Thursday, June 30, 2011

How Housing Starts Will Prevent Obama from Being Another Reagan

Veteran readers know one of my favorite charts is to juxtapose housing starts vs. unemployment. I forgot how I ran into this particular chart or what compelled me to contrast the two, but many years ago I did, and what I found is that housing starts typical forecast unemployment by 6-18 months. Ergo, if housing starts tank, you can expect unemployment to spike within the next year and 1/2.

Though I could speculate, I do not know the precise reason why housing starts forecast unemployment so well. I do know, whether the correlation is spurious or not, it's been a pretty good predictor in the past which is why I wanted to revisit and update the chart. I also wanted to revisit the chart because this recession is different than most others (duuhhhh!) in that unemployment has remained stubbornly high. Instead of a traditional recession where (cough cough, WHEEZE WHEEZE) FREE MARKET FORCES are brought about to take advantage of lower labor costs and lower cost opportunities presented by recessions and bring about a SHARP drop in unemployment, this time around it has not happened as unemployment stalls above 9%.



The question is of course, "when will unemployment come back down?" and this chart tells us the answer;

Not any time soon.

Notice that housing starts have also stalled. Unlike recessions before, when housing tanks, but then quickly recuperates, this time around it has not only tanked, but stayed tanked. Housing is still down and out, and assuming the correlation between housing starts and unemployment holds, you can expect unemployment to be hovering around 9% for some time to come.

Now this is GOOD NEWS in some regards because many political pundits (lacking the super awesome economic genius I am gifted with) are worried that Obama will be like Ronald Reagan. Reagan during his first term had very low approval figures just like Obama, but then an economic boom occurred in the third year of his first term, vaulting him into a second term. Those of the right side of the political spectrum are worried this could happen with Barry.

However, that is unlikely to happen. If you look at housing starts under Reagan in both parts of the double dip recession/Volcker Recession, housing starts recovered immediately. Additionally, they never went below 800,000. In Obama's case, housing starts tanked to 500,000 and have consistently stayed down there for over 2 years.

Of course, I don't know why housing starts track unemployment so well. And I am nowhere near as "educated" as the likes of Christine Romer and Paul Krugman. But so far this chart is batting about .925 while Keynesian-addicts such as Romer and Krugman are batting at about .000.

So those of you on the political right need not worry. The economy is not going to recover in time and strongly enough to the point it will save Obama. More importantly though however, is that we should not be cheering on a moribund economy so we can defeat somebody for political gain. We should be cheering this on because it's simply going to be another metric ton of empirical evidence that socialism and Keynesianism does not work, and free markets and a free people do. Of course "tell them that."

Tuesday, June 28, 2011

Or Your Could Just Buy a Motorcycle

Financial advice is hard to give nowadays. Until the budget gets balanced and economic growth is enough to outpace population growth, I have a hard time finding something to recommend to people beyond hedging items such as "gold, silver, bullets, booze, foreign ETF's, and stable countries' currencies."

But there is one investment, especially for young men, I am STRONGLY recommending.

Motorcycles.

Men, listen to me. You can go ahead and look on them there interwebz and read all about different prohibitively cars that have great mileage and worry about how the price of gas eats into your disposable income, or you can just buy a motorcycle. The compelling reason is NOT the money you'd save on gas, though that is certainly a factor. the compelling reason is the money you'd save on courting.

Gas, if you look at personal expenditures, is actually not that large of an expense. It usually is less than rent and even less than what you spend on booze, cigarettes and other vices. But if you employ your motorcycle correctly you can save a TON in....

courting.

Look, women LOVE motorcycles. Even the ones that don't claim to, once you throw them on the back, they LOVE motorcycles. You don't have to take them to fancy dinners, overpriced movies, trips to Cancun. You just say, "hey, get on" and off you go.

Better than that even is the money you save not having to go and search for a nice young lady to court. When you get a motorcycle, you don't go to the "clubs" or "discotecs" or "parties." You simply show up where the object of your affection is on a regular basis with your motorcycle jacket and helmet. And when you have built a repoire with the young lady you simply say, "Hey, want to go for a ride?"

It's almost, if not easier than asking a girl to ballroom dance. It is the perfect in.

Of course, motorcycles are not just for the young man. They are also for the young lady. Owning and driving a motorcycle immediately puts you in a higher regard amongst most males. Sure it may be a bit tom-boyish, but no man in the history of men ever said, "Oh, no! She has a motorcycle! That sucks! I'm never dating her!" Additionally, your ownership of a motorcycle also saves you the unnecessary time, money and expense of going out "clubbing" and buying the latest in night-club-wear. Put on some good jeans, some bootsy-boots, and BAM! You'll have plenty o' men pining for your affection and better gas mileage to boot!

So youth, for those of you looking to invest, but you plain just don't believe your 401k will be there. Or you just plain don't have the money to afford investing, then invest in a motorcycle. It will pay itself back VERY quickly and make your love life all that much easier.

Sarah Conant - Professoinal Crusader

What did I tell you people about the threat of crusaders?

Monday, June 27, 2011

Saturday, June 25, 2011

Notice the Statistics

I like the use of charts and statistics;

Friday, June 24, 2011

If This Doesn't Convince You...

then nothing will.

Oil Supports the Economies Leftists Are Most Proud Of

I will give a shinny nickel to any leftist or environmentalist that can explain why they love countries like Norway or they love people like Hugo Chavez, when their economies are largely based on "evil" oil.


Anyone? Anyone? Bueller? Bueller?

Thursday, June 23, 2011

Your Next Netflix

If you have not seen Cowboy Bebop (or don't even know what it is), it is the next thing you're going to put in your Netflix queue. Here is a video that not only highlights its AMAZING jazz soundtrack, but also shows you a clip of one of the better episodes;


A Friendly Reminder from the Captain

A friendly reminder from the Captain that today is Thursday, June the 23rd. Nothing special on this day, no holidays, no festivities, which means it's the PERFECT day to buy your girl some flowers.

Remember, flowers on birthdays and Valentines Day are more expensive and expected, rendering them ineffective.

But on non-descript days, like today, it's worth dropping $5 at your local grocery store.

This concludes the Captain's public service announcement.

Tuesday, June 21, 2011

Three From Oz

Some commendable charty goodness from the Oz Conservative

a funny little piece from Joanne.

and why not visit our good buddy Frank if you haven't in a while?

"No, Not the Canadians!"

Currently doing some research for a Canadian client and over the course of the research came across a very heartening chart.



Of course the only thing worse than Evil Big Oil is CANADIAN Evil Big Oil. Don't get me started about those evil Canadians with their hockey and Rumpleminze and civilized society. Don't want none of that stinking Canadian oil do we? No, much better to have stable, pro-US Middle Eastern oil.

Thursday, June 16, 2011

During My Stroll Through the OECD

The OECD, I must admit, has vastly improved how it's organized its data and statistics. Beforehand you had to just jump in and try to figure out the logic by which some French economist tried to organize the data. This usually required 2 hours of your life and the consumption of copious amounts of booze to bring your blood pressure down. Now you can find it relatively easily.

Regardless, I wanted to take a look at how our Canadian brothers and sisters were fairing up north, and thought the charts would be of some interest to our fellow Cappy Cap readers. I apologize for the size, you will have to click on it to get a decent size view of it.

The Captain is "Pro-Hound"

If I were to ever have a ton of money I would buy the original painting. (you need to scroll up once clicking on the link)

Wednesday, June 15, 2011

Adam Corolla Economics

Many years ago I remember listening to "Love Line" and Adam Corolla said something to the effect of;

"You know, you young kids may hate rich people, but if you look at how much they pay into the system you'll realize you don't want to piss them off. I mean, do you know those charts where they show you how much money is being spent or made? Yeah, Bill Gates would have like a million little dollar bills on the chart and then average guy would be a fraction of of a fraction of a dollar sign. You don't want that guy leaving."

Of course some people do.

But then there is a consequence.



Enjoy the decline!

Tuesday, June 14, 2011

"Tax the Richest 2%"

You just can't make it up. Saw their commercial and couldn't believe they used it as their URL. Ergo it deserves the Double Palm Face Plant Award.



I wonder if the phrase "capital flight" is in their vocabulary.

A Message from EVIL Big Oil

Supplied by my EVIL contact in the EVIL big oil industry, this answers a simple question I had about whether between the US and Canada, and all the various shale oil fields we're discovering if we couldn't just simply jettison the Middle East for our energy needs.

Of course, it is from Big Oil, so it should be ignored as we continue to pin our hopes of economic recovery on that there booming "green economy."

Monday, June 13, 2011

As If Apple Products Aren't Overpriced Enough

One of the fringe benefits of taking the occasional computer networking course at the local community college is that you start to understand the world of "geek humor" or the social side of the computer world.

For example, most of you have NO clue what the big hubbub is between "Mac" and "Windows" and "Linux." (Answer - It's nothing, TRUST ME. Just go back to using Window's machines and enjoy your lives citizens)

Or, when an IT geek cuts a joke and all the other geeks laugh, is it really that funny? (Answer - No, even when you understand the punch line, the jokes are really not that funny).

But every once in a while when the IT and economics worlds mix, it gets really interesting.

Wednesday, June 08, 2011

Comparing Job Creation of Obama vs. Bush

Criticize them both as much as you will from both sides of the aisle, Presidents Bush and Obama do have some similarities. Notably they both inherited recessions. And though the recession President Bush inherited was weaker than the recession President Obama inherited (though it was constantly claimed to be the worst economy in 50's years) a juxtaposition between the two presidents in terms of job growth is very interesting.

Upon inauguration in January, both suffered job losses, Obama more than Bush, but again in intellectual honesty due to the severity of the recession. And though volatile, changes in non-farm payroll jobs was less volatile under Bush than it was Obama. Despite the volatility both presidents are more or less neck and neck in terms of job creation (or rather "destruction") for their 29th month in office. Bush had at this point in his presidency resided over the loss of 2.6 million jobs, Obama 2.5 million. But note what happens after the 29th month under Bush. Job growth BOOMS.


This should be disconcerting for Obama and Obama cheerleaders because it is now put up or shut up time. And sadly, there are no more bullets left in his exhausted Keynesian elephant gun. Worse still, the extra 100,000 jobs came at a price of indebting the country to the point of insolvency. And worse than that is GW's economic boom was preceded by an expansionary fiscal policy that focused on tax cuts as opposed to spending.

In other words the ultimate show down between the two competing economic theories is about to occur. Keynesian vs. Austrian. Socialism vs. Capitalism.

Of course, it ultimately does not matter whether or not jobs are created because economics has largely become something of a religion. People want to believe in socialism. People want to believe in Barack Obama. People want to believe their "English" degree is going to land them a job. People want to believe in the Magic Job-Creating Unicorns. And so regardless of what happens, lessons will not be learned, intellectual honesty will not be adhered to and we will simply be condemned to repeat history.

Of course, the smart ones will enjoy the decline.

Help the Captain Research WWII

Hello Lieutenants!

The Captain has a mission for those of you with an expertise and knowledge he doesn't have.

I remember watching a WWII documentary about the siege of Berlin during WWII. As the Russians approached and it was becoming very apparent the Germans would lose the war, Berliners in a weird psychological way started celebrating. NOT because the war would soon be over, but because they were doomed.

Nazi's would shoot people trying to escape and even if they did manage to escape the Russians would shoot them. So they were trapped and more or less forced to sit there and wait for the Russians to come.

Since there was nothing else they could do, they started throwing parties. I saw some eerie video of Germans drinking and partying away. Sometimes these parties would often end in suicide.

Now it's one thing for me to simply recall this documentary, it's another thing if one of you would be so kind refer me to a documented source or link that actually cites it. I've tried searching teh interwebz, but am having no luck.

Any historian economists out there?

Like Selling a Rabbid Badger as a Pet

Yeah, good luck selling those things.

Tuesday, June 07, 2011

P/E Ratios - What They Tells Us of Probable Returns

Given our high P/E ratios here in the US, I'm pulling up an old chart that needs to be revisited. Comes from Dr. Robert Shiller and it is a very insightful chart. However, methinks it may be high time to see if the loyal readers and lieutenants of the Captain are starting to understand to become economists in their own right and can deduce the lessons that need to be learned from it.

So, do you see what I see?

"Business Journalist"

Yet another reason you should be reading Cappy Cap and not listening to the mainstream media. Because their "business journalists" purposely spend more than they make.

Monday, June 06, 2011

Rolling 20 Year Real Corporate Profit Growth Rate

When I make charts it's usually when I have a theory and I wish to prove it right or wrong. Most of the time, my theory is proven right. And I'm not talking like a batting average of say Christine Romer or a Paul Krugman, I'm usually right about 90%+ of the time. But this time my theory was wrong.

My theory was that because of a general decline in long term average economic growth rates as evidenced here;


Corporate profits would also be in long term decline. I also contested the general work ethic in the US economy has declined over time at all levels of management as well as innovation and creation and this would also translate into deteriorating corporate profit growth. So I did the exact same thing below as I did above. I took REAL non-financial corporate profits over time and averaged their growth rates on a "generational" basis (20 year span).

Of course I was completely wrong. Corporate profit growth had never been higher than in the past 20 years.



Now, many things can explain this. Two bubbles (housing and Dotcom) overstated corporate profit growth in the past 20 years and thus (barring another bubble) corporate profit growth would return to normal. Also, globalization where domestic companies have milked as much profit as they can from the domestic economy and now go overseas for growth in developing nations. But I truthfully don't know the answer.

The only real reason I posted this up here is because I put so much time into it, I was saying to myself, "the heck if I'm not posting this chart!"

Sunday, June 05, 2011

Charlie Varrick

This post has nothing to do with economics, politics or sociological matters. It has to do with a good solid guy flick that should rank up there with "Kelly's Heroes" "Midnight Run" and "Die Hard."

Charlie Varrick.

Not much good came out of the 70's. There was...umm....yeah...ahhh....hmmm.....

So there you have it, not much good came out of the 70's.

But there was a movie starring an underappreciated actor, Walter Matthau.

You all know him for his comedic appearances beside Jack Lemon, but if you look at his acting career, he actually played some pretty bad ass guys. Watch "Charade" starring Cary Grant and Audrey Hepburn and you'll see what I'm talking about.

Regardless, he plays a very hateable anti-hero in the movie "Charlie Varrick." It's a dirty, sleazy, crime-infested movie that is about the only thing great to come out of the 70's. I won't even tell you any details because it would just ruin the movie. I want you to go and watch it and appreciate it as much as I did.

So Netflix it or just buy it, because you'll want to own it as part of your collection. Just trust the Captain on this one.

Saturday, June 04, 2011

Recession Medicine

What's the Difference Between Minneapolis and Cuba?

At least you can escape Minneapolis.

When You Abandon Fundamental Value

Retirement programs.

There’s a novel concept for you. 60 years ago there was no such thing as a 401k, 403, IRA or SIMPLE plan. People retired by selling the family farm, enough heads of cattle or the family business. Less fortunate people had to rely on their children for retirement and some unfortunate souls, believe it or not, had to work till death.

But retirement programs are funny things and they have funny consequences. Especially when ALL of the retirement programs designate financial securities (read stocks) as the only medium by which you can save for retirement.

Let me repeat that again;

RETIREMENT PROGRAMS ARE FUNNY THINGS AND HAVE FUNNY CONSEQUENCES ESPECIALLY WHEN ALL OF THE RETIREMENT PROGRAMS DESIGNATE FINANCIAL SECURITIES AS THE ONLY MEDIUM BY WHICH YOU CAN SAVE FOR RETIREMENT!

Translated into English, this means with the advent of 401ks, 403bs IRA's, etc., this has channeled all retirement money into the stock market with little regard as to whether or not this would artificially inflate stock prices, thereby causing a bubble.

ie-are the cash flows below;


contributing to a long term bubble?

Of course history has told us that any time you abandon fundamental value as the only reason to invest in something, bubbles always occur.

For example, the famous Holland Tulip Bulb Bubble shows you what happens when you no longer value a tulip bulb for the fundamental value that it will bloom and look pretty, but rather value it based on the idea that you can sell it for more than what you paid for it because the person buying it from you doesn't care what they pay for it, because they know they can turn around and sell it to another person because they don't care what they pay for it because they know they can...etc, etc..

Or Beanie Babies. Paying $600 for something that is nothing more than cloth and beads. Doesn’t clean the house. Doesn’t pay a dividend. Just sits there. Once again, you have abandoned its fundamental value and paid $600 for (as far as I’ve been able to figure it) something to feed a middle-aged woman's midlife crisis.

Alas, today's modern stock markets I contest are no different For people no longer invest in stocks for their potential cash flows, profits and dividends, but rather invest in stocks as a vehicle for retirement. And in a very zombie-like fashion I might add.

Every month, every paycheck, without even thinking, there they are, millions of them, zombie Americans doing what their HR overlords and financial advisors told them to do;

HR Director - “You WILL invest in a 401k”

In unison - “We will invest in a 401k”

Government - “You WILL invest in an IRA!”

In unison - “We will invest in an IRA.”

With little or no regard as to whether the mutual funds (and underlying stocks) are actually worth the value.

Now couple this dramatic change in investment behavior with several factors;

1. The entire Baby Boomer generation is the first generation en masse to use the financial markets as their mainstay for retirement

2. The Baby Boomers are a plurality of the population

3. And are in their prime income earning years

Is it any shock the average S&P 500 P/E ratio has been consistently trading above its 80 year average of 15?

The question is what will happen when the Baby Boomers start to retire? And instead of contributing every month to their 401k’s like sheople, they withdraw?

Of course, there are arguments that a rise in the average P/E is legitimate and sustainable. One could argue that this is a behavioral change that is permanent. That the Gen Xer’s are contributing nicely and will pick up any slack. One could also make the argument that with the advent of the internet and online trading that prices to trade have fallen, allowing millions of Americans to flood the market with billions of dollars that would not have been invested otherwise.

Good arguments, and I agree.

But I wanted to check out to see how much of the past stock market performance was due to the market just being flooded with new money and not necessarily an increase in the profitability of companies.

So the first thing I did was compare the S&P 500 against new mutual funds sales (going back to 1984 which is as far back as ICI has the data), resulting in the chart below.

In obvious bubbles and crashes you can see the correlation, however, the S&P, as well as monthly contributions to mutual funds are in nominal dollars. Inflation alone would increase the correlation, so I adjusted the figures (and the S&P 500) for inflation (this causes for some unconventional measures, but they are meritous just the same).

The relationship still stands, and is particularly noticeable in the Dotcom Mania/Bust days. But girls aren’t impressed by economists who only adjust for inflation. Economically savvy and drop-dead gorgeous girls that have IQ’s of 490 and double as super models can see the obvious shortcomings of this chart and would say,

“Hey, Mr. Economist. If you want to stand any shot with me, you better darn well adjust those figures for the size of the economy and population!”

And we accommodate them, for we wish to stand a shot with them.

So then you have this, the S&P 500 divided by GDP (another weird figure, but interesting enough in itself) versus monthly contributions as a percent of GDP

(notice in Dotcom Mania, new sales of equity only funds accounted for more than 1% of GDP, as opposed to less than .2% just 15 years prior).

This is where it gets interesting because the two data series alone tell us many things;

1. Our broadest stock market index divided by GDP provides an interesting ratio, showing that it has consistently been increasing as denoted by the green line. ie-We apply more value to stocks, regardless of the amount of wealth our economy is producing.

2. Monthly new sales of equity only funds are amazing in themselves. Going from literally less than 1/10th of 1% of our GDP as late as 1992, monthly contributions have skyrocketed to .6% of GDP in all of 13 years! Furthermore, the insanity of Dotcom Mania had convinced people to forefeit money on the order of 1% of GDP a month into equity only funds for a solid year (1.6% in one month!).

3. Of course this could be because people had higher profit expectations of companies, and thus flooded the market with money, driving up prices, but it had nothing to do with the actual increase in our ability to produce wealth (from which profits derive). Even after the crash, we're still on an upward trend contributing a higher percentage of our wealth into the stock market, thereby increasing the value of the stock market, regardless of our wealth producing abilities.

However, there are more pertinent adjustments to be made.

In trying to find the appropriate base by which to adjust for inflation and economic growth, I was predisposed to use GDP as GDP is typically the base you adjust for. But after contemplation what mutual fund flows and indices should really be compared against is corporate profits as corporate profits are what ultimately drive the value of a stock.

Here, a similar correlation again, but this focuses on the heart of the matter; corporate profits. The only one true thing that should dictate stock prices.

Note the behavior of the S&P 500 relative to corporate profits. The stock market bubbles of 1987 and 1999 are obvious. Also note the highly correlated behavior of the monthly new sales of equity only funds as a percent of corporate earnings.

Ideally this should be a constant ratio, meaning people apply the same amount of market value to corporate earnings, thus, if corporate earnings go up, demand for that stock would go up by a corresponding amount, thus keeping the ratio constant (ie-if corporate profits go up 5%, demand for stocks would go up by 5%). Of course this ratio is not going to be constant because people's expectations of future profitability is changing and people's perception of value changes as well.

This is VERY obvious in the run up to Dotcom Mania. Traditionally sales in new equity funds would amount to no more than a percent or two of corporate profits. However, when people started having irrational expectations of corporate profits, this skyrocketed monthly sales to almost 70% of corporate profits. Arguably the clearest sign there was a bubble.

Regardless of temporary and irrational fluctuations in people's perception of value and expectations, look at the long term trend. After the stock market crash and people becoming disenchanted with stocks, new sales of equity only funds dropped down to a more "sane" 20%. While a significant drop, it still is significantly higher than the 2 or 3% and shows a general trend upward since the 1980's.

This suggests something a bit more permanent than just the random and chaotic whims and emotions of the market is afoot. And this something is disconnecting the relationship between what we pay in stock price and their corresponding profits, further suggesting to me we have once again abandoned profits, dividends and cash flow as reason to invest in stocks and are purchasing them for ulterior reasons. Given the high correlation between the increase in the S&P500 relative to corporate profits and new sales of mutual funds as a percent of corporate profits (.89) it suggests to me that gains in the market are primarily due to retirement money flooding the market and not so much increases in corporate profits.

All this being said, there is one final adjustment that should be made. Thus far all the charts and correlations have been made with "Monthly New Sales of Equity Only Funds" provided by ICI. This tells us nothing of redemptions that were made, ie-people pulling their money OUT of equity only mutual funds. If pure volume of retirement dollars flooding the equities markets is to blame for higher prices and not corporate profit-chasing dollars, then the net flow into equity only funds would be a more appropriate measure. Thus I ran the same figures of "Net New Flows into Equity Only Funds" as a percent of corporate profits versus the S&P 500 divided by corporate profits.

Albeit not as pretty as the previous charts, there is a correlation again, .30. Not as high as the New Sales figures, but a postive one none-the-less. And with with 262 data points, it is probably statistically significant.

However, speculate as we might that all this is being caused by new retirement money entering the market, we cannot know for sure. In Dotcom Mania was it just people’s irrational expectations of unrealistic profits that flooded the market with money? Is the rise in money entering the market now due to lower trading costs? Will Gen X continue this investment behavior? Or all of these things in play at once?

Alas, it seems all we’ve accomplished is proving that when a market is flooded with money, prices tend to go up.

Economists are very good at proving something that we already know.

Friday, June 03, 2011

How's That Keynesian Thing Working Out For You?

Had you listened to the Austrian economic model today's economic news of pathetic job growth and increased unemployment would have come as no shock. However, I am aware there are still some of you that believe in Keynesianism and are dumbstruck as to why the economy isn't booming and so permit me a lesson in economics.

You see, despite $2 trillion in "stimulus spending" and lord knows how much more in deficit spending, according to the Keynesian model this spending should have rippled through the economy and via a "multiplier effect" resulted in a multiple of the original stimulus amount in economic growth. This would have shifted the aggregate demand curve to the right resulting in full production and employment. Confetti would fall, Peggy Joseph wouldn't have to pay for her mortgage, the masses would cheer and Obama's Magical Flying Unicorns would fly in formation over the cheering masses (they're kind of like the Blue Angels, but not as cool).

Now, just assuming a multiple of 5 (meaning the MPS is .2, which it's not) that means a minimum of $10 trillion in additional economic production should have occurred just on the stimulus spending alone. Divide that by Obama's 3 years in office and roughly $3.3 trillion in extra economic growth over our base of $13.5 trillion should have resulted in a GDP of roughly $17 trillion. We're still sitting at $14 trillion.



So what happened?

Well Keynesian Kiddos, your dated model might have a little flaw. The MPC or alternatively the MPS.

You see, when you are mortgaging the future of the country to the point credit rating agencies are downgrading you people have a tendency not to want to spend or invest a lot in the country. Also, when you basically villainize profits, production and capitalism, businesses and banks don't want to invest. And when you just go and blow annually $1.4 trillion more than what you take in (all while making the taxpayer responsible for this profligate spending) people in general just lose faith in the country. So instead of the "happy go lucky spending spree" your model is based upon you see people tighten their wallets and spend less. Ergo our MPS goes up and your multiplier effect goes down;



In short, you failed to account for the psychological effect of bankrupting a country and what kind of effect that might have on people's spending as well as business investment.

Of course this "magical multiplier" effect of Keynesianism was flawed from the beginning. Not because there isn't a multiplier effect, but because it has nothing to do what what really matters; genuine economic production.

Spend all the government money on "community centers," "art programs," and "stimulus programs" you want, it's not what the people wanted. And claim all you want that "additional spending" is now rippling through the economy, the fact is the government wasted that "first round" of spending on something nobody wanted. That money, had it remained in taxpayer's hands would still be rippling through the economy, but through private hands (either through personal consumption or lending via banks) and therefore producing things people wanted. Not "$50,000 drinking fountains."

Perhaps a simpler way to explain it is to aliken Keynesianism to the "why can't we just print off more money" question. You don't have to be able to answer the question to know deep down in side you intuitively know that would not solve the problem.

So perhaps in your next economics class in college you can ask your economics "professor" a variant of that question with the presumption Keynesianism works.

"If the government can spend its way out of a recession, why can't the government just spend enough to spur enough economic growth so that we're all trillionaires?"

I myself would love to hear the answer to that question.

Wednesday, June 01, 2011

"How, Oh How, Is the Economy Not Recovering?"

I love stories like this where the "professionals of Wall Street" (remember those guys, the ones that headed up elite investment banks like Bear Stearns and Lehman Brothers) are "shocked, shocked" the economy hasn't recovered yet. What I love more is when they put the cart before the horse, driving up stock prices FIRST, presuming economic growth will follow. And then, perhaps the greatest quote in the entire article is:

"With these kind of dividend yields, these stocks are a steal!"

So once again it seems high time to me to explain the "dividend yield" and provide an important lesson in this fascinating ratio.

The dividend yield is the dividends of a stock divided by the price of a stock. In short it shows you the percent return you can expect to receive from dividends. So for example if a stock pays a $1 dividend per share and it's currently trading at $10, your dividend yield is 10%.

Most people scoff at dividends because they invest in stocks "because they will hopefully go up in the future." This increase in the stock price is called a capital gain. And while they provide the basis for millions of people's retirements and trillions of invested dollars, the premise of investing in a stock "because it will go up in the future" is flawed and will cause a horrendous problem in the future.

Understand what drives the price of a stock is the earnings or profits the firm makes.

HOWEVER,

you as a shareholder will not see the earnings of the firm. You only get to see the portion of the earnings the firm decides to pay out as it may wish to retain some of those earnings and reinvest them back into the company. This portion they pay out is the dividend.

Now, if you think about it, you will realize that the ONLY thing that really drives the price or value of a stock is the dividends because that is ALL the shareholders see.

Of course some people will say, "Yes, but don't I get SOME money in the future if I sell it?"

Correct, but when you sell it in the future, why did somebody pay you money for your shares? Or a better question, "what did you sell to that person?"

You didn't sell him "something you can sell for more in the future." You sold him a share of stock that will entitle him to the future dividends that stock will pay. That is what gives the stock value. The stock could be sold over and over again, but you are inevitably selling a security that pays out dividends and nothing else.

So are dividends so high and prices so low that they are "a steal" as super intelligent Wall Street investment types say they are?

Well, here you go.



I've pointed this out before, but I shall say it again.

Dividends historically paid out around 5%. Today they are below 2%.

The reason why dividend yields are so low can be explained by reading the post about 3 posts below titled "When You Abandon Fundamental Value."

So my fine loyal readers, take it from the Captain. Right now buying the average S&P 500 stock is like buying something at about 2.5X's more expensive than it traditionally has been. To put it into perspective think of common everyday consumables we buy with the following prices;

A gallon of gas going for $9.75
A Kia Rio going for $25,000
A Big Mac going for $8.75
A movie ticket for $25

That is what (using the dividend yield as a metric for value) buying into the US stock market is like today.

And bar any economic growth (which there is "surprisingly little" of), you can expect reality and efficiency to hit the markets. May not happen today. May not happen tomorrow. But it will happen. And the only thing that is going to give your precious little 401k balances a boost is going to be BOOMING economic growth that can only come from a Austrian economic model ala Ronald Reagan circa 1981 and not this Keynesian nightmare the naivety of the American voting public has wreaked upon us.