THE ENTERPRISE--The Economy and more...
ARE THE RUMORS EXAGGERATED?
I cancelled out of one event last Thursday and a meeting Friday morning because we were expecting a big winter storm. It was truly nasty about 1AM with ice forming fast, but by morning the temperature warmed up, and it was just wet and gray. There's are a couple of lessons in this story--about the outlook for economy. The first lesson is that forecasts are inevitably wrong, because they are educated guesses about the future--which is uncertain. The second is that if you "hunker down" too hard, you suffer as if the storm had hit, even if it passes you by. The third is, take threats & risks seriously, but carefully consider how you think about them and what you do to react.
WHO DO YOU WANT TO BELIEVE?
The mainstream media is at it again, aided and abetted by Wall Street, and maybe, like the weather forecaster, they are right. Or maybe not. Perhaps the US economy is headed straight into a nasty recession. But then again, is this like my winter storm warning? Ok, I concur that retail is very weak right now. Many (but not all) of the companies I am in regular contact with report retail business slid steadily from mid-December to sometime in Jan. and for some, Jan stayed down. For others, it didn't. Why? (Export sales and results from the better US based multinationals are very strong--GE, CAT, IBM, etc.!)
THREE REASONS THINGS ARE DOWN
---1) Consumers "shot their wad" at Christmas and are figuring out how to pay those bills when gas and heating energy costs are way up. The bills will eventually get paid, and the energy costs will stay up. Somehow, they'll get used to it, and begin shopping again, albeit at a reduced rate and for different kinds of goods and services.
---2) Retailers' fiscal year ends Jan. 31 and they want to manage down inventories, because it's the prudent thing to do, and 2008 will likely be slow, at least at first. Thus they buy less in Jan.
---3) The news and the mood of the economy, fueled by media (and exacerbated by politicians) is gloomy. There's an old saying in the media, "If it bleeds, it leads." Translation: Bad news gets a lot more attention than good news. Why do you supposed Iraq has fallen off the headline news.
For a couple of weeks, most of the companies I talk to were singing the blues. In the last two days I've talked to a couple that had OK--or better than OK--January results. The common denominator: both have been aggressively targeting gains in market position and share. (Keep this point in mind.) I also listened to a conference call with Dr Richard Curtin of the U. of Michigan on Consumer Sentiment. While he concurred that there are a lot of dark clouds and risks on the horizon, he puts the risk of a deep recession at only 20%, while cautioning that 2008, and especially the 1Q will be very slow, with little or no growth, and a possible dip into negative growth--temporarily.
THE BIG QUESTION--HOW LONG DOES THE SLUMP LAST AND HOW DEEP DOES IT GO?
Attached is an interesting article from a few thousand miles away. Maybe it's right. Maybe it's wrong. If I heard correctly, this year's and last year's economic growth in 4Q will be about the same. Last year was gloomy too. But somehow, the economy rebounded. And 5% unemployment is essentially "full employment" by historical standards. Curtin's data showed that unemployment numbers are being increased by younger and more transient employees, and that unemployment among married couples is really low on a historical basis.
BUT, make no mistake, there will be layoffs coming and those will be in the headlines. (Why? Because in a downturn of any kind the knee-jerk reaction of management everywhere is "CUT HEAD COUNT," because it's one of few things they can do "right away." Now, IF they became "fat" in good times, that's exactly the right move. (But the absolute right move is to CUT COMPLEXITY that was added in the desperate search for growth in markets that weren't growing. That will save money and cut fat without cutting muscle.) And, if these companies were not "fat," cutting head count might be exactly the wrong move and may cripple them just when they should be trying to innovate and grow.
Widely publicized downturns also have two undeniable characteristics:
---First, when things are bad, everyone is more pessimistic that is warranted; (the opposite is also true: when things are good, everyone is too optimistic)
---Second, downturns are great times to attack and gain market position and share while competitors grieve the losses and attribute them to a soft market. A downturn doesn't mean that all sales of everything stop and go to zero. It does mean they all drop, and sometimes, as in housing, precipitously to 1/2 the previous level. That is a tough one to cope with. As Dr. Curtin said, consumer spending seldom actually declines much, it just stops growing; but people keep spending on services, non-durables and essentials.
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EXCERPTS FROM The U.S. Economy Is Fine (Really)
By BRIAN WESBURY
THE WALL STREET JOURNAL ASIA
January 29, 2008
[My emphasis added]
It is hard to imagine any time in history when such rampant pessimism about the U.S. economy has existed with so little evidence of serious trouble. True, retail sales fell 0.4% in December and fourth quarter real GDP probably grew at only a 1.5% annual rate. It is also true that in the past six months manufacturing production has been flat, new orders for durable goods have fallen at a 0.8% annual rate, and unemployment blipped up to 5%. Soft data for sure, but nowhere near the end of the world.
It is most likely that this recent weakness is a payback for previous strength. Real GDP surged at a 4.9% annual rate in the third quarter, while retail sales jumped 1.1% in November. A one-month drop in retail sales is not unusual. In each of the past five years, retail sales have reported at least three negative months. These declines are part of the normal volatility of the data, caused by wild swings in oil prices, seasonal adjustments or weather.
A year ago, most economic data looked much worse than they do today. Industrial production fell 1.1% during the six months ending February 2007, while new orders for durable goods fell 3.9% at an annual rate during the six months ending in November 2006. Real GDP grew just 0.6% in the first quarter of 2007 and retail sales fell in January and again in April. But the economy came back and roared in the middle of the year -- real GDP expanded 4.4% at an annual rate between April and September.
With housing so weak, the recent softness in production and durable goods orders is understandable. But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing.
Personal income is up 6.1% during the year ending in November, while small-business income accelerated in October and November, during the height of the credit crisis. In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications. ...
... Yet many believe that a recession has already begun. This pessimistic view argues that losses from the subprime arena are the tip of the iceberg. An economic downturn, combined with a weakened financial system, will result in a perfect storm for the multi-trillion dollar derivatives market. It is feared that cascading problems with inter-connected counterparty risk, swaps and excessive leverage will cause the entire "house of cards," otherwise known as the U.S. financial system, to collapse. At a minimum, they fear credit will contract, causing a major economic slowdown.
For many, this catastrophic outlook brings back memories of the Great Depression, when bank failures begot more bank failures, money was scarce, credit was impossible to obtain, and economic problems spread like wildfire. This outlook is both perplexing and worrisome. Perplexing, because it is hard to see how a campfire of a problem can spread to burn down the entire forest. What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets. ...
... In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover's tax hike passed in 1932, and then FDR's alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%. But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower.
These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.... ... Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.
The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, the U.S. government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it's the development that investors should really worry about. It reads just like the 1970s.
The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.
Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It's a wonderful buying opportunity.
---Mr. Wesbury is chief economist for First Trust Portfolios, L.P.
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SOMEBODY IS GOING TO CRASH OUR SYSTEMS ONE OF THESE DAYS--BIG TIME
In 2001 and 2002 I wrote and published my only fictional book--THE SILENCE. It was a novel and while it was fiction, it was not far out at all. I did a lot of research, dreamed up some diabolical schemes and chose as the villains, people from (of all places, Pakistan--programmers and China--in the government). I think my novel was prophetic. I hope not. It is features a nasty set of tricks, none of which were "made up." Every method I described existed at the time, and they have only gotten more potent now as technology has advanced and networks have spread to cell phone/PDA/combination devices.
At the time I lobbied (tried to) several government agencies to plug the holes in our cyber security. I barely got answers from a couple, and heard nothing from others. Since then, I have friends who have retired from those same agencies, and I know things I didn't know for certain then. My fictional theme was absolutely credible and possible--and it still is. In a recent Bruce Willis movie, LIVE FREE AND DIE HARD the villains employ some of the dirty tricks I wrote about in 2001-2002. But they stop short of the whole array, and of course Willis foils them, destroying an incredible array of airplanes, helicopters, buses, trucks, cars, bridges and elevated highways. The problem is that nothing much has been done in the 5+ years since I wrote THE SILENCE. (yes, it's still on sale on amazon, find it at my web site. click on The Silence on the left side of the main page, and then click on "buy it" up on the header bar.)
THE PRIVACY FREAKS ARE AT IT AGAIN
Finally the administration wants to improve our cybersecurity, and guess what. A liberal Democrat opposes it. (You can read the details--IF YOUR SYSTEMS ARE STILL UP & WORKING.)
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EXCERPTS FROM Bush Looks to Beef Up Protection Against Cyberattacks
Estimated Cost Could Be $6 Billion; Democrats Are Wary
By SIOBHAN GORMAN
January 28, 2008; Page A8
[My emphasis added]
WASHINGTON -- President Bush has promised a frugal budget proposal next month, but one big-ticket item is stirring controversy: an estimated $6 billion to build a secretive system protecting U.S. communication networks from attacks by terrorists, spies and hackers. Administration officials and lawmakers say that the prospect of cyberterrorists hacking into a nuclear-power plant or paralyzing Wall Street is becoming possible, and that the U.S. isn't prepared. This is "one area where we have significant work to do," Homeland Security Secretary Michael Chertoff said in a recent interview.
The White House's proposal has already dismayed lawmakers concerned about civil-liberties violations. Democratic lawmakers are also frustrated by what they see as the White House's refusal to provide details of the program, and say that could threaten the fate of the initiative. Protecting private computer systems would likely require the government to install sensors on private, company networks, officials familiar with the initiative said. Amid divisiveness about other government-surveillance programs, having the government monitor Internet traffic, even in the name of national security, will be a hard sell to Congress and the public. ...
... Last week, a Central Intelligence Agency analyst reported that cyberattacks have disrupted power equipment in unspecified regions outside the U.S. In at least one case, he said, the attack knocked out power in multiple cities. The outages were followed with extortion demands. The U.S. government has been monitoring cyberattacks on U.S. systems under a program with the moniker Byzantine Hades. It has tracked, among other threats, continuing operations from China against U.S. computer systems, according to former intelligence officials. They say the program has discovered what appear to be efforts from China to collect information on specific types of U.S. military programs, such as "quiet drive" technology that helps submarines evade detection. Some U.S. officials believe such espionage is connected to the Chinese government. Homeland Security counted 37,258 attacks on government and private networks last year, compared with 4,095 in 2005, the first year it started counting standardized data. ...
...Access to private networks will be a major sticking point because intelligence agencies, including the National Security Agency, are to play prominent roles. "We need to be very careful," Mr. Chertoff said. "There is a lot of thought being given to: How do you organize this in a way that protects an incredibly valuable asset in the United States but does it in a way that doesn't alarm reasonable people, and I underline reasonable people, in terms of civil liberties?"
House Homeland Security Committee Chairman Bennie G. Thompson, a Mississippi Democrat, wants the administration to put the program on hold until it can answer congressional concerns. "We don't want to unconstitutionally infringe on the rights of private business under the guise of this new program," Mr. Thompson said. He said he was particularly irked to learn that Mr. Bush had signed a classified directive that outlines how the White House proposes to bolster security of government networks weeks ago but "has refused to share [the directive] with Congress."
White House spokesman Scott Stanzel said the White House is giving "careful consideration" to Mr. Thompson's request for the Jan. 8 directive, which he described as "a continuation of our efforts to secure government networks, protect against constant intrusion attempts, address vulnerabilities and anticipate future threats."
[ED. NOTE--COMPLEXITY IS A HUGE PROBLEM IN OUR GOVERNMENT]
The structure of the initiative has also been under debate. Officials in Director of National Intelligence Mike McConnell's office argued for a centralized approach, according to a former senior government official. But they appear to have lost the fight in favor of a structure that would dole out responsibilities, and slices of the budget, to individual agencies, two former officials said.
The CIA and the Pentagon didn't want other agencies mucking about in their computer networks; other agencies sought to maintain exclusive relationships with certain industries. Some security experts warn a dispersed structure will invite bureaucratic turf wars. Mr. McConnell's office declined repeated requests for an interview. ... Write to Siobhan Gorman at [email protected]
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THERE YOU HAVE IT
Sorry for posting two long articles, but each is important in its own right. Instead of spending $6B for cyber security, try to estimate the cost if some country or terrorist group (best CIA estimates--likely candidates: China or al Qaeda, Hezbollah, et. al.) silences all electronic communications for just "a while." Wall Street, banking, Air traffic control, email, cell phones, land lines, the Internet, TV, radio, etc. It isn't just possible. It's likely. (e.g., In 2004 hackers knocked out 9 of the 14 servers that run the entire Internet. Recently, they shut down an entire small European country.) In the PR for my novel I called these cyber attacks "WMDs" but it stood for Weapons of Mass Disruption. There are some things the government shouldn't do and does badly. There are others that ONLY the government can do. This is one of them.
"It can't happen, you say?" But then the Giants could never beat the Patriots, but they DID in the Super Bowl just ended.
Bottom line, the US and it's economy aren't doomed just yet—suffering from a bad case of being over extended -- but not "doomed" Actually, one of the few things I agree with Ron Paul on is that we do have to quit living beyond our means and mortgaging and bankrupting our country.
On the cyber-front, our massive information and communications networks, run by computers and transmitted over fiber optic cables and via satellites now have hundreds of millions of interconnected devices. All of which are vulnerable--to vandals, to terrorists and to countries that want to bring the US to its knees. The good news--for now--is that's not in China's best interests. But it was able to shoot down one of its satellites, filling the orbits with 25 years worth of debris. It could shoot down some of ours, and the eyes and ears of our vaunted global systems--military and civilian would be blind and deaf for a long time.
This is why the next President of the US has to be someone who had experience and fortitude (guts, tenacity, etc.) to deal with these kinds of issues--and not someone whose memory, politics and positions shift with the popular opinion. You know what and who I mean.
Best, John
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