25 July 2009

Is the economic crisis over?

One would think so if one were to judge by the financial press, mainstream economic pundits, spokesmen for the current administration, or the reports on television. Major stock indices are hitting highs not seen since last year. The DJIA is up about 40% in four months. Companies are reporting "better than expected earnings."

TYWKIWDBI continues to be afflicted with "skepticemia." I've maintained a pretty consistent bearish and skeptical position in my postings in this blog's economics category since January of 2008; I continue to use ETFs (DOG, RWM) to maintain a short position on the Dow and Russell equal to my long positions, effectively leaving me out of the market, and I continue to be long gold (GLD) and short GLD puts.

My doubts were well expressed this week by a commentator (whose name I didn't catch) on the Bloomberg channel on satellite radio this week. He noted that the companies who are reporting better-than-expected earnings are doing so NOT based on increased sales, but on decreased expenses, and that the major component of those decreased expenses are lower salary costs from widespread layoffs.

And those corporate earnings are NOT IMPROVED, they are just "better than expected." Instead of falling 45% perhaps they fell just 35%. That's not good news; it just means the analysts were as incorrect on the downside as they typically are on the upside.

Meanwhile, the U.S. is desperately seeking foreign investors willing to purchase immense quantities of treasuries.
Geithner, who traveled last week to the Middle East and Europe, has to convince foreign investors to keep buying Treasury bills, notes and bonds; they hold nearly half of the government's roughly US$7 trillion in publicly traded debt...

If foreign demand for U.S. debt sags, that could drive up interest rates and spell big trouble for an economy hobbled by 9.5 percent unemployment...

In the worst case scenario, a rush by foreigners to sell their U.S. debt could send the dollar crashing and inflation soaring. Because that would also hurt the value of their remaining holdings and the U.S. economy — a key market for their exports — private analysts believe such a scenario is not likely to occur...

In March, Chinese Premier Wen Jiabao said his country was concerned about the “safety” of the large amounts of money it had lent to the United States...
On the upside, I should note that Nouriel Roubini, whose comments I heard on the radio about two years ago got me out of the market, now is offering some encouraging words, but those comments are expressed with many conditional phrases.

No one who reads this blog should make any personal economic decisions based on my opinions. You have to do your own "due diligence." But do keep in mind that most of those who offer financial advice in this country have a vested interest in keeping people invested in financial instruments.


  1. I'll believe we're out of the woods when the unemployment rate stops rising...

  2. You may have heard Robert Reich on Bloomberg. He had posts on Salon and TAPPED saying the same thing; and Krugman mentioned this in his NYT blog as well.

    On the other hand, James Fallows (writer and blogger for The Atlantic), a China expert, had a post early this month throwing very cold water on the fear that China is losing faith in the dollar:


  3. @Swift - I'm an Atlantic subscriber with a deep and longstanding respect for the opinions of Fallows. I should write up a summary of his comments separately. Tx.


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