An article titled ‘For stocks, summer ends with jobs data’ reports that economists polled by Reuters forecast U.S. job losses of 225,000 for August (July - 247,000), and that the U.S. unemployment rate will rise to 9.5% (July 9.4%) - a statistic that I remain skeptical about.  Government data will be available Friday, while during the week U.S. August manufacturing and service sector data will be released as will U.S. July construction spending and factory orders.

Stay tuned for posts this week on the U.S. jobs estimates and reports.  I continue to believe U.S. jobs and consumer confidence are the most critical ‘key element’ in the timing of U.S. (and broader world) meaningful economic recovery.

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An article today by Paul Krugman, the Nobel Prize winning economist, titled ‘How big is $9 trillion?’ says:  “There’s been some hysteria about the administration’s new estimate that the cumulative deficit will be $9 trillion over the next decade. Don’t get me wrong: this is bad. But it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t”.  Dr. Krugman goes on to say that the U.S. economy and federal tax base is also enormous, that GDP currently is about $14 trillion, and that economic growth averages 2.5% a year (which he says has ‘been the norm’) and inflation is the targeted 2% a year GDP will be around $22 trillion a decade from now (the calculation actually results in $21.74 trillion.  I made the calculation to be sure the 2.5% was indeed a ‘real growth’ factor) – which Dr. Krugman says would result in adding debt equal to about 40% of GDP in circumstances where federal debt is about 50% of GDP.  He goes on to say that “So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s. He concludes by saying “Again, the debt outlook is bad. But we’re not looking at something inconceivable, impossible to deal with; we’re looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with”.  My comments are:

•    first, Dr. Krugman’s starting point of accepting the Administration’s ‘new estimate’ of a cumulative deficit of $9 trillion over the next 10 years may prove to be understated given what I think to be the importance (in particular) of the loss of manufacturing jobs in the U.S. over that past decade;

•    second, I am very skeptical of Dr. Krugman’s assumption of 4.5% nominal GDP growth per year compounded over the next 10 years based on underlying 2.5% real growth and a 2.0% inflation rate.  I could better understand it if it were based on a lower growth rate and a higher inflation rate.  In order to accept such numbers I need to know where specifically Dr. Krugman believes 2.5% compounded real growth is going to come from in an economy that continues to lose jobs in general and manufacturing jobs in particular, and specifically why he thinks it appropriate to assume a compounded inflation rate over the next 10 years of 2% - in my view a very long time period to predict anything, particularly in the uncertain economic times we currently are experiencing;

•    third, I think compounding from today on a straight line basis for 10 years is very risky (see my other post today commenting on Roubini’s view of a possible ‘double dip’ recession).  If the growth Dr. Krugman is assuming in his calculations doesn’t happen beginning immediately, the compounding result in the later years of the 10 year period is (arithmetically) significantly reduced.

I for one don’t take much comfort from Dr. Krugman’s article, and I encourage readers to ‘Think for Themselves’ – my increasingly consistent stated mantra.

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An article yesterday titled ‘Roubini warns of double-dip recession: report’ says Nouriel Roubini “sees a “big risk” of a double-dip recession” and “said it appears the global economy will bottom out in the second half of this year, and that U.S. and western European economies will likely experience “anemic” and “below trend” growth for at least a couple of years” after a quarter or two of rapid growth related to recovery in inventories and production levels.  He also is reported as saying that he thinks “another reason to worry is that energy, food and oil prices are rising faster than fundamentals warrant, and could be driven higher by speculation or if excessive liquidity creates artificially high demand” and that the global economy “could not withstand another contractionary shock” if speculation drives oil rapidly toward $100 per barrel from its current +$70 levels.

Roubini has been proven right in the past.  Intuitively what he says makes great sense to me given the U.S. unemployment situation and the other ‘weakness factors’ that I see in the U.S. economy going forward and comment frequently on in these blog posts.  I suggest you read my post today on Paul Krugman’s views on the ability of the U.S. to continue financing its large annual deficits going forward.  From my perspective if Krugman were to adopt Roubini’s views I think he likely would reach a different conclusion with respect to prospective U.S. annual deficits being ‘possible to deal with’.

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An article today titled ‘Bye-bye, recession; hello, higher taxes’ reports the IMF as saying most countries will need to raise taxes in the future to pay off the trillions of dollars they spent in fighting the global recession.  IMF’s Chief Economist is reported as saying that “the time will soon come to pay the piper (related to government stimulus spending) and that higher taxes in nearly all countries is inevitable” and that “the recession that began early last year is virtually over, but … that it has left deep scars that will take years to heal”.

I have said in previous blog posts that taxes will have to be raised in the U.S. and other developed countries to finance both ongoing deficit spending and incremental deficits related to bail-out and stimulus packages.  That said, it seem oxymoronic to me to say on one hand that taxes will have to increase (which has to reduce the amount companies and consumers will have to spend) without commenting on and quantifying the effect that will have on prospective continuity of GDP growth (i.e. which is implicit in ‘economic recovery’).  This doesn’t seem like rocket science to me, in fact it seems to me to be much like sitting down with a comparatively simple jigsaw puzzle comprised of quite large pieces.  It may be that many of the economists and others who regularly comment on things economic are playing with old jigsaw puzzles with missing pieces.

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An article today titled ‘Wall Street sees shoppers as key to rally’s future’ says that “On Wall Street, the average shopper can trump a Federal Reserve policy maker”, and that “With other parts of the economy showing signs of improvement, the question of when a recovery will occur and how strong it will be lies with consumers”.

Frankly, this having been my constant refrain on this Blog for many months now, the only interesting thing I see in this is why so little has been written in since the beginning of the year on the importance of U.S. consumer spending to U.S. economic growth and health.  The article says “reports last week showing weaker-than-expected retail sales and flagging consumer confidence overshadowed an upbeat view of the economy from the Federal Reserve” and “This (coming) week, the consumer is in focus again as a stream of retailers report second-quarter earnings. Wall Street will want to know if retail companies, like businesses in other industries, made money primarily because of cost-cutting rather than from improved revenue or sales”.  This suggests Wall Street focuses on the consumer only when news is about to be released.  I simply can’t believe that.  My guess is that it is the article writers and reporters who think from a myopic 100 foot level and not from a 10,000 foot level when reporting on news just released or about to be released.  The economists and smart Wall and Bay Streeters have to know the importance of the U.S. consumer to U.S. economic health – just as the U.S. Administration must know that in spades.  Collectively, they just may not want to emphasize it by talking frequently about it.  That said, the referenced article also says “Friday’s consumer sentiment report was a jolt for traders about exactly how uncomfortable consumers still are with their finances and the state of the economy”, so perhaps I am wrong in my assumption as to Wall Street and Bay Street focusing on the importance of the U.S. Consumer to recovery.  If I am wrong in my Wall/Bay Streeter assumption I don’t think that augers well either for investors who rely solely on their investment advisors and don’t ‘think for themselves’.

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An article yesterday titled ‘The Quick Buck Just Got Quicker’ reports James F. Reda & Associates recently conducted a study of changes in pay packages by 191 of the U.S. largest companies which says “changes in these companies’ plans made short-term incentive pay a bigger part of the compensation pie” – this in the face of a statement made in the article (by its author) that “With outsized and corrupting corporate pay packages under scrutiny, you might think that companies would be rushing to tamp down their compensation plans. Making sure that pay actually rewards long-term performance, for example, seems a fairly obvious way to allay shareholder fears that managers are lining their pockets rather than safeguarding their companies”.

So what does one take from this.  At least two things:

•    first, as Mr. Reda is reported as saying, shorter-term compensation incentives invite higher risk behavior on the part of executives;

•    second, and in my view far more importantly, the logical reason Boards of Companies might approve compensation plans that pay more incentive for near-term results is because they think that will motivate executives to produce better short-term results.  The question is, at what long-term cost to the company’s economic well-being.  For example, an obvious way to improve near –term results (both in earnings and cash flow) is to postpone capital spending.  What effects does this and other ‘rob Peter to pay Paul’ management strategies have in the longer term context of a company’s economic well-being – nothing but negative ones.

To me, to the extent near-term incentives are replacing long-term incentives is simply one more reason to despair over the ‘short-term gain’ for ‘long term pain’ attitudes that seems to have prevailed in America (particularly) after the year 2000.

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An article on August 12 titled ‘Deflation looms in the post-crisis world’ says “Deflation one. Inflation nil. While the U.S. Federal Reserve, moved gingerly towards a more optimistic view of the U.S. economy Wednesday, saying “activity is leveling out,” it is clear that deflation rather than inflation remains the primary threat in a post-crisis world.  Evidence from all quarters of the globe Wednesday showed that as yet, rampant stimulus-driven inflation has not emerged and deflationary forces continue to have the upper hand as economies struggle to recover from recession - a process that is expected to be slow and painful”.  The article goes on to quote Brian Bethune, Chief U.S. Financial Economist at Global Insight as saying: “The bottom line here is that the Fed is sticking to its guns and maintaining a relatively aggressive posture on policy in a situation where the economy is at a critical turning point and inflation is running below the Fed’s desired target”.  If, as a result of things such as current oil prices, spare manufacturing capacity, and reduced consumer spending, inflation runs for the foreseeable future in the U.S. and Canada at less than the typically targeted 2% - 3% per year I see at least the following implications:

•    GDP growth, which clearly in a fiat currency environment or otherwise has an inflation component will have to be less than those now calling the ‘end to the recession’ likely are hoping for;

•    Government revenues will be less than governments likely are forecasting, resulting in budget deficits being higher than are being forecast;

•    China’s store of U.S.$ are not going to suffer from a fate of hyper-inflation, resulting in China being ever more powerful on the world stage as a result of continuing to use its large store of U.S.$ to make strategic (read ‘resource oriented’) acquisitions; and,

•    importantly, new job creation will be slow – particularly in the U.S. where I think many of the manufacturing jobs that have been lost are unlikely to return, and where I think manufacturing jobs will continue to be lost to both further automation and off-shore sourcing.

If I am right in these observations, for me it follows that the U.S. dollar must drop over time as it weakens against strengthening fiat currencies of those countries that have and will continue to supplant U.S. manufacturing jobs, U.S. monthly net trade deficits continue for the foreseeable future, and the U.S. Federal Government continues to run large annual deficits.  Going forward, I see none of this as a pretty picture from the point of view of the standard of living of the average American.  Rightly or wrongly, I do see gold as a ‘purchasing power’ hedge in what I see to be the likely economic ‘times ahead’ for both the U.S. and Canada – and I believe this will be the case in circumstances of either inflation or deflation.

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An article today titled ‘U.S. home foreclosures set another record in July’ says RealtyTrac has reported that U.S. home forecloures jumped 7% over June numbers and 32% year/year – having escalated with escalated U.S. unemployment.  RealtyTrac says that in June one in 355 U.S. households (being more than 360,000 households) with a mortgage received a foreclosure filing in July.  While hardly unexpected given the U.S. unemployment rate (reported last week at 9.4% and expected to exceed 10% in the near term) I think this is just ‘more of the same’ in the context of ‘green shoots and meaningful economic recovery’.  Note I continuously use the phrase ‘meaningful economic recovery’.  I simply don’t think any statistic that shows a small increase in month/month GDP signifies much of anything, and certainly in my view does not signal or demonstrate ‘meaningful economic recovery’.  To me, unless economic recovery is meaningful it makes little sense to talk about it – and for me ‘meaningful economic recovery’ means several continuous months of GDP growth with an ongoing prospect of further continuous economic growth beyond those months.  I just don’t see that happening in the U.S. unless U.S. Job Losses reverse, the U.S. consumer gains confidence, U.S. house prices start to rise, and U.S. house foreclosures return to levels experienced in the first few years after 2000.

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An article today titled ‘Economy Does Better Without Doing Well’ says “Most economists in the latest Wall Street Journal forecasting survey said that the recession is over, but as the economy moves into a recovery period the state of the consumer remains a key question”, and approximately 40% of those economists said that a substantial increase in consumer spending isn’t necessary for sustained economic growth.  The article also says that ”recently Morgan Stanley economists presented three keys to sustained recovery, and none of them relied on the consumer”.  Allen Sinai of Decision Economics is quoted as saying “Modest consumption, government spending, exports and inventory rebuilding can bring “it” about”.

The question I have, and the question I think readers of this post should have, is:  What is “it”?  As I read the referenced article (I suggest you click on the link and do likewise) I largely see support for the position I have been continuously taking in my blog posts - namely that seriously enhanced spending by the U.S. consumer is essential for meaningful and protracted U.S. economic recovery.  I can’t see how it can be otherwise, and continuously wonder – other pursuant to one or more theoretical constructs – how anyone can reach a different conclusion.  I read an article in the last day or two where people were quoted as saying they were spending far more time reading about and trying to understand the economy than they ever had before.  I say ‘good for them’.  I believe this is a time when thinking people ought to start seriously ‘thinking for themselves’ and not ‘hang their respective hats’ on articles and reports whose authors seem in the past few weeks to be jumping on the ‘the U.S. economy has bottomed and is in recovery’ bandwagon.  While I continue to hope I am wrong, I see the U.S. (and hence most of the rest of the world) economy much like someone who has overindulged and fallen in a swamp.  When striving to get to ‘high ground’ as he/she wallows around, he/she periodically steps on a rock buried in the mud and gains new hope they are going to make it to the other side – only to take their next step and sink in a little further.  My strong recommendation to readers – read everything you can on the U.S. and world economy, don’t place ‘blind reliance’ on what ‘experts’ and ‘pundits’ think and say, and THINK FOR YOURSELF.

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An article titled ‘China Charges 4 Rio Tinto Employees; Spying Allegations Are Dropped’ reports that yesterday China did just that – formally charging the four with ‘commercial bribery and trade secrets infringement’.  China is reported to have ‘backed away’ from charges of espionage or violation of the country’s state secrets law, which are reported as ‘much more serious’.  The article does not say what the possible penalties might be should one or more of those accused be found guilty.  It will be interesting to see how this plays out, both from the standpoint of this specific fact situation - and in my view even more so from the perspective of what general impact, if any, this has on companies doing business in China.  Stay tuned.

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