November retail sales drop, investors dream of bottom

Reuters writes November retail sales drop, investors hope for bottom:

CHICAGO (Reuters) – Many retailers posted sharply lower November sales at stores open at least a year, prompting some investors to pour into the sector on hopes the dismal results signaled a bottom for share values.

Discounter Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz) bucked the trend with a bigger-than-expected rise, helped by lower gasoline prices and record sales of grocery items close to the U.S. Thanksgiving holiday.

Overall, same-store sales fell 2.1 percent, not quite as bad as the 2.4 percent average forecast, according to Thomson Reuters data.

Excluding results for Wal-Mart, the world’s largest retailer, same-store sales fell 7.8 percent, worse than the 6.9 percent decline forecast by analysts, according to Thomson Reuters. That was the worst monthly performance since it began tracking sales data in 2000…

and

…But in a sign for the better, nearly half of the 35 retailers reviewed by Thomson Reuters beat bleak sales estimates.

“The reaction is that worse than this, we’re unlikely to see. And when you think in those terms, you begin looking forward positively,” Gilford Securities retail analyst Bernard Sosnick said…

Yes, when you close your eyes and phase out into la-la land, you may actually see a bottom here. Not if you look at the numbers and the facts. This is only the beginning of the end of consumer borrowing and spending. Consumer credit is peaking. It’s only downhill from here.

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Consumer Credit Ditch

Consumer Credit has been increasing relentlessly.

Click image to enlarge.

However, a closeup shows us a curious detail:

Click image to enlarge.

A little, seemingly harmless ditch can be see in August 2008. The last time, however, this has happened was in January 1998.

Is this a sign that the consumer credit market is close to peaking? Sure it is.
Does the credit card industry yet have the worst ahead? Sure it does.
Should Americans stop borrowing and start saving? You bet they should!
Do Hank Paulson and Ben Bernanke want to see them be responsible citizens and consolidate their finances? Nope.

Expect Capital One, American Express, and Discover to be in line for the next special treatment bailouts.

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Has Silver Bottomed?

This year the price of a silver ounce has fallen to less than 1/82 of a gold ounce. While gold pulled back by about 30% from $1,011 to around $704, siver has plummeted by 58% from $20.92 to $8.79.

With the money supply on the rise again, and the Federal Reserve policy obviously out of control, coupled with a very cheap ratio in terms of gold, it is certainly reasonable to start being bullish on silver again. Silver is, after gold, the best monetary metal. True, it derives a lot of its demand from industrial uses, but it has already taken its beating for it.

As far as my limited chart reading skills go, the SLV chart seems to reaffirm this belief:

Click on image to enlarge.

Has a floor formed? I do think so. Has the trendline been broken? Not quite yet, but it looks like we’re close to a trend reversal.

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The True Gross Domestic Product

The Gross Domestic Product (GDP) is a figure that, in itself, tells us virtually nothing about the true state of the economy. The purpose GDP is to estimate the output of factors of production inside the territory of a country.

The way this is calculated is by adding up all money prices spent on goods by domestic individuals, plus the price of goods exported to individuals abroad, minus the price of goods imported, so as to exclude products that were not produced inside the country.

The GDP adds up as follows:

GDP =
Private Consumption (sum of prices paid for consumer goods by domestic non-government Individuals)
+ Private Investment (sum of prices paid for factors of production by domestic non-government Individuals)
+ Government Expenses (sum of prices paid for consumer goods and factors of production by government individuals)
+Exports (sum of prices paid for consumer goods and factors of production sold abroad)
Imports (sum of prices paid for consumer goods and factors of production for goods produced abroad)

The main problems with this figure are the following:
– All prices are added as US dollar prices. Thus the effect of inflation is not taken into account satisfactorily. Even in the so called Real GDP, the deflator used is based upon the insufficient consumer price index.
– Government expenses are added to the total product at cost. Bureaucratic waste is not accounted for.

Thus we shall employ the following makeshifts in order to better approximate the country’s true productive capacity:

– Instead of US dollar prices we shall add up the price of goods sold in fine ounces of gold, a true and stable money.
– Government expenses shall be discounted significantly. All expenditures by the federal government shall be included at 30% of reported prices and local and state governments, due to better oversight, shall be included at 50% of reported prices.

Below please find the historical development of the True Gross Domestic Product in the United States from 1947 through 2008:

Click in image to enlarge.

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The Great Depression – Now and Then

The public, these days, is cheering on a government that is repeating the mistakes of 1929 one by one.

It is thus necessary to outline the parallels between 1921-1933 and 2001-2008:

The Inflationary Periods

1921-1929:

  • A sharp recession occurs during 1920 which liquidates the previous inflation from World War 1
  • The 1920s boom is kicked off: The Federal Reserve Bank, established in 1913, inflates the money supply via credit expansion from July 1921 through December 1928 at an average annual rate of 7.7% by printing money to purchase acceptances, commercial paper, government securities, silver certificates, and foreign bonds
  • Motivations of this inflationary policy were mostly:
    • Facilitate speedy recovery of the 1920 recession
    • Support for the government of Great Britain and German states and municipalities via foreign loans
    • Support for export lobbyists in the US by making more US$ available to foreigners
  • The Dow Jones Industrial Average soars from 63.90 in 1921 to 381.17 in October 1929
  • President Coolidge, in office until March of 1929, calls the American prosperity “absolutely sound”, stocks “cheap at current prices”; secretary Treasury Mellon announces “There is an abundant supply of easy money which should take care of any contingencies that might arise.”; both announce a “new era” of permanent prosperity (Ralph W. Robey, “The Capadores of Wall Street”)
  • In October 1929, a liquidation of unsound investments is kicked off by the crash of October 1929

2001-2007:

The Depression

1929 – 1933:

  • In March of 1929 President Herbert Hoover takes office
  • In October 1929, immediately after the crash, the Federal Reserve doubles its holdings of government securities, adding over $150 million in reserves, and discounts about $200 million for member banks, thus postponing necessary liquidations on the stock market and enabling NYC banks to take over brokers’ loans which other non-banks would otherwise have liquidated
  • The money supply expands by nearly 10% in one week
  • The Federal Reserve lowers the rediscount rate from 6% at the time of the crash to 4.5% by mid November
  • Secretary Treasury Mellon periodically assures the public that there is “plenty of credit available”
  • However, toward the end of 1929 all these measures prove futile and the money supply drops back to pre-crash levels
  • During November 1929 Hoover calls in White House conferences with industry leaders, getting them to pledge that wage rates will be maintained and not adjusted as lower prices for goods sold would mandate, thus postponing the necessary correction and prolonging the depression
  • On November 24th 1929 the Dept. of Commerce establishes a definite organization to join with the states in expanding public works programs
  • Hoover grants more subsidies to ship construction through the Federal Shipping Board
  • The Federal Farm Board
    • In June 1929, the Agricultural Marketing Act is passed, establishing the Federal Farm Board (FFB), furnished with $500 million by the Treasury to make all-purpose loans to farm cooperatives at low interest rates and to establish price stabilization corporations with the objective to artificially keep up farm prices
    • On October 26th 1929 the newly established FFB launches a program to lend $150 million to wheat coops and establishes the Farmers’ National Grain Corporation with $10 million capital; as farm prices continue to fall, the Farmers’ National itself begins to buy up wheat to keep up prices; the inevitable fall of prices is thus postponed as farmers are encouraged to keep producing surpluses; in 1930 prices continue to fall as the FFB keeps accumulating wheat surpluses
    • In spring of 1930 Hoover acquires from Congress an added $100 million in order for the FFB to continue lending and buying and establishes the Grain Stabilization Corporation (GSC) to replace Farmers’ National and redouble price stabilization efforts
    • By June 30 1930 the GSC has accumulated over 65 million bushels of wheat held off the market; prices continue to fall
    • On November 15, the GSC is authorized to purchase as much wheat as necessary to stop any further decline in wheat prices and buys up another 200 million bushels until mid 1931; prices continue to fall
    • The FFB finally decides to dump the excess stock abroad and prices fall even more drastically, the entire operation significantly postponed the necessary correction and prolonged the depression
    • By the end of the Hoover administration the FFB has incurred cotton and wheat losses of over $300 million
    • Other programs launched by the FFB that either failed in the same manner or proved impractical from the outset: Cotton Stabilization Corporation, National Wool Marketing Corporation, National Livestock Marketing Association, California Grape Control Board
  • July 3rd 1930: Congress approves the expenditure of a giant $915 million public works program
  • Throughout 1930 the New York Federal Reserve lowers the rediscount rate from 4.5% to 2%; the money supply remains stagnant
  • In mid 1930 the Smoot-Hawley Tariff is signed into law, raising import tariffs to record highs, and spreading protectionism all over the world – consumers and exporters suffer from the ensuing decline of international trade
  • October 1930: Hoover threatens federal regulation of the New York Stock Exchange, unless it bans the practice of short-selling, which would speed up the market correction
  • By December 1930 factory employment has fallen by 16%, manufacturing production by 20%
  • Government expenses rise from 14.3% of Gross Private Product (GPP) in 1929 to 18.2% in 1930
  • May 1931: The crisis spreads to Europe with the run on the Austrian Boden-Kredit Anstalt – the Bank of England, the Austrian government, Rothschild, the Bank of International Settlements, and the New York Fed grant millions of dollars to it
  • In 1931 unemployment in the United States rises to 16%
  • Government expenses rise from 18.2% of GPP in 1930 to 24.3% in 1931
  • The Bacon-Davis act is passed in 1931, requiring a maximum 8 hr work day and payment of at least a prevailing wage on public works projects, thus increasing unemployment
  • By fall of 1931 all agitation to preserve wage rates proves futile and wages begin to fall
  • In fall of 1931 Stock Exchange authorities restrict short selling, prolonging the necessary adjustment of prices
  • In 1931, upon Hoover threatening Federal legislation, the largest US banks establish the National Credit Corporation which quickly moves to bail out failing banks, loaning $153 over a three month period, thus prolonging the misallocation of resources
  • In 1932 sales taxes are imposed on gasoline and other articles, new taxes are levied on bank checks, bond transfers, telephone, telegraph, and radio messages, income taxes are raised from a 1.5% – 5 % range to a 4%-8% range, the corporate income tax is raised from 12% to 13.75%, the gift tax of 33.33% is reinstated
  • Government intrusion increases from 24.3% of GPP in 1931 to 28.9% in 1932
  • In January of 1932 Congress hurriedly establishes the Reconstruction Finance Corporation (RFC), equipped with $500 million of taxpayer money, and empowered to issue further debentures of up to $1.5 billion
  • During the first 5 months of operation the RFC makes $1 billion worth of loans of which about 60% are lent to banks, and 20% to railroads whose securities are held by a lot of savings banks
  • In July 1932 the Emergency Relief and Construction Act increases the RFC’s authorized capital from $2 billion to $3.8 billion
  • Governor Franklin D. Roosevelt of New York establishes the first governmental unemployment relief authority: the Temporary Emergency Relief Administration, equipped with $25 million; other states quickly follow
  • In February 1932 the Glass-Steagall act is passed which greatly broadens the assets that the Federal Reserve Bank can purchase and permits it to use government bonds as collateral for its notes, in addition to commercial paper
  • Throughout 1932, the Federal Reserve increases its reserves by another $660 million to $2.51 billion, an unprecedented increase in history; the money supply keeps falling regardless, because commercial banks begin accumulating excess reserves; excess reserves rise from 2.4% in the first quarter of 1932 to 10.7% in the second
  • In July of 1932 the Federal Home Loan Bank Act establishes 12 district banks, equipped with $125 million of taxpayer money, and the authority to purchase mortgages at as low as 50% of value
  • In the beginning of 1933 many states impose compulsory debt moratoria, debt liquidations are halted
  • In 1933, bank failures rise to 4,000 from 1,453 in 1932
  • In 1933, as a response to increasing bank runs, states impose bank holidays, allowing banks not to redeem deposits
  • In March 1933 Hoover leaves office; as a result of his unprecedented government intervention, by now production has fallen by more than half from 1929, unemployment is at 25%, and GNP has fallen almost in half; the country is in the depths of the Great Depression
  • President Roosevelt continues Hoovers failed New Deal policies of massive government intervention. The US economy remains in a miserable state with above double digit unemployment until 1938 and with a horrible war lasting from then through 1945 during which people are forced to ration consumption and pay up to 90% taxes. The Depression comes to an end after WW2 when malinvestments are liquidated, taxes are but by 1/3 and government spending is cut by 2/3
  • Bottom Line: A recession that was the correction of a boom caused by government intervention in the money and credit market, was prolonged and turned into a decade long depression, again due to government intervention as a result of an unwillingness to let the correction occur clean and quickly.

2007 – 2008:

  • From 2000-2008 the percentage of government intrusion into the private sector increases steadily
  • Throughout 2007 and 2008 the Federal Reserve Bank lowers the federal funds rate from 5.25% in September 2006 to 1% by October 2008
  • Stock and Home Prices keep falling continuously
  • In December 2007 the Federal Reserve Bank introduces the Term Auction Facility (TAF) in order to purchase short term debt from troubled banks who need funds; so far it has injected about $400 billion under this program
  • On January 11, 2008, Bank of America announces that it plans to purchase the troubled bank Countrywide Financial for $4.1 billion in stock
  • In March 2008 the Federal Reserve Bank of New York provides an emergency loan to the troubled bank Bear Stearns; the measure proves useless and the bank is sold to JP Morgan Chase at $10 per share
  • In March 2008 the Federal Reserve announces that it will inject another $200 billion to battle the problems that banks are having with unsound investments
  • On September 7th 2008 the troubled semi-public banks Fannie Mae and Freddie Mac are taken over by the federal government; the banks own or guarantee about half of the U.S.’s $12 trillion mortgage market
  • In September 2008 the SEC imposes a temporary ban on short-selling
  • On September 16 2008, creates an $85 billion credit facility in order to support the troubled insurer AIG at the cost to AIG of the issuance of a stock warrant to the the Federal Reserve Bank for 79.9% of the equity of AIG
  • On October 3rd 2008 the Emergency Economic Stabilization Act of 2008 establishes the Office of Financial Stability, equipped with up to $700 billion in order to buy worthless securities with the objective of stabilizing their prices, home prices continue to fall
  • So far, the combined total of all government actions taken in order to battle the depression have amounted up to $8 trillion – aggravating the crisis significantly
  • From November 07 to November 08 the Federal Reserve Bank more than doubles the amount of assets on its balance sheet by $1.2 trillion to now $2 trillion, but banks build up excess reserves and thus the effect on the money supply is minimal
  • As these lines are written the crisis spreads to the job market. All across the country people are beginning to lose their jobs and production/consumption figures are beginning to slow down significantly; due to the misguided government policy these numbers will, however, turn much worse as the crisis progresses
  • The new government, taking office in January 2009 will enact further measures of government intrusion, including public works programs, raise taxes, and increase the national debt, repeating the mistakes of the Great Depression
  • As things have played out so far 1929 has roughly resembled 2007 and 1930 has resembled 2008; 2009, 2010, and 2011 will most likely resemble 1931, 1932, and 1933

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