MACRO MINUTE – THE U.S. ECONOMY IS NOT COLLAPSING

Over the last several years my outlook for the domestic economy has been generally steady – we’re in a balance sheet recession and the government is running large enough budget deficits to offset the effects of de-leveraging to a large degree. This means the economy won’t fully recover and feel healthy again until the balance sheet recession is over and the private sector can run with the baton without the aid of the government’s massive deficits. Based on my estimates, we likely won’t be at that point until 2013 or perhaps later.

The primary reason why the government response has failed to generate a sustainable recovery is due to several factors. First, our leaders misinterpret the actual way in which our monetary system operates. This has resulted in a persistent dissemination of neoclassical economics over the last 30 years which has contributed to a misguided policy response on both sides of the aisle. This contributed to an excessively financialized global economy and helps to fuel the misguided policy response in the current environment in which monetary policy and the Fed is largely impotent. In short, we’ve focused too much on helping the banks when in fact, this was never a banking crisis. It was always a household crisis. Unfortunately, Main Street has been overlooked for the most part.

In terms of the outlook going forward – not much has changed. These broader macro trends are all still in place. The balance sheet recession continues, large deficits continue, the inept government response continues and therefore the malaise (but not a collapse) continues. This all means the economy is likely to remain in a growth phase, but domestic demand will remain stagnant to the point where it feels like a recession (although the NBER won’t classify it as such) and results in a high rate of unemployment and below trend growth. But make not mistake, this is most certainly one long recession – a balance sheet recession.

To my surprise, the corporate profits picture has remained very strong over the years. This has created an even more confusing environment for many. As companies cut costs and Asia recovered, the global diversity of the the American corporate sector led to a robust profit recovery. Contrary to popular opinion, America’s corporations remain the best in the world. But as domestic demand has remained low they’ve been given little incentive to leverage up and hire new workers en masse. Meanwhile, fat profit margins, below trend domestic growth and strong Asian growth has led to a healthy bottom line. This has all been good news for the stock market since the 2008 crisis occurred.

In my opinion, the government’s deficit remains large enough to support below trend growth in the coming year. That is likely to come under pressure as we head into 2012, but the deficit should remain large enough that we can sustain growth and not fall into a technical recession. The major risk to this forecast is international markets. In particular, I believe China holds the keys to the kingdom. If the Chinese economy can thwart a hard landing in H2 then much of the worrying will subside and the domestic economy will get back to business as usual, which, in this environment, means inadequate growth, but top line growth ultimately translating to bottom line growth as margins remain strong (read, no hiring).

The other major risk is Europe. Europe is clearly on the precipice of a potentially serious crisis. It is eerily reminiscent of 2008 and the EMU leaders are woefully behind the curve. The bad news is that there is no structural fix in place yet and that means the turmoil will likely continue. The good news is that every time Europe has been pushed to the brink their leaders have been responsive (and yes, they built this flawed currency system so it is their duty to fix it once and for all). I think there is a fairly high probability of a 2008 type event in the coming year. If Italy is pushed to the brink (and I do think bond vigilantes will continue to push them) then we are likely to see a much broader response which is likely to involve ECB rate targeting or Eurobonds. This is the bazooka and would put an end to this silly crisis for the most part. Then the EMU just needs to fill in the holes with the final pieces of a fiscal union. Easier said than done – I know, but if there is one thing we know, it is that wealthy politicians don’t like to see their wealth collapse due to their own lack of action. And I am confident they will act when forced to. I guess we can call this the Trimerkel Put. It’s there, it just needs to be dusted off once every few months.

All in all, I think it’s unwarranted to panic excessively over the domestic U.S. economy, however, the risks to the global economy are substantial.

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Got a comment or question about this post? Feel free to use the Ask Cullen section or leave a comment in the forum.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Thanks for these macro minutes. they’re always excellent. Can you update us when you get a sell signal on your algo? Thanks.

  2. Will disagree again (again at the margin only!). Eurobonds won’t happen because that is just Germany/North subsidizing the South/periphery. ECB rate targeting is hocus pocus (targeting a lower yield doesn’t do anything to stimulate demand, this is an old whip that you are whipping up again, it won’t do anything in the US and it won’t do anything there!).

    What will happen is ECB will buy up sovereign debt when pushed to the brink. It will make a lot of noise, governments will try and promise some austerity (and like Italy back out of it in just a few days or weeks just like it has done in tghe past 2 days) and sovereign spreads will widen. ECB will step in again (the past few times they ahven’t even bothered sterilizing).

    Re: China – they are set for a hard landing according to Patrick Chovanec although Pettis seems to think they will avoid it. My take – it’s hard to say what comes out of there but such a crazy stimulus fueled by printing yuan in late 2008/2009 is more likely than not to lead to a hard landing than a managed soft landing. In any case, they certainly don’t have the room to push through another huge stimulus.

    And let’s not forget Bernanke, he won’t settle for the muddle through, so it is highly likely that he will continue to do stupid things and one of them eventually will backfire.

    The risks are skewed (significantly) to the down side. I admire your optimistic outlook (optimistic nowadays is for a muddle through for a few years!), but I project that things WILL END BADLY.

  3. If US government starts discretionary cutting following the bipartisan congressinal prescriptions (or the lack of such prescription), and if unemployment benefits are not extended anymore (with the high long term unemployment rate we have already) this could be another danger for eventual downturn.

  4. Cullen,
    My own view has been very similar. Which begs the question – why is Benny pursuing policies that have NOT and will not help.
    My only answer is that
    1) He thinks a lower dollar helps on the margin. And QE reflates Asia and thus raises their real exchange rate and that is what Ben and Obama admin want to see – if the Renminbi is not revalued on a nominal basis, Ben will just raise inflation in China.
    2) Keep rates and thus, debt service, low for the government. Rates are already low so I dont know how much he gains on this.

  5. “It was always a household crisis. Unfortunately, Main Street has been overlooked for the most part.”

    This all started with Ronald Reagan and the middle class has been hanging themselves ever since.

    Furthermore, people really need to stop worrying about Europe.

    Trichet and the ECB is well funded and has more ammunition then people realize. He continues to thumb his nose at the ratings agencies. Which is exactly what he should do.

  6. Eurobonds and bailouts are the same thing in effect.

    Of course one is actually a plan while the other is ad hoc.

  7. Cullen-
    Everytime I get a little tilted you bring me back to center. I let you because it’s worked.. when I get too, “this is going to happen” speak my biases are taking over.
    Thanks for bringing me back to center it has increased my income and clients wealth.

  8. Cullen, I generally agree with your take on this environment but I’m a little puzzled but your belief that this was never “a banking crisis” per se. I see your point for the larger banks but the community banks that got squeezed in to predominantly real estate lending do not appear to have recovered to any significant degree?

  9. Agree that the US is now on a muddle through trajectory. I think that 2013 is optimistic. The problem is twofold and interrelated — 1) a global housing crisis must be unwound before any real recovery can begin and 2) the precarious condition of major banks, not only in the US.

    The present muddle through trajectory is contingent on absence of shock. The US economy and the global economy are both teetering on the edge of a cliff, and a shock anywhere could easily push us all over. There are several known unknowns and we have no way of knowing the unknown unknowns — another significant terrorists attack, significant natural disaster, etc. Perhaps the most significant complication is that the global leadership and their advisers seem to be clueless. There is nothing substantial being done to address the problems, and, in fact, the push politically is in the opposite direction, aided and abetted by neoliberal and Austrian economists in the US, UK, EZ, and now it seems Japan, too. Expansionary fiscal contraction? Concern with government debt in the face of demand deficiency? Really?

    This uncertainty in the face of contingencies is reflected, for example, in the demand for gold and US tys at negative real yield.

  10. The rate targeting wouldn’t be primarily to encourage growth but more to bring down the rates of the PIIGS to ‘manageable’ levels and stop the panic. I do think at the end Europe will let the ECB to do some sort of Quantitative easing or rate targeting. A fiscal union is too hard to create at this moment and the cost of letting the PIIGS fail are too great.

    That said, European QE is also a stretch at this point in time.

  11. KP, hmmmm. Let’s revisit this one in exactly one month (which should be just after the Bundestag votes to withdraw monetary support for the bailouts on Sep 29th). I don’t share you optimism…..

    rhp

  12. Cullen,

    I was wondering whether you read Michael Pettis’ latest piece about Chinese growth slowing to 3% by 2013 and if we could get your thoughts.

  13. I highly doubt a Chinese ‘hard landing’ will happen this year. And the Chinese government has very strong incentives to avoid a hard landing. A hard landing in the US means Obama can say good bye to a second term. A hard landing in China means that all the problems that are high growth hides will be uncovered or intensified and massive riots leading to tons of officials in China getting the chop.

    I do think they got room for one more big stimulus package if they come close to a hard landing. Then a few years of more growth and then hell breaks loose. Inflation will shoot through the roof and the common Chinese citizen will suffer -again.

    Funny thing, China has had this massive growth in its money supply year in year out and massive food inflation and yet I hardly see someone who believes in Chinese hyperinflation in the West. Yet you see every expert (Western and Chinese) and their dog saying The USA will suffer hyperinflation regardless the rather ‘meh’ growth in its money supply.

  14. Sorry, i went through the comments myself and found it as of 08.19.11, Cullen what would trigger you abort your override and dive into the market?

  15. Now that I’m an MMT apprentice in training, it’s amazing to me how many patently false statements are made by politicians about the budget, debt, our economy, etc. Thank you Cullen for making me aware of the nonsense that is going on – although I have to say it’s made me a bit more frustrated about our leaders. It is downright scary that government leaders who don’t understand how our monetary system works have their hands on the dials of the economy control panel.

    Apparently economists don’t get it either:

    http://www.thefiscaltimes.com/Columns/2011/08/30/What-Caused-the-Financial-Crisis-Dont-Ask-an-Economist.aspx#page1

  16. I think Ben believes he’s running a hedge fund.

    He’ll be sending out 1/4 updates and statements in 2012.

    His benchmark is 5% over his version of the CPI(excludes all items except a new Range Rover the following day after purchase, A Ryan Leaf football card, Florida Marlin baseball tickets, and home prices in Riverside.)

  17. Want a real world example of the US econonmy NOT collapsing…read Joy Global’s (JOYG) recent earnings transcript. High quality beat, with great backlog growth. Take it from them and not from the economists…

    “So as disconnected as it seems from the macro environment, that is the environment we’re seeing right now. Everybody seems to be on schedule. We see no evidence of delays, deferrals, slowing down of any of the projects that we’re working on.”

  18. Dean Baker also says no double dip:

    “Have the Double-Dippers Been Dipping Too Much?
    Monday, 29 August 2011 08:46

    The Commerce Department just released data showing that real consumption spending rose by 0.5 percent in July. This makes it highly unlikely that growth will turn negative in the current quarter. Consumption is 70 percent of GDP and this figure implies a 6.0 percent annual growth rate.

    Of course consumption is not really growing that fast, more likely it is increasing at near a 2.0 percent annual rate, but maybe this number will shut up the arithmetic challenged economists who keep talking about a double-dip recession.

    The economy’s problem is pathetically slow growth. We should be seeing growth of 5-7 percent as the economy rebounds from the worst downturn of the post-war period. Instead, we will be lucky if growth just keep pace with the growth of the labor force, preventing unemployment rate from rising further.

    The implication is that tens of millions of people will remain unemployed or underemployed because of the Wall Street sleazes and the incompetent economists who could not see an $8 trillion housing bubble and still don’t know a damn thing about the economy. It’s a crime that they still have their jobs.”

  19. Cullen,

    Would you offer any thoughts concerning Hussman’s recession signature? I know you’ve mentioned in the past that the identification of a new recession doesn’t mean much, considering we are in a BSR. However, I am beginning to wonder if there is a higher degree of tension between a muddle-through BSR (malaise) vs. an outright technical recession (collapse). Hussman puts it this way:

    “recessions are essentially periods when the mix of goods supplied by producers has become too different from the mix of goods demanded by consumers. Except during the deepest recessions, blindly stimulating demand is not a useful way to remedy these imbalances. Recession is a natural, even useful process. The economy requires a whole range of adjustments in prices, production and worker skills. Those adjustments can be costly, time consuming, and painful, but the lesson from other countries is that if you try to avoid the adjustments, you end up avoiding long term growth. The best policy response for the Federal Reserve is to ease only enough to keep the banks liquid, and to reassure the markets during any short term panics. The goal is to make sure that even in a recession, there is never a panic that prevents good, potentially successful business ventures from obtaining the capital they need to operate.”
    http://www.hussmanfunds.com/html/economy.htm#recession

    What are the current imbalances? What are the adjustments which need to be made and are not? What are the effects? Are deficits around 9% of GDP enough to sustain economic activity (not to mention are they delivered effectively)? I was flipping through the Mosler’s Valance Weekly Economic Chart Book, and couldn’t help notice a lot of positive data which support the malaise theme.

    Now, you have obviously stated quite clearly that there are significant risks evidenced in Europe and China. However, could Hussman’s recession signature be indicating that these risks are unavoidable?

    By the way, I agree with VII that you have a unique ability to hold risks and reality in tension, and have brought be back to the narrow road on more than one occasion.

  20. I have a big cushion this year in performance so I am not overriding it. I missed it. I’ll catch the next wave. Big deal. I made a mistake. I have to learn from it and get over it. Unfortunately, I don’t have a back-up plan for the model’s signals so there’s no going back really….

  21. Nicely put. My question is whether these shocks are avoidable, particularly Europe. The housing imbalance of 2003-2008 was noticeable. It was not hiding in a corner, it was ignored by our leaders. Even practitioners didn’t anticipate the effects it would have. Are we doing the same thing with Europe? EMU is arguably unsustainable in current form, and is it too late to avoid the bad event?

  22. Very nice.
    If Benny really believes QE works, he should buy SPX futures and short oil futures. I would respect him more.

  23. Sorry Cullen I wasn’t trying to knock your decision to override, seems like a smart move given the systematic risk in the market right now.

  24. Yes, corporate profits have been good but one should dig a little deeper. Sales have gone down. Companies have stopped expanding their business. Because they could service the shrinking demand with the existing capacity. Although sales have gone down the expenses for capacity expansion disappeared all together. And that’s why profits continue to be strong. As a result, companies are sitting on record amounts of cash and that’s NOT a good sign.

    And what about the disastrous Philly FED report ? Does TPC disregard it because it doesn’t fit his “”muddle through”” state of mind ? Perhaps he liked the latest railtrack report more (=muddle through) ?

  25. Your note fits well with Schiller recent interview and the “damaged psyche” of the investment class and american’s in general. Interestingly this is how some people fall into emotional depressions. Certainly hearing that economy is “weak”, “unemployment” is high etc is not a positive environment for business management, investors and citizens . Perhaps the longer we remain in this malaise, the more we believe it to be and the more difficult it will be to remove get out of it.

    Cullen is the root problem the BS recession or the excessive financialization or something else? That is, what is the symptom and what is the cause?

  26. Quite simple. When GDP is say 3% and (price-)inflation is say 5% then the REAL GDP is (3 – 5) = -2%.

    Reports coming out China clearly indicate that inflation over there is high and that (high) inflation has to be subtracted from the nominal chinese GDP. So, the amount of goods (e.g. barrels of oil, tonnes of coal) consumed is already shrinking. So, the chinese economy is already shrinking.

  27. ‘Then the EMU just needs to fill in the holes with the final pieces of a fiscal union…’

    Sure, Cullen. By filling in the holes I guess you just mean: telling those millions of crazy Greeks, Irish, Portuguese, Spanish and Italians that all they gotta do is abandon centuries of fiscal independence, hand it over meekly to a bunch of unelected Eurocrats in Brussels and then everything will be cool. ;-)

    I love your optimism, but it still takes my breath away.

  28. The primary reason why the economy is so “”weak”” is the amount of excessive debt. William K. Black talked about “”excessive debt”” and TPC talked about “”growth of debt above productive means”” or something along that line. Well, there’s a VERY good gauge for “”Excessive debt”” and that’s called the “Debt to GDP”” ratio. When one pulls up that graph then one sees that starting in about 1950 that ratio remained remarkebly flat until about 1981. After 1981 that ratio went up much much more steeply. So, the US (and other countries as well) has been piling up “”excessive debt”” since the early 1980s.

    I would like to share that graph with the readers of this blog but this blog doesn’t allow pictures to be shown by someoen who posts a comment.

  29. Cullen,

    Thanks for the thoughtful comments. You mentioned the Governement Stimulus in the US. Don’t you think the removal of the Stimulus going forward which may have propped up the weak recovery, will make the weak recovery even weaker – or send us into a recession?

  30. I’ve shared this before..I think it is one of the most overlooked modern Pop art forms.

    I do respect Ben Bernankes Beard. I have never seen such a well groomed, manicured body of hair in my life. And I’ve been around some fellas who took alot of pride…

    If I were an artist I’d do a whole pop art on the mans beard. It’s simply a work of art. I would imagine if there was a fettish(which I’m sure there is) group well they would spend alot of time with pictures of Bens Beard.

    Which gives me a good segway to say…what up F.Beard-u changed you photo..u know…you’ll always be my screaming monkey. hope your well

  31. It will put downside pressure on the economy, but I am not sure it will be enough to send us back into recession. I kind of think this “new recession” debate misses the point. Technically, I could end up being wrong, but the whole point is that this has been one long recession regardless of what the NBER ultimately declares. And because we’ve failed to understand this balance sheet recession we’ve misinterpreted the necessary policy response, etc.

  32. I respectfully disagree. I would compare the events that led to the Great Recession similar to the events that led to the Great Depression; you had an asset bubble in stocks whereby in about 5 years stock prices rose six fold combined with overly leveraged households (around 100%), especially farmers. In the 10 years leading to the Great Recession you had stock prices rise 3 fold, home prices rise 3 fold combined with household debt greater than in the 1920’s (around 130% in 2006). I would describe the decade of the 1930’s as the great contraction until 1932, followed by the great recovery, a setback in 1937 but by 1940 GDP was 10% greater than in 1930. It was also characterized by persistently high unemployment, but you have to remember, unemployment was measured differently back then. They just took the raw unemployment numbers, meaning if you had a part time job, you were considered unemployed. To compare unemployment in the Great Depression to the Great Recession, use the U6 number.

    Because of government policy and intervention the Great Recession will be characterized by a lot of mini-recession, mini-recoveries persistently high unemployment (comparable to the 1930’s) and stretched out over about 20 years. By the way, these kinds economic calamities are not unusual. Whereas they tend to be global in nature since the 20th century, they have tended to occur at intervals of about 70 to 80 years somewhere in the world as far back as the Tulip Mania.

    As far as corporate profits go: I think the bean counters at most corporations have done a massive Al Dunlap on their companies in order to make the bottom line look good. But companies cannot continue to remain profitable if they are being cannibalized and eviscerated. To remain profitable and productive corporations have to invest in capital equipment and come up with new products. Eventually, there will not be much left to cut, profits will dry up, sales will remain flat and stockholders will wake up and realize that it is going to take a massive amount of capital to make American corporations truly profitable again. Look for huge hits in corporate profits in the coming years and stock P/E ratios to fall to around 8.

  33. The biggest problem with quantitative models is when the operator allows human reason and emotion to override the very thing the model tells them to do. Trust me because I have been in the boat before.

  34. Cullen what do you think about this trash from Goldman Sachs?
    Goldman Sachs saying the “world’s going to hell”

    And how come no one speaks out against this “propaganda” as often and aggressively as a tin foil hat wearing hyperinflationists. I can excuse a Porter Stansbury, Shadowstats and other gold bugs who are emulating the GS business model to make a buck. But why give – a “reputable” and “respectable” investment house with real market sway – a blank check?

    http://www.businessinsider.com/goldman-the-worlds-going-to-hell-heres-how-to-cash-in-2011-8?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+clusterstock+%28ClusterStock%29&utm_content=Google+International

  35. TPC, “ECB rate targeting” means the ECB buying as many periphery bonds as it takes with keystroke money to keep rates at the target, right? It means focusing not on quantity but on price. I agree that this is the only way out (unless the ECB recaps the banks with keystroke money instead), but it means ECB QE on a massive scale probably well exceeding QE1 and QE2 totals in the US. Do you think that this will bring the Euro down to par with the dollar?

  36. China has a big bullet against inflation that it has not used – they could allow the RMB to rise against the dollar. They could compensate by allowing the Euro to fall a bit, which will help prevent a big loss in export related employment. The only wild card is what happens if China allows the Euro to fall too much – the Euro could collapse in a massive bank run. So they have to be very careful.

  37. Fgtalpha, hmmm. the earnings call transcript notes that higher commodity prices have encouraged production increasing need for their heavy machinery. This company seems like a niche market in the commodities production sector and I wonder how long this growth they talk about will be sustained. Also, looks like they are really moving into the Chinese coal markets. I’m not sure how much this one company’s bottom line reflects on the US economy.

    I, for one, would not take this earnings call as a bellweather for the markets OR the US economy……… but…….good luck

    rhp

  38. Article in WSJ today about increased ER visits in AZ (or Nevada??) correlating with rate of foreclosures. Takeaway……..”foreclosures are not good for your mental health!”

  39. I like that phrase “Trimerkel Put”. It makes me think of my original idea – that the EU will suddenly unify under a new dictatorship during a maximal crisis emergency. They will appoint a Triumvirate of Merkel, Sarkozy, and Berlusconi to a restored “Office of the Caesar”, which will be given absolute sovereign power over all of the EU. It will be the ultimate Trimerkel, until the long knives come out and one ruler survives.

  40. You are basically agreeing with Cullen. You are saying the next 20 years will be a big muddle through, more or less. Cullen may think the ultimate recovery will happen sooner than 20 years, but of course no one really knows. It could be anything from a few years to many decades depending on variables that cannot be estimated. I happen to think the ultimate recovery can’t happen until new energy sources are able to seriously replace depleting fossil fuels, which argues for a longer timeframe.

    I like the comparison of today’s CEOs to Chainsaw Al. :)

  41. A little “Atlas Shrugged” anecdote.

    Two friends of mine, both talented scientists, both moved to the USA to be on the cutting edge, one ended up BEING the cutting edge, doing research that will (mark my words) end up feeding into a multi-billion dollar industry. Both took their wives, both had two kids.

    BOTH WANT TO GET THE **** OUT OF DODGE.

    Reason? Economic situation is bad for family.

    Both pulled the trigger and are now leaving, both going Down Under. I’m looking forward to it because I get to work with both on some very lucrative projects. This story isn’t uncommon and I know of another three scientist buddies who are also prepping to leave the USA on economic grounds. It’s not that scientific conditions are necessarily bad, it’s that education, healthcare, etc, SUCKS and is getting worse compared to elsewhere in the OECD.

    Point of this story is, don’t be too optimistic that America’s innovators will come through with strong future US growth because a whole lot of “America’s” innovators aren’t actually American at all and they’re under siege / being starved out by “financializers” who have captured DC. A bad enough economy and the brains go home, taking their ideas with them.

  42. I agree pretty much with Cullen but I see aggregate demand collapse coming in Europe and that will affect the US economy too.

    I believe that they will not let any government default to happen in Europe but they still believe that public sector excessive spending has caused the problems in Europe and they are pushing the austerity measures.
    The euro can survive like this even if the economy goes to depression. On the other hand It might not survive as unemployment goes to sky high and social unrest starts in some of the member countries.
    The politicians don’t see the flaw in euro at all. There has been very little talk about fiscal union and my understanding is that member states really don’t want It.The situation in Europe is much more troubling imo. In US they might talk about spending cuts but they don’t let the aggregate demand collapse. I don’t want to sound like Dr. Doom and may be there is someone here that could convince me otherwise but I just cannot see anything positive coming out of the stuff that they are pushing in Europe.

  43. Yeah people are too smug about the ‘system’ fixing everything (Cullen’s Trimerkel put or the Bernanke put). I feel like the ‘system’ is pretty ineffective now and can only deal with problems as they come along. However people shouldn’t think that central bankers can just wave magic wands and all the problems will be back stopped. That is a dangerous precedent that seems to have permeated everywhere.

  44. Amazingly nobody mentioned the mountain of private debt accumulated. Throw all economists that do not see this as one of the root causes for the crisis in the dust bin.

  45. Interestingly, deep drops in the Philly Fed have correlated in the past with bottoms in economic activity, not deterioration. That being said, I think the risk of recession is strong here.

  46. Can anyone expound upon the accounting of US corporate profits and how they relate to our foreign account. Seems like the whole global village thing has muddied the waters to a degree. If a corporation is based in the US, but has plants all over the world is it strictly the corporate profits taken from abroad that go to the positive side of our foreign account balance sheet? If I buy a Toyota made in Ohio how is that added to Japan’s foreign account.

  47. Cullen, how do demographics figure in to your estimates? In the USA, the youngest Baby Boomer turned 65 this year and there is a Baby Bust following. I understand that an Echo Boom should start about 2020. Europes native population is declining and Japan is steeply declining. Any comments? Thanks.

  48. It’s true at the corporate level and has been true for years. Quick bottom line CEOs and CFOs do away with R&D and treat their technical people poorly and it looks good on their bottom line. They are treated like heros by the board which proptly approves of a bonus for the CEO… and then down the road everything turns sour, but then it is somebody else’s problem. These quick bottom liners are like a plague of locusts. (Not that lazy or obsolete technical staff don’t cause the same problem)

  49. As intelligent and educated as he clearly is, maybe Bernanke really is clueless.

    On the other hand, maybe he agrees with Cullen on the “misguided policy response on both sides of the aisle”, and believes it’s all up to the Fed.

    Europe sounds like the 800 lb gorilla; if the Fed has to be the ultimate backstop there too…

    Beard or no beard, he is not in the most enviable position

  50. Models utilized to overide human experience and reason??? Chess yes, markets not so much. Yes, I remember the days of the 80’s when portfolio insurance worked so well and of course there is the 1000 pt drop in the dow.

  51. Go to the link PHys.org and read the articles on the research breakthroughs in materials that impact every corner of our lives whether it is photonics, chip manufacturing, cloaking, solar and while the researchers who MAY reside in the US but are on work VISA’s. It’s hard to find an American in the group.

    This is but example but it is glaring and it impacts the future productivity of our country and its ability to stay competitive and provide organic opportunities and competitive standard of living.

    Time has run out. The same financiers who in 1989 leveraged United Airlines to the breaking point and walked away with millions while conning workers into beleiving that purchasing the airlines and becoming owners was worth the investment. They actually began this ponzi scheme in the early 80’s and worked their way through every sector of our economy. Our leades both business and political believed int this dilusion of Reagonomics to the extreme up to the point where the financiers have now sucked the bone marrow our of our nation.

    The challenge that lays before us will test us on the equivalence of our civil war.

  52. I talk to people all the time and they feel we never left the old recession. I know this has been mentioned in the past, but it seemed prudent to say it again. These are regular everyday people, without much if any money in the markets. I think they have a better sense than some of the experts frankly.

  53. Except Europe would be in a depression by then. And the other thing is to wonder how undervalued is the RMB right now? According to a recent Big Mac Index(Yes I know, a very scientific and detailed study) the RMB should be close to ‘fair value’. Also note they’ve been revaluing the yuan -at a glacial pace but revaluing all the same.

    Also note that exports is one of the party’s sacred cows. They’ll let the RMB appreciate only when all other options look terrible. I’m with Jim Chanos on this one, I think if there’s a hard landing the Chinese government is more likely to depreciate their currency further to increase exports.