Investing in the Apocalypse

The Dow
between mid-Feb and mid-March dropped 38%.
between mid-March and mid-Apr (today) rose 34%.
Since mid-Feb the Dow is down 18%.
(Remember that if the market falls from 100 to 50, it drops 50%. If it then raises 50%, it will only be at 75. It takes a bigger % gain to recover than the % fall that got you into a hole.)

This raise of 34% strikes me as irrational. Our economy will not be the same for at least a year. It could easily take years to get back to normal. Profits will drop more than the 18% that the Dow has fallen.

The dilemma is that if you get out of the market and then get back in, you have to be smart on timing twice: you have to know when to sell (best time was 15 Feb and second best might be now) and when to buy (that may be about mid-summer when people finally realize how abnormal the new normal is or even in February of next year when a new administration awakens optimism).

I don't know about you, but I cannot save enough to retire on the 0.1% return of a bank account, and one of the only certainties in investment is that risk and reward go together. If you avoid risk, you will avoid returns.

What are our options?
1. Just ride this out and try not to get cute on timing. This probably means looking at some lousy monthly statements during the next 3 to 12 months. (And probably a couple of exciting ones. It seems safe to say that volatility will continue to be high. Also, as the government pumps money into an economy where people are going out less and consuming less, this money might just find its way into investments rather than consumption, oddly driving up asset prices even as the underlying economy of everyday consumer behavior shrinks.)
2. Sell and wait for months to finally buy in later. The risk is that you miss the sharp rise that could easily characterize the uptick or that you simply sell at the beginning of a surprisingly decent year's gain.
3. Invest in countries and states that are having better success managing the coronavirus. Of course if it is a country like South Korea that is so dependent on exports, even getting your own act together might not be enough when your trading partners are in a deep recession or - worse - enacting xenophobic trade barriers. In this situation, having a great economy is like having a beautiful home in a terrible neighborhood; still not that great. Still, I do think that there will be a return premium on communities that are well managed.
And speaking of well managed, California (and possibly Washington) companies are more likely to benefit from a virtual world and from smart government management to enable their communities to be less hard hit than companies in other regions. CA and WA's companies could be as different from the rest of the nation as any foreign companies.Watch your own behavior. What are you consuming more of? Less? This could be a leading indicator of where profits will flow.

All the above should be taken with a grain of salt. Your best bet is to diversify across time (just buy once a day or month or year or decade depending on what you can afford, regardless of whether the market is reaching new highs each day or seeming to drop into the abyss) and companies / industries / and countries. Still, I have trouble believing that the market is going to have a great run over the next quarter or three. We have yet to get handle on this pandemic, much less what it will take to adjust to a post-coronavirus world that could easily run at about 75 to 95% of current levels for quarters or even a couple of years.

Ron's Economic Forecast for 2018 - Highest Probability of a Recession in 8 Years

A Chinese recession? A bumbling Fed Chair? A downturn in stocks? Your blogger predicts a 33% chance of bad news for the American economy in 2018.

THE LAST SEVEN YEARS

As we were coming out of the Great Recession, people continued to fixate on threats. When you've been beaten you flinch even when someone raises a hand to wave at you, so this makes sense. The Great Recession was awful and it left people anxious about what might happen next. I've reported it before but it bears repeating: in the decades before and after, the economy created an average of 2 million new jobs each year: in the oughts, from 2000 to 2009, the economy did not create jobs but rather destroyed an average of 100,000 jobs per year. Rather than create 22 million jobs, that decade destroyed a million jobs. Just consider what a shortfall of 23 million jobs in a decade means for a moment.

In light of that, it only makes sense that early in this decade people were so aware of what all could go wrong that they lost track of what all could go right. I was cautiously but unrelentingly optimistic about the economy throughout the recovery and it has gone well; now the unemployment rate could soon fall below 4% and the S and P 500 is up nearly 4X (well, 3.6X) what it was when the market bottomed out in early 2009. Even last year, after the election of Trump, I put aside my disbelief and repugnance in his presidency to predict that he would likely preside over another great year for the economy. 

Now, for the first time since the end of the Great Recession, I'm pessimistic about the economy. It seems as though that 8 years of good have distracted people from the fact that bad things, too, can hit. Just as 7 years ago most people seemed skeptical that things can go well, most people now seem skeptical that things can blow up.

PERCEPTION AND POLICY

One thing that I've learned is that people mostly don't distinguish between the state of conditions (e.g., we have high or low unemployment), the rate of change in conditions (e.g., the unemployment rate is dropping) or the rate of change in the rate of change (e.g., the economy is still creating jobs but at a slower rate). Obama took office as the Great Recession was at its worst and to this day many people associate him with that state of terrible unemployment. Trump took office when the economy was mostly recovered and many people now associate him with that state of wonderful employment. I do believe that policy makes a difference but the most obvious complicating factors are simply this: it takes time to get policy passed, it takes even more time for that policy to impact the economy, and easily the clearest instance of when policy makes a difference is during a recession. Simply put, there are a variety of theories about how policy changes long-term economic conditions but the causation lag is long and filled with uncertainty. (For instance, most people would agree that early childhood education and wellness programs are positive but assuming those are targeted at kids under 7, it'll be half a century before those children reach their peak earning years and any number of complicating factors - from wars to the popularization of computers or robots - could exacerbate or mitigate the impact of this early childhood intervention. In any case, it's safe to assume that the president and members of congress who instigated such policy would be dead by then and most people will have forgotten them and their policies.)

And a further complication is that about two-thirds of Republicans and a third of Democrats can't see the good when the other party has the White House. 

WHAT IS POSITIVE

Debt levels in the US are relatively low; as a percentage of GDP, federal debt is up about ten percentage points, corporate debt is up about six percentage points and household debt is actually down about five percentage points in the last 5 years, making for a net change of about 11 percentage points. With less reason to pay down debt in 2018, households, corporations and even the government have reason to continue with - and potentially even increase - current levels of spending. This should have a positive impact on future spending.

Unemployment is 4.1% and has now been below 5% for two years. The impact of sustained low levels of unemployment not only include the fore-mentioned debt pay down but great increases in net worth. One of the most extraordinary statistics from the recovery? The net worth of households is up $42 trillion since the depth of the Great Recession and up $30 trillion from its pre-recession peak in 2Q 2007. When people are collecting regular paychecks they're able to save and invest in homes and stocks. This, too, is promising for 2018.

Further, as unemployment stays low companies have to offer higher wages to attract workers. Wages are growing. As an anecdote, at Thanksgiving we were with three young women all in their early thirties; within the prior four months all three had accepted new positions (two at new employers) for raises ranging from about 15% to 100%. This is the kind of thing that happens when unemployment threatens to drop below 4%.

Further, the Republican tax plan looks to be front-loaded in its impact. Some indications are that it will stimulate the economy the most in 2018 and then slightly less in each of the next few years. It has the potential to add another one percentage point to GDP growth in 2018; that impact is huge.

Finally, the popularization of entrepreneurship - the essence of my book The Fourth Economy - is continuing. Economic policy at the regional level is increasingly focused on entrepreneurship programs within universities and emulating Silicon Valley's success. (None of that will be easy but even mediocre efforts at things that matter a great deal pay off more than extraordinary effort on things that matter little.)

This is all great news and the most likely thing is that it will translate into another great year.

There is about a 67%  chance that the stock market will again rise by double-digits, unemployment will drop below - and stay below - 4%, and wages will rise faster than they have all century. 2018 could be one of the best years since the late 1990s and will likely start out that way. Among other things, this would mean a rise in household income at every level, including median and lower-income and not just those in the top 1 to 20%.

WHAT IS WORRISOME

There is about a 33% chance that the economy turns down in 2018. That turn would probably start some time between May and October.

There are a few reasons that it may turn down: China, a new Federal Reserve Chairman and monetary policy, Trump, and the nature of business cycles.

BUSINESS CYCLES

There are two common measures for these cycles: unemployment rates and the stock market. Sometimes an economy is creating jobs and wealth and sometimes it is destroying them. Since 1900, the US has had 23 recessions, including the Great Depression that began in 1929 and the Great Recession that began in 2008. The length of those downturns has varied from 6 months (the shortest period of downturn that can qualify as a recession) to 43 months (the Great Depression in the early 1930s).

If you were plunked down into a random month between January 1900 and December of 2017, the odds that you'd land in a month in which the economy is suffering from a recession is roughly 24%. Of course Keynesian economics made great advances in the aftermath of the Great Depression and since then the odds of any given month being in recession are 14%. (In the 33 years leading up to the end of the Great Depression, the odds of you landing in a recession plagued month were 48%.)

Curiously, the odds that you would have a month since 1948 in which the unemployment rate is as low - or lower - than it is now is 15%, nearly identical to the odds that you'd be in a recession. The odds that the unemployment rate is 4.1% or lower is the same as the odds that it is 7.4% or higher. (Which is to say that most - about 70% - of the time the unemployment rate bounces around between it's current rate of 4.1% and 7.4%.)

Why does the economy rise and fall? It's because good optimism eventually becomes bad optimism. The economy is bad and someone is optimistic enough to start a business that depends on rising sales. Their optimistic bet pays off, they get rich, and that optimism fuels more optimism. More businesses are started, more stocks bought, more employees hired ... and the economy expands. There comes a day, though, when the optimism is unfounded. New businesses fail at a little faster rate, old businesses expand more slowly or even contract, and the economy begins to destroy jobs and wealth. Now, pessimism is the wise bet and companies layoff and investors hold onto their money. In a bust the pessimists become the leaders. Until the cycle starts anew, as it has a dozen times since the end of the Great Depression in 1933. The booms help to create new things and the busts help to destroy the old; between them job and product markets transform over time, and what we buy and what we do for a living radically changes over a lifetime.

Why mention this? Well, if we're just betting on probabilities - putting aside reasons for optimism mentioned above - there is an 85% chance that unemployment goes up from 4.1% and only a 15% chance that it goes down from there. This claim is less scientific than simply based on data since 1948. Again, the unemployment rate of 4.1% or lower occurs only about 15% of the time. The next month we draw out of the hat is more likely to be higher than lower. Let me be clear: many of the fundamentals suggest that the economy will continue to do well in 2018; that said, economies do not expand without interruption and the odds that it will falter, that unemployment will tick up, are never zero.

Similar for stock prices. Since 2000, stock prices have fallen in five years, or 29% of the time.

ANOTHER REASON TO WORRY? TRUMP

Worst case, his stupid ideas become bad policy. It's not clear that anyone in the Republican Party will resist him and he has at least another year to run with a Republican led House and Senate. If he signs legislation that leads to the deportation of millions of illegal aliens, we'll have a recession. If he manages to jettison NAFTA, we'll have a recession. If he cuts funding for research, per capita GDP growth will slow and the steady increase in life expectancy that we've enjoyed for more than a century could stall. 

And of course the Mueller investigation could result in a number of Trump's administration - even Trump himself - facing charges that could force his resignation or even imprisonment. While the final resolution - him in jail or remaining in the White House with Mueller's investigation finally concluded - could stabilize or even rally markets, it's hard to imagine that in the space between when Mueller makes his big reveal and when there is a resolution won't be a time that rocks markets.

In the 10 months before Nixon resigned in the aftermath of the Watergate scandal, the S and P 500 fell 43%.

NEW FEDERAL RESERVE CHAIRMAN JEROME POWELL

Janet Yellen's replacement as head of the Fed (he'll take over in February) is Jerome Powell. I have two big concerns with him: he has no degree in economics and he will be responsible for tightening monetary policy, a delicate operation that can frighten markets.

Work experience - Powell has served in the Fed for years - helps a great deal when it is business as usual. Theory, though, is essential when things change and unlike Yellen and Bernanke who had studied, researched and published on the topics of recessions and recoveries, Powell has never published anything that would suggest he has thought deeply about these topics. The last Fed Chairman to lack an economics degree served in the 1970s but this disregard for expertise is, of course, characteristic of Trump.

The Fed has announced that it will raise interest rates. If it does this too quickly, it slows down the recovery. If it does this too slowly it fuels an asset bubble and / or inflation. Simply put, money pumped into the system helps encourage "real" economic activity (actual investment, consumer borrowing, and hiring) but also drives up prices. People have argued that since the emergence of the World Trade Organization, it is harder for that money to drive up the price of goods that can be imported but instead drives up the prices of assets like stocks and homes. They argue that loose monetary policy is less likely to drive up the price of apples than it is to drive up the price of Apple stock. 

Before the Great Recession, excess reserves in American banks ranged from about $1.5 to $3 billion. As the Fed pumped more money into the economy to counter the credit crash, excess reserves rose to $2.9 trillion, roughly 1,000X more. Yellen has quietly lowered that to $2.3 trillion but there is still a lot of money to pull out of the system. Related, the Fed is finally moving interest rates back up, something that will have a ripple effect on lending and all the hiring, expansion, and spending that accompanies low interest rates.

Unwinding loose monetary policy is somewhat like the game of operation, an attempt to remove something without setting off buzzers that suddenly send markets down or - worst case - cause a contraction in credit and a stutter in hiring or consumer spending. I simply trust a lawyer less than I do academics who have studied these matters extensively. I'd be much more comfortable with Yellen serving another term (as the men have for decades back) than I am with Powell learning this new position during a sensitive time in the transition of monetary policy. He's a risk.

AND FINALLY, CHINA

Ruchir Sharma has been worried about a global recession emanating from China for a year or two. He has a couple of plausible concerns, chief among them the amount of debt China has  recently created. 

Sharma cites thirty instances in which private debt over a 5-year period grew faster than GDP by at least 40 points. (Imagine in year 0 that a country's private debt is equal to 100% of of GDP and in year 5 it is equal to 140%.) In each of these cases, GDP growth fell by more than half over the next five years, occasionally slipping into recession. [See page 300-1 of Sharma's The Rise and Fall of Nations] Sharma is worried about China because over the last five years private sector debt as a percentage of GDP has gone up 56.5 points. It could be that China will escape a downturn as it pays down debt but, again, 30 of 30 countries have been caught in the consequences of rapidly growing debt.

His other concern has to do with a belief in the way business cycles purge the old and create the new. As mentioned, since the US has become the major economy in roughly 1900, it has had 23 recessions. By contrast, in the quarter century since China has begun its great ascent it has had 0 recessions. None. This is a long time to go without market correction.

My own concern with China has to do with my belief in the progress that communities make through four economies: agricultural, industrial, information and entrepreneurial. China - in my opinion - has successfully made the transition from agricultural to industrial economy. Its per capita GDP is now about $10,000, which is one mark for the transition to a new economy. Curiously, President Xi has recently assumed more power than any leader since Mao and is making sounds of a crackdown on dissent. It seems plausible to create an industrial economy coincident with tight government controls; it does not seem plausible to do that with the emergence of an information economy. Simply put, I'm dubious about the compatibility of government control and the emergence of an information economy reliant on knowledge workers who have easy access to information technology and - obviously - information.  I don't know how you create an information economy while limiting access to information. 

China has not only emerged as the second biggest economy in the globe but it has accounted for a huge portion of global GDP growth over the last quarter of a century. If it falters, it will have a ripple effect.

Finally, things happen that haven't been predicted. The price of mortgage backed securities suddenly falls. Terrorists fly planes into the World Trade Center. I've listed a variety of triggers for a recession but it could easily be something completely unforeseen that is the trigger.

THE FORECAST

For now I'm keeping my money in stocks until the end of the first quarter of 2018. I think the market will rise another 3% to 8% by May and the unemployment rate will go as low as 3.8%. Home construction will rise, as will business investment.

I'm worried, though, that the the market will turn down about mid-year, as will job creation. The market could finish the year down about 5% to 10% and while unemployment will still be decent (4%? 4.5%?) job creation will turn negative for the first time in 8 years. The total number of jobs created in 2018 will be about 1 million, give or take, about half what it has averaged during the recovery.

For the year:
S and P 500: down 5 to 10%

Jobs: up 1 million

Unemployment: Roughly unchanged or up slightly to somewhere between 4.0 to 4.5%

Finally, where we are as of when this was published:
S and P 500 is at 2,692.71
Unemployment is at 4.1%

The Good News Is That We're Only 6 Years Away from Republicans Blaming Democrats For Taking Too Long to Repair the Economy

We're about six years away from the Republicans tapping their foot impatiently, glancing at their watch, complaining to anyone who will listen that the Democrats are taking too long to repair the wreck they had made of the economy.

The conversation in 2022

"Oh sure," the Republicans will say. "The economy is creating jobs. But what kind of jobs? I've heard that they're not even good jobs. This recovery is so slow."
"We don't really have data on that yet but indications are that they are not much different than the jobs we created last time."
"They're part-time jobs."
"Well, we are creating about 200,000 jobs a month again. That's a lot better than losing 400,000 jobs a month like it was at the end of your guy's term."
"Oh sure. Blame him for your problems. Take responsibility. You're in charge now and the economy is growing very slowly."
"Yeah. It can do that after it's been gutted."
"That's history."
"Well, the recession lasted nearly two years and just ended months ago. At least the economy is now growing even if it is growing slowly."
"You know that the American people will hate you for this slow growth, right? They're going to blame you for every bad thing in the recession because the fall was quick and the recovery slow. And we are so going to beat you in your re-election bid because we're going to tell them that we need change."
"Even though the recession started on your watch and the recovery was on mine?"
"Oh please. That's easy. After the economy created 23 million jobs under Clinton, we talked the country into change."
"Yeah. Quite the change. Dubya presided over just a tenth of that number of new jobs. And left Obama with an economy that destroyed 800,000 jobs in just his first month alone. 5 million in his first year."
"Sure. And then in his second term the economy created 10 million jobs."
"Something it had done in only two terms before, both of them Clinton's. See. You agree it got better under a Democrat."
"Doesn't matter. After that term we talked the American people into change again."
"And blew up the economy. Again. The third Republican administration in a row and the third recession in a row."
"So."
"So how do you think the American people will be suckered into changing yet again from what's working to the party that keeps blowing up the economy?"
"Because recessions take a long time to recover from and they'll be hungry for change. They won't be happy with your paltry recovery. I'll be able to tell them that this is all your fault and they'll believe me because their memories only go back about three to six months, tops, and the problems they had with us happened years earlier.  You know I'll win again."
"Yeah. I do know that."
"But don't worry. We'll bring you in for clean up again in four to eight years because it makes such a lasting image, you surrounded by debris, up to your elbows in high unemployment rates you only gradually whittle back down. It's a picture that will help us to win again."
"Yep. I know that too."

“Can the U.S. economy be doing all that well if ‘Kidney’ is a common autofill?”

Two things can be true: the economy is getting better and things are incredibly hard for some people. The social safety net has holes in it large enough for entire families to fall through.

An article from Forbes' staffer Maggie McGrath about non-traditional measures of economic well-being includes this sobering statistic.

Data from Google’s search autofill — which updates the most likely completion of often-searched-for phrases, like “near me” or “that deliver” for the phrase “pizza places” — supports the food stamp data and the hunch that Americans are still feeling the ill effects of the recession. ConvergEx found that the phrase “I want to sell” autofills with “my car,” “my house,” and most concerning, “my kidney.” The word kidney has cracked the top three autofill results every quarter since the fourth quarter of 2013.

“Can the U.S. economy be doing all that well if ‘Kidney’ is a common autofill?” Colas asks.

Breaking the Handcuffs of History - From Stimulating the Old Economy to Creating a New One

I'm a firm believer that the farther back one goes into history, the further ahead one can predict. This, of course, depends on understanding patterns and dynamics that drive events. As much as I love history as a means for understanding how we got here and the direction we're heading, I often see history used as a way to define what is possible rather than create new possibilities.

In today's economy, there are frequent parallels drawn to FDR and the slow recovery from the Great Depression. I'm not sure that the right lessons have been drawn from this.

WWII seemed to have ended the Great Depression. Industries like information technology and commercial aviation were direct products of the war effort. Industries like pharmaceuticals and media were less obviously a product of the war than of the many beneficiaries of the GI Bill that created so many knowledge workers who, in turn, created or made possible new industries so dependent on knowledge workers.

One lesson is that if we also stimulate the economy and fund education, we'll also stimulate GDP and create jobs. This is partly true - as can be seen by the fact that we've partly accomplished these goals. (GDP is again rising; unemployment stays disturbingly high.) But it seems to me that there is a more important lesson.

FDR partially, and the second world war more completely, didn't just nudge the economy towards full employment. FDR created entirely new departments and government bureaucracies in addition to the new industries that were spun off from the war effort. It wasn't just that old industries and government agencies employed more people: entirely new industries and agencies created jobs.

Bush started - and then Obama continued - a huge stimulus package. But neither have actually helped to create new industries.

Alternative energy is the obvious new industry that could be created by government initiative. Others include longevity enhancement, nanotechnology manufacturing and repair, commercial "space" travel, and mental health through cognitive science (and not just pharmaceuticals) to name just a few.

To date, the attempt to create jobs by cutting taxes for corporations and buying bonds from banks has proven wildly inadequate. Corporations now sit on top of a record $2 trillion in cash - money that's not being used to create products, processes, or jobs. Banks are still not loaning. Corporations and banks have money but they are not creating.

Instead of wasting stimulus potential through tax cuts and bank financing, the government would do well to directly fund the creation of new technologies and companies. Yes, fund new companies that represent new industries that would absorb displaced workers and hire new ones.

The real lesson of the recovery from the Great Depression is not to merely stimulate the old economy. It is, as well, to help play midwife to new ones. Until we're that bold, I think that our recovery is going to look more like Japan's decade long stagnation than any previous recovery we've enjoyed.

I'm Not Unemployed - I'm Running for President

Lou Dobbs has gone from an advocate for the laid-off American to role model.

I've always been a little ambivalent about Lou Dobbs. I can't say that I've followed him closely (although to be fair, I've paid far more attention to him than he has to me), but I admire that he's realized the real economic issue is stagnating wages for the average person. I don't like that he translates this into a protectionist, anti-immigrant platform. He might have the wrong solution but at least he has the right problem. With that said, my ambivalence has changed to admiration.

Two weeks ago, Dobbs was laid off from CNN. Many of his fans could likely relate. And now Dobbs has done something completely inspired: he's announced that he's running for president.

Think about this as a means to cope with the trauma of getting laid off. Imagine yourself at a job interview.

Interviewer: So, you have been laid off for, uh, three months now?
You: Not really. I'm actually in the early phase of announcing my candidacy for president. I'm discussing options with various people.
Interviewer: So you are not laid off?
You: No, not technically.
Interviewer shifts in his seat, scratches his head: Well, are you collecting unemployment?
You: Yes, but only to better understand the economy.

Think about it. No awkward gap in your resume. "Financial Analyst at GE, 2005-7, Project Manager at GE 2007-9, Presidential Candidate 2009-10." It is a bold move that would show that you are goal oriented and willing to think outside the box. And it makes being ignored by dozens of prospective employers seem paltry in comparison to being ignored by millions of prospective voters.

Lou Dobbs may have just gone from spokesperson for the working man to role model. I know that the next time I'm laid off, I'm running for president.

Today's Big Idea for Congress

I generally dislike term limits. They seem to me a way to ensure that the lobbyists have all the experience and the legislators are perpetually going - but never getting - up a learning curve. With that said, I'd like to propose term limits of a particular kind.

Here in California, we are about to provide the second recessionary dip courtesy of a mandated balanced budget. California's requirement that budgets be balanced inevitably exacerbate the highs and lows of business cycles. When the economy is booming, the state gets more revenues and floods the economy with some combination of tax cuts and spending. When the economy is faltering, the state gets less revenue and makes things worse by increasing taxes or cutting spending.

Governments need discretion to raise taxes and cut spending during booms and lower taxes and increase spending during recessions. Governments can offset swings in the economy.

But of course, once you give a legislature power to run deficits, there is no stopping them. And, as they did through most of the last administration, they run deficits even during a boom time.

So, how do we allow legislatures the power to offset recessions without enabling them to create chronic deficits? I'd like to propose a "three-deficits and you're out" policy. Members of Congress can vote for deficit spending - but only three times before they are out. They have the tool to offset recessions but not to avoid hard choices regarding spending cuts and tax increases.

This proposal might need one other provision to make sure that the legislature doesn't fail to offset recessions. Not only would they have only 3 deficits, but they'd be allowed nation-wide unemployment of only 10%. Local recall elections would be triggered by the third recession in a congress person's career and nationwide recall elections would be triggered by 10% unemployment rate.

And once we get that in place, I think that we ought to have a similar policy for the declaration of war. Knowing that they are ordering soldiers (and foreign civilians) to death by the declaration of war, a congressperson ought to be able to authorize only one war before hitting his or her quota. "Not only am I willing for our young people to die in this conflict, but I am sacrificing my own seat to authorize it."

I am aware that there are a few details that would need to be worked out, but as a blogger, my work is done.

Towards a Sustainable Recovery?

The new numbers suggest that our recession is receding.

New home sales (June) +11%
Home prices (June) +0.5%
Durable goods sales (June) +1.1%
New jobless claims (four week avg) – 1.5%
GDP growth in 2nd Q -1% (down but not as much as many economists had expected)
Dow Jones (July) +8%

Yet the one measure that has some commentators worried is that "consumers are scared," to quote George Stephanopoulos. Households are spending at a lower rate than before the recession. This, to me, is the best news of all.

I'm not sure why we'd want to return to a household savings rate of zero. If we pull out of this recession by some means other than unsustainable consumption, we might just fix a problem much bigger than a few quarters of economic contraction.

Out of Touch With (Virtual) Reality

In the midst of the dire news about the economy is this closing sentence:

For all of last year, the economy grew just 1.1 percent, unchanged from the government's previous estimate. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001

The stock market moves more than the economy because it is more in touch with virtual reality: the things that might happen rather than the things that have.

To be fair, jobless claims are rising, and the GDP dropped in the last quarter at a rather stunning 6.3% rate and the stock market has fallen by nearly a quarter to start the year. News is bad. But there are already signs of a recovery. It could be that this terrible recession will turn out to be not so awful. And that, too, will make for a great story.

It would be fascinating to write a history book that used current media techniques to report on history. Can you imagine MSNBC covering the Great Depression? Fox covering the McCarthy trials? Or CBS covering World War 2? PBS the Holocaust? In real time? Careful readers would be assured that these were, indeed, the end times for (in order) capitalism, capitalism and democracy, the free world, or, in the case of a Biblical people being decimated, simply the end of the world.

We live in age of hyperbole. Our mainstream media knows the shock and awe techniques for getting our attention. They seem, on the whole, a little more confused about what to do with our attention once they have it.

Last year, the economy grew by only 1.1 This is not speculative. It is simply a fact. And one unlikely to alarm anyone enough to buy a newspaper in order to learn more.

There is a great line of Phillip Roth's, a father talking to his son. "Anything can happen, but it usually doesn't." Sepculating about the economy's flirtations with collapse makes for alarming and exciting news. Liberals get to rail at the greed of Wall Street. Conservatives get to rail at the socialist inclinations of our new adminstration. And anyone trying to understand what is really happening - rather than what might happen - has to work hard to find out.

You Know Times Are Hard When ...

Sesame Street is laying off 1/5th of its staff. How much worse could it be? Those poor creatures are already sleeping in doorways and living on the street.

The Era of Freudian Economics

"I don't know why the economists haven't already figured out the cause of this economic downturn," Bernard said assuredly.

"What is it you know that they don't?" I asked.

"Well it's obvious," Bernard said. "We've given a whole generation no reason for libidinal repression. It is as if we gutted their desire for achievement."

"What?"

"We had a golden age of about a century when we still made people feel repressed about their sexuality but they no longer felt self conscious about consumption. We allowed indulgence, but only of a particular kind. It was a sweet spot for economic activity."

"Freudian economics?"

"Yeah. I guess," Bernard scratched his head. "See, everyone knows that people who are sexually repressed sublimate their sexuality into socially acceptable activities. Repression forces them to turn libidinous activity into productivity - or at least a skill like sports or music."

"So, repression is good for developing marketable skills?"

"Exactly! Without repression, they go right to sex - no intervening, forced development of skills that might make them more alluring as mates. Mating suddenly has nothing to do with economics and just has to do with mating. It's why guys increasingly fail to pursue good careers."

"So wages gradually erode as sex becomes less shameful?"

"Yes! But the shopping is still part of the culture of instant gratification. The consumption doesn't go away with the repression. If anything, it increases, all part of the general culture of indulgence."

"So, when people were repressed enough to develop skills but not so repressed as to stifle their shopping urges, the economy was a roaring success?" I paused. "Have I got that right?"

"Yes!" Bernard had a triumphant little smile. "Nothing could be more obvious."

"And now we're not making enough because our wages have fallen? And our wages have fallen because we're not repressed enough?"

"That's pretty much it, I figure."

"From repression to recession."

Bernard paused. "No. This is not just a recession. We've had those before. This is a drop in incomes, a delayed adjustment to a new lifestyle."

"A new lifestyle?"

"Sure. Incomes have not grown but spending has. Adjusting to that fact will require an adjustment in lifestyle."

"But at least the lifestyle will include sex," I noted.

"For whatever that's worth," Bernard said, speaking like a true octogenarian.

Hope for Scandal

Next week, an entire industry will disappear. For about two years, analysts have predicted and explained the political campaigns. Printers and advertisers have been busy putting together flyer's, ads, and radio spots. In one week, all of that will be over.

The bad news is that millions of jobs will be gone overnight. The only good news for the economy is that most of these were volunteer jobs.

Worse, for the last 16 years, our media has been moved along by a sense of outrage. First it was Bill Clinton's penis and then George Bush's brain that enabled news analysts and columnists and talk show hosts to express outrage and feign understanding. The growth in 24 hour news channels, on-line news, and talk radio has been one of the only bright spots in this American economy.

We can only hope that - for the sake of big media - whoever gets elected manages to find himself in a scandal soon. Maybe McCain, if elected, could invade Vietnam or Obama - striking fear in the hearts of whites who are a afraid of a black take over - might outlaw polka. We can only hope. For the sake of the economy.

Stimulating our Over-Stimulated Economy

Bernanke and Bush agree that our economy needs a stimulus. (Pelosi, Clinton, and Obama have also called for stimulus.) Basically, the proposal is to add about $100 billion in spending to our roughly $13 trillion economy (an infusion of less than 1%).

One, as long as they're doing this, why do it through banks? Why not send out vans and just pass out money to the homeless? Seriously. They'd spend money if they had it. Instead of a trickle down, we could have a surge up.

Two, is a stimulus really what's needed? Unemployment is higher but, at 5%, it is not that high. Meanwhile, a big part of the bump we're feeling is from home prices settling a bit. I'm not sure that's so bad. Here in San Diego, median home prices topped $500,000 for a while. If they kept rising at 5% to 15% a year, about .001% of households could afford homes, eventually. I'm not sure who benefits from that. If dropping home prices hurts the economy some, I don't know how that's to be avoided. Stimulating the economy so that home prices stay out of reach might help speculators, but it's not obvious how it helps normal people who just want a place to raise kids.

Three, our problem may be less a matter of stagnating consumption than over-stimulation. We already spend plenty. Many countries have savings rates of 20 to 30% (China's is close to 50%) but our savings rate is not far from zero. (Last year, briefly, our savings rate was negative.) It may be that stimulating the economy now is like offering an exhausted, crying baby a rattle.

Instead of more macroeconomic stimulus, how about a better safety net for this age of globalization? Why not offer longer periods of unemployment coverage, more aggressively fund training, and adopt policies that make housing affordable rather than expensive? A stimulus package seems like such an expensive and vague way to address real and specific problems.

And besides, it's not as though no one in Washington has already thought to cut taxes and increase spending in the last 7 years. If that is really what we needed, it's hard to explain how we got here.