Where is the Economy Going in 2011/2012?

[All-American]

Well now, I may not be all that mc'educated about the ins and outs of Wall Street, but from my fool's perch it doesn't take much to figure out that when a nation's best and brightest decide to pursue professions that don't actually make anything, and where the all the innovation and profit comes from figuring out better ways to buy low and sell high... well that isn't a sustainable model. That is a model built on the manufacture of losers (the suckers who manage to buy high and sell low).

It just doesn't seem like much good comes from the world of high finance.

I would be fascinated to hear more about the ins and outs of Wall Street (Viking, perhaps?), but I would think that your view on the sustainability of this economic model is based on the assumption that middlemen are not value adding. I see no particular reason why we should be worried that the nation's best and brightest drift towards resource allocation. We can be concerned about suckers who buy high and sell low, of course, but I have to suspect that these are not the major source of wall street wealth.

[Color Me Badd Fan]

Well now, I may not be all that mc'educated about the ins and outs of Wall Street, but from my fool's perch it doesn't take much to figure out that when a nation's best and brightest decide to pursue professions that don't actually make anything, and where the all the innovation and profit comes from figuring out better ways to buy low and sell high... well that isn't a sustainable model. That is a model built on the manufacture of losers (the suckers who manage to buy high and sell low).

It just doesn't seem like much good comes from the world of high finance.

The finance and banking system pre-1980s was highly inefficient. The expansion of the banking system has allowed for a much more free and easy transmission of money.

You take the good with the bad. In the process of funding the Internet Bubble, it made the US the world leader in technology. But it also resulted in half-built homes in Hesperia, CA. Clearly less regulation from the 1970s was good, but not enough regulation (late 90s and on) was not good. The biggest mistake made was repealing the Glass-Steagall Act. Depository banking functions and investment banking functions should not be mixed.

The biggest problem, IMO, is allowing banks to award extremely risky short term behavior that pumps up short term profits while screwing the long term health of the bank. If these guys are too big to fail, then they should be required to have clawback provisions in their executive bonus structures. I doubt that Dick Fuld and these other guys would have pressing for the sub-prime volume if they knew it would come back and bite them.

[NorthwestUteFan]

Thanks for the great info.

TARP, as you indicate, was instead used to give loans to banks, pseudo-banks, car companies, etc. This was used to prop up the banks liquidity and capital ratios, but was NOT used to buy toxic assets.

...and NBC and MSNBC via GE, etc.

• He expects moderate growth in 2011, and strong growth in 2012; however, this can be derailed by two things, high gas prices or (I forget the second maybe non-recovery of the housing sector? I'll have to check)
• He was asked about the deficit. He said that, in his opinion, we needed to spend what we did, and run the deficits that we have now, in order to prevent the receession from being much worse than it was; however, we need to now start lowering it (but not all at once). Currently, the defecit is 9% of GDP. He said that if we get it down to 2% in the next 5 years or so, he thinks we will be fine. If it stays at 9% or anywhere close to it past 2012, we will be in trouble

- Gas is pushing $4/gal up here, oil production is down worldwide but especially domestically, and the 'summer demand' has not yet started. Gas prices are not going down, unless demand somehow shrivels this summer. Higher gas prices will ripple and be felt through the prices of all goods and most services, IMO.

- I can't remember exactly, and his writings are very hard to understand, but I don't believe Keynes himself would be in favor of extended deficit spending as we have done it.

I am afraid we are broke and don't yet feel it. To avoid surpassing the current debt limit (which now exceeds GNP), they need to pull off some draconian cuts. I don't see the deficit dropping any time soon, unless they slash and burn the budget, cut "tax loopholes" (i.e. kid, mortgage, etc deductions, tax shelters, etc), and jack up tax rates, which will of course push the economy face down into the mud, then step on its neck.

- Another way Utah is effin' weird (in a good way for those of you who live there) is there seems to be a solid strength in the housing market. Most places in the country the bottom seems to be falling out, and there is SO much supply on the market that prices won't come up soon.

- Even gold, which some people hawk endlessly (lookin straight at YOU, Brother Beck), 'appears' to have increased four-fold over the last ~25 years. However when compared to the consumer price index, it is apparent it has risen by barely more than 80% over the last ~25 years, and much of that due to speculation. (Gold was roughly $350/oz in 1985, and is $1425 today. But $350 in 1984 is $778 today...). That means gold has an annual gain of under 2.5% since 1985! (using current dollars).

I guess what I am trying to say is much of what we everyday citizens consider as indicative of economic 'strength' (DJIA/stock market indices, gold prices, home/goods prices, etc) look 'strong' because the value of the dollar recently has fallen dramatically. DJIA rallying back to surpass $12k looks like a good thing, until I realize that DJIA at $11,723 in January of 2000 would be equivalent to $15,066 in 2011 dollars.

I am not going to build a bunker or anything like that, but I am also trying to tighten my belt and get rid of debt as fast as I can because I think things are going to get uncomfortable (to say the least).

[Paperback Writer]

Well now, I may not be all that mc'educated about the ins and outs of Wall Street, but from my fool's perch it doesn't take much to figure out that when a nation's best and brightest decide to pursue professions that don't actually make anything, and where the all the innovation and profit comes from figuring out better ways to buy low and sell high... well that isn't a sustainable model. That is a model built on the manufacture of losers (the suckers who manage to buy high and sell low).

It just doesn't seem like much good comes from the world of high finance.

One thing to consider is that Wall Street does provide investment capital to start-ups and to existing companies needed for growth. (This also occurs in Silicon Valley.) So while I agree that much of Wall Street profits are generated by being "winners" (and thus at the "losers" expense), Wall Street also provides investment capital for companies to grow. In those cases, it's not a winner/loser scenerio but a scenerio where Wall Street can realize massive gains while a company gets needed investment capital so it can expand and generate more jobs and economic growth for us non-Wall Street folks.

[beefytee]

I am not going to build a bunker or anything like that, but I am also trying to tighten my belt and get rid of debt as fast as I can because I think things are going to get uncomfortable (to say the least).

Debt seems like the last concern you should have with the stuff you mentioned. Are you predicting deflation?

[I.J. Reilly]

Someone correct me if I am wrong here, since I am not an expert on this, even though I work at a bank (I'm in marketing, not finance), but I think you are confusing what was originally going to happen, and what actually happened. TARP was originally envisioned to buy distressed assets to get them off of the books of the banks. The government would then resell them, hoping to get their money back over the next couple of years. This was not what actually ended up happening. TARP, as you indicate, was instead used to give loans to banks, pseudo-banks, car companies, etc. This was used to prop up the banks liquidity and capital ratios, but was NOT used to buy toxic assets.

As a result, banks still own many of these toxic assets (some have been sold off over the last couple of years, I have no idea what percent), so it is still a problem for the banks, but they are much better capitalized now than they were a couple of years ago, so they can handle it better.

As an aside, I was thinking of this thread recently, as a couple of weeks ago I was in a very interesting session with a very smart economist. Some of his thoughts were:

• TARP was absolutely necessary
• The best thing that the government did during the crisis was the bank stress tests, which were much more effective than similar measures in Europe
• He expects moderate growth in 2011, and strong growth in 2012; however, this can be derailed by two things, high gas prices or (I forget the second maybe non-recovery of the housing sector? I'll have to check)
• He was asked about the deficit. He said that, in his opinion, we needed to spend what we did, and run the deficits that we have now, in order to prevent the receession from being much worse than it was; however, we need to now start lowering it (but not all at once). Currently, the defecit is 9% of GDP. He said that if we get it down to 2% in the next 5 years or so, he thinks we will be fine. If it stays at 9% or anywhere close to it past 2012, we will be in trouble

A couple of additions:

The bailout is still approximately $123 billion in the red. This figure includes both monies repaid and profits earned by the government through dividends, interest, fees, or repurchase of warrants. As far as pure payment left on principal, there is about $313 billion left out there to be repaid.

Hopefully the economist you heard speak isn't relying on the housing sector fully recovering for his economic predictions. As far as I can tell, there is still a lot of inventory out there to be worked through before the real estate market starts to warm up again. Personally, if I had any say in the matter, I would discourage overconfidence in the housing market and either raise interest rates or significantly reduce/eliminate the mortgage interest payments tax deduction.

I agree with the economist that deficits will have to be reduced but now isn't necessarily the time. A few observations: first of all, the best way to reduce deficits is to increase revenue, either through raising taxes or an expanding economy. I vote for an expanding economy and higher/adjusted taxes. Slashing the budget right now would be a poor idea. Government expenditure is a significant portion of our overall economy, and the only area that can be temporarily artificially raised when the rest of the economy isn't doing to well, which is the situation we are in. While 2% is not a bad target deficit, eventually, the government is going to have to run surpluses to fund Social Security or figure something else out to do there.

[I.J. Reilly]

I guess what I am trying to say is much of what we everyday citizens consider as indicative of economic 'strength' (DJIA/stock market indices, gold prices, home/goods prices, etc) look 'strong' because the value of the dollar recently has fallen dramatically. DJIA rallying back to surpass $12k looks like a good thing, until I realize that DJIA at $11,723 in January of 2000 would be equivalent to $15,066 in 2011 dollars.

Gold prices are almost the exact opposite of the economic "strength" that you indicate. Gold is where investors go when they don't have faith in the overall economy. When there is a general feeling that economic health is back, gold prices will recede. If they don't, you'll be observing a bubble and my advice to you would be to calculate the right time to start shorting gold b/c you will make a bunch of money.

With increased globalization, the Dow is now more a proxy for the world economy than the US, specifically.

[I.J. Reilly]

The finance and banking system pre-1980s was highly inefficient. The expansion of the banking system has allowed for a much more free and easy transmission of money.

You take the good with the bad. In the process of funding the Internet Bubble, it made the US the world leader in technology. But it also resulted in half-built homes in Hesperia, CA. Clearly less regulation from the 1970s was good, but not enough regulation (late 90s and on) was not good. The biggest mistake made was repealing the Glass-Steagall Act. Depository banking functions and investment banking functions should not be mixed.

The biggest problem, IMO, is allowing banks to award extremely risky short term behavior that pumps up short term profits while screwing the long term health of the bank. If these guys are too big to fail, then they should be required to have clawback provisions in their executive bonus structures. I doubt that Dick Fuld and these other guys would have pressing for the sub-prime volume if they knew it would come back and bite them.

And now, for the awesome triple post, I speak specifically to the bolded paragraph above. I agree with your premise that incentives are out of whack on Wall Street, but I think the problem runs deeper than bonuses for short-term gains. While that is a problem, Lehman Brothers actually had some of the most aggressive policies on Wall Street to counteract this. A large portion of bonuses that were paid were done so in stock that didn't vest for 5 (iirc) years or more. If the company fails, your bonus never materializes.

One would think that this would drive employees to watch out for the long-term health of the company. Where I think that this goes wrong is that it doesn't scale up well. One individual trader can make huge bets that make him a rather large sum individually but on the balance sheet should a loss be incurred it really doesn't do that much damage. Since the upside to risk individually in this scenario is greater than the downside, individual risk-taking behaviors will increase. The problem with this comes in the aggregate. It's hard to tell you neighbor not to do what you're doing but you're not going to stop b/c you stopping doesn't really make that much of a difference one way or another.

On top of that, Wall Street has a herd mentality. It is hard for an investor to stay with his bank while it gives him 5% returns when he sees his neighbor making 15% returns on something that doesn't appear superficially risky (e.g., CDOs, ABSs, etc.) and he can easily take his money across the street.

[NorthwestUteFan]

Debt seems like the last concern you should have with the stuff you mentioned. Are you predicting deflation?

As I mentioned above, I am a complete neophyte economically. In a couple of months I will pay off a $550/mo car loan which will give me considerable breathing room.

I don't have a clue whether we will have inflation, deflation, or conflagration in the economy. I just don't think it will be getting stronger in the near term. Nearly every Joe Average out there, like me, is busy tightening his belt and gulping hard to swallow the weekly grocery bill and gas station bill. There is less money available to buy "stuff", and many consumer purchases (eg TVs, home improvement stuff) are made on 18 months same as cash.

With an economy that is so strongly dependent upon consumer spending and services it seems to me

As for houses, according to the Census Bureau, 18% of ALL homes in Florida, 16% in Arizona, 14% in Florida, and 8% in California are now vacated. I am willing to bet that exceptionally few of these properties are current on their property tax payments, which heavily strains local governments (esp FL and NV, which have no income tax).

The housing market is so heavily oversupplied right now that it isn't coming back any time soon. Personally I wish that I kept my down payment in the bank when I moved here 2 years ago and just rented.

[NorthwestUteFan]

Gold prices are almost the exact opposite of the economic "strength" that you indicate. Gold is where investors go when they don't have faith in the overall economy. When there is a general feeling that economic health is back, gold prices will recede. If they don't, you'll be observing a bubble and my advice to you would be to calculate the right time to start shorting gold b/c you will make a bunch of money.

With increased globalization, the Dow is now more a proxy for the world economy than the US, specifically.

You are speaking WAYYY over my head, and I greatly appreciate it! I will need to research and get caught up.

You are right, I got confused and misspoke. I mentioned gold because it is often being pushed as a "surefire safe haven" with marketing blitzes that claim "It's going up, buy it now!!". I am sure savvy investors have and will continue to do very well with it, but from my elementary back-of-the-envelope calculations tell me that it hasn't really increased value by much over the last several decades, despite a skyrocketing dollar value. Therefore it is more of a hedge against economic uncertainty, as you mention.

Somebody once gave me a truism: "In 1900, an ounce of gold would buy you a very nice suit. It will buy you exactly the same thing today."

[Clark Addison]

Hopefully the economist you heard speak isn't relying on the housing sector fully recovering for his economic predictions. As far as I can tell, there is still a lot of inventory out there to be worked through before the real estate market starts to warm up again. Personally, if I had any say in the matter, I would discourage overconfidence in the housing market and either raise interest rates or significantly reduce/eliminate the mortgage interest payments tax deduction.

No, he wasn't. He was forecasting continued deterioration with a the bottom of the trough coming around the end of 2011, with different troughs in different regions.