Thursday, July 30, 2009

"Why Aren't Companies Hiring?" Part V

Businesses have reacted to the tumultuous economic conditions in many ways. A logical action has been to reduce cash outlays to a level appropriate to what the new economic conditions seemingly warrant.

Along these lines, expenses have undergone scrutiny and in many cases have been cut, in order to preserve cash as well as improve profitability (or limit losses). Labor costs are notable expenses because of their size.

Many firms have incurred double-digit (percentage) revenue losses over the last few quarters. This can create a rather alarming atmosphere, especially in light of the tremendous overall uncertainty going forward, as discussed in the last post. In this type of fast-moving, uncertain environment where revenues, and losses, can accrue quickly, many businesses have felt they have had to move fast in order to contain potential damage.

Large-scale layoffs have occurred for a number of reasons. Under such uncertain, and unpleasant economic conditions, layoffs represent a quick means by which to bring down total costs and preserve cash. Layoffs have, over the years, become a type of "standard operating procedure" in business, i.e. they are viewed as a rational decision during tough times and are not stigmatized like they may have been a few decades ago. While there are of course many arguments that can be made with regard to the worth of an employee, as well as viewing employees as assets as opposed to expenses, in reality it is very difficult to quantify how one, or a number of, employees' dismissals will negatively impact a firm in the future. In other words, quantifying an employee's value is very difficult. However, determining each employee's total cost is rather straightforward.

Furthermore, there are other factors at play. Employee "turnover" costs are difficult to measure. This refers to how expensive it is for a firm to have high employee turnover, as opposed to low turnover. It is easy to neglect this, and other issues, in difficult economic times.

Another factor that comes into play is executive compensation issues as well as stock market pressures. How are the major executives getting paid and influenced, and how does this directly and indirectly impact hiring and employee costs? Since the highest executives are (likely) getting paid and otherwise motivated to produce profitability, this may well serve as a major influence when viewing employee expense levels. The executive compensation agreements and stock market pressures can create a relatively "short-term" outlook with regard to profitability and a resultant bias against "expenses."

One also has to wonder as to whether employees are at least partially "bearing the brunt of" poor operating practices that have exacerbated adversity at firms during this period of economic weakness. There are many potential areas within any firm that may be better managed even given the complicated and unpredictable nature of this economic weakness. This "inefficiency" may be compounded should greater economic weakness develop. If a firm is unaware of these "inefficiencies", it may neglect them, thereby causing greater losses, which in turn produces greater pressure to reduce expenses and therefore employees. These "inefficiencies" may be large, given the complicated nature of our current economic environment. Also, the previously mentioned issue that most firms don't have operating experience in pronounced economic downturns also plays a role in exacerbating this issue.

As seen by these past five posts, the question "Why Aren't Companies Hiring?" has a complex answer that encompasses many different factors. Given the severity of the problem, as well as its adverse impact on the economy, the natural question becomes what can be done to encourage, or cause hiring to happen? This question, again, has a very complex answer, especially in light of issues regarding Sustainable Prosperity.

As I started this series of posts with a quote, I will end it with one as well. This quote underscores the severity of the unemployment situation, and is from Mortimer Zuckerman discussing the unemployment levels. It can be found in his recent Wall Street Journal editorial found here:

"The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion."

SPX at 975.15 as this post is written

Wednesday, July 29, 2009

"Why Aren't Companies Hiring?" Part IV

In addition to the adversity and financial strains suffered by firms during this period of economic weakness, there exists significant uncertainty on many fronts. As mentioned in the last post, many businesses would find any further economic weakness to pose a formidable challenge. Although economist forecasts are predicting a weak economic recovery from here, economic forecasts have proven less than accurate the last couple of years. Furthermore, it could prove especially difficult to predict how any one company's demand would be specifically impacted by further economic weakness.

In addition to the uncertainty over future economic conditions, there is a broad array of factors and issues that create uncertainty. Some of these factors and issues have to do with proposed legislation, such as the environmental legislation, health care reform, various financial reform provisions, and other possible legislative acts. All of these issues pose a lot of questions right now, as none are finalized yet each hold the potential for increased costs as well as changes in "the ways things are done."

In addition to these legislative acts, there are probable increases in taxes, as well as changes in tax methods forthcoming. Again, both the financial impact as well as the inherent change create uncertainty.

Cumulatively, this high level of uncertainty both in future economic conditions as well as legistlative and other changes, appears to be one filled with potential challenges and increased costs. Even if the economy follows the economist consensus of a gradual weak, but sustained recovery, these economic conditions could prove challenging for many firms, especially those already financially impaired.

This uncertainty factor is highly significant with regard to companies' hiring, or lack thereof, as further discussed in the next post.

Part V to follow...

SPX at 979.62 as this post is written

Tuesday, July 28, 2009

"Why Aren't Companies Hiring?" Part III

The economic weakness that has occurred has caused a significant amount of financial damage. This can be seen in a variety of indicators and statistics, such as widening credit spreads, defaults, credit downgrades, etc. These worsening conditions have been accompanied by a curtailed (in many cases severely) access to credit. Whereas credit and other types of funding were abundantly plentiful (and in many cases cheap) into 2007, that level of credit and financing availability has since undergone a dramatic reversal.

An array of adverse business conditions have added to the misery. These have taken various forms, from very high excess manufacturing capacity to low capital investment.

In addition to these adverse conditions and financial strains, a major factor going forward will be consumer spending. As I discussed in a June 18 post, the ability for the consumer to keep spending may well be constrained going forward due to a variety of factors. This will be one more "headwind" that businesses will likely encounter.

Should further significant economic weakness occur, there is another major concern relating to businesses - their ability to successfully manage through severe economic weakness. Most businesses have not been exposed to the severity, both in length and extent, of economic weakness that further economic weakness would entail. This lack of operating experience could pose significant challenges and hurdles to businesses that have already been adversely impacted.

Part IV to follow...

SPX at 977.57 as this post is written

Monday, July 27, 2009

"Why Aren't Companies Hiring?" Part II

The economic weakness that accelerated in the latter months of 2008 and into 2009 played out in a very "tricky" fashion.

Very few mainstream economists foresaw what would happen. A testament to the complexity of the situation as 2008 progressed was the business shows airing arguments during the summer as to whether the economy was even in a recession.

Needless to say, that argument was answered by the 4th quarter. The list of rather unbelievable economic occurrences in 2008, and into 2009, is very extensive.

Given the "trickiness" in which the economic weakness has played out, one question that may be asked is "How well have businesses reacted?" As well, another major question becomes, "Given how businesses have reacted so far, how are they positioned for the future?"

Both of these questions are very difficult to answer. With regard to the first, there really is no established "scorecard" with which to grade businesses' response to the events of 2008 and 2009. As aforementioned, the way the economic weakness played out was "tricky" and certainly highly unexpected. While one may argue, in hindsight, that corporate forecasting might have been better, or any number of corporate actions, from cash management to inventory control, could have been more effective, those arguments certainly make more sense "after the fact." Sure, things may have been handled better, but most businesses won't, and can't, be effectively run if they seek to plan for contingencies that, at the time, seem very unlikely, if not unimaginable.

Perhaps even more important is the second question, "Given how businesses have reacted so far, how are they positioned for the future?" If one believes the current consensus among professional economists, that the worst (as far as economic weakness) is behind us, and that a steady, if not weak, economic recovery will continue through 2010, then the answer appears to be that businesses, as a whole, will continue to face a challenging environment, but in most cases will be able to survive.

However, if the economy defies consensus expecations, and materially weakens (a view I hold, as previously mentioned in this blog), it is much harder to generalize how adversely businesses would be impacted.

In the next post, I will discuss some issues that bear significance should this more adverse economic scenario occur.

Part III to follow...

SPX at 977.68 as this post is written

Friday, July 24, 2009

"Why Aren't Companies Hiring?" Part I

"As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering."

-Bill Gross, from the July 2009 Pimco Investment Outlook


The unemployment issue currently facing the country is severe and complex. Although this unemployment problem is to various extents recognized, there seems to be little discussion around the question "Why aren't companies hiring?" The simple, and perhaps indirect answer, is "because the economy is bad."

The next few posts will explore this question "Why aren't companies hiring?"

A few disclaimers with regard to this series of posts:

First, this unemployment/hiring aspect of our current economic situation is very complex. This series of posts will present a simplified approach to the question, as to avoid excessive complexity and length.

Second, as with any discussion of our current economic situation, it is of course impossible, and unwise, to characterize all businesses as if they currently are in the same situation. Obviously, they are all unique; however, there is enough commonality as to be able to generalize to some extent, especially among those businesses that suffer when the economy is weak.

Third, I have many theories as to why companies aren't hiring; this series of posts will explain some of them. The remainder will go undiscussed, at least for now, due to a variety of reasons.

Part II to follow...

SPX at 976.29 as this post is written

Copyright 2009 by Ted Kavadas

Thursday, July 23, 2009

The Commonality of The "Jobless Recovery" Belief

The following story from will serve as a good prelude to a series of posts I will write on joblessness and hiring. It discusses the widely-held (among economists) view that we are entering a "jobless recovery." :

It is important to note the commonality of the concept in economists' forecasts.

As I mentioned on June 9, I believe the term "jobless recovery" is a euphemism.

SPX at 976.25 as this post is written

Wednesday, July 22, 2009

Tax Breaks And The Economic Greenfield vs. Economic Brownfield Concept

Here is a recent story from BusinessWeek, "Will Tax Breaks Boost Jobs?"

As seen in my article (with italics added for emphasis) "America's Economic Future - 'Greenfield' or 'Brownfield' ?" (found here):

"One way to determine whether an economic "greenfield" environment exists is whether businesses are thriving and multiplying naturally – with an indicator being that they are choosing and wanting to locate their operations and sales territories in a specific location without needing to be artificially induced to do so through various incentives or coercions. However, this indicator has to be viewed in the overall economic context, as there may be circumstances that can serve to override casual observations."


One of the reasons I started this blog is because I felt that this economic 'greenfield' vs. 'brownfield' concept is not understood; yet has massive implications for our economic future.

As seen in the BusinessWeek article, that states and regions have to engage in bidding wars to attract and/or retain businesses (and jobs) is likely a "red flag." While it is easy to dismiss these "bidding wars" as "the way things are," perhaps the critical question, in the larger context, becomes "Is this the way things should be?"

SPX at 953.18 as this post is written

Tuesday, July 21, 2009

"Quick Fixes" To Balance State Budgets

I wanted to briefly comment on this recent (July 17) Wall Street Journal article that mentions how Illinois and California are working to "balance" their budgets:

The article brings to mind a term that I have used before, "quick fixes." Sadly, some of the means by which these budgets are apparently being balanced might not even meet the low threshold of a "quick fix."

Here is another article, from Forbes, with the subtitle, "Some of the games states are playing to plug vast holes in their budget deficits."

SPX at 954.45 as this post is written

Monday, July 20, 2009

Another Forecast Mentioning "Double-Dip" Possibility

Goldman Sachs yesterday came out with a new forecast on the S&P500 price as well as operating earnings, as seen on here:

I found the following phrase interesting; as this is another forecast that mentions the possibility of a "double-dip" recession in the future:

"Goldman's current economic view is for below-trend growth through 2010, and it believes the risk of a "double-dip" recession is still significant."

Also in the story it mentions that Goldman raised its operating earnings estimate on the S&P500 to $52 (from $40) for 2009 and to $75 (from $63) for 2010; and its S&P500 price target for year-end 2009 to 1060 from 940.

SPX at 951.13 as this post is written

"Focusing On Things We Can Control"

Recently I have seen a phrase mentioned by a couple of different Fortune 500 firms during conference calls. While discussing their financial results, they have mentioned that they are "focusing on things that they can control."

When I first heard this phrase it struck me as odd. I inferred from the phrase that they were trying to convey diligence with regard to managing in an uncertain environment.

However, in our current period of economic weakness, effective management during uncertainty and "uncontrollable" circumstances, is paramount. While no one says it is easy or straightforward, my analysis indicates it will be imperative, especially if there is further economic deterioration, as I believe will unfortunately occur.

As we have seen, this period of economic weakness has held plenty of unforeseen events and surprises. As I mentioned in here:

there is a lot on the plate here with regard to managing a business in our "new (economic) environment." Perhaps the biggest mistake will be to underestimate the complexity.

I will be discussing more of this issue soon...

SPX at 944.38 as this post is written...

Sunday, July 19, 2009

Clarification of a Phrase

I would like to quickly clarify a phrase I have been using on this blog...

The phrase is "this period of economic weakness."

The reason I use the term is that, as I have explained in this prior post:

that our current economic environment is difficult to classify. Furthermore, it is a very fluid situation that can change quickly.

Therefore, rather than getting "hung-up" on terminology, I seek to simplify matters by just calling our current economic situation "this period of economic weakness." I hope the phrase does not in any way diminish the implied severity of our economic situation.

SPX at 946.01 as this post is written...

False Signs of Recovery in Recessions

On July 16, I wrote the following:

"During periods of economic decline, it is relatively common to have periods of "relief" from decline - then a resumption of further decline. This is what I believe we are experiencing now, both in the economy as well as the stock market rally (which I have previously referred to as a "bear market rally.")

Subsequent to that post, I ran across the following in the August 3 issue (p. 102) of Forbes. In a column, A. Gary Shilling makes this comment:

"False signs of a recovery are common in recessions. Since World War II there have been 11 recessions, and in 8 of them real GDP rose in at least one quarter well before the recession was over. Recessions don't start at the top and go straight to the bottom."

SPX at 940.38 as this post is written

Laura Tyson on Economic Forecasting

I recently ran across a quote from Laura Tyson. It highlights some issues with regard to economic forecasting.

Here is her quote:

“We are in a balance sheet recession,” said Laura Tyson, a former head of the Council of Economic Advisers during the Clinton Administration who is now one of President Obama's economic advisors. “We haven't gone through this kind of recession in most of the lifetimes of the forecasters. By the way, the models that forecasters use are the same models that missed the fact that we were going to have this recession. So let's admit a lot of uncertainty here.”

SPX at 940.38 as this post is written

Friday, July 17, 2009

Roubini's Statement of Yesterday

After I wrote a post yesterday about Nouriel Roubini's latest thoughts on the economy going forward, he came out with a statement that elaborated upon his stance. It can be found at the following link:

As I pointed out yesterday, I find his views and forecasts to be important for a number of reasons, especially since he is considered among the "gloomiest" of professional forecasters over the last few years - and thus provides a good "negative" perspective among the professional economic forecasters.

I did find his latest statements interesting, for the following reasons:

-He paints a picture of rather tepid growth: "Roubini predicts a shallow recovery, with growth averaging about 1 percent over the next few years."

-He seems unique in acknowledging the possibility of a double-dip recession: "He also sees the possibility, he reiterated, of a "double-dip" recession toward the end of next year.

-His statements concerning the length of this recession are interesting (this from his formal statement): "If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two."

As seen in point #3, seen at

he provides some perspective on how our current period of economic weakness compares to the 1990-1991 and 2001 recessions.

As I have commented on previously, the length of this current economic weakness is outsized when compared on a historical basis. This outsized length is another argument supporting my theory that we are in a "new (economic) environment."

SPX at 938.62 as this post is written

Copyright 2009 by Ted Kavadas

Thursday, July 16, 2009

Financial Terms That Have Fallen Out of Use

I find it interesting that certain financial and economic terms seem to have completely fallen out of use, especially in the press.

Among these I would include "Quality of Earnings" and "Fiduciary Responsibility."

As well, "Moral Hazard" is still used but surprisingly much less than one would think. It seems to be on the way out.

What is the significance of these terms falling out of use?

I'm sure there are many other financial and economic terms that have fallen out of use. Let me know of any others that come to mind...

SPX at 940.49 as this post is written

Copyright 2009 by Ted Kavadas

Economic Forecast From The Federal Reserve

The recently released minutes of the June 23-24 FOMC meeting, found here:

stated the following: "The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010." Additionally, GDP for 2009 was forecast (using their term "Central Tendency") as -1.5% to -1.0%, and for 2010 as 2.1% to 3.3%. For 2011, 3.8% to 4.6% and "Longer Run" 2.5% to 2.7%. The Unemployment Rate is seen forecast as 9.8% to 10.1% in 2009, 9.5% to 9.8% in 2010, and 8.4% to 8.8% in 2011; with the "Longer Run" as 4.8 to 5.0%.

On another note, Nouriel Roubini is quoted at this link:

it says "The U.S. recession will last six more months and be followed by a “shallow” recovery, Nouriel Roubini said."

Additionally, "This is a great recession that could have ended up in a near depression,” Roubini, the New York University economist who predicted the credit crisis, said on Bloomberg Radio’s “Surveillance.” “We’re not out of the woods.”

I find Nouriel Roubini's comments, seen above, to be interesting as he has been seen as perhaps the "gloomiest" among the professional economists. Now, his (as well as RGE Monitor's) views don't seem too far from the consensus, albeit still below them.

The Federal Reserve forecast above, as well as Roubini's comments, seem to further confirm that there is a very widely held, tight (meaning there is little variance) consensus among public and private economists.

As stated previously on this blog, at this link here:

from a fundamental perspective, I don't think (based upon my analysis) that the economist consensus that the "worst is behind us" is correct, unfortunately. During periods of economic decline, it is relatively common to have periods of "relief" from decline - then a resumption of further decline. This is what I believe we are experiencing now, both in the economy as well as the stock market rally (which I have previously referred to as a "bear market rally.")

Furthermore, from a purely statistical standpoint, I stated this in a July 1 blog post (seen in italics below):

"This conclusion, that "the worst may soon be over" and that recovery will quickly follow, seems to be extremely widely held among forecasters, as documented elsewhere (such as the June 19 post) on this blog.

I find this "widely held" facet to be fascinating in and among itself. Economic forecasts since 2007 have proven very inaccurate, and now we have an overwhelming consensus among public and private forecasters of recovery and slow growth going forward. From a purely statistical standpoint, what are the odds of such an overwhelming consensus proving accurate going forward, given that forecasts of 2007 - early 2009 proved so inaccurate?

Another issue is why is there such a consensus? Are all the forecasters using the same models, or is there such uncertainty that a "safety in numbers" mentality has taken hold?

SPX at 939.54 as this post is written

Copyright 2009 by Ted Kavadas

Wednesday, July 15, 2009

Recent ECRI Statements

In this post I would like to highlight ECRI and some of its recent statements, after which I will make comments.

From a recent (7/14/09) Newsweek story, quoting ECRI, found here:

"From our vantage point, every week and every month our call is getting stronger, not weaker, including over the last few weeks," says Achuthan. "The recession is ending somewhere this summer."

I found the following phrase on this ECRI site link to be interesting:

"The emphasis is on the development of leading indexes that hold up in spite of structural changes..."

And finally, this is interesting from the ECRI website:

"In fact, over the last 75 years, growth rate cycle upturns during every recession were followed zero to four months later by the end of the recession itself. No exceptions."

"Actually, there’s been only one solitary exception in the data we have examined, which go back well over a century. This was the growth rate cycle upturn of 1930-31, which gave way to a renewed downturn. But, when this growth rate cycle upturn was beginning at the end of 1930, USLLI growth was turning back down, warning that the firming in growth would soon be reversed, effectively opening the door to depression. That’s not the case today."


My comments: There is a lot I could say regarding my views on ECRI's methodologies and current views.

For now, I will say that as previously stated on this blog, I believe (and my analysis indicates) that we are in a "new (economic) environment." Whether ECRI's methodologies yield the correct interpretation of our current economic environment will of course play out with time. This is something that I plan on watching closely...

As an aside, I've been wondering about the following...If a (U.S.) central banker or other main policymaker were to wholeheartedly believe in the methods and long-term predictive ability of ECRI's methodology, wouldn't it make sense, especially under a very stressful, uncertain economic situation, to try to craft policy in line with that which would promote strong ECRI leading (WLI & USLLI) growth - under the assumption that economic recovery would follow?

SPX at 927.66 as this post is written

Copyright 2009 by Ted Kavadas

"First Time Of Adversity" Effect

There was a recent article in The Wall Street Journal titled "Detroit's Food Banks Strain to Serve Middle Class":

One aspect that caught my attention was the mention of people who are receiving aid for the first time. In fact, the story points out that some people who used to be donors to the pantry are now requesting assistance.

During this period of economic weakness, this "first time of adversity" effect seems especially commonplace. It can take many forms, from those who are being laid off for the first time, to those who are receiving food assistance for the first time, to those who are unable to make payments for the first time, etc.

This "first time of adversity" effect is also very prevalent in many aspects of business as well. For example, I recently heard of a retail store that has been in the same location for 30 years, and now has decided not to renew its lease.

The prevalence of this "first time of adversity" effect supports my theory, mentioned previously on this blog, that we are in a "new (economic) environment." Many people as well as businesses that have never before encountered difficulties are now (unfortunately) doing so.

In my opinion this "first time of adversity" effect is very important information; and the "new (economic) environment" theory/reality is of tremendous importance.

SPX at 922.25 as this post is written

Copyright 2009 by Ted Kavadas

Tuesday, July 14, 2009

Various Characteristics of Today's Economy

I would like to mention an article in today's Wall Street Journal, titled "The Economy Is Even Worse Than You Think."

I found the article does a good job of highlighting certain characteristics of this period of economic weakness.

These characteristics reinforce a theme mentioned previously on this blog, that we are in a "new (economic) environment."

SPX at 901.06 as this post is written

Copyright 2009 by Ted Kavadas

Monday, July 13, 2009

Comparing The Great Depression To Our Current Economic Situation

In previous posts I have spoken of the comparisons between our current period of economic weakness and that of The Great Depression. Those posts were written on June 22 and June 15.

I would like to reiterate my view, seen in the above links, that although our current period of economic weakness does have similarities to that of The Great Depression, there are notable differences as well. To believe that both situations are very similar, and by acting accordingly, imperils our economic situation.

The reason I feel as if I need to reiterate these views is twofold. First, people in general seem fixated on the comparison. Second, two of perhaps the most influential economists of today (Paul Krugman and Christina Romer) recently had articles, found in the below links, in which they discuss our current situation in context of The Great Depression:

"That '30's Show" by Paul Krugman

"The Lessons of 1937" by Christina Romer

SPX at 879.34 as this post is written

Copyright 2009 by Ted Kavadas

Some Corporate Views On The Economy

Here are some recent articles in which corporations opine about the economy. In general, in these articles it is seen that these corporations agree with the current economist consensus that "the worst is over":

U.S. Economy: Manufacturing Shrank Least Since August (Update1)

"Car Makers See End to Sales Slide"

"FedEx Sees Signs of a Turnaround"

SPX at 879.13 as this post is written

Copyright 2009 by Ted Kavadas

Sunday, July 12, 2009

Warren Buffett's July 9 Interviews

I Warren Buffett's July 9th interview on CNBC

to be interesting, especially when he says:

"And it's very important the economy gets, comes back. It will come back. Government has less influence on how fast that happens than a lot of people would like to hope that it would. But government is a player, but it has no silver bullet. The economy will come back, though."

Here's another interview from July 9:

In this interview I found this comment, where he is discussing the economy, to be interesting:

"I want to emphasize we’re going to come out of this better than ever. I mean, the best days of America, by far, lay ahead. But not next week or next month. I don’t know exactly when we’ll come out. But we will come out big time."

It would have been very interesting for him to have elaborated upon the above statement. For instance, what factor(s) does he think will be the main economic drivers?

SPX at 879.13 as this post is written

Copyright 2009 by Ted Kavadas

More Latest Thoughts from Economists

I've recently run across three other economist forecasting items I would like to post. While I don't mean to overemphasize these forecasts, I do think they are very significant on a number of fronts; and as such they deserve close monitoring and continual analysis and commentary:

First, another economist forecast survey that seems generally in line with the apparent economic forecast consensus, which I remarked upon in the last post:

Second, from the RGE Monitor – U.S. Economic Outlook: Q2 2009 Update:

"We forecast negative real GDP growth in Q2 2009 and Q3 2009, and for real GDP to remain flat in Q4. After the sharp contraction in economic activity in 2009, growth will reenter positive territory only in 2010, and then at a very sluggish rate, well below potential."

Third, from the CalculatedRisk blog; not a economic/economist forecast, per se, but some thoughts as to what 2009-2010 may hold:

"I think the real GDP growth will turn slightly positive sometime in the 2nd half of this year, but my guess is 2010 will be barely positive, with the unemployment rate rising for most of 2010."

SPX at 879.13 as this post is written

Copyright 2009 by Ted Kavadas

Friday, July 10, 2009

Some Latest Thoughts from Economists

The latest Wall Street Journal economist forecast survey says "the median forecast sees the end of the recession next month."

Meanwhile, I would like to point out this quote from Christina Romer, from a June 28 article, as she mentions the prospects of a "V" recovery:

“I still hold out hope it will be a V-shaped recovery. It might not be the most likely scenario but it is not as unlikely as many people think."

SPX at 879.75 as this post is written

Copyright 2009 by Ted Kavadas

misc. note

Just a couple of quick notes...

First, as you might have noticed along the right side of the page, there is now an email sign-up powered by Feedburner/Google. This allows one to sign up to receive, via email, each day's post content.

Second, above this email signup, is a device from Site Meter.

My Thoughts on More Stimulus, Part IV

This is the fourth and last post (for now) with regard to my thoughts on the idea of further stimulus.

At this juncture, one is led to wonder "what if more stimulus is enacted?" What may be its potential size and composition? As seen in the following video interview of Christina Romer:

her view on the matter of additional stimulus is that "We'll do whatever it takes."

I found the "We'll do whatever it takes" phrase to be very interesting. First, do we, as a nation, know "what it will take?"

Second, this "We'll do whatever it takes" phrase naturally begs the question as to what, if any, limit there may be on the size of any additional stimulus efforts. Even if there is no presumable size constraint on additional stimulus efforts from a legislative perspective, might there be constraints imposed by such things as market reaction to additional indebtedness? As well, there are many other issues, of a complex nature, that would accompany further large-scale stimulus efforts.

Perhaps the most apropos way to end this series of posts on further stimulus is to say "Stay tuned." (lol)

SPX at 878.38 as this post is written

Copyright 2009 by Ted Kavadas

Thursday, July 9, 2009

My Thoughts on More Stimulus, Part III

This post will focus on the $787 Billion stimulus.

As mentioned in the last post, there are varying perceptions as to its effect-to-date.

I would like to go back to earlier this year, before the stimulus was enacted. I would like to briefly discuss the plan at that point, as it, as well as the analysis that accompanied it, ostensibly represented (at the time) our national understanding of the economic situation, as well as the solution.

A report was published on 1/9/09 titled "Job Impact of the American Recovery and Reinvestment Plan," commonly called the "Romer and Bernstein" report. At the time, I found the report to be very unconvincing with regard to support of the proposed stimulus action. The analysis, in my opinion, was very tenuous.

Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted. Perhaps the biggest problem is that it is relatively slow to disburse funds. If it were "front-loaded" it would be delivering funds at a much greater pace - and presumably be more helpful to the economy now, not later.

There is another issue that this slow disbursement causes - that of measuring the effectiveness of the stimulus. At this point, the stimulus is plainly lacking in effectiveness vs. plan, as measured by the unemployment rate. However, some supporters of the stimulus are quick to point out that only a fraction of the funds have been disbursed; therefore, it is too early to assess the viability of the stimulus plan, as its benefits have largely yet to be realized. Thus, a question forms: is the stimulus ineffective, or will it just take longer to attain the benefits? This question creates a conundrum in the following sense: if the stimulus is ineffective, presumably (according to stimulus proponents) we should then quickly do more stimulus; however, if the existing $787 Billion stimulus has yet to largely "kick in", then it would be premature to do additional stimulus. Another conundrum can then be seen: if we now assume that the $787 billion stimulus will work with time, but are later proven wrong, from a pro-stimulus viewpoint we will have wasted both time, and the ability to proactively stem further economic decline because we have passed on the current opportunity to do additional stimulus. Thus, as one can see, this timing of the benefit issue has created a difficult and tricky situation, especially for those who are stimulus proponents.

Other problems I have found with the $787 billion stimulus (again, assuming the stimulus should be done) is that much of the theory and practicality of the stimulus is flawed; and the "pork" is very objectionable in both size and (lack of) quality.

Ostensibly, this $787 Billion stimulus represented a "best effort" attempt to improve our economic situation. If one is of the opinion it is not working, or not working as planned, is it not working because it is poorly designed, or because the inherent concept of stimulus holds little or no validity?

For those that have not seen it, I wrote an article titled "Intervention's Potential Blind Spots" as I believe that various facets of intervention (including stimulus efforts) deserve further attention.

SPX at 884.88 as this post is written

Copyright 2009 by Ted Kavadas

Wednesday, July 8, 2009

My Thoughts On More Stimulus, Part II

Perhaps one of the first questions that should be asked with regard to our current economic difficulties is "Do we Understand the Problem?" I discussed this concept in the article "President Obama's Greatest Challenge" (listed here as the fourth article):

Do we understand the problem? I will leave that question unanswered, for now. However, some aspects to consider:

  1. We seem to continually underestimate the complexity and/or severity of our economic situation in that each stimulus is billed as the "solution" to our problems, yet each fails to stem further economic weakness. This problem has occurred with the $150 billion tax rebate stimulus in 2008; TARP in 2008, and now, based upon results vs. plan (to date), The American Recovery and Reinvestment Act of 2009.
  2. As mentioned in yesterday's post, "An Interesting Chart on Job Losses," the length and severity of this purported recession are outsized, on a historical basis, despite the very large aggregate intervention steps taken.
  3. There is widely varying conclusions as to the effect of the $787 Billion American Recovery and Reinvestment Act. As mentioned in this Wall Street Journal article (which does a good job of summarizing the current calls for more stimulus): "Depending on your perspective, the stimulus plan:     a: Isn't working. b: Is preventing unemployment from being even worse, or c: Hasn't had enough time to really kick in yet."
  4. The rather disconcerting reality that despite official large-scale interventions (including stimulus plans) since at least mid-2007, the economy is, at best, not getting any worse. But as mentioned in the following Wall Street Journal editorial, "The real question is how strong and sustained any expansion will be. If the "stimulus" were working as advertised, it ought to be very strong."
  5. Add to this list an array of disturbing economic statistics and other "outlier" behavior that I have previously discussed.
As listed above, as well as for other reasons, there is much to consider when one attempts to answer the question "Do we understand the problem?"

Part III to follow...

SPX at 880.38 as this post is written

Copyright 2009 by Ted Kavadas

My Thoughts on More Stimulus, Part I

Recently, there have been calls by some for additional stimulus.

As I believe this issue deserves significant analysis and discussion, the next few posts will address various facets of this issue.

I would like to start addressing the issue by calling attention to an article I wrote in January. It is titled "My Overall Thoughts on the Stimulus Measures, Bailouts and Interventions."

I wrote that article based, in part, on a series of proprietary models I had developed to analyze our economic situation. Sadly, our economic situation appears to be tracking "like a bloodhound" what I referred to in that article. The implications of such are enormous.

Now onto Part II...


As I have stated previously, I would like readers of this blog to be cognizant of the site disclaimer

SPX at 881.03 as this post is written

Copyright 2009 by Ted Kavadas

misc. note - email signup

Just a quick note. I have developed, for those interested, the ability to sign up for each day's content to be sent via email.

This email signup is found along the right-hand side of the home page, near the top

SPX at 882.52 as this post is written

Tuesday, July 7, 2009

An Interesting Chart on Job Losses

I ran across the following chart from, and found it interesting:

As one can see, the current degree of job losses is rather atypical.

I would also like to highlight another issue as well. From a historical perspective, this (purported) recession, that the NBER has classified as having started in December 2007, is getting "long in the tooth" from a historical perspective. The following blog post does a good job of summarizing how long recessions typically last:

As one can see, from a historical standpoint the severity of the job losses, as well as the length of this (purported) recession are atypical. Both have persevered in the face of very large amounts of intervention, including stimulus efforts.

As I have written about previously, the above is yet more evidence that we may well be in a "new (economic) environment" - with the associated implications...

SPX at 883.05 as this post is written

Copyright 2009 by Ted Kavadas

America's Economic Future

A little while ago I wrote an article titled, "America's Economic Future - 'Greenfield' or 'Brownfield'?"

I would like to make a couple of additional comments with regard to this article.

First, in my opinion the topic of America's Economic Future is not one that receives adequate attention. At this point, the topic is of the utmost importance.

Furthermore, the 'greenfield' vs. 'brownfield' classification is not well understood. The underlying dynamics are exceedingly complex; yet if we are to have Sustainable Prosperity it is imperative that we enact policies and actions in line with the 'greenfield' concept.

Second, there are no sirens or alarms that sound when a country or region slips from 'greenfield' to 'brownfield.' It often is a process that can go undetected. Yet, once a 'brownfield' condition is attained, it can be difficult, if not very so, to reverse. As mentioned in the article, the 'greenfield' vs. 'brownfield' should not be viewed in terms of one country's (or region's) condition, but in terms of one country's condition relative to that of other countries, especially those that might be competitors.

SPX at 888.98 as this post is written

Copyright 2009 by Ted Kavadas

The Importance of Scenario Planning to Businesses

The Wall Street Journal ran a story yesterday titled, "Pendulum is Swinging Back on 'Scenario Planning."  Perhaps most interesting is the history of scenario planning.

As I have written about previously in the June 18 post,  those who own or manage a business will likely continue to find themselves in a very challenging economic and business environment. As I've discussed in this article, there are quite a few things that businesses can do to mitigate and/or avoid the potential damage this economic weakness can cause.

Of course, it is unwise to generalize advice for all businesses, especially in an economic environment like that we currently have. However, scenario planning (and the associated modeling) can be a very valuable tool in helping businesses understand their specific situation (options, vulnerabilities, opportunities, etc) over a range of economic scenarios. It is paramount in effective business planning.

At this point, based upon the statistics I have seen, it would appear as if businesses in general are underutilizing scenario planning. I think this is very unfortunate, as it exposes businesses to risks and uncertainty that may be avoidable.

Should this economy continue to deteriorate, as I have discussed extensively on this blog, businesses could face a very difficult and tricky environment that may well be unpredictable. In such an unpredictable environment, scenario planning increases in value.

SPX at 892.56 as this post is written

Copyright 2009 by Ted Kavadas

Monday, July 6, 2009

Article of Note on the Foreclosure Crisis

I found this article, found in The Wall Street Journal, p A13, July 3-5, to be of interest. It is titled “New Evidence on the Foreclosure Crisis.”

While I can’t verify his analysis, the article is worth reading.

I don’t agree with all of his conclusions, especially his remark that housing prices are likely to stop declining soon.

However, his analysis and other conclusions are important in that they further support the idea that many of the policy efforts currently enacted to mitigate the foreclosure problem may be misdirected.

It is important to remember that much of the total intervention effort is aimed toward averting further weakness in residential real estate.

SPX at 888.65 as this post is written

Copyright 2009 by Ted Kavadas

Another Interesting New Index

I came across a new index that seems interesting.

It is called the Dow Jones Economic Sentiment Indicator. Details can be found here:

The only comment I want to make on it at this time is that I find it of interest as it employs a different methodology. I plan on monitoring this index.

SPX at 892.45 as this post is written

Copyright 2009 by Ted Kavadas

Friday, July 3, 2009

A Story Illustrating Sustainable Prosperity

The Wall Street Journal had an article from June 20 called "Delta Gets The Blues Again."  This article illustrates the concept of Sustainable Prosperity for one area.

SPX at 896.42 as this post is written

Thursday, July 2, 2009

Driving Around The Chicago Area...

Two things that seem especially noticeable when driving around the Chicago metro area are the amount of retail vacancies, and the poor physical conditions of the roads. Both are very visible testaments to this period of economic hardship.

Of course, it varies by location, but to generalize there is a lot of vacant retail space. It is growing more common for entire segments of malls to be vacant. Perhaps even more ominous is that for many existing retail locations and restaurants, traffic seems oddly low. For those stores and restaurants with such low traffic, one wonders how long they can stay operational.

With regard to the roadways, many are in drastic need of repair, with numerous potholes and other abnormalities including what I call "craters" (a vastly oversized pothole). It is not uncommon to find displaced chunks of concrete strewn on roadways. What is especially disconcerting is that historically, potholes would primarily form in the wintertime; now, many seem to be forming throughout the summer as well. Needless to say it will take a fair amount of time, money and effort to fix this segment of the area's infrastructure.

I was tempted to take pictures of some of the vacant stores and dilapidated roadways mentioned above, but I am sure that others have seen much of the same regardless of where they live...

SPX at 896.42 as this post is written

James Hamilton's Comment on Bernanke

I found this blog post from James Hamilton to be interesting:

especially when he says this:

"But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal."

I like to think of the role of the Fed Chairman in a different light, especially with our current economic situation. I believe that perhaps the two most pertinent questions are:

1. Does Ben Bernanke have a full understanding of the economic situation we find ourselves in?

2. What can (and should) he do about it? Especially considering the concepts of Sustainable Prosperity and America's Economic Future? (both of which have been extensively referenced on this blog)

SPX at 900.4 as this post is written

Wednesday, July 1, 2009

Another "The Worst May Soon Be Over" Forecast

The following story recently (June 25) ran in The Wall Street Journal:

"OECD Says The Worst May Soon Be Over For The Global Economy"

This conclusion, that "the worst may soon be over" and that recovery will quickly follow, seems to be extremely widely held among forecasters, as documented elsewhere (such as the June 19 post) on this blog.

I find this "widely held" facet to be fascinating in and among itself. Economic forecasts since 2007 have proven very inaccurate, and now we have an overwhelming consensus among public and private forecasters of recovery and slow growth going forward. From a purely statistical standpoint, what are the odds of such an overwhelming consensus proving accurate going forward, given that forecasts of 2007 - early 2009 proved so inaccurate?

Another issue is why is there such a consensus? Are all the forecasters using the same models, or is there such uncertainty that a "safety in numbers" mentality has taken hold?

SPX at 930.20 as this post is written