Friday, April 22, 2005

Statement of Purpose

The purpose of this blog, Economic Viewpoint, is to present the alternate view of current economic events. Mass media often focuses on one dimension of the economy with a lack of understanding of the related dimensions.

The least understood area of economics is consumer behavior. Indexes have been created to gauge it (i.e. consumer sentiment survey). The past couple years have showed us that this is not anywhere near an exact science, as consumer sentiment was negative much of 2002 and 2003, yet consumers kept spending. Since 60% of the economy is based on consumer spending, it is highly critical for companies to understand where the market is headed.

As a consumer, you must understand where the economy is heading to maximize your investments.

Emotions often get in the way of logical decision making. Ever read the reports of compulsive gamblers who believe the next play will be the big payoff? What about the Ebayers who pay well over market price for a trinket due to the thrill of winning an auction?

This same sort of thing happens in the economy, yet the consequences are more severe since they affect all of us.

Unfortunately, I believe the housing market has turned into the next "overhyped stock market." Take away the unreasonably easy money supply, which is slowly going away anyways, and the economic fundamentals are minimally different today than they were 10 years ago. High energy prices are also taxing consumers and reducing disposable income.

On the positive side of the coin, removing the housing problem and persistently high energy prices, the economy is well balanced. Demand is strong on both the manufacturing and service fronts. The job market is growing near it's historical average. The unemployment rate is dropping. Paychecks are growing. There is a lot to be optomistic about.

After reading EV, I hope that you use critcal reasoning to think of the unmentioned dimensions of the economy. Conventional wisdom tells us the housing market will continue to rise. Is this true? Maybe. Maybe not. Only time will tell.

Whether you agree or disagree with my posts and conclusions, I've accomplished my goal if you spend the time on EV contemplating the alternate view.

Thursday, April 21, 2005

Is Stagflation a Risk?

Today's article on supports what I have been writing, that the chances of us returning to some sort of "stagflation" are growing.

Stagflation is a combination of a stagnant economy with inflationary pressures. This is quite uncommon, since stagnant economies generally have very little inflationary pressures. The issue occurs when there is little to no economic growth, but pricing pressure increases. The last time this country has faced any kind of stagflation was the 1970s.

I believe the current round of inflation is affected by the following factors:
-lack of pricing power since 2000. The economy went four (4!!) years without any substantial pricing power due to a recession and subsequent jobless recovery. Now that the economy is growing at a decent clip, companies have found it easier to raise prices. I believe some companies are trying to catch up to where prices should have been.

-Competition from overseas. China's torrid economy is sucking up resources just as fast as we can produce them. Supply vs. demand.

-Low interest rates allowing easy access to money. When people are buying, prices rise. When no one buys, prices decline. Simple as that.

My solution to this problem is simple. Raise the short term rates 1/2% at the next meeting in May. The impact will be more emotional than material. It will show the markets that the Fed is serious about keeping inflation contained. The increase is small enough that it should not have an adverse impact on economic growth or consumer spending. Like all trends, the housing market is slowly coming back to earth, so the spending that is coming from home equity and refinancing is going to dry up anyway.

It's time for the Feds do their primary job (control the money supply), without worrying about upsetting everyone. A well-balanced economy today will bring a greater tomorrow.

Tuesday, April 19, 2005

Rampant Consumerism, Part II

I've been thinking about my earlier post about the Newsweek editorial about rampant consumerism. The more I think about it, the more I think that guy is right.

Looking at the headlines recently, some of the major ones have been "Record low savings rates" and "record high debt rates". Someone is getting rich from consumer debt. GM posted a $1 billion dollar loss today, yet that is amazing since they are on TV talking about the "American revolution" and how American it is to drive around in a large SUV. Wal-Mart stock is near it's 52-week low, yet they have higher earnings than ever, selling the consumer class a bunch of depreciating goods that we don't need if you get down to the nitty gritty of it.

I've been reading "Good Debt, Bad Debt" by Jon Hanson. I'll give a little preview, but I intend to post a full book report on here once I am completely done with the book. Mr. Hanson divides all people into two classes; consumerati and econowise. The consumerati (I figure a majority of us) do not understand the concept of delayed gratification. We spend and spend, putting off the dirty work until tomorrow. The econowise among us understand delayed gratification, and hence they have more opportunites to save money to invest at the right opportunity. Are there any readers who do NOT wish they had $300,000 to invest in real estate in 2002? I wish I had that kind of money then. Consumerati have largely missed out on opportunities such as that one due to the payment on the good 'ol GM SUV referenced above.

I was looking at my budget tonight on Money 2005 (technology should make it easy) but when the numbers are depressing, what is there to do? Change!!! Even though I am not finished with "Good Debt, Bad Debt", I feel I am longing (needing) to be econowise, yet I am still consumerati. I look at my trinkets (depreciating, worthless junk according to Mr. Hanson), and I know that having debt does not make me feel good. A nice car sure looks sharp in the driveway, but the thoughts of lost opportunity (opportunity cost) is enough to keep me up at night.

The consumer class powers 60% of the economy. If we stop buying new furniture, new cars, new computers, new toilet seats, new ...insert item here... the economy will stop. The flip side of that coin is the debt associated with all these purchases. Will the economy ever get to a point where we will choke on all our debt? I can imagine it happening if the dollar or housing market crashed. The most likely scenario is that we will continue on as we are now, not saving anything and spending away without regards to tomorrow.

I guess we shall leave the answer to tomorrow as well....

To view "Good Debt, Bad Debt" on Amazon, click on the link:

Monday, April 18, 2005

A New Era of Investing?

**I hate to post more than one article a day, but the first one is timely and this one has been on my mind, so here you go ***

Today on Yahoo there was a good article called "Sentiment vs. Sensible", courtesy of Forbes magazine. The premise of this article was that housing and real estate is in a bubble because of sentiment, and airline stocks, specifically AMR, are a heck of a buy because of sensible. Has this "touch and feel" ability created a bubble in the real-estate market? You can read the article by clicking the headline.

My main subject for today is again, you guessed it, housing prices. For the future, I will refer to housing as the real estate market, so commercial property is included.

I had a revelation (more like a hypothesis) this weekend about what could be causing high real estate prices. To my knowledge, this has not been discussed in the media, but surely it has been thought of by many economists. My revelation is that we may have entered a new period of investing, with the real estate market as the primary growth vehicle instead of the stock market.

Let's explore this by looking a little deeper. Post-WWII, the stock market has had spectacular growth and horrendous crashes, while the housing market has risen, stagnated, risen again, but never with huge gains or declines on a nationwide basis. After the 2000 stock market crash, many people have chosen to invest money in real property instead of paper assets. (I think a home should be considered a paper asset until you own the home free and clear.) In my opinion, the trend away from the stock market can be attibuted to the financial scandals and the terrorist attacks. When you come home from work, you can see your house and park in your driveway, but to many people a stock porfolio is a vision of a computer screen showing massive losses or lately, anemic gains.

If this trend is in fact a fundamental shift in investments, the stock market may soon be the "stable haven" and the real-estate market would be subject to booms and crashes. Would investors (home owners) be willing to endure these swings? I am leery. Americans are a very mobile group, living in multiple homes over a lifetime. I doubt that the average Joe is willing to stay in a house and foresake the McMansion because they are "underwater" in their home loan due to a downturn period. It's a lot easier to click on a computer screen and sell a stock portfolio, or to ride out a bear market since Joe doesn't (physically) come home every night to a stock portfolio.

Investors should consider themselves warned. Moving to real-estate as the primary investment market of the future could literally turn the McMansions into McPrisons. If the market is indeed making this switch, I advocate caution and awareness, two qualities that seem to be foreign to the mass investor class.

Stock Market at 8-Month Lows

This is bad news for any investors. Data points to a possible weak spot in the economy, with slowing profits and manufacturing growth. What does this mean for us?

Quite honestly, I hope this is only a rough patch of water. Some people claim the Feds can now slow their interest rate increases, but I do not believe this is possible. Here's the reasons why:

1. Inflation, while the official reports say it is contained, my own eyes and mind tell me otherwise. Rates must rise to curtail inflation. We could be entering a period of 1970's-style stagflation.

2. Budget deficit: While the federal government is running the largest deficit ever, if the economy starts to slow down, foreign investors might flee the US equities due to poor ROI. This could be mitigated by raising interest rates but that has it's own dire consequences of slowing the economy more, creating a snowball effect.

3. Housing prices are still out of control in some parts of the country. A slowing in the interest rates rise might allow this problem to manifest further, so instead of slight economic consequences, we could have a severe calamity on our hands.

I believe all of these problems could have been mitigated if the fed funds rate was at the appropriate level for the past year. (around 4-4.5% right now, with 30 year mortgage rates of 7-7.5%).

The economy is now a runaway train on a mountain pass. If the fed doesn't get the imbances slowed down before the next curve, we could be well off the track.

Thursday, April 14, 2005

Bankruptcy Law Changes--How will this affect you?

Congress finally passed a version of the bankruptcy bill that has been sitting around Congress since 1998. The real question is what is the material effects on the economy?

"But backers in Congress and the financial services industry argue that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires -- often celebrities -- who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Rep. David Dreier, R-Calif., said the legislation would save American families an average $400 a year in higher interest rates now charged to consumers to recoup losses from those who abuse bankruptcy proceedings."

I agree that bankruptcy is abused by a certain segment of people, but these are the people that should be held accountable for their actions. I highly doubt the credit card industry would return any of the money saved from this bill to consumers as well.

Possible economic side effects of this bill:
-credit becomes easier to get for the marginally qualified, since the chances are they would have to pay back something.
-Credit card companies' profit rises even higher, and last I checked the credit card companies weren't exactly broke. Here's the numbers for MBNA, one of the largest credit card issuers:
"For the fiscal year ended 12/04, interest income rose 5% to $4.07 billion. Net interest income after LLP rose 45% to $1.39 billion. Net income applicable to Common rose 15% to $2.66 billion. Net interest income reflects growth in loans outstanding and higher average yields on earning assets. Net income was partially offset by higher costs for services provided for by 3rd-party vendors"

$4.07 billion eh? Looks like they did about $12 billion in sales, so this equates a little over 30% profit margin. Wal-Mart did $287 billion in sales in 2004, profiting $17 billion. This is about 5.9% profit margin. Which business would you rather run if your bonus was based on profitability?

Some economic impact will surely be felt from the largest bankruptcy overhaul in over 25 years.

Wednesday, April 13, 2005

Retail Sales Hurt by Higher Gas Costs

***Sorry about the recent lack of articles posted. I had written some in advance and the links were expired. I uphold my journalism to the highest standard and will not post unsubstantiated articles. I was out of town for a few days and finally have caught back up.*****

Is this a surprise to anyone?

"The consumer has been the driving force powering the economy in the three years since the 2001 recession as Americans, bolstered by successive rounds of tax cuts and cheap credit, have spent with abandon."

We are most certainly practicing "Rampant consumerism".

"Analysts say continued gains in employment should produce further spending increases this year. But those employment gains will have to offset the waning impact of tax cuts and rising interest rates. The Federal Reserve is expected to continue with its nearly yearlong campaign of raising interest rates to make sure the rebounding economy does not produce unwanted inflation."

I know that my income has not risen 10% in the past year, yet housing prices around here did. How can anyone afford to buy a house now? As more income is devoted to housing and automobiles, something else must give. This could be the beginning of a long period of flat retail sales, given the end of cheap credit and higher unit costs of everything.

"The strong 0.7 jump in sales of autos and auto parts in March followed a much weaker 0.1 percent increase in February."

The automakers are giving away cars with huge incentives.

"The 1.9 percent drop in sales at clothing stores and the 0.7 percent drop at general merchandise stores, the category that covers big department stores, were both the largest declines since April 2004.

Sales also fell by 0.6 percent at furniture stores and were down 0.3 percent at electronic and appliance stores.

Bucking the downward trend, sales at hardware stores were up 1.5 percent, sales at sporting goods stores rose by 0.8 percent and service stations posted a huge 2.1 percent increase, a rise that reflected in large part higher gasoline prices."

Monday, April 04, 2005

Rampant Consumerism

I was reading my newest issue of Newsweek, and in the Comments section there were some really good reader comments about the article from a couple weeks ago, "The Incredible Shrinking Dollar". I wanted to respond to a couple opinions and post one response I thought presented the alternate opinion.

One reader commented that Americans practice "rampant consumerism". I take this to mean that we buy too much, consume too much, and waste too much. Purchases and consumption keep the economy growing. I believe the low cost of goods relative to income has driven many purchases. My grandparents had 1 TV set for many years. Most people I know today have two or three. Is this rampant consumerism? No. In 1979 the average wage was $2.90 an hour, so a full time employee making minimum wage would gross $6032 a year. If a TV set cost $400 in 1979 dollars, that would be close to 6.7% of income. Today the person making minimum wage will gross $10,920. A 25" Sanyo TV at Wal-Mart is about $250. This is less than 2% of income. The low costs of goods relative to income spur more purchases. Could we be living beyond our means? The low savings rate implies yes. That is a discussion for another day.

Another reader thought that we have given away the crown jewel of the economy; the industrial base (manufacturing). I could not disagree more. Companies have been offshoring labor for manufacturing for many years. China has cheap labor compared to our costs, but in due time the Chinese will get smart and demand more, bringing their costs more in line with ours. This is already happening in India with regards to software development. Unfortunately, our quality lagged the Japansese for many years and American manufacturing still has a "black eye", even though quality appears to have caught up. When is the last time you thought a Ford car was a quality product? What about Toyota?

We cannot and should not turn our backs on globalization. In an ideal world, the manufacturing base will be situated in the lowest cost areas of the world, while the innovation will be in the highest educated and most advanced areas. Will this be America in the future? Time will tell.

Here is one particular comment that attracted my attention.

"However, I must take issue with the assessment that our current arrangement, where foreigners send us their goods and we send them our debt, is good for both sides. It is far worse for us. We buy our gewgaws and gadgets from them, and they in turn use the dollars we send them to purchase our Treasuries, stocks and real estate. In this scenario, who is truly getting wealthy—we who are up to our eyeballs in debt buying depreciating goods, or they, who are not only selling us all their stuff, but investing in and purchasing our assets? The current situation is unstable not only economically, but geopolitically. For instance, China owns so much of our Treasuries and dollars that the United States could never be more than a paper tiger regarding Taiwan. In a conflict, China could bring the United States to its knees without ever firing a single shot. It would just have to say "sell," and our bond and stock markets would be instantly thrown into chaos. Until we get our financial houses in order, we will continue to be on the losing end of the deal when it comes to trade and the problems with the dollar and our debts."
Ft. Lauderdale, Fla.

This is an interesting comment, and I think the reader (name removed for Privacy) brings up an frequently overlooked consequence.

Friday, April 01, 2005

Irrational Exuberance, Second Edition

Today, one of the economists I most respect, Yale economist Robert Shiller, releases his book, Irrational Exuberance, Second Edition.

I have read an excerpt of this book in Money magazine a few months ago, and it made perfect sense. Mr. Shiller makes his point clearly and backs it up with undisputible facts. Mr. Shiller's point is that the housing market is dangerously overvalued, and left unchecked, faces a meltdown similar to the stock market meltdown with severe effects on the world economy.

Before you dismiss this book as "bandwagon rhetoric", consider that "Irrational Exuberance" (March 2000), which covered the insanely high stock market, was correct in it's predicition that the market value was out of line with fundamentals.

The most interesting thing about Mr. Shiller is he studies behavioral economics; the study of how people's behavior affects the economy. I find this to be much more fascinating than just looking at numbers and trends. If behavior had nothing to do with economics, there would be no housing bidding wars, no unrealistic price appreciation expectations, and no bubbles of any form.

From time to time, I will recommend books I find to be informative and insightful. I recommend that you purchase his book through Amazon, and the link to it is:

Irrational Exuberance Book on Amazon

To visit Mr. Shiller's website, here's the link:
Irrational Exuberance Home Page