Predictions About the Future: 2012 Edition

This year I'm being a little more specific, so I'll probably do worse than last year.

1. The unemployment rate will end between 8.0% and 8.5%. The employment situation will continue to improve, though not fast enough to lift large numbers of people out of misery and poverty.  The employment-to-population ratio will once again do very little, staying between 58.5% and 59%.
2. Housing prices will continue to fall slowly.  We'll see another 3-6% decline in existing home prices.
3. New homes and autos will not provide a major boost.  Some people have been predicting a rebound in the two sectors, but I think we are going through some long-lasting changes in behavior that will keep both from being major drivers of growth in 2012. 
4. The effective Fed Funds Rate will stay below 1%.  There's no inflation and growth is still weak, so the Fed won't move much, if at all. 
5. The US dollar will strengthen mildly.  The US will be the strongest major developed economy this year, as the Eurozone (collectively) will not grow, the UK will contract, and Japan will grow only slightly.  Thus the dollar will strengthen about 5% in the broad trade-weighted index.  China will continue to try to export as many problems as possible, so the dollar will be essentially unchanged against the yuan again.  Update 2012.03.17 - I mis-read the data for the previous year, which saw the dollar weaken by about 4.5%.  I think we'll see roughly the same change this year, or 5%.
6. Oil will end the year at $95/bbl +/- $5.  Increased US supply, changing driving habits, and slowing growth in Europe (on average) will balance out growing demand from the developing world.  All bets are off if Iran or Israel does something stupid, however. 
7. The Euro will survive.  It will be horrible for people living in the GIPS (ex-Ireland, where everyone will just emigrate), but the Eurozone will muddle through for yet another year.
8. Mitt Romney will be the Republican nominee.  Since the only other candidate with a competent national organization is a kook, Romney will win by default.
9. President Barack Obama will be re-elected.  See above.
10. Placeholder for House and Senate.  I'm not up on the Congressional races, so I'll fill this in later.  Update 2012.03.17 - The Senate will remain in Democratic hands, at 50-50 or 51-49.
11. The beginning of the end in Afghanistan will be downplayed.  There will be some troop reductions, but for political reasons the administration will try to downplay it, and the media will be too busy calling the political horse race to cover it.

Some off-the-cuff speculations: North Korea will act crazy but the hot peace on the peninsula will continue; the Occupy movement will mostly fizzle, but the national debate will still be better for its efforts; the Arab Spring will be taken over by Islamic parties everywhere dictators have been overthrown, but no new tyrants will go down; reactionary developments on the eastern side of the EU will largely be ignored by western countries focused on their economies; the coalition government in the UK will continue to survive despite the recession because the LibDems would be clobbered in an election; Putin will win the presidency in Russia in a highly fraudulent election; the news about Global Warming will continue to be horrible; the drug war in Mexico will continue to be horrible, but will improve slightly; South America outside of Venezuela will continue to improve both economically and politically; and Generalissimo Francisco Franco will remain dead.

Predictions About the Future: 2011 Report Card

So how did I do?

1. Close, but no banana. The final report in 2011 was for November, when the rate fell to 8.6%.  I could try to wiggle out by pointing to a larger-than-average movement in the denominator for November, but the truth is that the employment situation is getting better, albeit very slowly.  The E2P ratio did stay close to what I predicted, with 58.7% being reported in November.
2. Correct.  There was a small blip upwards in the middle of the year, but prices fell overall.
3. Correct.  Effective rates started the year at 0.13% and ended the year at 0.07%.
4. Correct.  I didn't specify a range, but the 2.5% increase seen over the year isn't that significant.  The change in the yuan dollar rate was about 1%, so I was right about that, too. Update 2012.03.17 - I wasn't right about the yuan.  It increased by 4.5% vs. the dollar, not 1%.  That's not insignificant, but in all likelihood a freely-floating yuan would be 4 or 5 to the dollar.  So it has a way to go.
   
5. Close, but no banana.  I forget which benchmark I was thinking of, but both the WTI Cushing and spot prices ended up below $100/bbl.  Brent, which is for a light sweet crude, ended at $107, but it always commands a premium to WTI.
6. Correct.  The euro still exists, and no country has left yet.
7. Wrong, wrong, wrong.  US-Cuba relations are about the same as they've been since the end of the Cold War.  No surprise, really, as I threw this prediction out just for the heck of it.
8. Correct.  There really hasn't been much of a change in Afghanistan AFAIK, except that relations with Pakistan have gotten a lot worse.
9. Depends on your perspective.  The Republicans relented, but they did extract some concessions.  The most prominent of them, the "Super Committee" was a complete bust, but there are automatic spending cuts scheduled in the 2013 budget.  They may very well not survive the budget process.  I was hoping for a completely clean victory by the Democrats, but the Republicans were even crazier than I expected.

Final tally: 5/9 right, 2/9 close but wrong, and 2/9 completely wrong.  Overall I'd rate my performance as a "meh" because I didn't tackle much that was hard to predict.

Galaxy-class Assholes

This really takes the cake, a Nobel, several Olympic Gold medals, and as many Peabodys as O'Reilly thinks he has won:

“Who do you think pays the taxes?” said one longtime money manager. “Financial services are one of the last things we do in this country and do it well. Let’s embrace it. If you want to keep having jobs outsourced, keep attacking financial services. This is just disgruntled people."

He added that he was disappointed that members of Congress from New York, especially Senator Charles E. Schumer and Senator Kirsten Gillibrand, had not come out swinging for an industry that donates heavily to their campaigns. “They need to understand who their constituency is,” he said.

Most of us who talk about pitchforks, tumbrels, guillotines, and the like are joking.  There's not going to have another French Revolution, and the people who want something like to happen that are idiots.  Besides, the government has too much firepower, and employees too many people who actually get off on kicking people while they're down.  But assholes like the one quoted above prove that the Occupy Wall Street protesters have valid reasons to take on banksters.  Not only does he brazenly assert that American legislators should respond to campaign donations, not the voters, which should be enough to get everyone out on the street by itself.   But he also shows that Wall Street doesn't understand the American economy or the role of finance in it, and needs to be beaten down for that reason, too.  A large, continent-spanning country of 310 million people can't survive on a financial sector concentrated in one city.  Only very small countries (less than 1 million people) can.  Even Switzerland, which is basically synonymous with banking secrecy and profiting from illicit wealth, has a large and healthy manufacturing sector (albeit with a higher portion of luxury goods makers than most).  A big country like the United States has to be good at making stuff.  And it is, in some sectors - airplanes and software most notably.  The role of a financial sector in such a country should be to facilitate the rest of the economy.  Instead, Wall Street has taken to profiting from the decline of other manufacturing sectors, and from increasing inequality.  It has both fed and gotten wildly rich from the increasing amount of debt Americans have accumulated in order to maintain their way of life as their incomes have been squeezed.  OWS is an entirely legitimate response to the problem the US financial system poses for the vast majority of the citizens of the US.

Bestest Grafick Evah

From this Robert Reich op-ed, which is good, comes the graphic below, which is great.

This is the best summary of the negative trends that have pinched the middle class over the last 35 years.  The point about women working comes across as slightly sexist, but I don't think the equivalent data for both sexes (dads can stay at home, too) exists, at least for the time period involved.  So the excellent NYT graphics department used the best available series.

We've been running the Republican experiment since the 1980s - cut taxes, cut social spending, cut public investment, increase war and security spending, and outsource much of the latter - and it hasn't produced good results for the majority of Americans.  The underlying trends - globalization, computerization - would still exist if we had stuck with Democratic policies, but overlaying Republican policies on those trends has amplified them.  Capital moves quicker and farther than labor, and giving more capital to the rich has only allowed them to shuffle it around with greater ease, dragging jobs with it.

Is Our Central Bankers Learning?

Twice in the past three days, important central banks have actually done something slightly positive.  Sunday night it was the European Central Bank deciding to intervene in the Italian and Spanish sub-sovereign bond markets.  Yesterday it was the Federal Reserve setting expectations on how long it plans to keep its current low-interest rate policy.  The ECB's intervention has worked, at least temporarily, as the interest rate premiums for both countries vs. Germany have dropped sharply (divide the numbers by 100 to get real world units).  The Fed's statement was aimed at general sentiment, not any specific index, so it's a little early to say if it worked.

In both cases, however, the gap between what is being done and what should be done is still far too wide.  Hopefully, these two actions were just first steps towards more sensible policies.

Update: 2011.08.11: Yves Smith talks about the central bank actions.

CowabungAA+

Ho-ly cow.  Stocks down, bonds up (yields move opposite of prices).  Thanks, S&P.

She's Got a Trichet to Ride

Megadiving in the markets today.  Nobody knows for sure what fears live in the hearts of market makers, but today it seems to be goings-on in Yurp, where the German-Italian bond spread continues to balloon.  The ECB's policies have been disastrous, predictably.

The most interesting proposal to resolve the crisis is this one from Ambrose Evans-Pritchard.  Generally I find AE-P to be a bit of a breathless blowhard, but at first glance the idea that Germany should withdraw from the Euro is quite intriguing.  Germany, along with a few others in concert, are more likely to be able to pull off a orderly withdrawal because they are more likely to be able to keep the whole thing secret.  Discretion during any unplanned currency switchover is very important, because public knowledge is likely to trigger a bank run.  (The situation is different if the changeover is announced years in advance, as happened with the formation of the Euro.)  The new currency - lets call it the nordmark - would appreciate against the rump Euro, allowing the South European countries to regain competitiveness and grown their economies without suffering through years of deflation first..

As always, reality is likely to be a lot more complicated, so such a move may end up making everything worse compared to organizing bailouts and haircuts and other such things within the existing currency union.  Or individual countries in the so-called PIIGS quintet may be better off going their own way.  Dunno.  But like the auto bankruptcies here in America, whatever happens should happen in an organized manner, because we know that chaotic failure will produce the worst outcome.  And right now Germany and its proxy the ECB are steering the Eurobus towards a cliff.

We'll Shoot the Patient Unless You Let Us Amputate

Shorter Republican leaders.

Allow Me to Be the First to Say

Wheeeeeeeeeeeeeeeeee!

Of course, there's a bit of bias in pointing this out. Rallies tend to happen over days or weeks, and thus are much less dramatic than the sense of doom created by sell-offs. I think the main point to take away from such events is that markets don't know jack about the future. If they did, big market-wide one-day moves wouldn't happen.

Update: Beat Atrios this time.

Alphabet Recovery Soup

The latest post by Reich has appeared on the blogs of the usual suspects, and on the blogs of the usually suspect. I think it appealed to a lot of people who don't usually read Reich because it was a declaration of doom from a normally optimistic person. But that doesn't mean that it was a ground-breaking post.

Reich is right that we can't return to the previous economy, but he gets a number of things half-wrong. First, he repeats the old wheeze about the consumer being 70% of the economy. That's the old economy; we actually need to go back to the old, old economy where the consumer is ~63% of the total, or less. Second, he says that we can't count on exports for growth because the rest of the world is contracting. This is true as long as the dollar is over-valued. A fairly valued dollar (roughly 0.65 EUR, 85 JPY, and 5 CNY) would do much to eliminate the trade deficit in goods other than oil. The Obama administration needs to work on the issue at lot harder. Finally, he says that we don't know what the future economy will look like. While making predictions about the future is especially hard, we certainly know what we want the future economy to look like. It would be filled with a lot of investment in energy-saving technologies, high-speed rail, public transportation, and national health care. It would also see a significant contraction of the finance, insurance, and real estate industries. But the political will to back major changes doesn't exist right now, and no clear leader has emerged. Obama is obviously in a position to lead, but he has been very tentative so far. With no leader, we will experience business-as-usual, but at a lower level.

V, U, L, or X - what will the future hold? Right now I think a couple of years of L are ahead of us.

Mid-term Report

So how am I doing so far with my predictions?

1. We're still in recession, yammering about green shoots not withstanding.
2. We're on pace to reach 10% for U-3 soon. I was optimistic about U-6; it's already at 16% and will top out around 20-21% next year. Update 2009/07/07: I think U-3 will top out around 12%.
3. Oil never got as low as I predicted, so the petro-states aren't suffering as much as I thought they would.
4. The dollar has weakened slightly, but I expected most of the decline to come in the second half.
5. No signs of a country leaving the Euro yet. I'll almost certainly be wrong here.
6. China's economy has weakened some, as has the renminbi, but so far the country has held up better than I expected. But the strength could be illusory as some of the economic indicators are contradictory, and investors apparently are doubling down in the export sector.
7. Germany and Japan have suffered significantly. I haven't checked on the smaller European exporters or the smaller Asian ones.
8. Both Chrysler and GM filed for bankruptcy, though later than I expected. I did not expect Fiat to come to the rescue, but it still remains to be seen if Chrysler can hold on with the market at ~9.7M units SAAR.
9. The banksters still roam free, sucking blood out of helpless taxpayers. The Fed has not had to inflate its balance sheet further, however.
10. CRE prices are getting hammered, but GGP is the only major property company that has filed for bankruptcy so far. Not as many major retailers have folded as I expected.
11. Housing prices continue to fall, and the decline in volume has slowed. I am surprised that more major builders haven't taken a dirt nap, but maybe I missed the announcements.

So far the economy is performing better than I predicted. Is that because of my tendency to be pessimistic, or because of my tendency to be early? Check back in December.

Misunderinvestment: 1Q 2009

Aye-yie-yie. 4.5% of GDP has disappeared from the most important part since 1Q 2006.

The biggest declines were in single-family homes, transportation equipment (this does not include personal transportation), other residences and home improvements, and computers and software. The two bubbles - dot.com (blue) and housing (orange) - can be seen plainly.

What is most disturbing about this decline is that the US already had among the lowest rate of investment in industrialized countries - only Germany was lower. (I'm still puzzled by that, though it could be a data issue.) Investment and growth go hand-in-hand. But what sector needs more investment? None that I can see, at least until obsolescence and population growth catch up to current supply - which will take 3-5 years. However, if the dollar finally falls to where it should be, construction of manufacturing structures and investment in industrial equipment will go much higher than recent levels.

Update: Here's the investment data in context. I've marked the recessions with a black line near the bottom.

A Long Way to Go

Have far have we gone on the road to re-balancing the economy? Not far at all.

We're still consuming far above the 1946 to 1996 average. (I chose not to include data after 1996 because 1997 is when it all started to go really wrong - though it doesn't show up in the data until 1998.) We're also consuming more than our equally bankrupt friends in the U.K., and far more than our sober peers in CA, JP, and the Eurozone (on average - the numbers vary widely within the zone).

I suppose I've become a bit of a crank on this (at least in the privacy of my own home), but it can't be stressed enough how painful the transition to a sustainable economy will be. Americans are not mentally prepared for what is to come.

GDP Data for 2008

Another belated post full of graphy goodness.

No dramatic changes at the highest level. The trade deficit fell slightly, but the country is still over-consuming.

Even with the trade deficit falling, both exports and imports increased as a percentage of GDP.

Consumption of motor vehicles registered the greatest decline. The share of spending on cars and parts (but not transportation services or fuel) has fallen from 4.1% of GDP in 2002 to 2.7% in 2008.

Residential investment has fallen from a peak of 6.1% in 2005 to 3.4% in 2008. That's a huge change. The increase in non-residential structure investment over the same period made up for half of the fall in residential. But the sector is wildly over-supplied and thus spending is set to contract.

Slavery for the Free: 2008 Edition

I'm a wee bit behind in posting this, but nonetheless here is the latest debt data.

Debt accumulation marched on, at least through December of last year.

Taking out intergovernmental debt doesn't change the overall picture.

Hooray! Consumers almost stopped accumulating debt last year. Too bad it took a major recession to force the change.

Here we see the spike in publicly-held federal debt that started last year. This year's increase will dwarf all previous years.

Next

Time to move on from the bank solvency issue, or at least move it to the back burner and hope it doesn't catch fire.

I think it's time I revisit the Flow of Funds report to see how much borrowing has changed. Another month of bad auto sales reports are due in a few days, and graphs will follow. The fall in auto sales has finally lead to huge production cutbacks in Japan. I will try to find domestic production numbers this month to see how the transplants are doing.

Timmeh

It looks like I was a bit too optimistic about Geithner back when he was nominated, though I was hardly thrilled at the time. The Larry and Timmy team isn't doing any better than Hanky and Bennie - and Bennie is still in the mix, buying everything that vaguely resembles a security. The Big Sh*tpile™ is still just that, and it seems to be growing, somewhat like fractals do, into Eastern Europe. Other bad economic news abounds - far too much to catalog.

Anyhoo, my recommendation is still the same: nationalize pre-privatize (though I might reconsider now that Greenspan has come out in favor of it). There just is not any possible way to resolve a) buying assets at prices that keeps banks solvent and b) buying assets at prices that don't represent a huge giveaway of taxpayer money. All of the proposals so far are just the original TARP dressed up different ways.

So, I don't know if it is time for Geithner to go because I don't know if the ongoing paralysis/stupidity (take your pick) rests with him, or goes all the way to the top, or stops in the vicinity of that a**hole Emmanuel. (External pressure is a possibility, but I think that some details about the source would have leaked out by now.) But Obama needs to change course shortly, or he risks foundering his whole presidency on resolving the current crisis. That would put an end to very needed reform of the way the economy operates.

January Employment Continues the Descent

We're probably going to get another six or eight months of reports like the two that came out this week.

On the employment front, every indicator continued to move in the wrong direction - employment, unemployment, workforce, and hours.

The peak for raw employment claims was back in the first week of January, but the adjusted and smoothed count continued to worsen. Ratios are still moving higher, though they will probably not reach the levels of the early 1980s because there aren't as many large manufacturing facilities in this country as there once were, meaning no mass firings of 5,000 workers at a time. Most of today's layoff announcements indicate that the cuts will take several months to complete.

Here are the key ratios for the same time period as the previous two graphs cover. The red line shows the most important ratio.

Extraordinary Claims: January 2009 Edition

(The original title of this post was "Extraordinary Claims Require Extraordinary Evidence.")

New unemployment claims were down from last week, but the data is so noisy that rolling averages have to be used.

The four week average of the raw numbers is still highly variable. The peaks are after Christmas and in early July. The year over year increase for both the unadjusted and seasonally adjusted numbers is huge.

New claims are already at a higher level than during the past two recessions. This graph also shows that new claims versus various population measures has come down over time. This is due mostly to the growth of employment that isn't covered by unemployment insurance.

Ask Your Child What He Wants for Dinner Only If He Is Buying

Here's the reason imports are falling - people have stopped buying.

Of thirteen major subcategories, only groceries (food and beverage stores) and healthcare were up over last year. Sales at gasoline stores were down over 35%, but that wasn't due to volume changes.