Some years ago (40, to be exact) I attended a rally for then-U.S. Sen. Eugene McCarthy, who was running against Lyndon Johnson for the Democratic nomination for president. “Clean Gene,” as he was called, shared a bit of barnyard humor that has stuck with me ever since. My knowledge of farm animals is pretty limited, so I can’t vouch for whether it’s true on a biological or zoological level.
According to McCarthy, pigs are mostly insensitive to temperature except in their snouts. In Minnesota, where McCarthy was from, it gets pretty cold, of course. But because pigs mainly sense temperature with their snouts, as long as their snouts are warm, they believe they’re warm all over. So when a pig gets cold, McCarthy said, it will try to warm itself up by sticking its snout between the hind legs of another pig.
According to McCarthy, it’s not unheard-of to see whole herds of swine forming a kind of daisy chain, each with its nose up the backside of the one in front of it. And if there’s an unexpected hard freeze, an unfortunate pig farmer might come out the next morning to find his entire herd frozen to death in a circle.
McCarthy shared this somewhat indelicate information as a metaphor for the behavior of politicians, but it also strikes me as highly applicable to the way financial regulators and executives have been behaving lately.
Take, for instance, Federal Reserve Chairman Ben Bernanke. Throughout the first half of this year, Bernanke insisted that the U.S. economy was not in a recession and stood a fair chance of avoiding one. While he acknowledged that the economy was weak and the financial system vulnerable because of mortgage-related problems, he expressed confidence that the Fed’s cuts in its key interest rate would be enough to prevent an actual economic decline.
We know now, of course, that Bernanke was wrong. According to the National Bureau of Economic Research, a private nonprofit business group that is the quasi-official authority on economic cycles, the U.S. entered a recession a year ago this month.
What’s more, a lot of people have known that all along; even an armchair economist like me. Back on April 23, I wrote in my blog for The Post and Courier that “it would appear likely that we’ll look back at the fourth quarter of 2007 as the beginning of this recession.”
But Bernanke – who holds his job as Fed chairman because he’s regarded as one of the nation’s top economists – continued to insist that there was no recession and that a recession could, in fact, be avoided.
There are only two possible reasons why Bernanke kept saying those things: Either he’s an incompetent economist or he was being deliberately deceptive.
I’d probably opt for the latter explanation, because there does seem to be a kind of traditional belief in the financial community that denial of negative conditions will somehow make those conditions go away. (The real estate community took a somewhat similar approach early in the ongoing collapse of that market.) And there’s also the Straussian belief, widespread in the Bush administration, that deception of the citizenry is a valid policy tool.
However, it doesn’t matter which explanation you prefer. Either way, it’s clear that we have no good reason to trust Bernanke as a steward of our economy and financial system.
Bernanke’s partner in the ongoing economic Tweedledum and Tweedledee act, Henry Paulson, will be leaving office in January as part of the turnover of the White House to Barack Obama’s team. But Bernanke’s 4-year term as chairman of the Fed doesn’t expire until January 2010, and his 14-year (!) term on the Fed’s board will last until 2020.
The totally inadequate response of Bernanke and Paulson to the current economic and financial problems is reason enough to want them both gone. But now that we have clear, decisive evidence of Bernanke’s unreliability even on the level of Economics 101, it’s imperative that he be replaced as rapidly as possible.
Bernanke should do the honorable thing and resign, now. And if he won’t do that, then the new administration and the new Congress should do whatever is necessary to dismiss him for incompetence. All he has done is try to keep financial executives’ noses warm, but the economic temperature is still dropping.
Showing posts with label recession. Show all posts
Showing posts with label recession. Show all posts
Tuesday, December 2, 2008
Thursday, November 20, 2008
'Tis the Season
This morning’s weekly report on claims for unemployment insurance benefits was greeted by the financial media with something like horror, though the stock market seems to have shrugged it off successfully by midday. Once again, however, the reported numbers are highly misleading.
The news tickers and financial correspondents are, as usual, reporting the Labor Department’s headline number: 542,000 initial filings for benefits, up from 516,000 the previous week and the highest level since 1992. Pretty shocking stuff, if it were real. Here’s a chart (click to enlarge, right-click to open in its own window) showing the true situation:
The headline number is of course the “seasonally adjusted” figure for initial claims. What the chart shows, in contrast, is the actual number of filings this year to date compared with last year and the average going back to 1967. And the actual number of filings, 511,941, was down in the latest week, not up.
That’s not to say that the employment situation is rosy. The latest number is in fact the second-highest for the corresponding week since record-keeping began; the highest was in 1982. And the total is 58 percent above the corresponding week last year, which, as the chart shows, was actually a little below the long-term average. But there’s no surprise here; the unadjusted figures this year have been running sharply higher than last year since February (with one week in July marking an exception).
Adding in continued claims, which are reported a week later than initial claims, the situation looks pretty bad:
The latest number for this series is 53 percent above the same week last year and, like the initial claims number, is the second-highest on record for the corresponding week, with 1982 marking the peak. And again, filings this year have steeply outpaced last year for pretty much the whole year, so I’m having a little trouble understanding why this is all such a shock to the talking heads on TV.
In both charts, this year’s filings have been following the long-term seasonal pattern quite closely but at an exceptionally high level. If the numbers continue that pattern, it’s not good news for workers, because the seasonal tendency is for layoffs to increase sharply until mid-January. Given the effect the economic slowdown is already having on retailers, car dealers and just about everyone else, it’s not good news for anyone.
The news tickers and financial correspondents are, as usual, reporting the Labor Department’s headline number: 542,000 initial filings for benefits, up from 516,000 the previous week and the highest level since 1992. Pretty shocking stuff, if it were real. Here’s a chart (click to enlarge, right-click to open in its own window) showing the true situation:
The headline number is of course the “seasonally adjusted” figure for initial claims. What the chart shows, in contrast, is the actual number of filings this year to date compared with last year and the average going back to 1967. And the actual number of filings, 511,941, was down in the latest week, not up.
That’s not to say that the employment situation is rosy. The latest number is in fact the second-highest for the corresponding week since record-keeping began; the highest was in 1982. And the total is 58 percent above the corresponding week last year, which, as the chart shows, was actually a little below the long-term average. But there’s no surprise here; the unadjusted figures this year have been running sharply higher than last year since February (with one week in July marking an exception).
Adding in continued claims, which are reported a week later than initial claims, the situation looks pretty bad:
The latest number for this series is 53 percent above the same week last year and, like the initial claims number, is the second-highest on record for the corresponding week, with 1982 marking the peak. And again, filings this year have steeply outpaced last year for pretty much the whole year, so I’m having a little trouble understanding why this is all such a shock to the talking heads on TV.
In both charts, this year’s filings have been following the long-term seasonal pattern quite closely but at an exceptionally high level. If the numbers continue that pattern, it’s not good news for workers, because the seasonal tendency is for layoffs to increase sharply until mid-January. Given the effect the economic slowdown is already having on retailers, car dealers and just about everyone else, it’s not good news for anyone.
Wednesday, November 19, 2008
It Could Be Worse
Today’s economic reports, stock market decline and related news stories were all pretty ugly. But they were 1970s ugly rather than 1930s ugly, which is some consolation.
The Dow Jones Industrial Average is down, as of today’s close, 44 percent from its all-time high set a little over a year ago. The decline from the January 1973 high to the December 1974 low was 45 percent. The decline from the September 1929 high to the July 1932 low was almost exactly twice as much, 89 percent. An 89 percent decline from the October 2007 high would put the Dow at about 1558, so today’s much-discussed close slightly below 8000 may not look quite so bad.
Mathematically, stock market movements resemble earthquakes; that is, they’re fractal and scale according to a power law. In oversimplified English, which is the only way I can understand this kind of thing, what that means is that exponentially larger movements occur exponentially less often than small movements. This is why seismologists are unable to tell Californians exactly when “the Big One” will occur but insist that the more time passes without a big one, the more likely it becomes. So same thing with the stock market.
The current bear market is the second since 2000; the decline from the January 2000 high to the October 2002 low amounted to about 38 percent. From the seismological point of view, that might mean that we’re less likely to get a “big one” of near 90 percent, and instead must suffer through a series of less catastrophic but still thoroughly unpleasant medium-sized shocks.
From the standpoint of technical market analysis, 8000 on the Dow isn’t very interesting anyway. The really interesting number is the October 2002 low at about 7286, which we could stretch a bit down to the 7000 level as an idealized 50 percent decline. If that range doesn’t hold, then we’re potentially looking at a decline to 1.) the 5300-5700 area, representing the trading range of a 1996 pause, for a possible 62 percent drop; the 3600-4000 range, which is the level of a somewhat significant sideways move in 1994 and would amount to a roughly 75 percent decline; or the aforementioned near-90 percent decline to the 1500 range. And of course there's always the possibility that the world could come to an end and the Dow would fall to zero, but personally I give that pretty low odds.
Those are, of course, the worst-case scenarios. The most optimistic case would be that the market is “base-building” right around where it is now and will launch a new, multi-year uptrend from here that will replenish all the 401(k) accounts and other investments that have been stripped in the past year. I’d feel a lot more confident about that scenario if it didn’t depend so much on believing that the same people who contributed so much to the current problems - and who are still apparently more interested in self-justification and self-aggrandizement than in doing anything for their society or their world - will somehow suddenly start making all the right decisions.
The Dow Jones Industrial Average is down, as of today’s close, 44 percent from its all-time high set a little over a year ago. The decline from the January 1973 high to the December 1974 low was 45 percent. The decline from the September 1929 high to the July 1932 low was almost exactly twice as much, 89 percent. An 89 percent decline from the October 2007 high would put the Dow at about 1558, so today’s much-discussed close slightly below 8000 may not look quite so bad.
Mathematically, stock market movements resemble earthquakes; that is, they’re fractal and scale according to a power law. In oversimplified English, which is the only way I can understand this kind of thing, what that means is that exponentially larger movements occur exponentially less often than small movements. This is why seismologists are unable to tell Californians exactly when “the Big One” will occur but insist that the more time passes without a big one, the more likely it becomes. So same thing with the stock market.
The current bear market is the second since 2000; the decline from the January 2000 high to the October 2002 low amounted to about 38 percent. From the seismological point of view, that might mean that we’re less likely to get a “big one” of near 90 percent, and instead must suffer through a series of less catastrophic but still thoroughly unpleasant medium-sized shocks.
From the standpoint of technical market analysis, 8000 on the Dow isn’t very interesting anyway. The really interesting number is the October 2002 low at about 7286, which we could stretch a bit down to the 7000 level as an idealized 50 percent decline. If that range doesn’t hold, then we’re potentially looking at a decline to 1.) the 5300-5700 area, representing the trading range of a 1996 pause, for a possible 62 percent drop; the 3600-4000 range, which is the level of a somewhat significant sideways move in 1994 and would amount to a roughly 75 percent decline; or the aforementioned near-90 percent decline to the 1500 range. And of course there's always the possibility that the world could come to an end and the Dow would fall to zero, but personally I give that pretty low odds.
Those are, of course, the worst-case scenarios. The most optimistic case would be that the market is “base-building” right around where it is now and will launch a new, multi-year uptrend from here that will replenish all the 401(k) accounts and other investments that have been stripped in the past year. I’d feel a lot more confident about that scenario if it didn’t depend so much on believing that the same people who contributed so much to the current problems - and who are still apparently more interested in self-justification and self-aggrandizement than in doing anything for their society or their world - will somehow suddenly start making all the right decisions.
CPI Update
A quick note to update my previous posting: The Consumer Price Index for October was lower than expected, showing a full 1 percent decline from September (on both a seasonally adjusted and unadjusted basis). Analysts are interpreting this relatively steep decline as a sign of worse-than-expected economic weakness. In terms of the chart included with my last posting, however, all it did was bring the index back to the top of the red trend channel, so it isn't (yet) indicating that the steep rise in inflation of the past four-plus years is over. Any further such declines, though, might raise the possibility that a deflationary trend is developing, which would tend to suggest that the current economic downturn could turn into something worse than a recession.
Monday, November 17, 2008
The Price of Everything
With the release over the next two days of the government’s two main inflation indicators – the Producer Price Index, due Tuesday, and the Consumer Price Index, set to be announced Wednesday – the markets, policymakers and financial media are likely to be focusing on this topic for the first time in a while. Lately, the only thing price-wise that has gotten much attention is the big decline in oil prices since the all-time high in July.
Wall Street forecasters on average are predicting the CPI fell in October by 0.7 percent after zero change in September, and are looking for October’s year-on-year increase to be 4.0 percent after a 4.9 percent rise in September.
Those estimates are based on the seasonally adjusted index, of course. I’ve been looking at the unadjusted figures going back to 1913, and frankly I don’t see any evidence of strong seasonal tendencies in this index, which is already kind of overprocessed without adding seasonal assumptions to the brew. And I’m not even going to talk about the inane “core” inflation concept, which excludes food and energy prices, allegedly because of their “volatility.”
In any case, one group that ought to be paying close attention to these numbers, adjusted or not, is the Federal Reserve’s interest rate-setting Open Market Committee. The minutes from that august body’s latest meeting are due for release Wednesday afternoon. Given that the FOMC opted at that meeting to cut the Fed’s main interest rate again, it seems likely that they decided (again) that inflation isn’t much of a threat right now.
I’d say the following chart argues otherwise:
What the chart (click on it to enlarge; right click to open in a new window) shows is pretty straightforward, with no massaging or processing: It’s the CPI, not seasonally adjusted, going back to 1990.
The top line of the orange-colored trend channel actually connects all the way back to a big spike in inflation that resulted from war-related shortages – World War I, that is. So as a growth rate, it generally represents the maximum rate of increase in inflation over a period of about 90 years.
But as you can see toward the right side of the chart, the CPI’s rate of increase accelerated at the beginning of 2004, as indicated by the red trend channel. By the middle of 2005, the index had actually broken above the 90-year top trendline. And by April of this year, it outpaced even the new, faster rate of increase, as indicated by its breach of the upper red line.
The all-time high in the index was set this past July, and the index has declined slightly since then. As mentioned above, the forecasters on Wall Street believe it fell again in October, and if there’s any seasonal tendency in this index, it’s toward an easing of the rate of increase during the fourth quarter. If the prediction of a 0.7 percent dip is correct, it will be the biggest monthly drop in the CPI (seasonally unadjusted) since November 2005. But it won’t be enough to drop the index below the top red line on the chart, let alone to bring it back into the long-term trend channel.
For some time now, high inflation combined with an economy in recession – “stagflation,” to use the term coined in the 1970s – has been the ultimate nightmare scenario for policymakers, politicians and investors. The Fed clearly thinks it has a better chance of warding off recession, by cutting interest rates, than of cooling off inflation, which would require raising interest rates. But if the rate cuts don’t keep the economy from declining – and so far, they obviously haven’t, as the latest gross domestic product numbers attest – they still stand a good chance of keeping inflation climbing.
Wall Street forecasters on average are predicting the CPI fell in October by 0.7 percent after zero change in September, and are looking for October’s year-on-year increase to be 4.0 percent after a 4.9 percent rise in September.
Those estimates are based on the seasonally adjusted index, of course. I’ve been looking at the unadjusted figures going back to 1913, and frankly I don’t see any evidence of strong seasonal tendencies in this index, which is already kind of overprocessed without adding seasonal assumptions to the brew. And I’m not even going to talk about the inane “core” inflation concept, which excludes food and energy prices, allegedly because of their “volatility.”
In any case, one group that ought to be paying close attention to these numbers, adjusted or not, is the Federal Reserve’s interest rate-setting Open Market Committee. The minutes from that august body’s latest meeting are due for release Wednesday afternoon. Given that the FOMC opted at that meeting to cut the Fed’s main interest rate again, it seems likely that they decided (again) that inflation isn’t much of a threat right now.
I’d say the following chart argues otherwise:
What the chart (click on it to enlarge; right click to open in a new window) shows is pretty straightforward, with no massaging or processing: It’s the CPI, not seasonally adjusted, going back to 1990.
The top line of the orange-colored trend channel actually connects all the way back to a big spike in inflation that resulted from war-related shortages – World War I, that is. So as a growth rate, it generally represents the maximum rate of increase in inflation over a period of about 90 years.
But as you can see toward the right side of the chart, the CPI’s rate of increase accelerated at the beginning of 2004, as indicated by the red trend channel. By the middle of 2005, the index had actually broken above the 90-year top trendline. And by April of this year, it outpaced even the new, faster rate of increase, as indicated by its breach of the upper red line.
The all-time high in the index was set this past July, and the index has declined slightly since then. As mentioned above, the forecasters on Wall Street believe it fell again in October, and if there’s any seasonal tendency in this index, it’s toward an easing of the rate of increase during the fourth quarter. If the prediction of a 0.7 percent dip is correct, it will be the biggest monthly drop in the CPI (seasonally unadjusted) since November 2005. But it won’t be enough to drop the index below the top red line on the chart, let alone to bring it back into the long-term trend channel.
For some time now, high inflation combined with an economy in recession – “stagflation,” to use the term coined in the 1970s – has been the ultimate nightmare scenario for policymakers, politicians and investors. The Fed clearly thinks it has a better chance of warding off recession, by cutting interest rates, than of cooling off inflation, which would require raising interest rates. But if the rate cuts don’t keep the economy from declining – and so far, they obviously haven’t, as the latest gross domestic product numbers attest – they still stand a good chance of keeping inflation climbing.
Thursday, November 13, 2008
Spin Cycle
The big economic news this morning was the report that Germany’s gross domestic product declined in the third quarter, marking the second quarter in a row that Europe’s biggest economy has posted a decline in output. That two-quarter decline of course prompted finance reporters to proclaim that Germany now has met “the technical definition of a recession,” which they said is “two or more quarters of decline in GDP.”
Um, no. In the U.S. at least, the organization that more or less officially declares when recessions begin and end, the National Bureau of Economic Research, defines a recession “technically” like this:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”
In practical terms, most recessions do include two or more consecutive quarters of declining GDP, but a recession can start or end during a quarter that shows an overall increase. As the NBER puts it:
“Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. The most recent recession in our chronology was in 2001. According to data as of July 2008, the 2001 recession involved declines in the first and third quarters of 2001 but not in two consecutive quarters. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.”
So far, the NBER hasn’t declared that the U.S. economy is in a recession, but they’re often a little slow to make such determinations; it wasn’t until July 2003 that they decided the 2001 recession had ended in November of that year.
Interestingly, the NBER body that makes these determinations is called the Business Cycle Dating Committee. Until recently, a casual observer of the talk coming out of Wall Street and Washington might have gotten the idea that the “business cycle” was a thing of the past, there would be no more downturns, just an endless vista of rising prosperity until the end of time, because our god-like regulators and CEOs would exercise their miraculous powers to make it so.
These of course would be the same regulators and CEOs who are now running hysterically around seeking taxpayer handouts and warning of the imminent collapse of our entire economic system if they don’t get them.
Cycles play a large role in the natural order and are often related to the kind of yin-yang/creation-destruction/attraction-repulsion systems found widely in philosophy and physical science. Given the fundamental dualism of financial and economic dynamics (buy or sell), it would be pretty surprising if we didn’t see some evidence of cyclicality in the economy and markets.
Well, no surprise here:
The chart shows the daily closing price of the Dow Jones Industrial Average from 1897 to the present, on log scale (click to enlarge). The gridlines are set to a time interval of three and a quarter years, and as you can see if you look closely, many of the most significant lows in the index occur pretty close to those lines.
That cycle is even clearer in this next one:
What this chart shows is the 52-week average of the daily percentage price change in the Dow over the same period shown in the first chart. The cyclicality in this time series is pretty obvious, though it clearly isn’t precise enough to be useful in making investment forecasts.
Possibly the most interesting thing about this chart is the fact that the Oct. 27 low in the Dow at 8175 came just seven days shy of the exact predicted date for the 3.25-year cycle low. The index and the average rate of change both rebounded from that point, possibly signaling the start of an upswing that could last a year or more. However, for that interpretation to retain any validity, the index will have to stay above the 8175 level; it’s succeeding so far, but just barely.
Um, no. In the U.S. at least, the organization that more or less officially declares when recessions begin and end, the National Bureau of Economic Research, defines a recession “technically” like this:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”
In practical terms, most recessions do include two or more consecutive quarters of declining GDP, but a recession can start or end during a quarter that shows an overall increase. As the NBER puts it:
“Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. The most recent recession in our chronology was in 2001. According to data as of July 2008, the 2001 recession involved declines in the first and third quarters of 2001 but not in two consecutive quarters. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.”
So far, the NBER hasn’t declared that the U.S. economy is in a recession, but they’re often a little slow to make such determinations; it wasn’t until July 2003 that they decided the 2001 recession had ended in November of that year.
Interestingly, the NBER body that makes these determinations is called the Business Cycle Dating Committee. Until recently, a casual observer of the talk coming out of Wall Street and Washington might have gotten the idea that the “business cycle” was a thing of the past, there would be no more downturns, just an endless vista of rising prosperity until the end of time, because our god-like regulators and CEOs would exercise their miraculous powers to make it so.
These of course would be the same regulators and CEOs who are now running hysterically around seeking taxpayer handouts and warning of the imminent collapse of our entire economic system if they don’t get them.
Cycles play a large role in the natural order and are often related to the kind of yin-yang/creation-destruction/attraction-repulsion systems found widely in philosophy and physical science. Given the fundamental dualism of financial and economic dynamics (buy or sell), it would be pretty surprising if we didn’t see some evidence of cyclicality in the economy and markets.
Well, no surprise here:
The chart shows the daily closing price of the Dow Jones Industrial Average from 1897 to the present, on log scale (click to enlarge). The gridlines are set to a time interval of three and a quarter years, and as you can see if you look closely, many of the most significant lows in the index occur pretty close to those lines.
That cycle is even clearer in this next one:
What this chart shows is the 52-week average of the daily percentage price change in the Dow over the same period shown in the first chart. The cyclicality in this time series is pretty obvious, though it clearly isn’t precise enough to be useful in making investment forecasts.
Possibly the most interesting thing about this chart is the fact that the Oct. 27 low in the Dow at 8175 came just seven days shy of the exact predicted date for the 3.25-year cycle low. The index and the average rate of change both rebounded from that point, possibly signaling the start of an upswing that could last a year or more. However, for that interpretation to retain any validity, the index will have to stay above the 8175 level; it’s succeeding so far, but just barely.
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