US Economy, the stock market , and other investment/savings strategies

[Crafty_Dog]

Scott G. was kind enough to share his thoughts with me on the Hussman analysis:

First, let me say that Hussman's credentials as a connoisseur of valuations is somewhat suspect. His Strategic Growth Fund (HSGFX) has managed the unenviable record of delivering a -21% total return since early March 2009, while the S&P 500 has enjoyed a total return of 224%. If he has provided a service to mankind, it is in demonstrating just how badly a market timing investment strategy can perform.

But eventually, of course, he will be right and the market will suffer a correction, and perhaps a serious one. It's all a matter of timing, something he unfortunately appears to lack in addition to not being able to recognize valuations over multi-year periods.

Be that as it may, I don't agree with the valuations he cites today.

The standard PE ratio of the S&P 500 is 18, as compared to its long-term average of 16. That is not particularly stretched, in my view, especially in light of the fact that corporate profits are close to record levels relative to GDP and long-term interest rates are exceptionally low.

If I use after-tax corporate profits from the NIPA tables as the "E" and the S&P 500 index as the "P" then I find that PE ratios are almost exactly equal to their average since 1960.

I don't give much credence to Shiller's CAPE ratio, since I think that the level of profits 10 years ago has almost zero bearing on the valuation of equities today. Corporate profits relative to GDP are much higher today not because they are unsustainably high, but because of globalization, which has allowed successful firms here to address markets that are exponentially larger than they could have addressed just a few decades ago.

While he worries that the market is hugely over-leveraged, I note that various measures of leverage in the household sector are as low as they have been for many decades. And the fact that banks have accumulated over $2.6 trillion in excess reserves while only moderately expanding their lending activities suggests to me that banks, as well as households, have been very risk averse and continue to be.

He insists on believing that the Fed's QE policies have directly distorted valuations and interest rates. In contrast, I think most of what the Fed has done has been to accommodate the market's extraordinary demand for safe assets. I believe that if the Fed had really been pumping money into the economy and distorting all manner of things, that we would have seen quite a bit more inflation than we have to date.

Nevertheless, I do wish they would accelerate their timetable for higher short-term rates and for the unwinding of their balance sheet.

[DougMacG]

That is a strong response by Scott Grannis.  These guys working in the same field are kind of tough on each other.  Hussman missed the entire run-up.  Most on Grannis' side of it missed the entire crash, also a pretty big event of the last decade.  Taking the middle ground, I say you don't get to compare performance only from rock bottom unless you called both the crash and rock bottom.

As interesting as the images in the rear view mirror are, the point between the optimists and pessimists today is who is right today.

Scott does a nice job of both hedging and backing up his view.  This is a post worth re-reading after the market makes its next move in either direction.  If it is up 224% every 5 years and you believe current polls then the DOW hits 38,000 at the end of Hillary's first term.  Back up the truck, as we used to say.

But then Scott would also be right if, as he says, "eventually, of course, [Hussman] will be right and the market will suffer a correction, and perhaps a serious one."

We are all lousy market timers.  I know a number of people who do large money management.  I would take the compensation but wouldn't want the responsibility of getting all of the market returns for their clients now while fully protecting them against the next, inevitable, serious correction.

To me, the stock market offers you cloudy title to a company.  You share ownership with people who have very different time frames, objectives and systems for getting in and out of ownership than you do.  Psychology, emotions and subtle tipping points that trigger other events matter, and most of that we can't see.

Scott G:  "The standard PE ratio of the S&P 500 is 18, as compared to its long-term average of 16. That is not particularly stretched, in my view, especially in light of the fact that corporate profits are close to record levels relative to GDP and long-term interest rates are exceptionally low."

From here record profits could continue to go up forever (lol), or go down in a very possible recession, or stay flat for years.  The DOW still at 17000 in 5 years not at all out of the realm of possibilities, nor a worst case scenario.  Artificially low interest rates will most certainly go up the instant moment we quit holding them artificially down.  And reserves parked safely is still money created (out of thin air).

Good luck to everyone who is in.  I lost all my stock market money last time I was dead wrong.

[Crafty_Dog]

The First Estimate for Q2 Real GDP Growth 4.0% at an Annual Rate To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/30/2014

The first estimate for Q2 real GDP growth is 4.0% at an annual rate, easily beating the 3.0% rate expected by the consensus. Real GDP is up 2.4% from a year ago.
The largest positive contributions to real GDP growth in Q2 were from consumer spending and inventories. The largest drag was net exports.
Personal consumption, business investment, and home building were all positive in Q2, growing at a combined rate of 3.1% annualized. Combined, they are up 2.8% in the past year.

The GDP price index increased at a 2.0% annual rate in Q2. Nominal GDP (real GDP plus inflation) rose at a 6.0% rate in Q2, is up 4.1% from a year ago and up at a 3.7% annual rate from two years ago.

Implications: What a difference one report makes. Real GDP came in higher than the consensus expected for Q2, growing at a 4% annual rate. The rebound more than offset the weather-related hit in Q1, when real GDP fell at a (revised) 2.1% annual rate. Today’s report includes revisions to the GDP data going back several years and shows an economy that was a little weaker in 2010-12, but stronger than originally reported in 2013. New figures show real GDP grew 3.1% in 2013 versus a prior estimate of 2.6%. The one drawback in today’s data was that much of the growth in Q2 came from faster inventory accumulation, which will be tough to duplicate for the rest of the year. We still expect growth between 2% and 3%, but wouldn’t be surprised if it continued to come in at the lower end of that range. Nominal GDP grew at a 6% annual rate in Q2, is up 4.1% versus a year ago and is up at a 3.7% annual rate in the past two years. Nominal GDP is a good proxy for the level of interest rates over time and suggests that the Fed is falling behind the curve. Even though we think they should move faster, the Fed will stick to ending QE by Halloween and then start lifting rates in the first half of 2015. The BEA also released its first estimate of GDO - Gross Domestic Output for Q1 last Friday. GDO attempts to measure “all” economic activity. In other words it includes more business-to-business sales along the value-added chain of production. GDO shows that rather than steeply declining in Q1, the economy was roughly flat. This is not surprising given brutal winter weather and it suggests that the drop in Q1 real GDP was not as sinister as many wanted to believe. In other news today, the ADP index says private payrolls increased 218,000 in July. Plugging this into our models suggests the official Labor report (released Friday) will show a nonfarm gain of 220,000. On the housing front, the Case-Shiller index, which measures home prices in 20 key metro areas, dipped 0.3% in May, the first decline in 28 months, although prices are still up 9.3% from a year ago. The dip in May was led by Atlanta, Chicago, and Detroit. Look for price gains in the year ahead, but not as fast as in the past couple of years. Pending home sales, which are contracts on existing homes, declined 1.1% in June after rising 6% in May. Combined, these figures suggest a 2.4% gain in existing home sales in July. After all that, it’s still the Plow Horse.

[ccp]

Happy days are here again oh happy days are here again oh happy days are here again oh yeaaaaaaaahahhhh!!!!!!!!!

 

You wanna buy land in south central Florida?   

[G M]

http://davidstockmanscontracorner.com/qe-and-zirp-have-failed-to-lift-main-street-but-withdrawal-of-the-monetary-heroin-will-be-brutal/

[ccp]

Stockman is right.  And what does 40% of the voting public want to do about the wealth gap?

Tax the "rich" which also includes much of the middle class, to pay for all their debts. Continue the war on savings as Crafty apply puts it, "welcome" 5 million more poor illegals on top of the 12 million already here, and then all their relatives turning the rest of the country into Kalifornia (NJ too), punish the energy sector as Doug pointed out is the most thriving sector of all, embolden our enemies, piss off our friends, divide the nation even more and blame the other side, call them "haters" as the first Black and stooge in office does, all the while it is their policies worsening this mess.

But yes gotta support that brockster and the rest of the "for the po crowd".
The democrats in lock step eternally pushing *forward*  destroying America.

[Crafty_Dog]

Events vs. Data To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/4/2014

If you’re an investor looking for a reason to be worried, there are plenty of headlines to light the fuse. Widening war in the Middle East, turmoil in eastern Ukraine (or is that western Russia?), a debt default by Argentina…problems with some Portuguese bank…Ebola…tapering.

It’s not a short list, and equities are down roughly 3% since their peak on July 24th.

Maybe, just maybe, a long-awaited stock-market correction has begun. We can’t confirm or deny that prediction. All we know for certain is that this would be about the 43rd correction analysts have called in just the past 24 months.

What we do know is that the fundamentals do not suggest anything terribly serious is wrong with the US stock market. Don’t take this the wrong way. These events are all important. They matter. But in the long sweep of history, they don’t yet rise to the level of world changing events. Most of us have experienced much worse in our lifetimes.

Compared to the Yom Kippur War, the recent conflict between Israel and Gaza is small. And an interesting by-product of this current conflict is that more Arab countries are now supporting Israel.

Meanwhile, Putin’s Russia is playing an increasingly weak hand trying to foment a border crisis with Ukraine. The recent downing of Malaysian Airlines flight 17 has pushed Europe into sanctions that hurt Putin’s inner circle in its most vital organ. That would be their wallets.

Yes, Argentina isn’t going to pay all its debts. But, given its history, why is this news? Since its independence in 1816, Argentina has been in default or rescheduling about 1/3rd of the time. We’d be more surprised if Argentina always paid its debts on time.

Ebola is certainly a scary headline, but projecting some turning point for the market due to Bird Flu, Swine Flu or even AIDS back in the 1980s was an overreaction.

Fear makes any one of these seem a potentially cataclysmic event, but the same could be said about hundreds of things that have happened in the past 200 years. The one thing we’re sure of is that the economic fundamentals haven’t changed much and that the market remains undervalued.

Real GDP in the second quarter rose 4% at an annual rate after a weather-related drop in Q1 of 2.1%. Moreover, revisions to 2013 show that real GDP grew 3.1% in the four quarters of 2013. By the way, some analysts used year-over-year data for 2013 to show a 2.2% gain in real GDP, but this is like using your average net worth for the year to reflect your financial health, not what you had at year-end.

The job market is showing steady gains, with another 209,000 added to payrolls in July. That’s the sixth straight month above 200,000, the first time that’s happened since 1997. And it looks like more of the same in August: initial unemployment claims are at a four-week average of 297,000, the lowest since April 2006.

In addition, the manufacturing sector looks like it’s firing on all cylinders. The ISM Manufacturing Index beat on the upside, hitting 57.1 in July, the highest since 2011.
Construction plunged in June, but that’s a very volatile indicator from month to month and the trend is still up, with a gain of 26% since the bottom in early 2011.

Technical analysis is not our area of expertise, which is why we have to be agnostic about whether we’re in a correction. But if it is a correction, we think a rebound would be soon to follow.

We still believe the bull market will remain intact until a recession is on the way, the equity market gets overpriced, or monetary policy gets tight. None of these are here yet and we don’t expect them anytime soon.

[G M]

Events vs. Data To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/4/2014

If you’re an investor looking for a reason to be worried, there are plenty of headlines to light the fuse. Widening war in the Middle East, turmoil in eastern Ukraine (or is that western Russia?), a debt default by Argentina…problems with some Portuguese bank…Ebola…tapering.

It’s not a short list, and equities are down roughly 3% since their peak on July 24th.

Maybe, just maybe, a long-awaited stock-market correction has begun. We can’t confirm or deny that prediction. All we know for certain is that this would be about the 43rd correction analysts have called in just the past 24 months.

What we do know is that the fundamentals do not suggest anything terribly serious is wrong with the US stock market. Don’t take this the wrong way. These events are all important. They matter. But in the long sweep of history, they don’t yet rise to the level of world changing events. Most of us have experienced much worse in our lifetimes.

Compared to the Yom Kippur War, the recent conflict between Israel and Gaza is small. And an interesting by-product of this current conflict is that more Arab countries are now supporting Israel.

Meanwhile, Putin’s Russia is playing an increasingly weak hand trying to foment a border crisis with Ukraine. The recent downing of Malaysian Airlines flight 17 has pushed Europe into sanctions that hurt Putin’s inner circle in its most vital organ. That would be their wallets.

Yes, Argentina isn’t going to pay all its debts. But, given its history, why is this news? Since its independence in 1816, Argentina has been in default or rescheduling about 1/3rd of the time. We’d be more surprised if Argentina always paid its debts on time.

Ebola is certainly a scary headline, but projecting some turning point for the market due to Bird Flu, Swine Flu or even AIDS back in the 1980s was an overreaction.

Fear makes any one of these seem a potentially cataclysmic event, but the same could be said about hundreds of things that have happened in the past 200 years. The one thing we’re sure of is that the economic fundamentals haven’t changed much and that the market remains undervalued.

Real GDP in the second quarter rose 4% at an annual rate after a weather-related drop in Q1 of 2.1%. Moreover, revisions to 2013 show that real GDP grew 3.1% in the four quarters of 2013. By the way, some analysts used year-over-year data for 2013 to show a 2.2% gain in real GDP, but this is like using your average net worth for the year to reflect your financial health, not what you had at year-end.

The job market is showing steady gains, with another 209,000 added to payrolls in July. That’s the sixth straight month above 200,000, the first time that’s happened since 1997. And it looks like more of the same in August: initial unemployment claims are at a four-week average of 297,000, the lowest since April 2006.

In addition, the manufacturing sector looks like it’s firing on all cylinders. The ISM Manufacturing Index beat on the upside, hitting 57.1 in July, the highest since 2011.
Construction plunged in June, but that’s a very volatile indicator from month to month and the trend is still up, with a gain of 26% since the bottom in early 2011.

Technical analysis is not our area of expertise, which is why we have to be agnostic about whether we’re in a correction. But if it is a correction, we think a rebound would be soon to follow.

We still believe the bull market will remain intact until a recession is on the way, the equity market gets overpriced, or monetary policy gets tight. None of these are here yet and we don’t expect them anytime soon.

http://humanevents.com/2008/02/25/brian-wesbury-sees-no-recession-ahead/

[Crafty_Dog]

Nonfarm Productivity Increased at a 2.5% Annual Rate in the Second Quarter To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/8/2014

Nonfarm productivity (output per hour) increased at a 2.5% annual rate in the second quarter versus a consensus expected gain of 1.6%. Nonfarm productivity is up 1.2% versus last year.

Real (inflation-adjusted) compensation per hour in the nonfarm sector was up at a 0.1% annual rate in Q2 and is up 1.0% versus last year. Unit labor costs increased at a 0.6% rate in Q2 and are up 1.9% versus a year ago.

In the manufacturing sector, productivity was up at a 3.6% annual rate in Q2, much better than among nonfarm businesses as a whole. The faster gain in manufacturing productivity was due to faster growth in output. Real compensation per hour declined at a 0.8% annual rate in the manufacturing sector, while unit labor costs fell at a 1.3% rate.

Implications: After a large drop in productivity in Q1, nonfarm productivity grew at a 2.5% annual rate in Q2. Hours continued to increase at a healthy clip and output climbed even faster so output per hour increased. Productivity is only up 1.2% from a year ago, but we think government statistics underestimate actual productivity growth. There are many examples, in every area of the economy, but the service sector is particularly hard to measure. Drivers used to buy road atlases, and then GPS devices to help them navigate; now they download free apps that are more accurate and provide optimal routes through real-time traffic patterns. Travelers used to guess, hit-or-miss, where to go for a meal. Now they can use free services to tell them what restaurants are close and provide reviews. The figures from the government miss the value of these improvements, which means our standard of living is improving faster than the official reports show. Sectors of the economy that are easier to measure show more rapid productivity growth. In manufacturing, productivity surged at a 3.6% annual rate in Q2 and is up 2.1% from a year ago. The surge in Q2 was due to output growing much faster than hours. In spite of the overall problems with measurement, we anticipate faster productivity growth over the next few years as new technology increases output growth in all areas of the economy. In other news, yesterday new claims for unemployment insurance declined 14,000 to 289,000. The four week moving average at 293,500 is now the lowest since February 2006. Continuing claims for jobless benefits declined 24,000 to 2.52 million.

[G M]

http://goldsilver.com/news/james-rickards-cold-war-2-0-is-a-financial-war/?utm_medium=email&utm_campaign=8+13+14+GS+Weekly&utm_content=8+13+14+GS+Weekly+CID_38c81df2ad88f08af610e8f4dbeaee17&utm_source=GoldSilver%20Email%20Marketing&utm_term=read%20more

[Crafty_Dog]

Silver Wheaton, Pan American Silver each -5%, hurt by low silver prices • 2:16 PM

       Silver Wheaton (SLW -5.3%) and Pan American Silver (PAAS -5.3%) are both
sharply lower as low silver prices combined with still-high costs combine to
weigh on Q2 results.SLW said its silver equiv. realized price fell from
$23.05/oz. a year ago to $19.83 in this year's Q2; gold sales accounted for
~30% of sales, and SLW’s realized gold price of $1,295/oz. was included
in a 14% drop in the silver equiv. price.In Q2 results for PAAS, the average
realized price for silver was $19.58/oz., down from $22.68 in the year-ago
quarter; gold, which accounts for ~25% of sales, also suffered, fetching
$1,289/oz.vs. $1,423 a year ago.

[G M]

Silver Wheaton, Pan American Silver each -5%, hurt by low silver prices • 2:16 PM

       Silver Wheaton (SLW -5.3%) and Pan American Silver (PAAS -5.3%) are both
sharply lower as low silver prices combined with still-high costs combine to
weigh on Q2 results.SLW said its silver equiv. realized price fell from
$23.05/oz. a year ago to $19.83 in this year's Q2; gold sales accounted for
~30% of sales, and SLW’s realized gold price of $1,295/oz. was included
in a 14% drop in the silver equiv. price.In Q2 results for PAAS, the average
realized price for silver was $19.58/oz., down from $22.68 in the year-ago
quarter; gold, which accounts for ~25% of sales, also suffered, fetching
$1,289/oz.vs. $1,423 a year ago.

Buy on the dips.

[Crafty_Dog]

I bought PAAS at 9 and rode it to 40.  Got out in the low 30s and mid 20s IIRC.

As I have cautioned here a number of times, as soon as interest rates go up, the experience of the late 70s teaches that gold and silver will bet fuct.  As it is gold is donw over 35% from its peak.

The piece in GM,s post 909 epitomizes the notion of profity from prophesy.  It can be done, but then again the market can be wrong longer than you can stary solvent.

[G M]

I bought PAAS at 9 and rode it to 40.  Got out in the low 30s and mid 20s IIRC.

As I have cautioned here a number of times, as soon as interest rates go up, the experience of the late 70s teaches that gold and silver will bet fuct.  As it is gold is donw over 35% from its peak.

The piece in GM,s post 909 epitomizes the notion of profity from prophesy.  It can be done, but then again the market can be wrong longer than you can stary solvent.

I'm not buying to flip silver and gold for profit. I'm buying to have something of value after we go Weimar.

[Crafty_Dog]

New Orders For Durable Goods Boomed 22.6% in July To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/26/2014

New orders for durable goods boomed 22.6% in July (+23.8% including revisions to prior months), easily beating the consensus expected gain of 8.0%. Orders excluding transportation declined 0.8% in July, but were up 0.3% including revisions to prior months, coming in below the consensus expected 0.5% gain. Orders are up 33.8% from a year ago while orders excluding transportation are up 6.6%.

The gain in overall orders was led by civilian aircraft and autos. The largest decline was for machinery.

The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure rose 1.5% in July (+2.7% including revisions to prior months). If unchanged in August and September, these shipments will be up at an 8.8% annual rate in Q3 versus the Q2 average.
Unfilled orders increased 5.4% in July and are up 12.3% from last year.

Implications: Durable goods boomed 22.6% in July, the biggest increase on record going back to 1958. The entire gain in durable goods orders was due to the very volatile transportation sector, which rose 74.2% in July. In particular, civilian aircraft orders rose 318% as Boeing received 324 orders for new planes in July. Excluding transportation, new orders for durable goods declined 0.8% in July, but were revised up to a 3% gain in June (versus a prior estimate of 1.9%) and are up 6.6% versus a year ago. The best news today was that shipments of “core” capital goods, which exclude defense and aircraft – a good proxy for business equipment investment – rose 1.5% in July and June shipments were revised up to a 0.9% gain (versus a prior estimate of -0.3%). These shipments are now up 7.6% versus a year ago, a major acceleration from the 0.4% decline in the year ending in July 2013. Until recently, business investment had been unusually slow relative to other parts of the recovery, but it now looks like companies are finally updating their equipment and building out capacity more quickly. On the housing front; mixed news on home prices today. The FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.4% in June, and is up 5.2% from a year ago. However, the Case-Shiller index, which measures homes in 20 key metro areas around the country, declined 0.2% in June, with 13 of the 20 areas showing a decline, led by Minneapolis and Detroit. That’s the first overall decline since early 2012. Still, in the past year, the Case-Shiller index is up 8.1%, with gains led by Las Vegas, San Francisco, and Miami. Both the FHFA index and Case-Shiller show smaller price gains in the past twelve months than in the twelve months that ended in June 2013. We expect that trend to continue, with these measures generally moving up but showing smaller gains than in the recent years. In other news this morning, the Richmond Fed index, a measure of factory sentiment in the mid-Atlantic region, rose to +12 in August from +7 in July, signaling continued gains in industrial production in August.

[Crafty_Dog]

The ISM Manufacturing Index Surged to 59.0 in August To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/2/2014

The ISM manufacturing index surged to 59.0 in August from 57.1 in July, easily beating the consensus expected level of 57.0. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)
The major measures of activity were mixed in August, but all remain well above 50, signaling growth. The new orders index rose to 66.7 from 63.4, while the production index increased to 64.5 from 61.2. The supplier deliveries index dipped slightly to 53.9 from 54.1. The employment index was little changed at 58.1 from 58.2 in July.
The prices paid index declined to 58.0 in August from 59.5 in July.

Implications: A booming report from the manufacturing sector as the ISM Manufacturing index, which measures factory sentiment around the country, rose to 59.0 in August, the highest level in more than three years. The best news in today’s report came from the new orders index, which rose to 66.7, the highest reading in more than a decade, and a sign that factory activity should continue to pick up in the months ahead. According to the Institute for Supply Management, an overall index level of 59.0 is consistent with real GDP growth of 5.2% annually. While last week’s GDP report came in at a strong 4.2% for Q2, we don’t expect the growth rate to remain quite that fast over the remainder of the year. The long-term link between the ISM report and real GDP growth has tended to over-estimate real GDP growth in the past several years. On the inflation front, the prices paid index fell to a still elevated 58.0 in August from 59.5 in July. Along with broader measures of consumer and producer prices, inflation is showing signs of overly loose monetary policy. The employment index was essentially unchanged at 58.1 in August, just off the three year high reading of 58.2 in July’s report. With the data in today’s release, we are currently forecasting a gain of about 25,000 manufacturing jobs for this Friday’s employment survey. In other news today, construction increased 1.8% in July and 3.3% including upward revisions for May and June. The gain in July itself was led by state and local projects (like paving roads and building bridges). A large gain in commercial construction was led by power plants and manufacturing facilities. The upward revisions for May/June suggest real GDP will be revised up to a 4.4% annual growth rate in Q2 from a prior report of 4.2%.

[Crafty_Dog]

The ISM Non-Manufacturing Index Increased to 59.6 in August To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/4/2014

The ISM non-manufacturing index increased to 59.6 in August, easily beating the consensus expected 57.7. (Levels above 50 signal expansion; levels below 50 signal contraction.)

The major measures of activity were mostly higher in August, and all remain above 50. The business activity index jumped to 65.0 from 62.4 while the employment index increased to 57.1 from 56.0. The supplier deliveries index moved higher to 52.5 from 51.5. The new orders index dipped to 63.8 from 64.9.
The prices paid index declined to 57.7 in August from 60.9 in July.

Implications: Another strong reading from the service sector as the ISM services index jumped to 59.6 in August, beating the forecast from all 74 economic groups that made a prediction and coming in at the highest reading since August 2005. The ISM service sector has now shown expansion for a 55th consecutive month. Paired with the strong ISM manufacturing report from Tuesday, it’s clear the economy is continuing to bounce back from the harsher than normal winter that slowed activity at the start of the year. The business activity index– which has a stronger correlation with economic growth than the overall index – rose 2.6 points in August to 65.0, the highest reading for the index in close to ten years. New orders dipped slightly, but remain at a very robust reading of 63.8, suggesting production should continue to pick up in the months ahead. After the drop back in April, the employment index has expanded for each of the past four months and, with this month’s reading of 57.1, has moved above the average reading of 56.5 seen over the past five years. As employment continues to expand, expect income growth to boost consumer spending and business revenue, which, in turn, will help support even more job growth in the future. In other words, the growth in the economy is self-sustaining and should remain that way until monetary policy gets tight, which is at least a few years away. On the inflation front, the prices paid index dropped to a still elevated 57.7 in August from 60.9 in July. No sign of runaway inflation, but given loose monetary policy, we expect this measure to either stay elevated or move upward over the coming year. Once again, we have a report showing the Plow Horse economy may be starting to trot. In other recent news, Americans bought cars at a 17.5 million annual rate in August, much higher than the consensus expected and the fastest pace since January 2006. Sales were up 6.4% versus July and up 10% from a year ago. These figures suggest a strong rebound in retail sales in August after no change in July.

[DougMacG]

" ISM Non-Manufacturing Index Increased to 59.6"

The economy seems to do best in the contrived measurements.  How many people don't work in America, how many people don't work full time (hundreds of millions), how many even know or remember what full time, private sector employment is anymore?

 0.0: That is the manufacturing and non-manufacturing index level today combined for all the companies that never started over the last 8 years since Pelosi-Obama-Reid took power.

" the Plow Horse economy may be starting to trot"

Last time Wesbury said that, we were headed into negative growth territory with an economy too weak to withstand winter.  No mention that it is still the worst economic recovery in 80 years, perhaps more.  I think Wesbury is conflating market success with overall economic performance, which is stuck in an intentional, no-growth pattern of stagnation. Plow horses don't trot, especially when pulling a heavy load.

[DougMacG]

Another view on the performance of the US economy by Democrat Lawrence Summers:

http://www.washingtonpost.com/opinions/lawrence-summers-supply-issues-could-hamper-the-us-economy/2014/09/07/274ce00c-352f-11e4-9e92-0899b306bbea_story.html

The U.S. economy continues to operate way below estimates of its potential that were made prior to the onset of financial crisis in 2007, with a shortfall of gross domestic product now in excess of $1.5 trillion — or $20,000 per family of four. Just as disturbing, an average economic growth rate of less than 2 percent since that time has caused output to fall further and further below those estimates of potential. Almost a year ago, I invoked the concept of “secular stagnation” in response to the observation that, five years after the financial hemorrhaging had been stanched, the business cycle was not returning to what had been previously thought of as normal levels of output.

"...weak growth along with significant decreases in labor slack suggest a major slowing of the growth of potential output."

Lawrence Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and economic adviser to President Obama from 2009 through 2010.


http://www.cbo.gov/publication/45150

(I will posting the policy part of this that follows on the Political Economics thread.)

[Crafty_Dog]

Why Do Stocks Keep Rising? To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/8/2014

So far this year, the S&P 500, including dividends, has returned 10.1% to investors. The NASDAQ, including dividends, is up 10.7%.

This has happened even though the Federal Reserve has tapered bond purchases from $85 billion per month, to the current $25 billion. And everyone knows, QE will fall to $15 billion after September 17th and zero after the Fed’s meeting in late October.

The market is up in spite of Vladimir Putin invading Ukraine, the rise and rapid spread of ISIS in Iraq and Syria, and even volcanoes in Iceland. It’s up even though Ebola is spreading in Africa, upcoming Congressional elections in the US, and some members of the Fed publicly vocalizing about the need to raise interest rates sooner than next year.

The stock market is up even though some previously bullish analysts have turned skeptical or even bearish. It’s up even though it had a little hiccup back in July and even though the 5-year Treasury yield is up 100 basis points since early 2013.

This continues a trend that started sixty-six months ago on March 9, 2009. Since then, the S&P 500 is up at annualized average of 24% (including dividends). And the things the market has worried about in the past year don’t hold a candle to the fears stirred up over those previous five years.

During those five years, pundits on many business TV shows, after hearing that we thought stocks could go even higher and that the economy would keep growing, always asked “yeah, but what about ______”?

You can fill in the blank with a hundred things…they certainly did…the Sequester, Greece, Dubai, Cypress, the Fiscal Cliff (twice), part-time jobs, and on and on. This incessant pessimism, the constant belief that things were bound to go wrong seems almost surreal. How can somebody stay negative for so long, but convince themselves that they are always right?

Maybe this is why CNBC viewership is falling. According to Zap2it.com, it’s fallen to a 2-year low (click here).

It’s important to remember that many people watch business TV at work and ratings services do not do a good job of capturing this viewership. Nonetheless, if these data capture any type of decline at all, it’s a real shame.

The 21st century is an amazing period of entrepreneurial activity. Fracking, 3-D printing, robotics, biotech advances, the Cloud, wireless communication technologies, smartphones, tablets, and apps are just a few of the areas of massive advancement.

The business world is vibrant, productive and massively efficient. One broad measure of profits has grown 20% at an annual average rate between Q4-2008 and Q2-2014. How come TV can’t capture that vibrancy in a way that attracts more viewers?

The good news is that TV does not drive stock prices, profits do. Rising profits prove that resources are being utilized more efficiently and when resources are used more efficiently, they become more valuable.

One problem the pessimists have is that they look back at 2008 and see a failure of markets and the success of government. But TARP and QE never saved the economy. Stock markets fell an additional 40% after TARP was passed.  But once mark-to-market accounting rules were changed in March/April 2009, the crisis ended and a recovery began. That recovery has been real, not a “sugar high,” built on government action.

It may not have been the strongest recovery ever, but in those areas driven by, or that utilize, new technology, it has certainly been profitable.
That’s why stocks keep rising in spite of all the negative news that circulates. Understanding profits is the key to understanding why stocks keep rising.
________________________________________

[DougMacG]

Eloquent, as usual.  A little smug about being right the last 60 months or so, after missing the last crash.

Who was right or wrong during the run up is not the same question as who is right today.

What do we know happens after a long run up in stock prices?

a.  It will go up further
   or
b. It will come to a screeching and painful halt and decline.

Quoting BW:  ""Stock markets fell an additional 40% after TARP was passed [in 2008]."   - He is making a different point but what was his prediction then?  40% further crash?  That is an awful lot of lost value[tens of trillions?] to have missed so recently to be smug about anything now (IMHO).  I predict the market now will do either a. or b. above, go up or go down.  I would not base optimism on this column because I believe he is cherry picking his facts.  Other facts are not so positive.  For example, what about the dearth of startups?

[G M]

http://www.marketwatch.com/story/the-american-family-makes-200-more-a-year-than-it-did-in-1989-2014-09-05

Don't spend that 200 bucks all in one place.

[DougMacG]

http://www.marketwatch.com/story/the-american-family-makes-200-more-a-year-than-it-did-in-1989-2014-09-05

Don't spend that 200 bucks all in one place.

1989 happened to be the end of the Reagan era, followed by endless, no-new-taxes tax increases, beginning in 1990.

That said, there are many problems with this type of analysis. 
a. Median family size is shrinking, so that measurement isn't particularly useful.
b. Tracking "the share of wealth owned by the top 3% of American families" over such an extended period doesn't show the mobility in and out of that group.
c.  We don't count most of the income received at the lower end of the scale.
d.  Every time an illegal or anyone else walks into this economy with nothing, the median goes down even if no one else's income or wealth has changed.

Far more enlightening IMHO are the analyses that take specific groups from specific points in time and then track their income and wealth mobility going forward.

[Crafty_Dog]

Economists See Overseas Risks as Growth Wild Card
WSJ Survey Shows Optimism on U.S. Economy, but Not So Much for Rest of World
By Nick Timiraos
WSJ
Sept. 11, 2014 12:08 p.m. ET

After an uneven first half of the year, most economists are relatively sanguine about the U.S. economy's growth outlook. It's the rest of the world that's a concern, according to The Wall Street Journal's monthly forecasting survey.

More than 90% of the 48 surveyed economists—not all of whom answered every question—said they expect the U.S. economy to improve relative to the first half of 2014. None see the economic outlook deteriorating. The survey was conducted after last Friday's weaker-than-expected August jobs report.

The brighter outlook for the U.S., coming as the Federal Reserve gets set to end its bond-buying stimulus program next month and amid generally improving economic data, stands in contrast to economists' views toward other large economies.

Just one-third said their outlook for the eurozone had improved, roughly balanced with the share seeing a worse outlook for the currency union. One-quarter of economists said their outlook for China improved, while almost 40% said it had deteriorated slightly. About 40% said their outlook for Japan had improved, compared with 12% that said it had deteriorated.

"The U.S. cycle is well ahead" of Europe and Japan, said Joseph Carson, an economist at Alliance Bernstein. "We've taken the hits and restructured. The household sector has deleveraged, and the financial sector has re-liquefied. You've seen little progress in Europe."

The U.S. is also better off because of increasing domestic oil production and the potential for new industries to grow on the back of that cheaper energy supply, Mr. Carson said.

Indeed, a majority of economists don't believe global oil prices will change over the next six months as a result of turmoil in the Middle East. One-third said the instability might lead to a slight increase in oil prices.

Economists cited the situation in Ukraine as the largest threat to global growth, followed by monetary missteps by central bankers and structurally high unemployment.

James F. Smith, chief economist at Parsec Financial, is pessimistic about the threat of economic warfare between Russia and Europe over the unrest in Ukraine, including the prospect of a European banking crisis from a Russian debt default. He also worries about the implications of Japan's growing trade deficit.  Still, compared with the August survey, the latest consensus outlook for economic growth, unemployment and inflation for 2014 and 2015 was little changed.

The economists see gross domestic product, the broadest measure of goods and services produced across the economy, advancing at a 3% annual pace this quarter and next. Just three economists expected growth to exceed 3.7% in the third or fourth quarters, and only two see growth falling below 2%.  The economy expanded at a 4.2% pace in the second quarter after contracting 2.1% in the first quarter, according to the Commerce Department.  Forecasters in the Journal survey expect the U.S. economy to grow at a 2.8% annual pace in 2015, down slightly from last month's forecast of 2.9% annual growth.

Economists saying there is more upside to their near-term forecast outnumber those who say there is more downside by nearly 2 to 1. Economists cited stronger consumer spending and faster capital investment by businesses as their top upside surprises, while they flagged geopolitical risks, Europe's economy, and the soft U.S. housing market as their biggest concerns.

Nearly half of economists believe that the 10-year Treasury yield will end the year at or under 2.76%, compared with the median forecast of 3% in the August survey.
Most economists don't expect the Fed to raise short-term interest rates from near zero before June 2015, and the number of economists who believe the Fed will move early next year declined since the August survey.

Messrs. Carson and Smith say they believe better hiring and growth in the U.S. could force the Fed to raise rates during the first quarter of 2015. Despite the turmoil abroad, the U.S. has seen little impact so far, Mr. Carson said. Stock prices and durable-goods orders have advanced, while oil prices have declined.

Others believe overseas risks will provide further reasons for policy makers to tread carefully. "If the Fed moves too quickly to raise rates, we risk leveling the forest rather than just trimming the overgrowth," said Diane Swonk, chief economist at Mesirow Financial. The turmoil abroad only makes the central bank's task "much more precarious," she said.

The Fed would rather move too slowly than too quickly, "given the lack of safety nets if we were to stumble into a recession," Ms. Swonk said.

[DougMacG]

...
More than 90% of the 48 surveyed economists—not all of whom answered every question—said they expect the U.S. economy to improve relative to the first half of 2014. None see the economic outlook deteriorating. ...

The optimism is impressive!  But stated occasionally in the climate change context, a poll of scientists (who all agree with each other) is not science.  This looks more like a study of how 'scientists' let the views of their peers influence their work. 

I judge economists by how well they can explain the past and present, not by how well they foresee the future, which none can do reliably or accurately. 

"... only two (of 48) see growth falling below 2%."

Not mentioned, but how many of these 48 economists predicted a contraction greater than 2% for last winter?  None, I'm sure.

[Crafty_Dog]

Retail Sales Increased 0.6% in August To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/12/2014

Retail sales increased 0.6% in August, matching consensus expectations, but were up 1.0% including revisions to prior months. Sales are up 5.0% versus a year ago.
Sales excluding autos increased 0.3% in August, matching consensus expectations, but were up 0.6% including revisions to prior months. These sales are up 4.1% in the past year.

The increase in sales in August was led by autos and building materials. The weakest category was gas.
Sales excluding autos, building materials, and gas were up 0.4% in August. If unchanged in September, these sales will be up at a 4.7% annual rate in Q3 versus the Q2 average.

Implications: A very solid report out of the retail sector today. Retail sales rose 0.6% in August, increasing for the seventh consecutive month, and rising by the most in four months. Sales continue to grow at a healthy clip from a year ago, up 5%. Moreover, the “mix” of retail sales was even better news than the headline, as gas station sales dropped 0.8% due to lower gas prices. Gas prices are also down 0.8% from a year ago. The widespread use of fracking and horizontal drilling is making this possible, which means consumers can take the money they save on filling their tanks and spend it on other things. “Core” sales, which exclude autos, building materials and gas, increased 0.4% in August and 0.8% including upward revisions to June and July. “Core” sales have now been positive in eleven of the last twelve months. These sales are a key input into GDP calculations and, if unchanged in September, the sales will grow 4.7% at an annual rate in Q3 versus Q2. Once we include other spending (on services and durables), our expectation is that “real” (inflation-adjusted) consumer spending, goods and services combined, will grow at a 2% annual rate in Q3. We expect consumer spending to accelerate in the year ahead, as lower unemployment means an acceleration in income gains at the same time that consumer debt service is hovering near multiple-decade lows. In other news this morning, no consistent sign yet of inflation in trade prices. Import prices fell 0.9% in August, although they declined only 0.1% excluding oil. Export prices slipped 0.5% in August and declined 0.3% excluding agriculture. In the past year, import prices are down 0.4% while export prices are up 0.4%. In other recent news, new claims for unemployment insurance increased 11,000 last week to 315,000. Continuing claims rose 9,000 to 2.50 million. These figures are consistent with our early forecast that payrolls are growing roughly 200,000 in September.

[Crafty_Dog]

Personal income increased 0.3% in August To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Deputy Chief Economist
Date: 9/29/2014

Personal income increased 0.3% in August (+0.4% including revisions to prior months). The consensus expected a 0.3% gain. Personal consumption rose 0.5% in August (+0.7% including revisions to prior months), beating the consensus expected gain of 0.4%. Personal income is up 4.3% in the past year, while spending is up 4.1%.
Disposable personal income (income after taxes) increased 0.3% in August and is up 4.2% from a year ago. The gain in August was led by wages & salaries in the private service sector, rent, and Medicaid, which offset a large decline in farm income.   
 
The overall PCE deflator (consumer prices) was unchanged in August but is up 1.5% versus a year ago. The “core” PCE deflator, which excludes food and energy, rose 0.1% in August and is also up 1.5% in the past year.
 
After adjusting for inflation, “real” consumption rose 0.5% in August (+0.7% including revisions to prior months) and is up 2.6% from a year ago.
 
Implications:  A solid report on consumer spending and income today.  Consumption rose 0.5% in August and was revised up for prior months.  This shouldn’t be a surprise; payrolls are up about 2.5 million in the past year.  Don’t let anyone tell you this is all unsustainable.  Total income – which also includes rents, small business income, dividends, interest, and government transfer payments – increased 0.3% in August, was revised up for prior months, and is up 4.3% from a year ago.  This is slightly faster than the 4.1% increase in consumer spending in the past year.  In other words, incomes lead spending and the US is not experiencing a credit-created increase in consumption.  One overlooked part of this economic report is the massive growth in government redistribution.  Medicaid, for example, is up 12.5% versus a year ago, largely due to Obamacare.  Overall government transfer payments – like Medicare, Medicaid, Social Security, disability, welfare, food stamps, and unemployment compensation – are a very large share of income.  Before the Panic of 2008, these transfers were roughly 14% of income.  In early 2010, they peaked at 18%.  Now they are 17%.  Redistribution hurts growth because it reallocates scarce resources away from productive ventures.  Keynesians try to say government spending is necessary to boost the economy in a recession, but this is certainly not the case anymore.  Private sector jobs have expanded for 54 consecutive months and private-sector wages & salaries are up 5.8% from a year ago, which is faster than the 5.3% gain in government transfers.  We expect both income and spending to accelerate in the year ahead as jobs and wages continue to grow.  In addition, consumers’ financial obligations are hovering at the smallest share of income since the early 1980s. (Financial obligations are money used to pay mortgages, rent, car loans/leases, as well as debt service on credit cards and other loans.)  On the inflation front, the Federal Reserve’s favorite measure, the personal consumption price index, was unchanged in August and is up only 1.5% from a year ago.  Given loose monetary policy, by the middle of next year, the Fed is going to struggle to keep inflation down at 2%. That’s part of the reason we expect short-term rates to move up in the first half of 2015.   

[Crafty_Dog]

248,000 Jobs Added in September

The U.S. economy added 248,000 jobs in September, and the headline unemployment rate fell to 5.9%. The real story is that 315,000 people left the workforce, and labor force participation ticked down again to 62.7%, remaining at levels not seen since the Carter-era recession. That's why the unemployment rate is falling. The U-6 unemployment rate, a better measure, sits at 11.8%. That said, the report contains some good news: The August report was revised up from 142,000 jobs created to 180,000, and CNBC notes, "The job creation [in September] was tilted heavily towards full-time positions, which surged by 671,000. Part-time jobs actually fell by 384,000." Furthermore, writes National Review's Patrick Brennan, "248,000 jobs in September is still not as fast as we’d like a recovery to be, but it’s noticeably more jobs than need to be created to keep up with population growth, and the past eight months have been a faster average period of job creation than any comparable time during this recovery." The American economy is resilient enough even to face the headwinds of Barack Obama's "recovery."
 
Are We Better Off Than Six Years Ago?

"t is indisputable that our economy is stronger today than it was when I took office," Barack Obama said in a speech Thursday, echoing his comments in his "60 Minutes" interview last weekend. Of course, that's an awfully low bar, isn't it? And, as the American Enterprise Institute's James Pethokoukis notes, we haven't exactly been going gangbusters. "But consider," says Pethokoukis, "(a) the economy has been unable to consistently grow at more than 2% throughout this expansion; (b) trend GDP remains below its prerecession path; (c) the share of adults with any kind of job remains well below pre-recession levels; (d) there are just 1.2 million more private jobs today than January 2008 despite 15.6 million more adults; (e) wage growth remains weak; (f) the megabanks are even bigger, (g) the pace of startups is lackluster; (h) median household income, as measured by the Census Bureau, was 8 percent lower last year than in 2007." A few more stats: The poverty rate is up, even though government subsistence is at a record high, and homeownership is down almost 3%. Consumer confidence took a steep drop from 93.4% in August to 86% in September. Obama admitted the American people "don't yet feel enough of the benefits." No kidding. His solution? To raise the minimum wage (which will kill more jobs) and to spend more on infrastructure. Where have we heard that before? Finally, Obama noted, "Make no mistake: [My] policies are on the ballot. Every single one of them." He got that right.

[ccp]

http://www.telegram.com/article/20140709/COLUMN70/307099992/0

[DougMacG]

http://www.telegram.com/article/20140709/COLUMN70/307099992/0

He may be the best President of the last 90 years for something he has not done:

"It is too early to tell whether the third phase will let Mr. Obama leave office with economic growth exceeding 4 percent, at least 300,000 new jobs a month being created, and an unemployment rate below 4 percent.  But if that happens — and the stock market does not implode — Mr. Obama will go down in history as the best president the U.S. economy has seen in 90 years."


In fact he presided over the tanking of the workforce participation rate to a level not seen since before women widely entered the workforce.  It is an economy that employs men at the lowest rate ever recorded.  What these twisted economic stats are telling us is just how twisted our economic stats are.

We are "adding" jobs beneath breakeven levels.  The jobs we are losing are full time and the jobs we are adding are part time.  Mostly though, fewer and fewer are choosing to work, now that it is optional and the rewards of work and starting businesses have been largely removed.

By their math, when this economy hits zero jobs with zero workers remaining, the unemployment rate will be at its lowest ever!

[ccp]

If you can get past all the darn popups and other ads from Forbes which I say I no longer normally read:

http://www.forbes.com/sites/adamhartung/2014/09/05/obama-outperforms-reagan-on-jobs-growth-and-investing/

Anyone care to argue the middle class are not being screwed over by the Democrats who rob them to pay for votes to a good portion of the population and those who are making out like kings who not only have made fortunes from bail out money indebting us for generations, but continue to have the gall to call for mass immigration to replace us with foreign workers who will work for less.  Think it doesn't drive down wages?

Most of the hard working Americans are sold out by both sides.

[Crafty_Dog]

Monday Morning Outlook
________________________________________
Timing The Market Doesn't Work To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 10/13/2014

The stock market doesn’t owe anything to anyone. If you missed the bottom in 2009, no one owes you another chance to get in when stocks are that cheap. We may never see such historic lows again.
And even if markets did give us another chance, most investors would probably miss it all over again because they would be in such a panic – just like in 2009. Breathless, breaking-news would provide so much instantaneous, and conflicting, analysis of technical indicators, like “support levels,” “trading-volume,” “200-day moving averages,” and “new highs and lows” that investors wouldn’t be able to act with any confidence.
Fundamental analysts would talk of a “downward spiral in the wealth effect,” “a new normal,” “peak earnings,” “political gridlock,” or, “Fed inaction.” With this back-drop investors would expect even more declines.
But, even after the events of recent weeks, an investor that bought the S&P 500 on December 1, 2007, and held, would have made 6% per year (including dividends) through today. More recently, even after another 1.5% drop last Friday, the S&P 500 was 12.6% above its level of a year ago (14.9%, with dividends). How many people think of 2007, or last October, as a buying opportunity?
Believe it or not, we would argue that today is what a buying opportunity looks like. When stocks were rising just a few months ago, lots of investors were upset they hadn’t gone “long” in 2013. Now, with markets falling, and equity prices hovering near those same levels, they hesitate to buy.
Think about all the reasons for the market drop. One fear is a slowdown in Europe. But Europe has been a very sickly plow horse for several years, so much so that many serious economists were proposing a break-up of the Euro.
We’re not forecasting an economic boom in Europe, but with money easy, a collapse is not in the cards either. More like a slow motion continuation of very weak real growth as Euro-sclerosis continues.
Another fear is a slowdown in China. But goods exports to China are only 0.7% of US GDP, about half of what we export to Mexico, and if China gets in trouble our imports from China will cost less. When China is importing much more from the US, a slowdown there will be more significant. But for now, the concern is overdone.
Yet another fear is that “Abe-nomics” isn’t working in Japan. For the record, it won’t work. Free-markets, not government, save economies. Japan has been in decline for the past two decades, but the US has still grown. In other words, it’s nothing new.
The strangest fear is that a strong US dollar will hurt the market. But a strong dollar in the 1980s and 1990s coincided with a bull market, not a bust. King Dollar is good for investors.
We are not saying equities will go up today, or tomorrow, or even this week. Heck, for all we know the long-awaited correction may finally be upon us.

But, the Fed is not tight, trade protectionism is not in the wind, tax rates are not headed higher, and big government is checked by divided government. Profits are still rising, the US economy is accelerating, and our models show that equities are still cheap. It may not be the “mother of all buying opportunities,” but it ain’t the end of equities, either.

[DougMacG]

Wesbury says market timing doesn't work yet he picks a market low starting point or a market high ending point or both to show performance.

[G M]

Wesbury has picked 12 of the last  0 recoveries.

So he has that going for him.

[Crafty_Dog]

Ummm , , , sorry but Wesbury has been decisively kicking the collective ass of this board when it comes to predicting the market, and inflation.

[DougMacG]

Markets go up and down, hopefully more up than down.  He is right when they are up and wrong when they go down.  For the right reasons?  I say no.  Entrenched companies did well under crony government and did well mostly outside our borders. 

If WE believe real unemployment is still nearly double digit, 9.6% best case by any consistent measure, then he has been wrong for 6 years about ECONOMIC recovery.

The main question always is, What next?

If a 5 year rise built partly upon a house of cards, QE, won't ever come down, then he is right about the market - for the wrong reasons.

[Crafty_Dog]

As always, "Profit or prophet-ize?"

[DougMacG]

As always, "Profit or prophet-ize?"

Fair enough.  Wesbury's point now is buy stocks now, after 5 years up and under political economic policies he and we think are harmful to investments.  We will see.

It's only theoretical to me.  I lost my stocks money not last time he was wrong but the time before that.

[G M]

http://www.mybudget360.com/not-in-the-labor-force-transfer-payments-one-third-supporting-population/

[Crafty_Dog]

Better Policies on the Horizon To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Senior Economist
Date: 10/27/2014

Some say we have a Plow Horse Economy because economic growth is always slow after a financial crisis. But the real reason is that politicians from both major parties keep throwing more government “solutions” at problems. This started well before President Obama took office.

The Bush Administration, and a spend-friendly Congress, pushed temporary “stimulus” spending in 2001 and then followed Larry Summers’ Keynesian advice in early 2008 and passed tax credits and even more stimulus. President Bush said, “I’ve abandoned free market principles to save the free market system” in an explanation of TARP. Then, we got more “stimulus” in 2009. Don’t forget quantitative easing, either.

We believe this is the reason real GDP growth during the current recovery, averaging 2.2% per year, is the slowest five-year period of growth without a recession in the last 100 years.

What’s interesting is that we can divide this economy into two parts – a “Race Horse” exists in many sectors, like fracking, and high-tech; like 3-D printing, the cloud, smartphones and apps. Government did not drive these processes and new techniques; free markets did.

But, where government interfered in the most overt ways – in labor markets and in housing – the recovery has been much slower. And government is using the “Amazon Model” of spend to grow in alternative energy production, hoping that losses today equal benefits tomorrow. This may be true, but at least Amazon is spending its own money and the stock market votes every day on whether it is a good idea or not.

To some, what we have just written sounds overly political. But we are actually thinking economically. We believe in small government because smaller government creates a more dynamic private sector with higher standards of living.

And, judging by the evidence, the American people are beginning to shift toward this view again. A recent Politico poll, weighted equally between Republicans and Democrats, showed 64% think things in the US feel “out of control.” Other polls show both the President and Congress with extremely low popularity right now.

It’s a 1970s vibe! Many Americans worry their kids will be worse off. They fret about ISIS and Ebola. Most Democrat candidates are allergic to President Obama showing up in their states or districts. The same was true back in 2006 when Republicans distanced themselves from President Bush.

Obviously, problems often stretch out longer than we think they should. But, it seems clear Americans are ready for a change, and when this happens, politicians start moving that way even if they don’t have strong ideologies. As an example, some are campaigning as “Clinton Democrats” these days – meaning that tax cuts and more moderate, even free market, policies aren’t off the table.

We aren’t projecting another Ronald Reagan. But a shift away from supporting “government solutions” to all problems seems more likely these days.

Next weeks’ mid-term elections are the first step, but major changes won’t take place until after the 2016 presidential election. Already there is more centrism on economics.
Years of sluggish growth have weakened the “status quo” faction inside the GOP. No wonder two of the GOP’s toughest Senate races this year are in Kentucky and Kansas where long-term incumbent Senators seem out of touch. And for Democrats, the burden of majority means they have to defend more incumbents – a tough road to hoe in a 1970s-like environment.

What this means is that a Republican president in 2016 would likely use special budget procedures to reform Medicare and Medicaid in addition to improving the tax system for both companies and individuals. But, right now a Democrat president looks more probable. And in 2017-18, with the recovery aging, she would likely support moves to reform the corporate tax code, plus reforming Obamacare with market-friendly changes like health savings accounts.

In other words, the next president is likely to be more market friendly than the current one. The American people won’t have it any other way. Look for evidence of this shift as the results of the mid-term elections pour in next week.

[Crafty_Dog]

The First Estimate for Q3 Real GDP growth is 3.5% at an Annual Rate To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Senior Economist
Date: 10/30/2014

The first estimate for Q3 real GDP growth is 3.5% at an annual rate, beating the 3.0% the consensus expected. Real GDP is up 2.3% from a year ago.

The largest positive contributions to the Q3 real GDP growth rate were net exports, consumer spending, and government purchases. The only drag was inventories.

Personal consumption, business investment, and home building were all positive in Q3, growing at a combined rate of 2.3% annualized. Combined, they are up 2.8% in the past year and up at a 2.8% annual rate in the past two years.

The GDP price index increased at a 1.3% annual rate in Q3. Nominal GDP – real GDP plus inflation – rose at a 4.9% rate in Q3 and is up 3.9% from a year ago and up at a 3.8% annual rate from two years ago.

Implications: Real GDP surprised to the upside in Q3, growing at a 3.5% annual rate. The best news in the report was that real business investment (excluding inventories) grew at a 5.5% annual rate in Q3 and is up 6.7% from a year ago. Some pessimistic analysts will surely point out that the trend in real GDP growth is still tepid, up 2.3% from a year ago and up at that very same 2.3% rate in the past two years. These data are accurate, of course, which is why we’ve been calling the economy a plow horse. But even a plow horse will sometimes pick up his pace. Arguing against this view are those who say government spending boosted growth in Q3. Yet, even without government spending, Q3 real GDP grew 3.3%, and if we exclude government, trade, and inventories, real GDP is up 2.8% annually in past 2 years. And that’s roughly what we think the underlying trend is for the economy as a whole. In other words, a slight improvement from the 2.3% pace many have become used to. Monetary policy is loose and will remain that way even as the Fed eventually starts lifting short-term rates. Federal spending has declined to 20% of GDP versus 24% of GDP five years ago. Corporate profits are at a record high. All of these factors signal better economic growth ahead. Meanwhile, today’s report continues to show that the Fed should start raising rates earlier than the market now expects. Nominal GDP (real GDP plus inflation) increased at a 4.9% rate in Q3 and is up at a 3.8% annual rate in the past two years. For comparison, nominal GDP is up at a 3.6% rate in the past decade. A short-term interest rate of essentially zero is too low given current economic conditions. Regardless, we expect the Fed to wait until the second quarter of next year to start lifting rates. In other news this morning, new claims for unemployment insurance increased 3,000 last week to 287,000. The four-week moving average is 281,000, the lowest since May 2000. Continuing claims for regular state benefits rose 29,000 to 2.38 million. It’s still early, but plugging these data into our models suggests October payrolls will be up about 240,000, another solid month.

[DougMacG]

It's funny that the first estimate would come out so high just before an election.  Meanwhile, 80% believe the administration would lie to them about something important. 

Even if true, that is a quarterly growth rate that was surpassed during 27 of the 32 quarters under Reagan.  (Source:  The Economy in the Reagan Years: The Economic Consequences of the Reagan Administrations,  By Anthony S. Campagna)

[Crafty_Dog]

Gas prices are falling and it looks like the Reps are going to take the Senate.

Both of these developments are very pleasing to the market and business confidence.

[Crafty_Dog]

QE: It Didn't Work To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Senior Economist
Date: 11/3/2014

Conventional Wisdom says that greedy, crazy, speculative, bankers almost destroyed the world back in 2008 and the government saved it with TARP and QE. Many analysts believe QE has kept the US from lurching back into recession. Some even think QE means hyperinflation is on the way.

But the data don’t support any of this. QE started in September 2008, while TARP was passed a month later. But between October 2008 and March 2009, the S&P 500 fell an additional 40%, while the recession only got worse. Inflation never took off and nominal GDP growth has remained subdued.

By contrast, our minority view is that the crisis was never as bad as many think; that mark-to-market accounting turned a large, but not economy-killing, problem, into a Panic. Supporting our case is that the equity market, and the economy, bottomed when mark-to-market accounting was fixed in March/April 2009. In other words, this is not a “sugar high” driven by monetary stimulus.

Only history can prove which one of these views is correct. But, now that the Fed has tapered, we have some real evidence to digest. The Fed has reduced its monthly purchases from $85 billion per month to zero. Yet, instead of a calamity, U.S. real GDP grew at a 4.6% annual rate in Q2 and a 3.5% rate in Q3. The unemployment rate has dropped to 5.9% from 7.2% a year ago (with a big assist from ending extended benefits). The S&P 500 closed at a record high on Friday. And, the yield on the 10-year Treasury is lower today than it was in December 2013.

In other words, it looks like ending QE3 made the economy stronger, not weaker. Intellectually speaking, those who believe that QE was driving economic activity have a problem.

Remarkably, many analysts who claim to believe in free markets support the conventional wisdom. They give credit to government or the Fed for driving growth, when in fact it has been government that has held growth back.

We believe new technology (like fracking, the cloud, 3-D printing, apps,…etc.) has driven profits higher. The stock market is up because it represents the returns from investment by the private sector in these new technologies.

Meanwhile, government spending, regulation, and tax hikes have held the broader economy back – to a tepid 2.3% annual real GDP growth rate since the recovery started in mid-2009. The economic drag from forced redistribution and a large misallocation of credit are holding back overall growth.
As QE ends, this misallocation of credit is diminishing and the private sector is expanding. It’s time for investors to focus even more on what’s been driving equities higher the past five years: the power of entrepreneurship, not QE.

[DougMacG]

QE: It Didn't Work
Brian S. Wesbury, 11/3/2014

"Conventional Wisdom says that greedy, crazy, speculative, bankers almost destroyed the world back in 2008 and the government saved it with TARP and QE. Many analysts believe QE has kept the US from lurching back into recession. Some even think QE means hyperinflation is on the way."

   - I think the view around here is that government bungled its regulatory role and government became a participant in the market, greatly skewing and screwing up all kinds of things.  This had nothing to do with free markets (or greed) running wild.


...QE started in September 2008, while TARP was passed a month later. But between October 2008 and March 2009, the S&P 500 fell an additional 40%, while the recession only got worse. Inflation never took off and nominal GDP growth has remained subdued. 

  - The market fell another 40% with QE + TARP, but we don't know how far it would have fallen without QE+TARP.  Wrong solution for the wrong problem.


By contrast, our minority view is that the crisis was never as bad as many think; that mark-to-market accounting turned a large, but not economy-killing, problem, into a Panic. Supporting our case is that the equity market, and the economy, bottomed when mark-to-market accounting was fixed in March/April 2009. In other words, this is not a “sugar high” driven by monetary stimulus.

   - I'm not sure how much of the market rise to date is a sugar high driven by monetary stimulus.  Good point on mark to market, but this was not the only error government made controlling the housing and financial markets.


Only history can prove which one of these views is correct.

   - Don't hold your breath.  History is still arguing over the Great Depression and the failed remedies.


But, now that the Fed has tapered, we have some real evidence to digest. The Fed has reduced its monthly purchases from $85 billion per month to zero. Yet, instead of a calamity, U.S. real GDP grew at a 4.6% annual rate in Q2 and a 3.5% rate in Q3. The unemployment rate has dropped to 5.9% from 7.2% a year ago (with a big assist from ending extended benefits). The S&P 500 closed at a record high on Friday. And, the yield on the 10-year Treasury is lower today than it was in December 2013.  In other words, it looks like ending QE3 made the economy stronger, not weaker. Intellectually speaking, those who believe that QE was driving economic activity have a problem.

   - This part at least does not address the question of whether equity values were run up by QE.  We know there is a disconnect between equities market GDP growth.

Remarkably, many analysts who claim to believe in free markets support the conventional wisdom. They give credit to government or the Fed for driving growth, when in fact it has been government that has held growth back.

   - I think they believe it is driving false growth, an illusion of growth.

We believe new technology (like fracking, the cloud, 3-D printing, apps,…etc.) has driven profits higher. The stock market is up because it represents the returns from investment by the private sector in these new technologies.

   - Margin levels and PE's are at or near record highs, no?

Meanwhile, government spending, regulation, and tax hikes have held the broader economy back – to a tepid 2.3% annual real GDP growth rate since the recovery started in mid-2009.

   - I believe that is growth below the break-even rate.  False growth.  Stagnancy.

The economic drag from forced redistribution and a large misallocation of credit are holding back overall growth.
As QE ends, this misallocation of credit is diminishing...

   - Agreed.

and the private sector is expanding.

   - Huh?  Because the Obama administration released a preliminary number, 3.5%,  just before an election?

It’s time for investors to focus even more on what’s been driving equities higher the past five years: the power of entrepreneurship, not QE.

   - The factors that support new entrepreneurial growth are still all pointing downward.  Even tomorrow's election can't change that.

     If one starts with a simple assumption that MV=PQ.  We know the output Q of the economy has been flat.  We know the price level P has been reasonably flat.  Conclude that The Fed pumped additional money M into the economy (trillions) at a rate roughly offsetting the rate that velocity of economic activity has decreased.  Wrong problem masked by the wrong solution.  But yes, "tapering" it to zero is good thing, long overdue.

[Crafty_Dog]

Good discussion on the merits.

Some additional points:

1) The market looks forward.  It tanked when McCain got passed in the polls by Obama.  It hits new highs when it looks like the Reps will control both houses.  Coincidence?

2) Many of the big gainers are international and have their profits made (and often staying) overseas;

3) Unemployment rate dropped when Reps insisted on shortening the 99 week "emergency" extension of unemployment-- much to the hysteria of Baraq and friends;

4) Deficit dropped sharply due to The Sequester-- again to Cassandran wailings of doom from Baraq and friends.

[DougMacG]

All good points.  Regarding McCain/Obama, it's true but I don't think the it was necessarily Republican vs Democrat.  More the fact that a very specific tax increase was coming, on these gains, on these stocks, in that time frame.  The Obama Presidency meant the presumed certainty that the 'Bush tax cuts on the wealthy' would expire.  Even if you didn't need to take your profit, you knew that everyone else did and would be selling.  They could buy back in too with a delay, but people wouldn't during a mass sell off.  Once the profits were gone, the ame impending tax hike the next time around (the first one got canceled) didn't have the same, immediate meaning to investors.

I'm not sure if the market cares too much about the current election.  We will have divided government either way.

[Crafty_Dog]

Monday Morning Outlook
________________________________________
Change Is In The Air To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/10/2014

While many flay away, trying to figure out the meaning of last week’s GOP wave election, it seems simple. The government has tried for more than five years to turn a Plow Horse economy into a Race Horse, and failed. Yes, the economy is growing and creating jobs, but living standards are growing slowly, or not at all, for many.

This doesn’t mean Republicans gave voters a reason to vote for them. There was no clear national agenda broadly accepted by GOP candidates going into the election.

Instead, the GOP capitalized on disappointment with President Obama, the economy, and a general feeling of malaise. Like the 1970s, a large expansion of the entitlement
state, higher tax rates, a patchwork quilt of crony capitalism, including subsidies for wind and solar power and electric cars has undermined growth. And no amount of Federal Reserve quantitative easing seems to help – banks are just piling up excess reserves.

What’s interesting is that voters seem to get what many opinion-leaders don’t get at all. There is an eerie agreement between many on the left and right that QE has had a big effect. The “left” – led by Paul Krugman – says QE (and other government spending) kept rates down, boosted stocks, increased consumer wealth and demand, and, therefore, economic growth. We just needed more of everything.

Meanwhile, many on the “right” say the only reason stocks are up is because of QE, but that somehow it only affected stocks and nothing else. They say this because they don’t want President Obama to get credit for anything.

We’re not sure which side is more twisted up in intellectual knots. If QE kept interest rates down, why did rates fall as the Fed tapered and then ended QE? And if QE is the main reason stocks are up, why hasn’t QE generated higher gold prices, a lower dollar, or broad-based inflation?

The bottom line is that neither Ben Bernanke nor Janet Yellen have ever fracked a well or burned the midnight oil writing apps. This recovery has not been about Washington, DC at all. It’s been about the Cloud, and 3D printing, and surging energy production, as well as, yes, a natural normal recovery in home building and auto production, which would have been even stronger if the federal government had just left those sectors alone.

That’s why profits are up and, in turn, profits are the key reason the stock market has been in a bull run. Meanwhile, those profits are helping generate the recovery we have, despite all the harmful policy gimmicks of the past decade.

In the end, the voters are looking for results and the only mechanism that will give them the extra growth they want is freer markets, including the freedom to fail.

Last week gave us two reasons to hope this policy shift is on the way. One is that many (but by no means all!) in the GOP are inclined to support freer markets and now their political hand is stronger. The other was the news Friday that the Supreme Court agreed to review a challenge to the health care law that asks whether Obamacare can only provide subsidies in states that run their own exchanges.

It’s hard to exaggerate the significance of this legal case. If the Court rules against the Obama Administration’s interpretation of the law – and we think it probably will – it would, in effect, free each state to decide whether it will be an Obamacare state or not as written. Without all the states involved, we doubt the law can survive. Those who support freer markets would be poised to move the health system in that direction.

None of this can be taken to the bank. Politicians, that supposedly support freer markets, have squandered the Reagan-Thatcher revolution – just look at 2005-06, when the GOP controlled every elected branch of government. But this time, the American public is running out of options. Freer markets are the only thing left to try. The stock market seems to understand this and is moving higher.

[Crafty_Dog]

Real GDP was Revised to a 3.9% Annual Growth Rate in Q3 To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/25/2014

Real GDP was revised to a 3.9% annual growth rate in Q3 from a prior estimate of 3.5%. The consensus had expected a revision to 3.3%.

Inventories, personal consumption, and business equipment investment were revised up, offsetting a downward revision in net exports.

The largest positive contributions to the real GDP growth rate in Q3 were personal consumption, net exports, and government purchases. The only component that was a drag on growth was inventories.

The GDP price index was revised higher to a 1.4% annual growth rate from a prior estimate of 1.3%. Nominal GDP growth – real GDP plus inflation – was revised up to a 5.3% annual rate from a prior estimate of 4.9%.

Implications: The bull market will continue to run. Forget the surprise upward revision to real GDP for a second. The best news in today’s report was that corporate profits grew at an 8.6% annual rate in Q3 and are at a new all-time record high. Ultimately, high profits are why equities are undervalued and today’s data supports further equity gains in the year ahead. The government’s measure of profits fell steeply in Q1, but the sharp rebound in the past couple of quarters suggests the drop was weather-related, just like the temporary drop in real GDP. The economy grew at a 3.9% annual rate in Q3, which is an improvement from the 3.5% rate reported a month ago. In the past year – which includes the weather-related problems in Q1 as well as the rebound – real GDP is up 2.4%. Real GDP is up at a 2.3% annual rate in the past two years, the same exact pace since the recovery started in mid-2009. However, we expect the pace of real GDP growth to pick up for the next couple of years. Nominal GDP (real growth plus inflation) was revised up to a 5.3% annual rate in Q3 from a prior estimate of 4.9%. Nominal GDP is up 4% from a year ago and up at a 3.9% annual rate in the past two years. These figures show the Fed’s target of essentially zero for short-term interest rates is too low and monetary policy is too loose. On the housing front, the national Case-Shiller index, which measures prices across the country, increased 0.7% in September and is up 4.8% from a year ago. The largest gains in the past year have been in Miami, Las Vegas, and San Francisco. The FHFA index, which focuses on homes financed with conforming mortgages, was unchanged in September but up 4.3% versus a year ago. In the year that ended in September 2013, the Case-Shiller was up 10.6% while the FHFA was up 8.3%. In other words, price gains have continued in the past year but at a slower pace. For the year ahead, prices will keep working their way higher but at an even slower pace, more like 3 – 4%. In other news this morning, the Richmond Fed index, a measure of mid-Atlantic manufacturing sentiment, fell to +4 in November from +20 in October. So factory activity is still expanding, just not as quickly.

[Crafty_Dog]

Oil - Just Another Price To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/1/2014

Don’t take this the wrong way: energy is important. Oil prices are important. But, we believeth those involved in economic punditry often bloweth them out of proportioneth.
Many, who previously fretted that higher oil prices meant economic doom, now say the sharp drop means an economic boom. We are happy to be paying less at the pump, but, from a macro-economic perspective, we don’t expect lower prices to generate a noticeable improvement in the overall economy.

There are four pillars of economic strength (or weakness) – monetary policy, tax policy, trade policy, and spending (or regulatory) policy. Right now, money is loose, tax rates will remain stable, trade policy is improving, and for the past few years, the leftward lurch in government spending and regulation has been gridlocked.

In other words, macro conditions in the US are no worse, and probably better, than they were a few years ago. Entrepreneurship is still flourishing. The US is riding a wave of technology – 3D printing, robotics, the Cloud, smartphones, tablets, apps, bio- and nano-technology – and horizontal drilling and hydraulic fracturing. Many prices are falling as these technologies boost productivity.

The only real mystery is why it took so long for oil prices to finally collapse. It’s not OPEC. The US uses roughly 19 million barrels of oil per day (bpd). Seven years ago US production was 8.5 million bpd; today, 14 million bpd, with energy independence in sight. OPEC is drowning under a gusher of tech-driven oil production.

Also, lower prices aren’t a tax cut any more than free mapping and direction-finder software, or a drought-resistant corn plant, is a tax cut. Lower oil prices, lower food prices, more efficient transportation, and better communication aren’t tax cuts per se, but instead are the fruits of entrepreneurship.

High oil prices stimulate drilling and more production, but squeeze consumers. Low prices slow drilling and production, but free up resources for consumers to spend on other things. It’s not a zero-sum game; it’s part of a process. Relative price changes cause a shift in resources, unlike a tax cut, which changes the incentives for labor and investment.
In other words, don’t look for an economic boom. The drop in oil prices is just a positive reinforcement to the growth engine that has been driving the US economy, and equity values higher, in recent years. It’s a Plow Horse and until a true change in policy kicks in, it will remain a Plow Horse. We need less government spending, less regulation, and lower tax rates to get a real economic boom.