What’s holding back the recovery?

By Adam Hersh
April 30, 2014

Nearly five years since the start of the business-cycle expansion, the U.S. economy is still struggling to gain traction.

Compared to the prior three U.S. expansions, going back to 1982, the economy is recovering at merely 60% of that pace. (See Figure 1) Whereas at this point in past recoveries, the economy expanded by an average of 19%, today, the U.S. economy has grown just 11% overall since the economy’s June 2009 trough.



In past expansions, government spending continued supporting economic recovery, rising 20% for two years beyond the start of the upswing and leveling out only thereafter.

But the fiscal policy response in this recovery was much different. Instead of expanding to support the economic recovery, the January 2009 American Recovery and Reinvestment Act, or ARRA, and related measures merely to offset the sharp fiscal contractions experienced widely across state and local governments. As one-time spending from the ARRA waned, Republicans won control of the House of Representatives in 2010 and set U.S. fiscal policy on a downhill course.

As a result, rather than supporting economic recovery, the public-sector contraction has cut one-third of a percentage point per quarter from the growth rate on average since the start of the expansion.

The rest of today’s GDP report from the BEA shows that investment overall continues to basically keep pace with what has been seen in other recent recoveries, even though investment shrank 6.1% overall in the first quarter. Persistent U.S. international trade deficits also continue to pose a drag on the larger U.S. economy, although with fairly stable downward pressure.

Thus the lackluster growth that we are seeing nearly five years since the U.S. economy began expanding can be traced back to two main factors: the ongoing financial stress faced by most American families whose incomes are struggling to keep up with household demands; and the abnormal fiscal austerity that undermined government’s usual contribution to smoothing downturns and laying the foundations for the next round of economic growth — this despite the fact that fiscal deficits will fall back to just 2.8% of GDP this year.

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America has conquered its debt crisis with incredible speed

By Ambrose Evans-Pritchard
12:06AM BST 24 Apr 2014

Americans are purging their excesses one by one. Spending by the US Federal
government has seen the steepest drop as share of national income since
demobilisation after the Second World War.

Claims that President Barack Obama is bankrupting America with a lurch towards
hard-Left statism are for tabloid consumption only. Outlays have fallen from
24.4pc to 20.6pc of GDP in five years. Spending is roughly in line with its
40-year average. This fiscal squeeze has been achieved without driving the
economy into recession or a Lost Decade, a remarkable feat.

The US Congressional Budget Office expects the budget deficit to drop to 2.8pc
of GDP this year, and 2.6pc next year. This is about the same as the
eurozone but with a huge difference. The US economy is expanding fast enough
to outgrow its debts.

The US energy revolution is of course half the story. It has stoked booms
across the Dakotas, Wyoming, Nebraska, Washington, Oregon, Utah and Texas.

Francisco Blanch, from Bank of America, estimates that Continue reading

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2013 Year-end Summary

Despite the financial markets performing well for the year, the economy has been slowly gathering steam. Thankfully and partly because of paralysis in Washington, the fiscal stimulus is being diminished “just slowly enough” as the economy regains confidence. Economists generally do not yet think we have achieved “breakout velocity” when the economy can grow without any stimulus at all. Because inflation has been non-existent and because signs of deflation remain lurking, the Fed will likely maintain its monetary stimulus and low interest rates for quite an extended period even though private sector loan demand is picking up.

Private sector has largely revived and private sector lending is once again increasing. The money in circulation is finally again increasing albeit slowly. However, we continue to remain cautious. It is far from certain that the economy has achieved breakout velocity or that the private sector is fully healed. There are many hazards, deflation among them, that could upset the as yet fragile recovery before we could possibly achieve any full blown economic expansion.

In context of the above, it is unlikely that we will see the similar stellar returns in the coming year even though we expect to see economic growth continue to strengthen. We anticipate curtailing some of our aggressive positions while expanding positions of more stable growth.

Because these quarterly thumbnail summaries are very abbreviated, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,


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Stupid Investment Phrases

By Morgan House
Nov. 14, 2013

My job requires reading a lot of financial news. It’s one of my favorite parts. But it gives me a front-row seat to the downside of financial journalism: gibberish, nonsense, garbage, and drivel. And let me tell you, there’s a lot of it.

Here are a few stupid things I hear a lot.

“They don’t have any debt except for a mortgage and student loans.”

OK. And I’m vegan except for bacon-wrapped steak.

“Earnings were positive before one-time charges.”

This is Wall Street’s equivalent of, “Other than that Mrs. Lincoln, how was the play?”

“Earnings missed estimates.”

No. Earnings don’t miss estimates; estimates miss earnings. No one ever says “the weather missed estimates.” They blame the weatherman for getting it wrong. Finance is the only industry where people blame their poor forecasting skills on reality.

“Earnings met expectations, but analysts were looking for a beat.”

If you’re expecting earnings to beat expectations, you don’t know what the word “expectations” means.

“It’s a Ponzi scheme.”

The number of things called Ponzi schemes that are actually Ponzi schemes rounds to zero. It’s become a synonym for “thing I disagree with.”

“The [thing not going perfectly] crisis.”

Boy who cried wolf, meet analyst who called crisis.

“He predicted the market crash in 2008.”

He also predicted a crash in 2006, 2004, 2003, 2001, 1998, 1997, Continue reading

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Why Deficits Don’t Matter.

by Bob Veres
October 29, 2013

The whole idea that we should control the deficit at all is costing our nation trillions of dollars in lost output. The result is lost income, savings, wealth and prosperity. “As a society, we don’t understand government finance,” says Kelton. “Most people – including most economists, think that it operates by the familiar rules of household finance.

Congress is coming off of a bruising debate over the deficit ceiling – a preview of what we will experience again in a few months. The economy is growing slowly – some would say incrementally, after the 16‐day government shutdown. Unemployment is a lingering problem, and the Fed’s quantitative easing (QE) program works in reverse; that is, instead of boosting economic growth in any visible way, any hint of ending it spooks the markets.

What’s to be done about this mess?

Stephanie Kelton, Associate Professor of Economics at the University of Missouri/Kansas City, believes that the root of all these problems can be found in a fundamental misunderstanding – shared by Democrats, Republicans and mainstream voters alike – about the government’s balance sheet. She argues, plausibly, that the whole idea that we should control the deficit at all is costing our nation trillions of dollars in lost output. The result is lost income, savings, wealth and prosperity.

“As a society, we don’t understand government finance,” says Kelton. “Most people – including most economists, think that it operates by the familiar rules of household finance. Therefore, we find it plausible when we hear politicians and government watchdogs urging us to balance the budget, control the urge to spend and pay down the debt.”
The mantra on the right: the federal government has to stop spending money it doesn’t have. The mantra on the left: we need higher taxes on “the rich” in order to balance the budget and pay down the federal deficit. Moderates call for a little bit of each.

“We act like there is some limited amount of money available,” says Kelton, “and that government competes for savings with the rest of the economy, and that too much competition for savings drives up interest rates, and higher interest rates crowd out all productive private investment. We act like the federal government is walking a fine line between solvency and insolvency – that if the debt gets too big, our creditors may begin to get nervous, downgrade our debt, our interest rates go up, and suddenly we end up like Greece.”

Yes. So? “That picture has no economic meaning whatsoever,” says Kelton. “None.”
Continue reading

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Quarterly Outlook Summary

There is little to change in our recent assessment of the markets and the economy. The economy continues to slowly gather steam as housing begins its long awaited recovery and as private sector business confidence and spending also recovers. The Fed, in light of continuing weak employment and being unable to raise inflation to meet its targets, continues with its stimulus programs to the full extent that it is able. Despite all of the recent hyperventilation about the political theatre in Washington, there is little on the table of significant economic consequence. The dollar amounts of spending that they are discussing for cuts or for stimulus pale in comparison to the strengthening private sector of the economy. In short, the overall economy continues to strengthen and the markets continue to be robust.

Although risks remain, they seem to be Continue reading

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Federal Debt and Deficit Reduction are Junk Economics.

Deficit cutting is still, precisely, the wrong economic policy prescription in the current weak economy of high unemployment. Whether raising taxes or cutting spending, the effect is the same. It may reduce the deficit but it also removes stimulus in an already weak economy. The current Trillion plus deficit going on five years shows no signs of inflation and interest rates remain at historic lows. There is no solvency or default concern as again, the bond vigilantes are non-existent as interest rates are at historic lows and Treasury bond prices at historic highs. The deficit remains the result of a weak economy, high unemployment and reduced profits such that reduced tax revenues more than account for the shortfall. None of this begins to address the high and growing social costs of extended unemployment in terms of welfare, crime, depression, alcoholism, degrading workforce skill sets and family breakup.

What are the risks of more stimulus? A little history may help.

During the great Depression, a small recovery had begun in 1936. Unemployment had dropped from 25% to 14% and GDP had grown at 12% for 4 straight years. Because some members of Roosevelt’s cabinet—notably Secretary of the Treasury Henry Morgenthau—were uncomfortable with the idea of running a long-term deficit, the administration moved to eliminate it. In 1937 the federal deficit fell to $2.5 billion (or 2.8% of GDP) from the previous year’s $5.5 billion (or 5.5% of GDP) as Roosevelt and Congress slashed spending by 18%. In 1938 spending dropped another 10% from 1937. The government effectively ran a balanced budget that year with a deficit of only $100 million or 0.5% of GDP. Then 1937-38 hit and the unemployment rate spiked back to 19% while GDP contracted over 6%. We had a double dip Depression.

It was only a scant 3 years later when the government began Continue reading

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OECD Finally Throws Austerity Overboard

By Ambrose Evans-Pritchard
8:26PM BST 16 Jul 2013

While the US jobless rate will continue falling to 6.7pc by the end of 2014 as recovery takes hold, the rate for the EMU currency bloc will rise to a fresh record of 12.3pc with large pockets of extreme distress.

A trans-Atlantic gap of 5.6 percentage points is unprecedented in modern times and appears to reflect the starkly different policies pursued by the two major blocs since the Lehman crisis.

The OECD listed many measures that can help mitigate the effects of unemployment and ease the way for displaced workers to find new jobs but left no doubt that the real villain is the contractionary policy mix in Europe.

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Quarterly Outlook Summary

The economy continues to slowly gather steam as housing begins its long awaited recovery and as private sector business confidence and spending also recovers. On the other hand, the public sector, the government, continues to curtail its spending causing economic headwinds to growth. The Fed has done, and continues to do, everything it can to stimulate but its tools are limited in effectiveness. Despite misunderstood allegations of massive money printing by the Fed, it will stay the course as long as inflation and employment remain below its stated targets. Absent any fiscal help from the Congress (such is highly unlikely) the economy will continue its slow growth trajectory.

The Japan anti-austerity experiment is succeeding despite the debt and inflation hand-wringers. This is what is necessary to finally overcome the decades old deflation firmly embedded in Japan. The growth in Japan’s GDP is now over 3 percent just since they began this massive deficit spending coordinated with central bank direct government bond purchases. Europe now facing austerity induced deflation and recession is closely watching. No one expects the EU to admit that their austerity strategy was a failure given the high social costs and the abysmal economic results.

Although the markets continue to perform moderately well, we remain cautiously optimistic and may continue to make some minor adjustments to take advantage of the improving and changing environment. We expect continued slow growth in the economy and in the markets, but because of the several risks that remain, we also expect volatility and periodic corrections.

Because these quarterly thumbnail summaries are very brief, please do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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How Austerity Has Failed.

by Martin Wolf
The New York Review of Books

Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed.

What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. If policymakers listened to the arguments put forward by our opponents, the picture, already dark, would become still darker.

Austerity came to Europe in the first half of 2010, with the Greek crisis, the coalition government in the UK, and above all, in June of that year, the Toronto summit of the group of twenty leading countries. This meeting prematurely reversed the successful stimulus launched at the previous summits and declared, roundly, that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013.”

This was clearly an attempt at austerity, which I define as a reduction in the structural, or cyclically adjusted, fiscal balance—i.e., the budget deficit or surplus that would exist after adjustments are made for the ups and downs of the business cycle. It was an attempt prematurely and unwisely made. The cuts in these structural deficits, a mix of tax increases and government spending cuts between 2010 and 2013, will be around 11.8 percent of potential GDP in Greece, 6.1 percent in Portugal, 3.5 percent in Spain, and 3.4 percent in Italy. One might argue that these countries have had little choice. But the UK did, yet its cut in the structural deficit over these three years will be 4.3 percent of GDP.

What was the consequence? In a word, “dire.”

Continue reading

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