03
Feb
15

the skeptical economist

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Recovery… really?!

by Henry Dailey

Three weeks ago I saw an advertisement online for Fidelity, the mutual fund company. I can’t begin to describe the befuddlement I felt when I read the two opening lines: “The American economy is expanding… and powering stock market gains.”

Who writes this stuff and how can they possibly believe it? Late last year none other than Bloomberg concluded that the relentless S&P gains of the past few years are overstated by 86% when the manipulation is considered. Most of the top “performing” company stock gains were in large part due to accounting trickery and share buybacks (funded by issuing new debt even though plenty of cash was available).

Here are some additional headlines that show how strong the expansion is:

• Caterpillar and Coca Cola are laying off over 3,000 people between them due to poor sales. Caterpillar sales have fallen for the past two years straight and it turns out that high fructose corn syrup isn’t the best diet foundation after all. I wonder what happened to all those “shovel ready” jobs? Are the shovels just to dig the grave for the US economy and American dream?

• Wet Seal, a teen apparel store, is closing 337 locations, two-thirds of all of its stores. About 3,700 jobs will be lost. I guess there isn’t enough demand after all for 8-plus teenager-focused retail store chains in every mall in the country. Why pay retail prices when you can buy the same ill-fitting and slutty fashions for $3 at Goodwill? That’s one store that is still expanding.

• JCPenney beat its sales expectations for the Christmas season and gave the company the confidence it needs to close 40 stores and eliminate over 2,000 jobs. What would have happened if sales tanked, as they did in 2013?

• The time to buy a house has never been better and the housing market is so strong that lending standards are being lowered again. 3% down mortgages from Fannie Mae are being promoted by none other than Obama himself but even that low ratio is far above what many people have in cash (see below). $300,000 for cardboard walls still means almost $10,000 down.

• Obama visited a car parts factory in Michigan last week to speak on how good car sales have been and what a boost they are to the country. Unfortunately the plant from which he spoke is closed due to insufficient demand for its products and had been closed before Obama arrived. Channel stuffing by GM remains at all-time highs. 30% of all new car loans are subprime rated. Car loan delinquencies are rising by double digit percentages over last year’s levels. In all but one city (DC of course) a new family sedan is unaffordable for the typical middle class household. Many dealers still have new 2014 models on their lots, even though 2015 versions have been in production for up to six months already.

• 30% of student loans are in default. This is despite a majority of graduates moving back in with their parents and probably saving a lot on housing costs. The definition of default for these loans is quite generous so a high rate such as this suggests a critical breakdown.

• Layoffs are ongoing and bankruptcies beginning for some companies involved in the “shale oil miracle”. This is the ONLY industry that had a net job gain since 2009 and often its wages were high enough not to have to live in your car on a diet of Ramen Noodles and Chef Boyardee.

• 62% of households cannot cover an unexpected expense of just $500 without borrowing, selling possessions, or asking for help from friends or family. The summary of the results of this survey began with a reference to “improving hiring numbers” as a dependent clause at the beginning of the first sentence, as though everyone knows and accepts it as fact. I’d like to know what they’re smoking.

• Despite America’s complete addiction to entertainment and sports distractions, 2014 movie ticket sales dropped to levels last seen in the late 1990s. Perhaps $12 for a matinee of the exact same show as last year (Captain Universe vs The Dark Mutant Robot Alien, Part 4) had something to do with it. Or, they were at home calling 911 to ask when the video game network would be up again, as one man in Florida did when it went down on Christmas Day.

• It’s not just the US as Target is closing ALL 133 stores in Canada after just a two year experiment. 17,600 jobs will be lost and the total cost of all their severance is almost the same amount as the total compensation of the departing CEO. I’d sure like a job where I can leak thousands of customers’ credit card data, spend tens of millions of dollars expanding to a new country without having a supply chain in place and get paid $60 million for being a failure, all while letting the core business become just a more expensive Walmart.

• There are thousands more layoffs at IBM, eBay and others, for a total of over 30,000 in just the first three weeks of the year.

I’m glad we’re in a recovery because I’d hate to see what a recession or depression would look like.

It’s like rainbow-chasing: you can pursue it forever and never get to the end. How can the economy be in a constant state of recovery but never actually recover?

typewriter-money

My take on this is that economic prognostications fall into the same category as Groundhog Day: you know that winter will eventually end, but you don’t really know when.

For example, yesterday Punxsutawney Phil’s shadow suggested that winter will last for another six weeks. But that is in Punxsutawney PA. There are over 30 other Groundhog Day observances, and the results vary depending on location.

According to Groundhog Day organizers, the rodents’ forecasts are accurate 75% to 90% of the time. But you would expect them to say that, wouldn’t you?

A Canadian study for 13 cities in the past 3 to 4 decades found that the weather patterns predicted on Groundhog Day were only 37% accurate over that time period. According to the StormFax Weather Almanac and records kept since 1887, Punxsutawney Phil’s weather predictions have been correct 39% of the time. The National Climatic Data Center has described the forecasts as “on average, inaccurate” and said that “the groundhog has shown no talent for predicting the arrival of spring.”

I’m not comparing my son to a rodent or disparaging his predictions. In fact, his ability to predict the future is less important than what he does with his beliefs in the here-and-now. Henry has proven he can make and save money, whatever the economic climate… and that, after all, is all that really matters.

۞

Groove of the Day

Listen to Judy Garland performing “I’m Always Chasing Rainbows”

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Weather Report

46° and Cloudy

(Yesterday’s weather at Estrella Vista predicts an early spring, but that’s why I live here.)


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