Chance favors the concentration of wealth, U of M study shows

University of Minnesota
July 21, 2011
Jeff Falk

Most of our society's wealth is invested in businesses or other ventures that may or may not pan out. Thus, chance plays a role in where the wealth of a society will end up.

But does chance favor the concentration of wealth in the hands of a few, or does it tend to level the playing field? Three University of Minnesota researchers have built a simplified model that isolates the effects of chance and found that it consistently pushes wealth into the hands of a few, ever-richer people.

The study, "Entrepreneurs, chance, and the deterministic concentration of wealth," is published in the July 20 issue of the journal PLoS ONE.

The researchers simulated the performance of a large number of investors who started out with equal amounts of capital and who realized returns annually over a number of years. But wealth did not remain equal, because each year an entrepreneur's return was a random draw taken from a pool of possible return rates. Thus, a high return did not guarantee continuing high returns, nor did early low returns mean continuing bad luck.

Even though all investors had an equal chance of success, the simulations consistently resulted in dramatic concentration of wealth over time. The reason: With compounding capital returns, some individuals will have a string of high returns and, given enough time, will accumulate an overwhelming share of the wealth.

This appears to be a fundamental feature of economies where wealth is primarily generated from returns on investment (for example, through business ownership and growth), the researchers said.

"Predictions from this model about how wealth is distributed were more accurate than predictions from classic economic models," said first author Joseph Fargione, an adjunct professor of ecology, evolution and behavior in the university's College of Biological Sciences.

The model predicts that the rate at which wealth concentrates depends on the variation among individual return rates. For example, when variation is high, it would take only 100 years for the top 1 percent to increase their share of total wealth from 40 percent—a recent level in the United States—to 90 percent.

Healthy economies support diverse entrepreneurial efforts, leading to high economic growth. But concentration of wealth reduces diversity, and with it the most likely growth rate for a country's economy, according to the researchers.

"The implication is that nations with diverse economies should tend to outcompete on the world stage those with large concentrations of wealth, such as monarchies, or established democracies that have allowed their wealth to concentrate," said author Clarence Lehman, associate dean for research in the College of Biological Sciences.

But while the rate of wealth concentration was increased by high variation among individual investors' returns, it bore no relation to the average economic growth.

"This leads to the surprising finding that wealth will concentrate due to chance alone in growing, stagnant or shrinking economies," said author Steve Polasky, professor of applied economics in the College of Food, Agricultural and Natural Resource Sciences.

The simulation results showed wealth concentrating regardless of economic cycles of growth and recession and regardless of whether wealth is split between two offspring every generation. As wealth concentrates with a few individuals, the growth of the economy will depend more and more on the returns of those few, making the economy less resilient to disruptions in their investments, the researchers said.

"The irony is that the economic diversity that helps ensure the presence of some successful enterprises and spurs economic growth could be lost if the success of these enterprises undermines economic diversity," said Fargione. "To retain the benefits of a diverse capitalist economy, we need economic policies that counter what seems to be the innate tendency for economies to concentrate wealth and become less diverse." 

The simulations showed that a tax (or other mandatory donation to the public good) on the largest inherited fortunes would short-circuit the over-concentration of wealth. But the researchers stress that their point is to advocate not a particular policy, but a policy that accomplishes the goal of protecting long-term economic stability.

The Negative Consequences Of Ending QE2 (Comstock Partners, Inc.)

Comstock Partners
4/21/2011

We cannot overemphasize the potential negative effects associated with the probable ending of QE2 at the end of June. QE2 is the Fed's unprecedented attempt to get the faltering economic recovery growing again in the absence of any further expansion of fiscal policy in the face of record federal budget deficits. In this regard the key fact to remember is that we are in a hesitant recovery that will remain restrained by the after-effects of a major credit crisis and the need to deleverage the enormous household debt built up during the boom.

As a percentage of GDP, household debt went from 45% to 68% in the 35 years between 1965 and 2000, and then soared to 98% over the next nine years alone to its peak in 2009. Since the start of the deleveraging process the percentage dropped to 90% by December 31st. In our view the deleveraging has a long way to go. Just to get back to the level reached in 2000 (which itself was historically high), household debt would have to decline by another $3.3 billion. Since this amounts to about 31% of personal consumer expenditures it is easy to see why the debt has been and will continue to be such a drag on the consumer and the economy in general.

With Congress and the White House under severe political pressure to come up with some meaningful cuts in the budget deficit, the expiration of QE2 has important negative consequences. You may recall that the stock market soared with the implementation of QE1 and the economy started to recover. However, when QE1 was wound down at the end of March 2010 the economy faltered and the stocks dropped 17%. To prevent the economy from dipping into another recession Chairman Bernanke, in mid-August announced the probable implementation of so-called QE2, a program to purchase $600 billion of Treasury bonds by the end of June with the stated purpose of driving up asset values in the hopes that it would spur additional spending.

Although QE2 has helped some segments of the economy and jump-started the stock market, it has had important negative implications as well. Since that time commodity prices have soared while long-term interest rates have climbed and the dollar has weakened. The rise in food and energy prices has caused top-line inflation to increase faster than wages, resulting in declining real income. In addition it has resulted in higher inflation in developing nations as well as the EU, causing them to raise interest rates at the risk of slowing down global growth. Some nations have also instituted capital controls to prevent too many dollars from entering. It is also likely that rapidly rising food and energy prices played an important role in engendering unrest in the Mid-East.

The coming end to QE2 is potentially negative for both the market and the economy. By the time it ends on June 30th the Fed will have bought an average of $3.8 billion of Treasury bonds every working day of the week. That amounts to about 70% of all the Treasury bond issuance since Mid-November. The proceeds, which went to the banks that sold them, were then used to buy up assets, mainly stocks and commodities. Without the Fed in the picture it is difficult to envision anyone else willing or able to step in and purchase the bonds without a really big increase in rates. With no help from the fiscal side the likely outcome is a major decline in asset values including stocks and commodities along with another round of weakening growth in an already fragile economy. It may well be that somewhere down the road there is another round of quantitative easing, but not before some severe economic and financial problems in the interim. More Comstock Partners Articles

NFIB: small business sector remains in a "rut" and unable to find reasons to ramp up hiring

NFIB Small Business Report

We can certainly "hope for change"here,

but history warns against a lot of optimism.

 

Summary
January 2011 (released 1/11/2011)

Optimism Index

The Index of Small Business Optimism lost 0.6 points in December, dropping to 92.6, not a huge change but not the hope-for rebound that would signify more growth in the small business sector. Apparently, the "management change"in Washington and marginally better retail sales numbers were not enough to pump up spirits at the New Year celebrations. This marks the 36thmonth of recessionary levels. Only once in that period did the Index get above 93 (last month) and has been below 90 for 26 months. (Dec. 2010 reading 4.6 points greater than Dec. 2009 however it is 8.8 points lower than Dec. 2005)

Labor Markets

Thirteen (13) percent (seasonally adjusted) reported unfilled job openings, a four point improvement that anticipates a reduction in the unemployment rate in the coming months. Over the next three months, 10 percent plan to increase employment (up one point), and nine percent plan to reduce it (down three points), yielding a seasonally adjusted netsix percent of owners planning to create new jobs, a two point gain from December and the best reading in 27 months. Until sales picks up, there is nopressing reason to hire. The reduction in the payroll tax will add some impetus to hiring as most of that addition to take home pay will likely be spent.

Capital Spending

The frequency of reported capital outlays over the past six months fell four points to 47 percent of all firms, disappointing and only three points over the record low level. Eight percent characterized the current period as a good time to expand facilities (seasonally adjusted), down one point but six points better than earlier in the year and the third highestreading since the economy peaked in December 2007. A net nine percent expect business conditions to improve over the next six months, down seven points from November’s rather astonishing reading (the level of optimism we had been hoping for) but historically decent. It is the second best reading since the 4thquarter of 2009 when the economy was expanding rapidly. Apparently the future is looking brighter for more owners, although much will depend on what Congress does early in 2011.

Profits and Wages

Reports of positive earnings trends fell four points in December, registering a netnegative 34 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising. Partof this is due to price cutting, which is fading in frequency as the economy continues to grow. Not seasonally adjusted, 14 percent reported profits higher (down one points), but 47 percent reported profits falling, a four point increase. For those reporting lower earnings compared to the previous three months, 55 percent cited weaker sales, four percent blamed rising labor costs, six percent higher materials costs, two percent higher insurance costs, two percent higher financing costs, and four percent blamed lower selling prices. Six percent blamed higher taxes and regulatory costs. Large firms may be posting great profits, but the trend on Main Street is not supportive of solid hiring and capital spending. Labor cost, materials costs, interest rates –not the problem. It is still weak sales.Seven percent reported reduced worker compensation and 11 percent reported gains. Seasonally adjusted, a neteight percent reported raising worker compensation, unchanged from November. Labor costs are not a problem for inflation yet but are not fading any longer.

Credit Markets

Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported that not all of their credit needs were satisfied, and 50 percent said they did not want a loan, down three points. Thirty (30) percent of all owners reported borrowing on a regular basis, up two points from the record low.A net12 percent reported loans "harder to get"compared to their last attempt (asked of regular borrowers only), up one point from November. Reported and planned capital spending are still hovering around survey recordlow levels, but are showing reluctant improvement.

Commentary

It appears that the small business sector remains in a rut”, unable to find reasons (drained by a 2 plus year recession period) to ramp up hiring and capital spending. The top problem remains weak sales, spread over too many firms. With weak sales prospects, hiring or spending on capital projects have little likelihood of paying off and therefore willnot happen. Congress passed or tried to pass a ton of legislation that had little to do with helping the economy. It is no wonder that consumers and owners are in a canyon of pessimism, the recession took a huge economic toll and the leadership inspired fear, not confidence. With the small business sector on the sidelines, it is hard to get national growth above the 2 to 3 percent range and the economy will not enjoy the type of rebound experienced after 1982 when GDP grew eight percent for over a year.

Don't believe the rosy forecasts (Shawn Tully)

Most economists and pundits predict

a continued upward trend for most assets

next year, but they will eventually

be proven wrong.

(thank you Mr. Tully for a breath of fresh air)

By Shawn Tully
Fortune
Other Shawn Tully Articles
12/30/10

In one of my classes at the University of Chicago Business School in the 1970s, the eminent statistician Harry V. Roberts liked to tell a story showing the homespun wisdom of his colleague and idol, economist Milton Friedman. The great monetarist was part of a panel evaluating a PhD presentation on forecasting growth rates for the U.S. economy. The candidate painstakingly described his methodology for fitting a broad array of variables––global capital flows, future exchange rates, immigration trends, and sundry other factors––into a computer model that, presto, spat out a prediction for the following year's GDP.

According to Roberts, Friedman delivered a brief, cutting critique––probably in the same nasal monotone I remember when, decades later, he returned my long-distance calls collect. Declared Uncle Miltie: "Why would this extremely complex model, based on factors that are themselves hard to forecast and could easily be wrong, produce a better number than taking the growth rates for the past five years, and dividing by five?"

For Roberts, the anecdote amounted to a parable on the pitfalls of economic forecasting. Friedman also liked to use the aphorism, "Predictions are extremely difficult, especially when they're about the future."

Friedman's lesson isn't that forecasting is impossible, but that the best prediction is usually the basic assumption that prices and growth rates will go back to their historic averages, or in economic parlance, "revert to the mean." What's difficult is guessing when that will happen. Indeed, the timing is truly unpredictable. But it invariably does happen.

Now, we're in the heart of the predictions season. The forecasts for the New Year from the pundits on Fox Business News, CNBC, Bloomberg TV and dozens of websites vary a bit, but the overall message is overwhelmingly the same for most assets: stocks will remain on a roll, generating double-digit gains for 2011. The prices of gold, oil and other commodities will continue their upward march. As for bonds, rates will keep rising, but slowly. And almost no one has a good word to say about the housing sector, where prices have fallen for months, and according to the prediction mill, are destined to follow the same downward trend.

The problem with these predictions isn't that they rely on complex economic assumptions. It's just the opposite––they're really not forecasts at all, but extrapolations. The pundits are telling us that recent trends will simply keep rolling.

They could be correct, but only for a while. In the longer term, these forecasts will prove wrong, for a simple reason. Most assets are already selling at prices far above their historic averages. As economic gravity takes over, they'll inevitably return to those benchmarks -- meaning stocks, bonds and commodities have a long way to fall.

So let's briefly examine these assets, and look at the factors that govern their long-term value. For commodities, it's production cost. For stocks, it's the multiple of price to average earnings. For real estate -- the surprise in this package -- it's the cost of owning versus the cost of renting.

Pricey equities

How about stocks? The best measure of the whether stocks are cheap or expensive is the price earnings formula devised by Yale economist Robert Shiller, which divides the current S and P price by a ten-year average of inflation-adjusted earnings. By smoothing earnings, Shiller avoids the error of judging that equities are cheap when profits are unusually high, as they are today.

Today, the Shiller PE is a lofty 22.7 -- that's more than 40% higher than its long-term average of 16. Indeed, stocks could keep rising for months or even longer. But that would make them simply more overvalued than they are today. In other words, a Friedmanesque reversion to the mean does not signal a rise in equity prices at all, but a sharp drop. The only question is when it will happen.

Let's move on to bonds. The sudden rise in yields on the 10-year Treasury from 3% in early December to 3.49% yesterday is a chilling reminder of the high risk to bond prices at these extraordinarily low rates. Despite the recent rout, the prices of 10-year Treasuries have plenty of room to decline. If yields return to their historic average yield of 6%, Treasury prices would drop by 20%.

The murky economy

It's extremely hard to forecast what changes we'll see in economic policy. Those changes may not affect the health of our economy this year or next, but they could greatly influence its future course. A prediction made by one of Friedman's heroes, the legendary Austrian economist F. A. Hayek, demonstrates the treacherous challenge of charting public policy. Complete Article






In 1979, when inflation was raging and the Federal Reserve was deploying cheap money to battle rising unemployment, Hayek gave a speech declaring that the Fed could not be trusted managing the money supply. Hayek stated that it would always succumb to political pressure to use cheap money to create jobs, and that the effort would bring not prosperity, but greater inflation.






Hayek was wrong. Three months before Hayek issued his warning, Paul Volcker became chief of the Fed. Over the next several years, Volcker defied Hayek's predictions by reversing course and taming inflation.






So here are the best predictions for the New Year: Prices of stocks, bonds and commodities will gravitate towards their long-term averages––meaning the odds are they'll go lower. As for economic policy, if Hayek can be wrong, why try to forecast the truly unpredictable?

Kudo's Mr. Tully for sharing your

perspective based on "real" fundamental

data versus the ever popular and

extremely misleading "Seasonal Adjustments".

Economics Video of the Year :Fear the Boom and Bust: A Hayek versus Keynes Rap Anthem" (Thanks to Economic Policy Journal)

Economics Video of the Year

Fear the Boom and Bust: A Hayek

versus Keynes Rap Anthem

(thanks to Economic Policy Journal 

for the Head's Up)

 
Creative Director John Papola
Creative Economist Russ Roberts
Music produced by Jack Bradley at Blackboard3 Music and Sound Design.
Music composed and performed by Richard Royston Jacobs.
Performed by Billy Scafuri and Adam Lustick.

2010: An Economic Review (Irwin Stelzer)

The year saw what must be the most rapid

peace-time deterioration in the

nation’s financial position.

By Irwin M. Stelzer
The Weekly Standard
WeeklyStandard
12/24/10

As we look back on the year that is limping to an end, there is little—not nothing, just little—to cheer about. The year opened with the headline unemployment rate at 9.7 percent, and the rate including workers too discouraged to look for work or involuntarily on short-time (the U-6 rate, in the jargon of the trade) at 16.5 percent of the work force. It is closing with the headline rate close to 10 percent and the U-6 rate at 17 percent. The number of workers unemployed for 27 weeks or longer has jumped during the year from about 6 million to 6.3 million. All of this despite the expenditure of about $1 trillion on an economic stimulus.

Republicans and conservatives take these numbers as final proof that the reputation of John Maynard Keynes should remain in the graveyard of fallen economists, while President Obama and his team claim that without the heavy dose of Keynes’s medicine, a demand-side stimulus, the jobs situation would be much worse. Only the federal government has survived job cuts—the number of employees on the federal government payroll has increased a bit. And these are what liberals call “good paying jobs”: the average annual salary of federal workers is close to $118,000, and in comparable jobs is about 10 percent higher than private-sector pay.

One thing is beyond dispute. The year saw what must be the most rapid peace-time deterioration in the nation’s financial position. Under Bush, a budget surplus running at 2.37 percent of GDP in 2000 turned into a deficit of 3.18 percent in 2008. Under Obama, the deficit rose to a staggering 9.91 percent last year. This year it will be closer to 11 percent than to 10 percent. Yes, some of this is the natural effect of the recession. But some comes from the president’s decision to allow congressional Democrats to dust off spending plans long gathering dust.

For them, Santa Claus came early this year, and stayed right through the latest deal agreed by Republicans: taxes on the so-called wealthy will not go up, a big win say conservatives who argue that the $100 million increase in taxes on the wealthy would have thrown us back into recession. But the price for that concession was agreement to spend another $1 trillion on some favorite Obama programs, increasing the deficit—something conservatives say will throw us back into recession!

The U.S. government now owes its creditors almost $14 trillion, up from less than $6 trillion when George W. Bush was packing to return to Texas. And the total is headed up, and will rise even faster if the recent increase in interest rates proves to be only the first round of rate rises. The rest of Mr. Stelzer's Review

TrimTabs Still Can't Figure Out Who Is Buying Stocks (Zero Hedge)

Great Post By  Zero Hedge

12-23-10

Save this post as we will all be reviewing

it several times throughout 2011

A year after Charles Biderman's provocative post first appeared on Zero Hedge, in which he asked just who is doing all the buying of stocks as the money was obviously not coming from retail investors (and came up with one very notable suggestion), today Maria Bartiromo invited the TrimTabs head once again (conveniently in CNBC's lowest rated show, during Christmas Eve eve, at a time when perhaps 5 people would be watching) in an interview which disclosed that after more than a year of searching, Biderman still has no idea who actually buying.

In response to Bartiromo's question if the retail investor, who left after the flash crash (thank you SEC), Biderman responds what every Zero Hedger has known for 33 weeks: "Retail investors are not coming back to the US. Those investors that are investing are buying global equities and are buying commodities. We are seeing lots money going into commodity ETF funds: gold, silver..." and the even more unpleasant summation: "individuals have been selling, companies are net selling, insider selling and new offerings are swamping any buyback and any cash M&A activity since QE 2 was announced. Pension funds and hedge funds don't really have that much cash to invest.

So what nobody's asking is what happens when QE 2 stops: if the only buyer is the Fed, and the Fed stops buying, I don't know what is going to happen...When I was on your show a year ago I was saying the same thing: we can't figure out who is doing the buying it has to be the government, and people said I was nuts. Now the government is admitting it is rigging the market." Cue Bartiromo jaw dropping.

As for the simple math of where the money is actually going:

"Money flows come out of income, take home pay of everybody plus money that came from real estate is down about $1 trillion a year. It peaked in the 3rd quarter of 2008, at $7 trillion, that's take home pay for everybody who pays taxes plus the money that came from real estate. It has now bottomed at $5.9 trillion. We are still down $1.1 trillion in money that people have to spend each year, that 16%. And some of the money that is leaving equity markets we think is going to pay bills."

Update: Charles has just sent in the following addendum

to his CNBC appearance:

Due to time constraints, what I didn’t get to address on CNBC today is what will happen after the Fed is either successful or not successful with QE2. The Fed is rigging the market by digitally creating money that is used to buy financial institutions assets — currently Treasuries, last year all kinds of toxic waste. What will happen when the Fed stops buying assets?

What the Fed is hoping is that QE2 actually works and the economy starts growing at 3+%. If that happens, unlikely as it is, then the Fed will end its QE activities. But for the stock market, if the only source of buying power, the Fed, withdraws its support, the market is likely to plunge to well below fair value. At that point perhaps some new source of money , i.e., China, et al will be able to buy US assets on the cheap.

The Fed is legally mandated to manage the economy, not the stock market. If the Fed’s QE is successful and the trickle down impact of higher equities creates a sustainable recovery, the Fed will gladly sacrifice the stock market to its legal mandate to manage the economy.

A more likely outcome is that while stocks will be higher by the end of QE2, economic growth will not be sustainable without government aid. That would then require additional QE. Stock prices could then keep rising for a while. At some unknowable now moment in time, unless the economy starts to grow again, no amount of QE can work forever in keeping the current stock market bubble from bursting.

Market looks overbought, overextended and overvalued (Comstock Partners)

It is safe to assume that CNBC,

Jim Cramer and Ben Bernanke share a

completely different perspective

about the market.

Comstock Partners, Inc.
Add'l Posts at Comstock Partners
12/16/10

After an 86 percent gain in 21 months the market looks overbought, overextended and overvalued. Furthermore, despite the implementaion of QE2 and the passage of the tax compromise, the economy is not likely to grow fast enough to to be self-sustaining.

Although the combination of QE2 and the White House/Congressional compromise on the tax extension issue is being touted as the great elixir that will spur economic growth we think that growth will be subdued and temporary. Indeed QE2 is already looking like a failure in its early stages. No matter what the "experts" say now, it was chrystal clear from the get-go that the Fed's intention was to lower long rates, not raise them. As it stands today the sharp rise in the 10-year Treasury bond is likely to further weaken an already dead housing market by enough to offset any additional growth that QE2 could have provided. Furthermore, the combination of QE2 and the big projected increase in the budget deficit caused by the compromise tax bill has helped spur another jump in commodity prices that will reduce real consumer income and negate much, if not all of the intended boost to consumer spending.

In addition economic growth will be tempered by the temporary nature of the stimulus, continuing high unemployment, a moribund housing sector, the dire condition of state and local finances, a lack of readily available credit and the ongoing fragility of a banking sector that is still loaded with toxic assets that are significantly overvalued on banks' balance sheets.

Another major headwind to growth is the ongoing need to reduce household debt to normal levels after the credit binge of recent years. Consumer credit excluding student loans continued its year-long slide in October, falling by $32.5 billion, and the unwinding has barely started. Although consumer spending has perked up recently, we note that a national survey indicated that the percentage of people saying that they used their credit cards over the Thanksgiving day weekend was the lowest (17%) in the 27-year history of the survey. According to major credit card companies, the use of personal credit cards dropped 11% in the 3rd quarter from a year earlier. Does all of this sound like a consumer ready to spend freely? We think not.

As if all of the above weren't enough, the chances of financial and economic crises overseas, particularly in Europe, China and Japan are exceedingly high. The turmoil in the European Union is not a temporary crisis that will be cured with the wave of a wand. A number of the weaker EU nations are basically insolvent, and their debts, sooner or later will have to be restructured. The New York Times and Wall Street Journal recently highlighted the exposure of German, French, British and Spanish banks to the debts of Greece, Ireland and Portugal. The IMF has warned that if the EU doesn't come up with a permanent solution the EU economy could go off a cliff. Meanwhile the austerity measures being imposed on the troubled countries will be a drag on the EU economy for some time to come. As for China and Japan, we'll leave that for future comment.

In light of these problems we believe that investors are overly optimistic. An 81% market rise in 21 months has already discounted a lot of good news----some of which will not happen. The market looks overbought and overextended, and is showing signs of an imminent top with lagging breadth, a lower number of new highs, overenthusiastic sentiment, higher-volume down days and a more frequent number of late-day selloffs. At this juncture we think that potential upside progress is limited while downside risk is high.

U.S. Confidence in Economy Declines in Early December (Gallup)

Consumers are no more optimistic about

the U.S. economy in early December 2010

than they were at this time a year ago.

(Don't share with Wall Street as they have a really good gig

going with their sugar daddy, Ben Bernanke)

Gallup
by Dennis Jacobs
Chief Economist
12/14/10

PRINCETON, NJ -- Economic confidence is deteriorating sharply at the worst possible time for the nation's retailers. Gallup's Economic Confidence Index averaged -31 over the first two weeks of December, fully offsetting November's improvement, and essentially matching the monthly readings of -29 in October and -33 in September.

Consumers are no more optimistic about the U.S. economy in early December 2010 than they were at this time a year ago.

The Economic Confidence Index consists of two sets of ratings: one involving U.S. consumers' perceptions of current economic conditions and the other involving their economic outlook. The December estimate is based on more than 5,000 interviews conducted during the two weeks ending Dec. 12, 2010.

Percentage Rating the Economy "Poor" Worsens
Across Income Groups

During the first two weeks of December, 45% of Americans rated current economic conditions "poor" -- wiping out the improvement to 41% in November, and essentially matching the 44% of October. Consumers' ratings of current economic conditions deteriorated about equally among upper-income consumers (those making $90,000 or more a year) as well as middle- and lower-income Americans (those making less than $90,000).

Americans of All Incomes Less Optimistic
About Economy's Direction

Right now, consumers' expectations for the economy are substantially worse across income groups than they were during November, with 61% now saying the economy is getting worse. During the first two weeks of December, 58% of upper-income Americans and 62% of middle- and lower-income consumers said economic conditions are "getting worse" -- a worsening from 53% and 57%, respectively, in November.

Americans' Economic Optimism
Fading in Early December

Gallup's Economic Confidence Index suggests that the sharp improvement in economic confidence seen in November may be dissipating at the worst possible time for the nation's retailers. The sour reactions of many to the Federal Reserve's efforts to pour money into the economy -- so-called quantitative easing -- may have negatively affected the economic outlook of some consumers and investors. That might also be the case with the financial difficulties in Europe. If so, the statement of the Federal Open Market Committee on Tuesday afternoon, and the reaction to it, could be more important than usual.

More likely, the government's early December report of a surprisingly high unemployment rate for November may have increased consumer worries not only about jobs but also the direction of the U.S. economy. This despite Gallup's tracking data suggesting this government report may be overstated -- at least as far as what is really taking place in the job market right now.

It also might be the case that some Americans who had hoped for increased political harmony after the midterm elections are disappointed about the current battle over the proposed extension of the Bush tax cuts and the extension of emergency unemployment insurance, particularly when so many Americans tend to support both efforts.

Regardless, consumer spending does not reflect an improving economy at this point. Add in the recent decline in economic confidence, and Christmas sales may not meet the increasing expectations that followed the success of Black Friday week.

Gallup will publish its final estimate of Christmas spending later this week. Link to complete Gallup Report

Must read post from Zero Hedge and Must watch David Stockman video

12/4/10
Zero Hedge
Do yourself and kids a favor and; visit Zero Hedge

There is propaganda, and there are facts. For anyone seeking just one concise, definitive and completely true (as in fact-, not hope- based) explanation of what has happened to the American economy in the past 2 years, we suggest this presentation by former OMB director David Stockman, whose 10 minute appearance on the CNBC's strategy session left the hosts with absolutely nothing to retort. Among his observations: the government sector for the first time in history is shrinking: "the reason is that governments are broke... we are going to have to cut back government employment."

 And it gets scarier: "if you take core government plus the middle class economy (65 million jobs), that's the breadwinning economy, if we take some numbers - how many jobs in the "core economy" in November - zero; how many jobs since last December: net zero; how many jobs since the bottom of the recession in June 2009: still a million behind from when the recession ended." As to whether the economy can grow without employment growth: "I can't imagine how it can because employment growth generates income growth which is the basis for spending and saving ultimately and we are not getting income growth out of the middle class."

And the stunner: the job "growth" has come almost exclusively from the part-time economy (two-thirds). Why is this a major problem: "there is 35 million jobs in that sector, with an average wage of $20,000 a year: that is not a breadwinning job, you can't support a family on that, you can't save on that. Those jobs will not generate income that will become self-feeding into spending."

As for the biggest condemnation, it is reserved to what Zero Hedge has been claiming for two years now is a completely broken market: "I can't explain the market... I don't know what it is pricing today, I don't think the market discounts anything anymore, it is purely a daytraders' market that is trading off the Fed, trading off the headlines. One day it is manic, the next day it is depressive, and we can't draw any conclusions." End scene.

Little Ho Ho Ho in the Data (Michael Pento) but the market doesn't care.....yet

The Dow is roughly 21% from its all time,

ever high, set in October 2007

Unemployment rate in October 2007...4.7%

(less than 1/2 of the current, fictitious rate)

Wednesday, December 1, 2010
By: Michael Pento

American consumers are trampling each other to capture the holiday spirit—which sadly has now become Black Friday and Cyber Monday. However, the economic data is flashing a warning sign that may, hopefully, deter shoppers from their recidivistic habits.

The number of mortgage applications in the U.S. fell last week by the most this year as lending rates inched higher. The average rate on a 30-year fixed mortgage increased to 4.56% from 4.50% the prior week. Borrowing costs have been rising since reaching 4.21% during the week ended Oct. 8th, which was the lowest in records going back to 1990.The Mortgage Bankers Association’s index dropped 16.5% in the week ended Nov. 26. The gauge of refinancing fell 21.6%, which was the biggest drop in all of 2010.

Meanwhile, the Challenger, Grey and Christmas report released today showed the pace of downsizing surged to the highest level in 8 months. Planned layoffs jumped 28% from their 37,986 level posted in October, to reach 48, 711 in November.

The ISM Manufacturing Report fell slightly in November to 56.6 from 56.9 in October. The ISM’s U.S. new orders index fell to 56.6 from 58.9, while the production index dropped to 55, the lowest level since June 2009, from 62.7. The employment gauge was little changed at 57.5 from 57.7, and the index of export orders dropped to 57 from 60.5.

Finally, the ADP report for November showed that of the 93,000 private sector jobs created this month, only 14k was in the goods producing sector of the economy. The direction of the ADP number is good but still very much shy of the number of new jobs needed to bring down the unemployment rate.

The economy is barely subsisting despite of, or perhaps more correctly, because of government intervention. When will we learn?

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

Federal Reserve Cuts Outlook on GDP and Jobs

By Luca Di Leo and Jon Hilsenrath
The Wall Street Journal
11/23/10

Federal Reserve officials downgraded their outlook for the U.S. economy at their early November meeting, projecting that the jobless rate could exceed 8% for two more years and that it won't return to its former vitality for five years or more.

Minutes of a Nov. 2-3 meeting and a previously undisclosed Oct. 15 video conference also revealed that Fed officials considered steps beyond the Fed's controversial decision to buy $600 billion more U.S. Treasury debt to lower long-term interests rates to boost growth—including setting a cap on longer-term interest rates, a move which hasn't been tried since the 1950s.

Federal Reserve officials downgraded their assessment of the U.S. economy at their last meeting three weeks ago as they debated the benefits and costs of a new bold step to support the recovery. Jon Hilsenrath has details from Washington.

The minutes offer some detail on the Fed's decision to buy more bonds, a divisive one inside the Fed and one widely criticized outside the Fed. "Somewhat more than half of the participants judged that, in the absence of any additional shocks to the economy, the economy would converge fully to its longer-run rates of output growth, unemployment, and inflation within about five or six years," the minutes showed. "The rest indicated that it could take longer for unemployment to fall back to its longer-run rate or for inflation to rise back to the level they deemed desirable in the longer run."

Meetings of the Fed's decision-making body—the Federal Open Market Committee—include the presidents of the 12 regional Fed bank and the members, currently six, of the Fed board in Washington. The bulk of that group projected unemployment, now at 9.6%, would descend slowly to between 8.9% and 9.1% at the end of 2011, between 7.7% and 8.2% in 2012 and between 6.9% and 7.4% in 2013, a grimmer outlook than the Fed's last official projections in June.

Fed official downgraded their growth projection to between 3% and 3.6% next year, compared to the 3.5% to 4.2% estimate it made in June. Fed officials forecast 2.5% growth in 2010, lower than the June prediction of between 3% and 3.5%. Though Fed critics warn its bond-buying program could spur inflation, the Fed projected inflation would remain below its informal objective of 2% through the forecast period.

The downwardly revised projections indicate the Fed might keep interest rates low for several years and suggests it is likely to follow through on plans to buy $600 billion in Treasury securities in the months ahead. The Fed said it stands ready to buy more securities if the forecast doesn't improve or deteriorates.

"They clearly indicated that even if the improved recent tone of the [economic] data continues and growth surprises to the upside next year it will not trigger any quick reversal in policy," Ted Wieseman, a Morgan Stanley economist, said in a research note.

The Fed's bond-buying has been attacked by GOP lawmakers and foreign officials, who said it could weaken the U.S. dollar and bring high inflation. Even though Fed officials voted 10-1 to support the move, strongly advocated by Chairman Ben Bernanke, the minutes showed that several worried about both those risks. "Some participants noted concerns that additional expansion of the Federal Reserve's balance sheet could put unwanted downward pressure on the dollar's value," the minutes showed. Several officials saw a risk it could "cause an undesirably large increase in inflation."

Fed officials held an unusual video conference on Oct. 15, a few hours after Mr. Bernanke laid out his thinking on inflation in a speech in Boston.

Officials discussed whether the Fed should target some long-term interest rate, in addition to holding its target for overnight rates near zero. In the 1940s and 1950s, the Fed pinned long-term rates below 2.5%. Though the Fed didn't take action in this direction, the discussion suggests the notion could come up later if the economy worsens.

Officials also discussed the pros and cons of adopting a firm numeral objective for inflation and considered holding occasional press briefings to explain the rationale for its decisions. Unlike the European Central Bank, which routinely gives press briefings after policy meetings, such a move would be a departure for the Fed.

Federal Reserve Unemployment Forecast:

• 2010: 9.5% to 9.7%
• 2011: 8.9% to 9.1%
• 2012: 7.7% to 8.2%
• 2013: 6.9% to 7.4%

Thanks for applying however we do not need you, Corporate Profits Were the Highest on Record Last Quarter

By Catherine Rampell
The New York Times
11/23/10

The nation’s workers may be struggling, but American companies just had their best quarter ever.

American businesses earned profits at an annual rate of $1.659 trillion in the third quarter, according to a Commerce Department report released Tuesday. That is the highest figure recorded since the government began keeping track over 60 years ago, at least in nominal or non-inflation-adjusted terms.

The government does not adjust the numbers for inflation, in part because these corporate profits can be affected by pricing changes from all over the world. The next-highest annual corporate profits level on record was in the third quarter of 2006, when they were $1.655 trillion.

Corporate profits have been going gangbusters for a while. Since their cyclical low in the fourth quarter of 2008, profits have grown for seven consecutive quarters, at some of the fastest rates in history.

This breakneck pace can be partly attributed to strong productivity growth — which means companies have been able to make more with less — as well as the fact that some of the profits of American companies come from abroad. Economic conditions in the United States may still be sluggish, but many emerging markets like India and China are expanding rapidly.

Tuesday’s Commerce Department report also showed that the nation’s output grew at a slightly faster pace than originally estimated last quarter. Its growth rate, of 2.5 percent a year in inflation-adjusted terms, is higher than the initial estimate of 2 percent. The economy grew at 1.7 percent annual rate in the second quarter.

Still, most economists say the current growth rate is far too slow to recover the considerable ground lost during the recession.

“The economy is not growing fast enough to reduce significantly the unemployment rate or to prevent a slide into deflation,” Paul Dales, a United States economist for Capital Economics, wrote in a note to clients. “This is unlikely to change in 2011 or 2012.”

The increase in output in the third quarter was driven primarily by stronger consumer spending. Wages and salaries also rose in the third quarter, which might help bolster holiday spending in the final months of 2010.

Private inventory investment, nonresidential fixed investment, exports and federal government also contributed to higher output. These sources of growth were partially offset by a rise in imports, which are subtracted from the total output numbers the government calculates, and a decline in housing and other residential fixed investments.

Economic growth will be tepid through 2011

11/22/10
NEW YORK (AP) — The pace of the U.S. economic recovery will remain steady but slow in the face of persistently high unemployment and heavy debt burdens, according to a new survey.

The National Association for Business Economics survey, set to be released Monday, found economists now expect growth of 2.7 percent this year, up slightly from the previous forecast of 2.6 percent.

For 2011, the group still expects an economic expansion of 2.6 percent.

The likelihood of either stagflation or relapse into recession was seen as low. But high unemployment, debt and severe loss of wealth are expected to hamper a more robust rebound, according to the survey.

"Confidence in the expansion's durability is intact, but panelists remain concerned about high levels of federal debt, a continuing high level of unemployment, increased business regulation, and rising commodity prices," said Richard Wobbekind, president of NABE and an associate dean of the Leeds School of Business at the University of Colorado. "

The 51 members surveyed by the group said they also expect consumer spending to remain modest, with this year's holiday retail sales expected to rise just 2.5 percent from last year.

Meanwhile, the number of jobs employers add to their payrolls is forecast to average less than 150,000 a month before picking up in the latter half of next year. The unemployment rate is expected to remain elevated at 9.5 percent or higher through early next year. It's expected to ease only slightly to 9.2 percent by the end of 2011.

That would mark the weakest post-recession job recovery on record, the group said.

The outlook on housing also remained tepid, with the group scaling back its expectations for housing starts this year to 720,000, from its forecast of 750,000 last month.

The bright spot in the survey was business spending, with sustained, double-digit growth projected through the end of next year. Spending on structures is now expected to grow 1.8 percent in 2011. That's still weak, but better than the previous forecast of 0.2 percent contraction.

NABE panelists also said they expect the federal funds rate to remain near zero until late next year. The 10-year Treasury note is now expected to yield 3.25 percent by the end of 2011, compared with the 3.75 percent forecast last month.

The survey was taken between Oc.t 21 and Nov. 4.

Christopher Whalen doesn’t expect the good times to last much longer -- especially for the big banks.

Tech Ticker
11/17/10
Millions of Americans are still struggling to find work in the aftermath of the 2008 financial crisis. Meanwhile, Wall Street is enjoying another banner year, earning an estimated $19 billion in 2010, according to a report by New York State Comptroller Thomas DiNapoli. That would make it the fourth-most profitable year for the industry.

Christopher Whalen, co-founder of Institutional Risk Analytics, doesn’t expect the good times to last much longer -- especially for the big banks. Whalen thinks they’re headed for a world of trouble -- although if you follow his comments, you know he’s been saying that for at least a year. (See: The "Real" Economy Is Dying: Q4 "Going to Be a Bloodbath," Whalen Says.)

"The crisis is going to come when people realize this current GDP level… is normal," he says, referring to the economy's 2% annual growth rate last quarter. That realization will lead to a sell-off in bank stocks, he predicts. “I don’t see how they (the stocks) can go up if we have down revenues and uncertain GDP.”

The heart of the problem remains flawed and risky real estate loans banks are still holding; Whalen says two-thirds of big banks assets are shrinking as a result.

“There’s a lot of losses in the system that investors haven’t seen yet,” he tells Henry in this clip. “All the industry is willing to do is admit to as much loss as they have cash flow, this quarter,” something banks are allowed to do now that the mark-to-market accounting rules have been removed.

Compounding the problem is a low interest rate environment that is becoming less beneficial to banks. Whalen says net interest rates margins are shrinking – meaning the spread between the rate banks borrow at and the rate they collect on their loans is shrinking, as older loans expire or get refinanced.

Zero interest rates are also making matters worse for the real economy, as Whalen details in his new book Inflated: How Money and Debt Built the American Dream.

Ben Bernanke's zero-rate policy is causing havoc with corporate pension funds expecting and needing to make greater returns to meet funding obligations, he says. “I think we’re going to have big trouble next year if we don’t let rates go up. Even 1% compounded is better than zero."

Fortunately, it’s not all bad across the board. The smaller, regional banks, are recovering. US Bancorp and BB&T, are two Whalen speaks favorably of, although, to avoid conflicts, he does not personally own any bank stocks.

Who really cares about manufacturing…Americans love to go shopping (Michael Pento)

Isn’t it great! Our production is plummeting

but our consumption is up. Weeeeeeeee!

Monday, November 15, 2010
By: Michael Pento

The U.S. manufacturing sector, which has declined to just 11% of GDP today from 28% of output in the early 1950’s, continues to erode. The inventory rebuild cycle appears to be over according to this morning’s release of the Empire State Manufacturing Survey. The Index plunged 27 points in November to register a negative 11.1 from a positive in 15.7 October. That reading was the lowest since April 2009 and the first contraction since July 2009.

The details of the report were also decidedly dour. The Empire State gauge of new factory orders plummeted 37 points to minus 24.4 from a positive 12.9 last month. A measure of shipments fell to minus 6.1 from a positive 19.4. The employment measure decreased to 9.1 this month, from up 21.7 and the average workweek index dropped to -13.0.

But who really cares about manufacturing…Americans love to go shopping don't you know. Retail sales in the U.S. climbed 1.2% October, the most in seven months. Isn’t it great! Our production is plummeting but our consumption is up. Weeeeeeeee!

Of course, economists are cheering this retail number and downplaying the manufacturing data in the belief that consumer spending will save us from another depression. But borrowing to consume is what got us in trouble in the first place. And since production is falling we have no way to pay back our creditors. The consolation we offer our foreign lenders is this; it isn’t such a big deal that we can’t pay you back because even if we did, the currency is becoming worthless anyway.

Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.

QE2 is economic voodoo to many (great read: informative and smidgeon of sarcasm...perfect)

By Lou Barnes
Inman News
11/12/10
The immediate aftermath of the QE2 (the Federal Reserve's Plan B quantitative easing strategy) announcement has not gone well: Mortgages rose to their two-month highs, near 4.25 percent, and the yield of 30-year T-bonds exploded from 3.93 percent to 4.32 percent.

QE2 has an immediate problem: Treasury yields are stone low because the whole world ran to our paper for safety, and now the Fed proposes to make that paper unsafe by printing cash to finance it. However, it is early: the Fed has yet to buy the first QE2 Treasurys, and the event will go better than the news.

Economic data ... during my Irish mother's long-ago visit to the Emerald Isle, the best forecast for weather called for a "bright interval," and our economy had the same in October. Even the grumpy National Federation of Independent Business survey of small business improved, though more reconciled to lousy conditions than truly better.

New unemployment filings touched a 2010 low at 435,000 last week -- that's more about running out of people to lay off than hiring.

QE2 is incomprehensible to the average citizen, and misunderstood by many finance people; even more do not want to understand. One example: Sarah Palin said this week that she just knows that QE2 is the wrong thing to do.

The policy errors that made the Great Depression great have been the life's work of Ben Bernanke: During the financial collapse from 1930-32, the authorities tried to balance the federal budget and maintained a tightwad Fed.

This time we mobilized fiscal stimulus and active central banks, but the underlying hazards -- asset deflation, capital shortage and credit freeze -- are still in place, and sovereign borrowing capacity is exhausted. That was not the case in the '30s.

This emergency is not over, maybe not by half. And from here to Europe fiscal support is turning to deep austerity, and suicidal disciplinarians are trying to shut down the central banks.

One Fed governor who voted for QE2 waited five whole days before shoving Bernanke under the bus. Kevin Warsh lauded "reallocation" of capital and labor (the benefits of foreclosure and unemployment), and deleveraging as "prudence to be celebrated" (credit is bad for all of you).

Instead of QE2, he advocated "pro-growth policies" -- reform of the tax code and regulation, presumably to be achieved in time to help this crisis by the arrival of little green men on the White House lawn.

For a splendid tale of successful QE in 1933, and a longer sidebar, visit certified no-illusions old-timer Paul Kasriel, "The Econtrarian."

At the G-20 meetings, China and Germany decried QE2 as an unfair manipulation of the dollar to weakness, and intervention in free trade. John Dillinger and "Pretty Boy" Floyd might have had similar objections to giving pistols to bank guards.

Bernanke needs help to explain QE -- ordinarily the job of the Treasury Secretary, and "Timid Timmy" may not up to it. Or President Obama, but he is still trying to get the plate number of last Tuesday's dump truck.

Bernanke is about to get help from the same quarter as last spring: Europe is coming unglued (again), now Ireland's turn, and U.S. Treasurys will be safe harbor.

Ireland did a brave thing when its real estate bubble blew: It guaranteed all bank claims. However, a 32 percent of gross domestic product budget deficit this year, bank losses deepening as real estate dominoes fall under the weight of austerity, and Ireland has had it.

It has some cash, but its bonds are wastepaper (see the writings of Morgan Kelly, economics professor at University College Dublin in Ireland).

Europe says aid is available, but Germany sets the conditions: Offer loans that would save Germany's banks from Irish default, with crushing balances and high rates that would prevent Irish recovery. Indentured servitude: "Until you learn to behave like proper Germans, you will be an object lesson to the others not to misbehave again."

The others may draw unintended conclusions from this offer of serfdom. Tough Ireland might lead the way: better to default, issue new Irish pounds; go back to spuds, cabbage and Guinness ... and independence.

Meredith Whitney on CNBC: Political gridlock could put our economy in a very bad state

Political gridlock could put our economy in a very bad state, Meredith Whitney, CEO of the Meredith Whitney Advisory Group, tells CNBC's Maria Bartiromo. She also says she's a seller of regional banks. Biggest financially challenged states include NJ, IL, CA and GA with FL rounding the corner.

Change We Can Believe In (including changing your mind): Obama ready to cut deal on Bush Tax Cuts

By CARRIE BUDOFF BROWN
11/11/10 
Politico

The White House signaled Wednesday that President Barack Obama is ready to cut a deal on the Bush-era tax cuts – accepting a temporary extension of the cuts for the wealthiest Americans to win renewal of tax breaks for middle-class taxpayers.

Such a deal would run counter to one of Obama’s longest-standing and most often-repeated promises from the 2008 campaign – that he would end the tax cuts for wealthier individuals.

But Obama’s top political adviser, David Axelrod, said Wednesday that the White House has to deal with “the world of what it takes to get this done” – a signal to Democrats that they don’t have the votes to kill the high-end tax cuts in the face of a new Republican House majority and resistance from Democratic moderates in the Senate.

“We have to deal with the world as we find it,” Axelrod told the Huffington Post.

Axelrod’s remarks confirmed what many on the Hill had long suspected, that lingering concerns over the weak economy and the political aftershocks of last week’s election would compel the president to accept a temporary extension of the high-end tax cuts.

The White House did not attempt to walk back the comments Thursday morning, arguing that Axelrod was echoing what the president already stated in his weekly address Saturday.

“The President has been clear that extending tax cuts for middle class families is his top priority and he is open to compromise to get that done,” White House spokeswoman Jen Psaki said in an email. “He has also expressed concern about the cost of making the highest income tax cuts permanent and is looking forward to discussing this and other issues with bipartisan congressional leaders next week.”

The nod to political reality is the kind of signal Democrats on the Hill have been seeking as they open negotiations next week with Republicans during the lame duck session of Congress.

But it is already being interpreted by the progressive base as a cave-in. They see little reason to cede ground to Republicans because polls show voters don’t favor renewing tax cuts for the wealthy. They say they want Obama to hold firm to his long-time campaign pledge to let those high-end tax breaks expire.

Jane Hamsher, a frequent White House critic, posted reaction last night to Axelrod’s comments under the headline, “Obama Twists Own Arm, Says ‘Uncle’ to Extending Bush Tax Cuts.”

“If he’s the ‘political genius’ guiding the Democrats these days, they should consider themselves lucky it wasn’t 100 seats” that they lost in the House, Hamsher wrote on her blog FireDogLake.

In his weekly address last week, Obama reiterated his campaign pledge of protecting the middle class tax cuts. He also said the country cannot afford to permanently renew the high-end tax cuts, which would cost $700 billion over the next 10 years.

He appeared to outline the shape of a potential deal: A temporary extension for wealthier taxpayers and at least a temporary extension for the middle class.

The tax cuts expire Dec. 31, placing pressure on Congress to strike a deal on an extension during the lame duck session.

"We don't want that tax increase to go forward for the middle class," Axelrod said. "But plainly, what we can't do is permanently extend these high income taxes."