what can W's supporters say to pick me up?

[jyl]

Back to the original question, which I read as concerning the stock market.

Rising interest rate environments are usually hard on stocks. Partly because higher interest rates tend to lower stock valuations, but also because higher interest rates tend to slow economic growth. Compare a longterm (40 year) chart of US interest rates to a similar chart of the S&P and you'll see the inverse correlation between them. (I'm sorry I can't provide those charts - I have them on my screen but cannot post them.)

And indeed economic growth is slowing. Growth troughed in 2001/2002, had a rebound in 2003/2004, peaked in 2004, and is now rolling over. Look at GDP growth (peaked 2Q04, has declined since). Also look at leading indicators like ISM new orders index (peaked >70 late 2003, today <60).

Slower economic growth usually leads to slower revenue growth. This can be artificially offset by a weaker US dollar, which makes US goods more competitive and also increases the reported US dollar value of foreign sales (an accounting effect), but at some point a decline in the US dollar starts to cause harmful effects (slows economic growth of the countries that buy US goods, also upward pressure on interest rates).

Meanwhile, input prices are rising. Oil is the most obvious one, but also look at steel, healthcare, pension, etc.

Slowing revenue growth and rising input prices pressures corporate profits. And indeed growth in S&P operating profits is slowing.

So far, companies have preserved profit growth by intense cost-cutting, hence all the outsourcing to low-wage countries (China, India), layoffs (US job growth weak, lags population growth), and no wage growth (US average wage not growing). Also, in some cases, by lower tax rates and federal government business. When these wells run dry, companies either have to accept lower profit growth (slower growth in corporate earnings) or raise end prices (more inflation).

For these reasons (and quite a few other reasons, which are more political or market driven) investors are concerned, and have been mostly taking stocks down this year.

[jyl]

Originally posted by legion
The biggest threat to the economy seems to be the fall of the dollar...which is caused in part by the deficit. How do we reduce the deficit? We could start by killing Amtrak, throwing out the tax code and the IRS with it, and killing the thousands of pet programs. Somehow I don't think those complaining want to do any of these thing.

Cut and run in Iraq you say? Wouldn't that save millions of dollars immediately? Yes, but it would cost us later.

Would you still propose to collect taxes, after throwing out the tax code and the IRS?

[juanbenae]

john, what as an example have other administrations done to address these issues in the past ? is it the deficit the major problem at this time that contributes to most of what you list above? it seems that it keeps coming back to that.

i guess i am looking to see more action on what ails us, and not so much on what aids the middle east.

[M.D. Holloway]

is'nt the deficit a number provided by the National Accounting Office? My question, where does this come from? I have always been very cautious with the folks that control the numbers - the outside doesn't know where the figs really and truely come from. That office (as well as others) is shrouded in obfuscation and blackart/dark talent that I'm not sure I would believe it.

At the end of the day, I look at where we've been, what we have, what we are getting, and the likelihood it will continue.

[legion]

Originally posted by jyl
Would you still propose to collect taxes, after throwing out the tax code and the IRS?

I just think there are more efficient methods of collecting taxes, be it a sales tax or a flat income tax. Keep in mind with the current system, we have to fund a massive government agency (the IRS) to enforce the ungodly complicated tax code. Keep in mind, my opposition to the IRS has nothing to do with "fairness". I just think there are less expensive ways to collect taxes.

[M.D. Holloway]

Symbol Last Change
DJIA 10,193.33 +180.97
NASDAQ 1,957.27 +43.51
S&P 500 1,157.26 +19.76
MER 53.18 +0.70

[juanbenae]

http://biz.yahoo.com/ap/050421/greenspan.html?.v=11

[jyl]

Originally posted by LubeMaster77
is'nt the deficit a number provided by the National Accounting Office? My question, where does this come from? I have always been very cautious with the folks that control the numbers - the outside doesn't know where the figs really and truely come from. That office (as well as others) is shrouded in obfuscation and blackart/dark talent that I'm not sure I would believe it.

At the end of the day, I look at where we've been, what we have, what we are getting, and the likelihood it will continue.

I don't think there is such a thing as the National Accounting Office, but I don't recall which government agency reports the official deficit figures. I'm sure it is a big task to track and sum up all the federal government's inflows and outflows, but I have not heard of much (any?) concern that the annual budget deficit numbers are systematically misreported.

I'd think that, over the past several decades, a systematic error would have been caught as people cross-check it against the government's cash balances and debt issuance. AFAIK, the federal budget deficit is calculated on a cash not accrual basis, so there's not much room to manipulate the numbers by making assumptions, unlike with a corporation whose income statement is on an accrual basis. An accountant would understand this better than I.

These figures are the subject of really intense analysis by economists and analysts outside of the government, and the numbers are so big that a meaningful fudge would require disguising some pretty enormous amounts of money (not hundreds of millions, but hundred of billions). Probably impossible to do, and political suicide to try.

On the other hand, the projections of the long-term future deficit involve many assumptions, and get manipulated by politicians - usually trying to minimize the number via rosy assumptions.

[M.D. Holloway]

That hack plays so many freaking games - I swear he has a vested interest! Anything he says manipulates the dollar/market.

For every economist that says the sky is falling, you can one that says it's floating.

Like a drunk uses a light post...

[jyl]

Originally posted by LubeMaster77
Symbol Last Change
DJIA 10,193.33 +180.97
NASDAQ 1,957.27 +43.51
S&P 500 1,157.26 +19.76
MER 53.18 +0.70

Market oversold. Technical and short-covering rally. A happy thing to see but doesn't say anything (positive or negative) about the long-term trend.

[M.D. Holloway]

ya, I know but I thought it was cool...

[juanbenae]

very enlightening john. thank you.

[hardflex]

There is a General Accounting Office (GAO) and the Congressional Budget office (CBO). look at www.cbo.gov for lot's of data on income and expenditures. I like historical data more so than projections.

The thing is, We've had low interest rates and record deficits the last few years. Both should be a big stimulant to the economy, so the economy should be humming along nicely. That alone signals fundamental weakness to me.

[widebody911]

Deficits don't matter
--Dick Cheney

[M.D. Holloway]

hardflex:do you do any club racing in the Mav PCA?

[turbo6bar]

Historical Budget Data

[hardflex]

not yet Lubemaster, hoping to sometime soon. Do you?

[jyl]

Originally posted by k911sc
john, what as an example have other administrations done to address these issues in the past ? is it the deficit the major problem at this time that contributes to most of what you list above? it seems that it keeps coming back to that.

I guess i am looking to see more action on what ails us, and not so much on what aids the middle east.

Warning: this post is going to ramble like mad.

I don't know as much about economic history as I wish I did. Let's see what I remember. Please, anyone who has a better memory, please correct/add to this.

1970s - Mideast instability (Iranian revolution), huge oil price shock, high inflation, low economic growth, weak dollar. Govt pushed energy conservation (CAFE fuel economy regs, etc). Fed raised interest rates (10 yr yield hit 15%!). Finally choked off inflation and forced oil prices down. Cost was a recession in 1982, Carter lost his job that year.

1980s - California housing prices peak around 1980, then fall. Reagan cut taxes and boosted defense spending, Fed cut rates, economy recovered. Budget deficit ballooned. Economy went into a growth recession in 1986/7. Stock market crashed in 1987. Reagan raised taxes in his second term. Economy recovered. California housing prices boom, peak in 1991.

1990s - Bush Sr succeeded Reagan at the start of the decade, raised taxes. First Iraq war and another oil shock, another recession in 1990/91. California housing prices tank, and banking system faces crisis (S&L scandals). Fed cut rates. Around 1991/2 stock market starts a long bull run. By 1993/4 economy is growing. Clinton takes office 1992. I can't recall what he did with taxes; he did reduce defense spending. Economy slows in 1995, but it is mild and brief. Economy resumes growth, budget goes into surplus. 1997 euro currency established. 1998 Asian crisis and LTCM, economy slows briefly and stock market falls, Fed slashes rates, market recovers quickly. Economic growth resumes, stock market goes parabolic into bubble.

2000s - Bush Jr replaces Clinton. Cuts taxes. Stock market peaks in 2000, then crashes, continues decline for 2 years. Fed starts cutting rates. 9/2001 terrorist attack, recession in 2001/02. Bush cuts taxes. Budget goes into deficit. Second Iraq war starts, oil price start rising, defense spending rises, budget deficit swells. Outsourcing of manufacturing takes off, Chinese economy booms. US trade deficit grows. Fed cuts rates to lowest levels since 1950s. Economy resumes growth in 2003.

So that gets us to 2005. What's going on?

Lots of people have drawn parallels to the early 1990s. A Bush in the White House, a war in Iraq and resultant Middle East turmoil seemingly triggers an oil shock, a bubble bursts (it was real estate in 1991), Greenspan at the Fed starts aggressively cutting rates.

But we seem to have deviated from the 1990s script. This time, the Iraq war is dragging on, oil prices have continued rising, the budget deficit has ballooned (remember, the Saudis and Japanese paid for Iraq War I). Now the economy is past the immediate bounceback recovery stage, and may be slowing down again. But even though the economy is slowing, inflation may be picking up. So the Fed is raising rates even into a possible economic slowdown.

So now people are looking at the 1970s for a parallel. They're talking about stagflation (low economic growth with high inflation).

Well, looking back to the 1970s and the 1990s is convenient, but I think there's something different now, which is China and India.

For decades, after WWII, the global economy was pretty static. The US was by far the largest and most dominant economy in the world. There was a period when Japan grew fast and started challenging the US - remember when our manufacturing industries were losing jobs to Japan? - but Japan has stalled out and hasn't grown in over a decade. The USSR was never an economic rival, and when it collapsed in the 1980s, the US became even more dominant.

In the 1990s, Europe adopted a common currency and has become more of an economic bloc ever since. And even though we think of Europe as economically stagnant (and the old EU countries like France and Germany are, sorta), actually the EU is growing through expansion into Eastern Europe which are higher-growth regions.

Now in the 2000s, China/India are racing up the scale. It is incredible how fast China has grown in the past ten years. It is already the second or third largest economy in the world, and either soon to pass Japan or already there. It is growing at 10-12% according to official data, probably more in reality, so at a pace 4-6X faster than the US, Europe, Japan. India is also growing very fast. They need to improve their infrastructure, but they also have an abundant and well-educated work force (who speak English well, too).

So after 50 years of the US being the undisputed #1 economy, the world is changing. Our economy is still growing, but our share of the world economy is declining. At the current pace, China's economy could be as large as the US economy in a couple of decades. India and Europe are also moving up, and the euro has emerged as an alternative reserve currency.

This is a very different situation than what we had in prior decades. What does it mean? Well, intuitively it seems that going from undisputed #1 to a tie for #1 isn't going to be an easy period for an economy. It doesn't have to mean the end of American prosperity - life is pretty darn good in lots of other countries - but seems like there could be some big bumps along the way.

I haven't thought through the details, maybe it is impossible to do so - actually I'm just thinking out loud here - but anyway, thought would be interesting to discuss.

P.S. Here are some pieces on the size and growth of the Chinese economy:

http://www.economywatch.com/world_economy/china/
http://www.icrier.res.in/BS05sizew.pdf

P.P.S. I'm not trying to be a China-basher, by the way. The Chinese people have every right to make a better life for themselves, and in fact I am Chinese-American myself - but given that I was born in NYC, have lived here (or in Europe) all my life, and don't even speak Chinese - well, I'm way more interested in what happens to the US.

[jyl]

Wow, I must have put everyone to sleep.

[M.D. Holloway]

Hardflex: not yet - I still have to do a bit more upgrades on the suspension. If you get a chance, check out the Maverick Region PCA. They are big into racing and autocross and have some excellent schools. Infact, the Roocie of the year is from the Maverick region. The region also boasts of having national time keepers and dirving instructors. The club is all about racing. Check out the website www.mavpca.org and go to the newsletter section. Slipstream is the Mag that I am the Mangaging Editor for. It is pretty good and gets better every month. I would be interested in what you think.

I guess that has nothing to do with this thread, then again, this is my typical "not adding much other than ignorance" portion of any thread - some things need consistancy.