Peak Stimulus is Right Now

There is talk in the air of a second stimulus. Actually, it would be the third since Bush passed one before he left us. Thanks, W, and good riddance!

Comments to my post on Embracing the W show some continued confusion over the timing of the Stimulus, so let me update everyone.

The specific stimulus bill counted out at $787B. I suppose you could include the unspent TARP as well, and the earmarks that got TARP passed ($180B?). Plus we had a $300B real estate bailout passed under W during the election summer of 2008.  So we are at well north of $1T of stimulii.

For a good resource, download PeakStimulus. This first chart is from that report. The second chart is from Goldman Sachs and includes inventory rebuilding. They both show that the peak of stimulus is right now.

 You can also read my take on this from prior posts, here and here. My preliminary conclusion in late August was that gimmicks - what I call Cash4GDP - have had a bigger impact than the stimulus itself. At least, easier to measure.

This isn't to say that the Stimulus isn't helping to buoy up GDP. It is. But the peak impact is now. It is downhill from here. A year from now, 70% of it will have been spent, and the remainder will be so stretched as to be lost in the noise. We actual risk the remainder having a negative impact, particularly if we try to reduce the short term deficit.

This may sound paradoxical, but take a look at the third chart. Since we have already be running high government spending (for years), the change in spending is what has a stimulative impact. If we reduce spending, as is inevitable without a second third stimulus, it has a negative effect, at least to the extent that government spending has much effect at all.

 This isn't to cheerlead for a new stimulus. Quite the opposite. The way out of our mess is to fix the financial sector and get the private economy on its feet. The many stimulii simply kick the can forward of that fix and put the economy on life support. Necessary adjustments are postponed. We are turning Japanese, indeed!

The silver lining in this leaden approach to our golden economy is that these stimulii don't do much, so the negative impact may not be that impactful, just as the third stimulus won't do much in the short run. In the long run the excessive debt, malinvestment and waste from the stimulii eat into our national wealth and impoverish us. Also, the long run may not be that far out.

Now, as to the Stimulus itself.

A big chunk of it (35%) has been tax credits to lower income (or no income) people, and that is being paid out weekly as we speak. Ford did that in 1975, to no effect. His failure got studied and it was realized that temporary changes to income are squirreled away in quick savings (not investments) or used to pay down debt. As such they act as a black hole in terms of stimulus. Bush did it twice, the second time in 2008. No impact. Christina Romer of Obama's Council of Economic Advisors studied these rebates and concluded a permanent tax cut has a 3x stimulus effect whereas these one-time rebates are inconsequential at best if not politically expedient and economically wasteful. (So why were they put into the Porkulus? Maybe because Obama cared more at that time about "social justice." meaning redistribution of wealth, than fixing the economy. Now his mistake is becoming apparent, even to him inside his bubble.)

Of the rest about $100B or 12% is well-designed to have an impact (according to the WSJ). The leftover balance is obscure in its impact. For example, a chunk goes to K12. I have a company selling into K12 and have visibility into how some of the stimulus money is being handled. Confusion reigns, and almost no jobs have been created. Why? No school district wants to hire with a one-time stimulus, and then fire when the government life support goes away. Instead they are trying to figure out what to do with it. In this way a chunk of the obscure part of the stimulus may be out of the Feds and into the school districts where is is hung up in a type of indecision purgatory.

Around $200B is considered direct aid, much of it to State governments or State construction projects. How is that being spent? There is a brewing scandal in California because the state unions are plundering the budget. More jobs? No, saved featherbedding jobs, more benefits and retroactive pay increases! An Orange Count firefighter makes $175K. Yes, you heard that right. Shocking, to say the least. Maybe they are using the vig they are collecting to buy cash4clunker cars, who knows.

In any event the schedule of flows of these funds peaked in Q3. To the extent it is still hung up in the hands of some "czar", or has left the Feds and gone into "indecision purgatory" before it is actually spent, the peak spending is in Q4 with slop-over into Q1. Right now. This is as good as it gets.

Comments

[John Smith]

We will have to deal with the deficit and the money printing one way or an other. There is just no way around it. The longer we wait the harder it will get. Although I think the Democrats will do what ever they can to pass a stimulus so they won’t get trashed in the 2010 elections. However that might actually back fire with the dollar declining even more then it already has and causing oil to go over 100 USD. The government will have to borrow 3 trillion next year so if you add an other stimulus on top of that it will be 4 trillion. That is close to a 100 billion a week. How long do you think it will take before the only buyers will be the US Banks who actually get their money from the FED.

The end of this whole mess is very close. We all better be prepared.

[Hockthefarm]

And somewhere far away, a lonely bell was ringing.
And it echoed through the canyon,
Like the disappearing dreams of yesterday.
JC: Sunday Morning Coming Down

"November 27 - UK Telegraph: "Let's be generous here. Maybe Dubai was just trying to set another record. It's already given us the biggest building, biggest indoor ski slope, biggest shopping mall and biggest theme park. Surely, it was only a matter of time before it went for another biggie: the biggest debt-market cock-up. Just have a squint at the planning that went into this one. Here's the latest from Sheikh Ahmed bin Saeed Al-Maktoum. 'Our intervention in Dubai World was carefully planned and reflects its specific financial position,' declared the chairman of the grandly titled Supreme Fiscal Committee. 'The government is spearheading the restructuring of this commercial operation in the full knowledge of how the markets would react.' Sadly, the Sheikh did not spell out all the careful planning that went on."

Prechter did quite a piece on this tallest building beacon, just can't remember where.
Hock

[cloudslicer]

Thomas Jefferson and Adam Smith are rolling over in their graves.

[DG]

It's funny that the market continues up in the face of what are clearly one-time events. As anyone who's ever done a valuation of a stock will tell you, you're not supposed to discount those types of things over the long-run because they aren't repeated. Right now, the market seems to be assuming the government can continue to pump stimulus cash into the economy ad infinitum or even devalue the dollar down to zero, Japan's tough talk notwithstanding, which will cause the market to continue to shoot higher on a nominal basis.

I read something over at Naked Capitalism that sort of opened the curtain on what the Fed and the government are really trying to do, which is remove the private sector from the economic game until they feel "all is well".

From the FOMC minutes:

'Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.'

Read that carefully and realize this: An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels. Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet. That whole credit channel thing. If not to expand lending during a credit crunch, then what else are they expecting?

I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless. Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns. Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?

http://www.nakedcapitalism.com/2009/11/a-significant-portion-of-policymakers-are-simply-clueless.html

That last sentence, of course, reminded me of this:

http://www.theonion.com/content/news/recession_plagued_nation_demands

Once again, life imitates The Onion.

[mannfm11]

I am amazed that so many smart people have been conditioned by the poor education all of us received at our universities to miss the forest for the trees. We are staring economic collapse in the face and all we can do is stand there with our fingers in the dike. The problem is a debt problem and the only solution is to hope all involved will ignore the fact that neither the lenders or the borrowers have the money to continue this game. This includes the governments around the world which have no capacity to do anything other than draw off the system they helped create to collapse.

All the rearrangement is to enable the elite to enslave people by attempting to convince us all this debt is good and that a haircut can be avoided. The reason for gold money is that even in fractional reserve banking schemes and all kinds of other government and Wall Street ponzi schemes, when the dust clears, the gold is still there. This is not possible with the purely paper system we have that presents no real mathematical solution. Instead we are convinced our money is guaranteed in the banking system while the only money to guarantee the money is in the accounts that are guaranteed. How much money to banks have in the first place to guarantee what is there? A mere fraction of what is imagined to be there. Ditto the socalled reserves, which are in the matresses of third world countries and among a few Americans and organized criminals. The real reserve postion of American banks was almost zero and the crunch was because banks were allowed to imagine they had money and lend it back and forth to each other in IOU nothings.

The populace has been conditioned to believe they owned their mortgaged homes. How many people believe they own their $400,000 home with a $500,000 mortgage on it? When a 45 year old has a $400,000 mortgage, it means he has to save 20% of the after tax $130,000 income he probably has to pay the loan off by age 65. The entire game is predicated on inflation rather than real price increases. Inflation of current income and inflation of the price of housing. Americans don't save 20%, or should I say 30% because 30% is what they would need to have the house paid and something in the bank to spend after working most of their lives.

There are few valid discussions on this subject because people have been brainwashed. Few understand why this think will deflate when they imagine that the Fed is printing money when in fact they are liquifying assets the banking system couldn't liquify because they didn't have a dime left to liquify anything. They don't seem to have a clue that the system is flooded with debt in excess of what the typical person has the capacity to pay within their lifetimes. You can at least imagine the government can manage its debt, if for no other reason than they don't die after a fixed number of years, though they can. The same can be true of an unlimited life corporation, but a person, a taxpayer, a debtor usually quits earning money at or around age 65.

[mannfm11]

DG this isn't an event. Those that call this an event are not competent to comment on this subject. This is the end of a monetary era. It is the end of an inflationary credit cycle. Stocks need an inflationary situation in order to justify their growth. Credit systems need to be able to grow to the sky, then to the moon, then out of the solar system, then out of the galaxy and pay no attention to the capacity of borrowers to repay or lenders to make good on their own promises in order for this to have been an event. You might read some of the stuff Doug Noland started writing in 2000 about this subject. http://www.safehaven.com/archive-2.htm You might read the failings of John Law in early 18th century France to create the very system we have today and then take actions to expand and justify it. Once you do this you will then understand the whole idea behind modern economics is a fraud and the entire game that Bernanke knows a damn thing about what he is doing is doubtful at best and at best he is John Law.

[joe]

With due respect mannfm - I think there is no historical precedent for this - not considering the extent of the web of global interests and the speed at which information and financial transactions happen - on a near 24 hour basis.

This is all totally uncharted ground here. I reckon it to being in a room full of gasoline fumes and waiting for the spark that blows the room up.

Joe

[Hockthefarm]

Mauldin's thoughts on Dubai

Subprime Dubai

While we in the US spent our Thursday eating turkey and watching football, the rest of the world's markets went into a downward spiral as Dubai announced it wanted its lenders to give the country a six-month moratorium on some $80-90 billion in debt. This has the potential to be the largest sovereign debt default since Argentina. Somehow this was a shocking development. (How can too much debt and real estate be a problem?) And by markets I mean gold, commodities, oil, stocks, and risk assets everywhere. They all went down. Today the US markets experienced their own sell-off, though not as deeply as the rest of the world.

As I wrote last Friday, the world is now negatively correlated with the dollar, and as money went into the dollar and US treasuries, everything else went down. Vietnam devalues, Greece is looking increasingly risky, Russia wants to devalue some more, the world is still deleveraging, etc. Is this another repeat of 1998, when Russia and the Asian debt crisis tanked the markets?

To get an answer, let's look at some facts about Dubai. It is one of the Arab Emirates; but unlike its neighbor Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading, and manufacturing. It is a small country, with a little under 1.5 million residents, but with less than 20% being natural citizens - the rest are expatriates. The gross domestic product is around US $50 billion.

(Note: http://www.ameinfo.com/67802.html and then converting the currency. I found the numbers on various websites and services strangely at wide discrepancies. This seems close to a median number. I think the discrepancy is mostly people confusing the GDP for the United Arab Emirates as a whole, which includes Abu Dhabi, rather than just Dubai.)

Dubai has become a byword for thinking large. The world's tallest building, underwater hotels, the largest manmade islands (plural), indoor snow skiing in the desert... For links to more information try this from Wikipedia: "The large-scale real estate development projects have led to the construction of some of the tallest skyscrapers and largest projects in the world, such as the Emirates Towers, the Burj Dubai, the Palm Islands and the world's second tallest, and most expensive hotel, the Burj Al Arab." The list goes on and on.

UBS suggests that the $80-90 billion in debt may not include rather large off-balance-sheet debt (where have we seen that one?). So, a country with a GDP of $50 billion borrows $100 billion. They build massive projects, which are now among the most expensive real estate in the world. The latest manmade island plans for one million people to buy property there. Seriously. Talk about Field of Dreams.

Then came the credit crunch. Property values dropped by as much as 50%. Sales, say the developers in understatements, have slowed. Seems there was a lot of debt used to speculate on real estate, not to mention buying Barney's, Las Vegas casinos, banks, etc. And while US banks have little exposure, it seems England has about 50% or so of the debt, with the rest of Europe having the lion's share of the remainder. Admittedly, the estimates seem to confuse the debt of Dubai with that of Abu Dhabi, so it is hard to know a reliable number, other than that European banks are the most exposed.

Now, here's the deal. Abu Dhabi has the world's largest sovereign wealth fund, at over $650 billion. Dubai has a "mere" $15 billion. If they cared to, Abu Dhabi could write a small check and make all the problems disappear. It just seems that they are not ready to do that, at least not yet. Abu Dhabi already got the world's tallest building on past debt problems.

Construction and real estate were as much as 25% of the economy. Let's see. Large leverage with maybe $5 billion in interest in a $50 billion economy that is 25% construction? A construction and real estate-driven economy. A real estate bubble. Sound like California, Florida, Spain? How can this be a surprise, except that everyone expected big brother Abu Dhabi to pick up the check?

While Abu Dhabi did advance $5 billion earlier, Dubai is not letting that money out of the country. There are projects to be finished, you understand. From where I sit, this is just rather hard-headed negotiations, a restructuring of who owns what and who will get what assets. It will all settle out. Given the massive losses that world banks have already taken, this is rather small potatoes.

So why the reaction by the markets? Because I think many participants know that the potential for there to be a serious correction is quite real. When anything as relatively small as Dubai spooks the market, it should serve as a warning sign. The world has priced in 5% GDP growth for the US and much of the developed world in the equity and commodity markets. Either we have to get that or the markets are going to have to come back to the reality of what I think is going to be a much lower growth figure.

But in any event, one of the lessons to be learned is that investors should pay attention to where the leverage is. Unsustainable debt trends end in tears. They always do. Spain, Greece, Italy, the UK, and Japan will all have to face major restructuring in the next decade due to leverage. And we in the US will also find that we cannot grow debt at our current levels. Will we pare our debt willingly or be forced to by the market? Either way, it will make for a less than optimal economy over the coming years. Muddle Through, indeed.

John Mauldin
Frontlinethoughts.com

[Hockthefarm]

When you strip out all the charts and dialogue, I think Prechter has articulated the one truth about our current situation.

Lax credit standards coupled with credit availability have driven prices far too high and created massive amounts of employment unjustified by economic profit.

And further to Prechter's point, there is no way out of this.

In the short term confusion helps:

More Government Data Fun:
Unemployment Claims Were Not Down

The headlines said that initial claims dropped to 466,000 here in the US, finally falling below 500,000. This was greeted with proclamations of recovery. First, let me say that 466,000 people filing for unemployment is still way too high. That is a lot of people losing their jobs, and when we first crossed over 450,000 a few years ago that level was seen as a sign of recession.

Second, the headline number was a seasonally adjusted number. The actual number was 543,926. What is happening is that we are coming off of wickedly high numbers in 2008 and a seasonal number that was much lower in the preceding years. It is another part of the Statistical Recovery. And this trend is likely to keep on for the rest of the quarter. My friend John Vogel, who analyzes the unemployment numbers for me each week, shows pretty convincingly that the average for this current quarter will be over 500,000 per week on a non-seasonally adjusted basis. This is less than a 10% drop from last year for the same quarter. Job losses are continuing to mount, and we are on our way to an 11%-plus unemployment number by next summer. Statistical Recovery, indeed.

John Mauldin
Frontlinethoughts.com

It is just a matter of time. Do we reset in 5 years, or 20? China, I'm sure hopes it is 20, because by then we will be out of the game completely.
Hock

[DG]

DG this isn't an event. Those that call this an event are not competent to comment on this subject.

mannfm11,

I must not have been clear. The "one-time events" are the stimulus programs, not the overall context in which they are occurring. What I mean is that when you do a company valuation (or an estimate of the fair value of the market), you are supposed to strip out one-time events like a boost in earnings driven by a government stimulus program, which is just noise in the bigger scheme of things. The valuations in the market right now seem to rely on these stimulus programs going on indefinitely.

[twitter.com/DrBubb]

"When you strip out all the charts and dialogue, I think Prechter has articulated the one truth about our current situation.

Lax credit standards coupled with credit availability have driven prices far too high and created massive amounts of employment unjustified by economic profit."
== ==

Very good. The little discussed reality. From 2003-2007, we had an economic recovery that was mostly a fiction, built on debt, and characterised by unsustainable jobs, and people believing in unsustainable asset values. People, companies, and governments built on those shifting sands, and now all the false grow has all been blown away. But the debt remains... to be paid off, or written off,

People, companies, and governments will have to shrink their spending down to what is sustainable. The governments are doing the reverse, and INCREASING their spending to make up for reduced spending in in the private sector. Governments will soon have to shrink back a long, long way, if they are to avoid an Icelandic-like death trap.

Sadly, they don't "get it" yet.