Tuesday, June 08, 2010

The Bullish Case for U.S. Economy, U.S. Equities

BlackRock Vice-Chairman Bob Doll in today's WSJ:

"There is no question that we face formidable, long-term structural problems that make U.S. stocks less attractive for many investors. But I believe that the spirit of innovation and entrepreneurship that has defined America in past crises will prevail again and propel our markets forward. As such, overweight positions in U.S. equities are more than warranted.

Though housing is weak and debt and deficit levels are rising, compared to the rest of the world the U.S. is in reasonably good shape. Our economic fundamentals are sound: Manufacturing levels are up and interest rates and inflation are low. The broader economy's recovery is also finally translating into meaningful employment improvements—recent employment reports show increases in average hourly earnings and hours worked—and I believe this trend will continue.

When the markets faltered in 2008 and revenue growth stalled, U.S. companies moved decisively to cut costs—unlike their European and Japanese counterparts. Now that recovery has taken hold, businesses are replenishing inventories and rehiring, corporations are expanding exports, and American consumers are responding better than most expected.
 
Potential risks—trade complications, escalating credit contagion, overly aggressive financial regulation, and tax increases—clearly remain. But for the moment, our nation seems poised to remain a City Upon a Hill."

39 Comments:

At 6/08/2010 8:41 AM, Anonymous KipEsquire said...

What exactly is the basis for assuming any positive correlation, let alone a robust one, between "the spirit of innovation and entrepreneurship" and "exchange-traded equities"?

The only recent correlation I'm aware of is generally referred to as "the dot.com bubble."

 
At 6/08/2010 9:07 AM, Blogger juandos said...

"There is no question that we face formidable, long-term structural problems that make U.S. stocks less attractive for many investors..."...

Hmmm, could it be because many investors see more and higher taxes in their collective future?

U.S.’s $13 Trillion Debt Poised to Overtake GDP: Chart of Day

 
At 6/08/2010 9:25 AM, Anonymous Anonymous said...

The TED Spread continues to widen.

 
At 6/08/2010 9:28 AM, Anonymous Hopium said...

Hahah your out of your mind.

Bullish? WHERE! All the, feel good articles in world will not change things.

Were going down.

 
At 6/08/2010 9:50 AM, Anonymous Lyle said...

The point that compared to other countries the US is better off is clearly true in terms of Demography. Our population will continue growing while China and Mexico will soon start seeing static populations.
As someone put it most other countries would gladly trade problem sets with the US.

 
At 6/08/2010 10:37 AM, Blogger PeakTrader said...

The Bad News - Bad News on Jobs
June 1, 2010

TrimTabs Investment Research Inc. tracks the real-time jobs picture by monitoring income tax deposits at the Treasury. And these have suddenly started falling. Based on the latest data, the firm predicts the economy will actually lose up to 200,000 jobs, net, in June.

The government says the unemployment rate "edged down" to 9.7%...But that's only because about one and a half million people have just, miraculously "disappeared" from the official labor force.

Some of the new "jobs" may not even exist...adjustments may be adding as many as half a million extra "jobs" to the core figure, says independent economist John Williams at Shadow Government Statistics.

The private sector picture may still be in recession... The number employed in the private sector is still about 900,000 below where it was even a year ago...And remember, it has to keep growing just to stand still, because the population is growing.

"There's practically no growth in private sector employment," says Gluskin Sheff strategist David Rosenberg.

Average hourly earnings were up 1.9% from a year ago...The government also reported that those workers produced 2.8% more goods and services per hour. So they actually got paid about 1% less...and over the same period consumer prices rose 2.2%. So even those lucky enough to be working have gone backwards — before taxes.

 
At 6/08/2010 10:43 AM, Anonymous Anonymous said...

We could do really good, or we could do really not good in the 21st century! It pretty much depends on who gets to define what wealth and capital actually are: the people, or the government.

 
At 6/08/2010 10:47 AM, Blogger PeakTrader said...

So, there may be a slowdown this year and then we have 2011. I stated before:

Perhaps, there will be a perfect storm in 2011 when the U.S. reaches the 90% threshold of government debt to GDP, which locks in countries into slow growth and high unemployment economies, while private debt remains high, taxes increase even more, and government stimulus winds down.

The U.S. has been unable to create a virtuous cycle of consumption-employment, where consumption increases employment, and employment increases consumption, etc.

 
At 6/08/2010 11:27 AM, Blogger Ron H. said...

"Our population will continue growing while China and Mexico will soon start seeing static populations."

Lyle, if I'm not mistaken, most of the increase in US population is due to immigration. Do you see population increase as a good thing?

 
At 6/08/2010 11:47 AM, Blogger Ron H. said...

"Average hourly earnings were up 1.9% from a year ago...The government also reported that those workers produced 2.8% more goods and services per hour. So they actually got paid about 1% less..."

Only true if the total 2.8% is attributable to improved worker efficiency. What part did technology, or other capital investment play?

 
At 6/08/2010 12:12 PM, Anonymous Anonymous said...

Lyle, I've seen people make that demographic statement before about China. But I think it misses the point that their growth hasn't been due to a growing population, but from getting a fairly small part of their population from the farm to the city in recent decades.

There are still plenty of people in basically subsistence/small farming who can keep moving into higher productivity jobs and keep the growth going.

Plus over there, the people retire back to small farms or family houses, not some Ponzi scheme so they're not as much a burden.

Their population could decrease and they'd do just fine.

 
At 6/08/2010 12:27 PM, Blogger PeakTrader said...

Ron, real nonresidential fixed investment declined for five consecutive quarters in 2008-09, falling to about a 40% seasonally adjusted annual rate in the first quarter of 2009 and has subsequently expanded at a slow rate compared to before the recession.

http://www.bea.gov/briefrm/nonresfi.htm

 
At 6/08/2010 12:34 PM, Anonymous Tom in Maine said...

The web link to the article does not work...

it should be
http://online.wsj.com/article/SB10001424052748703561604575282893796461472.html

great blog, love reading it every day!

 
At 6/08/2010 12:47 PM, Blogger PeakTrader said...

The "original post" states:

"Our economic recovery, though relatively strong, is still tepid (U-shaped). But our rebound in corporate profits is robust (a definitive V). Corporate profits could reach a new record high in this year's third quarter."

My comment: There's an inverse relationship between wages and profits.

 
At 6/08/2010 12:55 PM, Blogger bix1951 said...

How big can it get?
Is growth unlimited?
How big is infinity?

We need to learn to live in an economy that does not grow.
That is our destiny. That is what we should assume. Zero growth.

 
At 6/08/2010 1:14 PM, Blogger Ron H. said...

"...and has subsequently expanded at a slow rate compared to before the recession."

Well, if the slow rate of RNFI can't account for some of the 2.8% increase in output, then I can only imagine that those workers are so thrilled to still be working, that they are working their a**es off to keep it that way.

 
At 6/08/2010 1:24 PM, Blogger Jody Wilson said...

The dividend yield of the S&P 500 index is 2% right now. The historical average range is about 3% to 6%, so based on this alone, U.S. stocks are highly over-valued. Add in high long-term unemployment and looming bankruptcies around the world, and I don't see how anyone could honestly recommend buying or holding stocks right now.

 
At 6/08/2010 1:24 PM, Blogger PeakTrader said...

Ron, it seems, the worst workers or workers with the least experience, were laid off, while the remaining workers were less likely to ask for raises, in this poor economy, and are working overtime.

 
At 6/08/2010 1:32 PM, Anonymous Lyle said...

To answer the question about immigration, historically immigration has been a good thing for the US, essentially it would not exist without it. Recall that at various periods the immigrants came from a new demographic and the folks already here felt the country was going to hell in a handbasket, 1850s and the Know Nothings (anti Catholic, i.e. German and Irish), 1920s and the anti southern european feeling that lead to the restrictive immigration law, and now. Once upon a time in biology there used to be a concept called hybrid vigor, and I think it applies to the US, with CNN reporting that interethnic and interracial marriages at an all time high of one out of 7. At least to this point the melting pot is still melting in the US.
On the issue of age distribution, yes China is undergoing the transformation that we went thru 1870 to 1930 as the population moves off the farm, but that they are doing this in the face of an aging population. China has a problem that the one child family cannot support their elders in the old extended family way. If you look by 2030 china will have a significantly older population than the US. Looking at Japan as a sign of what an older population implies, then growth will slow down in China.

 
At 6/08/2010 1:38 PM, Blogger Ron H. said...

"We need to learn to live in an economy that does not grow.
That is our destiny. That is what we should assume. Zero growth."


Unless population growth is also zero, we will all become poorer in a zero growth economy. How would you reach zero growth?

China has a fairly harsh policy, and our Science Czar Eric Holdren thinks he could maybe just "slip something into the water supply", among the many other bizarro ideas he has.

What's your suggestion?

 
At 6/08/2010 1:46 PM, Blogger PeakTrader said...

Lyle, a hundred years ago, immigrants had roughly the same skills as the domestic population. In recent times, immigrants had lower skills than the domestic population.

If the U.S. population doubles with the same skill level, then GDP doubles. If the population doubles with lower skill levels, then GDP will less than double.

 
At 6/08/2010 1:51 PM, Anonymous Lyle said...

On the issue of skill level there it is a dumbbell shaped distribution we get a lot at the top and a lot at the bottom in terms of skills and education.
However all immigrants have something that many natives lack a lot of ambition. It takes guts to track accross the Az desert just like it took guts to head out for OR or Ca in 1850 from Missouri by wagon train. In terms of construction many are as skilled as US workers, perhaps even being able to do more with less.

On another topic. there are stories that China is having to raise wages for workers in that the supply of new workers is decreasing:
http://www.nakedcapitalism.com/2010/06/chinese-labor-markets-tight-since-last-year.html
This suggests that there are limits to how far the migration can run, again perhaps because the number of people with large ambition is running low in the boonies.

 
At 6/08/2010 1:55 PM, Blogger PeakTrader said...

One reason income inequality increased in the U.S. is we flattened the bell curve. There are more high and low skilled immigrants compared to average skilled immigrants.

 
At 6/08/2010 2:08 PM, Blogger PeakTrader said...

Lyle, I'm sure most of the population of Bombay India would prefer to live in a U.S. city.

 
At 6/08/2010 2:08 PM, Anonymous Anonymous said...

However all immigrants have something that many natives lack a lot of ambition.

This statement, like your statement about "guts", is pure bullshit. If these "immigrants" are so blessed with ambition and "guts", then why hasn't that translated into better outcomes in the countries that they've left to come here? Shouldn't those countries be the exemplar of paradise that leftists always claim will come when white people have been displaced and we learn to embrace collectivism. After all, their home countries are being run by collectivist people-of-color, committed to "social justice". Why aren't leftists lined up at the border waving them back?

Time and time agian, stories, like this one, put the lie to the "jobs Americans won't do" argument.

 
At 6/08/2010 2:36 PM, Blogger Ron H. said...

"My comment: There's an inverse relationship between wages and profits."

Peak, then how do you reconcile these two statements?

"But our rebound in corporate profits is robust (a definitive V). Corporate profits could reach a new record high in this year's third quarter."

"Average hourly earnings were up 1.9% from a year ago..."

 
At 6/08/2010 2:41 PM, Anonymous gettingrational said...

A quote from PeakTrader: "The U.S. has been unable to create a virtuous cycle of consumption-employment, where consumption increases employment, and employment increases consumption, etc."

This is not virtuous but a vicious cycle. Consumption is 2/3 of GDP which is great if Production and Savings/Investment supports this system. But the system is now a cycle of Fed Stimulus (Rebuilding America) with consumption boosters to buy Imports.

A Virtous Cycle is more domestic Production of Goods and Services with resultant Savings and Investments and then consumption. What will lead GDP growth, as it has recently? Exports to low conumptions economies.

BTW, Bob Doll has it right if we can get the deficits (Trade & Gov't) eliminated.

 
At 6/08/2010 2:54 PM, Blogger PeakTrader said...

Ron, profits may rise 6% and wages rise 3%, or profits rise 12% and wages rise 2%, etc. So, profits increase at the expense of wages and vice versa.

In the 2000s, U.S. corporations had a record 20 consecutive quarters of double-digit profit growth, while average hourly earnings most likely increased faster than 1.9% a year.

 
At 6/08/2010 3:30 PM, Blogger PeakTrader said...

Gettingrational, the U.S. is a consumer-driven economy. If we were an export-led economy, we could produce more than consume. However, the rest of the world will not or cannot consume more than we produce to increase our employment (or employ our idle resources).

So, we need to increase consumption to increase employment, and continue the virtuous cycle until we reach full employment. We cannot reach full employment through saving.

Our economic growth and rising living standards will come from the inventions and innovations of the highest skilled workforce in the world. Therefore, the U.S. can consume (and save) more than it produces in the global economy.

 
At 6/08/2010 3:33 PM, Blogger Ron H. said...

gettingrational said...

"A quote from PeakTrader: "The U.S. has been unable to create a virtuous cycle of consumption-employment, where consumption increases..."

GR, the term "virtuous cycle of consumption-employment" is a term often used by Keynesian economists, and has a particular meaning when used in this way.

PeakTrader uses Keynesian references frequently, but we overlook it, because he is otherwise right on the money, and an excellent source of good information. :-)

(I hope PT knows I'm teasing him.)

 
At 6/08/2010 3:44 PM, Anonymous gettingrational said...

Peak Trader, I completely disagree with the first two paragraphs of your response. I completely agree with your last paragraph except that Intellectual Property rights will have to be enforced (especially in China where it is almost non-existent) -- for U.S. trade success.

 
At 6/08/2010 5:59 PM, Blogger Ron H. said...

gettingrational, keep in mind that imports generally benefit consumers who are able to buy less costly goods and are therefore wealthier, as well as businesses that buy cheaper capital goods and materials, and are therefore more competitive. Exports generally benefit companies and perhaps "the rich" who produce goods and services for export.

 
At 6/08/2010 6:52 PM, Blogger PeakTrader said...

Gettingrational states: "A (virtuous) cycle is more domestic Production of Goods and Services with resultant Savings and Investments and then Consumption."

So, you hire workers to overproduce and then what? Continue to build-up inventories? How can you save when no one is buying your goods & services?

Maybe you believe you can export your goods. Are you going to lower prices enough so that Chinese earning $0.25 an hour can afford them?

 
At 6/08/2010 9:43 PM, Anonymous gettingrational said...

Peak, we disagree. You are so last century and so I can imagine how U.S. success has tainted your perception. The battle lines for economic success in this new century are evident now and the U.S. cannot evade economic reality with last century's mindset.

 
At 6/08/2010 9:55 PM, Anonymous gettingrational said...

Ron H, you are making economic success to complicated. There are billions of new consumers for everthing from software to bilge pumps that can be produced in the U.S. We are at an inflectio point where the Feds can continue to encourage consumption by the unemployed or help to open new markets for U.S. Goods and Services and cherish the newly privately employed U.S. citizens. Think Big like your forefathers and not contritely small like so many mall walkers of today.

 
At 6/09/2010 12:03 AM, Blogger Ron H. said...

"...the Feds can continue to encourage consumption by the unemployed or help to open new markets for U.S. Goods and Services..."

How exactly would the Feds help to open new markets? What does that even mean? I suppose the Feds could keep inflating the money supply until we are forced to devalue the dollar, that should help exports.

...and cherish the newly privately employed U.S. citizens.

Is sethstorm helping you write this?

As PeakTrader pointed out, those billions of new consumers can't afford our stuff. If they could, they would already be buying it.

 
At 6/09/2010 2:11 AM, Blogger PeakTrader said...

Gettingrational, some things are timeless, e.g. economics and mathematics (which existed before people).

The innovations of Wall Street created enormous (excess) capital, assets, and goods for America, in the global economy. Yet, we blame Wall Street.

If Americans can't save, because they borrow and spend, through cheap capital, assets, and goods, then the government should save for them. Instead, the government went on an even bigger spending spree.

So, no matter what century you're in, when you use up and squander all your fuel, then you won't have any fuel left to get anywhere.

 
At 6/09/2010 10:59 AM, Anonymous gettingrational said...

Ron H, Your quote in part:

"How exactly would Feds open new markets? What does that even mean?"

Here is the United States Trade Representatives 2010 Report: On China's Trade Barriers and efforts by the U.S. to overcome legacy and newly created trade blocking practices. Please take special notice of U.S. high tech intellectual property which is pervasiely stolen. I hope you and others take the time to read this and push the Feds for more aggresive market openings and IP protection.

 
At 6/09/2010 11:20 PM, Blogger Ron H. said...

gettingrational, Thanks for the link. I must confess, I couldn't make it through all 37 pages, but I think I get the idea.

By "open new markets" you mean that US bureaucrats should ask a global body of bureaucrats to demand of Chinese bureaucrats that they eliminate or reduce economic policies that are, for the most part, harmful to Chinese consumers.

This report makes abundantly clear the inherent difficulties in dealing with a government controlled economy, such as that in China,...and if we're not very careful, our own.

I don't think it will work. China doesn't seem inclined to buy more from the US, and there isn't much to threaten them with. If they were interested in buying more US exports, they wouldn't keep loaning us money.

I'm not sure what the solution is to the problem of intellectual property piracy. China has been slow to recognize the concept.

How do you suppose a FTA would work with China?

 

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