Carpe Diem

The Packer Fan

A Packer fan was enjoying himself at the game in a packed Lambeau Field, until he noticed an empty seat down in front. He went down and asked the guy next to it if he knew whose seat it was. The guy said, “Yes, that’s my wife’s seat. We haven’t missed a game since the Lombardi days, but my wife just died suddenly.” The fan offered his sympathy and said it was really too bad he couldn’t find a relative or friend to give the ticket to and enjoy the game together. “Oh no, none of them were available” the guy said, “they’re all at the funeral right now.”

Carpe Diem

Psychology is the Joker in Economy’s Deck of Cards


From Time Magazine, December 2, 1957 issue:

The uneasy sign in the nation’s economic picture is not the statistical droop but the mood. If too many consumers postpone purchases out of worry, shrinkage in sales may bring on a real recession. “Psychology,” says Vice President Dr. Arthur A. Smith of Dallas’ First National Bank, “is the joker in the economy’s deck of cards.”

Now I’m not saying I think the U.S. economy is about to go into a recession, but it does seem like there is a certain amount of “recession psychology” going on, and some have suggested that we might be “talking ourselves into a recession.” Recessionary fears seem to generate more media attention than maybe more realistic talk of an economic slowdown, which feeds the “recession psychology” (see the increase in “recession” hits above on Google Trends for January).

According to futures trading on Intrade, there is now about a 71% chance of a U.S. recession in 2008. So let’s assume it happens: the U.S. economy goes into a recession this year. How bad will it be and how long will it last? The chart above shows the average length of U.S. recessions going back to 1854, using data from the NBER.

We know this for sure: It could be a lot worse, recessions used to last almost two years during the 1854-1919 period, and 1.5 years in the 1919-1945 period. Since WWII, the average recession lasted 10 months, and the last two recessions (1990-1991 and 2001) lasted only 8 months. With the support of a booming world economy, we could expect a short and shallow 2008 recession, IF if happens. If futures trading is correct, there’s a 29% of NOT having a recession, so don’t give up hope.

We would have to experience at least 6 months of significant economic downturn to have a recession, and there’s no evidence yet that there’s even been one month yet of serious decline in the important recession-indicating variables. I’m still saying the U.S. economy is not in recession. But then there’s always the joker….

Carpe Diem

Why Is $5 Gas Good for America? Many Reasons

“High Gas Prices Truly Cut Dependence on Foreign Oil,” Wired Magazine 2008

“Why $5 Gas is Good for America,” Wired Magazine 2005, here’s an excerpt:

Rising oil prices are more than just an irritant or even an ominous nick out of the GDP. For anyone with a fresh idea, expensive oil is as good as a subsidy – with no political strings attached. Indeed, every extra penny you pay at the pump is an incentive for some aspiring energy mogul to find another fuel.

For the better part of a century, cheap oil has fatally undercut all comers, not to mention smothered high-minded campaigns for conservation, increased efficiency, and energy independence. The changing outlook opens horizons – for conventional drilling, sure, but also for alternatives. Some new technologies merely produce more crude. But others tap energy supplies that have nothing to do with black pools under the Middle East.

What to do? Keep driving. In fact, drive more. The longer gas stays expensive, the higher the chance we’ll see alternatives.

Carpe Diem

By the Time NBER Announces A Recession, It’s Over

From today’s Washington Post: The NBER’s pronouncements historically come long after recessions have begun, a whopping seven months on average. By the time the bureau announced the recession of 1991, it had already ended.

It’s true. On April 25, 1991, the
NBER announced that a recession started in July of 1990. It later announced at the end of 1992 that the recession actually ended in March 1991. It was an 8 month recession, and it took the NBER 9 months to make the official determination.

And for the last recession that lasted from March to November 2001, the NBER announced on November 26, 2001 that a recession started in March, just about the time that the recession was ending. In July 2003, the NBER made the official announcement that the recession ended in November 2001. It was an 8 month recession, and it took exactly 8 months for the NBER to make the official recession announcement.

Bottom Line: If the NBER’s track record continues, by the time it announces the next recession, it’s likely the recession will already be over. So sit back and relax. Even if there is a recession in 2008 or 2009 or 2010, we probably won’t know for sure until it’s just about over. And by that time it will, well, be over.

Carpe Diem

A Rising Global Tide of Capitalism Lifts All Boats


From an Anonymous comment on CD:

“Isn’t it better that the world economy is becoming less dependent on the U.S.? Isn’t a multi-polar world more economically resilient than a uni-polar world? Other countries that have been helped by the U.S. in the past are now able to help the U.S. through their sovereign wealth funds. That would seem to be an improvement from a world where the U.S. is responsible for all of the world’s ills and gets little thanks for its efforts either philanthropic, diplomatic or military.”

The top chart above shows the decline in the U.S. share of world stock market capitalization from more than 50% in 2001, to less than a third in 2007 (32.8%), using data from the World Federation of Exchanges. Even though the U.S. Stock market capitalization has increased in each of the last five years, the explosive growth in many of the emerging markets has caused the U.S. share of world stock value to decline. In other words, the relatively poor countries are getting richer, and the relatively rich U.S. gets richer, but the “poor” are getting rich even faster. That’s great.

Likewise, even though U.S. GDP has increased this year at a healthy 3.1% rate, our share of world GDP growth has fallen below 30% (see bottom chart above), due to the even greater growth in the emerging economies like China and India.

One result of all of that economic and stock market growth around the world?

According to the NY Times, “Last year, foreign investors poured a record $414 billion into securing stakes in American companies, factories and other properties through private deals and purchases of publicly traded stock. That was up 90% from the previous year and more than double the average for the last decade.

The influx is the result of a confluence of factors that have made the United States both reliant on the largesse of foreigners and an alluring place for opportunistic investors. The weak dollar has made American companies and properties cheaper in global terms, particularly for European and Canadian buyers. Even as Americans confront the prospect of a recession, economic growth remains strong worldwide, endowing oil producers like Saudi Arabia and Russia and export powers like China and Germany with abundant cash.”

Bottom Line: Globalization and the spread of market capitalism has both united the world economies in important ways, while at the same time helping to strengthen and support the U.S. economy. We have the advantage of selling American products to the growing middle and upper classes around the world at a time when U.S. demand is slowing, and also being the recipients of massive foreign investment at a time when it is needed here. Yes, it is better that the world economy is less dependent on the U.S., and it is also better that the U.S. economy can become more dependent on the world economy.

Carpe Diem

GM Counts on India, China to Offset U.S. Slump

An interesting Bloomberg exclusive “GM, Ford Count on India, China to Offset U.S. Slump” supports the suggestion in the post below that today’s global economy helps support the U.S. economy in ways that are fundamentally different than in the past. Consider these excerpts from the article:

1. General Motors CEO Rick Wagoner says the U.S. is in an automotive recession, and he and his fellow CEOs are looking abroad for help.

2. With sales stagnating in Europe and down in Japan as well, U.S. automakers are banking on developing markets such as China and India to ease the pain. “Everybody is aiming at Russia, China and India,” said an auto analyst. China is an automobile market that’s going to be as big as the United States or EU.

3. U.S. sales are expected to fall by 2.5% in 2008 to 15.7 million units, but worldwide sales are expected to rise 4% this year to 75 million vehicles. In other words, almost 80% of the world vehicle market is now OUTSIDE the U.S.

4. The biggest sales gains for vehicles will come from countries where the rate of automobile ownership is climbing, like China, Russia, Eastern Europe.

5. In 2007, GM last year sold more than 1 million vehicles in China for the first time, and sales there are expected to grow by 15% this year.

6. GM sold 1 million units last year for the first time in the Latin America, Africa and Middle East region.

7. GM sold 3.82 million vehicles in the U.S. in 2007, and about 5.5 million units OUTSIDE the U.S., which means that GM now depends on foreign sales for almost 60% of its total sales.

Bottom Line: In previous U.S. economic or automotive slowdowns, especially in the 1970s, 1980s and 1990s, there certainly weren’t strong growth areas in countries like China, India, Russia, etc. to help support GM and Ford when U.S. sales slumped. It should be considered a positive development that in an era of globalization, Ford and GM are no longer so dependent on just the U.S. market.

Carpe Diem

Worldwide Outsourcing Industry Rebounding

Equaterra, one of the leading outsourcing advisory firms, just released its latest quarterly report on worldwide outsourcing activity, based on a survey of its advisors. From its press release:

“Despite fear of a recession in the U.S., jitters on virtually all major stock exchanges worldwide and widespread cut-backs in corporate spending, EquaTerra’s 4Q2007 Pulse surveys revealed that outsourcing demand is rebounding, with continued strong growth in EMEA (Europe, Middle East and Africa) and a substantial increase in North America. In fact, 70% of EquaTerra advisors cited increased demand levels for Information Technology (IT) and business process outsourcing in 4Q07, with demand up 19% over 3Q07, up 24% over 4Q06, and at the highest level recorded since 2Q05. Further, 59% of service providers cited new deal pipeline growth in 4Q07, and 57% expect demand to increase in 1Q08.”

Reasons for the recent rebound in outsourcing demand include:

1. Increased focus on the bottom line and cost reduction (one benefit of an economic slowdown?)

2. New and growing areas like legal and knowledge process outsourcing, and document and electronic records management

3. More but smaller outsourcing deals spread across a greater number of service providers and delivered on a more global basis

Bottom Line: Today’s inter-connected global economy, fueled by worldwide outsourcing, represents a fundamental shift in the way the world operates, probably in ways we haven’t even fully appreciated yet. Worldwide outsourcing opportunities are increasing continually, which in many important ways serve to increase the resiliency, flexibility and strength of both the emerging economies and the advanced economies like the U.S. Isn’t it possible that globalization and outsourcing help to support and insulate the U.S. economy from significant economic downturns and recession?

Carpe Diem

Commercial Bank Loans At Record-High

The chart above (click to enlarge) shows the series “Commercial and Industrial Loans of Weekly Reporting Large Commercial Banks” from 1988-2008, available from the Federal Reserve via FRED. A couple key points:

1. As of the first week of January, commercial bank loans are at a record high of $760 billion.

2. It was only three months ago, in early October 2007, that commercial bank loans surpassed the previous record high commercial loan volume of $722 billion set back in September 2000 (a banking milestone that went unreported).

3. Compared to many economic and banking variables that are reported only monthly or quarterly, often with long lags, commercial bank loans are reported weekly, with a lag of only a few weeks, and therefore provide important, current, and up-to-date information on commercial bank lending.

4. It’s true that “commercial and industrial loans outstanding” are considered to be a lagging indicator by The Conference Board, but it’s also true that commercial loans started declining at the onset of both of the last two recessions (see chart above).

Bottom Line: Given the continuing strength of commercial bank lending at record-high levels through early January, it’s highly unlikely that the U.S. economy has entered into a recession. I’ll continue to monitor this important economic variable.

Carpe Diem

Remember: Government Has No Money to Give, II

And Government’s “Transfer Bucket” Leaks:

The standard stimulus package doesn’t change incentives. It’s a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.

And even the people who get the money often save more of it than they spend.

That’s why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician’s approval rating.

~From George Mason economist and Cafe Hayek blogger Russ Roberts on NPR, transcript available here

Bottom Line: Despite what the media, general public and politicians seem to believe, there simply is no such thing as government money. For the government to send out tax rebates to one group, they have to: a) raise taxes on other groups to get the money, or b) borrow money from other groups to get the money, meaning there cannot be any net positive stimulus, as Professor Roberts suggests above. It’s merely a coerced government transfer of funds from Group A to Group B, making one group better off at the expense of the other group.

The only comment I would add is that the transfer of water from the deep end of the pool to the shallow end in Professor Roberts’ example is done with government’s leaky and porous bucket (pictured above), so that the pool actually loses water overall and becomes smaller at both ends!