Experiment in economic policy

Investors Business Daily opines that “Big government threatens our well-being with irresponsible health care “reform,” higher taxes on entrepreneurs, a tax-filled cap-and-trade energy bill, a host of new business-strangling regulations and trillion-dollar deficits as far as the eye can see.” Then they go on to say: “In late July, economist J.D. Foster of the Heritage Foundation put it succinctly: ‘This is no longer an experiment in economic policy. The results are in: Keynesian stimulus does not work.’ This GDP report doesn’t change that conclusion a bit”.
It is difficult to be more pessimistic than that. However, they do state that we have “stepped back from the abyss.” and that “our only hope going forward is the private economy. Though hindered by massive government intervention in housing, banking and industry, it’s still the most resilient in the world. Given the list of problems they cite, it is difficult to reconcile the optimism and pessimism contained in the piece. I suspect that we will slip back into recession in another quarter or so. I found little reason or justification for their, admittedly muted, optimism.

The stock cleared

The S&P 500 snapped a two-week losing streak, but the Nasdaq failed to do the same. Top-rated stocks also showed some mixed action. Some marquee names further weakened, but a few of them managed gains amid choppy market conditions.
Apple (AAPL) logged a second straight weekly loss. The stock is now in its first test of its 10-week line since it cleared a cup-with-handle base in January. But its pullback came in heavy trading, which is not ideal.
The bellwether has had a long, steep ascent and has been above its 10-week line since December. Apple reports after the market's close Tuesday.

Most understand economics only experientially

The bailout fiasco is just now starting to show up for the act of desperation that many suspected it was. Instead of allowing markets to resolve a severely over-leveraged and distorted economy, the government decided to try to “bluff” its way through one more time. This strategy has been one used for almost 5 decades. Each time the credit stimulus required is bigger than the last. Each time the distortions to relative prices is made worse. Each time the misallocation of resources becomes greater. Each time the credit levels of individuals and government expand. Each time inflation becomes a bigger problem. Finally, a time comes when malinvestment and credit burdens are too large to be supported. It is probable that we have reached that point. To appreciate how far we have come regarding the abuses of credit creation, one need only note that since the Federal Reserve was created in 1913, the dollar has lost about 96% of its purchasing power. Most of that loss (probably in excess of 90%) has occurred since 1980.
There are still many that believe that government actions will get us out of our predicament. They won’t. When we come out of this mess, it will be in spite of these actions. They will serve to make the problem worse and cause it to last much longer. Japan has been employing similar stimuli for two decades, and its economy has still has not recovered.
As time passes, it will become apparent to all but the dullards that these interventions were non-helpful and actually harmful. Most understand economics only experientially. Events as discussed in the following post by Rolfe Winkler today are what will continue to surface with the passage of time and provide enough instances for the experiential learners.
Besides being a terrible decision that will cost taxpayers dearly, the article also talks about the unintended consequences of drawing deposits away from smaller, solid banks to the weaker GMAC. The unintended consequence is to weaken the stronger banks.

Overall price inflation was modest

The Fed's April Beige Book was just released.
According to the report, the economy grew at a "moderate to modest" pace, but a rise in gas prices could hurt consumers in the near term.
The last Beige Book released in February showed economic activity growing steadily throughout the country.
A little more on fears of rising energy costs:

Overall price inflation was modest in most Districts. However, contacts in the Cleveland, Richmond, Atlanta, Chicago, Kansas City, and Dallas Districts cited rising transportation costs due to higher fuel prices. Minneapolis and Dallas noted that airlines have raised their fares to offset higher fuel costs. Richmond reported that rising fuel costs were a serious problem for both land and ocean shippers, while intermodal transportation firms in Dallas said that they had increased prices in response to higher fuel costs. In Atlanta, higher transportation costs were passed through to consumers without much difficulty. In contrast, contacts in Cleveland, Chicago, and San Francisco said it was difficult to pass through higher costs to consumers. Input costs for manufacturers in Boston, Cleveland, and Kansas City rose somewhat, but with little pass-through. Price pressures have eased somewhat for manufacturing firms in Philadelphia. Higher prices for construction materials narrowed profit margins for contractors in Kansas City.

Prepared by the Federal Reserve Bank of Cleveland based on information collected on or before April 2, 2012. This document summarizes comments received from business and other

The world oil economy

Natural gas in North America broke below the $2.00 barrier today, for the first time in ten years. It’s important to remember that, unlike oil, natural gas does not trade at a converged, global price. Accordingly, a million BTU in LNG form currently trades for over $9.00 in the UK, and over $15.00 in Japan. Such low prices for natural gas unquestionably give the US a competitive advantage. But, it will take a resurgence in manufacturing and related industrialism to full capture the price disparity. After all, the US is still very much an oil-based economy.
That said, energy transition will indeed continue–and even accelerate. It is simply unavoidable that any physical process, which could be switched to natural gas from oil, will be overlooked in this economy. Given that the world oil economy is contending with prices for a million BTU in the $17.00 to $20.00 range, we should begin to see an arbitrage that captures the N.A. natural gas advantage at $2.00 per million BTU. How appropriate therefore that the Oil and Gas industry itself should get the ball rolling, in this regard. See this Reuters story – Drillers dropping diesel for cheaper natural gas:
North American oil and gas companies are trying to take the sting out of low natural gas prices by using it instead of costlier diesel fuel to drive their drilling rigs… Apache Corp, the largest U.S. company focused solely on oil and gas exploration and production, is in the process of converting its first rig to run on power generated by liquefied natural gas (LNG). Canada’s Encana Corp’s already has 15 of its more than 40 rigs driven by gas, and plans to convert even more.
I’ve written extensively about the long, and economically painful process of energy transition but it now seems likely that the first five years of such a disruptive transition is now behind us. In the next phase, a longer period which should take at least another 10-15 years, we will see oil cede its primacy first to coal. This hand-off from oil to coal is already very much underway. Natural gas will then start to compete against coal more forcefully by mid-decade, and then later in the decade the fast rate of growth in renewables–taking place from low levels in the background–will break out to the upside and gain significant share of global primary energy supply.

Business investment spending

Bill Dudley, the president of the New York Federal Reserve bank, indicated that he is most likely supporting additional action by the Federal Reserve to speed up the economy.

In remarks at an event in Syracuse, New York on Thursday morning, Dudley argued that "recent growth rates are barely keeping up with our potential."

"The incoming data on the U.S. economy generally has been a bit more upbeat over the past few months, "Dudley said. But it is "still too soon to conclude that we are out of the woods."

Some of the growth in sales and job creation in the first three months of the year may have been due to the mild winter pulling forward hiring and economic activity, Dudley said.

More from the speech:

 William C. Dudley, president of the Federal Reserve Bank of New York.

Extraordinary valuation levels

Bill Gross: One of Our U.S. GDPs Has Gone Missing

[The last fifty years] produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually. That’s another way of saying you would have been far better off investing in paper than factories or machinery or the requisite components of an educated workforce. We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds. Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been. Financial leverage, in other words, drove the prices of stocks, bonds, homes, and shopping malls to extraordinary valuation levels – at least compared to 1956 – and there could be payback ahead as the leveraging turns into delevering and nominal GDP growth regains the winner’s platform. …Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.