Smiley Face

Let's all put on that smiley face.  Now, what does this have to do with economics and/or finance?  Absolutely nothing.  I am just trying to make you feel better before the financial bubble burst.  So, enjoy.  Everything is going to be just fine.  Believe me.  That is what Washington wants you to believe. By the way, is the turmoil in Egypt the new Black Swan?

Chicago Fed National Activity Index for December 2010

As I have previously posted, I consider the "Chicago Fed National Activity Index" as the best macroeconomic measure that portends to the overall strength and direction for GDP.  Why this index? Because this index is a weighted average of 85 indicators of national economic (GDP) activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. Each month, the Fed of Chicago provides a monthly index number, which reflects economic activity in the latest month, and a three-month moving average. Month- to-month movements can be volatile, so the index’s three-month moving average provides a more consistent picture of national economic growth.

Now, what is the index saying for December?  According to the Fed of Chicago, "Led by gains in employment- and production-related indicators, the Chicago Fed National Activity Index increased to +0.03 in December from –0.40 in November. December marked the first time in five months that the index had a positive reading. Three of the four broad categories of indicators that make up the index made positive contributions in December, while the consumption and housing category continued to make a large negative contribution."

For December 2010, the index is encouraging, because it moved to the plus column, which indicates that GDP is expanding above its historical tend rate of growth.  However, when you look at the 3-month moving average, the index is still below its historical trend rate of growth.  And, that is still the problem.  According to the Fed of Chicago's own statement, "consumption and housing continue to make a large negative contribution to GDP." And, I don't expect that consumption and housing are going to make a positive impact on GDP anytime soon, especially for 2011.

 

It is Only Money

Yesterday, the Fed repeated its previous announcements that it will continue its course of action, which we all know has worked, so very will (LOL), by purchasing $600 billion of bonds from Wall Street.  It also repeated its short-term interest rate target of “zero percent,” and suggested it sees no change in its policies coming any time soon.  The Congressional Budget Office (CBO) reported that the Federal Deficit would reach $1.5 trillion in 2011, as I posted yesterday, that the U.S. Government would borrow 40 percent of the money it spends in 2011.  The CBO, also, pointed out that tax revenues, as a percent of GDP, will sink to the lowest level since 1950.  That is NOT good news, which definitely tells us that the economy remains sick, because consumers, who account for 70 percent of GDP, are struggling, as are small businesses.  QE1 is over.  Did that assist you?  No, because you are not Wall Street.  Now, QE2 is underway and again it will only benefit Wall Street, not you.  QE1 and QE2 are designed to boost GDP through your wealth effect of a rising stock market.  (That is, your perception is that you are wealthier because of your unrealized stock market gains.  Therefore, you will consume more, which increases GDP.  However, what about those really, weak real estate values out there?  Oh, that should have the opposite impact on your wealth effect.  But, the Fed doesn’t want you to think about that.)  Keep-in-mind that the stock market is not the economy, but that is the association Washington and the Fed want you to make.  The result of this false association will be an eventual stock market decline that reverses the entire, manipulated rise in prices since March 2009.

In Elliott Wave terms, Bear Markets usually have two huge down-legs separated by one rally between the two down legs.  The decline through March 2009 was the first major down-leg.  The rally from March 2009 is the fake-out rally.  Therefore, coming soon to your financial house will be the third-leg down, which will be more powerful than the 2007-2009 decline.

I am Back!

After my hiatus, I decided it was time to come back to life.  What triggered this decision?  Well, I would have to say it was the State of the Union message last night.  Not really, but it sounded good, at least to me.

Let see, President Obama’s State of the Union address stated that the following issues must be immediately addressed: (1) cutting the deficit, (2) reducing unemployment, and (3) ensuring the U.S. can compete with economic rivals, namely China.  I totally agree.

These are definitely laudable motives for improving our economy. However, how are we going to cut the deficit?  And how we going to make the U.S. competitive with economic rivals such as China?
Let’s see are we planning on repealing the Federal Minimum Wage?  You know - we have to pay people over $7/hour.  In China many people make $7/DAY.  Exactly how do we compete with that?

Or, are we going to disband the EPA and tear up all the environmental laws?  After all, in China you just dump your poisons in the water and spew them into the air.  Can anyone explain to me how, when entitlements are 56% of the budget, and we currently borrow between 40% to 43% of the budget, how one intends to be "learner and smarter" and get rid of the deficit - when you have to pay interest charges - without cutting those entitlements?

Today, the Congressional Budget Office said that Social Security will pay out $45 billion more in benefits this year than it will collect in payroll taxes, further straining the nation's finances. The deficits will continue until the Social Security trust funds are eventually drained, in about 2037.  Ouch, Ouch, and Ouch!!!  In addition, the CBO stated the federal budget deficit will reach nearly $1.5 trillion in 2011 due to the weak economy, higher spending and fresh tax cut.  I really believe (no, I know) that the majority of Americans do not realize what the shortfall in social security and the $1.5 trillion federal deficit means to the future of America, and, of course, to their future. 

Where is the sanity in all of this?  It is all very crazy, indeed.  As a nation, we can not deficit spend our way out of our economic problems.  What we have done is create the greatest financial bubble in the history of mankind.  Now, that is crazy!

How Much Debt Is Too Much?

We are on the verge of that famous 90%-100% debt-to-GDP ratio where many believe a sovereign debt crisis is inevitable.