INTEREST-RATE MOVES WARN THE ECONOMY MAY BE BROKEN

NY POST ^ | 08.05.03 | JOHN CRUDELE

[massadvj]

What the future holds is anyone's guess.

True. The only tried and true strategy is to keep diversified, and not just in stocks and bonds. Personally, I own real estate, stocks, inflation-adjusted bonds, gold, collectible coins with numismatic value, art works, antiques, and about 6-months income in cash. Occasionally, I toy with futures, but not much the last few years. I have never had a year-to-year decline in my net worth in three decades, even though I am technically unemployed.

Lately, I've liked gold, stocks and all manner of art and antiques. Bonds make me very nervous, and stocks seem quite iffy beyond a 6-month horizon.

Politics interest me, but most of my interest is in trying to figure out the economic ramifications so that I can profit from what is going on, as opposed to having an axe to grind one way or the other. If I had my druthers, politicians would have very little power or influence, but that's not going to happen in my lifetime. I guess we should be thankful for the fact that politicians generally will sell out very cheaply. They tend to underestimate the value of their authority, for the most part.

[BushCountry]

To be honest, it is just amazing all the bad news that gets generated in the face of good news. If the GDP reaches 6.5% growth the ecomony will be booming and will create several million new jobs. The deficit as a percentage to the GDP will be lower than it has been in several years. The United States ecomony is a several trillion dollar machine and a few hundred billion here and there hardly makes a dent.

[El Gato]

4 year car loans topped 6.5% on average last week. And that's if you have AAA credit and put a down payment down. The reality in the market place is much different.

My wife and younger daughter bought new cars last week, their loan rate, on 4 year loans, from a credit union, not the manufacturer or dealer, was 3.95%. Since the dealer did not do the fianancing they got some good rebates and my daughter got a "first time buyer" (just got her first post college job) rebate as well.

[El Gato]

Ummm, I might need have stayed up too late and need to get some sleep, but I was under the impression that high unemployment numbers mean that there are going to be less, if any, jobs for them to go back to, if they had jobs in the first place.

In anycase the unemployement stats are seasonally adjusted to attempt to take into account such factors. However, you might a glitch because in the summer, if they are seeking work, students count as unemployed, but when going to school, even if they want a job they are not counted as part of the workforce, unless they are actually working. At least thats the way I understand it.

Another (negative) factor maybe the return of all the Reservists and Guardmen called to extended active duty for the various aspects of the war against the jihadies. While on active duty they are not considered part of the workforce, but when they come back, if they had jobs before they left, whoever is doing their job now may be let go, and if they didn't have a job before, and can't find one upon their return, they at least become part of the workforce and are counted as unemployed.

[BushCountry]

My wife and younger daughter bought new cars last week, their loan rate, on 4 year loans, from a credit union, not the manufacturer or dealer, was 3.95%. Since the dealer did not do the fianancing they got some good rebates and my daughter got a "first time buyer" (just got her first post college job) rebate as well.

Isn't this impossible in this terrible economy?

[MissL]

I am a huge Buffet fan...his Nebraska Furn. Mart opened today in Kansas City, Kansas. Employing 800 people...great benifits and good salaries.
I am not employed in anyway by Buffet but admire him and follow his advice. The message is mixed at this point because a few months ago he said to hold on and get ready for a long hard ride, as far as growth in the economy. But I have found retail a bit better during the month of July and so far even better in August. People are out and buying....don't know why.
So maybe the opening of the Furn. Mart and the turn in the "spending" if not the "economy" are a sign...put your seatbelt on and ride that roller coaster !!!
People are still out of work and companies are showing a profit because they are cutting jobs...not because of sales...jobless rate down because people have dropped off the "books"...false economy and it will catch up to us. Very Soon the numbers will come in and will make Bush a one term president if he does not turn this around. It is all about the economy and he needs to produce. It does not matter when or who started the downhill slide it only matters when it is turned around and it had better happen ASAP !!!

[Beck_isright]

W will not be a one term Prez. Put that in stone unless he pulls a Kobe Bryant in the Oval Office (Republicans are held to different standards than Demorats). The reality is that our central bank has screwed the proverbial pooch. Everyone is looking at "the latest" stats. Take a look at the historical parallels. There are few. The one that stood out for me is the steep increase in bond yields only paralleled once in our history (August 1987). The amount of debt we owe as consumers and a nation has also occurred only once but not at these astronomical numbers; Germany, 1932.

[P.O.E.]

Back when Bush Senior was vying for re-election, the media kept murmuring "recession, recession, recession" for about a year and a half. Enough gloom spouted eventually effects people's long-term wealth expectations, and they cut back and VOILA! a recession.

I can't believe they're trying the same thing all over again - and some people fall for it. Probably the same people that fell for the whole "new economy" and "repeal of the business cycle" during the Clinton era BS-inflated bubble.

[Beck_isright]

"Back when Bush Senior was vying for re-election, the media kept murmuring "recession, recession, recession" for about a year and a half. Enough gloom spouted eventually effects people's long-term wealth expectations, and they cut back and VOILA! a recession.

I can't believe they're trying the same thing all over again - and some people fall for it. Probably the same people that fell for the whole "new economy" and "repeal of the business cycle" during the Clinton era BS-inflated bubble."

This is far beyond that nonsense. This is a historical disaster of unprecedented proportions. The seeds were planted by Jimmy Carter, fertilized by Tom Foley and Tip O'Neil, and allowed to bloom by Klintoon's administration. This is not a "W" or any other problem. The system is broken. If you don't believe me, ask all the retirees and pending retirees who have been wiped out.

[ggekko]

The recent rise in rates is a sign that the economy is reflating and not poised for collapse. The recent lows seen in Treasuray bond yields were based upon the market's fear of a DEFLATIONARY scenario. The market has discounted that scenario for the present.

John Crudele has been so wrong about everything for the last 18 months I don't know why anyone reads his stuff anymore.

[P.O.E.]

If you don't believe me, ask all the retirees and pending retirees who have been wiped out.

No offense, but most of them probably didn't belong investing in the market in the first place. They just got caught up in the mania.

There are many, however, who got wiped out due to fraud and malfeasance. I'm still waiting for the likes of Ken Lay to stand trial (I'm sure the list of names could go on and on).

I'd also venture that many - including pension fund managers - were misled by "consultants" instead of taking due diligence.

[FITZ]

What the future holds is anyone's guess.

Yes ---things can change ---and quickly. I will have trouble believing the economy is getting better until someone can tell me what the new good economy is based on. For now, all I see is far too much socialism ---which brought down the Soviet Union and will bring us down also. Unless globalism reverses I can't see things going well ---- we're sending out millions of jobs and meanwhile millions of indigent people are moving in ---that doesn't add up.

[Kosh5]

A couple of more things are noteworthy in considering the state of any economic recovery.

1. Economic activity has been on the backs of the consumer. Multiple tax rebates and the overall tax reduction has gone a long way to freeing up cash for consumer purchases. The advent of extraordinarily low interest rates (I have a 4.25% rate for the next 5 years) has allowed consumers to refinance and plow much of the savings into consumer spending that would have been otherwise not possible. I personally think that the automobile industry is the biggest recipient of this windfall.

2. Psychological patterns of companies: Right or wrong, companies operate on annual budget cycles. In the past decade or so, many companies have migrated to discretionary mid-year budget revisions. The bulk of spending authorization in most mid to large companies, however, occurs in the annual budget cycle. Given the generally conservative nature of budgets and corporate spending behaviors, I doubt we will see meaningful improvement in corporate spending until companies are convinced that they have a handle on costs and that a recovery is impending. Executive surveys be damned - if you don't budget it, you cannot spend it.

Having said all this, I believe that the overall economy turned the corner sometime in the second quarter of this year. The reason has multiple facets:
1. Unemployment: if one uses unemployment as a proxy for business investment and expansion, the stabilization of unemployment rates at around 6% is meaningful. Further, layoffs have dropped overall in recent months. While we do hear about the occasional layoff announcement, these announcements do not appear to be moving the top-side measure. Also, does anyone else remember the notion that ~6% was the "full employment" level?
2. Retail sales: Overall retail sales turned the corner in the March-April timeframe. This is noteworthy in that the overall consumer retail climate has been very weak for the past year. Add to this that rebate checks had not yet hit, and it appears that the consumer is loosening the pursesprings a little.
3. GDP: GDP has not been in the toilet, either. I also remember a time when low single-digit growth was considered a good and prudent goal. When did +2% become a recessary indicator???

Given the above, I think we will see business investment and spending increase slightly for the balance of this year. Growth should pick up considerably in the first half of next year - following the budget cycle. A lot of companies and departments are going to be anxious to spend a lot of mony as quickly as possible. Those Finance Grim Reapers cannot take away something you have already spent!!!

[Beck_isright]

"No offense, but most of them probably didn't belong investing in the market in the first place. They just got caught up in the mania."

A 401K or pension plan allegedly funded by your company is "mania"??????????? No, this is worse than we thought. Your perceptions of fraud sniffs of the "black helicpoter" crowd. This problem is systemic, as the author said. And I agree with him on many points.

Over 70 years ago, thousands of investors thought that Shenandoah and Blue Ridge were companies "too big to fail". Once again, the foolishness has returned.

Those who have not learned history, are doomed to repeat it.

[Beck_isright]

"Unless globalism reverses I can't see things going well"

Damn you for introducing logic into an economical discussion:)

And a great statement of fact by you sir. Kudos and a tip of the hat.

[CyberAnt]

Just because unemployment numbers go up - that doesn't mean the jobs no longer exist. While that is a part of the number, because companies can go out of business or move.

Having worked for 7 years in a college area, I can tell you the kids go home - and don't work for the summer, and then return to the college town and find another job - and not necessarily the job they had when they left.

On the street where I worked - it was lined with apartments. Every summer, the students who were renting the apartments went home. We loved it, because we could find a place to park more often. But, come the middle of August, here they would come back to rent an apartment and look for a new job.

Maybe you don't think this job flux has much affect on the numbers, but I think it does.

[CyberAnt]

Hmmmm? Joke? Yeah right! Very funny!

While all the politicians you know may be one step above a used car salesman - it's simply ignorant to say THEY ALL ARE. Because, that's just too general. Actually, there are more good ones than there are bad. It's just that all the media talks about are the bad ones.

[P.O.E.]

It's not just my perception of the problem with pensions. For example:

Who's to blame for the big hole in many pension funds?

While I don't usually agree with "The Economist" on political issues, I do find their financial insights informative.