Wednesday, June 25, 2008

The latest reason to ignore anything Warren Buffett says about the economy

Warren Buffett thinks the economy is already in a recession and will get worse. As I've shown before, he might be a great investor, but he knows nothinga bout real economics. In the last round, I debunked his "We're already in a recession claim." Actually, he debunked himself, telling El Pais the U.S. is not in a recession, after telling Der Spiegel that the recession's already here.

More importantly, while 1Q 2008 GDP was low by our standards (although "normal" by French standards), it was still positive. So have all other quarters of GDP since...2001. "Recession" means two consecutive quarters of economic growth, so how can we be in a recession when we haven't had a single negative quarter yet?

Could Buffett justify claims of a "recession" based on other economic indicators? Hardly. I debunked the latest job numbers a few weeks ago, which were because of 200,000 new entrants to the workforce. Hourly earnings and productivity are still up. Do people care about weakening industries and credit markets? No, they care more about what they bring home, and their employers care about how efficiently they produce. That's the remarkable resilience of the American economy: it still grows despite all the supposed weaknesses in construction growth and consumer spending. In the end, their changes are merely shifts in economic activity, because a decline in one can mean an increase elsewhere in the economy -- other growing industries the mainstream media doesn't like to admit are growing, and/or personal saving that fuels business investment. Obviously if construction spending and consumer spending fall, but economic growth is still positive, there are more-than-offsetting gains elsewhere in the economy.

Where's the recession, Buffett?

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4 Comments:

Blogger Mark said...

Where to start? In 2001 they said they were staring into an abyss. The numerous rate cuts down to emergency rates stoked housing and lots of debt. Debt reached record levels in personal, municipal, state, and federal. The subprime crisis was the tip of the iceberg. The dollar has lost 40% of its value. Freddie and Fannie have a lot of Asians holding their debt and they will demand much higher interest rates on that debt. Oil went from 10$ in 1998 to $140+. Oil spikes usually precede recessions. So you've got a consumer who's broke, a system that can't really lend him much more money for junk like tvs and vacations, no house to use as an ATM anymore, imploding financials, rising inflation, and the good chance that rates will go even higher. If the US is not in a recession yet on a technicality, it surely will be, perhaps another depression. Just the way I see it.

Tuesday, July 15, 2008 11:34:00 AM  
Blogger Perry Eidelbus said...

Actually, oil spikes sometimes coincide with recessions but do not cause recessions. This pet theory of Stephen Roach has been debunked by Caroline Baum and others. The economy was already choking in the early 1970s before the embargo, before the oil spikes of the early 1980s, and it was already contracting in July 1990 a month before Saddam's invasion of Kuwait.

Also, the Asians are stuck, as I explained here. They can't "demand" anything, because there's no way they can get the terms they want. If they can't get higher interest rates, what are they going to do, threaten to sell off bonds that nobody will buy? They're not going to sell off dollar-denominated securities, which will kill the value of their U.S. investments, as well as force them to weaken the yuan further (and China is having VERY BAD inflation now, worse than ours!). As someone put it, if I owe you a thousand dollars, I have a problem, but if I owe you a million dollars, you have a problem

The U.S. won't necessarily see a true recession, but we should recognize that this economic downturn, however bad it may be, has been engineered. It was engineered by bad Fed policies, and by bad government policies. The Fed created a flood of dollars we never heard about unless we paid close attention to what was. This was done primarily to "stimulate" the economy after the dotcom crash and 9/11, but it wound up supplying lenders with cheap credit. Meanwhile, Congress was legislatively blackmailing lenders to give loans to people who were too irresponsible -- as you say, using the house as an ATM to spend like there's no tomorrow. Now we have the moral hazard of bailing out any big company that got in trouble.

Tuesday, July 15, 2008 7:15:00 PM  
Blogger Mark said...

You admit there will be an "economic downturn" and admit it may be pretty bad. How is that avoiding a recession or worse? Good points to balance out mine about the Asian debt, but neither of us knows who'll be correct. And you didn't really address my broke-consumer issue. North America is what, 66%-80% consumer spending, right? When most regular Joes can't afford their home and have lost their jobs, it's a bigtime downturn, or as I said, a depression.

You admit the Fed misled everyone with bad policies, there's no housing ATM, no easy credit, yet you won't acknowledge that means rates are going up. If you could explain that one, I'd be interested.

Thursday, July 17, 2008 2:57:00 PM  
Blogger Perry Eidelbus said...

You admit there will be an "economic downturn" and admit it may be pretty bad.

Wrong. I said "however bad it may be," which is not the same.

"Downturn" does not mean a recession. A car can slow its velocity yet still not be going in reverse.

Good points to balance out mine about the Asian debt, but neither of us knows who'll be correct.

Actually, the Asian governments' actions have demonstrated precisely what I've said since the early days of my blog. Look at the global numbers. China is up $100 BILLION in U.S. Treasury securities from 5/07 to 5/08. The UK is extremely strong also. Year on year, the total is $500 billion MORE.

Does that look like dumping dollars to you?

And you didn't really address my broke-consumer issue. North America is what, 66%-80% consumer spending, right? When most regular Joes can't afford their home and have lost their jobs, it's a bigtime downturn, or as I said, a depression.

The U.S. economy is approximately two-thirds consumer spending. As high as 80% is quite impossible. At that point there isn't a high enough level of domestic savings to finance businesses, and even an excellent investment client such as the United States' cannot attract sufficient foreign capital to make up for it.

As I've said before, thou shalt not measure an economy by consumer spending alone. A decrease in consumer spending is a short-lived consumption shock. It's short-lived because the economy will adjust to higher savings rates, and remember that investment creates economic growth too. Don't fall for the BS that the Associated Press' Martin Crutsinger and Jeanine Aversa constantly spew, "Consumer spending falls," blah blah.

You admit the Fed misled everyone with bad policies,

Not just admit, I accuse.

there's no housing ATM, no easy credit, yet you won't acknowledge that means rates are going up. If you could explain that one, I'd be interested.

Why should I acknowledge such a thing? I don't know what Bernanke & Co. will do. You don't either. Bernanke has surprised us before by defying expectations, and he's crazy enough that he might lower rates again if the economy looks bad.

Thursday, July 17, 2008 9:20:00 PM  

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