GDP Shrinkage

GDP's negative trending
Is not the economy's ending;
We're having a boom
In the stuff we consume,
Offset by less government spending.

It was a shock to read yesterday that the US economy actually shrank by -0.1% in the fourth quarter of 2012, but the markets reacted steadily.  It appears that, beneath the negative headline number, the private economy is actually doing pretty well.  Here's the Washington Post on the breakdown of the numbers (see chart at right):

The GDP report for the fourth quarter of 2012 is, on its face, disappointing. The economy shrunk, at an 0.1 percent annual rate, the first such contraction since the recession’s nadir in 2009. But commentators are surprisingly upbeat about it. Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

Small Investors Jump In

At times, when the stock market rises,
The basis for all the new highs is:
Investors who yearn
For a better return
Than the interest-rate outlook advises.

The billions investors have shifted
To stock funds effectively lifted
The market's appeal
(And also, the deal
That avoided the big Fiscal Cliff did.)

There's a saying that's really akin to it,
From traders who've commonly been to it:
On the stock market floor,
According to lore,
You get out of it what you put into it.

I guess by now almost everybody is aware that we are in a bull market for US stocks, and one would expect a surge of small investor interest to follow this realization.  However, according to the Wall Street Journal, a massive inflow of retail cash into equity mutual funds also preceded and contributed to the market surge.  On Tuesday, the Dow Jones Industrial Average rose 72 points to close at 13,954, its highest level since October 2007.  The Dow has risen 850 points - or 6.5% - in January, a New Year's achievement not seen since 1989.  As shown by the graphic, this strong performance was helped by $6.8 billion of investor cash flowing into equity funds in the first three weeks of the year, after years of massive outflows.  No doubt some of the recent inflow manifests the public's relief that the federal government did not take the economy over the Fiscal Cliff in January, and is thus a rebound from the fearful, exaggerated December outflow.  However, in the market, optimism may create its own reward by boosting demand for assets (stocks) and hence, their prices; proving, once again, that you get out of life what you put into it.

Fertile Ground

A politico trained in agronomy
Was convinced he could grow the economy:
"To start with manure
'S the best way for sure,
So bullsh*t's incumbent upon-a me."

If there's one phrase that unites Washington these days, it's "to grow the economy."  Passions may boil over whether it's better to direct such growth from "the middle out" or "from the top down;" whether "the job creators" or "America's working families" comprise the more fertile soil in which to germinate the economy's roots; but there is no doubt as to the choice of metaphor.  In the newly redesigned New Republic's Jargonist column, Noreen Malone finds that "growing the economy" is a relative neologism in our old republic, first popularized by Bill Clinton in 1992.  Prior to that, the preferred metaphor imagined the economy as "an engine," on the basis of which the partisans could dispute how many cylinders it had, or whether it was firing on all of them.  Perhaps it is time to bring back Adam Smith's "invisible hand," although, in our hypersexualized era, we may not yet be ready for its inappropriate touch.

Core Cash Flow Multiple

Said a notable stock-pickin' man:
"Of $AAPL I'm not such a fan,
But the price is so low
Compared to cash flow,
I'm buying as much as I can."

Hedge fund manager and blogger James Altucher posted an amusing take-down of the bearish Apple sentiment in Seeking Alpha yesterday. The gist of it is that six times cash flow is too little to pay for the shares of a company whose revenue is still growing at 20%, so the recent fall to $440 from $600 a share is just noise.

Says Altucher: "I own Apple since my initial $1000 call and anyone who did is well in the money. Meanwhile, I also own Google and Amazon. These companies are going to keep innovating past each other and by the time they are through one of them is going to make a time machine, the other is going to put a phone into our neurons, and the third is going to let us spend the rest of our lives in drugged out virtual realities while we fly around in pilotless spaceships. So I'm staying long."

N.B. Altucher's investment horizon is five years, so this is not exactly a day-trading recommendation.

Regulatory Oversight

If the SEC chairwoman-candidate
Has both tried the Street and defended it,
One may sensibly ask
If she'll make of her task
To have reined in the Street or befriended it.

According to the New York Times' Dealbook, there's a "signal to Wall Street in Obama's pick for regulators."  So, one may ask, what is the signal?  In announcing his nomination of Mary Jo White to run the Securities & Exchange Commission, President Obama said: "It’s not enough to change the law; we also need cops on the beat to enforce the law," adding: "You don’t want to mess with Mary Jo." Indeed, Ms. White made a name for herself as the United States Attorney in Manhattan in the '90s, prosecuting the 1993 World Trade Center bombers and John Gotti, among others. The current US Attorney in Manhattan, Preet Bharara, who put inside trader Raj Rajaratnam in jail, is among the generation of prosecutors trained by Ms. White.

This is all well and good, but her appointment sends other signals as well.  As a recent, must-watch PBS Frontline documentary points out, no Wall Street or financial industry figures have been prosecuted for the frauds that contributed to the financial crisis.  As chair of the litigation department at Debevoise & Plimpton for the last ten years, Ms. White made it her business to keep the industry's leaders "untouchable".  The "revolving door" between Wall Street and Washington has long served to take the teeth out of regulation; it remains to be seen which way the door is turning in the case of Mary Jo White.

Davos

There's a conf'rence of world VIPs
Taking meetings in spas and on skis;
By Switzerland's hills
They solve the world's ills,
Or at least decide who's the big cheese.

Every year at this time, the gloom of January is brightened (or deepened, depending on your viewpoint) when central bankers and business leaders from around the world gather in Davos, Switzerland to discuss the world economic outlook.  The World Economic Forum is "committed to improving the state of the world" and, according to the organizers of the annual meeting, it "remains the foremost creative force for engaging leaders in collaborative activities focused on shaping the global, regional and industry agendas." Others take a more cynical view, including Bloomberg radio commentator and former SEC chairman Arthur Levitt, who has given up going to Davos, remembering it as a social competition in which the object was to collect the greatest number of prestigious names on one's "dance card."

Those prestigious names are now concerned over the possibility of systemic financial failure, according to a report by Reuters.  Over 1,000 central bankers and business leaders were surveyed ahead of the annual meeting, and it turns out that they are worried about all the excess liquidity that the former have pumped into the system for the benefit of the latter.  Recurring asset bubbles and "currency wars" of internationally competitive devaluations are some of the other concerns that keep the power elite uneasily awake through those snowy Alpine nights.

2nd Term Priorities

Obama's prioritization
In his 2nd-term administration
Should be making some dents
In the rising expense
Of medicine and education.

This priority shouldn't give pause
To government skeptics because
There's much to be gained
By undoing the pain
From ongoing federal laws.

President Barack Obama kicked off his second inauguration yesterday with a rousing speech of liberal policy prescriptions that he intends to pursue in his new term.  Underlying much of the rhetoric was the goal of using the social fabric and safety net to support and strengthen the American middle class.  Among the many factors that have led to the hollowing-out of the middle are the rapidly rising costs of education and healthcare.  It is education that is increasingly necessary to enter the world of steady, well-paid work, while affordable healthcare would prevent much of the undoing of employer-provided benefits that we have seen in the last generation, as well as the great number of personal bankruptcies.

To those who ask: what could the federal government possibly do to arrest these cost increases, I would say: what is it currently doing to contribute to them?  Two examples come to mind.  In education, the federal government contributes to the price spiral by providing a seemingly limitless supply of student loan funding for it.  A more discriminating, less misguidedly generous posture might be in order.  In medicine, the Medicare and Medicaid programs are the biggest contributors to the "fee for service" model that is one of the roots of healthcare inflation identified by the President.  These are just two thoughts off the top of my head; I'm sure that thoughtful policymakers could find more.

Punitive Measures

A six-billion loss dealt a blow
To the name of a bank's CEO.
To atone for this trade,
He merely was paid
A paltry ten million or so.

What do you take from the man who has everything?  That was the question faced by the board of JPMorgan Chase, which had to determine the consequences for CEO Jamie Dimon of the $6.2 billion loss from the "London Whale" trades.  The answer was a 50% reduction in Mr. Dimon's total compensation, from $23 million in 2011 to "only" $11.5 million for 2012.  (To be fair, the compensation package reflects a record year for the bank's profits, in spite of the outsized trading losses.)  The New York Times' Dealbook page, no doubt attempting to wrap its head around the fact that $11.5 million is only half of someone's compensation, believes that, in the face of such a striking management lapse, more radical changes are called for.  Suggests columnist Agnes Crane:

One could be to split the roles of chairman and chief executive. A well-chosen chairman provides a check on a chief executive’s powers. In one indication that this can work, GMI Ratings last year concluded that an executive pulling double duty can earn 50 percent more than the total pay of two people performing the top jobs separately.

It sounds as though, if governance is strong, compensation finds a more appropriate level as a matter of course.

Post-Holiday Blues

The December performance of retail
Was bullish in ever-y detail;
All the gifts that were sold
Decisively told
A surprisingly good Christmas tree tale.

But the 1st quarter figures & facts
Describe a consumer that lacks
A spending position,
Since broad imposition
Of 2% more payroll tax.

The US retail sales numbers for December were announced on Tuesday, and painted a picture of robust holiday consumption.  The 0.5% quarterly increase was much better than expected, and much faster than the rate for the previous two quarters.  However, it looks as though the momentum may not carry through to the 1st quarter of the new year.  Weekly retail reports in January have already fallen below expectations, and the reason seems clear: most US workers now have less take-home pay, thanks to the increase in the payroll tax by two percentage points to 6.2%, from the temporary, "stimulus" rate of 4.2%.  Other indicators appear less than bullish, as well: the Federal Reserve Bank of New York reports that manufacturers in its district (which is also my district) continue to reduce their activity.  The ongoing drama of the fiscal cliff and debt ceiling doesn't help, either.

Non-Negotiable

Said Obama: "I think that it's lowdown
To set up a Debt Ceiling showdown.
Though the House GOP
May well disagree,
It's a road I intend not to go down."

Battle lines have been drawn over the increase in the federal debt limit, which must happen by March to avoid a government shutdown and likely default.  President Barack Obama gave a press conference yesterday in which he pledged not to negotiate with the House GOP over the debt ceiling increase, saying that such crisis-fueled, eleventh-hour bargaining is no way to run the government.  The crux of the President's argument is that the Congress cannot refuse to incur the debts for the spending it has already approved; he likened it to beginning a diet by walking out on the rich meal you've just had, without paying the check. 

For their part, Republicans clearly intend to use any available leverage to force a reduction in federal outlays, regardless of default risk: House Speaker John Boehner, while acknowledging the economic harm that would come from a default, said: "The American people do not support raising the debt ceiling without reducing government spending at the same time."

However, the Washington Post's Greg Sargent thinks the Senate Democrats may hold the trump card: if the House passes a bill with both a debt ceiling increase along with big Medicare and Social Security cuts, the Senate could simply amend the bill by stripping out the cuts, and send it back.  Sargent believes that the Senate GOP is more politically realistic, and would not filibuster the amendment.

Bottom line: at this point, it's too soon to say that America has passed the era of banana republic politics.

Free Markets

The market's a clever creation
And a hallmark of civilization.
Though it's good to be free,
I-ron-i-cal-ly,
It isn't, without regulation.

This past weekend I discovered the Unlearning Economics blog, thanks to my new Twitter friend Frances Coppola (There once was a lady from Kent...), who linked to a post on The Fantasy of a Pure Market.  The anonymous economics student/blogger complains of a certain shallowness in libertarian thought, specifically, that it posits

some sort of neutral laissez-faire state, beyond which any ‘intervention’ is deemed unnatural. The ideal minarchist libertarian state would enforce property rights and contracts, and prevent force, fraud and theft. People could own what they acquired through ‘voluntary’ exchange; they would be free to do what they wanted with their property. I find libertarians rarely explore their preferred institutions much deeper than this, and build many of their arguments on the distinction between ‘markets’ and ‘government.’ However, on close inspection, the boundary between the two becomes blurred.

The crux of "Unlearning's" argument is that the things that libertarians hold out as "natural", fundamental underpinnings of free markets - such as property and contracts - are in fact social constructs designed to achieve socially optimal ends.  It is therefore illogical to argue against "government intervention in the markets" when markets such as we know them would not exist but for government intervention.  It's only a question of degree.

Back To Work

The ranks of the long-unemployed
(A status you'd like to avoid)
Have started to thin
From the slow growth we're in;
Is it reason to be overjoyed?

The jobless in longer-term stages
Are fewer than they've been in ages,
Though many returning
To rolls of the earning
May settle for minimum wages.

There's a glimmer of good news for the long-term unemployed: your chances of finding employment are growing.  The proportion of job-seekers unemployed six months or longer was 39.1% in December, the first time this ratio has fallen under 40% in more than three years, according to the Wall Street Journal.  Although that still leaves 4.8 million long-term jobless, it's a considerable reduction from the peak of 6.5 million in 2010.  But, you say, haven't most long-term unemployment reductions come from discouraged job-seekers dropping out of the labor force?  The answer appears to be: not so much.  The number of jobless who report they've given up looking is estimated at 400,000 over the last year, while the number of Americans with jobs rose by 2.4 million over the same period.

Now for the bad news: wages of returning workers fall by 11% for every year they are out of the workforce, and unemployment benefits no longer last 99 weeks - it's now 73 weeks at most, depending on your state of residency.  Some of the long-term unemployed may have been motivated by their expiring benefits to take lower-paying jobs.  Finally, those poor souls who have gone three or more years without work had no holiday cheer in December, as their numbers have not yet reduced.

In Lieu of Geithner

Said Obama: "In term number two,
For Treas'ry I want Mr. Lew.
I'll rely on his talents
To find fiscal balance,
And fight with Republicans, too."

It's reported that President Barack Obama will nominate Jacob ("Jack") Lew, his former budget director and current chief of staff, to succeed Timothy Geithner as Treasury Secretary.  As the mainstream media will tell you, this signals a change in focus from the global financial crisis that dominated the President's first term, toward budget fights with Congress, and long-term fiscal sustainability.  The Wall Street Journal characterizes Mr. Lew as "a veteran of numerous Washington budget battles, stretching back to his work as a senior congressional aide in the 1980s." Oddly, there is little initial signaling of congressional opposition to this proposed nomination, despite Mr. Lew's inflexible reputation and angry clashes with Republican aides during the 2011 debt ceiling fight. Former Senator Judd Gregg, a New Hampshire Republican, may have summed it up best: "He's a tough guy to negotiate with. He has his positions and he doesn't give much ground, though he's really a nice person."

Mint the Coin

With the Debt Ceiling coming up soon, it
Is time (although some may impugn it)
For coining a halt
To a US default
With a really big monet'ry unit.

A one-trillion coin, it is said,
Could be minted and shipped to the Fed,
In order to pay
What the US of A
Might be forced to renege on instead.

This sizeable denomination
Would be kept out of mass circulation,
The better to sidestep
That such an untried step
Precipitates hyperinflation.

When Republicans finally come round
From running bond issuance aground,
It's back to the Mint
For the Coin, where its stint
Will be wound up with melting it down.

So let's mint The Coin out of platinum!
Though objections there be, we may flatten 'em.
There are ways besides cash
'Round the Debt Ceiling clash,
But there's nothing as clever as that in 'em.

It's an idea so crazy, it just might work: the US Treasury could circumvent the looming debt ceiling showdown by minting a very large denomination platinum coin of, say, $1 trillion. The coin could be deposited in Treasury's account at the New York Fed, where the new funds could be used to pay any of the Federal government's many obligations. First proposed in a comment on an economic blog in 2010, the Coin is within the legal powers of Treasury, which "may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time." Never mind the fact that this law was intended to facilitate minting bullion coins for numismatists - it's on the books. Of course it's absurd to speak of minting a $1 trillion coin to keep the government out of default, but the debt ceiling itself is absurd, as is the threat to throw the nation into default for political purposes. So, it's a case of fighting crazy with crazier.

The "Mint The Coin" movement has been gaining steam thanks to the (only slightly tongue-in-cheek) advocacy of such leading economic writers as Bloomberg's Josh Barro and Business Insider's Joe Weisenthal. For those who fret that the issuance of a $1 trillion coin would ignite inflation of Zimbabwean proportions, a former head of the US Mint (who wrote the 1996 platinum coin law) has weighed in with a cogent explanation of why that would not happen. It all comes down to a choice: would we rather the US Treasury default, or do something absurd?

Economics and Ideology

As opposed to the world's great religions,
Economics is free from divisions
(Except for the few
Applicable to
The really important decisions).

Economists from around the country and the world converged on San Diego this past weekend for the American Economics Association annual meeting.  Among them was Paul Krugman, who would take part in a panel discussion of "What Do Economists Think About Major Public Policy Issues?"  The discussion centered on a paper by UC San Diego economists Roger Gordon and Gordon Dahl, which subjected the question of "Professional Consensus or Point-Counterpoint" among their peers to statistical analysis.  Gordon and Dahl concluded that professional consensus does indeed exist, and that much of the disagreement is not ideologically driven. As preparation for his part in the discussion, Prof. Krugman published a New York Times blog post in which he concluded that, while consensus may generally reign in the Dismal Science, a statistical approach may overlook the at-times virulently ideological disputes that arise in the biggest and most consequential matters.  These include questions such as whether "the benefits of the American Recovery & Reinvestment Act exceeded its costs."  (I.e., was the stimulus worth it?)

The panel also included the University of Michigan's Justin Wolfers, who offered a milder interpretation.  Although Prof. Wolfers' analysis also showed an ideological basis for economists' opinions on the stimulus bill, he nevertheless could not conclude that, on the whole, responses to a broad range of policy questions are statistically correlated to ideology.  May there yet be hope for rationally based policy?

The Bonds That Divide Us

At the Fed, there are three schools of thought
On the bonds that Bernanke has bought:
A) keep on going,
B) begin slowing,
Or C) we would rather have not.

Minutes of the Federal Open Market Committee's December meeting were released on Thursday, and they reveal the divisions among the members on the Fed's policy of buying mortgage and Treasury bonds to stimulate the economy. Following that meeting, on December 12, the Fed announced that it would continue with the bond purchases until the pace of job creation improved. Yet, the minutes show that the "hawks" on the committee fundamentally disagreed with the entire program and, even among those who supported it, there was disagreement over its timeline. Those who wanted an open-ended monthly commitment to add $85 billion to the Fed's balance sheet were most concerned with allowing the stimulus to have its intended effect, while those who worried about the risk of adding so much to the Fed's own investment portfolio wanted to bring the program to a mid-2013 close.

However, Diane Swonk of Mesirow Financial tells the New York Times that "there’s still a huge bias toward buying." Any appearance of dissension, according to Ms. Swonk, reflects merely "modest misgivings in the middle of the most aggressive effort the Fed has ever undertaken to stimulate the economy."

Kicking The Can Down The Cliff

Under watchful regard of a nation
In Twenty-Thirteen celebration,
Congressional members
Took leave of December
By rigging the rules of taxation.

With many a jubilant *clink*,
The deficit promised to shrink,
But much is depending
On questions of spending,
And soon we'll be back at the brink.

The prospects are less than appealing
For the next round of Washington dealing,
Especially if
There's a new Fiscal Cliff
When Treasury hits the Debt Ceiling.

As everyone knows, the US Congress passed an emergency measure on New Year's Day to avert the worst of the automatic tax hikes that were to take effect under the "Fiscal Cliff" provisions that it enacted after last year's debt ceiling fight. For those who want to know what the latest tax deal means for them personally, Matthew O'Brien has a couple of helpful charts in The Atlantic. The bottom line is that, while everyone's tax rates and payments are now less than they would have been under the full Fiscal Cliff, most Americans will see another 1.5% of their income going to taxes, and the well-to-do will feel 3-8% poorer. Ironically, some of the most fortunate taxpayers are those whose income is between $200-500 thousand. They have mostly avoided marginal tax rate increases, which apply to income above $400,000 ($450,000 for joint filers) and will not pay more in alternative minimum tax, which has been permanently "patched".

Those who may have worried that a bipartisan agreement on taxation signals a change in the ways of Washington will be reassured to know that the deal has preserved an impressive array of obscure tax breaks for special interests, as the New York Times reports.

However... the thornier questions of cutting expenditurses (or at least, reducing their long-term growth) have been pushed off by a month, as has the always-explosive question of raising the Federal debt ceiling. Another high-stakes political standoff is therefore guaranteed, which means that the celebrated tax deal is actually not much to celebrate.