Brilliant Economists Can’t Figure It Out

A picture is worth 1,000 words.

and a million laughs….
this cartoon and hundreds of others like it are 6 years too late….

So let me get this straight, companies are making record profits and the American consumer is somehow suffering and unable to buy any of the goods and services corporate America is selling them?

How are the corporations making these profits if workers are faring so poorly? I walk into Best Buy and see people everywhere buying stuff. I look around and see people out shopping, bags bursting with new items they just purchased. If you go to any Starbucks cafe on Saturday morning you have to wait in a long line to get your gourmet latte.

If these are bad times, what do the good ones look like?

~~~

BR: While 70% of the US economy is driven by the consumer, don’t forget about the rest of the world: US companies are selling goods and services to overseas corporate/gov’t customers in Asia, Europe and Latin America, as well as to each other.

Mr. X, you ever heard of credit cards? Equity lines of credit? Stuff like that?

Mr X. you are X actly wrong on so many levels I do not even know where to start but I’m sure others will point that out to you..

Ciao
MS

I want to know what news is coming for BSC….all the major financials are up to flat and BSC is down over 2 bucks…or about 2%.

Someone knows something relating to BSC

Ciao
MS

MS
RE: BSC
Todd Harrison over at Minyanville passed along that there was chatter on Monday that BSC was now having currency issues. Not a fact, probably a rumor, but maybe today’s price action tells all.

trickle-up economy in full swing.

Looks like the cartoon worker is employed by a big bad cartoon corporation. Looking in his cartoon paycheck I wonder if he sees the real world cost of benefits received or the ’employer share’ of his fica taxes typical of an employee of an evil corporation. Benefits typically run to about 25% of labor costs and medical costs are increasing at 30-40% clip. Must be the evil corporations in the cartoon healtcare industry. Increasing real world costs of liability insurance and medi-care, medicaid regulations among healthcare providers can’t have anything to do with it since the whole evil, greedy cartoon corprate interests narrative becomes unadulterated bunk. We can’t have that. You guys need that narrative.

~~~

BR Oh, puh-leeze.

These are the simple facts: Corporate profits are at record highs. At the same time, this post recession recovery has been one of the worst since WWII in terms of job creation, income and wages.

I don’t make a moral judgment about it — I neeed to know what reality is so as to best protect my clients assets.

“If these are bad times, what do the good ones look like?”

TROLL ALERT

You sound like one of the “Brilliant Economists Can’t Figure It Out”

Real estate left? If the current owners are upside down on their mortgages then they are worse off than the dot.com boom left them — instead of an asset worth zero they have an asset worth less than zero net that continues to drain cash — but, sure, the real estate is still worth something to someone, somewhere, at least in principle.

My own take though is that the credit debacle is going to continue to unwind far more slowly than expected — the peak in ARM resets isn’t due for another year at least — with continuing areas of profit but rising volatility and the possibility of serious reversals means more nimbleness will be required; i.e., it has not been a particularly grand time for buy-and-hold strategies the past 7 years and that’s probably going to hold doubly true for the next 7 IMHO.

“You guys need that narrative.”

Posted by: Tom | Aug 22, 2007 12:38:23 PM

_____________________

So, Mr. Tom “Bull” – where do you see sound financial practices? What is your narrative? If you aren’t in the Cabal (and, since you’re posting here – I assume you’re not), you’re one of us (middle class taxpayer). The only difference is that when we’re all trying to pick up the pieces, you’ll be getting laughed at.

I’ll bet you tink Bush has changed America for the better, too. Keep on holding on to the delusion. You are the punch line.

Mr. X-actly wrong

here’s some evidence that you do not have to collect(based on your own comments) but apparently I do

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY8m0nta94GA

let’s talk about fake corporate profits when you finish reading that.

Ciao
MS

You know, there is a societal element that is missing from this discussion and that is how difficult it is, and how much stigma is attached to people who admit to struggling.

We look at pictures from the Dustbowl days with great reverence, but modern-day folks who struggle are treated like lepers and admonished for their failure to engaged in creative financing to improve their lifestyles.

There is as much as a ponzi scheme going on in “image” as there is in finance. You borrow to keep up with him, he’s borrowing to keep up with the other guy, on and on it goes to the very top…where there is one rich guy who is just so rich, he doesn’t even know other people exist.

guys take it easy on MR. X

even i dont see any problems right now….neither with consumer spending nor with business spending.

i have been hearing that consumer are neck deep in debt since the last two years….but damn it…they are still buying stuff….how??

so please some one explain in plain english….what is the current status of consumers??…..on average how much are they in debt??…how much interest and minimum payment are they making on an average??

i have seen that Debt servicing ratio (DSR) is 14% or something….can some one explain if this 14% means consumer have 14% debt payment wrt to their disposable income??

Marcus Aurelius: Empty houses don’t remain empty for long. They either get resold or become rentals. Sold for less, the buyers’ credit screwed up, yeah, probably. I think if you gave the average person the choice between living in a house they couldn’t afford for a few years, getting their credit messed up (which many will challenge anyway on the grounds that they were “victims” of unsavory mortgage lenders trickery), and having to relocate when it’s over to rent another person’s foreclosed on home, OR putting all their savings into WorldCom or Pets.com stock in 1999/2000 and losing every penny with absolutely nothing to show for it in the end and nothing to enjoy before then, most folks would take the living in the nice house for a few years. As a result of these ridiculous exotic mortgages, many of these folks got the opportunity to live in a house they never could have dreamed of living in, for about the same monthly payment as renting an apartment or some small old home in a less desirable area. At least when they got “tricked” into a bad deal they got something out of it, unlike the Global Crossing investors who got nothing.

Funny you bring up Bush and Enron. I don’t know what that has to do with the price of tea in China, let alone Greenspan dropping the FFR to 1% and creating an unsustainable housing bubble to bail out the telecom/dotcom bust. Since you thought it was relevant to this discussion, I’ll be happy to indulge. Most of Enron’s fraud occurred during 1998-2000, that’s when Fastow & Co. set up the maze of phantom off-shore corporations and engaged in the bulk of their deceit. Where was the FTC? Where was Reno and the Justice Dept? Where was the SEC, on that and so many other matters? They were busy making Microsoft miserable, and took their eye off Clinton’s buddy Bernie Ebbers, and McAuliffe’s ATM machine over at Global Crossing.

I could care less about GWB’s track record with business ventures, newsflash, he’s a politician not a businessman. I’m sure his record is nowhere near Hillary’s success in the cattle futures market or land development deals. If a President’s success in business ventures is the litmus test for the success of the U.S. economy, then we shouldn’t have to worry about where the next bubble on the horizon will come from because Queen Hillary will surely find it for us. Unfortunately, it doesn’t work that way or Jimmy Carter and Herbert Hoover would have presided over great economies. In answer to your example though, no, I don’t see the next bubble coming from medical stocks.

Mr. X,

The cartoon is competely accurate, so where’s the beef ? Profits as a share of total income are at all time record highs at 13.4%.

Right now total income compensation to workers is 57.0% of total income. Since 1968 we have had 158 quarters of data, only in 27 quarters has workers share of income been lower than 57%. Here’s the math. 82% of the time it’s been better for workers than now.

And people’s opinions are likely flavored with what’s been going on. In the second quarter of 2006 the total compensation number was 56.0%. Only 3 quarters of the past 158 were worse.

Is it the math you have trouble with or the truth?

michael schumacher: I’ll be happy to talk about fake corporate profits. If you’re right about Wells Fargo and their accounting practices, then the issue is a FASB rule that allows for derivatives to be accounted for differently based on notional values. Sounds similar to what Fannie and Freddie went through the past few years. Could it be another late 1990’s fraud like we saw in the telecom and dot com bust? Possibly. Yet again though, you are trying to predict the future instead of dealing with the reality of the present. That’s why I said prove it that I’m wrong. I can prove corporate profits reports right now, I can prove that the late 1990’s had a lot of stock in tech companies soaring to stratospheric levels with absolutely no earnings to support them. I can prove that consumers are still out spending money. Look at all the lines for the iPhone around the country, they aren’t all full of people wanting to still have telecom/internet access for their new life as a street urchin. Look at all the lines at airports and the airline load factors, they aren’t all the unemployed and downtrodden relocating to search for a job in a new city. Look at hotel occupancy rates, they aren’t all huddled masses who just got kicked out of their foreclosed on home. They are all real, average, middle class folks who are out spending money to buy things they WANT, not need. That tells me the economy isn’t quite staring into the abyss, yet. Maybe things change by late 2009 when the market figures out that their beloved 2003 capital gains and dividend tax cuts won’t be renewed. Then all bets are off.

If you asked me, I would tell you that those corporate earnings are nothing more than paper profits… or worse, balance sheet transgressions.

I think the point is Bush goes on TV, along with the Kudlows of the world, talking about Goldilocks when 66% of the citizens think we’re headed for recession.

Lessee,

Corporations are rolling in it. Workers are up to their necks in debt, getting nudged further from hope of a secure retirement. That I get. Toles concludes the problem is…economists. OK, not every cartoon reveals a universal truth, but then Barry stands up and claps?

So tell me, did an economist push you off the swing set when you were a kid?

VJ:

“OK. Let’s just take ONE example. Explain why nationally, Poverty has risen every year after 2000 and declined every year for eight straight years before 2001.”

Where do you get your stats, VJ? ACORN? MoveOn.org? The government? Do you trust the government’s CPI and PPI statistics too?

“Then why do we currently have the largest inventory of vacant unsold houses in history ?”

Because of the homebuilders not scaling back their production of new homes to keep supply and demand in balance. They erroneously believed that they were experiencing a blip in the boom, and that they could simply throw in new appliances or upgrades to other amenities as sweetners to bring the buyers back while they kept on building more McMansions. The housing correction is also only 24 months in, so supply of vacant unsold homes should be high because the builders didn’t stop building at such high rates until recently and the inventories have to be repriced to clear the market.

“Actually, Enron’s cooking of the books only went back five quarters from when they went bankrupt. They waited until they were no longer any reuglatory cops on the beat.”

Factually incorrect. Here’s the facts:

http://www.enronfraud.com/enr-cgi-bin/mil?templ=qa.html

From the site:

Q: I own Enron stock. Am I part of the securities class-action lawsuit?
A: If you purchased Enron securities between October 19, 1998 and November 27, 2001 (the “Class Period”), then you are an investor for whom we are trying to seek additional recoveries. If we are successful, you will be eligible to share in the recovery.

Q: What is a class period?
A: A class period is a specific time frame during which a company is alleged to have been improperly conducting its business. The Class Period is specified in both the complaint and the notice. There is always the possibility that a class period may be extended or shortened.

So yeah, 11 months in 2001 vs. over 2 years between October 1998 and January 2001. Sounds like the regulators who were on the beat must have been chasing interns or asleep at the switch from late 98 on, while the current Administration came in, cleaned thing up, and secured convictions against the executives responsible for the improper conduct. That would be the Justice Dept. in power from 2001 to 2006.

“As someone famously once said, You do the math.”

See above.

Thank you, MS. A “neat little trick” and “illegal” makes sense to me.

And, for those wanting to delve into sham earnings reports, let’s write Dell on the chalkboard under Wells Fargo…

michael schumacher:

“Lines for buying iphones and purchases of coach handbags?…that’s how you determine if the consumer is ok?? what a barometer???

Can’t compete with that mentality. Somebody else can waste time.”

Unless the stores selling those items are donating them to anyone who shows up at certain times of day as a charitable tax write-off, then we have to assume that the people purchasing iPhones and Coach handbags are using some viable means of exchange, some sort of method of payment. That means either they earned it (cash/check/debit card), or anticipate earning it (credit). That is a far better barometer of consumer sentiment than answers given on telephone polls regarding consumer confidence. Not quite like the Days of Unicorns and Rainbows in 1998/99 when middle aged women would line up for hours and pay large sums of money to buy Beanie Babies, but one barometer of consumer sentiment, nonetheless.

Excellent Martin Wolf article in the FT today, “Why the Federal Reserve has to keep the party going.”

“Assume, finally that the government pursues a modestly prudent fiscal policy. Then US households must spend more than their incomes. If they fail to do so, the economy will plunge into recession unless something else changes elsewhere.”

“Today’s credit crisis, then, is far ore than a symptom of a defective financial system. It is also a symptom of an unbalanced global economy. The world economy may no longer be able to depend on the willingness of US households to spend more than they earn. Who will take their place?”

Mr. X,

Where’s the consumer going to get their free money now? You’ve obviously been insulated from economic realities all your life.

You wanna know what my mother stood in line for, for hours?

Fruit…so that her children could get some vitamins during the winter. (obviously, that wasn’t here in the states)

America is scared to death that it may have to start living within its means. Call it a crisis of confidence if that’s what people want.

irony is dead.
UNSUSTAINABLE GROWTH FOREVER OR BUST!!!

——
A quick hello to the board….I’m a long time lurker…first post. Great blog, great humor, interesting array of perspectives, and kooky antics.

hi.

An ancedote for Mr. X:

My SIL continues to buy junk for her family. Yes, their tv broke down last week, so it was off to Best Buy for a new one.

How did they afford it? Credit, of course. Just another couple of grand of debt on top of the 5-figure credit card debt they currently have.

You are probably wondering how I know they have that much CC debt…well, I needed that info when I was working to save their house from foreclosure two months ago….

BTW, last week my SIL called my wife crying for money because they were going to turn off their electricity. My wife, being the softie, paid the bill (which had not been paid for 3 months).

Yeah…the economy is solid…LOL

Averages are way too skewed in such a bifurcated sample… I agree with the fact that our dollar is decreasing in value and costs are increasing faster than wages (obvious), however, the question I would ask is what is the MEDIAN…

Does that household income figure include the average CEO and HEDGE FUND MANAGER… hell, most of the “upper” wage earners have exploded in the last decade…

Lets remove the “outliars” and see what the average household income is in the under 1 mil. a year group… much worse I have to presume.

http://journalism.nyu.edu/pubzone/theoryb/node/409

So, if the mega-rich are becoming mega-richer… who’s the poor sap and how many are there that have to make lesser than less to get the AVERAGE to go DOWN…

Yawn.. Yet another thread where anyone who is in any way bullish on anything is simply shouted down by the masses (bears).

At some point, these forums will only be visited by you bears, and you can circle-jerk each other every time the market goes down a few percent.

eddie-

Please provide some antidote to what “us” bears see as unfolding right in front of all of us.

Also please provide some form of discussion topic as to why “we bears” are all wrong and you (along with your perma bull view) are correct.

I fail to see how all these banks tapping LOC’s and now the created money (via the Fed) is somehow bullish. It’s bullish all right…biggest bunch of…..FTM

Ciao
MS

Ciao
MS

michael schumacher:

“Were we not talking about Airlines??? and Airports????”

Yes, and I would suggest that everyone in line at the airport has either paid for or is about to pay for an airplane ticket. People don’t wait on queues at airports just for fun, they actually have an intention of travelling somewhere, and paying hundreds, sometimes many hundreds of dollars to do so. They give their money to the airlines, the airlines give them a ticket, and then they wait in line to go where they need to go. It really is that simple. During economically desperate times people don’t tend to travel this way in such large numbers, they either go by car or bus, and the carriers are often in bankruptcy and not offering as many routes then either. This means people are spending a lot of money on travel, whether for personal reasons, or for business. Neither indicates economic armageddon. The major airlines are also all out of bankruptcy for the first time in ages as a result.

“Now all of a sudden it’s Airline manufacturing??”

Yeah, all of a sudden, amazing how that works. Airplanes crowded with passengers paying for travel = more revenue and ideally more aggregate profits for the airlines = airlines demand more aircraft from manufacturers to expand service = more jobs in Seattle and Chicago at Boeing = economic growth = higher compensation in union contracts/collective bargaining = higher wages.

“Damn you sure know how to cherry pick when it suits whatever argument you’re trying to make”

As opposed to, say, nitpicking and only trying to shoot holes in economic discussions, which is of course far, far easier when you don’t have to support your claims at all, only hurl insults.

“I’ve wasted enough time with you, someone else can.”

Thanks michael schumacher, I take you at your word on this one. Have a nice day.

Along similar amusing lines, the credit card song…

http://www.youtube.com/watch?v=2JwdIWjVHaU

Mr. X has worked awfully hard at convincing people everything is OK when, if everything were OK, there wouldn’t be any need to reframe it all in such a glorious light.

What next, you dangle a pocket watch?

nobody answered my question about real data about consumer debt situation.

but thats all right…i have another question.

lets say the FED buys all the worthless paper for now 30 days (but who will stop the 30 days cycle going for ever, you can always rotate the money, right? ).

so in other words…all the risk now belongs to FED, so no more collapse due to subprime (financed by taxpayers instead of bankers paying for their folly).

will that lead to inflation….i am feeling it wont…because the money injected is not a new money created…they just stopped money from getting destroyed….in other words asset values would have crashed if not for FED handout…but now Assets will hold their ground.

means no deflation but also not big inflation….even though FED may be printing 300-500 billions dollars to buy all those garbage and to lend to those guys to play with the market.

BR: me too! that’s why i’m pissed.

Here is a great you tube vid from a SNL skit..

http://www.youtube.com/watch?v=MxFx0NzSjWw

The USA has been deliberately destroyed economically. It all began when the manufacturing sector was dismantled and left to rot, and all those jobs were outsourced to Asia. Now America produces relatively little of value – its economy is about 70% consumer spending and the rest was taken up by the housing boom. Now that bubble is bursting and the consumer is too maxed out to continue propping up the economy, what is going to happen? America has NOTHING to fall back upon. Maybe American corporations will do fine as their balance statements include profits made from overseas manufacturing, but the majority of Americans are in for a very long recession.

It’s pretty obvious that mostly everyone is pretty much optimistic. Not many see hard times coming that’s for sure!

Anecdotal stories about shoppers with bursting bags does not meet even the laugh test. Perhaps the Best Buy was in one of the more wealthy neighborhoods?

Real facts trump stories about seeing busy shoppers. Real facts such as WalMart’s guidance for the rest of the year:

H. Lee Scott Jr., the company’s president and chief executive, said that consumers slowed their spending markedly in the last weeks of the quarter, as rising interest rates and gas prices took a toll on paychecks. “Consumers are under difficult pressure financially,” he said, in an unusually grim conference call, prerecorded for investors and analysts. “Consumers are running out of money by the end of the month.”

Mr. X,

“Where do you get your stats, VJ?”

For Poverty ? The Census Bureau of course. Where do you get yours ?

“Because of the homebuilders not scaling back their production of new homes to keep supply and demand in balance.”

Did I mention “new” homes anywhere in my posting ? Let’s check:

“Then why do we currently have the largest inventory of vacant unsold houses in history ?”

Nope. I did not.

Next excuse ?

“Factually incorrect. Here’s the facts”

You’re conflating what was publicly reported, hence available for regulators to act upon, and what was done internally, which regulators would have had no possible way of knowing until after the fact.

Got any more goal posts you want to carry around ?
.

“Most of Enron’s fraud occurred during 1998-2000, that’s when Fastow & Co. set up the maze of phantom off-shore corporations and engaged in the bulk of their deceit. Where was the FTC? Where was Reno and the Justice Dept? Where was the SEC,

—–And those Democrats who had complete control of Congress
—–in those years! Don’t forget to blame them. That’s what
—–can happen when every branch of the government is controlled
—–by one party. Let’s not let that happen again, ok?

on that and so many other matters? They were busy making Microsoft miserable,

—–But, but, but… how did Bill Gates get to be the richest person
—–in the world in those years and 100’s of his employees millionaires
—–during those awful times?

and took their eye off Clinton’s buddy Bernie Ebbers,

—–But, but, but… I thought he was Trent Lott’s buddy?

and McAuliffe’s ATM machine over at Global Crossing.”

—–But, but, but… what about the Contract With America:

———-http://www.house.gov/house/Contract/CONTRACT.html

—–and the FISCAL RESPONSIBILITY ACT, etc?

Mr. X is a lying Republican hack. It is pointless to argue with a liar.

Earnings are not profits. ‘Record profits’ may be correct in an absolute sense but not in relation to total national income or GDP where we find records all the way back during the real ‘golden age’ of capitalism in America, an age which had ended by the mid-1970s, i.e. prior to decades of progressively greater financialization and the gloss it placed over long-run deterioration in real median hourly wages, necessity of multi-worker households working multi-jobs, a gini coefficient worthy of third world status, deteriorated physical and social infrastructure, misallocation of funds into production of means of destruction with attendant sectoral disproportionalities and still weaker real economy mismeasured by a GDP accounting which fails to sufficiently differentiate between productive and unproductive…

We have two generations which have never experienced a truly strong expansionary economy but became infatuated with what is best termed fictitious capital, the hall of mirrors of claims to claims to claims…facilitated through and partially recognized in a progressively untenable accumulation of debt.

Mr. X,

What’s your take on this story?:

http://tinyurl.com/2782y2

Now, I haven’t seen all of the reporting about this, but I already anticipate that the bank in China will likely say that the securities they purchased carried a AAA rating, and that the degree of erosion of confidence and market price of these securities is unforgiveable under the circumstances. I may be wrong but that’s what I expect.

In making those purchases, the Bank of China and/or its customers provided liquidity to a great many U.S. consumers… by augmenting their ability to expend discretionary dollars to continue their spending that wouldn’t have been available for the flights from airports you mentioned, or for the vast consumerism I witness almost daily… but instead those dollars would have been put in down-payments or principal payments on houses they’ve purchased, and in many instances they overpaid for these purchases because of the sea of easy money for bidding provided by the mortgage industry.

Where would we be now, economically, if the billions reportedly bought by this bank (and likely other billions, many billions throughout the world) in China had not been purchased by them?

I’ll remind you that the current U.S. circumstance is that quite a few very large mortgage banks in the U.S. are already either bankrupt or there is at least a threat that they will be bankrupt, all because they either created these securities or carried them in investment portfolios they then had to hedge with derivatives contracts, and now they hold assets they can’t sell or can only sell by significantly discounting them, thus marking off corporate shareholder book value by the tick tock.

The very issue is that the mortgage banks, and conventional banks, are holding mortgage paper that their otherwise compliant, resourceful and cooperative partners, other banks they borrow from ordinarily, won’t loan them money on for continuing operations based on what they put up as collateral.

The financial system that you are so optimistic about is in turmoil, to a degree that the Federal Reserve itself has needed to ask banks to do something they ordinarily don’t do because of their reputations… step up to the discount window and borrow at a higher rate than otherwise available to them, simply because they’re short of liquidity they can’t obtain in any other convenient way than by the Fed’s discount window.

Do you suppose the Bank of China would have bought those securities… thus giving U.S. consumers the liquidity for consumerism mentioned earlier… had they realized that the packages carried Trojan Horses designed to offset the risks from the mortgage banks from making inappropriate loans?

Now, let’s be honest in this of course. While we may realize that the banks did not really intend or expect that the Trojans would be flops (they were full of the same perpetual optimism you display), nor did they expect them to fuel a liquidity crisis that might yet seriously damage the financial system… they still elected to use techniques to distort the true credit quality of issues packaged for sale. Are you at least capable of accepting this as fact?

Recently, when China had an issue with its government authority that regulates quality control issues in manufacturing of food items (I think the equivalent would be that it was like their FDA), because an official had taken a bribe for lax control, and as a result some dogfood sent to the U.S. was contaminated, they took the official out back and put a bullet in his medulla oblongata. Bad dogfood exported to the U.S. — Bullet.

What do you suppose China would ask us to do to make recompense for allowing toxic waste to be sold as AAA-rated paper? You think they’ll be very receptive to Paulson’s next beggar-thy-neighbor trip to China, begging them to float the yuan?… or receptive to other U.S. officials when they encourage the Chinese to continue buying U.S. mortgage paper?
—
My next question flows logically to the topic of this discussion… that cartoon that may or may not tell an underlying story. One potential untold story might be that the pile of cash on the desk in a way may represent a kind of phantom profit that wouldn’t be quite as big had China realized the nature of what they were buying and had decided not to buy it… and thus not fueled the U.S. consumer to put on the spectacular floor show that you’ve kindly reviewed in your comments.

Is there anything about your position, that you’ve stated quite well, that you might ever anticipate could change?… Is it possible that you’ve overlooked anything, anything at all that would give you an expectation that true underlying economic conditions in the U.S. are not fully reflected by what both of us see every day… in the malls… in commercial construction… and in the parking lots of Big Box retailers everywhere?