Tag Archives: recession

October Surprise

While most of the speculation about an October surprise has revolved around the probability of an Israeli attack on Iran’s nuclear capability, or a financial collapse in Spain or Italy that drags the Eurozone to the depths, it could be that we already know the October surprise but are either ignoring it or hoping, against hope, that it is not true.

We got a surprise this week with the announcement that JPMorgan Chase lost $ 2 billion in a risk management strategy gone bad.  We saw oil prices decline on news of lower than expected economic growth in China, the defeat of President Sarkozy in French elections, and similar results in Greek elections further undermining confidence in the Eurozone.  But this is May not October.

What is our October Surprise?  

The realization that the US is back in recession.  That now seems the most likely scenario for the US economy given the anemic pace of US GDP growth, persistently high unemployment, a declining work force shrinking because more people quit looking for work and thus are no longer counted and continued polls telling us Americans think the country is going in the wrong direction.

But don’t take my word for it.  The Economic Cycle Research Institute (ECRI) a New York City-based independent economic research think tank said May 9, 2012 that year-over-year growth in US real personal income has been lower for the last three months than it was at the beginning of each of the last ten recessions. The ECRI has correctly predicted three of the last three recessions.  In September 2011 the ECRI said it saw this pattern emerging and now it is reaffirming its analysis telling us that “this is what personal income growth typically looks like early in a recession”.

Some would argue the US feels like we have been in recession or worse since 2008, but data tells us we came out of recession in mid-2009 but our deficit spending levels, fiscal and monetary policy has not produced the kind of robust recovery previously seen.  So it is tough to see how digging our fiscal hole deeper with more deficit spending will change things now.

We could tax the rich—if we can find them.  California is the poster child —or basket case for that strategy with a deficit now looming to $16 billion from $9 billion at the beginning of the year.  California is not only bleeding red ink, it is bleeding people.  From 2000 to 2009 California lost a net 1.5 million resident to other states. Only New York lost more—1.6 million residents. Think about that— 1.5 million people is a city the size of San Diego voting with their feet. Yet,  on the June primary ballot is a new tax increase on cigarettes and on the November ballot we face the prospect of two dueling income and sales tax increase measures.

So the October surprise is that it may all hit the fan starting in October as voters realize not only is our economy back in recession but that we are staring in the face the prospects of a tsunami of new taxes at the beginning of 2013 from the end of the Bush tax cuts, the end of the payroll tax cuts,  the prospects of higher taxes on both the Federal and State levels.  Meanwhile it will be obvious to every voter that our current policies are not working.

This is not what President Obama and Governor Jerry Brown want to hear, but it is the reality we all face.  The challenge for the President and Governor of California is to define a message and a policy that is something other than more of the same—because that is going to be a tough sell.

The challenge for Republicans now is to present the country with a policy vision they think will work better.  Being opposed to everything President Obama is doing is not sufficient and will not overcome our belief that both parties are guilt of the same sins.

They both spend too much of other people’s money and pander to the pet causes of their base.  They all lack ‘day jobs’ that force them to live with the laws, policies and regulations they impose on the rest of us.  They forget whom they were elected to serve and the longer they are in Washington the more disconnected they become from Main Street.  These are the manifest symptoms of confidence lost.

Senator Richard Lugar lost his first primary election challenge in more than 36 years in the US Senate from Indiana to a Tea Party activist this past week.  The Democrats said this was the ugliness of the Tea Party cleansing the GOP of moderates. But one of the reasons Lugar was defeated was the realization by Indiana voters that Senator Lugar sold his house in Indiana years ago taking up permanent residence in Washington DC and has not truly been a Hoosier for quite some time.

The Economics of Baby Making

According to the California State Demographer the recession has put a crimp in our baby making style.  The 526,774 actual births in 2009 were down 24,793 from 2008’s 551,567. This drop is larger than any California has experienced since 1994.  The State’s latest forecast says California’s total annual births will increase about 65,500 (12.4 percent) from the 2009 level, to total over 592,000 by 2019. California’s total fertility rate is now below replacement level (2.1) and is expected to fall below 2 by 2019.

The fertility rate fell for all racial or ethnics groups but only Hispanics maintained fertility rates at or above replacement levels.  But the forecast estimated that Hispanic birth rates will also slow from the decade high of 2.92 to 2.28 average live births per woman during her reproductive life.  The replacement rate is 2.1.

It seems when the economy turns bad we postpone having babies.  This is fine for guys but that biological clock keeps ticking for women.  The Demographer’s projected increase in birth rate reflects the typical recovery pattern that better times put us in the mood again.

Uncertainty is causing our “Deer in the Headlights” Economy

That was the general reaction to the latest UCLA Anderson economic forecast predicting “very sluggish growth” for a slowly recovering economy into the 2012 election season. The forecast for California was no better saying it would be a long, slow, slog to gain back the 1.3 million jobs lost in the recession let alone generate growth beyond that loss. UCLA forecast the national unemployment rate will be 9.7 percent by 2010 year-end and 9.5 percent in 2011.  For California today’s 12.6% unemployment rate is expected to fall slowly and average 12.2% for 2010, but will not fall below double digits until 2012.

Remember, if voters approve Proposition 23 in the Fall 2010 election, California’s AB32 Global Warming Solutions Act would be suspended until unemployment falls below 5.5% for four consecutive quarters.  You can bet its proponents will be campaigning for the measure saying California’s AB32 is a “jobs killer”.

UCLA senior economist David Shulman said there were two reasons for the slow recovery.

  1. Our Economic Balance Sheet is a Mess. The UCLA “balance-sheet hypothesis” done two years ago, is similar to the University of Maryland and Harvard University results finding that” recoveries from the bursting of debt-fueled financial bubbles are invariably slow and are associated with high unemployment rates and rising government debt.”  Meaning quick recovery is not likely.
  2. Too Much Policy and Tax Uncertainty.  “The recovery is being exacerbated by an extraordinary increase in policy uncertainty, which is amplifying the usual economic uncertainties associated with recessions.” So businesses are unsure that investment, new hiring or purchasing new equipment makes sense given the uncertainty over tax rates, and the looming costs for new environmental, energy, financial, labor and health care policies the Government is imposing.

“As time passes the economy will naturally heal and the policy uncertainties will resolve themselves to allow growth to return to a 3% path, causing unemployment to begin a long-awaited downward trajectory. We forecast that these more ebullient trends will become noticeable by 2012.”  —-David Shuman, Senior Economist, UCLA Anderson Forecast

So what?

Uncertainty has a way of sapping our confidence leaving us with that ‘deer in the headlights’ feeling that discourages the very actions most needed to break the cycle.  The economy needs to grow again to pull the US back into sustainable growth mode.  But the actions of the government are having the opposite effect and every day consumers are receiving rising health care premium notices, notices of changes in bank fees and credit terms, reports of dismal housing sales and falling home values even at record low rates—and then there is the unemployment rate looming over us like a falling sword.

The result is a TEA party where the punch is spiked, the crowd is surly and the politicians are running for the exits or being thrown out by the crowd.  While the results of the 2010 election season are increasingly the sum of the fears of incumbent politicians in both parties, the change it is bringing helps to turn our civic attitude from uncertainty to empowerment once again and this is good.

The genius of America has always been our ability to adapt and change—to reinvent ourselves, to live into our future rather than be shackled to our past.  What we’re proving to ourselves all over again is we still can do it.

Change WE can believe in is turning our uncertainty into certain action, not necessarily the way our leaders want, but the way we want to put America back to work.

YES, We Can!

Our Hierarchy of Needs as Uncertainty Threatens Recovery

President Obama has scored some impressive legislative victories on his policy priorities, but there is a big ‘be careful what you wish for’ caveat that clouds his success.  Because much of the Obama agenda is seen as over-reach by a skeptical public, the success in passing his agenda adds anxiety and uncertainty to a fragile confidence in recovery.

The irony in this is that just when fears of a double dip recession were abating the steam seems to be going out of the slow but steady return to growth just when the President needs that growth most going into the Fall 2010 elections.

Wells Fargo Economics released its latest report on GDP performance in the second quarter calling it ‘less strength than meets the eyes’.[1] Despite real GDP growth at 2.4 percent in Q2 the economic data were revised downward for the past three years meaning the recession was deeper with real GDP declining 4.1 percent over the six quarters of recession compared to estimates of a 3.8 percent drop.  Real GDP grew 3.2 percent over the past year, but the economy weakened as Q2 progressed.  Fed Chairman Ben Bernanke called the economy unexpectedly fragile sending the Dow down.  Durable goods orders fell in June and consumer confidence fell in July, despite solid corporate earnings and rising share prices.

The Piling Up of Doubt

The problem facing President Obama is that the sum of our fears including cost of his new programs, the impact of rising deficits, the loss of confidence in global financial markets about America’s financial strength and leadership (we keep spending while the rest of the work steps hard on the spending brakes) and the looming prospect of higher tax rates at the end of 2010 is sapping confidence and raising doubts about the sustainability of the recovery.

This is the ugly market report card on the President’s economic performance going into the mid-term elections.  He still has time to turn it around before the final exam in 2012 but not with business as usual.

The problem is just when we need the President to rally consumer and business confidence that a weak start to recovery will pick up steam if we will only get out there and go about our business. The public increasingly sees the President as an impediment to economic growth not a steady hand on the rudder navigating us through the storm.

Living into our Economic Hierarchy of Needs

It does not have to be this way, except politics appears to be trumping economic common sense.  To many it feels like we are watching an impending wreck in slow motion.  We see the ditch coming but we just can’t see clearly enough to keep the car on the road.

  • Hunker down
  • Hoard cash
  • Defer spending and hiring
  • Push revenue into 2010 to avoid taxes in 2011
  • Take profits now even at the expense of growth next year
  • VOTE like your economic life depends upon it!

These are not the policies or strategies of sustainable long term growth but they are right out of the Maslow’s hierarchy of needs and they reflect the sum of our fears in an uncertain economy.


[1] www.wellsfargo.com/economicsemail

Volatility is a Wonderful Thing

Volatility is a wonderful thing.  It not only brings profits to some willing to take risk, it punishes the foolish and teaches them lessons that make them stronger.  Some days just aren’t that great in times of volatility, but we keep going because we believe that tomorrow will be better, that we will be wiser the next time, and it reminds us of the values and principles that ground us to reality. That is the natural optimist in each of us, but it also works for companies and countries too.

We are living through one of those funky periods where life seems out of control and surreal.  Just when we think things are getting better something completely unexpected like a ‘flash crash’ of 1000 points happens on Wall Street.  Just when we think our energy situation is improving because advanced technology has enabled domestic production to go up, BP blows it and mucks up the Gulf of Mexico.  Just when the global markets show signs of growth Greece bleeds red ink and threatens to take the rest of the PIIGs or even the Euro with it.

Volatility teaches us lessons the hard way so we remember them.

What are you talking about, you ask?

  • EURO RESPONSIBILITY. After months of finger pointing by European leaders that the world’s economic problems were caused by those nasty American bankers and shady credit default swaps and other instruments of financial torture, we learn that ancient Greece has been up to its ancient ways cooking its books to hide its budget deficit borrowing money like Wall Street speculators from European banks eager for the transaction fees.  As Bogart said best “I’m shocked to hear that gambling is going on here!” But this time it was the GERMAN sheriff stepping in to break up the mayhem and restore order.
  • GHOST OF CALIFORNIA’S CHRISTMAS FUTURE. For California, living near the edge is not something we learned from Greece but our fate could be similar to Athens when judgment day arrives.  Those Greeks rioting because their pensions, salaries and spending irresponsibility was purchased with borrowed money look a lot like the California state employees, CALPERS, and the feckless State Legislature.
  • ARIZONA, MEXICO, DRUGS AND CONTROL OF THE BORDER. Drug cartels fight for control of markets and supply routes leaving a trail of violence and lawlessness sweeping Mexico.  Now that violence spills over the US border but the Federal Government does little to stop it. Arizona’s Governor is appointed Secretary of Homeland Security and its expectations that the Feds will help are raised then dashed when nothing happens.  After years of writing letters to Republican Feds, Secretary Napolitano now ignores the same plaintive letters from her successor as Governor.  The parties switched places but the results are the same—NOTHING!  So Arizona ups the ante by adopting SB1070—a virtual mirror of Federal law except it prohibits racial profiling (something not prohibited in Federal law) in an effort to get the Feds to act.  President Obama then accuses Arizona of racial profiling intentions. President Calderon correctly points out that drugs are a problem because of US drug demand.  While he disses Arizona for SB1070 in a state visit Mexico’s own immigration law is much more onerous than the Arizona law.  Mexico depends upon the remittances from Mexicans working in the US to family back home to help prop up its failing economy. There are immigration issues which must be addressed, but this is political malfeasance where both Democrats and Republicans seek to use a divisive issue to score political points. Shame on both of them!
  • A POX ON BOTH PARTIES! Republicans hope for an election bloodletting as Americans recoil from the stunning overreach of Democrats misreading their mandate and misusing the recession and economic volatility to impose a program of deficits spending, vast intrusions into business and daily life, and a blitzkrieg of legislation with little transparency hoping to enact their agenda before midterm elections.  But as voters it seems like we just kicked out the Republicans for the same reasons—they forgot who they work for!  Now we are unsure that returning them to majorities will be much of an improvement.
  • CHANGE WE DON’T BELIEVE IN ANYMORE. The president’s popularity was born of Americans joy at his election as a symbol to the world of our redemption from discrimination past and our belief in the principles of the founders that “all men are created equal” for the future.  But the celebration has turned moody feeling deceived that this change is not really what we expected. Americans see little difference between the Democrats overreach in power today rewarding their friends and the Republicans overreach in power yesterday doing the same. Sometimes those friends are the same bankers, unions and lobbyists pouring money into the political accounts of politicians to gain favor.  The Tea Party movement is a powerful and terrifying symbol of American dedication to its Constitutional values for our political class and due notice that the revenge of the voters will be exacted on both parties before it runs its course.

So why am I optimistic?

The genius of America has always been our ability to adapt to change and reinvent ourselves to take advantage of opportunities presented.  The volatility and economic shock we have experienced combined with the political wake-up call we are experiencing now are the best evidence of that American renewal process at work today.

The midterm elections will punish incumbents in both parties.  But we hope it will bring in new blood with a deeper commitment to the values we seek to advance and less partisanship.  We have learned as voters that we get better results in Congress when both parties fear us.  Giving big majorities to either party rarely works out well for us so we need to keep them evenly balanced and have good “adult supervision” from our president to set a wise course.

So far Obama is not winning any ‘Rookie of the Year’ awards but we still hope he can turn things around. But as insurance we are likely to take away his majority in at least one house of Congress this November.  And if his performance does not improve we may not renew his contract in 2012.

Volatility separates those with a future from those with just a past.

The difference between America and Greece is while we both celebrate our past, America lives into its future.  Our manifest destiny was reinvented from a quest for control of our continent to a quest to project our values of liberty, competitive markets and the rule of law into a world that craves each.

We won the cold war and now are completing the circle of the end of that long struggle.  Had America as the sole superpower after the Cold War sought to preserve its hegemony we would not have seen the rise of China as a great economic power, the integration of Europe, the natural spread of democracy and thirst for freedom all celebrated as global progress.  But progress also brings problems we now share with a more integrated world including the struggle to deal with Islamic terrorism, bad boy countries in the continental neighborhoods that must be policed, and the unintended consequences of global markets and trade.  But that interdependence is also strength since the consequence of not working together is worse than the price of compromise.

The world still needs American leadership but what it wants is American resolve to live into its core values and act predictably to advance them.  The world worries when America’s President apologizes for America’s values or advancing America’s self interest. In a choice between having the world love us and having them respect us take the latter every time.

When we live into our American values we set the global compass to true north and enable others to act in their self interest in ways that are either deliberately in concert with our own or—if they feel daring opposed to them.  If America wimps out and lets such challenges pass we only invite more dangerous behaviors.  But when we stand up for our values—and for our friends and allies—we don’t need to apologize for our behavior.

Volatility is a wonderful thing because it separates the brave from the bullies.

The best way to deal with bullies has always been to confront them face to face and expose them for what they are.  Bravery is learned from experience and is born of self confidence and values that are stronger than the fears we face.

That is why I have faith in America’s future!  But I am still going to enjoy kicking both Democrat and Republican butts this election.  I am not a Libertarian like Rand Paul but he said it for all of us election night in Kentucky:

“We are coming to take back out country!”

Turning Convergence to Strategic Advantage

As the feed-in-tariff problems of Spain and, more recently, Germany caused major ripple effects around the world for renewable energy especially solar photovoltaic technology players, the United States has become the market of choice for global players in renewable energy.  The most recent evidence of that is the outpouring of capital from China being investing in establishing market share in the space.

Why?

Because these global players see the convergence of state renewable portfolio standards, Federal stimulus money, investment tax credits and loan guarantees, and America’s insatiable appetite for technology and innovation as solution to a wide range of problems including greenhouse gas emissions reduction.  It is convergence and the welcoming of disruptive technology change that is part of the American genius for continually reinventing itself. While many nations criticize America, our culture, our economic freedom, or respect for the rule of law and opportunity quotient means that people around the world wants to be part of the action in America.

A New World Economic Order Taking Shape

Since World War II America has leveraged its capital and power to help nations and continents recover from the ravages of war, disaster, internal conflicts and other calamities as American treasure was used to rebuild and American power to defend against the Axis power, against Communism, and now Islamic extremism. We should celebrate the success of these achievements and wish our friends the very best in using them for their future economic growth and self interest.

Today, the results of those American efforts combined with the resourcefulness of Europe, Japan, Asia and elsewhere have brought us to a world where American military power is just as strong but America’s lessons in economic power has been multiplied in the faster growing economic miracles of Korea, the leverage of capitalism in China to raise up a great and proud nation, in Brazil and elsewhere.

I am not claiming American credit for these economic miracles, but let’s face it Communism and Socialism did not produce those results.  So today in the early stages of recovery from this great recession we have faced, is it time for America to think about how to point the way for the next stage of global economic growth and renewal?

Time to Emancipate the Children!

Is it time to emancipate the kids and tell them how proud we are of their accomplishments, but now it’s time to buy your own insurance, build your own house, and take responsibility for your own future.  We will help you and love you as always, but it is time for you to be independent.

This is NOT a sign of American weakness or isolation, but a symbol of strength and confidence.

Just as that idea was ruminating around in my head while reading about some of the problems in Europe, along comes an article from Rand Corp about Korea and whether the South is adequately preparing for what might happen in the North.[1] It said that South Korea has relied on American power to defend it for so long that it is failing to take the actions needed to prepare for the potential for either a North Korean attack or worse a North Korean collapse in the future.  Rand says that America is not helping Korea prepare because it is not forcing Korea to accept its adult responsibilities for its own future.

In Loco parentis!

We see that same phenomenon at work in Europe, I think.  I was reminded of that recently when the French were critical of American efforts to help Haiti as being inadequate.  Someone quipped that the French are “always there when they need us.”  It’s true isn’t it?  Europe is proud and haughty but dreadfully ineffective in making decisions, acting in its strategic best interests or projecting its potential power as a global player in the world.  It often acts like a teenager quick to anger but short on common sense.  There always seems to be time to fire off a ‘wise-ass’ text message slamming America, but never time to do their own homework!

The best evidence of that in recent years is the incredibly stupid growth in European dependence on Russian gas when they know that Russia will shut off the gas without a second’s hesitation if doing so achieves some tactical or strategic goal.  Europe dithers in admitting Turkey to the EU because of its angst over Turkey’s Muslim heritage yet many European nations having allowed Muslim immigration for years now refuse to assimilate them into the population so they can become members of the European family because they are not French-enough, German-enough.

Time to Focus on Economic Growth and Revival

America is coming out of recession and despite the rocky road to recovery ahead has great potential for growth and economic revival.  It is time for America to seize its opportunities and project its strengths to achieve that great revival.

Here are some ideas to consider:

  1. Send Me Your Smart and Eager Yearning to Breathe Free! The greatest strategic risk in the world today is not the current economy, or security or terrorism it is demographics.  In Europe, Japan, China and elsewhere the population is aging and birth rates are low.  Immigration to America has produced a younger population so our aging problem is not as severe.  But our immigration problem is we are restricting access to America for the very people we most want and need—the bright, educated, smart, technology saavy H1-B dreamers and inventors of tomorrow.  Instead our lack of action has allowed America to be the safe haven of millions of poor seeking a better life.  While the latter are a source of immense talent, we also need the former better educated professionals.  Other rich and powerful countries facing a threat of population decline they cannot stop without changing demographics but their cultures prevent them from doing so.   So they seek to grow fast economically today hoping for a long, graceful decline.  The American tradition of multi-cultural assimilation of immigrants is one of our greatest accomplishments and one of our strategic advantages for the future.  Use It! The US should open the doors to immigration targeting students and well educated professionals eager for a vibrant place to expand their knowledge, take advantage of opportunities for better lives for their families and live the American dream.  If America can reinvest in its population of young, smart, talented and skilled to build a vibrant multi-cultural workforce from that melting pot it will remain the technology leader of the global economy and engine of economic growth for a long, long time.  The US should make strategic immigration reform a high priority.
  2. Join in the Dance of Freedom and Self Discovery! The most pernicious and effective threat to tyrants around the world is the effective export of American culture, ideas, technology and example.  America should celebrate its way of life by sharing it with the world through open communications, unrestricted internet access and technology investments to defeat the best hackers and thought police from blocking access to the world’s ideas.  Google should be shamed into rejection of every attempt to restrict access to the world’s information by China and other countries.  And if it goes along with such shameful behavior others should challenge it by redoubling their efforts to fill the gap in access to the free flow of ideas.  America’s gift to the world is the spirit of freedom, the first amendment writ largely, and the welcoming of many voices.  Just do it!
  3. Tough Love for the Emancipated Kids! I seek an America capable of projecting its ideas and its power anywhere in the world and make no apologies for that view.  It is what we do to be who we are.  For that reason I would say to South Korea that we expect you to step up and prepare to defend yourself and spend your own money doing so.  America will be there for strategic backup, for logistics, for projection of power and deterrence, but we are not going to permit you to off-load your defense responsibilities to us.  In effect, buy your own insurance!  We should tell the Europeans the same thing.  You can’t have it both ways, American defense and America to criticize as cover for your own weaknesses.  If you fear the Russians, quit buying so dang much of their natural gas!  I could rant on, but you get the point!

Looking out for America’s strategic interests

I do not want to sound like an isolationist and do not, for one moment, want to suggest that America should withdraw from the world or not face squarely the strategic challenges ahead.  I simply think we should be more deliberate and less apologetic about doing so. The recovery period ahead offers America a unique opportunity to get our act together domestically and we should do so internationally as well.  Our strategic interests are changing and so must our strategic priorities.

Will this make us more popular around the world?  Don’t bet on it!  The kids are going to be shocked that Mom & Dad are setting them free to get a job, find a place to live and buy their own insurance.  Maturity is a wonderful thing for kids—and spoiled nations. Besides, the ‘old folks’ still have a lot of life left in us and we intend to make the most of it.  If we do well enough, we might just leave a little of that good life capital behind for the kids after we’re gone!  Our kids will do fine in this tough love environment and get stronger in the process—we’re focused on assuring the best place on earth to protect the freedom and opportunity for our grandchildren.


[1] http://www.rand.org/commentary/2010/01/21/KH.html