Wednesday, February 11, 2009

Historical perspective

The unemployment data has been massaged over the past week a number of people have put together decent charts showing that while unemployment has dipped, this decline is not unprecedented.

(Hat tip to Scott for passing along this chart).

I'll address the severity of the current decline in moment, but I think it's fair to say that things today are at least as bad as 81 or 74. Will we bounce or breakdown? That's the $789 billion question.

I think it's fair to question Steve Ballmer's business acumen (Microsoft hasn't exactly been setting the world on fire with him as CEO), but I don't think you can question his reach into the economy.

Today he made the following comments that should get some attention:

"Microsoft Chief Executive Steve Ballmer sketched a dire portrait of the world economy on Friday, likening it to market conditions in 1837, 1873, and 1929, each of which involved bank failures, high unemployment, and a depression.

"This is a once-in-a-lifetime economic crisis," Ballmer told a retreat of House Democrats in Williamsburg, Va. "There is a lot of history around that, and frankly if you stop and think about it, 1837, 1873, 1929, 2008, it's almost exactly a whole lifetime between each of the major economic difficulties that we face."

Ballmer said that economic growth in the last 25 years was fueled by innovation, globalization, and debt--and that the current levels of debt were unsustainable. "In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent," he said. "Last year, private sector debt as a percentage of the GDP: 300 percent, far more leverage."

ECON 101 - It's called supply AND demand for a reason.

"Mortgage applications in the U.S. slid last week to their lowest level since November, led by plummeting demand for refinancing amid tighter credit and a worsening economic outlook.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan decreased 24.5 percent to 600.6 in the week ended Feb. 6, from 795.4 in the prior week. The group’s refinancing measure plunged 30.3 percent and the purchase index fell 9.8 percent to its lowest level since December 2000.

“Demand for refinancing has waned after surging in December,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York.

No matter what type of stimulus or bailout emerges, you can not force wary buyers to buy. Without a rebound in demand and growing supply, the housing market will remain unstable.

Charlie Munger has been Warren Buffett's investment partner for much of their successful run with Berkshire Hathaway. He authored a well constructed op-ed in the Washington Post today (it apparently helps to own 20% of a newspaper when you want to write an op-ed) - it's worth a read, but here are the key thoughts.....

"A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes. "

"Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law."

"The modern form of this duty would demand at least some increase in conventional taxes or the imposition of some new consumption taxes. In so doing, the needed and cheering economic message, "We will do what it takes," would get a corollary: "and without unacceptably devaluing our money." Surely the more complex message is more responsible, considering that, first, our practices of running twin deficits depend on drawing from reserves of trust that are not infinite and, second, the message of the corollary would not be widely believed unless it was accompanied by some new taxes."

Here, here......

Finally, just a quick note on a global firm with local ties - Alcoa.

S&P downgraded their credit rating to BBB- from BBB+ with a negative outlook. "The downgrade reflects our belief that the company's credit metrics will deteriorate significantly during 2009 and, given uncertainties regarding the length and depth of the ongoing economic downturn". Unfortunately, for Alcoa they are a relatively small player in the global aluminum industry and size will be a virtue as companies seek to weather this downturn.



Anonymous said...

How about commenting on Brookfield Renewable Power and National Grid - both foreign owned and local employers.

The Artful Blogger said...

Hmm, I don't know much about Brookfield other than they are part of a large, financial stable enterprise. I think there are substantial questions about the near-term future of wind power (financing remains challenged and lower costs for other energy alternatives makes wind less appealing).

Re: Nat Grid - As an enterprise, I think Nat Grid remains relatively strong b/c power generation is a relatively stable business. While the legacy of Niagara Mohawk's poor financial management remains, within the confines of a healthier Nat Grid they should be fine.

Both companies are a bit outside of my areas of expertise, but I find energy an interesting diversion. Thanks for the comment.