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Here's yet another look at the issue of money (in this case M2 money) and nominal GDP. Velocity is a measure of how many times a dollar of M2 changes hands in order to produce a given level of output (i.e., nominal GDP divided by M2). As this chart makes clear, money growth surged in Q4/08 and Q1/09, while nominal GDP fell. That means velocity collapsed as people suddenly decided to boost their holdings of cash, CDs and money market funds instead of spending the money. This was a prime example of a sudden shock to confidence.In recent months, however, M2 growth has slowed quite a bit, and my estimate of nominal GDP in the second quarter (-1% real growth and 2.5% inflation) shows that in nominal terms the economy is once again growing. This same estimate of growth coupled with recent data on M2 suggests that velocity essentially stopped falling in the second quarter. Going forward, spending habits will continue to revert to more normal relationships. Confidence is returning. The recession has essentially ended, as the economy is very likely to register positive real growth in the third quarter.
As I've mentioned before, there is a strong positive feedback relationship at work now. As confidence rises, money that was stored up in M2 is released, and that supports stronger growth and stronger cash flows. That in turn boosts confidence, etc. With cash yielding almost zero, the demand to hold that cash will decline since a growing economy offers a lot of more attractive alternatives.
I remain steadfastly and viscerally opposed to the spend-and-tax policies of the Obama administration, but for the moment they can't do as much damage as the good that is now coming from the simple fact that the economy is no longer shrinking and confidence is rising. The economy was able to heal itself without any meaningful help from the stimulus bill (indeed, I should say in spite of the stimulus bill, since it was essentially a massive negative shock to confidence since it telegraphed a huge increase in future tax burdens), and there is every reason to think we will see modest growth (on the order of 3% a year) going forward.
That's probably not enough to boost corporate profits much, but even if they don't grow at all for the next year, that doesn't rule out a rise in equity prices, since PE ratios are relatively low.
7 comments:
Scott,
Where is money being released to...the declining retail sales?? The growing number of vacant homes and office buildings??? Evaporating new home sales?? Declining shipping revenues??? The increasing number of loan defaults and tightening lending standards??? The contracting hotel revenues??? The evaporating tax revenues???
I hear about all this money being released....but the data coming to me just doesn't reflect it....
Things lately just don't make sense to Alstry as California and its municipalities are about to fire hundreds of thousands of government workers and over a million may lose welfare benefits from budget cutbacks and we are seeing stories like this in the LA Times:
Late-night military helicopter flights over downtown Los Angeles this week are part of training exercises to familiarize military personnel with urban settings and prepare them for future assignments overseas, authorities said.
The Black Hawk helicopters, which have appeared nightly for almost a week, have attracted the attention of residents as they hovered over downtown landmarks like City Hall, or maneuvered quickly between office skyscrapers on Bunker Hill. Though many residents speculated that the diving and climbing helicopters were part of a movie shoot, authorities confirmed Wednesday that they were part of a joint exercise.
http://www.latimes.com/news/local/la-me-copters26-2009jun26,0,5276214.story
Out of all the cities on the West Coast....why L.A.?
The black helicopters are coming to get you...
Bill,
The blackhawks may not have to go overseas at all.
The Governator announced this morning the he may force hundreds of thousands of State workers to take an additional furlough day, a 14% wage cut.
How many of those families will not be able to pay their mortgage with a 14% wage cut?
The city of Sacramento has announced 300 layoffs to its police and firefighters....that doesn't include additional 100 municipal workers or even contemplate school teachers....and that was ONE CITY just this week.
Start adding up all the cities in America!
What happens when millions lose welfare and there are no available jobs????
I have defined this phenomena as Zombulation....and its effect is spreading rapidly across America.
http://alstry.blogspot.com/2009/06/zombulator-turning-america-into-ghost.html
Sure M2 maybe stabilizing for now, but if you think about it, does that really matter with the potential unrest ahead?
Alstry,
What you are fearful of a negative feedback loop, where more layoffs cause more layoffs, cause more layoffs. It's pretty much been discussed at length and in my opinion, is the cause of the "panic" post-Lehman.
However, negative feedback has an opposite and that's growth. More hiring, causes more hiring, causes more hiring. Pretty much what we saw from 2001 through 2007.
Things are cyclical. Just accept it. Just as hiring can't go on forever, layoffs can't occur forever. At each end of the cycle, we pretty much reach a point that it is unsustainable. On the upside, a hiccup causes a pullback and sets the downside cycle into play. On the downside, we reach a point where all the dead-weight is gone, companies (and governments) get lean and any increase in sales/confidence sets the upside cycle into play.
It's just a matter of extremes in the cycle and you think it may get worse. Some people think we've seen the bottom of the cycle (or that it's already factored into equity prices if we're not at THE bottom yet).
IMHO, I'm with the author of this blog and think we've seen the worst. I think government layoffs are a good thing. It's a pruning of sorts that eventually reduces the drag on the efficiency of our economy.
For example, our local government has gotten rid of the deadweight. They've laid-off the lazy people; the ones they wished they'd never hired in the first place. They retained the best workers and in the end, the taxpayer gets more for their dollar. Same with most of the corporations I know.
This same cycle allows for more profitability for businesses.
It's all cyclical. Just accept it.
Cabo,
It is actually called an adverse feedback loop, which is really a positive feedback loop, and results in the opposite mathematical conclusion of a negative feedback loop. That said, I understood the point you were making.
Despite what you may think about my perspective, I am very optimistic about the future. But my optimism comes from change that many of you can't even contemplate at the present.
Regarding the present, we are no where close to the bottom of the cycle. The cycle has a long long way to play out.
It is not the end of the world, but the beginning of a new existence. A revolution of sorts where old models don't apply in the new paradigm.
Right now we are in the deconstruction phase, and that is what I am analyzing. The reconstruction phase is likely 24-36 months out.
The issue now is how does the deconstruction phase play out?? War, Depression, Pandemic....all very functional at accelerating to the end of the cycle setting the foundation for change.
Data that Alstry focuses on for the current phase is unemployment, declining sales and earnings, bankruptcies, foreclosures, and tax receipts. ALL of the above are deteriorating...at different rates, but ostensibly deteriorating.
When the deterioration stops, we can begin to discuss the reconstruction phase. But I think it is a bit premature for consideration at the current time.
I think what you are having trouble with is the change. Are you and Scott really analyzing resistance to change and having trouble assessing the real issue?
We are all in this together. Similar to the passengers on the Titanic. They all thought their environment couldn't change. The ship was supposedly unsinkable. When it in fact did sink, it was not the end of the world, just a very cold swim....FOR THOSE THAT SURVIVED THE CHANGE.
For now, it is all about surviving the change.
having been booted off SA for the upteenth time (even with followers this time) it's funny how expressing any specificity or "type" of optimism outrages the editors of that site and makes me think they're not interested in providing a serious dialogue on the possibilities for an end to this truly epochal collaspe of Wall Street and with it State and Local finances. I truly think it odd to consider "financial wizard" and "revolutionary" in the same breath and therefore in need of being silenced. Of course Alexander Hamilton was labelled "the most dangerous man alive" by one of my ancestors, John Adams. In any case your site is truly a font of usable information from which I and my father are making lots of money. can't believe its free. Keep up the good work. I guess the fascist bond guy Jansen is the one who runs SA at the expense of any debate, least of all one in which ordinary people can make their fortunes. There is a special place in hell for "Federal Rerserve trained bond salesmen" like him who think the more government debt and more inflation there is the better that is for hitler youth types like himself. I will greatly enjoy reading his attempts at blogging his portfolio to prosperity as the rest of us rejigger our way out of his born to lose investments such as t-bills which Jansen keeps pounding the table on. I am totally invested in your recovery thesis. I think it the least likely outcome among the SA types and therefore makes it an even better play in here. (i'm tired of all the conspiracy theories as it relates to money and wealth, too. aren't you?) I waited for the sell in May crowd to materialize in order to excercise some buying oppurtunities but was disappointed when the pessimists failed to deliver. I also think there is a fear factor in your predictions: if recovery does in fact materialize in the fall which indeed would be the next Black Swan event in this extraordinary time we live in. this surprise will be devastating towards fixed income investments. Everyone hates the true "anti-government" types-those who believe in prosperity and productivity as the correct basis for directing public policy. Unfortunately you need billions just to be left alone by the big government nazis, let alone all the gold bugs who'll be digging the fillings out of people's teeth when they get the war they've all been pounding the table for. we'll see if the "working poor" can make it through yet another democratic disaster. obviously if the social unrest really does explode with massive rallies against federal authority my bullishness will really shift into high gear. finally a little honesty in governmment.
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