Healthy economy equals quiet bulletin board

[Giant Communist Robot]

While the US economy officially grew at 1.7 percent in 2011, which is roughly half of the final 2010 number I believe, based on my earlier post, it was probably south of 1% if a reasonable inflation number was calculated into the mix.

The BEA doesn't release a nominal percent change from previous period; they are all real, which means they are adjusted for inflation. You do say reasonable, though, so maybe you mean some ShadowStat figure--but I wouldn't call them reasonable if they include the most volatile components with the core. I'd call them inflammatory or misleading.

[Shapley]

http://www.bls.gov/news.release/cpi.nr0.htm

Consumer Price Index - December 2011

The Consumer Price Index for All Urban Consumers (CPI-U) was
unchanged in December on a seasonally adjusted basis, the U.S. Bureau
of Labor Statistics reported today. Over the last 12 months, the all
items index increased 3.0 percent before seasonal adjustment.

Similar to last month, the energy index declined in December and
offset increases in other indexes. The gasoline index declined for
the third month in a row and the household energy index declined as
well. The food index rose in December, with the index for food at
home turning up after declining last month.

The index for all items less food and energy increased 0.1 percent in
December after rising 0.2 percent in November. The indexes for
shelter, recreation, medical care, and tobacco all posted increases,
while the indexes for used cars and trucks, new vehicles, and apparel
all declined.

The all items index has risen 3.0 percent over the last 12 months, a
decline from last month's 3.4 percent figure. Recent declines in the
energy index have brought its 12-month change down to 6.6 percent
from 19.3 percent in September. The 12-month change in the index for
all items less food and energy held at 2.2 percent, while the 12-
month change in the food index edged up from 4.6 percent to 4.7
percent.

Table A. Percent changes in CPI for All Urban Consumers (CPI-U): U.S. city
average

[Giant Communist Robot]

This must be the third time I've posted about "noise in data" and I'm beginning to feel people must be tired of reading about it, because I'm getting tired of writing about it. So I'm not going to bring it up again. If you have a rebuttal, post it and I'll read it.

[Giant Communist Robot]

The biases in inflation as measured by the CPI are

Substitution--when the price of a product goes up substantially consumers tend to substitute lower priced alternatives. Since the CPI is a fixed weight index the accurate impact of the price increase doesn't show.

Quality--advances in technology can lead to longer lives for some products. Even with hedonics this can be hard to show as the increased life can take time to show up.

New Products--new technologies often lead to lower prices but the CPI doesn't include them until they are commonplace.

Outlet--consumer shifts to online places like Amazon or wholesale clubs isn't covered by CPI.

It's not like the government is unaware of these problems. The base period when items in the index and their weights are adjusted now changes more frequently and they are quicker to add new products to the basket. They struggle with hedonics, which adjusts both ways.

[Giant Communist Robot]

I don't think that's the concern. Maintaining them will only add to their losses.

Speculative. Maintaining the houses with the expectation that the expense will be recovered by a higher sale price--certainly in this lifeless market--is dubious. Banks probably feel it's better to take the loss as a beneficial tax filing.

[Shapley]

I would imagine it is difficult to establish a maintenance mechanism for so many homes. As noted before, banks are not in the building and maintenance business, they are in the money business. They can hire someone to maintain them, but it would take a time and manpower to determine how much maintenance is needed, how to arrange for it, and how much it would cost. I suspect they are concerned about fraud - hiring someone to maintain the homes at a high cost while providing minimal (or no) actual maintenance.

It's probably a problem they've not encountered on such a scale in the past, and they still haven't figured out the cost/return figures - particularly since those figures fluctuate with the housing market.

In theory, it would be a win/win - they would provide jobs for low- to mid-range workers while retaining or restoring the value of the homes they are holding. But, given the enormity of the situation, they may simply not be equipped to deal with it, though they've certainly had long enough by now to formulate a plan.

[Haggis@wk]

I think Shapely has the right of it; the enormity of the situation has overwhelmed the banks. As banks are not monolithic I'm sure there are some banks that are maintaining their property in a prudent manner to maintain or at least forestall a decline in value. Here in Dallas is an example. I suspect in other rich to very-rich neighborhoods homeowner associations are "encouraging" the banks to keep the properties at least curb appeal worthy, regardless of what might be going on inside.

It's the normal to poorer neighborhoods that will suffer and in Dallas "normal" is $150 - $250K range of homes. There are a few vacant home within a few blocks of me that are suspect. They were on the market several times in the past few years and then they were offered as rentals. Now the signs have disappeared yet the houses remain vacant. The yards are being maintained but one had a major leak that drained into the street for a few days before a plumber showed up. No water in the street now but you have to wonder what cause the damaged in the first place and what will the accumulative damage be?

It's a beautiful corner home with a newer pool (3-4 years as I recall)

That particular home has been the subject of curiosity among my neighbors and we comment on it when we meet in the street (we're very boring in Plano, Friday night football and vacant houses take up most of our conversations!!!)

[Giant Communist Robot]

The Congressional Budget Office on Tuesday predicted the budget deficit will rise... a $973 billion deficit...A rising deficit... the United States recorded a deficit of more... The deficit ... The largest deficit recorded

Such a leeeeeengthy quote, but this caught my eye. Can anyone enlighten me on the effects of the deficit? I see this on Wiki's Deficit Spending article:

For the public sector to be in deficit implies that the private sector (domestic and foreign) is in surplus. An increase in public indebtedness must necessarily therefore correspond to an equal decrease in private sector net indebtedness. In other words, deficit spending permits the private sector to accumulate net worth.

This is a turgid way of restating the accounting identity I keep referring to. That's two ways to say it; if you still don't get it I'll add this poetic method: When the government spends, the money goes into private pockets.



There's so much complaining about and fear of the deficit. Excessive deficit spending could lead to higher interest rates, loss of consumer confidence in the U.S., maybe a larger trade gap. Saying the deficit is too big by merely pointing at it's numbers doesn't make sense. There is no automatic threshold over which a problem occurs. This has to be done heuristically. That means we have to look at it's effects.

Is inflation out of control? Not even close.

What about the bond market, because this affects interest rates? Here you must look at both coverage and yield. Coverage is the ratio of bidders to securities offered. Prime brokers are required by law to submit a bid (more on this in a moment), but there are not so many of them to give good coverage, which is generally in the range of 2:1. Treasuries now have 4:1 or even 5:1. It's not an exaggeration to say that U.S. government securities are enthusiastically received. The other aspect is the yield. Prime brokers must bid, but that doesn't mean they have to bid high--if they don't want it they can low-ball it until it's attractive to them. Look at the rates on short term notes, what do you see? Zero point practically nothing. Does this look like rising interest rates?

What about a loss of investor confidence? Even with the lackluster performing economy the S&P has more than doubled since it's low during the recession.

I could go on, but I'm tired of this. Right now I think the deficit could double and we would not see substantial harm.

[Giant Communist Robot]

Shapely has the right of it; the enormity of the situation has overwhelmed the banks

No argument there.

[Giant Communist Robot]

Since there's nothing in the data to support it, I'm wondering where ECRI's recession call went wrong. Last year we had the debt limit debacle that resulted in downgrading U.S. bonds. Following that, and surely a result of, was a big drop in the manufacturing indices. But it was temporary. I'll guess the bond rating and indices are in their model and caused an erroneous signal.

This looks like an example of Godel's Incompleteness Theorem. Their model was a closed system and couldn't give the correct forecast--they needed to look outside the model to see the data was the problem. Systematic.

[Haggis@wk]

When the government spends, the money goes into private pockets.

But it came out of private pockets to begin with, processed with a governmental handling fee and then spent. My point all along is that people and businesses can spend their money better than the government since the government puts itself in the position of deciding which businesses are "worthy". Solyandra and their ilk comes to mind.

[Giant Communist Robot]

But it came out of private pockets to begin with

I was posting about deficit spending. It comes out of a keyboard.

[Giant Communist Robot]

people and businesses can spend their money better than the government

It's impossible for the government to allocate as effectively as people. Consequently the better would be to spend the money on entitlements of various kinds, then the people can spend it.

[Haggis@wk]

...Consequently the better would be to spend the money on entitlements of various kinds, then the people can spend it.

or, and here's a radical idea, let them get jobs?

[Giant Communist Robot]

It's taken me a while to get back to Reinhart and Rogoff, but I wanted to see why they felt Debt-to-GDP ratios were so important. Here's this:

Debt intolerance is defined as the extreme duress many emerging markets experience at external debt levels that would seem quite manageable by the standards of advanced countries.

...and there you have it--the cheerleaders for Debt:GDP say this only applies to emerging markets.

...and here's this:

default often occurs at levels of debt well below the 60% percent ratio of debt to GDP enshrined in Europe's Maastricht Treaty...Safe debt thresholds turn out to depend heavily on a country's record of default and inflation.

Assuming this is true, then our record of zero defaults and low inflation would suggest no problem. From another perspective one could look at the bond market to see if anyone believes there is any evidence to worry about--and we see nothing.


They believe Debt:GDP to be important because defaults in these countries trigger larger crises.

[Giant Communist Robot]

I got lost and forgot to give R&R's symptoms of Debt:GDP trouble--

1) loss in market confidence
2) spiraling interest rates
3) political resistance to repaying foreign creditors

[Giant Communist Robot]

...Consequently the better would be to spend the money on entitlements of various kinds, then the people can spend it.

or, and here's a radical idea, let them get jobs?

it looks like you might be making the case for the government to do nothing, and this is actually a legitimate and defensible idea. I've heard Romney express something to suggest this, and of course Paul hates the Fed. BTW, I've ordered The Creature From Jekyll Island, a book that gives a scathing critique of the Fed--it sounds like an exciting read.

[Giant Communist Robot]

...and now to get back to Ben Graham's definition of trading--it's trying to catch the tops and bottoms of price movement, and has nothing to do with time.

The two books of his that I read were quite nice, dense with ideas, and stimulating. Value Investing looks fine if you are going to buy the company, but what about those metrics for the average investor? It's not as if the people that run those companies don't know about this stuff. They are acutely aware that the numbers they release affect the price of their stock. Numbers can be manipulated. Here I am thinking of GE and it's silo accounting that allowed it to be dead on target every time, but there are other ways. I'd say the average investor can't know if the numbers they need to know for Valule Investing are real. I can see this will work for some people, but not for me.

[Giant Communist Robot]

Many years ago I held an entry level position at a really big company. An old guy was hired, and when I asked about him I was told he was just looking for some job to do and had actually made a fortune in the market. Later I had a chance to work with him and I asked him about his methods. We whipped out S&P Stock Guides and he explained something that sounded like Value Investing. He said some things like "buy a stock whose price price is low, has low debt, an excellent record of making dividend payments" and so on. Then I asked him "when do you sell?" His eyes bulged and he looked like he'd seen a ghost; he leaned over to me and said, soto voce, " You never sell!"

[Giant Communist Robot]

Numbers can be manipulated

at least in the short term.