The Market Ticker

Here 'ya go folks:

Get the tomatoes out on the table so they're good and rotten in a couple of months, and mark this post in your browser bookmarks.

Those two would be Brian Wesbury and Robert Stein, and this is their pronouncement:

Once the "real" recession started--the one that began in September--we consistently forecast it would be over by mid-2009, earlier than many (including the Federal Reserve) predicted. Now it looks like our V-shaped recovery is underway. When the NBER eventually gets around to declaring the recession end date, we think it will be May 2009.

You have to be joking - or toking - to make a statement like this.

Or more probably, you are two of these three:

To use one of their famous phrases: Pick any two!

Look, I'm all for people being optimistic.  But there is a difference between optimism and idiocy, and this falls into the latter category, with apologies to Moe, Larry and Curly who among them can certainly find more IQ points than either of these fools have individually.

Let's just pick on a few of their pieces of stupidity, starting with this one:

Other signs of a rebound in monetary velocity can be found in prices. Consumer prices fell at a 12.4% annual rate in the last three months of 2008, the fastest decline since the Great Depression. In the first three months of 2009, however, prices are up at a 2.2% annual rate.

Right.  But that was headline inflation, not "core". 

And what's in headline inflation?  This:

Do I really need to explain?  Oil went from $110 - $40 during the last three months of the year.

The first three months of this year, it went from about $38 to just under $50.

Or, if you prefer, let's use the form of inflation in energy prices that every man and woman actually sees every week or so - gasoline.

How hard is this to figure out?  Gas (wholesale, before taxes) goes from $3.50 to under $1, and then rises to around $1.50 in the two periods under consideration.

Oil, of course is in everything, not just gasoline, and while some of it (e.g. corn planted in a field, then harvested) has a long cycle time (about nine months to a year from planting to harvest to eating) many other products made with oil, such as anything plastic (e.g. packaging for consumer products, television cases, etc) have a short cycle time. 

This, by the way, is the excuse used by economists for ignoring "headline" inflation and focusing on core, which excludes food and energy.

I'll do just one more:

Meanwhile, both major measures of consumer confidence (from The Conference Board and University of Michigan) shot upward in April.

The major correlation factor for consumer confidence is in fact stock prices.  That's been known for oh, a couple of decades or more.  Take that out and then let's talk about consumer confidence.  Hmmmm...

These "market callers" are just two of many who are proclaiming that "The Recession is over!"

Let me ask these two, or any other person making such a proclamation the following questions.  This is for a grade, and you are expected to show you work.  There are 100 points, I'm a tough Professor and grade on a 7-point straight scale, not a curve.

1. This recession, as with the one previous, was caused by too much debt.  In the previous one (2000-03) the debt was centered in Technology Companies that were levered up to their necks and had no reasonable expectation of being able to actually turn a GAAP profit.  Most never did and went under, putting lots of well-paid employees on the street, killing demand for industrial and especially computer products while producing a nasty little business-led recession.  Instead of taking our lumps we as a nation "reflated" by driving malinvestment into housing and convinced millions of Americans to take cash out of their house that didn't really exist, replacing it with debt.  The IMF claims that the total to be defaulted or lost is around $2.5 trillion; my figure is $2.5-3 trillion for residential housing only, another $trillion or so in commercial real estate, and $300-500 billion in credit cards.  About $700 billion has been defaulted so far, leaving another $1.7 trillion (on the low end) to somewhere north of $3 trillion (on the high.)  For 20 points, explain how, with the debt still present in the economy, we're going to refinance it this time around.  Please be specific as to how we're going to accomplish this.  Magical thinking earns an automatic zero.
2. During the 2000 decade we "pulled forward" demand through those aforementioned cash-out HELOCs and similar shenanigans.  We also drove our savings rate to at or below zero.  This added 5-10% to GDP.  I will be polite and call it 5%, just to make the question easier.  For 10 points, please explain how we will replace this 5% of GDP that is now permanently gone - a task required to generate positive growth.  For the other 10 tell us how we manage capital formation (since we can't do it with debt any more) without taking another 4% off GDP in the form of savings (the consumer is 70% of the economy, roughly; if the savings rate stabilizes around 6%, which it appears to be, that's roughly the net change.)
3. We operated at a "run rate" of approximately 14 million automobiles for the years 2003-2007.  These were sold on the premise of "zero percent interest" financing as well as rolling over the previous car loan balance into the new vehicle.  The latter can only be done once and the former is gone forever.  That is, we "pulled forward demand" in the car business too.  Current demand for vehicles is around 9 million, which is unreasonably low, but a 20% loss of demand, permanently, is almost certain.  The Big Three alone employ roughly one in ten people in this country between them and their suppliers.  For 10 points please explain what the 2 million people that will be rendered permanently unemployed by this reduction in capacity will do for a job that can pay anything close to UAW Union Wages.  For the other 10 please explain the hit to GDP that will result from losing 2% of the workforce, along with the debt they hold that will be forced to default.
4. We have somewhere around 14 million unoccupied housing units (apartments, townhouses, condos and homes.)  Most of these were built during the boom years.  Many are second homes but there is approximately 10% "excess capacity" in primary homes, and what's worse is that builders are still building!  Much of this inventory is "hidden" in the form of defaulted mortgages where the lender is literally allowing the current occupant to live free, having sent them an NOD but failing to proceed with foreclosure, or they have foreclosed but are holding the inventory back.  Roughly 14% of GDP was in some way connected with home building prior to the downturn.  Now add in the demographics; the boomers are beginning to retire and over the next 10-20 years will be vacating all those second homes as they are forced to sell them to replace the money that was in their 401k before it got turned into a 201k.  For 20 points please explain how GDP expands and we have a robust economy when 14% of the economy has disappeared, there is more than a year's worth of official inventory available now, there's at least another year's worth being intentionally "held back" and worse, by the time those two years are consumed we will have 10-20 years of demand that can be met by boomers downsizing and selling their assets off to live!
5. And finally, the last question is in three parts.  For 10 points, please choose any of Wells Fargo, Citibank or Bank of America and break down both their balance sheet and all off-balance-sheet exposures to residential housing, detailing the following: 1) Acquisition cost, 2) current marked value, 3) the formula or other means used to mark that asset, including all variables traced to their derivation or origin and 4) the performance of said asset held to maturity given questions 1-4 above.  In particular I am interested in held Option ARMs and HELOCs although all classes must be identified in detail, including specific identification of the unsecured portion of any loan outstanding, whether in security or whole loan form.  For 5 of the remaining points repeat the exercise for all commercial construction loans and C&I exposure.  Your answers must include exactly how insolvent these institutions are, reduced to a dollar amount.  For the final five points on the exam explain how the banks can earn their way out of the hole in credit card and other receivables when the rocketing interest rates are forcing those who can pay to do so immediately, thereby creating an ever-smaller pool by the day of those who can't, and for whom the recovery on the unsecured portion of their debt, irrespective of the interest rate, will be zero.

That's 100 points, and I'm willing to bet neither of these two can manage to get any grade other than a screaming "F".

Yet if you can't answer these five questions competently and completely you cannot possible claim that we are exiting the recession now, nor can you put forward a cogent argument for economic stabilization, say much less growth.

Invest and plan accordingly, and realize that these two, and hundreds just like them, are the people who are providing "investment advice" to you when you call with questions about your 401k or IRA.  It is also, unfortunately, what you will read when you pick up any mainstream newspaper or magazine on investing, including, unfortunately, FORBES.

In fact, if you have an "investment adviser" either personally or through your work's 401k plan (which is now probably a 201k) print this Ticker out and give it to them, asking them to answer those five questions.

If they can't, but are telling you that "the recession is (almost) over, time to get back in the market" fire them immediately. 

They are incompetent or worse, as there is no argument for a durable economic recovery to be made without answers to these five questions (and a whole bunch more, but we'll start with these five!)

PS: Any other so-called "economist" who wishes to take a crack at the above exam is welcome to submit their paper to me for grading as well.

Disclosure: No positions related to the firms mentioned.