The Election, the Economy and the Blame Game

As with the Bush tax cut and $300 Bush rebate checks back in 2001, no one remembers the months leading up to the 2008 election.  As Barry Ritholtz mentions in his post on his website,    

"...Had Al Gore been President from 2000-08 (and controlled Congress), the next GOP President would have flailed him for the recession and crisis bank relentlessly. Hell, the GOP still beats Jimmy Carter like a piñata. Once Obama took office, that was pretty much the last we heard of the Bush recession. The public actually forget who authorized TARP, who bailed out Citibank, BofA, AIG, Fannie Mae, Bear Stearns, etc."  

The tea party movement--while distancing themselves from the Bush years--blame Obama for the failing economy.  Now the shift in power is back to the Republicans in the House establishing a split Congress.  Funny how our memories are short term.  The same people that voted for change this year voted for change 2 years ago with a strong shift back to the Democrats. 

Pivital election years like this one only verified my long standing thoughts on the voting public:  Most people have no idea what REALLY drives the economy and this go-around, what REALLY caused the financial crisis.  No one realizes that the systematic failure of the financial sector and eventually the global economy is beyond any individual person or political party.  We so easily overly simplify the economic issues in 2010 to one or two areas:  taxes and government.  Television and radio ads beat these ideas in our heads.  Yet the seeds of economic destruction that lead us to where we are now reside in deregulation and--at the time, clever--financial engineering.  The environment existed in the 2000s and still exists to this day. It wasn't illegal
but it was hazardous and full of great risk.  As long as Congress is lobbied by the banking industry regardless of who is in power, PROPER and SMART regulation will never be established.  The Consumer Protection Bill was a good start but won't have a huge effect on the overall economy and unemployment.  It might not be next year or 5 years from now but the same problems that got us in this mess will resurface sometime in the future. 

We fail to remember that after the smaller recession in 2000-2001, employment took several years to recover to pre-recession levels.  We want unemployment to fall NOW yet our economic reality dictates otherwise. 

I guarantee that in two years, if the economy is still struggling, the balance of power will shift once again.  The blame in 2008:  The GOP.  The blame now:  The Dems and Obama  The blame in 2012 will shift back to the GOP if unemployment stays high (which it probably will).

Watch it happen.

Big Picture Economic Overview

A great post from The Big Picture blog by Barry Ritholtz on the economy as a whole.

I highlighted some sections that are worth noting as the year continues.

1. The Economy is recovering; The recession is over: Of that, we have no doubt, as the data is clear. The free fall of 2008-09 is over, and a gradual improvement is seen across the board. Industrial manufacturing, exports, autos, retail sales, durable goods, travel all confirm that the economy is “healing.”

2. But, the recovery is “Lumpy”: — Part of the reason some people doubt the recovery story is how unevenly distributed the improvements are. Geographically, much of the country is still soft. In retail, it is pent up demand plus luxury goods. In technology, it is mobile devices and consumer products. Financial firms are taking advantage of the steep yield curve and ZIRP to arbitrage profits, as opposed to actually lending. Profits are not evenly distributed either.

3. Government spending is only part of the story: In the midst of the crisis,  Credit froze, the consumer panicked, and business spending looked to be going extinct. Uncle Sam temporarily bridged the gap.

But the argument that government spending is the only game in town overstates the case. Private sector CapEx spending and hiring is improving (albeit slowly); Consumers have come out of their bunkers and are dining out, going to the movies, hitting the malls, and traveling.

We have not returned to the Home ATM days of 2004-07 — and probably won’t in our lifetimes — but the present environment is a massive improvement from the 2008-09 contraction.

4. Weak Improvement in Employment: The massive labor under-utilization is one of the two biggest drags on the economy (RE being the other). Near record low hours worked suggest that employers can simply increase hours rather than make new hires. Thus, I do not look for a V-shaped employment recovery — forget about 400-500k NFP data — anytime soon.

There are 15 million unemployed, and 8 million underemployed — it will take a long time for them to be re-absorbed into the economy. The 2001 recession took 47 months to return employment to pre-recession levels. This recession will likely take 65-75 months to achieve that goal — if not longer.

5. Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.

Commercial real estate tends to lag residential by 18-24 months. It is still adapting to the downsizing of America, particularly retail. The over-investment in commercial real estate of the past decade will take at least another 5 years to resolve, if not longer.

6. Deflation? Inflation?:  Well, as my pal Jeff Saut notes, we definitely have “flation.” Just not the type that everyone fears.

As of today, Deflation is a fact, inflation is an opinion. We are still living in a period of falling prices, heavy discounts, wage deflation, asset depreciation and lack of pricing power.  The S&P500 is below levels seen in the 1990s; Wages are flat for a decade.

The risk going forward is that the Fed fails to remove the accommodations in time. But they have Japan as an example of ZIRP with no inflation.  So long as labor under-utilization is near record levels, they can take their time in tightening.

7. The rest of the world: Europe is a disaster, and is likely to remain that way for a while. Asian economies are doing very well, helping to pull the rest of the world along — but China’s market is at 6 month lows, something few people are discussing. The risk in China’s real estate and stock markets has been mostly ignored,. Commodity regions and emerging markets still have strength.

Economic Biases; Poor Reasoning

A great post on The Big Picture Blog describing how our biases have guided how we perceive the economic changes over the last several years. 

While this type of behavior isn't anything new--we are all human after all--biases and irrational conclusions seem to be getting a stronger lift through media outlets on both sides.   It is still amazing to me that even among individuals who are educated fall victim to biases and do nothing to change their habits.  They rarely weed through their ideology to get to the real truth.  As a psychologist once told me, "People are afraid of what they don't know or what makes them uncomfortable."

How do individuals perceive FINANCIAL REGULATORY REFORM, INFLATION, CREDIT CRISIS, MARKETS? Read ON HERE

Bank Failure Counter

This doesn't even make the last "block" of a newscast anymore. Yes, bank failures continue. This year, its the regional banks versus the larger banks.

NUMBER OF BANK FAILURES:

2000: 2
2001: 4
2002: 11
2003: 3
2004: 4
2005: 0
2006: 0
2007: 3
2008: 25
2009: 140

2010 (April 5th): 66