Putting a price on the green lunch

How Much Is The 2nd Derivative Worth?

Well, according to the stock market more than $4T dollars. Market cap of the Whilshire 5000 in the march lows day $9.38T, market cap today $13.4T. Given the total US corporate profits(including non-publicly traded corporations) was $1.2T in 2008
, the market decided that when economic data stops accelerating the rate of contraction that is worth putting a additional 4x profit multiple over it. It was a about an 43% rally, did the green shoot story overshoot?It looks like so since a 2nd derivative doesnt tell you anything about WHEN a bottom is coming, it just tells you that there is one. The green shooters have a $4T gamble going on, time will tell whether they paid the right price for their optimism

Inflation

Paul Krugman is a Deflationist Moron

Krugman seems to be in the camp that deflation is inevitable, there is nothing that can be done and people shouldn't be worried about inflation.
Here's how the fed can create tons of inflation. Working with the treasury they announce a broad tax cut of $20T for all US citizens, it would financed by creation of new money by the Federal Reserve, this would bypass the banking system need to expand credit.

If people save 80% of that, they would still spend $4T. US consumer spending would rise by about 40% very quickly and tons of new money would flood the economy. This wouldn't create just inflation, hyperinflation would likely to be the result. The fed is not going there just yet(and they shouldn't) since the core CPI and inflation expectations are still within the Fed's range but if things fell out of bed you can count on the fed to make everybody to pay more for goods and services.
And to the extend that markets are forward looking people SHOULD be worried about inflation at some point over the next years as the fed suffers from an asymmetrical dilemma, where inflation is bad but deflation much worse therefore they will like to err in the side of the former
To argue otherwise is to ignore most of the american central bank literature of the last few decades where they make it clear they wont tolerate deflation and a frozen financial system wont prevent them from meeting their objectives.

Shawdow Banks

Til Schuermann on the real size of the Non-Bank Sector

Til Schuermann a member of the Federal Reserve Bank of New York testified before congress and he made some scary remarks. It's a highly recommended reading

"When one adds credit provision though corporate bonds and commercial paper, one realizes that commercial banks have provided only about 20% of total U.S. lending, since the early 90s. The four decades prior had banks’ share closer to 40%. The rise of market-based instead of bank-based credit provision in the last twenty years has been substantial and important."

Bernanke was using misleading numbers about a 50% share a few months ago, I assumed his figure was correct. I first saw the 20% in the Economist a few weeks back, the FRBNY now is backing this. With the shadow banking system now in its grave(the commercial banks still zombified) plus market lending still weak(although enjoy a nice temporary rebound) this spells big trouble for future credit growth and US potential GDP. The stock market is almost surely being delusional if they expect the type of corporate profit margins the US had in 2007 to return, if anything they will continue to shrink. 2010 GDP which is forecast to be around 2-3% is also almost surely too optimistic with the current levels of credit growth and household stress

Overdose

Green Shoot Smokers Running Out of Breath

Time to lay off the bong fellas

US Consumer

Retail Sales, PCE to surprise in the downside?

"Recession Turns Malls Into Ghost Towns" - WSJ



Gap Profit Falls as Consumers Trim Clothing Purchases

This week ICSC-Goldman Store Sales posted a 1.2% decline W-W
Redbook reported -0.2% in store sales from Apr to May

Japan GDP

Japan Posts its Worst GDP Number Ever

What are the odds that the worst GDP report ever is followed by a V type recovery as it seems to be currently embedded in Japanese equity values?(Or at least expectations that another L wont occur)
Here's some analyst comments from the worst report ever
"We’ve turned the corner. The economy is no longer in free fall"
“The worst is over,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “We’re going to see positive growth -- not significant growth, but growth --from the second quarter onward.”

They usually justify the optimism by hand picking data that is bouncing around
It just seems that the odds that people are engaging in wishful thinking is much greater than the odds of a actual V recovery after collapses of this magnitude(specially when needed reforms are still lacking), maybe wishful thinking is as much as 8-1 favorite to be taking place than the theory that an actual V type recovery is happening

I've been hearing a lot of 'inventory' recovery in the 2nd half following inventory drawdowns in the US and countries. That is totally wrong, inventories are down but SALES are down even more



As sales reset to a new level so does inventories, who is going to rebuild invetories when you can't sell anything?

Hussman Watch

John Hussman Watch

Hussman lastest article looks mostly correct with the exception of when he addresses the idea of pundits referring to consumers increasing their savings as being bad to the economy

He says
"At present, it is not valid to say that the economy is weak because people are saving too much, because if gross savings were up, gross investment would also be up."

Well the problem is that when pundits say 'people' are saving too much they refer to US consumers and to some extend to the corporate sector not to "gross domestic savings"(that is, total saving including consumer, corporate and government entities) that Hussman is addressing, in fact one of the arguments of the pro-stimulus people is that since consumers are saving more its up to the government to borrow and spend so to keep gross domestic saving from collapsing national income(Like in the example he outlined)

So yes he is right that gross domestic savings is not rising(Mainly due the government deficit) but its not rising because left to its own devices it would have risen and the government decided to try to cushion its impact by increasing government investment(thus lowering government saving) by running deficits and through the stimulus plan, so the pundits are wrong from a nit picky English perspective but their main point still stands, a rise in consumer saving in a macro level while desirable in the long-run is not its good for the economy at all when it happens in a major way very quickly, if uncontrolled it would lead the US into a deep depression, yes savings equals investment but only because 'investment' includes inventories, so if everybody stopped buying from wall-mart tomorrow the rise in WMT inventories would show up as 'investment' even though WMT had no intention on increasing investment, in fact its just the opposite they will cut jobs, stop expanding till they see a pickup in sales(Hussman acknowledges this by saying "Output that is not consumed represents 'investment' even if it is unintentional 'inventory investment.' ")

This article from Wikipedia nails it
Savings Identity
"Note that this is an "identity", meaning it is true by definition. This identity only holds true because investment here is defined as including inventories. Thus, should consumers decide to save more, and spend less, the fall in demand would lead to an increase in business inventories. The change in inventories brings savings and investment into balance without any intention by business to increase investment.[2]

Note, that as such, this does not imply that an increase in savings must lead directly to an increase in investment. Indeed, business may respond to increased inventories by decreasing both output and intended investment. Likewise, this reduction in output by business will reduce incomes, forcing an unintended reduction in savings. Even if the end result of this process is ultimately a lower level of investment, it will nonetheless remain true at any given point in time that the S=I identity holds"

Therefore Hussman setup a bit of a straw man and is nit picking pundits and analysts because when they say a 'this rise in savings is hurting the economy' they do not mean 'gross domestic saving'(Which is affected by government deficits and investment) but they refer to consumer and business saving(that is gross domestic private saving), which a major quick rise in a macro level would result in a economy much weaker than otherwise(The so called Paradox of Thrift)