes the fast rise of the market.

Hmmm maybe we need to give the Fed chair the ability to toss into jail anybody who expresses irrational enthusiasm or (negativity for that matter) about the economy.

Of course that would lead to PBS/History channel news shows and super cautious politician. But I bet it would dampen the business cycles.

[DougViages]

The media will portray Pres. Obama as the savior of the country. They will report in a more upbeat way starting in 2009. That change in their approach could have a positive impact on consumers and the economy.

Just my 1.1 cents!

[Rustic23]

Geofrey
Don't confuse the Economy with the Market. I believe the media has an effect on both, but it effects the mood of the average consumer more than the educated consumer. Last stats I saw said that only 20% of the US population had college degrees and there is a good percentage of those that have no business education or market education. Members of this forum do not qualify as 'average consumer'.

Another example today on CBS morning show. A very glum forecast of what would happen if the big 3 were 'no more'. The million of ancillary jobs that would be lost right down to the doughnut shop. Truth, sure, but is anyone really talking about them going away or reorganizing? Not a mention of what would happen if they re organized a far less frightening situation.

Houston Chronicle: paraphrase 'if the auto co. don't get their loan they will be gone in three to four months'