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Valance Chart Review, Nov. 22, 2008, on the verge of the historic Obamaboom.
Current low levels of output and employment mean the US economy can turn dramatically upward with
a healthy fiscal adjustment to restore aggregate demand to full employment levels.
However, any such expansion without a policy to substantially reduce gasoline consumption can quickly
drive up CPI and again bring into question the wisdom of using fiscal policy to sustain output and
employment.
Most of the charts are looking like this- after muddling through with gradually declining indicators, it all
hit the wall in July.
One large factor was the Mike Master’s Congressional interaction regarding passive commodities
strategies and the influence of futures markets on the price of oil. This resulted in a massive commodity
inventory liquidation that exceeded the Aug 06 liquidation triggered by Goldman changing their
commodity index.
Inventories don’t appear to be excessive, but they should continue to come down as they did after Aug
06.
Car sales began to fall sharply at the beginning of 08, well ahead of retail sales which peaked in July like
most other indicators. Perhaps the cumulative effect of falling car sales was what caught up to the rest
of the real economy in July.
Personal income fell some after the second quarter uptick due to the fiscal package, with lower interest
income a contributor to the weakness (lower interest rates tend do lower demand through the income
channel).
Personal spending, however, fell more substantially, due in part to the sudden difficulty in obtaining
financing.
Payrolls have been soft since q2 06 (as previously discussed) but the rate of decline has been increasing
all year and has yet to show signs of moderating.
All the confidence type indicators look like this.
New home data looks very weak apart from actual units in inventory, in line with other inventory
indicators.
Existing home data shows the results of the high level of foreclosures.
Affordability offers a glimmer of hope, as the declines in sales have moderated some.
The rate of price declines has seems to be moderating as well.
Home ownership is way down and it seems would be owners are currently renting.
The decline in housing starts has kept the rental market relatively tight.
Debt levels began falling in q2 06 with the Goldman gasoline inventory liquidation and the fall off in
mortgage lending on fraudulent income statements and fraudulent appraisals.
And consumers have recharged their batteries just in time for the coming Obamaboom.
These are the indicators that led me to believe that by June 06 the US consumer no longer had the
ability to increase their debt ratios, which was necessary to drive the expansion given the falling Federal
deficits and increasing trade deficit. It was then I suggested demand would fall until the Federal deficit
got sufficiently high to reverse it.
While prime mortgage delinquencies continue to rise, sub prime delinquencies show signs of leveling
off, albeit at high levels. Their mortgage backed securities are priced for higher losses.
The automatic stabilizers are working to reverse the slump in output and employment, but have a long
way to go if not supported with the proactive fiscal policy currently proposed for the Obamaboom.
Price increases are moderating since the Masters liquidation of this year, much like they did after the
Goldman liquidation of Aug 06, though not yet as far. Once these technically driven inventory
liquidations run their course, the pattern seems to have been for prices to resume their advances and
return to their previous trends. Especially when the Obama administration introduces proactive $700
billion+ deficits kick in.
Demand fell during the Goldman liquidation that began in Aug 06, and now again with the Masters
liquidation, but so far the drop has been far less. This means the Saudis remain the swing produce and
price setter, and so may want to keep prices low enough for some period of time to discourage
alternatives. There’s no way to tell what they are thinking, however. And with an Obamaboom without
a plan to reduce gasoline consumption, demand will quickly increase and the Saudis will remain firmly in
place as swing producer and price setter.
While the drops are precipitous from very high levels, more than half the non manufacturing businesses
surveyed are still reporting higher prices.
The pre Masters commodity buying by pension funds that drove up prices probably brought out a lot of
new supply that at least for the moment has nowhere to go. The Obamaboom, however, could quickly
restore demand from real end users.
With moderate employment costs the Obamaboom can mean very high rates of profit growth.
The Obamaboom should restore Fed confidence and perhaps restore the nominal rate of interest to
about a 2% spread above core cpi.
With the right $700 billion + deficits the Obamaboom can carry equities back up through the highs in no
time.
The eurozone looks terrible and doesn’t have the institutional structure to run budget deficits sufficient
to restore output and employment. But that’s another story…