Monday, April 12, 2010
Damn. This could be quite possibly the worst economic news I've seen in weeks.
I wouldn't necessarily have a problem with a rah-rah article about the economy, just to make people feel good about their prospects. The Newsweek piece seems to be so transparent as a booster shot for the current adminsitration's handling of the economy, with no discernable evidence. Also, it bothers me that the authors don't understand that debt is a type of capital:
So what will our new economy look like once the smoke finally clears? There will likely be fewer McMansions with four-car garages and more well-insulated homes, fewer Hummers and more Chevy Volts, less proprietary trading and more productivity-enhancing software, less debt and more capital, more exported goods and less imported energy. Most significant, there will be new commercial infrastructures and industrial ecosystems that incubate and propel growth—much as the Internet did in the 1990s.
Sounds cool, can't wait.
I guess it is a nit, but they mean to say, "less debt and more equity." (Which I am all for). You don't need an economics degree from an Ivy League university and an MBA to know, generally speaking, that capitalization is debt plus equity (hybrids are a wrinkle).
Added bonus for geeks -- the formula for the weighted average cost of capital:
i = (D/D+E)*(1-T)*r + (E/D+E)*k
the proportion of debt times the tax complememt times the cost of debt, plus the proportion of equity times the cost of equity.
In CAPM theory, that gives you a hurdle rate to use for NPVs, if anybody cares about that kind of thing anymore.
Newspeak is getting ahead of the story, most probably because the magazine won't still be here when the actual recovery begins (that is, if the breakout of WaPo enterprise values from a week or so ago had any validity).
By the way, is our greatest risk still deflation or should we now worry about inflation? Beyond inventory whip, is our economy growing or not?
Whatever the answer, bet on higher rates. If Bill Gross has decided US Treasuries are a bad bet, as he has, then it's probably we are going to see some interesting times pretty soon.
The Treasury itself is going to be screwed by increased rates, since we have big refinancings to do later this year (and next) even while the fiscal deficit dictates huge new borrowings.
What happens when history's largest tax increases hit a weak economy later this year, one also beset by trade disputes, and yet insatiable government spending force interest rates to rise even while unemployment grows? What do you call that? Newsweek calls that "recovery", but maybe it should be called "double dip disaster"...
When it passed, I saw Stimulus as cynically designed to give a Sugar Rush in 2010 -- not in 2009 -- in order to boost the Democrats in the 2010 mid-term elections. Thus, Newsweek's cheerleading is following script.
The true private sector isn't following this script, however. Interest rates are low -- gas is relatively cheap -- we're spending an extra trillion ... thus, the economy should be going gangbusters. WTF?
Instead we're likely to have an anemic jobless recovery with continued high unemployment, as Obama & Co will continue to provide gale-force headwinds. Can't wait for the debate over Energy, and Obama to continue to call it an engine for job creation.
I posted below about how the Blue States -- except for the donut hole around DC -- are the ones actually bearing the brunt of high unemployment. This could complicate Democrats hopes of retaining seats in Congress. My over/under had been +55 for the Republicans in the House, but it could go much higher because of this phenomenon. Recall that Scott Brown won Barney Frank's district. Developing .....
Propaganda, pure and simple. Half of the list excerpted in Escort's comment above is a lie or utopian fantasy.
Less debt? Less imported energy? New commercial infrastructures? How about more debt, more expensive energy, and millions of square feet of empty commercial infrastructure. What a joke.