Occupy Wall Street: Good, bad, or indifferent

A lot has been said of the Occupy Wall Street (OWS) movement, both for and against it. In case you have somehow managed to avoid hearing about it, here's Wikipedia's definition:

... is an ongoing series of demonstrations in New York City based in Zuccotti Park in the Wall Street financial district. The protests were initiated by the Canadian activist group Adbusters. They are mainly protesting social and economic inequality, corporate greed, corruption and influence over government—particularly from the financial services sector—and lobbyists. The protesters' slogan, "We are the 99%", refers to the difference in wealth in the U.S. between the wealthiest 1% and the rest of the population.

Some are praising it.

Others, like Ben Stein, not so much. In Letters to the Lazy, he wrote:

But don't just whine and beat drums about people you don't know and don't mock the best political and economic system there has ever been. Do something specific and constructive, and if you are willing to work as hard as the people on Wall Street, you might just accomplish something.

But what about the rest of you, those not in the media and not in the movement. What do you think of it? Is it helpful and productive? Does it at least stimulate conversation? Or maybe it's a pointless act in futility? Sound off below!

Posted by Matthew at 2:26 PM | Comments (10) | TrackBack
Category(s): Current Market Events, Economy
Tag(s): economy, Occupy Wall Street, OWS

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A fun day from beginning to end. It's about time.

Well, that was encouraging. The major indexes closed up about 3% yesterday, primarily on good news from Europe concerning the debt crisis there.

Now if we could string 10 more days like today together, we'd all be feeling a lot better. But every party has a pooper, that's why we read the analysts at the Economic Cycle Research Institute. According to this NY Times article:

Are we heading into another recession now? Again, the consensus says we’re not.

But at least one organization with an exceptionally good track record says another recession may already be here. That is the Economic Cycle Research Institute, a private forecasting firm based in Manhattan. It was founded by Geoffrey H. Moore, an economist who helped originate the practice of using leading indicators to predict business cycles. Mr. Moore died in 2000, but the team he trained is still at work.

Relying on a series of proprietary indexes, the institute correctly predicted the beginning and the end of the last recession. Over the last 15 years, it has gotten all of its recession calls right, while issuing no false alarms.

That’s why it’s worth paying attention to its current forecast. It’s chilling: as bad as the economy has been, it’s about to get worse.

But let's not end such a hopeful day on a negative note. You'll be happy to know that not everyone agrees with the ECRI's take. This guy, for example:

As for the economy, [last Monday] we noted that 14 of the 18 economic reports issued in the previous week came in better than expected. That trend continued last week with 11 of the 16 releases showing better than estimated results. Of particular interest were better than anticipated numbers on employment, vehicle sales, vehicle production, construction spending, and manufacturing/non-manufacturing PMIs. In fact, the composite Purchasing Managers Index is consistent with +1.8% GDP growth for 3Q11. Additionally, U.S. Machine Tool Orders have soared, same-store sales for the average casual dining chain were up 2% in September (an acceleration from August) and railcar traffic trends for the past two weeks have been quite strong (particularly intermodal).

All of this is inconsistent with an economy entering a recession. As stated, we guess people could actually talk themselves into a recession, but at the current time the metrics actually suggest the economy is marginally strengthening. To be sure, cyclical sensitive sectors, namely housing, has been so weak it is difficult to envision how much more it can contract. Household balance sheets have improved since the 2008/2009 “Financial Fiasco.” The trade deficit is likely to improve due to slower import growth and a decline in energy and commodity prices. Said price declines should also check headline inflation and lift households’ purchasing power.

Which view is correct? Don't know, because as I pointed out last week, "It's tough to make predictions, especially about the future ( Members Only)." But as all the drama unfolds, we try to give you both sides of the story.

Inflation History: The Rise and Fall of the U.S. Dollar

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Category(s): Economy
Tag(s): debt crisis, economy, predictions

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Are these unprecedented times? Not really.

While it seems like things have never been the way they are right now, this excerpt from Ron Blue's 1994 book Storm Shelter reminds us that "What has been will be again, what has been done will be done again; there is nothing new under the sun" (Ecc 1:9). Ron points out that while economic uncertainty is certain, God's principles are adequate for our protection. They've been tested through the centuries and never found wanting.

The picture is as clear in my mind as it was nearly thirteen years ago. As I pulled off the interstate en route to my office, I did not see the road markers; instead my eyes swam with the signs of the times.

The year was 1982. Interest and inflation rates had soared to all-time highs, investors faced crushing 70 percent tax brackets, and the price of gold leapfrogged daily. Taking stock of the situation, most analysts warned of a devastating financial explosion within the next few years.

As I drove to work that day, the economic consequences seemed both crippling and inevitable. I had just launched our investment and financial counseling firm. How, I wondered, were we supposed to respond to the clients who came to us for advice? Could anyone afford to purchase a home with 15 to 20 percent interest rates? Which kinds of investments and tax plans could stand up to double-digit inflation? And if the predicted monetary collapse did occur, would the resulting political turmoil uproot even the best-laid financial plans?

One of my fears as I navigated the interstate highway that day was that we faced a "worst-ever"? economic climate. Yet economic uncertainty - and its accompanying effects on our sense of security and well-being - are nothing new.

Ten years earlier, in 1972, we had been saddled with Watergate and an oil crisis that threatened to throttle the world's economy. Who can forget the lines at the gas stations or the rationing of fuel oil that winter? Then, too, I remember being hit with wage and price controls for the first time since World War II. And for the first time in my memory, the prime rate hit ten percent. Economic security seemed an elusive, if not impossible, dream.

Ten years before that, in 1962, the specter of economic and political uncertainty had hovered in every corner of the world. Our amazement at seeing a shoe-pounding Nikita Khrushchev vow to "bury"? us turned to horror as the Cuban missile crisis unfolded. At that point a nuclear holocaust seemed at least possible, if not imminent. And Vietnam lay just around the corner . . .

In 1952, in the shadow of the spread of Communism, amid the mud and blood of the Korean War, bomb shelters were among the best-selling items in the United States. In 1942, we faced Pearl Harbor and felt the full force of our entry into World War II. In 1932 we awoke to the nightmare of the Great Depression. And on and on and on. The point is that we will always face uncertainty.

Suddenly, I felt the subconscious click of the proverbial light bulb: The biblical principles of money management I had been teaching and using for years would work under any economic scenario. Armed with these concepts, I knew exactly how to help our clients weather the coming storm, no matter how hard the financial winds blew.

The predicted financial blowout never did occur. Yet as our business grew in the years that followed, we faced a thousand different financial situations that seemed specially tailored to test the worth and endurance of the money-management concepts our firm espoused. But in each and every case the biblical principles held fast, strengthening our clients' economic positions - and bringing them peace and security in the bargain.

So what does this mean? It means you should have inside-out thinking. You should avoid panic selling. You should have a long-term game plan and stick to it.

You see, it's easy to make a case that this time is different. But friends, just as you should not "grieve like the rest of men, who have no hope" (1 Thess. 4:13), neither should you be fearful like the rest of men who have no heavenly Father who has promised to "meet all your needs according to his glorious riches in Christ Jesus" (Phil. 4:19). So, keep praying, that the Father "may give you the Spirit of wisdom and revelation, so that you may know Him better" (Eph.1:17).

Inflation History: The Rise and Fall of the U.S. Dollar

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Tag(s): economy, Faith, market volatility

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Perspective: Avoid panic selling in a volatile market

[Originally posted on our Member's Blog on 08/05/2011]

How did you hold up yesterday? Yesterday was a good example of panic selling. Don Hays offered this morning that the volume of declining stocks was 82 times that of advancing stocks on the Nasdaq index yesterday. That's extreme. So if you weathered yesterday pretty well emotionally, it's a good sign.

I think the reason people are so fearful right now is because things feel so out of control. Government seems to be making lots of decisions, but few of them seem like really good ones. We keep hearing that the economy is broken (though we're a long way from bread lines and shanty towns). We've been burned by the stock market twice in the past decade and people are worried that we're out of bullets to deal with another crisis. Things just feel unstable.

Maybe you feel this way. If so, I'm not going to tell you that everything is fine and you don't need to be concerned. Nobody knows what the future holds. It is possible financial panic is around the corner. As much as we'd like to, it's almost impossible to ever completely rule that out.

But before making the leap of (negative) faith (also known as worry) to that conclusion, let's ponder a less dramatic scenario.

Since 1928, there have been 26 bull markets, including the one we're currently/recently in. As this post from seekingalpha.com stated on April 26, just a few days before the market peaked, this current/recent bull was very close to the middle of the pack in terms of both length and total gains. A little over two years and right around a 100% gain. Very normal.

All of that is fine, but if the bull market length and duration we just experienced was normal, it stands to reason that hitting a bear market after that point would also be quite normal, right?

This isn't an argument to say we have flipped over and this will develop into a bear market. I don't know if that's the case at this point or not, and neither does anyone else.

Rather, the point I'm trying to make today is that even if this is the beginning of a new bear market, it doesn't necessarily mean this bear market is going to be catastrophic or historic. It could just be a "run of the mill" bear, in the same way that the last bull was fairly "normal".

And it could be that it's happening not because the world is about to end, but because this is what the market does. It cycles between bull markets and bear markets. I hope you understand that if you're going to be an investor over the span of multiple decades, you're going to have to weather a number of bear markets. Some will be longer and deeper than others. But they're going to happen.

You know what else? They're normal. That should be some comfort. You don't need to worry about them or freak out when they finally do arrive. Sure they're unpleasant, but so is getting your teeth cleaned at the dentist. You still do it (I hope). They're basically the equivalent of investing winter, and they come around just like the seasons.

A lot of today's investors came of age during the extended bull market of 1982-1999. That bull market was by far the exception to the rule. (And in fairness, even that bull market technically had a mini-bear in there. Remember 1987? The worst single day for the stock market ever when it plunged nearly 23% in a single day. Makes yesterday look like a picnic.)

Hopefully it's some comfort to take a deep breath and recognize that a bear market every 3-4 years is about the historical average. It depends on how you slice and dice the data, but that's more or less been the average over the past century. If this is a new bear, which I'm not quite ready to concede, it will be our third in twelve years. Hmm. Dare we say, not all that abnormal? That the first two were a bit more severe than average shouldn't be a huge shock, given the massive bull market that preceded them, and the fact that the last one coincided with a banking crisis, which is unusual and not in a good way.

As you go about your weekend, try not to worry about the market. Life is more than the food we eat and the clothes we wear, and our Father knows our needs and promises to meet them. (That may sound familiar, I didn't come up with it myself.) It could be that next week will be wild and nasty. But it might not be. It could also be that this is a correction that doesn't ever develop into a bear market, in which case you'll forget about this little blip faster than you can imagine. After all, how often do you think about last summer's correction? It was worse than this year's has been so far.

As always, we encourage you to stick with your long-term investing plan. Hopefully you followed our advice and developed one long ago at a time when your emotions weren't screaming at you. Trust that version of yourself — I can almost guarantee he/she is a better information processor and decision-maker than the version that's feeling panicky today.

[For more about a membership to Sound Mind Investing, click here]

Inflation History: The Rise and Fall of the U.S. Dollar

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Tag(s): economy, market volatility

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SMI audio commentary: Face your fears

Does the market's recent weakness have you a little weak in the knees? SMI founder and publisher Austin Pryor says keeping historical trends in mind can help you face your fears.

To listen to his audio commentary, click the arrow (1:35).

Inflation History: The Rise and Fall of the U.S. Dollar

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Tag(s): audio, current market events, economy

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What's going on in the economy?

SMI's executive editor Mark Biller offered an easy-to-understand overview of current economic conditions on Friday's "Connecting Faith" program on Faith Radio (with stations in Minnesota, Iowa, Wisconsin, and the Dakotas).

Mark also talked with guest host Michelle Strombeck about how implementing wise investing boundaries can help investors gain financial stability and make steady long-term progress.

To listen, click the arrow on the audio player below.

Posted by Joseph at 3:35 PM | Comments (1) | TrackBack
Category(s): Current Market Events, Economy
Tag(s): economy, radio

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"The Path to Prosperity"

Following up on Austin Pryor's Monday post that mentioned the new budget plan put forward by Rep. Paul Ryan, chairman of the House Budget Committee, let me steer you to three resources that provide more information about the plan. Titled "The Path to Prosperity," the plan sets forth a strategy for cutting $6.2 trillion from currently projected federal spending over the next decade.

1. The full text of the plan (a 73-page PDF file) is here.
2. Chairman Ryan offered a summary of his plan in yesterday's Wall Street Journal.
3. The House Budget Committee has released a brief video that lays out the essence of "The Path to Prosperity."

Posted by Joseph at 11:10 AM | Comments (0) | TrackBack
Category(s): Economy, Inflation Watch
Tag(s): federal budget, federal debt, federal spending

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A return to the gold standard? Not likely

In this month's cover article (subscribers' link) in the SMI newsletter, I listed several of the arguments made by the gold bulls. One was the suggestion that the U.S. might some day return to a gold standard. It's assumed to be the only way guaranteed to rein in out-of-control federal spending and defeat inflation once and for all.

I indicated that of all the bullish arguments, this seemed the weakest. It relied on the Congress and president to conspire to limit their own spending ambitions. This seems to me an obvious non-starter.

Here's the relevant excerpt:

In recent decades, rare has been the monetary heavyweight who would openly suggest a return to a form of gold standard. Following the various financial and currency crises of the past three years, that's no longer the case. Last year, the president of the World Bank called for a return to a fixed rate exchange system (the former one broke down in 1971), adding, "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."...

Gold bugs have seized on the possibility of a new gold standard and made the calculations to determine what gold's price would need to be in order for the dollar to once again be backed by gold. One approach to doing this is to compare the amount of dollars in the Fed's monetary base ($1,700 billion) with the amount of gold the U.S. currently owns (263 million ounces). The answer pegs the required price of gold at about $6,400 ounce, 350% above current levels.

The problem with this particular bullish argument is that a gold standard restricts a government's freedom to print money to pay for every whim. A return to one, even in partial form, seems only remotely plausible, if not unthinkable.

Here's a similar skeptical response, except in this writer's view the "blame" for the unlikelihood of a successful return to a form of gold standard lies not with the political class but the American people:

The voting booth would quickly crush any attempt to bring back what the masses do not understand, and the American people have little understanding of what money is.

In addition, and despite another old proverb that tells us "we have gold, because we cannot trust governments," your average American, especially her elite, harbors an extreme trust of government. It can solve all problems in their view, it can even tame "climate change" if only given a chance, and something as fundamental as the provision of money cannot, and should not, be left to anything as independent of political manipulation like adhering to a gold standard requires. Democratic America is simply not prepared for a gold standard...

We'll soon be testing Americans' appetite for spending discipline as Rep. Paul Ryan introduces his plan for avoiding the debt crisis that everyone knows is coming unless we dramatically change our present course. Everyone wants a solution. Few are willing to sacrifice.

Posted by Austin at 4:06 PM | Comments (0) | TrackBack
Category(s): Current Market Events, Economy, Inflation Watch
Tag(s): gold, gold standard

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Reviewing the financials of USA Inc.

Kleiner Perkins Caufield & Byers (KPCB), one of the world's largest venture capital firms, has issued a sobering report on the financial challenges now facing a well-known entity that has been around for a more than 200 years. That entity is the United States government.

KPCB researcher and strategist Mary Meeker has put together an "income statement and balance sheet" for Uncle Sam, and it's not a pretty picture. Her report includes a two-page foreword (by George P. Shultz, Paul Volcker, Michael Bloomberg, Richard Ravitch and John Doerr), a 12-page text summary and 460 PowerPoint slides.

Here is one of those slides, followed by part of the text summary:

Imagine for a moment that the United States government is a public corporation. Imagine that its management structure, fiscal performance, and budget are all up for review. Now imagine that you're a shareholder in USA Inc. How do you feel about your investment?....

If we were long-term investors, how would we evaluate the federal government's business model, strategic plans, and operating efficiency? How would we react to its earnings reports?.... [F]ew of us take the time to dig into the numbers of the entity that, on average, collects 13% of our annual gross income (not counting another 15-30% for payroll and various state and local taxes)....

By the standards of any public corporation, USA Inc.'s financials are discouraging. True, USA Inc. has many fundamental strengths.... But cash flow is deep in the red (by almost $1.3 trillion last year, or -$11,000 per household), and USA Inc.'s net worth is negative and deteriorating....

Since the Great Depression, USA Inc. has steadily added "business lines" and, with the best of intentions, created various entitlement programs.... Apart from Social Security and unemployment insurance, however, funding for these programs has been woefully inadequate — and [is] getting worse.

Entitlement expenses amount to $16,000 per household per year, and entitlement spending far outstrips funding, by more than $1 trillion (or $9,000 per household) in 2010....

Regardless of the emotional debate about entitlements, fiscal reality can't be ignored — if these programs aren't reformed, one way or another, USA Inc.'s balance sheet will go from bad to worse.

None of the information in the report is truly new. Larry Burkett, who was honored posthumously last week at the annual National Religious Broadcasters convention, was writing about these same issues nearly 20 years ago. But the KPCB report offers a clear and sobering reminder that time is running out.

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Category(s): Economy, Inflation Watch
Tag(s): federal budget, federal debt, federal spending

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Running the government on 8%

Following up on Joseph's post from yesterday, this CNNMoney.com graphic is telling:

From the article:

Today, the United States spends roughly 76 cents of every federal tax dollar on just four things: Medicare, Medicaid, Social Security and interest on the $14 trillion debt. That leaves 24 cents of revenue to pay for everything else the federal government does. ...

Barring serious efforts to curb the growth in the country's debt, by 2020 Washington could be spending 92 cents of every tax dollar on Medicare, Medicaid, Social Security and interest alone. That would leave just 8 cents to pay for everything else.

It's easy to gripe about government spending and to rail against it generally. It's very hard to figure out how specifically to reduce Medicare, Medicaid, and Social Security. And yet these are the three areas within our direct control that are going to soak up most of the dollars (interest really isn't within our direct control anymore — that money is spent and interest rates will be dictated by the markets).

Any spending cuts are welcome at this point. But we have to realize — and soon — that spending cut proposals that don't reach to these three specific programs simply aren't going to be enough.

May God give us wisdom and the strength to make the hard decisions that lay ahead.

Posted by Mark at 10:15 AM | Comments (0) | TrackBack
Category(s): Economy, Inflation Watch
Tag(s): federal budget, federal spending

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Report: 2011 deficit to hit all-time high — national debt will go to 69% of GDP

Once a year, the Congressional Budget Office releases a report that looks ahead at the federal budget situation over the decade ahead. The latest Budget and Economic Outlook (PDF—190 pages) came out last week, and (not surprisingly) the news isn't exactly encouraging.

Excerpts:

The United States faces a daunting fiscal outlook, both for the next few years and for the long term. The Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion for fiscal year 2011, about $200 billion more than the deficit recorded in 2010....

The accumulating deficits [over the next several years] will significantly boost federal debt held by the public. Over the course of fiscal year 2010, debt held by the public jumped from $7.5 trillion to $9.0 trillion. By the end of 2011, CBO projects, that figure will be $10.4 trillion and, at 69 percent of GDP, the highest level since 1950.

[D]ebt held by the public is projected to continue its upward climb, reaching $18.3 trillion...by the end of 2021. With such a large increase, along with an anticipated rise in interest rates as the economic recovery strengthens, interest payments on the debt are expected to skyrocket. CBO projects that the government's yearly net interest spending will more than triple between 2011 and 2021 (from $225 billion to $792 billion).

Interestingly, the report notes, if it weren't for those skyrocketing interest payments, yearly deficits would shrink significantly over the next several years, with outlays eventually almost matching revenues by 2017. But, of course, interest must be counted.

And there's more:

Beyond the 10-year projection period, further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending as a percentage of GDP well above that in recent decades.

In particular, spending on the government's major mandatory health care programs — Medicare, Medicaid, CHIP, and health insurance subsidies to be provided through the new insurance exchanges — along with Social Security will increase from roughly 10 percent of GDP in 2011 to about 16 percent over the next 25 years. If revenues stay close to their average share of GDP for the past 40 years, that rise in spending will lead to rapidly growing budget deficits and surging federal debt....

[A] growing federal debt...would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. It is possible that interest rates would rise gradually as investors' confidence faltered, giving legislators warning of the worsening situation and sufficient time to make policy choices that could avert a crisis. Indeed, because interest rates on Treasury securities are unusually low today, such a crisis does not appear imminent in the United States.

But as other countries' experiences show, investors can lose confidence abruptly and interest rates on government debt can rise sharply and unexpectedly....

[T]here is no way to predict with any confidence whether and when such a crisis might occur and no identifiable tipping point of debt relative to GDP. However, the risk of a crisis probably will increase when investors' growing confidence in the global recovery and the stability of the financial system increases their desire to hold private securities and foreign debt rather than Treasury securities.

A report such as this is, by nature, speculative. Accurate 10-year forecasting is impossible. That said, the overall budgetary trend is indisputably unsound — and the results could be dire.

Let us hope Washington heeds the warning.

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Category(s): Economy, Inflation Watch
Tag(s): federal spending, national debt

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Well-reasoned forecasts

We normally don't spend much (if any) time discussing various forecasts for the new year. That's because we think very little of most attempts at forecasting — it mostly amounts to guessing, and that we can do without.

That said, I do still read some forecasts every year. I do this not because I'm particularly interested in what the authors predict will happen, but rather I'm interested in the reasons why various predictions are made.

In other words, I have very little confidence in the predictions people make, but I do think there are occasionally pearls hidden within the reasoning used to arrive at those predictions.

As an example of the forecast type I find helpful, I pass along this 2011 analysis by Edward Harrison (hat tip to The Big Picture blog). You won't find predictions regarding where the stock market will go this year and such in it, but then I've just told you those are the least useful parts anyway.

Rather, he explains why he is cautiously optimistic for 2011. He starts with a current review of the economy, explaining why double-dip recessions are the exception rather than the rule, and that in light of the positive economic trajectory, there is every reason to believe the recent technical recovery will blossom into a full-blown cyclical recovery. However, he also lists and explains five specific risks that threaten to derail the recovery.

Finally, I thought his comment that debt is a mechanism that pulls demand forward is both solid and thought-provoking. Done on a grand scale, as has occurred over the past 25 years, it's not surprising that demand would be soft for some time to come, as we've borrowed for a long time from future consumption.

It's a good read if you have the time, not just for the thoughts themselves, but as an illustration of the type of forecast that can actually help you sift through ideas, as opposed to the much more common "guessing" type that serves mainly the forecaster — that is, if should he or she be so fortunate as to have some guesses actually come true!

Posted by Mark at 9:35 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): forecasts

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And the forecast is for...

Here in Georgia where I live, we got six inches of snow yesterday morning. Very unusual for this part of the country. But the weather forecasters were dead-on in their predictions, so we were prepared and are now cozy here with plenty of provisions and, if need be, a back-up source of heat.

The folks who forecast weather for a living are usually pretty accurate (probably because they're dealing with events only a few hours or days away). Regrettably, the same can't be said for those who forecast the economy and the stock market, as the Wall Street Journal's Jason Zweig points out.

Every January, hordes of highly paid experts attempt to predict what the economy and the markets will do in the coming year. Later in the year, nearly all of the forecasts turn out to be wrong....

Why do people with years of experience, massive expertise and mountains of data at their disposal so often get the future wrong?

First and foremost, the future is the realm of surprises; no one, no matter how expert, can reliably foresee what will happen and how people will react to it. As the economist Friedrich von Hayek said in his lecture "The Pretence of Knowledge" when he won the 1974 Nobel prize in economics, "in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process…will hardly ever be fully known or measurable."

Forecasts also go wrong because they tend to be either too tame or too extreme. For a forecaster, there is little point in differing slightly from the consensus prediction. No one gets fired for being in the middle of the pack, nor do forecasters get much credit for being a little bit less wrong than their peers. If a forecaster is going to deviate from the average, he might as well go all the way.

Therefore, while most pundits tend to cluster around a safe consensus, a few stake out the risky but potentially lucrative ground of extremely bullish or bearish predictions. If they turn out to be right, their accuracy will seem miraculous and they will be famous; if they turn out to be wrong, most people will forget.

Jason Zweig offers a few ideas for getting some practical use out of usually errant forecasts, such as averaging various forecasts ("errors will frequently offset one another," he says). But in the end, despite all the complex formulas and computer modeling forecasters use, financial forecasting comes to down to trying to predict the unpredictable.

Zweig's ends his piece by quoting G.K. Chesterton:

"The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite.… It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait."

Because no one can know the future, we always urge you to keep your stock portfolio well-diversified and your bond portfolio (if any) as insulated as possible.

After all, no one knows what kind of inexactitude and wildness may lie just around bend.

Yesterday on The Meeting House from Alabama's Faith Radio, I talked with host Bob Crittenden about the difficulty (if not impossibility) of making consistently accurate market predictions. You can listen to a portion of that interview below (14 min.).

Posted by Joseph at 11:55 AM | Comments (0) | TrackBack
Category(s): Current Market Events, Economy
Tag(s): diversification, forecasts

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Why isn't the Fed more worried about inflation?

I thought some readers might find it helpful to understand why the Fed doesn't appear to be as concerned as many commentators about the risk of future inflation.

Note that I'm not writing this explanation because I necessarily think the Fed is right and its critics are wrong. This is simply to help you understand both sides of the argument a little better.

With the disclaimer that I'm not an economist (nor do I play one on TV), here's a quick, general explanation of why the Fed is doing what it's doing.

The Quantity Theory of Money helps visualize this. Simply put, this theory says:

M * V = P * Q

M = Money in circulation
V = Velocity of money (how fast is the money being turned over, how much lending is going on)
P = Price level
Q = Growth of the economy

What critics have focused on (really for the past two years) is how the Fed has dramatically boosted M (the money supply). The fear is that all this extra money eventually drives up P (prices). In other words, that eventually the extra money translates into significant inflation.

What this ignores is the fact that at the same time M has gone way up, V has gone way down. This is why everyone has been clamoring for the banks to lend more (while also clamoring that they should tighten their lending standards and hold more reserves — never mind that doing all three of these things simultaneously is impossible).

As Paddy Hirsch notes in the video in the post below, people aren't borrowing or spending, banks aren't lending, taking the velocity of money way down. The money supply was dramatically increased in response to this, with the goal of offsetting that sharp decline. This is why we haven't seen the big spike in inflation that many have feared despite the fearsome charts everyone has seen showing the increase in the monetary base.

Without that spike in money supply, what does our formula say would happen? If M stays the same but V drops sharply, the formula says that (P)rices and or (Q) Growth are also going to drop sharply. Neither of those are good outcomes, so it's pretty easy to understand the Fed's response.

Back to the formula. MV=PQ. If (V)elocity is low, (P)rices are stable, and you want to boost Q (growth of the economy), how do you do it? By increasing M, the monetary base. Which is what the Fed is trying to do with its QE2 policy.

The danger, of course, is that as growth starts to increase, the velocity of money will also increase (more buying, borrowing and lending). If that happens while the money supply is still high, that's when P would be expected to climb higher and we'd have inflation.

The good news is the Fed has various ways (so they tell us) to reduce the money supply before that point. The bad news is it's difficult to know exactly when to do so and by how much.

Is there room to question Bernanke and what the Fed is doing? Sure — I have plenty of questions myself. Is Bernanke crazy and recklessly driving us off the edge of a cliff, as some observers seem to think? That's probably a tougher case to make than the critics suggest.

Posted by Mark at 9:51 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): Federal Reserve

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Fed policy in layman's terms

Paddy Hirsch, senior editor for the daily radio program Marketplace, does a great job of taking complex ideas and making them understandable.

In the video below he discusses what the Fed is trying to accomplish through its policy of "quantitative easing" (i.e., putting more money into circulation by buying Treasury notes).

Hirsch was raised in Ireland and attended the University of Warwick in the UK. After serving as an intelligence officer in Royal Marines, he went into journalism and developed a knack for creating simple explanations of complex topics.

For more on this topic, see the post from our own Mark Biller above.

Posted by Joseph at 9:50 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): Federal Reserve

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Gridlock ahead? And what about the Fed?

SMI's assistant editor Joseph Slife was a repeat guest yesterday on The Meeting House, produced by Alabama's Faith Radio.

Interviewed by host Bob Crittenden, Joseph offered analysis of financial matters facing the lame-duck Congress and discussed what may be ahead for the new Congress in 2011.

In a second segment, he talked about the Fed's attempt to create inflationary pressure by pumping $600 billion into the economy.

To listen, use the audio players below — or right click/save as to download mp3 files of segment one and segment two.

Posted by Matthew at 12:20 PM | Comments (0) | TrackBack
Category(s): Economy, Taxes
Tag(s): economy, Radio, tax cuts

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Links round-up

Rather than writing a post today on a single topic, I want to alert you to several interesting items from recent days.

First, at the Wall Street Journal, Brett Arends observes that many dividend-paying stocks look considerably better than bonds being issued by the same companies, yet the public keeps piling into bonds.

Arends also has a somewhat scary analysis of the "Retirement Disaster Ahead." Bottom line: many people are still counting on unrealistic future investment return numbers. As a result, they aren't saving nearly enough for the type of retirement they expect.

A recent auction of TIPS (Treasury inflation-protected securities) sold notes with a negative yield (-0.55%)! Seems strange, but Mark Hulbert explains why that makes sense, given that these TIPS can be thought of as an insurance policy protecting you against the risks of both severe deflation and hyperinflation.

On that same topic, Eric Jacobson of Morningstar adds some good context to this TIPS news, explaining that if annualized inflation over the next five years is higher than 1.52%, the buyers of these negative-yielding bonds will wind up winners.

While the big twin news events of last week were Election 2010 and the Fed's QE 2 announcement, there was also a surprisingly good (or at least, less bad) jobs report. As the Vanguard video below makes clear (an interview with Vanguard's chief economist Joe Davis), there is a reasonable "case for cautious optimism" on the economy at this point.

Finally, new rules about reporting the cost basis of investments are going to start kicking in for brokerages next year. This will mean brokerage customers have some decisions to make soon. So be watching your mail for information from your broker. This information could have important implications, particularly if you have money in a taxable investment account.

Posted by Mark at 9:10 AM | Comments (0) | TrackBack
Category(s): Current Market Events, Economy, Taxes

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'Unusual uncertainty'? Par for the course

Federal Reserve chief Ben Bernanke rattled markets and raised eyebrows yesterday when he told the Senate Finance Committee the outlook for the economy is "unusually uncertain."

Of course, economic uncertainty is nothing new — and therefore not all that unusual. But present-day uncertainty tends to be very sharp in our minds while previous times of uncertainty have faded in our memories.

Last week, I spoke with radio host Bob Crittenden about the certainty of uncertainty on "The Meeting House," a program airing on Alabama's Faith Radio.

You can hear that segment below (14 min.) — or download an mp3 (Windows users: right click, then "save link as").

Posted by Joseph at 9:50 AM | Comments (0) | TrackBack
Category(s): Current Market Events, Economy
Tag(s): economy, radio

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British budget battle

The new coalition government in the U.K. is doing something remarkable: cutting spending. As you might imagine, this is not going over well among those who are recipients of government money (including the one-in-five British workers employed by government).

The ax-and-tax budget plan also increases the value-added tax and raises the tax rate on capital gains. That's making for even more unhappy Brits.

Below is a tongue-in-cheek "mash up" of last week's House of Commons speech by George Osborne, Chancellor of the Exchequer (the British Cabinet minister responsible for economic and financial matters). A few days before the speech, Osborne said that unless Britain takes strong steps to reduce its $1.4 trillion national debt, it will be "on the road to ruin" like Greece.

Warning: prepare to hear plenty of screaming.

Posted by Joseph at 2:05 PM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): government spending

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What $13 trillion could buy

In case you missed the news, the U.S. federal debt crossed the $13-trillion mark last week.

Because the human mind has trouble comprehending a number that large, the folks at SmartMoney ran a few calculations and have put $13 trillion into terms easier to understand:

• With $13 trillion, Americans could buy nine 32-gigabyte iPhones (the 3GS model) for every human being on the planet;
• For $13 trillion, 68 million students could be sent to Yale University (four years of room and board at $190,000);
• $13 trillion could buy every person in the U.S. one item off of McDonald's dollar menu every day for the next 115 years;
• $13 trillion could buy round-the-clock on-call medical care for the entire population of the U.S. — for 30 years;
• For $13 trillion, everyone in the U.S. could spend the next 60 years hanging out everyday at Disneyland (based on the cost of Disney Premiere Passport ticket).

Of course, for $13 trillion we could also pay off the national debt. If we paid down $1 million per day (assuming interest was not accruing), we could have the debt completely wiped out in just 36,000 years!

In its just-released "Annual Report on the Public Debt" (PDF), the Treasury Department estimates the debt will grow to $19.6 trillion by 2015. If you're not among the faint of heart, check out the U.S. debt clock here.

Update: Want to help reduce the debt? Check out this official U.S. government page.

Posted by Joseph at 9:45 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): national debt

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Sometimes you just gotta laugh

I'm not sure why God gave human beings a sense of humor, but having one sure does help.

In doing research on European debt problems — serious problems to be sure — I stumbled across this video clip (transcript here) from Clarke and Dawe, a popular comedy team in Australia:

John Clarke and Bryan Dawe offer up satire segments regularly on the Australian Broadcasting Corporation's news program, The 7:30 Report.

Thanks, guys. I feel better — uh, sort of.

Posted by Joseph at 9:50 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): financial humor

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Steady investing in an unstable economy

In the midst of high unemployment and growing concern about federal spending, the stock market (despite yesterday's sharp loss) has been moving along very nicely, thank you.

Why? SMI's executive editor Mark Biller (right) discusses that question — and explains why it's so important to have a long-term investing plan — on today's MoneyLife radio program. Mark talks with host Chuck Bentley of Crown Financial Ministries.

Click the arrow below to listen (20 min.) — or use this link to download an mp3 (right click/save as).

Posted by Joseph at 11:35 AM | Comments (0) | TrackBack
Category(s): Economy, Investing Principles
Tag(s): Crown Financial Ministries, investing principles, radio

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Revisiting "The Coming Economic Earthquake"

Echoing concerns raised by Larry Burkett in his 1994 book, The Coming Economic Earthquake, SMI Assistant Editor Joseph Slife recently wrote a "déjà vu all over again" post about runaway government spending and debt. (Back in the day, Joseph did some of the research for the Earthquake book and produced a radio special based on it.)

To listen to a conversation with Joseph about these issues — from last Monday's Faith Meeting House program on Alabama's Faith Radio — click the arrow on the audio player below, or use this link to download an mp3 file (17 minutes—right click/save as).

In the interview, host Bob Crittenden mentions the radio special based on the Earthquake book. Use the audio player below to hear an excerpt from that 1994 program (13 minutes).

Posted by Matthew at 8:55 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): radio

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60 Minutes: Inside the collapse

One writer that Austin and I really enjoy is Michael Lewis. Some know him as the author of the book, The Blindside (the film adaptation of which recently earned Sandra Bullock an Oscar), but he's written a bunch of other excellent books over the years, many dealing with financial topics.

My first exposure to Lewis came way back in college when one of my finance professors gave me a copy of Liar's Poker to read, a book which went a long way toward convincing me I didn't want to become a stock broker.

Several months ago, I learned that Lewis was writing a book investigating the causes of the recent financial collapse, and I immediately put it on our book order list to get as soon as it was released. Last Sunday night, I happened to catch the beginning of 60 Minutes (as the NCAA tournament selection show was ending) and was pleased to see that the opening two segments were interviews with Lewis profiling his new book.

I found them to be very interesting. Lewis has a great way of distilling what is going on and making it understandable, while also weaving in interesting stories that make it all much more pleasant than financial content often is.

If you're interested and have a few minutes, the videos are below — they run roughly 16 and 8 minutes, respectively. Or you can read this transcript instead.

Posted by Mark at 1:05 PM | Comments (0) | TrackBack
Category(s): Economy

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The pain of math

From this morning's news:

The Obama administration has been eager to counter the argument that the stimulus has been ineffective amid a Washington debate over whether a second stimulus might be in order.

Administration officials said they looked at $150 billion of the stimulus spending and determined it had created or saved about 650,000 jobs through September 30.

This is pretty simple to break down:

$150,000,000,000 in stimulus / 650,000 jobs = $230,769 per job.

The average American, age 25-64, makes roughly $32,000 per year (per this wikipedia chart).

So, we spent an average of $230,769 to create jobs that typically pay $32,000. That's enough money to pay their salary for 7 years.

The only thing more shocking than the amount spent per job created is that the Administration apparently thinks this is an effective counter-point to the idea that the stimulus has been ineffective.

Do they think nobody can do math anymore? Or do they really think $230,769 per job is a good deal?

Posted by Mark at 12:20 PM | Comments (0) | TrackBack
Category(s): Economy

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Gov't up 40% on Citi share conversion

Here's a random bit of good news from the Wall Street Journal.

Citigroup Shares: Treasury is up Almost $10 Billion Since Conversion:

UBS analysts figure that Geithner & Co. are currently in the money to the tune of some $10 billion, since they converted $25 billion dollars in preferred shares — out of a $52 billion preferred stake — at a price of $3.25. "Each penny increase in the stock price produces a $76 [million] unrealized gain," wrote UBS' Glenn Schorr in a note out early Friday. Citi shares are currently trading around $4.70, since the end of July they’re up roughly 48%. ...

Oh, and besides the cool $10 billion Treasury stands to net, Schorr points out that the government still has some has $27 billion in preferred shares that Citi needs to repay at some point, which could represent another $2 billion or so in annual return.

You may recall that back in July we noted the government had done quite well when Goldman Sachs repaid its TARP money also, so at least in some cases the taxpayers are earning some solid returns on these bailout/loans.

Posted by Mark at 3:24 PM | Comments (0) | TrackBack
Category(s): Economy

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Bernanke - Take II

Earlier this week, President Obama made it official and reappointed Ben Bernanke for a second term as Federal Reserve Chairman. This wasn't a big surprise and was viewed by many as the safe choice. It would have been tough to switch to a new leader while we're still very much in the midst of volatile economic times.

That's not to say, however, that everyone loves the decision. Bernanke is getting mostly positive reviews from economists for his performance during the financial crisis. But he's also drawing his fair share of criticism. Here's a sampling.

Robert Samuelson thinks that while Bernanke made some significant mistakes, he got it mostly right:

Here is where Bernanke distinguished himself. A student of the Great Depression, and especially of the disastrous effects of bank failures, he went well beyond the standard response of lowering interest rates (the overnight Fed funds rate dropped effectively to zero by December). The Fed created a dizzying array of "liquidity facilities" that substituted more than $1 trillion of Fed credit for retreating private credit. The Fed supported markets for mortgages, money market funds, commercial paper, auto loans and student loans. The strategy was, as [In Fed We Trust author David] Wessel says, to do "whatever it takes" to avoid a complete loss of credit and confidence — a loss causing continuous drops in spending and asset prices (for stocks, bonds, homes) and culminating in depression.

Although there were other actors, the Fed's interventions were decisive in halting the panic. It is an open question whether any other Fed chairman — someone without Bernanke's detailed knowledge of the Depression — would have been so bold in supporting credit markets. Moreover, Bernanke's approach inspired similar moves abroad. After the 1997-98 Asian financial crisis, Time magazine ran a cover story called "The Committee to Save the World" featuring Summers, then-Fed Chairman Alan Greenspan and then-Treasury Secretary Robert Rubin. An updated version might have Bernanke on the cover under the headline: "The Man Who Saved the World."

The Wall Street Journal isn't quite as generous. In their estimation, Bernanke deserves credit for what was done after the crisis blew up. But he also deserves criticism for being largely responsible for creating the problem in the first place:

This commodity spike weakened the economy further in 2008 and contributed to the failures that struck after Labor Day. As economists Anna Schwartz and John Taylor have noted, Mr. Bernanke misdiagnosed as a liquidity crisis what was principally a bank solvency problem. This is one reason his easing did little to stem the panic throughout 2007 and 2008. A steadier monetary hand might well have avoided the autumn panic. But the Bernanke Fed was taken as much by surprise as Lehman Brothers.

All of this history is relevant because the Fed is now back where it was in 2003, albeit with a weaker recovery and more political complications. The test of Mr. Bernanke's second four years will be whether he has the wisdom and political courage to roll back his epic monetary easing before it creates the next set of problems or a new inflation. Everyone loves a central banker when he's flooding the economy with money, at least while the mania lasts. But Mr. Bernanke will sooner or later have to say no to the political class. This is something he has never done, and already there are signs in China and the edges of the dollar bloc of new asset bubbles.

But those criticisms pale when compared to the harsh words John Hussman has for Bernanke in his latest commentary:

Ben Bernanke (like Tim Geithner and his predecessor Hank Paulson), shows no hesitation in diverting the real resources of the American public to defend and compensate the bondholders of mismanaged financial companies who made reckless loans and who should have (and equally important, could have) been expected to write down principal or swap debt for equity as an alternative to receivership. This is not decisiveness. It is timidity and poor stewardship. Worse, the underlying problems are not healed — only band-aided temporarily by a flood of public money.

Unfortunately, the resources used in the recent bailout were not just free money tossed out of a helicopter. Only a partial-equilibrium economist thinks that way. No, this was an allocation of trillions of dollars of real resources that could be spent improving access of poor families to health care, finding cures for life-changing diseases, providing better education, and reversing the crowding-out of productive private investment. A public servant willing to act this carelessly with the resources entrusted to him, and so strongly in defense of fellow bankers, frankly does not deserve the job. Most likely, we will face the same credit issues a few quarters from now, given that the lull in the adjustable-rate reset schedule is near its end. We continue to expect a fresh acceleration of credit losses as we enter 2010. It would be best if we faced these challenges with more thoughtful leadership.

It's good to realize that judging the performance of Fed Chairmen is difficult to do accurately in the moment. Volcker was hated when he was breaking the back of inflation in the early 80s, as it involved brutally painful interest rate hikes. But today he is widely lauded as one of the best Fed chiefs we've ever had. On the opposite end of the spectrum, Greenspan was widely hailed as "The Maestro" — a supposed genius who left the job with great popularity. Yet just a few short years later, many hold him responsible as one of the prime culprits of the financial crisis.

Time will tell how Bernanke is remembered. How he deals in his second term with the inflation threat created during his first term will likely go a long way toward writing the rest of the story.

Posted by Mark at 4:06 PM | Comments (0) | TrackBack
Category(s): Economy, Inflation Watch

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Could your house soon be "underwater"?

"How high's the water, mama?" Johnny Cash sang in "Five Feet High and Rising."

A report from real-estate tracking firm, Zillow.com offers an answer: it's getting higher. Zillow's second-quarter numbers, reported by Bloomberg, show that almost one-fourth of U.S. mortgage holders were "underwater" — i.e., the balance on their mortgage exceeded the value of the house.

Just last week, a study from Deutsche Bank projected that close to half of the nation's 52 million mortgage borrowers could be "underwater" by early 2011. (That conclusion is disputed here.)

Could the rising water put you under? That largely depends on how large a down payment you made, what kind of loan you chose, and how long you've been in your house.

But even if you were wise in all those things, you still might get hit because of what SmartMoney.com calls "the broad and persistent decline in home values."

SmartMoney offers "four warning signs" that the water around you might be rising:

Foreclosures in your neighborhood.... As homes go into foreclosure, they create a domino effect, lowering home values throughout a neighborhood in a cascade beyond homeowners' control.

Homes lingering on the market.... Compare the time it took for homes to sell in your neighborhood three years ago vs. today; if it's taking weeks or months longer to sell, the prices homes can fetch are dropping, [says Mark Zandi, chief economist at Moody's Economy.com].

Increasing unemployment. In most cases, the cities where homes have lost the most value during the past year also possess the highest unemployment rates.

Homes in disrepair. Dented siding, peeling paint and broken porches could be signs that neighbors are having trouble making ends meet and can no longer pay to take care of their home, Zandi says. Or they may have gotten an appraisal and discovered their homes have dropped in value and are no longer worth the cost of repairs.

Fortunately, as SmartMoney notes, being underwater has relatively little effect on homeowners who don't need to sell right now (or qualify for a loan). The article quotes Zillow spokeswoman Amy Bohutinsky: "Individuals who are staying put for at least the next five to seven years will likely recoup the lost value of their home."

Our August Level 1 article offers guidelines for those who are already underwater and are no longer able keep up with their mortgage payments.

Posted by Joseph at 9:23 AM | Comments (0) | TrackBack
Category(s): Economy

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A surprising skeptic on "cap and trade" — the concept's originator

In early July we pointed out some of the economic ramifications of the proposed "cap and trade" legislation. Recently, concerrns about the effectiveness of "cap and trade" have arisen from an unlikely source — the economists who came up with the idea originally. From today's WSJ:

In the 1960s, a University of Wisconsin graduate student named Thomas Crocker came up with a novel solution for environmental problems: cap emissions of pollutants and then let firms trade permits that allow them to pollute within those limits.

Now legislation using cap-and-trade to limit greenhouse gases is working its way through Congress and could become the law of the land. But Mr. Crocker and other pioneers of the concept are doubtful about its chances of success. They aren't abandoning efforts to curb emissions. But they are tiptoeing away from an idea they devised decades ago, doubting it can work on the grand scale now envisioned. [More...]

Posted by Austin at 11:08 AM | Comments (0) | TrackBack
Category(s): Economy, Taxes

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Federal deficit: a 10-fold increase in just 2 years — and growing

In advance of tomorrow's release of the latest federal deficit numbers, USA Today reports on what we're likely to see.

Previous estimates from White House and Congressional number crunchers have projected the deficit for 2009 in $1.7-$1.8 trillion range. (To put those estimates in perspective, the final deficit in 2007, just two years ago, was $161 billion — about 10 percent the size of current projections.)

But wait. The USA Today story suggests the numbers to be released tomorrow will show a deficit likely to grow even larger than previous estimates.

"This is going to be a very depressing outlook," predicts former CBO director Douglas Holtz-Eakin....

While revenue continues to decline, government spending is rising as a result of the $787 billion economic stimulus plan passed six months ago. Stimulus spending will increase in the next few months, says Treasury chief economist Alan Krueger.

(You could say that Congress is spending like drunken sailors, but that might not be fair to inebriated seamen.)

More from USA Today:

The recession, now in its postwar-record 21st month, has dealt a worse blow to the budget than the administration expected:

• The economy is set to shrink by 2.6% this year, more than twice what the White House predicted in February and May....
• Unemployment, projected at 8.1% this year by the White House, was 9.4% in July. Spending for jobless benefits, Medicaid and Medicare has soared as people have lost work and health insurance. Jobless benefits are costing more than twice what was spent last year....

Sen. Judd Gregg, R-N.H., top Republican on the Senate Budget Committee, says having a deficit at "previously unthinkable levels...shows an incredible lack of fiscal responsibility."

The story also notes that the "current $11.7 trillion debt already equals about $38,500 for every U.S. resident."

We're pretty optimistic folks at SMI, but it is difficult to imagine that this "incredible lack of fiscal responsibility" is in the best long-term interest of the country.

Is there anything you and I can do, since we're more than a year away from the next election? Yes, at least two things: 1) Pray, 2) respectfully give your members of Congress an earful. Both are appropriate aspects of responsible stewardship.

Posted by Joseph at 10:55 AM | Comments (0) | TrackBack
Category(s): Economy

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Gov't earns 23% on Goldman bailout

Way back in September when the first TARP bailout was being considered, amidst the noise and debate, a few voices could be heard saying that, if structured properly, the government might not get fleeced when all was said and done.

That will probably end up being optimistic in the final overall analysis, but last week's news about Goldman Sachs repurchasing warrants from the U.S. Government as part of extricating itself from the bailout arrangement gives momentary credence to that earlier idea. In Goldman's case, they paid $1.1 billion to redeem the warrants, in addition to the $318 million in dividends they had already paid the government.

That means Goldman ended up paying the government $1.42 billion on the $10 billion in TARP assistance they received, or a 23% annualized return.

That's a pretty good return (although there are still plenty of questions surrounding the whole issue of whether they should have been bailed out, etc.).

Unfortunately, the government doesn't seem to be consistently replicating this type of success in other TARP repayments from other entities. So how the overall program will fare (in financial terms) remains to be seen. But at least in this one instance, we can see pretty clearly that the government didn't just "spend" the $700 billion in bailout money last fall. Chunks of it have been coming back a bit at a time, some with decent returns attached. Regardless of your feelings about the bailout overall, there's at least a little good news to be found in that news.

Posted by Mark at 4:45 PM | Comments (0)
Category(s): Economy

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There's good news, and there's bad news

The good news is the index of leading economic indicators is signaling that the recession is nearing its end:

The index of leading indicators, which signals turning points in the economy, is rising at a rate that has accurately indicated the end of every recession since the index began to be compiled in 1959.

The index was reported this week to have risen for the third consecutive month in June, and to have risen at a 12.8 percent annual rate over those three months. Such a rise, pointed out Harm Bandholz, an economist with UniCredit Group, “has always marked the end of the contraction.”

Mr. Bandholz said he expected that the National Bureau of Economic Research, the official arbiter of American economic cycles, would eventually conclude that the recession bottomed out in August or September of this year.

The bad news? An end to the recession doesn't mean a healthy expansion is waiting around the corner. In fact, there are a number of reasons why a strong recovery is unlikely. This well-written piece by John Mauldin David Rosenberg explains them each in detail, but the short-list includes the likely absence of consumer spending (normally a driver of expansion), a still-ailing financial sector, revenues that continue to come in way behind those of a year ago (even if improving on the even-worse rates of the past two quarters), and a giant hole to fill on the jobs front.

Perhaps not surprisingly, then, Jeremy Grantham now says the market is trading at a Boring Fair Price.

Posted by Mark at 4:10 PM | Comments (0)
Category(s): Current Market Events, Economy

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Presumably non-partisan federal budget commentary

You know blogging has gone mainstream when the director of the Congressional Budget Office (an independent nonpartisan agency) has his own blog. It's been around for more than a year... not sure why I never came across it before. Looks like he (or, possibly his staff, since he's presumably a pretty busy fellow) posts fairly regularly.

Here's the front page if you want to bookmark it for future reference. Tuesday he reported what went on at the White House when he met with President Obama, "his key budget and health advisers, and some outside experts."

There's an archive section devoted to budget projections. And from that archive, here's a July 16 post on The Long-Term Budget Outlook. Some excerpts:

Under current law, the federal budget is on an unsustainable path, because federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the population will cause federal spending to increase rapidly under any plausible scenario for current law. Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress economic growth in the United States. Over time, accumulating debt would cause substantial harm to the economy....

CBO estimates that in fiscal years 2009 and 2010, the federal government will record its largest budget deficits as a share of GDP since shortly after World War II. As a result of those deficits, federal debt held by the public will soar from 41 percent of GDP at the end of fiscal year 2008 to 60 percent at the end of fiscal year 2010. This higher debt results in permanently higher spending to pay interest on that debt....

Not easy reading, but appears to be a good source of data directly from the horse's mouth rather than as filtered through the liberal or conservative media.

Posted by Austin at 4:00 PM | Comments (0)
Category(s): Economy, Inflation Watch

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Savings rate jumps to highest level in 15 years

In the June editorial, I wrote that consumers were sharply adjusting their spending/borrowing/saving habits.

Here's the proof, from this report on May incomes: "With the boost to incomes, the savings rate rose to 6.9%., the highest in 15 years."

Unfortunately, the "boost to incomes" referred to was primarily due to one-time stimulus checks sent to roughly 50 million Social Security recipients in May. It would be easy here to spin off-topic on the idea that this "income boost" basically amounted to working taxpayers paying off debts for (mostly) retired folks — probably not a great strategy for getting the economy humming again.

Instead, we'll keep the focus on what the recipients did with that extra "income" — they mostly saved it or used it to pay off debt (those two activities look the same in this particular statistical measurement). That's good on the personal level; it's what they almost certainly should be doing with that extra money.

But it also shows why one-time stimulus payments are typically ineffective at stimulating the economy. The people receiving the money don't spend it, and it's basically just a transfer from one group of citizens to another (normally from those who pay income taxes to those who don't, or at least from those who pay a lot of income tax to those who pay relatively little).

More importantly, it shows the headwinds the economy is going to have to fight as it eventually returns to health. The "New Normal" idea is based, in part, on the prediction that people aren't going to simply return to the irresponsible spending habits of the past few years. Rather, they're likely to take any increases in income to pay down debt and increase savings, as is evident in this May data. To what extent people continue to do so, and for how long, once the recession ends, will determine to some degree how quickly the economy returns to health. Ironically, what's good for individual financial health (debt reduction and savings increases) is bad for the short-term health of the economy. But that's the price we pay for past excesses.

Posted by Mark at 10:14 AM | Comments (0)
Category(s): Economy

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What is the recession for?

I don't do a lot of listening to sermons and other material (mainly because I don't focus well on other tasks while I'm listening to something else). Blessed with more than enough to keep busy with at work, a relatively short commute, and a busy family life, that doesn't leave a lot of time to sit and listen.

However, I made time to listen to a John Piper sermon this morning titled What is the Recession For? Wow. Great stuff. Made me feel a little guilty that I haven't been contemplating and writing more along those lines these past several months. The text of the link above is good, but is more of a short summary (not word for word), so I strongly encourage you to listen to it or watch it if you can. (Download and podcast links are also available.)

Piper explores five of God's purposes in this recession:

1. He intends for this recession to expose hidden sin and so bring us to repentance and cleansing.
2. He intends to wake us up to the constant and desperate condition of the developing world where there is always and only recession of the worst kind.
3. He intends to relocate the roots of our joy in his grace rather than in our goods, in his mercy rather than our money, in his worth rather than our wealth.
4. He intends to advance his saving mission in the world — the spread of the gospel and the growth of his church — precisely at a time when human resources are least able to support it. This is how he guards his glory.
5. He intends for the church to care for its hurting members and to grow in the gift of love.

The point of my first paragraph was simply to point out that I don't take it lightly recommending you spend 42 minutes watching or listening to this sermon. But if you can find the time, I think it will be well worth the investment.

Posted by Mark at 11:09 AM | Comments (0)
Category(s): Christian Interest, Economy

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'How many millions are in a trillion?'

That was the person-on-the-street question posed by Econ4U.org.

Do you know the answer?

In a companion telephone survey (with the question worded differently), 21 percent of respondents got the correct answer. It's a good illustration of how much difficulty we have comprehending these large numbers, as Mark pointed out in his post earlier today.

Posted by Joseph at 4:03 PM | Comments (0)
Category(s): Economy

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National Debt road trip

Austin forwarded this to me last week during our writing frenzy. I think some of you will find it eye-opening, as I did.

One of the problems with discussions of government spending and debt is that the numbers are so huge. Most of us have no reference point for numbers in the billions and trillions, so we react much the same way to a report of a $300 billion deficit as we do a $500 billion deficit — they're both incomprehensibly huge.

This short video (less than 3 mins) does a good job of translating the pace of federal spending to something we're more familiar with: miles-per-hour on a cross-country road trip. Take a few minutes to watch it. You may be surprised.

Posted by Mark at 1:11 PM | Comments (0)
Category(s): Economy, Inflation Watch

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Outlook for Social Security darkens

The 2009 report from the Social Security Board of Trustees is due to be released any day now. Preliminary indications are that the system's financial outlook has gone from bad to worse.

A story in the Washington Post notes that "the [Social Security] trust fund's annual surplus is forecast to all but vanish next year — nearly a decade ahead of schedule — and deprive the government of billions of dollars it had been counting on to help balance the nation's books."

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the [Congressional Budget Office], the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes....

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits.... But the rapidly deteriorating economy — particularly the loss of more than 4 million jobs — has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year [rather than the $80 billion originally forecast] and only $3 billion next year....

Though [President] Obama has pledged to address the precarious financial situation of Social Security, the administration currently has no plans to do so. Under pressure from congressional Democrats who argued that Social Security should not be at the top of the new administration's agenda, the White House last month dropped a proposal to name a task force to reexamine the program.

Future Social Security obligations have long been the "800-pound gorilla" sitting in the middle of Washington's living room — readily apparent but generally unacknowledged.

Proposals for fixing/reforming/improving Social Security have been around for decades, but they remain only proposals. Will members of Congress continue to ignore the warnings, just as they failed to heed warnings about Fannie Mae and Freddie Mac?

Posted by Joseph at 4:05 PM | Comments (0)
Category(s): Economy, Taxes

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New normal?

Same author as the previous post, but since he's making sense, you get another dose. Here, Jack Hough reasonably argues that the abrupt market/economy adjustments of the past year have simply brought us to the levels we should have been at all along. In other words, we're not in extraordinary times now — we were in extraordinary times over the past few years. Or, welcome to the new normal.

(Note: he's not saying the wrenching adjustment process of the past year is going to be the norm going forward. He's saying where the economy and stock market are today might not be far from where we should be.)

A reminder for newer readers — when we post articles like this, we're not necessarily saying "we think this article is right." Instead, we're trying to provide compelling food for thought to help you build a healthy perspective on the markets and economy. If we think something is spot-on accurate, we'll normally say so.

Posted by Mark at 10:39 AM | Comments (0)
Category(s): Current Market Events, Economy

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Ugly truths of the car industry

I'm not totally jiving with everything in this article (like the paragraph about health costs), but this author raises some really good points about our domestic auto industry. In light of the expected Chrysler bankruptcy today, it's worth a quick read.

Posted by Mark at 10:29 AM | Comments (0)
Category(s): Economy

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Refinancing to a fixed-rate mortgage

Hopefully most readers have long-ago done this, but it occurs to me that we haven't really discussed that the current interest rate environment is ideal for homeowners to refinance out of adjustable-rate loans and into low-rate fixed mortgages. A huge number of homeowners have been refinancing this year to take advantage of the current historically-low interest rates.

Some think these low rates will be with us for some time, but I personally wouldn't wait around if I had an adjustable-rate mortgage and planned to stay in that house for more than a year or two. The ability to lock in 15- and 30-year rates around 5% is a no-brainer, especially given the alternative of a variable rate that is extremely vulnerable to future inflationary (upward) pressure. Nobody knows when those inflationary winds will start blowing in earnest, but some think we may be seeing the first traces already breezing through the bond market.

At any rate, hopefully this post is redundant and any readers with variable-rate mortgages have already refinanced to low fixed-rates. If not, now is an extremely opportune time to do so.

Normally I'd encourage the 15-year loan for anyone who can swing the higher payment, but given the economic uncertainty and the fact that 15- and 30-year rates are pretty close in many markets, it may be worthwhile for some to consider sticking with the 30-year loan and simply doubling up your principal payments (rather than being locked into the higher 15-year payment). I'm not advocating any radical change in philosophy here. I'm simply acknowledging that in an extremely uncertain economic and job climate, payment flexibility may be more valuable than shaving an extra eighth or quarter off the interest rate. It's real easy to turn a 30-year loan into a 15-year with principal prepayments; it's very difficult to do anything to ease the pressure of a 15-year loan payment if you're unfortunate enough to lose your job at some point.

Posted by Mark at 2:33 PM | Comments (0)
Category(s): Economy, Family Finances

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Perspective on Obama's $100M budget cut

Since we're doing perspective posts today (see post below), we may as well make it a double.

Here's MarketWatch's surprisingly candid take on President Obama's announcement today that he's asking his cabinet to find $100 million in budget savings:

To get a handle on how insultingly trivial the announcement is, one need only compare the targeted cuts to the administration's spending plan for 2010.

With cuts in federal spending by $100 million, the government will save roughly 1/36,000 of the $3.6 trillion it expects to spend next year.

Put another way, if the budget were a yardstick, the administration would be proposing to shorten it by 1/1000 of an inch. That's 25.4 microns, or about half the width of a human hair.

Ouch. Guess you have to start somewhere, but it's a little late to play the fiscal responsibility card.

UPDATE: The Associated Press notes that "[t]he thrifty measures Obama ordered for federal agencies are the equivalent of asking a family that spends $60,000 in a year to save $6."

The Heritage Foundation has a picture worth a thousand words.

Posted by Mark at 4:32 PM | Comments (0)
Category(s): Economy, Taxes

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Inflation experiment

The Fed is “running a laboratory experiment” on what drives inflation: the money supply or the output gap, says Laurence Meyer, a former Fed governor and now vice chairman of St. Louis-based Macroeconomic Advisers.

That's the summary of an excellent Bloomberg article on inflation and the recent government actions. There are two competing heavyweight theories squaring off right now. Call it Keynes vs. Friedman II.

Nobel-prize winner Milton Friedman contended that “inflation is always and everywhere a monetary phenomenon.” In other words, when you create too many dollars, it will eventually show up as inflation as more dollars chase the same supply of goods.

SMI tends to agree with the Friedman economic view of the world, so you've been exposed to a regular diet of this sort of thinking. We believe the government's massive spending will ultimately be inflationary (which is why we'll be exploring the inflation topic in the cover article of next month's newsletter).

While Friedman is a big name and his followers are widespread, his view is by no means unchallenged. The primary competing viewpoint on inflation comes from Keynes, whose economic theories dominated for decades (some would say until they were disproven during the 1970s by rampant inflation coupled with stagnant growth; i.e., the infamous "stagflation").

The article explains how the current economic situation is viewed through Keynes' framework:

At the root of that concern is substantial and growing slack in the economy, which, according to White House chief economist Christina Romer, is operating 5 percent to 10 percent below potential. That means the economy will have to grow a percentage point above trend — reckoned by the administration to be about 2.5 percent annually — for five or more years before the slack is used up.

The Phillips curve — developed by economist A.W. Phillips using Keynesian concepts — posits that such excess will reduce inflation as firms stuck with idle capacity cut prices and workers facing layoffs accept smaller wage hikes.

In essence, it boils down to this: can the government get away with significant money creation (to help spur the economy out of its present trouble) without causing serious inflation at some point down the line? Friedman would likely say no, Keynes would likely say yes.

Even if inflation is the eventual result, there's the tricky issue of timing. As San Francisco Fed President Janet Yellen is quoted in the article as saying a few weeks ago, “For some time to come, disinflation, and even deflation, will represent greater risks than inflation."

Much more to come in the May issue of SMI.

Posted by Mark at 1:44 PM | Comments (0)
Category(s): Economy, Inflation Watch

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I.O.U.S.A. (again)

Back in early January, I noted that CNN was airing the documentary I.O.U.S.A. over the weekend. But then I, probably like many of you, got busy and never actually watched it.

For those of you who want to watch this but don't necessarily feel like you can sink 90 minutes (or however long it is) into it, you'll be glad to learn there's a short version created for people like us. In fact, I watched it this morning on YouTube. Powerful, disturbing stuff.

Okay, for some of you, 30 minutes is still too long. I'll do the heavy lifting for you. Watch the first 15 minutes, then jump ahead to minutes 20-22 and watch the financial warfare bit. That'll give you a really good feel for the key material.

If this fires you up enough to actually want to do something about it, a good first step might be to check out the National Tea Party Day activities in your area next week. Obviously we need to vote and be involved that way, but these rallies are a good way to show our elected officials that the people are getting restless. Sadly, getting that message across loud and clear is probably the only thing that will push them to act before the bottom completely falls out.

Posted by Mark at 11:48 AM | Comments (0)
Category(s): Economy, Taxes

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Not feeling the recession?

Do you ever watch the news coverage of the current "terrible" recession and think to yourself, "I just don't see that here"? There could be a good reason why you don't.

I've linked to similar charts in the past, but this Forbes series of U.S. foreclosure and unemployment maps are worth a fresh look. They vividly illustrate how concentrated the worst of the housing and unemployment woes are. And by extension, they explain why many people simply aren't feeling this recession the way the national news implies "most Americans" are.

That's not to say the problems aren't real. Some, particularly in the financial arena, have long-reaching implications. But chances are pretty good that your local economy isn't doing as poorly as the national figures, unless of course you live in one of the handful of hot spots illustrated on these maps.

Posted by Mark at 3:25 PM | Comments (0)
Category(s): Economy

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Progress report

Six months have come and gone now since the financial crisis went code red and TARP I was rolled out in response. It's natural to wonder, then, how the government is doing in responding to the problem.

Unfortunately, the answer has to be "not well."

Below are two excerpts. The first is from the very first blog post SMI put up about the Treasury bailout plan (last Sept 23). The second is from Jon Markman's latest column, written last week. See if you can find the common thread.

From the SMI Weblog last September:

But there are key details still being hammered out, and this leads us back to the baseball card story. The problem is that nobody knows exactly what these potentially bad loans should be priced at. The financial institutions have them "marked" at a certain price, but that price is almost certainly too high, as most of them would love to unload them but can't because there aren't any buyers at the prices these bad loans are supposedly currently "worth." Like my dad told me, it's not worth the value in the price guide if there isn't anybody willing to pay you that amount.

There is some recent precedent for what these loans are worth, as there have been some fire sales of late for similar assets. In most of these cases, the bad debt was sold for something like 20-30 cents on the dollar.

So there are basically three prices in play in the current discussions.

The "hold to maturity" price would be the highest. This price assumes the debt won't default and the payments will be made as scheduled for the loan's life. We all know this isn't happening. If it were, there'd be no current crisis.

The "mark to market" price is closer to reality, but still likely to be considerably inflated.

And then there's the "auction" price, or what those assets would bring if they were sold on the open market. It's not entirely true that there are no buyers for this stuff currently. There just aren't any buyers at the prices the financial institutions are willing to sell at. That's not necessarily them being unrealistic or greedy. It's a realization that if they sell at the lower prices an "auction" would bring, they would need to raise more capital in order to stay in business - and might not be able to do it.

The Treasury bailout plan is drawing a lot of heat from a broad range of critics, over a range of different issues. But probably the biggest one is this: what price is the government going to pay for these assets? The one that makes the most sense would seem to be the auction price. That way the taxpayer (government) takes on the least risk and has the potential to benefit as the crisis ends and at least some of these loans come up in value a bit.

Unfortunately, buying the bad debt at the auction price doesn't help the banks any. If they were willing to sell at that price, they could likely already sell the stuff now, as there are vultures out there willing to buy these assets at bargain bin prices (at least according to some reports). The banks are still stuck having to raise huge amounts of capital in that scenario, which most of them are unable to do.

From Jon Markman's column last week:

There are also questions over the quality of loans and securities the banks will put up for sale and the prices they will accept. There is already a very active market for these securities — the government isn't starting from scratch — but banks have been unwilling to let them go for what investors are willing to pay. If you assume most of these loans and securities started life being worth the equivalent of $100, most are now being carried on banks books at around $80. The government would be happy to buy them with its funny money at $80 as a sneaky way to recapitalize banks without nationalizing them, but real-money investors in recent months have been willing to pay only $25 to $35.

If all the loans were really bought at $35, experts tell me, most banks would have to take losses large enough to send them into bankruptcy. Not good. So using government-subsidized loans, BlackRock and its peers appear willing to pay around $40 to $50, but they can't pay much more because they still need to mark them up and sell them to clients at pension funds who know full well that the loans are superrisky. Don't forget that underlying each CDO and loan are hundreds of real, live homeowners who might lose their jobs next month and stop paying their mortgages. The more investors pay, the longer they will need to wait for a good return.

Presumably, the best securities will go first, so the most interesting juncture in this whole drama will come a few weeks after it starts, when fund managers balk at paying $50 and banks won't take the bids at $35. My guess is that if and when the auctions start to lock up, a lot of bank stocks are going to get hammered, and there will be renewed talk of nationalization.

Scary, huh? The central problem six months ago is still the problem vexing the government-sponsored solution today: What price to put on these toxic loans? Six months have gone by, yet we're really no closer to resolving this central problem.

Ultimately, I don't believe the government is going to be able to "fix" this issue with taxpayer money. I think it will eventually take "nationalizing" some of these banks (i.e., allowing them to go through a government-arranged bankruptcy where they continue to function and service customers while wiping out the shareholders and giving the bondholders a nasty haircut) in order to write-down their massive debts to zero.

While that's an ugly option, it's not any worse than saddling the productive citizens of the U.S. with massive additional tax burdens for decades to come as a result of issuing huge new amounts of debt. I'd argue that it's actually much more just and appropriate. But that's still politically too unpalatable, so we'll continue to spin our wheels and spend huge gobs of money shooting for a quick fix.

Posted by Mark at 3:07 PM | Comments (0)
Category(s): Current Market Events, Economy

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Tyrannosaurus Debt

With the Congressional Budget Office projecting (PDF) that President Obama's budget will produce $9.3 trillion worth of red ink over the next 10 years, it's time for a blast for the past: "Tyrannosaurus Debt," from the 1970s-era series Schoolhouse Rock.

It's fun — but not funny.

Posted by Joseph at 2:35 PM | Comments (0)
Category(s): Economy, Taxes

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Foreclosures concentrated in certain areas

Mark posted on this topic in January, but it bears repeating for a sense of perspective.

USA Today reports that "[m]ore than half of the nation's foreclosures last year took place in [just] 35 counties."

Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows - more than were recorded in the entire United States just two years earlier....

A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble....

Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures last year.

In more than 650 other counties - about a fifth of the nation - the number of foreclosure actions actually dropped since 2006.

A USA Today map illustrates the foreclosure rate county-by-county for both 2006 and 2008.

Posted by Joseph at 3:32 PM | Comments (0)
Category(s): Economy

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"Is there any such thing as Christians cheering each other up?" (Philippians 2:1, LB)

It's not going to be easy, I know. But I hope this month's cover article reminded you of God's great and precious promises and got your eyes looking up.

On the financial front down here, I searched everywhere for a positive article. (That there are so few to be found should be of interest to contrarians everywhere.) But here are two that I hope will provide at least a little encouragement.

• Done With Bad News, Here Are Four Reasons To Be Optimistic

  In the face of a nearly daily barrage of bad news, new lows and low spirits, perhaps it is important to smash the news cycle and find a few reasons to be more upbeat regarding the economy and markets. With that in mind, here are four reasons to be long-term optimistic: (More...)

• 7 Signs of an Economic Bottom

  Recent news on continued home price deflation and sales, Bernanke's testimony that the economy could be worse than expected and record low consumer confidence all mean the economy is still shrinking. The economy is, however, starting to show signs of shrinking at a slowing rate, which is the beginning of the bottoming process. The early signs of finding a bottom include: (More...)
  

Posted by Austin at 3:44 PM | Comments (0)
Category(s): Economy

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Tax hikes arrive

I hope you didn't think that simply allowing the Bush tax cuts to expire was going to be the extent of President Obama's tax hikes.

In his 2010 budget proposal announced today, Obama addresses a couple of his chief priorities: health care reform and the energy/environmental outlook. Throw in a dose of "restoring fairness to the tax code" and you've got a hat trick (that's a hockey term for you non-Northerners).

First, to raise money for revamping the health care system, there's a significant new tax hike for the "affluent." In a nutshell, this change would reduce the value of itemized deductions for everyone in the 35% marginal tax bracket as well as many of those in the 33% bracket, by only allowing these taxpayers to deduct 28% of the value of their deductions rather than the 33% or 35% they can deduct now. For every $10,000 in deductions then, someone in the 35% tax bracket would pay $700 more in tax.

Here's how the administration expects this to play out, as related by this article from today's New York Times:

The officials said the resulting increase in revenues, estimated at $318 billion over 10 years, would account for about half of a $634 billion "reserve fund"? that Mr. Obama will set aside in his budget to address changes in the health care system. The other half would come from proposed cost savings in Medicare, Medicaid and other health programs.

If only the real world was so simple. The problem is that this type of estimate completely ignores the fact that people change their behavior when their tax incentives change. To assume they won't is simply naive.

Allow me to paint an extreme example to illustrate the point. You're a "rich" person with an extra $50,000 laying around. You have many options of what to do with that money, obviously. But two extremes of the risk/reward spectrum would be buying T-bills, which would be completely safe but not earn very much, and starting a new business, which would be very risky but potentially very rewarding.

When tax rates are very low, the idea of taking the risk to start a business is appealing, because you know you'll get to keep most of the reward if the business succeeds. When tax rates are very high, there's little incentive to take the risk of losing your capital, since you won't get to keep much more of the profit than you would if you simply kept your money safe in T-bills.

Now nobody is saying these tax changes, in and of themselves, are going to cause everyone to suddenly stop starting businesses (or expanding the ones they currently operate). But there's a continuum here. And each tax increase pushes people a little further down that risk/reward continuum. Different people, different ideas - they all have different tipping points along that continuum. Let the Bush tax cuts expire? A few percent tip over from risk-taking to playing it safe. Cut itemized deductions? A few more tip over. Implement a cap and trade tax on businesses? A few more.

The problem isn't so much that those individual taxpayers will pay less taxes themselves as a result of becoming more conservative in their economic decision making, though that's certainly a factor. It's that the group we're talking about includes 45%-55% of the small- and medium-sized businesses in America, who happen to be the nation's primary employers. As they tip over, job creation slows, business growth slows, GDP slows, and so do tax revenues.

If that sounds like theoretical, "supply side" thinking, check out the following table illustrating "Hauser's Law." It illustrates that over the past 60 years, Federal tax revenue has stayed almost exactly at 19.5% of GDP, despite marginal tax rates fluctuating from 90% to 28% during that period. The point:

The data show that the tax yield has been independent of marginal tax rates over this period, but tax revenue is directly proportional to GDP. So if we want to increase tax revenue, we need to increase GDP.

What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice.

Moving on, Obama's concern regarding traditional energy sources causing global warming is addressed with a "Cap and Trade" proposal. This environmental priority will generate revenue by forcing companies to buy permits to exceed pollution emission caps. There are lots of issues rolled into one here, but we'll leave those aside for another day to focus squarely on the economics of this.

It's basic, although often demagogued by politicians and misunderstood by the public, that corporations don't pay taxes - individuals do. That is, corporations take their tax expenses into account, just like all their other expense, when setting prices.

In a stunning back-handed admission of this, the administration isn't pretending that most of the billions of dollars in cap/trade revenue will go to researching and promoting alternative energy sources. Rather, they recognize that the billions in taxes paid by businesses will ultimately be passed on to consumers in the form of higher energy (and other) bills. So the administration is planning to take the money from this tax to extend and increase the "Making Work Pay" tax credit.

In other words, government is going to collect an energy tax from all citizens, then give that money back to low- and middle-income citizens. A very small amount gets siphoned off for alternative energy research. But this is primarily a tool to accomplish two goals: (1) redistribute wealth, and (2) make renewable energy sources more competitive with traditional "carbon" energy sources. (Though it's worth noting they won't be making renewable energy more competitive by lowering its price, they'll be doing so by artificially raising the price of traditional energy.)

The New York Times article sums it up pretty well:

The combined effect of the two revenue-raising proposals, on top of Mr. Obama's existing plan to roll back the Bush-era income tax reductions on households with income exceeding $250,000 a year, would be a pronounced move to redistribute wealth by reimposing a larger share of the tax burden on corporations and the most affluent taxpayers.

I'll say. But here's the real kicker:

Behind the numbers in Mr. Obama's first budget is one of the most far-reaching domestic agendas in years, and at a time when the president and Congress are already grappling with an economic crisis worse than any in decades.

That's really the rub. During normal economic times, I can get my brain around something like the cap and trade proposal. I wouldn't like it or agree with it, but I could understand the desire to promote renewable energy sources, with the hope that the artificially level playing field might lead to breakthroughs that could help solve the long-term energy needs of the country. I get that. But now? In the face of this economic crisis, with all the other tax increases already on the table? Don't tell me this is okay because they won't kick in until 2012: wealthy people usually got that way by being forward-thinking. You better believe they are making financial decisions today based on what's coming down the road 2-3 years from now.

There's plenty more: a dramatic tax increase on foreign profits of U.S. businesses, a repeal of oil company tax "breaks", excise taxes on oil, and so on. These are part of a package that will supposedly raise taxes on business by more than $350 billion over the next 10 years.

"The budget also begins to restore a basic sense of fairness to the tax code, eliminating incentives for companies that ship jobs overseas and giving a generous package of tax cuts to 95% of working families," Mr. Obama said in his budget message.

All well and good, except for the two points made earlier. Businesses don't pay taxes, individuals do as those costs are passed on to them. And individuals (who often own or influence business decisions) change their behavior in response to tax incentives.

We haven't touched on what the cumulative impact of these proposals does to the calculus surrounding where businesses will want to locate - here in the U.S. where they'll already be subject to one of the highest corporate tax rates in the world plus all these new extras, vs. other countries where they won't. But we've probably covered enough ground for one day.

Posted by Mark at 1:22 PM | Comments (0)
Category(s): Economy

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Not a promising beginning

In my latest editorial, I listed a few of the reasons my hopes for 2009 have suffered a setback.

The editors of Investor's Business Daily (aka America's other daily business newspaper) have offered a more detailed look at the various actions of the new administration that add to, rather than reduce, investors' anxiety. They introduce them with:

Today, as the market continues to sell off and we plumb 12-year lows, we wish we had a different explanation. But it still looks, as we said four months ago, "like the U.S., which built the mightiest, most prosperous economy the world has ever known, is about to turn its back on the free-enterprise system that made it all possible."

How else would you explain all that's happened in a few short weeks?

This is followed by a lengthy, rather discouraging, laundry list of concerns. This is not recommended reading for the faint-of-heart breadwinner/taxpayer.

Posted by Austin at 5:11 PM | Comments (0)
Category(s): Economy

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Signs of life

MarketWatch's chief economist, Irwin Kellner lists 21 specific data points that indicate the recession is easing. He's not saying it's over, just that there are some encouraging "signs of life" beginning to emerge amidst the scalded landscape.

Kellner has this to say about the cause of the improvement:

Clearly, this has nothing whatsoever to do with the stimulus package that the president signed into law last week. As a matter of fact, if the recession does end within the next few months, it will probably be in spite of this package, rather than because of it.

If you want a policy to credit, it's monetary policy. The combination of liquidity that the Federal Reserve has pumped into the economy, along with its special lending programs and capital injections into the banks, is largely responsible.

While I don't really have an opinion one way or the other regarding his overall assertion, it is worth pointing out that economists have long said that the impact of monetary stimulus typically kicks in between 6-12 months later. February is the sixth month since the huge deluge of new money supply started being infused into the economy. So Kellner's observations would seem to be consistent with this long-held economic rule of thumb.

Posted by Mark at 2:16 PM | Comments (0)
Category(s): Economy

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Policy disputes, not partisan personal attacks

The times, they are a changin'. And not for the better.

It's increasingly apparent that the people at the financial controls in Washington are guessing their way through the rescue/repair/recovery process. It doesn't inspire confidence.

Because these are momentous times when ambitious federal government policy prescriptions are being debated, I expect a number of our blog links may gravitate in that direction.

None of our comments, I trust, will be disrespectful of our president or congressional leaders as individuals (and we ask that your comments avoid these sorts of attacks as well). But, when appropriate, our posts will take issue with their policy prescriptions which we believe, based on historical precedent, are misguided.

All this is to say that, while we don't intend these to be partisan posts, they might come across that way due to the stark lines now being drawn between the two political parties. Don't interpret our disagreement with policy proposals as a personal attack on any individuals.

Personally, I'm an equal-opportunity critic. The eight years of spending and government expansion under President Bush were, in my view, a disaster. On balance, congressional Republicans were complicit in the pork barrel spending, and many of those who lost their seats in recent election cycles deserved to do so.

Unfortunately, the congressional Democrats, in control since 2006, are proving to be as spendthrift, as corrupt, and worse. And President Obama has started his term with spending decisions that will haunt the country for many, many years to come. So long, "change we can believe in." Hello, "spreading the wealth around."

The articles we'll be sharing in the coming weeks/months reflect our free market perspective. Consequently, they will often focus on the specific dangers and weaknesses inherent in the "solutions" being proposed (and enacted) because we believe it's important you be informed of opposing viewpoints.

Naturally, in addition to these matters, we'll continue to comment on the market and other financial topics. But the changes being proposed for our economic system - to our tax system, Social Security, health care - are so significant that they merit our concentration and study as they come to the fore of the national debate.

Posted by Austin at 2:00 PM | Comments (0)
Category(s): About Our Weblog, Economy

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Revisiting The Coming Economic Earthquake

In recent weeks, several SMI message board posts and blog comments have mentioned Larry Burkett's 1991 (and revised in 1994) book, The Coming Economic Earthquake.

When published, the book was widely criticized as being 1) unnecessary scare mongering and/or 2) too simplistic in its view of the U.S./world economy.

As one who helped research that book, I am convinced that much of the criticism came from people who didn't actually read it. Larry simply presented the idea, consistent with basic economics and documented by history, that debt - whether it be personal, business-related, or governmental - cannot continue to expand indefinitely. At some point, a time of reckoning must occur.

I heard echoes of Larry when reading a long interview in a recent Barron's with Ray Dalio, chief investment officer of Bridgewater Associates.

[I think we are experiencing] a "D-process," which is different than a recession - and the only reason that people really don't understand this process is because it happens rarely.... This was the dynamic that occurred in Japan in the '90s, that occurred in Latin America in the '80s, and that occurred in the Great Depression in the '30s.

Basically what happens is that after a period of time, economies go through a long-term debt cycle - a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes.

At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt.

Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.... The process of bankruptcy or restructuring is necessary to its viability. One way or another, General Motors has to be restructured so that it is a self-sustaining, economically viable entity that people want to lend to again....

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes - the cash flows that are being produced to service them - or we are going to have to raise incomes by printing a lot of money.

It isn't complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue....

A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation - and that will last for as far as I can see out, roughly about two years.

On this last point, I'm not sure Larry would agree. In his book, he expressed concern that trying to inflate the money supply by printing a large amount of new money would stoke inflation, even hyperinflation.

Dalio is arguing that, at least in the near-term, combining printing money with a devaluation of the currency can achieve the necessary balance. Maybe. But I am reminded of one of Larry's favorite sayings: "The man who tries to ride on the back of the tiger is likely to end up inside." (To be fair, Dalio's comment is specifically focused only on what he expects this year and next. He may well agree with Larry regarding the longer-term; we don't know from this interview.)

Focus on the Family recently re-aired a 1992 interview with Larry in which he talked about the Earthquake book. You can hear it here. (NOTE: The timetable Larry envisioned played out in 1997 in Asia. It was delayed here in the U.S. for several reasons, including technological innovation, a slowing in the rate of growth of government spending in the mid-1990s, and a long period of low interest rates that helped keep debt "affordable.")

Posted by Joseph at 1:45 PM | Comments (0)
Category(s): Economy, Inflation Watch

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Stimulus for your consideration

A couple of quick items brought to my attention in the past few days:

Dr. Adrian Rogers, 1931-2005:

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."?

(Thanks to Toby J., a good friend who happens to be a charter subscriber of SMI, for that quote.)

Milton Friedman on free enterprise, 1979:

(Thanks to friend Rob Y. for that timely clip.)

And finally, from our own "Keith" discussing Wesley's paradox on the SMI weblog Friday:

"May I suggest that capitalism succeeds when Biblical compassion in society balances its harshness? Without Biblical compassion, capitalism will destroy the culture which once flourished through its practice."

Posted by Mark at 4:06 PM | Comments (0)
Category(s): Economy

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"This is not something any business can afford to do"

CNN reports that State Farm is getting out of the homeowners' insurance business in Florida.

The reason? The company is losing money in the Sunshine State, having paid out $1.21 in claims for every dollar of premiums it has collected since 2000. Many of those payouts, of course, were hurricane related. Florida was hit by four major storms in 2004.

State Farm asked state insurance regulators to approve a rate hike, but was turned down. Without the prospect of being able to turn a profit, State Farm says it can't continue in business in Florida. "This is not something any business can afford to do," company president Jim Thompson said.

I don't have any great affection for insurance companies - sometimes they can be quite irritating - but there's a lesson here: a company cannot stay in business (or at least cannot continue all aspects of its business) if government, however well-intentioned, insists that the company follow an unprofitable business model.

The State Farm-Florida situation offers a cautionary tale regarding too much government involvement in the decision-making process of the private sector.

Indeed, it is a cautionary tale likely to have multiple sequels as we see government flexing its muscles via the TARP (Troubled Asset Relief Program). Business decisions will take second place to political considerations.

Is that good for the consumer and for the economy? Time will tell.

Meanwhile, the New York Times offers this helpful table showing where the TARP money has been going.

Posted by Joseph at 3:25 PM | Comments (0)
Category(s): Economy

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Wesley's paradox

Long-time SMI contributor Mike Cave forwarded me an extremely insightful article recently, questioning whether free markets can survive in a secularized world. It begins:

The 18th Century English cleric and theologian John Wesley was troubled by a paradox that emerged as his teaching spread. He, like other Protestant thinkers stretching back to Calvin, taught that one could honor God through hard work and thrift. The subsequent burst of industry and frugality generated by Wesley's message improved the lot of many of his working-class followers and helped advance capitalism in England. But, "wherever riches have increased, the essence of religion has decreased in the same proportion,"? Wesley observed, and subsequently pride and greed are growing more common, he complained.

Wesley could see only the beginnings of this trend; two hundred years later, the world is reaping the full brunt of its aftermath. So where do we go from here?

The meltdown of the financial markets in the last few months has left us grappling with how we can keep markets free and principled at the same time. The only debate so far is between those who want more government regulation - who want to impose from the outside via the regulator's eye the restraint that our institutions once tried to instill in us - and those who think that more government will only undermine our prosperity. Neither side seems to be winning the public debate because most Americans are probably equally as appalled by the shortcomings of the markets as they are by the prospect of more government control of them.

A weighty subject to say the least. Can free markets stay free when the majority of their participants no longer hold to the traditional "Protestant Ethic"? While obviously a return to values like thrift and honesty aren't enough to save a man's soul, is it possible for our society to return to those values short of a widespread religious revival? And if so, will that be enough to allow another run of prosperity for our economy after the current poisons are flushed from the ailing economy's body?

Let's open this up and discuss - your comments on these questions, or any other related thoughts, are invited below.

Posted by Mark at 3:40 PM | Comments (0)
Category(s): Christian Interest, Economy

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I have good news!

With gloomy economic news getting most of the attention these days, I thought I'd brighten things up going into the weekend with a list of recent "good news" stories you may have missed:

    "? Pending home sales rise

The National Association of Realtors reports pending home sales increased during December by 6.3 percent.... The South and Midwest posted big gains in pending sales.... The Pending Home Sales Index is a major indicator for the housing sector.

    "? Geico to hire 870 in first quarter

Geico Corp. said it plans to hire 870 new associates in 19 states in the first quarter of 2009.... Geico is currently looking to add customer service, claims, sales, and auto damage adjuster positions to the company's regional offices and service centers.

    "? Evidence points to recession's end by July

Economists Nicholas Bloom and Max Floetotto of Stanford University say that "based on the analysis of 16 previous economic shocks... and using the latest data on uncertainty measures, our model predicts that the worst has been avoided.... [W]e believe growth will resume by mid-2009."

    "? Kellogg reports 7% increase in profit

Kellogg said Thursday its profit rose 7% during the fourth quarter.... Revenue increased 5% to $2.93 billion.

    "? Silicon Valley has a few rare bright spots

Executive recruiters in Silicon Valley, and the tech business in general, see glimmers of hope in some areas of technology. "It's not all doom and gloom," said Robert Greene, founder and CEO of GreeneSearch, Inc. in San Mateo, about 20 minutes north of Silicon Valley.... "Overall, hiring for engineers and product managers remains pretty strong."

    "? Wal-Mart U.S. same-store sales up 2.1%

Wal-Mart Corp. said Thursday that January same-store sales... rose 2.1%, ahead of the target of 1.1% in a Thomson Reuters survey. January total world sales for the company rose 1.8%.

    "? Panera Bread Co. expects to open many stores in 2009

Panera Bread Co., the chain of 1,250 bakery-cafes, plans to take advantage of its debt-free balance sheet and the U.S. real estate slump to open as many as two locations a week in 2009, said Chief Executive Ronald Shaich.... "A recession is a time to develop if you have the balance sheet to do it, and we do," Shaich said. "There will be opportunities."

H/T for some of these to PositiveEconomicNews.com.

Posted by Joseph at 2:51 PM | Comments (0)
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Past financial crises

According to this pair of economics professors from Maryland and Harvard, the U.S. crisis is following a very similar path to past serious financial crises in developed countries. Naturally, this doesn't mean our experience will be exactly like these others. But the information in "What Other Financial Crises Tell Us" does provide a frame of reference for what might be in store.

Here are a few excerpts, though it's worth reading the whole thing.

Let's start with the good news. Financial crises, even very deep ones, do not last forever. Really. In fact, negative growth episodes typically subside in just under two years. If one accepts the NBER's judgment that the recession began in December 2007, then the U.S. economy should stop contracting toward the end of 2009. ...

In the typical severe financial crisis, the real (inflation-adjusted) price of housing tends to decline 36%, with the duration of peak to trough lasting five to six years. Given that U.S. housing prices peaked at the end of 2005, this means that the bottom won't come before the end of 2010, with real housing prices falling perhaps another 8%-10% from current levels. ...

Equity prices tend to bottom out somewhat more quickly, taking only three and a half years from peak to trough -- dropping an average of 55% in real terms, a mark the S&P has already touched. However, given that most stock indices peaked only around mid-2007, equity prices could still take a couple more years for a sustained rebound, at least by historical benchmarks. ...

Needless to say, a near doubling of the U.S. national debt suggests that the endgame to this crisis is going to eventually bring much higher interest rates and a collapse in today's bond-market bubble. The legacy of high government debt is yet another reason why the current crisis could mean stunted U.S. growth for at least five to seven more years.

The bottom line of their analysis seems to be this: this could last a while. The good news, if there is any, is that perhaps stock prices won't decline a whole lot more than we've seen, and the economic conditions may not get tremendously worse. The bad news is that conditions could stay roughly the way they are for at least a few more years.

As usual, your outlook on this projection depends quite a bit on your personal situation. To someone in their 30s or 40s with a pretty stable job, this isn't awful news. The prospect of funneling a couple years' worth of contributions into a stock market at these levels might actually hold some appeal. But obviously for many, this is anything but a cheery forecast.

Again, it's worth reiterating, just because this is the "average path" doesn't mean it will necessarily be the course of this particular crisis.

Regardless of your outlook on this scenario, prudence dictates a continued emphasis on reducing debt and increasing emergency savings. People who have those two elements firmly under control are going to be much better positioned to withstand the rest of this economic down turn than those who don't.

Posted by Mark at 11:40 AM | Comments (0)
Category(s): Economy

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Smoot-Hawley II

I was hoping to try to ignore the stimulus efforts for a while, as it seems we've been writing about them a lot lately. But I saw this today, and it's scary, so I figured I'd pen one more missive before laying the topic aside for a while.

First a bit of background. Economists argue about a lot of things, but one area that most of them agree on is that protectionism is bad (meaning, when countries put up trade barriers to try to direct their economic efforts inward towards their own products and services). While protectionist measures sometimes feel good, history shows they inevitably bring retaliation from other countries, and overall economic growth quickly declines because it's so much harder to trade with other countries.

The number one example of the negative impact protectionism has on economic growth has to be the Smoot-Hawley Tariff Act of 1930. Over 1,000 economists immediately petitioned President Hoover to veto the bill, and many industry heavyweights also vigorously opposed it. But it was signed anyway, and sure enough, the world quickly erupted into trade wars that many believe lengthened and made the global depression more severe.

"Why the economic history lesson," you ask? Because apparently the Congress is filled with men and women who missed the "Causes of the Great Depression" lecture in their American History course. Sure enough, faced with an economic environment some are comparing to the early 1930s, the House included a "Buy American" clause in the recently passed stimulus bill. This NY Times editorial summarizes the provision this way:

Steel industry lobbyists seem to have persuaded the House to insert a "Buy American"? provision in the stimulus bill it passed last week. This provision requires that preference be given to domestic steel producers in building contracts and other spending. The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the United States, and the Senate may broaden such provisions to include many other products.

The rest of that article warns of the slippery slope such provisions put us on. They haven't gone unnoticed either - ABC News reports the international response to these provisions has been swift and very negative.

Hopefully those legislators who did make it to class and learned some of the Great Depression's causes, or at least aggravating factors, will be able to muster enough support to avoid making the exact same mistakes this time around.

Posted by Mark at 3:52 PM | Comments (0)
Category(s): Economy

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Economic impact of abortion

Today WorldNetDaily is re-running a 1998 Larry Burkett article titled "The George Bailey Effect."

SMI's own Joseph Slife is cited as a contributor to the article, so here's an interesting peek at what Joseph used to do before joining the SMI team.

Posted by Mark at 12:49 PM | Comments (0)
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Peering over the ledge

We interrupt our normally optimistic reporting to bring you this view of what could go wrong...

Crown's MoneyLife radio program yesterday was a really good discussion of a recent Wall Street Journal article titled The Doomsayers Who Got It Right (subscription required). While you can't read the actual article unless you're a WSJ subscriber, the first link above is a loose transcription of the radio program which discusses many of the details in the article.

The article catches up with the current thinking of three prominent economists/money managers who predicted much of the economic crisis. An extremely brief summary of their views follows.

Jeremy Grantham points out that the unintended consequences of the government's response to the financial crisis are unknowable. He thinks there's a long-term risk of a surge in inflation and sees a better than 50-50 chance 2009 will see the stock market decline further. He's setting aside cash in case stocks fall significantly lower, though the article doesn't say he's actually predicting that. In fact, somewhat surprisingly to me, Grantham mentions that he expects real (after inflation) returns of 9.5% from foreign stocks and 7.5% from U.S. stocks over the next seven years. Those are both pretty decent numbers.

Bob Rodriguez sees the economic slide continuing much longer than most. He says his concern isn't the next two years, "but period three through 10." He expects high inflation during that time and GDP growth of less than 2% per year, which would mean a very slow recovery.

Much of this prognosis is based on a change he sees in the U.S. consumer from spender to saver. The Crown program pointed out that the paradox here is that it's a great thing at the individual level for people to quit spending so much and start saving - exactly the right prescription for personal financial health. But 70% of our national economy is made up of consumer purchases, so if the savings rate does go from 1%, where it's been in recent years, to 7%-10%, where Bob Rodriguez sees it moving to by next year, that means the economy as a whole is going nowhere fast.

As an investing blog, it's also worth noting that Rodriguez was buying stocks in October and November for the first time in over a year, though mostly in the energy sector where prices for real assets (like oil) will likely rise as inflation catches hold.

Peter Schiff is probably the most bearish of the group, expecting massive inflation and sharply higher interest rates as foreign investors eventually refuse to buy U.S. debt. He sees the dollar dropping significantly in that scenario and foreign markets outperforming U.S. markets by a significant margin as a result. (Detractors would point out that while many of Schiff's dire predictions have panned out, his actual investment performance has been poor, as his investments have been mainly overseas stocks and commodity-based, both of which were hammered in the downturn last year.)

There's value in examining the "what if's" these bearish views present. The most important take-away from an article like this is probably not so much on the investing side (though there are elements there worth exploring, and we likely will in the months to come), but the personal finance side. If these men are right, the economy is not going to get better anytime soon. In these scenarios, it is paramount that readers do the hard thing in preparing themselves financially by spending less than they earn, paying down debt, and establishing an emergency savings reserve. Don't assume things will bounce back quickly.

I really appreciated the conclusion of MoneyLife host Chuck Bentley's take on all this, which you can find at the end of the program or transcript (linked to above). He explained that as Christians, we don't have to put a positive or optimistic "spin" on this sort of news, but we can and should have hope about the future, in spite of what may come economically because God can and will redeem even the tough things that happen to us. Read or listen to the ending of his program for his full take. It's good stuff.

As you know, SMI doesn't put a lot of faith in any expert's predictions. So we're not going to get all panicky about these predictions. But it is worth soberly considering these gloomier outlooks so as to prepare ourselves in case they are accurate. That starts with getting our personal finances in order, and then ripples into our investing decisions. Again, the investing implications of all this are a little beyond the scope of this post, but we'll likely delve a little deeper into some of this in the future.

Posted by Mark at 4:29 PM | Comments (0)
Category(s): Economy, Inflation Watch

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Where the money is going

In case you're wondering where all that "stimulus" money is likely to go, the chairman of the House Appropriations Committee - Democrat David Obey of Wisconsin - has laid it all out in an easy-to-read executive summary (PDF). (NOTE: Like many political documents, this one has a certain "spin" to it.)

New York Times economics editor Catherine Rampell presents Chairman Obey's spending breakdown in a handy pie chart.

One thing in the stimulus breakdown that is a bit misleading is the number ascribed to "tax cuts." Much of that figure is actually payments to people (perhaps as many as 45 million people) who have no federal income tax liability in the first place, therefore such "cuts" are not cuts in the strict sense of the word.

Details about the soon-to-be-introduced tax measures are sketchy in this news release from House Ways and Means Chairman Charles Rangel (D-N.Y.). But the release does list two tax "credits" designed to benefit people who pay no income tax.

Meanwhile, The Hill newspaper reports that Appropriations Chairman Obey thinks the $825 billion stimulus measure "may undershoot the mark." He suggested that Congress may have to spend even more money to stimulate the economy.

UPDATE: If you'd like to read the stimulus bill for yourself (warning: it's 258 pages), go to ReadTheStimulus.org.

Posted by Joseph at 1:52 PM | Comments (0)
Category(s): Economy

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Foreclosure map

This map shows how foreclosures are impacting various parts of the country. It's a great reminder that real estate is local, and as a result, the national average statistics being commonly referenced these days actually mean dramatically different things for different regions.

Posted by Mark at 1:13 PM | Comments (0)
Category(s): Economy

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I.O.U.S.A.

When we chose Where Does the Money Go? as our October 2008 cover article, we couldn't foresee the incredible binge of government spending on the immediate horizon. The TARP bailout package weighed in at $750 billion, which is partially responsible for the estimate out this week that the government will run a deficit of $1.2 trillion dollars for fiscal year 2009.

Actually, that deficit number - staggering as it is - is hopelessly optimistic. That's because it's before the stimulus package currently being debated is even considered. That package is expected to cost somewhere between $800 billion and $1.3 trillion (what's a half trillion among friends?). Add that into the mix, and you get something like U.S. News & World Report's estimate of a $2.2 trillion deficit for the year.

To put that number even somewhat in perspective, consider that 2008's deficit of $400 billion was an all-time record. We're looking at a shortfall in 2009 more than five times as large as the previous record amount!

Before I begin hyperventilating, I'll get to my original point of this post: CNN is airing the critically acclaimed documentary I.O.U.S.A. twice this weekend. It's a film examining "the rapidly growing national debt and its consequences for the United States and its citizens."

Note that I have not seen the film, so I can't vouch for what's said or any of the content. But if there was ever a time for a national conversation about government spending, this is certainly it.

CNN is airing the movie at 2 p.m. EST on Saturday, and 3 p.m. EST on Sunday.

Posted by Mark at 2:17 PM | Comments (0)
Category(s): Economy

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'Does the free market corrode moral character?'

That's the latest "Big Question" posed by the John Templeton Foundation. (Mark blogged about the Foundation's "Big Questions" series last June.)

Weighing in on the matter of how the market affects moral character - for good or ill - are such notables as Michael Novak (author of The Spirit of Democratic Capitalism), John Bogle (founder of Vanguard), and Garry Kasparov (former world chess champion, now a political leader in Russia).

If you enjoy the "world of ideas," the Big Questions site is worth your time.

Posted by Joseph at 1:00 PM | Comments (0)
Category(s): Economy

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