Green Shoots are a Mirage
Posted by Michael A. Kamperman on May 7, 2009
I want the economy to get better. I keep looking for solid signs of recovery and so far I cannot find them. Many have recently talked of the green shoots they see that indicate the economy will be recovering soon. The most talked about green shoot is a slowing in the rate of economic decline. The global economy collapsed in the last 7 months. The rate of decline has to slow as one gets closer to the floor from the roof top. In February, Japanese exports fell almost 50% from year ago levels. Japanese industrial production fell 38% from year ago levels. U.S. auto sales are down almost 50% from 2006 levels. It is only natural that the rate of economic decline will slow.
Weekly jobless claims fell to 601,000 this morning. However, this number does not include the mass layoff from Chrysler, which filed for bankruptcy last Friday. Chrysler Financial is being liquidated and all of Chrysler’s factories have been shuttered until the firm emerges from bankruptcy. GM is up next and already plans to close most factories for up to 11 weeks this summer in an attempt to align supply with demand. A very good real time indicator of economic activity is industrial demand for natural gas. Since Chrysler closed its factories last Friday respected blogger Robry825 has reported on the investorvillage.com CWEI message board that demand from the industrial sector for natural gas has fallen below 19 Bcf for the first time during the economic collapse. This is an indication production is going lower, not stabilizing.
The coup de grace is today’s subpar auction of 30 year U.S Treasury bonds driving interest rates in the U.S. higher. If this continues it will end the benefits of lower mortgage rates. The reason the bond auction went poorly is partly a fear of inflation due to quantitative easing programs. But primarily it is the lack of available purchasing power in the bond market. The money doesn’t exist to absorb the new bond issues. The Federal Reserve missed an important opportunity when it failed to up the level of quantitative easing at its last meeting. Hopefully the next time they meet they will understand the green shoots they thought they were seeing were a mirage and significant additional action on their part is still required. Perhaps tomorrow’s unemployment report will serve as a wake-up call. Hopefully it will not be dismissed as a lagging indicator by those whose thirst for recovery is leading them to see mirages. Unless we understand the depth of the crisis we will not take the bold and controversial steps necessary to stabilize the economy.
Badtux said,
The Treasury auction is a double-edged sword though. What it could mean is that investors now have inflationary expectations and thus will move their money from under (virtual) mattresses to more productive investments that actually add to the economy (not that Treasuries don’t, but Treasuries are just one place investors parked their money while waiting out the economic storm due to deflationary expectations). In short, the higher interest rates could spur bank lending amongst banks that have been preserving capital and not lending because they did not see a margin spread that was high enough to justify the risks, which in turn could end the credit starvation that has afflicted small businesses in particular, which are reliant upon bank loans in order to make the investments needed to swiftly adjust to market conditions and which, deprived of that lubricant of capitalism, must instead wait until they manage to accumulate enough capital in order to adjust to market conditions. The end result if bank lending opens back up again will be a more flexible and more productive economy that has the potential to employ more people.
The other interpretation is that the money supply has deflated to the point that the Treasury must pay a large amount of interest in order to attract sufficient money to Treasuries to sell them all. Note that this money then flows back into the banking system when the Treasury spends it so we’re not talking about something which deprives the economy of capital (it’s not like government spending is the Black Hole of Calcutta that just chews money up and dumps it into the Marinas Trench), but it is a worrisome sign of deflation and thus indicative that we need more quantitative easing on the part of the Federal Reserve, perhaps with the Fed pouring a lot of money into the long-term Treasury auctions in order to drive the interest rate down.
You appear to be of the latter opinion. Many of the financial analysists appear to be of the former opinion. Personally, I don’t think either possibility has sufficient data to assign it any reasonable probability right now, I want to go look for more data points.
One thing is clear: Something new is happening. Whether this is good or bad is yet to be known.