This report amuses me:
.....while investors had been applauding the drop in oil prices since then, there was an assumption that lower commodities prices would hasten a recovery in the U.S. economy. Now, he said, investors are worried that the economy might be weakening even as oil falls.
"It's disinflation coupled with an accelerating downside in the economy. That's not what people were prepared for. I think people were expecting disinflation as an economic recovery was under way," Lee said. "The surge in unemployment today really underscores that fear."
So, the plunge of oil in the past 2 months was supposed to somehow miraculously save tens of thousands of people whose fates were probably decided - I don't know - maybe up to 4 to 6 months (if the world hasn't changed much since I came into this hidey-hole of mine a year ago, and if my memory serves me correctly, companies don't decide to do axing overnight, nor do they start re-hiring on sudden and drastic drop in oil ; and those that have shut down don't just suddenly somehow within 2 months decide that this is the best time for a comeback - especially in an environment where both banks and customers are not exactly going to be able to give them the best deal) before oil came down?
We would need a time machine to do that, won't we?
My limited knowledge in economics (macro?? micro....??) tells me that recovery in economy hinges largely, if not solely, on:
1) The collective spending power of local residents who are still GAINFULLY EMPLOYED, and who are still willing to spend even if they can AFFORD to,
2) A declining trade and budget deficit, and
3) The ability and willingness of the country and her people to SAVE
And point 1) above depends on how much discretionary income, or simply, SPARE cash, the general population has.
After having to fork out for taxes, INCREASINGLY COSTLY mortgages, increasingly costly basic necessities - thanks to inflation (and really, is OIL the only reason behind the cost of everything, including HOUSING, skyrocketing? Does inflation not have perhaps just a little to do with too much money that's NOT supposed to be there in the first place floating around for grabs, in a culture that is known for its insatiable appetite for material possession? Does it not have something to do with the fact that we are living in an era where the very idea of using money that you've NOT earned is not only no longer frowned upon, but actually encouraged, advocated, and - this is the most detrimental part - EMBRACED? Let's be honest, if you were a waiter working in a clean, decent restaurant, and one day you send a diner a bill that comes up to, let's say, $200, and he pays in CASH, wouldn't your first thoughts be along the line of: jeez, doesn't this dude earn enough to own a credit card?) - little wonder that at this time of the year, and with the prospect of the country's economy in such a questionable state, that money would be very prudently allocated and spent only on such necessities (applicable to first world countries only) as college fees, summer traveling and cooling of homes (which makes me wonder how demand of oil could have dropped and hence caused oil to drop......??).
On my point 2):
I am not even going to use the more direct "positive trade and budget balance" here, because to expect that to happen - particularly amidst a rising greenback in a global economic slowdown - in the near term would be akin to expecting oil to fall to $85 dollars per barrel after OPEC holds their meeting next week to see if they want to CUT SUPPLY.
On my point 3):
I've lost touch with (can I be blamed??) how and where banks get the bulk of their capital these days, but it used to be the nation's SAVINGS.
Well, today you have an endless list of sophisticated structured instruments that banks can churn out and market to the public who won't ever stop buying things that everyone else seems to be buying, and anything that promises low-risk, if not no-risk, and unimaginably (only coz it's crazy, ridiculous, and the method with which to derive the figure stumps even a college graduate) high returns, and the usual bonds and stocks they can readily issue to the unwary (I mean, it's a bank! If you can't trust a bank, can you trust your neighbors, your best friend, why, even your dog Lucky??) public.
I've digressed AGAIN.
Where was I?
Yes, SAVINGS.
Er......
What's there to say about savings?
Except that to the best of my knowledge, the country prefers to SPEND, and wants her people to do the same. Why, you've got to get your people out there spending to boost the economy don't you?? After all, didn't you give them a free-flow of cash to dispose of whenever and however they fancy, and the promise of even far better things to come?
I don't remember a whole lot about economics. I took them more than 10 years ago and the only things that have stuck are my funny (only coz he thinks he's funny) professor, and (this one's really clichéd), the words "SUPPLY" and "DEMAND".
So, I'm not going to continue to dwell on what makes or breaks a country's fortune.
What I care about is this: for as long as buying continues (for a variety of reasons but probably mainly instigated by a strong USD - which is strong only coz the others are WEAK...ok, I shan't confuse anyone anymore), and for as long as there are enough bulls out there who are full of hope one day, only to be dismayed days later at a seemingly unsustainable rally, I can still relish every minute of my happy bear sessions!
.....while investors had been applauding the drop in oil prices since then, there was an assumption that lower commodities prices would hasten a recovery in the U.S. economy. Now, he said, investors are worried that the economy might be weakening even as oil falls.
"It's disinflation coupled with an accelerating downside in the economy. That's not what people were prepared for. I think people were expecting disinflation as an economic recovery was under way," Lee said. "The surge in unemployment today really underscores that fear."
So, the plunge of oil in the past 2 months was supposed to somehow miraculously save tens of thousands of people whose fates were probably decided - I don't know - maybe up to 4 to 6 months (if the world hasn't changed much since I came into this hidey-hole of mine a year ago, and if my memory serves me correctly, companies don't decide to do axing overnight, nor do they start re-hiring on sudden and drastic drop in oil ; and those that have shut down don't just suddenly somehow within 2 months decide that this is the best time for a comeback - especially in an environment where both banks and customers are not exactly going to be able to give them the best deal) before oil came down?
We would need a time machine to do that, won't we?
My limited knowledge in economics (macro?? micro....??) tells me that recovery in economy hinges largely, if not solely, on:
1) The collective spending power of local residents who are still GAINFULLY EMPLOYED, and who are still willing to spend even if they can AFFORD to,
2) A declining trade and budget deficit, and
3) The ability and willingness of the country and her people to SAVE
And point 1) above depends on how much discretionary income, or simply, SPARE cash, the general population has.
After having to fork out for taxes, INCREASINGLY COSTLY mortgages, increasingly costly basic necessities - thanks to inflation (and really, is OIL the only reason behind the cost of everything, including HOUSING, skyrocketing? Does inflation not have perhaps just a little to do with too much money that's NOT supposed to be there in the first place floating around for grabs, in a culture that is known for its insatiable appetite for material possession? Does it not have something to do with the fact that we are living in an era where the very idea of using money that you've NOT earned is not only no longer frowned upon, but actually encouraged, advocated, and - this is the most detrimental part - EMBRACED? Let's be honest, if you were a waiter working in a clean, decent restaurant, and one day you send a diner a bill that comes up to, let's say, $200, and he pays in CASH, wouldn't your first thoughts be along the line of: jeez, doesn't this dude earn enough to own a credit card?) - little wonder that at this time of the year, and with the prospect of the country's economy in such a questionable state, that money would be very prudently allocated and spent only on such necessities (applicable to first world countries only) as college fees, summer traveling and cooling of homes (which makes me wonder how demand of oil could have dropped and hence caused oil to drop......??).
On my point 2):
I am not even going to use the more direct "positive trade and budget balance" here, because to expect that to happen - particularly amidst a rising greenback in a global economic slowdown - in the near term would be akin to expecting oil to fall to $85 dollars per barrel after OPEC holds their meeting next week to see if they want to CUT SUPPLY.
On my point 3):
I've lost touch with (can I be blamed??) how and where banks get the bulk of their capital these days, but it used to be the nation's SAVINGS.
Well, today you have an endless list of sophisticated structured instruments that banks can churn out and market to the public who won't ever stop buying things that everyone else seems to be buying, and anything that promises low-risk, if not no-risk, and unimaginably (only coz it's crazy, ridiculous, and the method with which to derive the figure stumps even a college graduate) high returns, and the usual bonds and stocks they can readily issue to the unwary (I mean, it's a bank! If you can't trust a bank, can you trust your neighbors, your best friend, why, even your dog Lucky??) public.
I've digressed AGAIN.
Where was I?
Yes, SAVINGS.
Er......
What's there to say about savings?
Except that to the best of my knowledge, the country prefers to SPEND, and wants her people to do the same. Why, you've got to get your people out there spending to boost the economy don't you?? After all, didn't you give them a free-flow of cash to dispose of whenever and however they fancy, and the promise of even far better things to come?
I don't remember a whole lot about economics. I took them more than 10 years ago and the only things that have stuck are my funny (only coz he thinks he's funny) professor, and (this one's really clichéd), the words "SUPPLY" and "DEMAND".
So, I'm not going to continue to dwell on what makes or breaks a country's fortune.
What I care about is this: for as long as buying continues (for a variety of reasons but probably mainly instigated by a strong USD - which is strong only coz the others are WEAK...ok, I shan't confuse anyone anymore), and for as long as there are enough bulls out there who are full of hope one day, only to be dismayed days later at a seemingly unsustainable rally, I can still relish every minute of my happy bear sessions!
7 comments:
Hi,
the basic understanding of my studies tell me one thing - a consumer economy can sustain if left on its own, BUT the cycles have to be respected... if there is a bust after boom, the best way to handle it is make it tougher, not print more money to avoid it.
What the post 1971 world has been doing is dancing to the tunes of FIAT MONEY, almost all the world economies are living in a brand new world - a world where new money is created just out of thin air!!! what a magic!!!
When this magic is up for curtains down, the best of brains can't avoid the bust.
Today (from early this millennium) the US consumer is SPENDING BEYOND HIS MEANS. The US is the final destination of world's excess money (read fiat money). People are spending more than they have and they can pay back...
Well, Well, Well. This all was good till yesterday... when some realized this is not the way (not all realized). The central bankers are importing more fuel to print more money - (read dollars) and the world is still trusting dollars (after the end of goldilocks).
Living beyond your means has at least one consequence - you have to pay for it one day. AND today the US consumer is paying for it!!! The problem is still people don't want to digest this fact. The US govt is running a HALF a BILLION deficit. Simply put they own so much money to the world and their currency (as you say) is stable as other currencies are falling !!!
Dear Jules, your post has inspired me to post my musings about the economy once again - I think I haven't forgotten what I learned about the Micros and Macros...
Your post is very inspiring for the real thinking kind of guy...
THANKS
hahaha....Harry, I just sent you a message on bloglog on this, before I got down to really read every word you wrote in your comment...anyway, you'll find out :-)
Yes, I absolutely agree that when a kid does something bad and get himself into trouble, you teach him a lesson, NOT give him candies and throw him a party to pacify him in the hope that he will not put you in a nursing home when you get old and frail.
Remember what I said about complex humans and relationships? I should have added human intentions. I don't believe the market's ever been totally left to run on its own. Maybe it once did, like before Livermore's time perhaps? The crash of the market in 1929 was alleged to have been a fate that could have been avoided had the Fed intervened...
If you pull out your DOW chart and zoom into that period prior to the crash, you'll see a recipe for the crash - a parabolic upward move of nearly 100 % in a year. Read the Times archive and you'll get an idea of the degree of bullishness and hope in the market pre-crash. (Come back to the present, we have DOW going from 3000 over to 11 thousand in 5 years - from 1995 to 2000 - that's roughly 50% pa on average? Hold on to that thought for now).
So in a free market, hope, greed and fear fuel the boom and bust cycles. And a real nasty bust in 1929 resulted in a decade of "back to basics" kind of living that many people were no longer used to anymore. Then along came the war that helped fixed everything(what a paradox). The economy began to pick up - over 80% of all unemployed came under the government's payroll, and businesses thrived - the war had created an unprecedented demand for a numberless kinds of stuff...
So my question is: if government spending is the key to saving the economy, why isn't the solution to the current problem US's facing geared to something like spending on building better infrastructures in the less developed part of the country, improving the educational system, and investing in anything that facilitates a culture of realism and honest living, and cutting down on handouts to those who can but choose not to work (think I will get clobbered for saying this...but it sucks that if you work, you pay for those who don't want to..doesn't it?), and cut down on or remove other unnecessary spendings (the list too long and too controversial for publishing).
So, coming back to the 200 over percent rise in DOW in 5 years. I think the very fact that post 2000 has seen a series of Ms (double, tiple, quadruple tops) on the DOW chart is a sign that the plunge we see in 1929 is not likely to happen. The consolation is that at least at every point in time now, there're 2 opposing forces at work - bulls and bears - to keep the market from going crazily (the redundancy is intended) euphoric. Unlike Livermore's time, information comes much easier and faster to people, and investors are more savy and wise today. You hardly get consensus anymore, and people question everything questionable. That's good. It keeps those in authority in check.
What is the same today and a century ago in the investment and trading world is our emotions. And that's why you still get those booms and busts. It keeps our earth spinning :-)
Hi Jules,
First my thanks for replying to my comment.
I agree with your view but let me once again put few things here:
In the past century there have been two major economic theories -
a. John Maynard Keynes - The General Theory of Employment, Interest and Money.
b. Friedrich Von Hayek - His theory was simply a TOTALLY FREE MARKET Theory.
Keynes theory believed the govt should control economy and regularly intervene in order to have stability. It said the govt should spend more in depression times (like one of 1929) and run deficits and should do the opposite in good times.
This is what the govt adopted during WWII, and miraculously this worked !!! (as you say)
Hayek was quite bewildered by the success of Keynes theory and believed it was a big step in wrong direction. He wrote "Road to Serfdom" which attacked the whole theory. He stated that more govt intervention means more govt control and people becoming slaves of govt, leading to birth of more Hitlers, Stalins etc.
BUT, nobody listened to Hayek. In fact after WWII, Keynes theory was the de facto standard throughout the world.
There is a long story but to cut it short let me tell your readers that the Keynesian theory failed as govt control resulted in isolation of countries' economies and price controls lead to unnecessary high prices for goods.
In 70s, Margarette Thatcher was the first British PM to adopt the free market theory of Hayek and very soon Ronald Reagan, the prez of USA followed her. These changes dramatically turned the whole world!!! We had one by one so many countries turning to free market theories (even communists) and it worked miracles !!! Those who were clinging to Keynesian socialist theory like the USSR failed miserably. Free Market was the buzzword in economic circles during 80s and 90s.
But later there began to erupt few crisis like in Japan, Asia and South America. If we look at the roots of all these, there were excesses and lack of proper govt regulations. Japan's crisis was what that the USA is witnessing now in even worse form. Similar things can be said about the currency crisis of Asia and complete failure of countries like Mexico in SA.
What we can see is the govt did not have "rule of law" to regulate excesses from being built and then the intervention (US bailout of Mexico with $50 Billion) etc.
Had the free markets be left to run on their own with govt just being a facilitator by having robust laws to not let excesses build up, the Hayekian theory would have worked very fine. The trouble is the govt instead of stopping the crime, let the criminals like Greenspan flourish and let them do the most moronic things. I consider Allen Greenspan the biggest economic criminal of this decade. Nobody learned from the failures and still not learning.
Well, My friend, you say the govt should start spending to boost economy (like what Keynes wanted) but just think about the current account deficit of USA, and the debt the US govt is carrying.
Like you most people believe that will work, but also keep in mind that this Fiat Money economy just can't keep on growing forever. I leave two links here which will be very helpful for your readers -
http://indexviews.blogspot.com/2008/07/fundamentals-of-techincals-new-episode.html
http://indexviews.blogspot.com/2008/07/continued.html
I see where you're coming from, Harry. My focus was really just on employment. I define a bad economy as one where many people have no jobs and no means of securing the most basic needs. In such times, government should do something. Spending should be strategic, with an aim to re-build the foundation to a healthy economy.
US is already in debt, something that's happened and cannot be undone. What they can do now is to invest prudently in areas that will help lift their GDP and in initiatives to change mindsets, if not the entire culture. I'm only saying this for argument's sake of course. Honestly, I don't even know if the ones in power truly cares...
By the way, Reagon did spend a bomb on the development and testing of something that can intercept a missile :-)
Oh Jules, Come on!
I posted such a big response to tell u just one thing - IT CAN'T BE FIXED by KEYNESIAN THEORY failed to explain the truth to you.
You believe the govt should expend BUT WHERE WILL IT BRING MONEY FROM? IT DOESN'T HAVE ANY !!! AND IT IS NECK DEEP IN DEBT.
The solution is just leave the forces of market to work on their own. DO NOT INTERFERE IN THE MARKETS AND LET PEOPLE SUFFER.
Its the govt intervention that has MERELY postponed the crisis so far, NOT ENDED it. Had the govt not intervened, there would be small problems that would rectify on their own but now it has grown so big and if your thoughts are taken care of then it will be doom very soon.
Just think where the money will come from? and tell me.
Thanks for the reply in advance...
:-)
Jeez, Harry, you are more evil than me! :-D
From the bottom of my heart...er...no, let me do this again...the very rational part of me, namely, my HEAD, tells me that the solution that will end all problems will be something like 1929.
But in a world that's so connected today, when US suffers, all of us will suffer too, and we're already seeing the other parts of the world bearing the brunt of a weak US economy.
And let's say we don't get hit, I will still feel terrible for people who have to start sleeping on the streets.
So, I'd rather see US fixing their problem without having to plunge to the bottomless pit.
And I do believe that it can be done. There are still money going into US. If those money are put to work properly, and they produce more than they consume, in time, their economy should pick up slowly.
What I'm NOT agreeing with is the printing of more money. And honestly, I don't know if they still do that, after witnessing the problem it created.
You know what, I actually think they should bail out ALL the financial institutions! Not just 2 or 3 and leave investors with a false hope. They should JUST DO IT.
LOL!!!
And where do they get the money from? Seize all the other companies that are barely coping, sell the stocks real cheap (think there are still sovereign funds looking for a bargain), start selling their oil reserves, etc.
Just don't print money, don't sell weapons, don't start another war.
From the bottom of my heart, I would love to see US recover without having to go through a major crisis. That's why they need to go down now and not continue to tout a bullish market. If they fall now, it wouldn't hurt so much. If they don't, and when they do plunge later, the damage to global economy would be unthinkable.
And I'm sure that the country is no longer living in denial. Although there are still some out there fretting over how the bailout is not going to make it easier for people to get a mortgage (really want to slap them, don't you? Me too!!), these are mainly commentators. People who can't afford a house are actually aware that they can't afford a house and are not thinking of getting one.
I don't believe all that I read in mainstream news. What they say might not reflect the sentiments of the general public.
If people are getting sober and sensible, I don't want to see them punished.
They should be given whatever help they need to get back on their feet.
And we're back to square one: where does the money come from?
That would be McCain / Obama's problem. :-D
So, my take is still that the govt SHOULD intervene, but not in such a way that would create new problems.
Do I believe in a totally free market? Only if I believe also that corruption and manipulation don't exist at all.
I believe in intervention by a clean, altruistic government :-)
Oh, Harry, I know I'm pissing you off by not addressing your point.
The thing is, I don't really believe in theories. Afterall, theories are created by humans. And humans are not perfect. They make mistakes all the time. Many theories have been proven wrong over time.
I believe in what works.
And I believe in miracles :-)
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