Haven't been able to get online regular for the past few days so don't know if this was posted.
Norths Reality check 65 below. What do you think? We are seeing inflation in the cost of items like food and gas but are consumers gaining confidence do you think? I tend to think --"IF" --the feds are going to be able to pull it off this time then things will start to improve starting in the fall. What do you think are we coming out of it this time with inflation or are we going to sink further and now is the eventual depression we have all been expecting?
REALITY CHECK 65
snip--
Deflation in Japan is continuing, despite the Bank of
Japan's forced interest rate of approximately zero.
How bad is this deflation? For anyone in Japan who
did not get a salary cut, it's not bad at all. Hamburgers
sell for half of what they cost last year. Real estate is
still sinking. This has been going on for 21 consecutive
months. (SEATTLE TIMERS, June 25).
The banks are stuck with assets that are falling in
price. This reduces their capitalization, making them more
vulnerable to an economic recession. So, they don't lend
as much money. So, the economy falters again. So, prices
go lower. Hmmm.....
National deflation? Since when? Not since the
1930's. But it's happening in Japan.
Japan and the United States constitute almost half of
the world's economic output.
What about the United States?
AMERICA'S INFLATION
So far, prices are still going up. In fact, they are
going up faster than last year. The Consumer Price Index
is now rising at a rate of 3.5%.
Look at bank savings account rates and money market
rates: under 4%. Then deduct anywhere from 20% to 33%
because of income taxes on interest income. The
conservative American saver is falling behind. His capital
is eroding. He is being reamed by the Federal Reserve
System's short-term policy of forcing down short-term
interest rates.
Price inflation is the product of a rising money
supply. The FED is engineering an inflationary scenario.
No matter what Greenspan says about the evils of price
inflation, the FED is actively creating it.
Take a look at the MZM figures (money of zero
maturity). Since last November, it has risen at a rate of
22% per annum.
www.stls.frb.org/images/publications/usfd/page3.gif
Using the famous "law of 72," we divide 72 by 22.
That gives us 3.5. This means that if the present rate of
MZM growth continues, this monetary unit will double in 3.5
years.
If all Greenspan can do to defer recession is pump in
money to drive down short-term rates, then he is facing a
hard road ahead. Price inflation will escalate. This will
be bad for the dollar.
Stocks are not doing well, and the public knows it.
Between January and May of 2000, investors poured in $193
billion into stock funds. By May of this year, it was $38
billion.
Factory orders were down in May by 6.2% compared to
May, 2000.
Now, what about consumer confidence. Here, there may
be good news. Take a look at James Stack's long-term chart
on consumer confidence.
www.investech.com/others/chart.cfm?id=228
Notice the recent turnaround. The 1990-91 chart had a
similar upward move. But this was early in the recession.
It took half a year to get the economy out of the recession
zone. The same pattern is found in the 1980 and 1981-82
recessions. The turnaround came early. If the recent
turnaround can be sustained, then, according to the chart,
we're going to come out of recession in half a year, maybe
in early 2002. The recession is not identified in the
chart because the NBER has not announced it yet, assuming
that it exists.
However, look how low consumer confidence was early
this year. It was lower than at any time since the chart
begins in Johnson's era. Recent moves by the stock market
indicate that the economy is not expected to recover. The
market recovered briefly, but is now giving up its gains.
The familiar time lag of 6 month between the stock market's
turnaround and the economic recovery tells us to postpone
hope in a strong recovery.
Now check the "Gorilla Index" beneath the consumer
confidence chart. These are major high-capitalization
stocks. The index does not inspire optimism.
The chart for initial jobless claims has risen sharply
over the last year, from 312,000 a year ago to 400,000
claims today.
http://lioninc.com/lion/initial_claims1
It peaked at about 500,000 in the 1991 recession. But
there were millions fewer workers in the economy. So,
today's figures indicate continuing trouble for workers,
but not a crisis. The overall unemployment rate was 4.5%
in June.
So, if we really are in a recession, and unemployment
is low by any previous recessionary standard, the consumer
confidence ought to be rising. Consumers think the worst
is over, and nothing happened to them. But consumers may
be wrong.
PARETO'S LAW AND THE SAVINGS RATE
What about savings? First, if I were to ask you to
guess what percentage of individually owned stocks are held
by the richest 20% of American households, you could use
Pareto's 1897 "80-20 law" to guess the answer: 80%. But
what is the percentage, really? It's turns out to be 80%.
www.businessweek.com/magazine/content/01_23/c3735031.htm
[My thanks to Gordon R. Vaughan for sending this link.]
A recent study by two Federal Reserve economists
indicate that from 1992 (the beginning of the economic
recovery) until 2000, American households sold a staggering
$2.5 trillion in directly (non-fund) owned stocks. Not
bought -- sold! They bought stock mutual funds, but they
sold off 50% more money's worth of individually held sticks
than they bought.
You get the picture: the bulk of these net sellers
were the richest people in the country. The June 4
BUSINESS WEEK article comments:
Thus, the data suggest that these affluent
households drastically reduced their saving
by selling stocks and spending the proceeds,
even as the soaring value of their remaining
equity holdings greatly increased their wealth.
The result, the authors estimate, was a sharp
drop in their savings rate from 8.5% of dispos-
able income in 1992 to a negative 2.1% in 2000.
But this wasn't true for the vast majority of
households. Indeed, far from cutting savings,
most began squirreling more of their incomes
away, with the savings rates of the bottom 40%
of households rising from around 4% in 1992 to
over 7% in 2000.
The people with most of the wealth were bailing out of
the stock market during the biggest increase in history.
Or were they?
How did the market go up if they were selling shares?
Were foreign buyers the main buyers? No. The trade
deficit was not great enough to account for this high a
move. Then who bought the shares, thereby forcing up
prices?
I will hazard a guess: the purchases were made through
401(k) accounts, which are tax-deferred. The rich spent on
consumption the proceeds from the sales of their
individually held shares. This funded the economic boom.
They used their corporations to load up on stocks on a tax-
deferred basis.
If you have a better explanation, let me know:
gnorth@bigfoot.com
If this is the case, then the holders of shares are
assuming that they can cash out when they retire, and do so
at lower tax rates, when they are in lower income tax
brackets. They have sheltered their income, and they have
also enabled themselves to be able to move in and out of
shares without paying capital gains taxes.
This, it seems to me, is very significant. They can
bail out of this market at any time and not suffer the tax
consequences. They need not worry about having to pay the
government a dime on their profits if they decide to move
into something safer than stocks.
But, in the meantime, they are strong holders. They
think long term. They don't need their money now. If they
took it now, they would be hit by taxes, and maybe even by
an early retirement penalty.
At present, these two forces are in balance: the
ability to sell, tax-free, and the willingness to hold
shares for the long term. If rich investors think that the
stock market will always go back up, they don't feel the
pressure to sell. Their money managers tell them to sit
tight. So does the press. So does academia. "Don't try
to beat the stock market. Buy and hold." But whenever
they decide that stocks are too risky, they will not be
deterred from selling by tax considerations. They will
sell.
Who is sustaining this boom? The rich. This is
Pareto's law in action. We should not be surprised.
Maki and Palumbo conclude that "all of the
consumption boom of the latter 1990s and
virtually all of the decline in the personal
savings rate in the last decade can be attributed
to the richest groups of households." They also
estimate that the top 20% of households accounted
for 46% of total consumer expenditures last year.
What we are seeing is a shift of savings to corporate
entities. We are seeing the boom sustained by rich
people.
The stock market is basically the affair of pension
funds. What it does day to day is irrelevant, except to
lure the best minds into the great game of trying to beat
it. It's like the metallic rabbit in a Florida dog race.
It races ahead of the dogs to keep them running.
When the present retirement fund owners begin to
retire, the truth of the stock market will be visible to
all: it will not have made most people rich. It will not
provide a safe and happy retirement for all, including most
of today's stock market winners. It will fall when the
buyers start to unload. But it has offered a lot of
dreams, and it has offered capital to entrepreneurs to
build a better world. What they do with these temporary
funds is another matter.
The stock market is the concern of the richest 20% of
the population. It is not making the little guy rich. The
little guy is up to his ears in debt. The idea that he can
get rich, a comparative concept, is the stuff of dreams.
He can get richer than he was 20 years ago, or than his
parents were 40 years ago, but he cannot get richer than
the general economy grows, unless he gets lucky.
THE BUSH TAX CUT
This tells us that Bush's tax cuts will have very
little effect on the economy. They are back-loaded: strung
out beyond the 2004 election. They are mainly for the
middle class. This will, if anything, increase personal
saving, since these are the buyers of individual equities.
It looks as though the middle class is saving, and has been
since 1992, but their total contribution to the economy is
minimal. There are lots of them, but their net worth is
minimal. Again, Pareto told us this in 1897.
We should not expect a boom as the result of the new
law. We should take what we can get, but it's not much,
economically speaking.
Nor should we expect much from the FED's reduction of
interest rates. The expansion of consumer debt is the
inhibiting factor. How much more will the consumers buy?
If they are almost tapped out in terms of the percentage of
their after-tax incomes going to dent (no longer
deductible, except for mortgage debt), then there are
limits on the public's ability to spend more.
I don't think Greenspan is trying to get consumers to
spend. I think he is getting corporations to continue to
employ people. The lower the interest rate, the lower the
cost of credit to businesses. The lower the cost of
business, the more likely that it will employ people.
The economy is not in crisis mode yet. If Greenspan's
rate cuts can keep it stumbling along at this level of
unemployment, Bush will get credit for a success. But no
recession in history has ever been this mild.
You may bet on an economic recovery from this
mini-recession before the year ends. If it is in the
pipeline, the stock market boom should be beginning now. I
am not convinced. So far, neither is the market.
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If you enjoy Reality Check and would like to know more,
please visit our website:
http://www.freebooks.com
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If you'd like to suggest Reality Check to a friend,
please feel free to forward this letter to them.
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reality@agora-inc.com
Norths Reality check 65 below. What do you think? We are seeing inflation in the cost of items like food and gas but are consumers gaining confidence do you think? I tend to think --"IF" --the feds are going to be able to pull it off this time then things will start to improve starting in the fall. What do you think are we coming out of it this time with inflation or are we going to sink further and now is the eventual depression we have all been expecting?
REALITY CHECK 65
snip--
Deflation in Japan is continuing, despite the Bank of
Japan's forced interest rate of approximately zero.
How bad is this deflation? For anyone in Japan who
did not get a salary cut, it's not bad at all. Hamburgers
sell for half of what they cost last year. Real estate is
still sinking. This has been going on for 21 consecutive
months. (SEATTLE TIMERS, June 25).
The banks are stuck with assets that are falling in
price. This reduces their capitalization, making them more
vulnerable to an economic recession. So, they don't lend
as much money. So, the economy falters again. So, prices
go lower. Hmmm.....
National deflation? Since when? Not since the
1930's. But it's happening in Japan.
Japan and the United States constitute almost half of
the world's economic output.
What about the United States?
AMERICA'S INFLATION
So far, prices are still going up. In fact, they are
going up faster than last year. The Consumer Price Index
is now rising at a rate of 3.5%.
Look at bank savings account rates and money market
rates: under 4%. Then deduct anywhere from 20% to 33%
because of income taxes on interest income. The
conservative American saver is falling behind. His capital
is eroding. He is being reamed by the Federal Reserve
System's short-term policy of forcing down short-term
interest rates.
Price inflation is the product of a rising money
supply. The FED is engineering an inflationary scenario.
No matter what Greenspan says about the evils of price
inflation, the FED is actively creating it.
Take a look at the MZM figures (money of zero
maturity). Since last November, it has risen at a rate of
22% per annum.
www.stls.frb.org/images/publications/usfd/page3.gif
Using the famous "law of 72," we divide 72 by 22.
That gives us 3.5. This means that if the present rate of
MZM growth continues, this monetary unit will double in 3.5
years.
If all Greenspan can do to defer recession is pump in
money to drive down short-term rates, then he is facing a
hard road ahead. Price inflation will escalate. This will
be bad for the dollar.
Stocks are not doing well, and the public knows it.
Between January and May of 2000, investors poured in $193
billion into stock funds. By May of this year, it was $38
billion.
Factory orders were down in May by 6.2% compared to
May, 2000.
Now, what about consumer confidence. Here, there may
be good news. Take a look at James Stack's long-term chart
on consumer confidence.
www.investech.com/others/chart.cfm?id=228
Notice the recent turnaround. The 1990-91 chart had a
similar upward move. But this was early in the recession.
It took half a year to get the economy out of the recession
zone. The same pattern is found in the 1980 and 1981-82
recessions. The turnaround came early. If the recent
turnaround can be sustained, then, according to the chart,
we're going to come out of recession in half a year, maybe
in early 2002. The recession is not identified in the
chart because the NBER has not announced it yet, assuming
that it exists.
However, look how low consumer confidence was early
this year. It was lower than at any time since the chart
begins in Johnson's era. Recent moves by the stock market
indicate that the economy is not expected to recover. The
market recovered briefly, but is now giving up its gains.
The familiar time lag of 6 month between the stock market's
turnaround and the economic recovery tells us to postpone
hope in a strong recovery.
Now check the "Gorilla Index" beneath the consumer
confidence chart. These are major high-capitalization
stocks. The index does not inspire optimism.
The chart for initial jobless claims has risen sharply
over the last year, from 312,000 a year ago to 400,000
claims today.
http://lioninc.com/lion/initial_claims1
It peaked at about 500,000 in the 1991 recession. But
there were millions fewer workers in the economy. So,
today's figures indicate continuing trouble for workers,
but not a crisis. The overall unemployment rate was 4.5%
in June.
So, if we really are in a recession, and unemployment
is low by any previous recessionary standard, the consumer
confidence ought to be rising. Consumers think the worst
is over, and nothing happened to them. But consumers may
be wrong.
PARETO'S LAW AND THE SAVINGS RATE
What about savings? First, if I were to ask you to
guess what percentage of individually owned stocks are held
by the richest 20% of American households, you could use
Pareto's 1897 "80-20 law" to guess the answer: 80%. But
what is the percentage, really? It's turns out to be 80%.
www.businessweek.com/magazine/content/01_23/c3735031.htm
[My thanks to Gordon R. Vaughan for sending this link.]
A recent study by two Federal Reserve economists
indicate that from 1992 (the beginning of the economic
recovery) until 2000, American households sold a staggering
$2.5 trillion in directly (non-fund) owned stocks. Not
bought -- sold! They bought stock mutual funds, but they
sold off 50% more money's worth of individually held sticks
than they bought.
You get the picture: the bulk of these net sellers
were the richest people in the country. The June 4
BUSINESS WEEK article comments:
Thus, the data suggest that these affluent
households drastically reduced their saving
by selling stocks and spending the proceeds,
even as the soaring value of their remaining
equity holdings greatly increased their wealth.
The result, the authors estimate, was a sharp
drop in their savings rate from 8.5% of dispos-
able income in 1992 to a negative 2.1% in 2000.
But this wasn't true for the vast majority of
households. Indeed, far from cutting savings,
most began squirreling more of their incomes
away, with the savings rates of the bottom 40%
of households rising from around 4% in 1992 to
over 7% in 2000.
The people with most of the wealth were bailing out of
the stock market during the biggest increase in history.
Or were they?
How did the market go up if they were selling shares?
Were foreign buyers the main buyers? No. The trade
deficit was not great enough to account for this high a
move. Then who bought the shares, thereby forcing up
prices?
I will hazard a guess: the purchases were made through
401(k) accounts, which are tax-deferred. The rich spent on
consumption the proceeds from the sales of their
individually held shares. This funded the economic boom.
They used their corporations to load up on stocks on a tax-
deferred basis.
If you have a better explanation, let me know:
gnorth@bigfoot.com
If this is the case, then the holders of shares are
assuming that they can cash out when they retire, and do so
at lower tax rates, when they are in lower income tax
brackets. They have sheltered their income, and they have
also enabled themselves to be able to move in and out of
shares without paying capital gains taxes.
This, it seems to me, is very significant. They can
bail out of this market at any time and not suffer the tax
consequences. They need not worry about having to pay the
government a dime on their profits if they decide to move
into something safer than stocks.
But, in the meantime, they are strong holders. They
think long term. They don't need their money now. If they
took it now, they would be hit by taxes, and maybe even by
an early retirement penalty.
At present, these two forces are in balance: the
ability to sell, tax-free, and the willingness to hold
shares for the long term. If rich investors think that the
stock market will always go back up, they don't feel the
pressure to sell. Their money managers tell them to sit
tight. So does the press. So does academia. "Don't try
to beat the stock market. Buy and hold." But whenever
they decide that stocks are too risky, they will not be
deterred from selling by tax considerations. They will
sell.
Who is sustaining this boom? The rich. This is
Pareto's law in action. We should not be surprised.
Maki and Palumbo conclude that "all of the
consumption boom of the latter 1990s and
virtually all of the decline in the personal
savings rate in the last decade can be attributed
to the richest groups of households." They also
estimate that the top 20% of households accounted
for 46% of total consumer expenditures last year.
What we are seeing is a shift of savings to corporate
entities. We are seeing the boom sustained by rich
people.
The stock market is basically the affair of pension
funds. What it does day to day is irrelevant, except to
lure the best minds into the great game of trying to beat
it. It's like the metallic rabbit in a Florida dog race.
It races ahead of the dogs to keep them running.
When the present retirement fund owners begin to
retire, the truth of the stock market will be visible to
all: it will not have made most people rich. It will not
provide a safe and happy retirement for all, including most
of today's stock market winners. It will fall when the
buyers start to unload. But it has offered a lot of
dreams, and it has offered capital to entrepreneurs to
build a better world. What they do with these temporary
funds is another matter.
The stock market is the concern of the richest 20% of
the population. It is not making the little guy rich. The
little guy is up to his ears in debt. The idea that he can
get rich, a comparative concept, is the stuff of dreams.
He can get richer than he was 20 years ago, or than his
parents were 40 years ago, but he cannot get richer than
the general economy grows, unless he gets lucky.
THE BUSH TAX CUT
This tells us that Bush's tax cuts will have very
little effect on the economy. They are back-loaded: strung
out beyond the 2004 election. They are mainly for the
middle class. This will, if anything, increase personal
saving, since these are the buyers of individual equities.
It looks as though the middle class is saving, and has been
since 1992, but their total contribution to the economy is
minimal. There are lots of them, but their net worth is
minimal. Again, Pareto told us this in 1897.
We should not expect a boom as the result of the new
law. We should take what we can get, but it's not much,
economically speaking.
Nor should we expect much from the FED's reduction of
interest rates. The expansion of consumer debt is the
inhibiting factor. How much more will the consumers buy?
If they are almost tapped out in terms of the percentage of
their after-tax incomes going to dent (no longer
deductible, except for mortgage debt), then there are
limits on the public's ability to spend more.
I don't think Greenspan is trying to get consumers to
spend. I think he is getting corporations to continue to
employ people. The lower the interest rate, the lower the
cost of credit to businesses. The lower the cost of
business, the more likely that it will employ people.
The economy is not in crisis mode yet. If Greenspan's
rate cuts can keep it stumbling along at this level of
unemployment, Bush will get credit for a success. But no
recession in history has ever been this mild.
You may bet on an economic recovery from this
mini-recession before the year ends. If it is in the
pipeline, the stock market boom should be beginning now. I
am not convinced. So far, neither is the market.
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
If you enjoy Reality Check and would like to know more,
please visit our website:
http://www.freebooks.com
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
If you'd like to suggest Reality Check to a friend,
please feel free to forward this letter to them.
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
To subscribe to this free newsletter, send an e-mail to:
reality@agora-inc.com
> And I forgot to add the board is experiencing memory loss.