End of the Intermediate Trend?

[amins]

Elliot Wave 3 thinks so.

Love da pullbacks!

[Grieve]

Economic data has been disappointment recently, but I still think (hope) any pullback will be shallow. The economy is improving, no doubt about, just slowly as hell. Of course now the market is worrying that the economy is improving enough that the Fed is going to start tightening things up (especially thanks to Warsh's comments)...

[Hoofhurr]

You'd really think there would be a way to mitigate the business cycle. I know some companies that are in susceptible cyclic businesses manage to do it. Why can't the economy as a whole be managed the same way?

[Dustie]

You'd really think there would be a way to mitigate the business cycle. I know some companies that are in susceptible cyclic businesses manage to do it. Why can't the economy as a whole be managed the same way?

That's basically what the fed attempts to do. The danger is in controlling it too tightly and stifling growth, innovation and hindering maximum employment.

[Hoofhurr]

That's an interesting perspective considering the last year or two. It seems the danger comes from both too tightly and too loosely to me and the fallout is the same regardless because growth, innovation, and employment seem to be in pretty bad shape currently. Would you attribute the current economy to a Fed that over-tightened things too much during the last decade? I understand your concerns but I'm confused about how you could be worried about over-tightening when it appears to me we've just been through a cycle of over-loosening and could use some tightening up. Granted we should always be worried but some correction in the conditions that led to the last 2 years should be warranted in my view. Being worried about over-tightening at this point is like worrying about the accelerator on a car going down hill with no brakes. I'm a fiscal moderate clearly and boom and bust cycles drive me crazy.

What concerns me the most is the fact that we always get burned by these cycles. We must not have the proper indices or the appropriate critical alerts when the existing indices hit certain levels. Why can't we steer the economy somewhere in the middle? Why does it always have to be at the point where we grow as much as we can get away with? To over use the car metaphor, why is it best to drive as close to the speed limit as the law will let you get away with? We know that at those speeds accidents are more likely to be fatal.

The nature of the beast is that policy always lags behind innovation and as innovation and the economy grow the policy making bodies have to grow in kind and it seems to me that this didn't happen.

I'm actually fascinated by behavioral economics and I don't think you can accurately discuss the economy without discussing human behavior at the same time. But I have to get back to work.

[Dustie]

That's an interesting perspective considering the last year or two. It seems the danger comes from both too tightly and too loosely to me and the fallout is the same regardless because growth, innovation, and employment seem to be in pretty bad shape currently. Would you attribute the current economy to a Fed that over-tightened things too much during the last decade? I understand your concerns but I'm confused about how you could be worried about over-tightening when it appears to me we've just been through a cycle of over-loosening and could use some tightening up. Granted we should always be worried but some correction in the conditions that led to the last 2 years should be warranted in my view. Being worried about over-tightening at this point is like worrying about the accelerator on a car going down hill with no brakes. I'm a fiscal moderate clearly and boom and bust cycles drive me crazy.

What concerns me the most is the fact that we always get burned by these cycles. We must not have the proper indices or the appropriate critical alerts when the existing indices hit certain levels. Why can't we steer the economy somewhere in the middle? Why does it always have to be at the point where we grow as much as we can get away with? To over use the car metaphor, why is it best to drive as close to the speed limit as the law will let you get away with? We know that at those speeds accidents are more likely to be fatal.

The nature of the beast is that policy always lags behind innovation and as innovation and the economy grow the policy making bodies have to grow in kind and it seems to me that this didn't happen.

I'm actually fascinated by behavioral economics and I don't think you can accurately discuss the economy without discussing human behavior at the same time. But I have to get back to work.

I agree there is danger in being too tight or too loose. I mentioned too tight because that the general trend in discussion recently. I agree with the Buffet types that worry about the coming inflation. Just keep things in perspective as you think about cars speeding down a hill. We just had the worst economic crisis since the Great Depression and 90% of us are still working (of people who want to work). Milk still costs the same thing it did last month. Gas prices are down. Natural gas prices are down. There's no mass starvation or homelessness (although I'm sure it's ticked up). It's really quite a good system that we and most other developed countries are using. Our homes are worth less, but for most people they can still easily afford a place to live (even if it's 1 or 2 bedrooms smaller then their last house).

As far as catching these problems before they occur, that would go against your acknowledgment that economics is also a social science. You can't adjust a knob and make consumers more willing to spend vs save. You can adjust a knob and make it easier for consumers to spend or to save, but you can't ever predict all of the unintended consequences. That's why every economic theory you'll read will start with "all else equal, such and such will lead to higher consumer saving (or whatever)"

It's kind of like saying, "Why didn't we predict the invention of the light bulb and make electricity distribution regulations and plans ahead of time. Then, we'd have a nice well thought out plan and power grid." I also like to use the example of the statue on top of the Capitol building in DC which is pointing east. The city grew and developed to the west, exactly opposite of the direction where most city planners believed new development would occur. There are some things that even the smartest among us can't predict.

[Hoofhurr]

Maybe but prediction is the name of the game. People act to innovate because they are moved to make a change and in their minds they predict a future where that change has been realized. Identifying valuable innovations and investing in them is how you make money. Identifying trends in innovation and watching them for impact is how you keep bad things from happening. The market isn't going to watch for the impact of innovation as long as the innovation is making money. It's up to the regulatory bodies to do this.

When someone creates something like a securitized debt obligation which made a lot of money very quickly, shouldn't that be something that is closely watched? It's unclear to me why it takes years of testing for a new drug to go to market but complex financial instruments get integrated as soon as someone is willing to buy into it.

[Breand]

The Fed caused this crash by being too loose, they lowered interest rates immediately after 9/11 to 1% and let the lenders go buck wild with all the easy money, which drove up home prices to unsustainable levels. Think of it this way, the lower the overnight lending rate, the more money gets put into circulation. It's what they call too many dollars chasing too few assets, and it creates bubbles. It created the tech bubble in the 90s and the housing bubble this decade.

What the Fed SHOULD have done is gotten tighter and either should have never lowered it to 1% in the first place, or at least not have kept it there anywhere near as long as they did.

The current situation is NOT a recovery. It's the Fed sticking to their typical M.O.: lowering interest rates to recover from recessions. The problem this time is it's now as low as you could possibly go so it is taking longer, there's simply nothing more the Fed can do. But it's still the same old boom and bust cycle the Fed perpetuates. By having the lending rate set to near zero, they are yet again creating too much money to chase too few assets (which is why oil has risen again) and will create yet another bubble that will burst.

It's laughable how Bernanke can say we are in a recovery. If we were truly in a recovery he still wouldnt have to keep the lending rate at near zero. Do not trust a word this man says, he is either entirely incompetent, or knows the gig is up and is just trying to make it last as long as possible.

The real solution as always is to let the market decide lending rates. If the Fed wasnt tampering with the lending rate, businesses that are overextending themselves would simply go bust, which would create an atmosphere of cautiousness so that industry wouldnt make ridiculous gambles and expect government bailouts. We wouldnt have boom/bust cycles, and if by chance there was a global crisis, the recovery would be MUCH swifter without Fed mingling.

[Hoofhurr]

Bernanke inherited a low interest rate before lowering it even more didn't he? I thought adjusting the prime rate was a tool that was invented specifically because of past depression/recessions. I think what contributed to the bubble was the ability for hedge-fund type investment firms to create value out of nothing, or value out of something that very few people really understood. If the Fed printing dollars is bad then how can it be good for these firms to create ambiguous value without having to have much by way of proven assests in the event their financial innovations were over-inflated?

The housing bubble was almost certainly paired with the interest rate but it was also paired with the fact that banks were so focused on making money that they had no internal self-regulation. As a real estate agent I dealt everyday with loan officers who were paid for the quantity of loans they made and never the quality of those loans.

It's easy to blame the fed for failing to curb these financial institutions but why is it that these banks don't self-regulate? Why is pursuing profit with reckless abandon socially acceptable? I agree that a sense of caution was completely absent in the economy for several years preceding the recession.

[Dustie]

It's unclear to me why it takes years of testing for a new drug to go to market but complex financial instruments get integrated as soon as someone is willing to buy into it.

That's what a market is. A place where people are willing to buy things for a certain price. Regulations should protect us from fraud -- I bought something labeled as a pet rock but it was actually a pet snake and it bit me. Market participants need to protect themselves from stupidity -- I bought a pet rock and now I feel stupid because one year later, no one will buy this from me.

[Hoofhurr]

It's a bit naive to think that all consumers are going to be informed consumers. If you look at things like credit card contracts, home loans, paint/toys/pet food from china, advanced financial instruments,the actual cost of health care, and subsidized food industries, you can see where even half-way smart consumers like myself might get into trouble.

Imagine a market where the consumer had to understand everything they were purchasing. Much less would be purchased and this is clearly not the case for most purchases. Advertising would take the form of a lesson plan and there would be fewer hot chicks in commercials. Most people take it on faith that reputable companies won't try to screw them and that regulatory agencies are properly motivated and funded to protect us. Unfortunately, neither of these are true and there's not much the average consumer can do about it.

As long as the gap between consumer and product continues to widen we're going to experience more of these boom/bust cycles. I think many of the larger more ingrained problems with our world stem from precisely this issue. The issue that there is this huge, tangible, intellectual, geographical, gap between the consumer and the product. Most consumers have no idea what a product or service really costs because of their obtuseness and complexity. Isn't the market failing to accurately value products if the majority of consumers don't understand the products they are buying?

I've tried to think of a way for the market to self-regulate and competition succeeds fairly well at this but companies competing in a market have already agreed to certain terms. If you're building coal-fired power plants and so is your competitor then you really don't want to call out your competitor on polluting the environment. Or more importantly, it's really hard to convey that message to your consumers in a tangible way.

I'm fairly convinced that prices for something sort of get ingrained in a person's mentality or in the social consciousness and that has much more of an impact on value than the cost of the product itself.

[Vllad]

Economic data has been disappointment recently, but I still think (hope) any pullback will be shallow. The economy is improving, no doubt about, just slowly as hell.

Are you sure it is improving?

Wouldn't the proper discription actually be that the economy isn't continuing to dive? Short term leveling off doesn't mean we are improving. That is yet to be determined.


Vllad

[Dustie]

It's a bit naive to think that all consumers are going to be informed consumers. If you look at things like credit card contracts, home loans, paint/toys/pet food from china, advanced financial instruments,the actual cost of health care, and subsidized food industries, you can see where even half-way smart consumers like myself might get into trouble.

Imagine a market where the consumer had to understand everything they were purchasing. Much less would be purchased and this is clearly not the case for most purchases. Advertising would take the form of a lesson plan and there would be fewer hot chicks in commercials. Most people take it on faith that reputable companies won't try to screw them and that regulatory agencies are properly motivated and funded to protect us. Unfortunately, neither of these are true and there's not much the average consumer can do about it.

As long as the gap between consumer and product continues to widen we're going to experience more of these boom/bust cycles.

I guess that's where I'll always disagree with most people here. I believe that, once protected from fraud (labeling a snake as a pet rock), the onus is on the consumer to be an informed consumer. Most people with credit card debt are not in that position because they didn't read the fine print. They're in that position because they knowingly spent more money then they had. The fees and increased rates certainly exacerbate an already bad situation, but they are not the root cause.

Think about it. Should I, knowing nothing about classic cars, go and spend 100K on some sports car from 1950? Of course not. I should look at consumer reports, ask a friend who is an expert -- or better yet, refrain from diving into an area where I don't have even the basic knowledge to decide if I'm getting value for my money. This is essentially what happened with these exotic financial products. People just didn't understand them. As always, back to Buffet, he turns down deals that he doesn't understand. That's why he only took a 25% hit through this crisis instead of a 99% hit like many consumers of exotic assets (i.e. that town in Iceland).

[Grieve]

Are you sure it is improving?

Wouldn't the proper discription actually be that the economy isn't continuing to dive? Short term leveling off doesn't mean we are improving. That is yet to be determined.

Signs Of An Improving Economy Multiply

Fed's Beige Book sees signs economy is improving

(etc)

Like I said, it's slow, but things are improving.

[Grieve]

I guess that's where I'll always disagree with most people here. I believe that, once protected from fraud (labeling a snake as a pet rock), the onus is on the consumer to be an informed consumer. Most people with credit card debt are not in that position because they didn't read the fine print. They're in that position because they knowingly spent more money then they had. The fees and increased rates certainly exacerbate an already bad situation, but they are not the root cause.

Think about it. Should I, knowing nothing about classic cars, go and spend 100K on some sports car from 1950? Of course not. I should look at consumer reports, ask a friend who is an expert -- or better yet, refrain from diving into an area where I don't have even the basic knowledge to decide if I'm getting value for my money. This is essentially what happened with these exotic financial products. People just didn't understand them. As always, back to Buffet, he turns down deals that he doesn't understand. That's why he only took a 25% hit through this crisis instead of a 99% hit like many consumers of exotic assets (i.e. that town in Iceland).

I would agree in a qualified way. Far too many people live beyond their means, take risky bets, or don't consider the consequences of things like job losses, falling house prices, etc. And that makes it all the more frustrating for people who are smart and cautious with their finances, when the reckless people get bailed out or helped (all the people getting mortgage and/or credit card balances written off, or interest rates lowered, etc).

However...I still put a lot of the blame on the credit card companies, mortgage companies, retailers, and so on. If you offer a drink to an alcoholic, it may be their decision to take it, but shame on you for doing so. And these companies not only offer, they cajole, beg, badger, and generally don't take no for an answer.

The same principle for fast food joints, or cigarettes. Yes, people should know better, but they don't. People are stupid and uneducated, and looking for the easy option, whether it's a Mickey-D's burger, no-payments-no-interest for a year, or a mortgage where they pay next to nothing for 3 years. Maybe the answer is better education, maybe it's more regulation, but let's face it...people aren't going to change their habits without some major catalyst.

[Vllad]

That article should read, "Signs that the economy could be improving".

We could see increases in sales from now until the end of the year and still end up with a negative GNP for the year. It really depends on how much sales increases.

Even in this article they say things like "leveling off" and "have stopped declining".


The following sentence is bull shit.

Another positive data point came from FedEx Corporation (NYSE:FDX), which raised guidance for earnings for the first fiscal quarter to 58 cents from the previous guidance range of 30-45 cents. FedEx is considered a sign of the trend in the economy due to its large volume. However, it should be noted that the increased guidance was due mostly to cost cutting and increased volume of international shipments.

While I agree that FedEx is probably the best single company to judge on how the economy is rolling however not if you go based on stock price.


Even railroad traffic is starting to decline at a slower rate, with the latest report showing that U.S. freight rail carloads declined 16.4% in August 2009, measured on a year over year basis.

Again while declining less is an improvment over declining more doesn't really mean the economy is improving.


More Bull Shit

Although the stock market liked this report, it did not like results from retailer Best Buy (NYSE:BBY), which reported a 22% drop in earnings in its fiscal second quarter. However, the second quarter is backward looking and the company raised its outlook for earnings for the year to $2.70-3. Management also provided positive commentary with Jim Muehlbauer, the CFP saying, "customer traffic patterns have started to indicate signs of stability."

This coming from the guys who needs there stock price to rise in order to keep there jobs. Nothing stock whores say can be trusted nor has any relevance.



Vllad

[Dustie]

The same principle for fast food joints, or cigarettes. Yes, people should know better, but they don't. People are stupid and uneducated, and looking for the easy option, whether it's a Mickey-D's burger, no-payments-no-interest for a year, or a mortgage where they pay next to nothing for 3 years. Maybe the answer is better education, maybe it's more regulation, but let's face it...people aren't going to change their habits without some major catalyst.

I guess we agree but it's a matter of degree. Here's what I worry about. Say the government decides that to "protect the uneducated consumer" they will stop McDonalds from making Big Macs. Yes, they will save the 100,000 morons who eats Big Macs everyday from dieing of a hard attack. But they will screw the 100,000,000 people who eat and enjoy Big Macs responsibly once a month. Ditto with 7 year ARMS. There are cases for responsible borrowers to use an ARM. But in order to protect the uneducated consumer, they're denied to everyone. As always, this results in a race to the bottom and a "least common denominator" mentality.

[Hoofhurr]

Unfortunately, we have to do something about the losers in the capitalist system because they still end up being your neighbors and voting citizens. It might suck and I might wish that everyone had the same work ethic and goals but letting them rot is not an option either because their mistakes impact every aspect of our lives. You have to be incredibly wealthy for the lower class to have no impact on your life.

Anyhow, I think selling people things that they don't understand or can't afford only benefits those that are doing the selling in the long run. When people go broke by the millions that's going to be bad for the nation as a whole and cost the responsible or less naive public sorely. The only people who make out like bandits are the ones that pushed their products and got away with it. That's really unacceptable. Saying that people should be responsible for the mistakes they make is fine until you have to bear their burden with them and is incredibly hypocritical when the wealthy people buy their way out of responsibility. So what's a solution?

Well we definitely need to work on making everyone a little smarter. Why they don't teach mortgage and finances in high school is a mystery to me. Mock home ownership should be a class. So should budget balancing. These seem like a far more applicable math subjects than algebra. Health class definitely needs to be pushed more as well when it comes to diet and exercise and the cost of neglecting either.

The other thing we need to figure out is how to make the regulatory agency positions as enticing as career choices as the business world offerings. How are you ever going to catch the best paid, smartest people making mistakes or committing fraud if you don't have their counter parts in the regulatory institutions?

We've relied on altruism for too long I think. There is no room for altruism in a capitalistic society. It's outdated and not effective as an incentive.

[Dustie]

Well, we disagree.

At least I do agree with the financial and health education bits.
Finance Classes
1. Long term thinking
2. Budgeting
3. Saving and investing
Health Classes
1. Food and Diet
2. Sleep
3. Exercise

[Hoofhurr]

Despite our disagreements, Dustie, I know that you respect my right to have a differing opinion. I feel like I learn a lot from you from our discussions which is all I'm really after. We definitely share some values as is obvious from your suggested high school curriculum. Enjoy your weekend.

[Breand]

It's easy to blame the fed for failing to curb these financial institutions but why is it that these banks don't self-regulate? Why is pursuing profit with reckless abandon socially acceptable? I agree that a sense of caution was completely absent in the economy for several years preceding the recession.

Because they know that if they may actually fail, the government will bail them out. They don't need to restrict themselves, because the government will always save them.