Today’s durable goods report is disappointing because everyone’s looking for unassailable confirmation that the economy has sufficient wherewithal to forge ahead. The latest numbers out of Washington fall well short of delivering a macro knock-out blow by that standard. The good news is that a close look at the durable goods stats doesn’t look fatal either.
Do Gasoline Prices Still Threaten Retail Sales?
Two months ago, I wondered if rising gasoline prices threatened retail sales. At the time, energy costs were rising, taking an increasing bite out of consumer purchases. It looked like a train wreck. Consumer purchases, after all, represent roughly 70% of GDP. But gasoline prices hit a ceiling in early May and have been flat to moderately lower ever since. There’s no assurance that prices won’t resume taking flight, but for the moment there’s been a slight reprieve on the energy-based assault on retail sales.
Strategic Briefing | 7.26.2011 | Taxes & The Budget
Our Real Deficit Problem Has Nothing to Do With Traditional Government
The Atlantic | July 25
In 1960, the last full year of the Eisenhower administration, taxes were 17.8 percent of GDP and primary spending (excluding interest) was 16.4 percent. Social Security took in and paid out 2.2 percent. Medicare didn’t exist. So Everything Else had a primary surplus, with taxes at 15.6 percent and spending at 14.2 percent.
In 2010, in the supposed age of “big government,” spending on Everything Else was only 14.7 percent of GDP, and that was swollen by the recession and stimulus spending. By 2021, according to the CBO’s alternative fiscal scenario (the pessimistic one), spending on Everything Else will be 13.0 percent–less than in 1960. Everything Else tax revenues–that is, everything except the Social Security and Medicare payroll taxes–will be 12.5 percent of GDP, for a primary deficit of only 0.5 percent. And that’s assuming that all of the 2001, 2003, and 2009 tax cuts are extended indefinitely.
Risk Management & Uncertainty
Predicting is hard—especially about the future, runs the old joke. But there’s no escaping forecasting in finance and economics. Even a passive investor has an assumption—a forecast! If you own an S&P 500 index fund, you’re assuming that you’ll earn an equity risk premium. Where did you get that idea? There are a thousand possibilities for thinking positively, but the key point here is that you’re anticipating a premium will come your way simply by holding risky assets.
Tactical ETF Review: 7.25.2011
The budget talks in Washington are suffering from “gridlock” and so the risk of default still lurks. Meanwhile, the crisis facing the euro remains an evolving situation. But asset markets around the world don’t appear worried, at least as of Friday’s close. As our review below of ETF proxies for the major asset classes shows, buyers have had the upper hand recently. That’s a bit unnerving. Even in the best of times, a broad sweep higher in everything suggests there’s a correction brewing somewhere. That certainly looks like the case for U.S. stocks this morning: futures are reportedly “set to drop.” Meanwhile, here’s how the major asset classes stack up via representative ETFs through July 22…
Book Bits For Saturday: 7.23.2011
● The Man and the Statesman: The Correspondence and Articles on Politics
By Frédéric Bastiat
Review via The Wall Street Journal
Bastiat’s short essays, which he grouped under the title “Economic Sophisms,” are beloved by friends of laissez-faire. Late in the 19th century, small-government Democrats quoted him on the floor of the House against the high-tariff schemes of the GOP. The Republicans groaned when they heard Bastiat’s name. Unable to answer his arguments against government economic intervention, they charged him with being French. Familiar though Bastiat’s economic writings may be, his letters, until now, have been available only in their original language. “The Man and the Statesman,” the first in a projected English-language edition of Bastiat’s collected works, encompasses 209 letters as well as a sampler of his political essays and notes and a helpful glossary from the editors (Jacques de Guenin, Jean-Claude Paul-Dejean and David M. Hart). But the letters are the thing. Through them shines the most charming economist you have ever met.
Will Commercial Lending’s Revival Survive The Summer Slump?
The rebound in commercial and industrial (C&I) lending rolls on, but for how long? Recent history suggests a case for thinking positively. The value of C&I loans has risen in each of the last eight months through June. That’s the longest stretch of monthly increases since the recession formally ended in June 2009 and so it’s an encouraging sign that lending—a key indicator of future economic activity—has entered a period of sustained growth.
Jobless Claims Rise 10k: Biggest Jump In 8 Weeks
The message in today’s update on initial jobless claims is that the labor market recovery has stalled. The crowd has more or less suspected as much these last several months, but today’s numbers drive home the point. It’s clear from looking at the trend that we’re stuck in an elevated range. It could be worse, of course. New weekly claims could be rising. Instead, they’re treading water, albeit at levels that leave little room for comfort in thinking positively about what happens next for job creation and therefore the economy. True, overall growth still has the upper hand and there’s a number of reasons to expect more of the same. But the economy’s flying closer to stall speed.
A Long US Holiday For The Bond Vigilantes
Bond vigilantes are driving yields higher for certain European countries, but there’s little sign of stress in the U.S. Treasury market. The dollar is hardly perfect, but it’s still the world’s reserve currency and it claims a number of benefits over the euro. Even so, the low yields on Treasuries is surprising to some considering the surge of predictions that the fiscal and monetary stimulus in recent years would eventually drive yields skyward. In 2009, for instance, The Wall Street Journal argued that the vigilantes “appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession.” Two years on, the benchmark 10-year Treasury yield is roughly 2.9% as of yesterday, or about 50 basis points lower than when the Journal expressed its concerns about the blowback from vigilantes on May 29, 2009.
One More For The Road…
Just as I’m heading out the door for a week-long holiday, I see that Financial Advisor has published my latest piece on a new generation of research focused on the eternal search for excess returns born of skilled trading, a.k.a. alpha. As per the article’s title, it’s an old debate with some new twists. For the details, read on here…