Wednesday, December 30, 2009

Sustainable Prosperity

One of the terms that I frequently mention is "Sustainable Prosperity." I think the term and its meaning have tremendous significance to our economic future at this juncture.

Providing an exact definition for the term is difficult due to the complexity of the underlying concepts.

"Sustainable" can be defined in terms of time, as well as continuity. If a posititive economic trend exists for a few years, can it be termed 'sustainable'? Case in point was the housing bubble. Most would say it lasted between 5 to 10 years. The economy certainly benefitted from it. However, the benefit was not sustainable. In fact, in its wake, it has caused an immense amount of damage and poses a tremendous ongoing threat.

From a continuity standpoint, in order for growth to be sustainable it has to be resistant to severe economic setbacks. Of course, history has shown that recessions, panics, and the occasional depressions are inherent in the economic cycle. However, if economic growth is sustainable in nature it should over the course of time be able to recover "lost ground" and attain new highs.

The concept of "Prosperity" is somewhat difficult to define as well. I like to think of it as being multifaceted and having deep "breadth." Of particular concern should be enrichment that is narrowly achieved, i.e. a large amount of the nation's prosperity concentrated in the hands of a few. This is a concern from both a societal and economic standpoint. Strong, vibrant, and sustainable economies have widespread prosperity.

Other aspects of "Prosperity" is the amount and composition of such. If median household income is growing at a rate greater than inflation, can that be termed prosperity? Can prosperity be defined in GDP growth? Or is prosperity a more general term that encompasses such concepts as standard of living, the ability for the masses to have affordable access to healthcare, higher education, etc.?

As aforementioned, I believe that the concept of Sustainable Prosperity is more important now than ever before. If one assumes, as per the current economic consensus, that we are experiencing economic recovery, I think it would behoove us to constantly assess whether we are experiencing true "Sustainable Prosperity" or something that might only resemble such.

SPX at 1123.89 as this post is written

Tuesday, December 29, 2009

An Interesting Letter Regarding Economic Systems

Below is an excerpt from a reader's letter found in The University of Chicago Magazine, Nov-Dec 2009 p. 10-11. It is from Frank R. Tangherlini. I found the ideas he presents to be interesting and notable:

"Second was Michael Fitzgerald’s article on the Chicago School and the experiences as a youngster during the Depression of the Thirties have left an imprint on my thinking about economics, which is why I noticed a glaring omission in the exchanges and comments of these distinguished economists: their failure to empathize with the hardships experienced by average folks because of the severe economic downturn, such as described in the article by Lydialyle Gibson, “On the Line.”

There have been millions of workers who have been laid off in the past few years, who are now living in straightened circumstances, not because of poor performance on their part, but rather because of the poor performance of the market system. Indeed, one reads in Gibson’s article, “‘It’s less and less uncommon,’ says Kathy Donahue, Catholic Charities’ director of programs, ‘to find working people among those in line for a hot meal.’” The basic problem is that the system of economics that informs the thinking of many economists tends to maximize the wealth of a relatively small number of people, without imposing the constraint of requiring the simultaneous well-being of the average citizen, including a substantial reduction and eventual elimination of those below the poverty level, as well as a significant reduction of those in prison. This social constraint is what government is intended to bring about, i.e., “to provide for the general welfare,” as stated in the Preamble to the Constitution. Not placing sufficient emphasis on this fundamental injunction is the basic flaw in the Chicago School of Economics and our present system of capitalism more generally. Unless one admits this and redesigns one’s approach to economics, this tragic situation will reoccur over and over again, eventually, alas, bringing down our nation.

Frank R. Tangherlini, SM’52
San Diego


SPX at 1127.78 as this post is written

Larry Summers On Growth - March 13 2009 Speech

Here is one more excerpt from Larry Summers' speech of March 13. I find this excerpt to be of particular significance with regard to the concept of Sustainable Prosperity:

"Of fundamental importance is ensuring that we do not exchange a painful recession for another unsustainable expansion. That would not only be irresponsible – it would be counterproductive. We have seen what happens when we pursue policies that produce short-term, instead of durable and sustainable growth."

SPX at 1127.78 as this post is written

Monday, December 28, 2009

Fannie Mae And Freddie Mac Developments Of December 24

For those who may have missed it, there was a notable development on December 24 concerning Fannie Mae and Freddie Mac. Here is The Wall Street Journal link and the Treasury Dept link:

Basically the government announced plans to cover an unlimited amount of losses at both companies.

It is yet another testament to the extent of intervention in the real estate markets.

I think this "blank check" approach carries many risks. A while back I wrote an article ("Business Planning Principles Applied to the Stimulus / Intervention Efforts") about how interventions could be effectively managed. The article is not intended to condone or support the concept of interventions. However, there should be a regimented approach to their administration. These interventions carry a tremendous amount of risk, aside from the substantial amounts of money being expended.

SPX at 1126.48 as this post is written

Wednesday, December 23, 2009

Article On Detroit Unemployment

Below is an article from The Detroit News of December 16 titled "Nearly half of Detroit's workers are unemployed".

Among other things, Detroit's economic situation seems to refute the theory, with which I vehemently disagree, that we as a nation do not "need" manufacturing in order to be successful.

SPX at 1117.83 as this post is written

Larry Summers On Bubbles - March 13 2009 Speech

As I, as well as others, have been frequently mentioning bubbles, I thought it would be interesting to post a few comments (excerpts) that Larry Summers made concerning their effects during his March 13, 2009 speech. I found these comments to be very interesting, especially in light of our current economic condition and prospects for Sustainable Prosperity.

Here is a link to that speech, which was made to The Brookings Institution:

"Our single most important priority is bringing about economic recovery and ensuring that the next economic expansion, unlike it’s predecessors, is fundamentally sound and not driven by financial excess.

This is essential. Without robust and sustained economic expansion, we will not achieve any other national goal. We will not be able to project strength globally or reduce poverty locally. We will not be able to expand access to higher education or affordable health care. We will not be able to raise incomes for middle class families or create opportunities for new small businesses to thrive."


"We have seen housing prices reach unsustainably high levels and credit spreads reach unsustainably low levels in the middle of this decade. And we saw bubbles in technology in the late 1990s.

Bubble driven economic growth is problematic because of disruption and dislocation – affecting those who took part in the bubble’s excesses and those who did not. And, it is not entirely healthy even while it lasts."


"If growth in the coming years is not to be driven by asset price inflation-induced consumption, other engines of growth must be identified. These forms of growth should be sustainable and shared by the majority of American households."

SPX at 1117.83 as this post is written

Tuesday, December 22, 2009

Total Household Net Worth As Percent Of GDP

The following chart is from the CalculatedRisk Blog on December 13

and depicts Total Household Net Worth as a Percent of GDP. The underlying data is from the Federal Reserve Flow of Funds 3Q 2009 report.

I am posting it here for reference purposes, and I might comment upon it in the future. I find it to be a very interesting chart.

SPX at 1116.34 as this post is written

Stiglitz On 2010

Here is a story from yesterday on comments by Joseph Stiglitz about his views on 2010 economic performance:

From the article: "Nobel Prize-winning economist Joseph Stiglitz warned there's a "significant" chance the U.S. economy will contract in the second half of next year..."

I find Stiglitz's view significant because it is in marked contrast to that of the 2010 economic consensus among mainstream economists.

SPX at 1117.67 as this post is written

Monday, December 21, 2009

Banker Pay

Recently, both President Obama and Treasury Secretary Geithner have bemoaned the banker pay issue.

Here is a Wall Street Journal story of December 14 containing President Obama's comments on the issue, which contains his "fat cat" quote:

Here is a Bloomberg article of December 5 that mentions Treasury Secretary Geithner's comments:

What I find notable about President Obama's and Treasury Secretary Geithner's utterances on the subject is that of all the people that could potentially change the situation regarding banker pay, these two are probably most foremost. For them to simply bemoan the situation, when they are the most empowered to act upon rectifying it, seems odd.

SPX at 1112.10 as this post is written

"Too Big To Fail"

The term "Too Big To Fail" is heard frequently.

However, for all of the talk regarding its danger, very little if anything has been done to rectify the condition.

As seen in The Wall Street Journal of December 16, p C18, "The top four banks have combined assets of $7.4 trillion, or 56% of the U.S. banking sector's total. In 2000, the top four's $2 trillion of assets accounted for 35% of the total."

"Too Big To Fail" has many adverse consequences. Perhaps the most serious is that it potentially fuels moral hazard.

SPX at 1102.47 as this post is written

Sunday, December 20, 2009

2010 S&P500 Earnings Projections

Tommorrow's Barron's cover story has forecasts provided by 12 strategists and investment managers. I would like to highlight their S&P500 earnings forecasts for 2010.

As seen on page 28, the average of the 12 stated forecasts is $75.75.

From what I have seen, this $75 level is very common among forecasters, and as such seems like the predominant forecast for "operating earnings."

SPX at 1102.47 as this post is written

Two Notable Ben Bernanke Articles

Here are two articles on Ben Bernanke that I found interesting. There is much I could comment upon in each. I disagree or otherwise have differing opinions on various statements in these articles; however, I do feel the stories are valuable as they present an in-depth look at Ben Bernanke from a historical and philosophical perspective.

The first is the Time Magazine "Person of the Year" story of December 16:,28804,1946375_1947251_1947520-3,00.html

The second is titled "Bernanke's Philospher" and is found in the December 2009

SPX at 1102.47 as this post is written

Jim Rogers And Ron Paul Video Interviews

Here are two interviews that I found interesting. Although I don't necessarily agree with all of the views voiced by Jim Rogers and Ron Paul, I think both interviews are well worth watching.

Here is the Jim Rogers interview (length 5:20), titled "What Recovery? America's Problems 'Getting Worse, Not Better,' Jim Rogers Says" on Yahoo Tech Ticker December 10, 2009:'s-problems-%22getting-worse-not-better%22-jim-rogers-says-388223.html?tickers=SKF,XLF,FAS,FAZ,%5EDJI,%5EGSPC,UUP

Here is the link to the Ron Paul interview (length of 8:56) of December 16, 2009 in which he responds to Ben Bernanke being named Time Magazine's Person of the Year:

SPX at 1102.47 as this post is written

Friday, December 18, 2009

Wall Street Journal Article On "Strategic Defaults"

Yesterday The Wall Street Journal had an article titled "Debtor's Dilemma: Pay the Mortgage or Walk Away." Here is the link:

The article has a variety of statistics and views on the issue of "strategic defaults." As well, it discusses the legality and consequences of such.

I have previously written numerous blog posts on the issue of "strategic defaults." (Those posts can be found under the "Real Estate" category listed along the right side of the home page). "Strategic defaults" is an exceedingly important concept for a variety of reasons. Like many economic issues, it is a very complex topic dependent upon many factors. I find the topic fascinating.

It should be very interesting to see the course of "strategic defaults" as time progresses.

SPX at 1096.08 as this post is written

Thursday, December 17, 2009

US Dollar and S&P500 Comments

Here are two charts that I find notable.

The first is the daily chart of the US Dollar. I have added the 50-day moving average. As one can see, the trend seems to be "up." This increase, if sustained, will pressure the US Dollar carry trade and that would likely have an outsized negative impact on various markets:

chart courtesy of

The second daily chart is of the S&P500. The trading range from roughly mid-November until now has created a lessening of the Bollinger Bands, as shown on the chart. The width of these Bollinger Bands is seen below. As those familiar with Technical Analysis are aware, this lessening can often signal that a large directional move lies ahead in the price of the security:

chart courtesy of

SPX at 1098.94 as this post is written

Wednesday, December 16, 2009

Article on Asset Price Bubbles

In my opinion, the existence of asset price bubbles is of paramount importance.

I have recently written a few posts on the subject. I would now like to comment on a Wall Street Journal article from Monday titled "Economists Warn of Asset-Price Bubbles." Here is the link:

First, I would like to reiterate that I believe there are many bubbles in existence right now. This is in contrast to the commonly held theory that bubbles may form in the future if low interest rates and other stimulative measures are maintained.

Second, from the article, I completely disagree with the following excerpt with regards to "don't appear to be taking any chances":

"Although global growth and financial markets are rebounding more quickly than was expected last summer, the Fed and the European Central Bank don't appear to be taking any chances."

I base my disagreement on several factors. In my previous writings I have extensively written about the potential perilousness of interventions, moral hazard issues, asset bubbles, etc.

Third, I strongly disagree with this excerpt:

"The usual warning sign of new bubbles, rising inflation..."

Assuming that "inflation" refers to inflation as measured by CPI, I disagree that rising inflation is definitely one, if not the key, warning signs of new bubbles. Without writing extensively about this, I would point out that two of the largest bubbles of the recent past (as well as from a long-term historical context) were created in periods of low (CPI) inflation: the housing bubble and the surrealisticly absurd internet stock "hyperbubble."

I will be commenting further upon bubbles as time progresses...

SPX at 1107.93 as this post is written

Tuesday, December 15, 2009

The Federal Reserve's Role

In his December 7 speech, Ben Bernanke made the following comments with regard to the role of The Federal Reserve. For now, I will post an excerpt I found notable, and may comment upon it at a later date:

"In all of these efforts, our objective has not been to support specific financial institutions or markets for their own sake. Rather, recognizing that a healthy economy requires well-functioning financial markets, we have moved always with the single aim of promoting economic recovery and economic opportunity. In that respect, our means and goals have been fully consistent with the traditional functions of a central bank and with the mandate given to the Federal Reserve by the Congress to promote price stability and maximum employment."

SPX at 1113.69 as this post is written

Monday, December 14, 2009

A Comment On Ben Bernanke's December 7 Speech

I would like to briefly comment on Ben Bernanke's December 7 speech, that can be found at this link:

Here is one excerpt that I found notable:

"Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year--sufficient to bring down the unemployment rate, but at a pace slower than we would like."

I found this notable as he is reiterating his opinion that economic forecasting is inherently uncertain. In his May 22 speech, which I commented upon in a June 17 post, he had spoken at length on this issue.

I think that this inherent uncertainty in economic forecasting is a very important point. I have written about the topic, and have extensively detailed how accurate economic forecasting, especially since 2007 has proven incredibly difficult. This issue doesn't seem to gather much attention. However, among other issues, it seems as if it should call into question the potential accuracy of current economic forecasts.

SPX at 1112.25 as this post is written

Thursday, December 3, 2009

S&P500 Trendline And 50% Retracement

The following chart shows a Weekly Log Chart of the S&P500 from 2007. I have drawn a trendline from the October 2007 highs as well as a retracement indicator from the March 2009 bottom of ~666. (Please note that the trendline and retracement both might be off by a "hair," but this is relatively immaterial to the main message)

Chart courtesy of

The trendline is significant as it represents the downtrend line from the October 2007 highs. As one can see, the current S&P500 price of 1110 is very close to that downtrend line.

As well, the current price is very close to the 50% retracement of the move from the S&P500 October 2007 high to the March 2009 low. This 50% retracement is shown in gray and is at 1121.44.

SPX at 1109.58 as this post is written

When Might I Become "Bullish"?

In this post I would like to respond to a question that was raised in response to the final post (November 6) of my "Danger In The Markets?" series.

The question raised was "What would have to occur before you considered moving bullish?"

I will answer this question in the context of the general stock market (S&P500). As readers of this blog know, I have repeatedly expressed doubts as to the sustainability of this stock market rally. I continue to view it as a bear market rally, albeit a strong one. If this indeed proves to be a bear market rally, by definition it will go below the 666 March low. There are a variety of technical, fundamental, general economic, and "behavioral" characteristics of this stock market rally that cause me to draw such conclusions.

Additionally, as I have previously stated there are a lot of factors and conditions in various other markets (outside the stock market) that cause me to be very concerned. Posts explaining these concerns can be found under the "Investor" category on the right-hand side of the home page.

Another concern that I have is that, as stated in yesterday's post, I view many asset classes as being in bubbles now. This is a very serious condition. Investing in bubbles can be extremely profitable on the way up; however, for the "long" investor they can produce huge losses if one doesn't time the exit appropriately. While I view some bubbles as being bigger than others, if the markets enter a "general liquidation" phase like they did in 2008 and most asset classes prove to be tightly correlated, as they were in 2008's decline, there would be widespread severe losses throughout most asset classes.

A few years ago I ran across a quote that I found most valuable. In essence, it said that the last place you want to invest is in an asset class whose bubble has popped.

To conclude, before I would change my overall stock market stance to "bullish," I would want to see an overall market environment considerably different than that currently existent. While I can't exactly specify the parameters of this change, because so many factors are involved, I think a change to "bullishness" will be plain to see, if not explicitly stated, in the blog posts.

One other thought...bear markets can last for years and can make many turns. Assuming we are in a bear market, the ultimate low could be years away.

SPX at 1111.62 as this post is written

Wednesday, December 2, 2009


from the November 3 FOMC Minutes:

"Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks."

from the book Meltdown, p8, by Thomas E. Woods, Jr.:

"The Fed's policy of intervening in the economy to push interest rates lower than the market would have set them was the single greatest contributor to the crisis that continues to unfold before us. Making cheap credit available for the asking does encourage excessive leverage, speculation, and indebtedness."


As one can see from the above two quotes, there is a considerable difference in philosophies regarding the probability of prolonged low interest rates in creating asset bubbles. The top quote is from the November 3 Federal Open Market Committee Minutes, while the quote below it from Tom Woods Jr. and seems to offer a concise view of the Austrian philosophy on the low interest rate matter.

The issue of whether the ultra-low interest rate environment that has been put in place has fomented asset bubbles is a critical one. For background on this matter, the November 30 BusinessWeek had a story titled "Is the Fed Creating New Bubbles?" and can be found at this link:

My opinion on the matter is that there are currently multiple bubbles that have formed across various asset classes. They are of various sizes and "vintages." Asset bubbles that burst can of course cause tremendous economic damage. Perhaps the best example of this is "bursting" of the housing bubble.

Some bubbles are harder to spot than others. Bubbles, almost by definition, include irrational behavior, and therefore can be hard to predict both in their formation as well as their ultimate size. There are many factors that can come into play in order to cause bubbles.

I have addressed my thoughts as to whether Gold is in a bubble in a November 20 post. Another question, that is critical to both investors and the economy, is whether U.S. Treasury securities, especially the 10 Year, is in a bubble. I believe the answer to this is "yes." The reasoning for my opinion is rather lengthy and complex; however, the previous post (from November 30) represents some of my thought on the issue.

SPX at 1112.28 as this post is written