Are we in a recession or depression?

The old joke is that if your neighbor lost his job, it is a recession. But if you lost your job, then it is a depression.

So how do economists define a depression? There does not appear to be any firm definition, but the Wall Street Journal takes a stab at it in this ARTICLE[$]. One definition requires a decline of at least 10% in per person output. Others say that unemployment must exceed 10% and stay there for several years. And based on a WSJ poll of economists, the odds that we will see a depression is at 15% on average. The estimate range was 1% to 30%.

To reach 1930s depression levels, unemployment would have to rise to 25% and GDP would have to fall 28%. We have quite a ways to go to reach that level. The WSJ chart at the left compares today's conditions to that of the 1930s. Click on the image to enlarge it.

So do you think we are headed to a depression?

Sunrise or Sunset for Solar Power?

As we know, part of Obama's stimulus plans are to fund alternative energy. China has recently been doing the same. Of the alternatives, I have been interested in solar and to a lesser degree wind.

This week Barrons had an article on the fall in solar panel pricing...

"Cheaper solar silicon is of course a great thing for the planet's living creatures. But solar companies and investors who planned for silicon that was scarce and high-priced must adjust their business models for a glut that looms larger than most anyone expected. New government subsidies will help in the U.S. and in China, which energized solar stocks last week with a plan to help China's struggling photovoltaic industry. Lower prices will also stimulate sales volumes as solar panels become cost-competitive with fossil-fueled power. The question is whether solar energy's volume producers will end up resembling the high-margined Intel or the profitless memory-chip makers." Full article HERE[$].

So perhaps a bad time to get into solar? Or not?

I continue to use the Greenblatt value filter to look for likely stock candidates. Back on March 16 I noticed that GT Solar (SOLR) showed up on the Greenblatt filter so I made an investment.

GT Solar does not make solar cells. Rather it makes the equipment that makes the solar cells. As has been said elsewhere, the ones who made the money in the gold rush of 1849 were not the miners but rather the merchants who sold the miners the picks and the shovels. That's GT Solar's business.

It is up 72.9% in the two weeks since I bought it on March 16. This compares with the Total Stock Market being up 8.4% over the same period. And even today while the market was down 3.6%, SOLR was up another 1.6%. Daily trading volume over the last three months was 800K shares. But over the last few days trading volume has rocketed. Today its volume was over 6M shares.

I think I'll put in a stop loss.

BTW, on March 16 I also saw Lilly (LLY) listed on the Greenblatt value filter. Furthermore it pays a 5.8% dividend. So I bought in. It is only up 3.9% compared to the Total Stock Markets 8.4%.

Financial oligarchs have captured the U.S. government

The upcoming May 2009 issue of the Atlantic Monthly features an article by Simon Johnson, of MIT and former chief economist of the International Monetary Fund.

Briefly, Johnson posits that the United States government has become the hand maiden to the financial oligarchs.

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."

The full article can be read HERE.

Krugman and Obama at odds?

Nobel prize winner economist and liberal pundit Paul Krugman is featured as the cover story in the current issue of Newsweek. Long a critic of George Bush, Krugman is now highly critical of the Obama administration's economic plans...

"Krugman portrays Treasury Secretary Tim Geithner and other top officials as, in effect, tools of Wall Street (a ridiculous charge, say Geithner defenders). These men and women have "no venality," Krugman hastened to say in an interview with NEWSWEEK. But they are suffering from "osmosis," from simply spending too much time around investment bankers and the like. ... It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street."

MORE.

Closing the Tax Gap

With record deficits, the Obama administration is looking for ways to increase tax revenue. One way is to improve tax compliance. For example, it is estimated that cash transactions that go unreported account for $100B in lost tax revenue.

But how to force compliance? Perhaps one way would be to eliminate legal tender currency and force everyone to use checks or debit/credit cards for all transactions.

Most businesses could easily work this way although I would assume many would prefer to stay with cash for obvious reasons.

Casual businesses such as street vendors present a different issue as they would have no way of processing a debit/credit card or validating a check in real time.

Others may raise privacy concerns since checks and debit/credit cards leave an electronic trail.

MORE and MORE.

Is Greenspan to Blame?

In a WSJ editorial on Feb 11, John Taylor of Stanford University laid the blame at Alan Greenspan's feet. Taylor and Greenspan had been long time friends. Perhaps no more. MORE[$].

Then on March 9, Greenspan responded with his own WSJ editorial blaming the Chinese saving rate as the root cause. MORE[$].

Today, the WSJ has a series of economists give their views on the controversy. The vast majority point the finger at Greenspan. MORE[$].

Water over the dam, I suppose. But if the Fed was a key cause of the problem, what does this say about what the Fed should be doing going forward?

One thing I think is good about the European Central Bank is that they only have one mandate... to maintain a stable value of the Euro (i.e., avoid debasement/inflation).

In the case of the US Federal Reserve it has several mandates: "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

Easier said than done. These mandates are often at cross purposes.

We have had a chronically weak dollar and serial asset bubbles (isn't that known as inflation?). Now we have a weak dollar and high unemployment. And the Fed is now maintaining low interest rates by buying US treasuries and printing dollars - surely a new disaster in the making. And now we have calls by the Chinese, Russia and others for a new reserve currency to replace the dollar. So on what basis can one say that the Fed has done a good job since Alan Greenspan took over from Paul Volker?

And here Greenspan defends himself on 60 Minutes...

Eurozone, a bystander or wise?

James Surowiecki of The New Yorker writes on what the Eurozone is not doing. Specifically the European Central Bank is not doing "quantitative easing" for two reasons. One is that they feel that they can sit on the side and simply benefit from the "quantitative easing" the US fed is doing. Secondly is their fear of stoking inflation / hyper inflation akin to that of the 1920s in Germany. MORE.

A New Reserve Currency?

The WSJ reports on China calling for the creation of a new international reserve currency to replace the dollar. Could it be a concern by the chinese that their huge us treasury holdings are in jeapordy of debasement by the fed's actions? MORE[$]

Quantitative Easing

The term "quantitative easing" that the fed and others use, seems so innocuous. I did a Google on "define: quantitative easing". Here are the two web definitions that came up...

Quantitative easing is what non-economists call 'turning on the printing press'. In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital.

This is the second one that came up:

The term quantitative easing refers to the creation of a pre-determined quantity of new money 'out of thin air' through open market operations by a central bank as the start of a process to increase the money supply. It can, more simply, be understood as an indirect method of printing money.

Washington Deflowered?

"People have been saying that Wall Street took their checkbooks down to Washington and lobbied to get the regulation they wanted rather than stricter regulation. And therefore, Congressmen were the victims of this. I’m sorry, but Wall Street was not debauching a virgin, it was paying a harlot." – John Steele Gordon as quoted in the Wall Street Journal

$10 Trillion and Counting

PBS Frontline presented an hour long horror show on America's mountain of debt and the crisis of government debt titled Ten Billion and Counting.

The Good Hands People

The whole process of "fixing" the economy seems to me to be out of control and is being "fixed" by many of the same individuals who facilitated getting us into the mess.

Don't get me wrong. The lion's share of the blame goes to us citizens as spendthrifts and Wall Street as the sheep shearers.

But there is a huge amount of grandstanding by the same politicians and government operatives who facilitated the mess. Some points.

Robert Rubin: Glass-Steagall was put in place in the 1930s to prevent banks from also setting up investment operations. It was repealed under the Clinton watch. On the Whitehouse end, the push to repeal was spear headed by Clinton's own Treasury Secretary, Robert Rubin. Within a few weeks of the repeal, Rubin left that post and took over a top position at Citibank. And we all know what has happened to Citi since then.

Larry Summers: As Treasury Secretary, also under Clinton, he gave approval that credit default swaps did not have to be regulated. Ooops.

US Representative Barney Frank and Senator Chris Dodd: Both had long pushed that Fannie Mayhem and Freddie Fraud take on more and more suspect mortgages in the interest of helping the disadvantaged buy homes. A noble goal. Except they should have helped them get jobs before they helped them get homes they could not pay for. Thus they enabled the likes of Countrywide and others to dump their crap on FM-FF. Not to worry. The government (taxpayer) would not be on the hook. Ha! Oh, did i mention that Dodd is under an investigation in Congress for the mortgage sweetheart deal he got from Angelo Mozilo, CEO of Countrywide before Countrywide blew up? That investigation will go no where as too many other pols are dirty also. And Dodd is under a similar housing cloud for another sweet heart real estate deal in, of all places, Ireland. Dodd, Frank and others in congress have gotten campaign donations from FM-FF, Countrywide and others. And now i see that the so-called "Dodd amendment" in the stimulus bill that was passed last month had a clause that specifically allowed bonus agreements to be paid out, such as AIG's. Dodd now claims that it was not in his amendment when it went to committee and he does not know how it got into the bill. So if you take that as true, then the more damning critique is that Dodd and congress do not even know what they are voting on. See THIS for the story on the Dodd Amendment.

George Bush #2: He let PAYGO (pay as you go) lapse. The odd thing is that it was in George Bush #1's administration that PAYGO was first put in place. Bush #2 should have listened to his father.

Tim Geithner: Prior to becoming Treasury Secretary he was the governor of the New York Federal Reserve Bank. The NY Fed is supposed to take the lead on recommendations and follow through on the overseeing of Wall Street. He was in the slot when the excess grew and finally blew up. Now he runs treasury. Was that position a reward or punishment? Oh yeah, Geither was also so busy managing the New York Fed, that somehow, he forgot to pay his Social Secuity Taxes he owed when he worked for the IMF. Now he has the IRS under him. As an aside, today I saw Obama on tv defending Geithner. It reminded me of Bush's infamous "you're doing a heck of a job, Brownie" fiasco in trying to defend the indefensible.

Alan Greenspan: Poor guy! He is all over the press trying to paper over and defend his blunders, easy money, poor eyesight when it came to bubbles and serial financial bailouts. Very sad. He should change his name to Greenspin.

Hank Paulson: What does one expect when the guy who is supposed to be the guardian of the people's treasury previously headed up Goldman Sucks.

Ben Bernanke: Protégé of Greenspin. Helicopter Ben. Depression expert. Fed governor from 2002-2006 and Fed Chairman from 2006-2009. What was he exactly doing at the Fed during the lead up to the current situation? And why is he the best guy to resolve the current situation?

As I said, the lion's share of the blame goes to US citizens as spendthrifts and Wall Street as the sheep shearers.

But it is very hard to believe that we are now in good hands and that all will be well.

Where did all the wealth go? To our kids.

Rob Atkinson of The Atlantic Magazine looks at the brighter side of the fall of housing and stock prices...

Like millions of Americans, I dread getting my quarterly 401k statement. Every time I open one I think, "I guess I won't be retiring at 65." And so it didn't really come as a surprise when the Federal Reserve reported that household net worth plunged $11.2 trillion in 2008, a stunning 18 percent loss in one year. No wonder The New York Times says that "the most recent loss of wealth is staggering."

So did this wealth actually disappear? Of course not. My house is still here. The companies in which my mutual funds own stock are still there. All that changed was this: The prices at which American asset owners can sell their assets fell by $11.2 trillion. But the prices that buyers have to pay for those assets also fell by $11.2 trillion. And that's not necessarily a bad thing.

Read the full article HERE.