Archives For Economy

The “V” Is Complete

April 2, 2013

Back in March 2009, we started writing and talking about a “V” shaped recovery.  Our thinking was pretty simple.  We believed the US economy experienced a “panic” for the first time since 1907.


We thought the Panic of 2008/09 was caused by government policy mistakes, not a breakdown of the capitalist system.  Specifically, we don’t believe the bubble in housing would have happened if the Greenspan Fed had not pushed interest rates down to 1% in 2003/04.  And, yes, Fannie, Freddie and the Community Reinvestment Act played a role, too.


But the biggest problem was overly strict mark-to-market accounting rules (M2M) which acted like an accelerant for the crisis.  They turned what was probably a $400 – $500 billion bad loan fire into a multi trillion dollar inferno.  And then instead of fixing the bad accounting rule, the government tried to fill the gaping hole itself – with TARP and Quantitative Easing (QE).  In other words, while many saw “market failure” and a “government fix,” we saw “government failure” compounded by “policy mistakes.”


As a result, we thought once the accounting rule was fixed the economy would bounce back rather nicely.  It was not a surprise that the market fell nearly 40% after TARP and QE were put in place, but finally bottomed when investors realized in March 2009 that M2M rules would be fixed.


The conventional wisdom does not see the world this way.  Many are convinced the Great Recession really never ended and any good data or market rebound is the result of a “sugar high” – created by easy Fed policy and government stimulus. 


We don’t believe this.  Excess government spending harms economic growth and QE has ballooned the Fed’s balance sheet, but not the M2 money supply.


In other words, what government has done to boost growth is less effective than many believe.  More importantly, because the entrepreneurial spirit is still alive and well in America – a wave of new technology – the Cloud, Smartphone, Tablet, Fracking, and 3-D printing – is boosting growth and creating record levels of profits.


It’s what we call The Plow Horse Economy.  New technology is boosting growth while government policy mistakes create headwinds. 


The entrepreneur is winning.  And, last week, the S&P 500 reached an all-time record high close – in other words, the right hand side of the V has been finished off.


Some call it a new normal, others a sugar high, while still others are convinced that it’s all just a new bubble.  We think the growth is “real” and the entrepreneur is the hero.


This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy. This article is contributed by Brian Wesbury, Chief Economist for First Trust Portfolios.


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Weekly Update – January 22, 2013

Markets closed out another positive week, shrugging off lackluster consumer confidence and
moderate earnings reports to hover around multi-year highs. For the week, the S&P 500 gained 0.95%, the Dow gained 1.2%, and the Nasdaq gained 0.29%.[i]

In Washington, Congressional Republicans backed off from a debt showdown against a
resolute President Obama that could have risked a government default on debt. Republicans said they were prepared to raise the debt ceiling and allow the federal government to borrow operating expenses for the next three months, kicking the fiscal can further down the road.[ii]

To be frank, we’re frustrated with Congress’ inability to make hard choices about spending
and debt. Allowing the U.S. to fall into default would be catastrophic, given that the world treats U.S. government debt as essentially default risk free. Despite their promising rhetoric to use the debt ceiling debate to force widespread fiscal reform, many politicians seem to have abandoned that position in favor of baby steps.[iii]

Federal Reserve Chairman Ben Bernanke spoke on Monday, showing support for the fiscal
cliff deal reached on January 1, but emphasizing that lawmakers still need to come to an agreement over the debt ceiling. The chairman also claimed that the Fed’s unusual December move to tie monetary policy to unemployment and inflation targets was designed to provide financial markets with greater clarity.[iv]

Earnings reports show that the final quarter of 2012 ended well, with many firms
reporting better-than-expected (but not mind-blowing) results. However, business leaders are still cautious, noting that the debt ceiling debate and uncertainty over potentially higher corporate taxes clouds their 2013 outlook. On the positive side, many firms are bullish on the U.S. economy and are confident that trends show an ongoing recovery.[v]

In a rare confluence of events, Monday was both a national holiday and the inauguration
of President Obama’s second term, starting the week off fairly quiet for markets. There will also be relatively few economic reports released this week, meaning that traders will turn their attention to remaining earnings reports from firms like Google (GOOG), Starbucks (SBUX), and McDonald’s (MCD). Investors will also be paying close attention to new reports about the strength of the housing market, which are widely expected to show a continued recovery.[vi]