Market Talk

University of Maryland economics professor Peter Morici takes both parties to task over the issue of budget reform, saying neither side is facing up to the reality of the situation and the challenges. His last line is actually the most telling (we journos would say he buried the lede): “Americans really need adults to govern but few can be found on either side of Pennsylvania Avenue.”

Ain’t that the truth?

The Budget Follies: Demagoguery and Sophistry Reign

Federal finances are in shambles, and Americans should be amused if not disgusted by the explanations and solutions both political parties offer.

The President’s budget plan issued in February projects a $1.6 trillion deficit for 2011 and a cumulative shortfall of $11 trillion through 2021.

Things may get worse, as additional revenue and cost savings from health care reforms don’t materialize and the 4 percent growth assumed by the President’s budget for the next four years proves Pollyanna.

Time and again, House Democratic Leader Nancy Pelosi and President Barack Obama have demagogued the problem, blaming two wars and tax cuts instigated by President Bush and the Great Recession.

To set the record straight, in 2007, the year before the financial crisis, with wars in Afghanistan and Iraq at full tilt and Bush tax cuts in place, the federal deficit was only $161 billion. In 2011, with the economy in its second year of recovery and TARP money returning to the Treasury, the deficit is ten times larger and greater than $1.4 trillion notched in 2009, the pit of the recession.

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Peter Morici, an economics professor at the University of Maryland, is putting a price on the rise in crude prices in terms of jobs lost, and while you can quibble with his math if you like, and he uses the occasion to push for more drilling in the U.S., he makes the very good point that the current crisis, or shock, or whatever you care to call it, is going to cost Americans jobs, and jobs aren’t something we can afford to forego these days.

High Oil, Gas Prices Destroys 600,000 Jobs

Turmoil in the Middle East and elsewhere have pushed up oil prices more than
$20 per barrel, and average gasoline prices from less than $3.00 a gallon to about $3.60. All the additional cash spent on imported oil that does not return to buy exports translates into lost demand for U.S. goods and services, lost growth and fewer jobs. Higher gas prices simply means fewer cell phones, restaurant meals and other good purchased that create jobs.

Most economists built some increase into 2011 GDP forecasts, but the recent surge, if it sticks through the spring, will reduce U.S. growth from 3.5 to 4 percent to 3.0 to 3.5 percent, perhaps less. Overall that translates into at least 600,000 fewer jobs, or nearly 50,000 a month. Moreover, lost taxes exacerbate federal and state budget problems.

U.S. policy arbitrarily limits the development of domestic oil and gas, and the more rapid deployment of abundant domestic natural gas. Premised on false assumptions about the immediate viability of electric cars and alternative energy sources, such as solar panels and windmills, these make the U.S. economy more vulnerable, Americans poorer and raise unemployment, and do little to raise environmental standards—instead of drilling in places the U.S. government can regulate, development goes abroad to places where U.S. enforcement has no teeth.

In combination, limits on conventional energy development and excessive optimism about alternative energy technologies are making the United States even more dependent on imported oil and more indebted to China and other overseas creditors to pay for it.

We see where, once again, the weekly jobless claims have fallen…after rising the week before…and falling the week before that…and rising the week before that.

I’m seriously starting to think this particular data point is telling us very little about the jobs market and the economy right now. Apart from that brief dip below the 400,000 level in December, this reading has been stagnant for more than a year. We know, too, that while companies are still trimming staff, the worst of the layoff storm is over.

What matters now, and I think it was Dan Greenhaus over at Miller Tabak who I saw first make this point, is the rate of hiring, not firing. On that front, we’ll get the big national, nonfarm payrolls report from the BLS tomorrow. The spin is sure to be pretty, but unless this thing explodes, it’s going to show exactly what the weekly claims are showing: the jobs market is stagnant.

The latest Dow Jones survey of economists has the consensus job growth number at 136,000, with the unemployment rating inching up to 9.5%. That’s barely enough to keep up with population growth, to say absolutely nothing of the 8 million jobs that disappeared in the recession (1.1 million of them were recovered last year,) or the jobs that need to be created but aren’t in order to get the economy back to a more sustainable, stronger position.

“Job loss,” Rebecca Thiess at the Economic Policy Institute wrote, “is only half the labor market story.” It’s not just the jobs lost; it’s also the jobs that needed to be created to keep unemployment stable, but weren’t.

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Got to get outta dodge and head home, but here’s a couple more opinions on the whole Egypt story for your evening commute.

Read Jerry Seib’s excellent take on not only what’s happening right now in Egypt, but what it means in a historical sense. He notes there have been three distinct phases to Mideast politics since the 1950s, and…

A fourth phase likely started over the weekend in Egypt. But whether the political “reform” movement in Cairo’s streets turns out to be a positive or negative turn for the region—and for the U.S.—depends much on Hosni Mubarak, Mohamed ElBaradei and, to a lesser extent, Barack Obama. If history is any guide, it may take months, if not years, to know precisely the outcome.

On that angle, Dennis Gartman, who edits and publishes the closely followed Gartman Letter, has this to say about the historic import of the day:

We’ve no idea how the current turn of events shall play out in the coming hours, days, weeks, months or perhaps even years. These are events unlike any the world has seen since the post-French Revolution Era when revolution swept across the world. When the brilliant Chinese political leader, Zhou En-Lai, was asked in the 1970’s what he thought of the French Revolution, he replied, wisely, “It is too early to tell.”

He was right. It was too early to tell even almost two hundred years after the events.

Gartman notes that the Russian Revolution of 1917 actually started in 1905 with a peasant uprising. An uprising of starving peasants. There’s that food prices angle.

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Barry Ritholtz over at The Big Picture has been on this saw lately about how people are missing out on this rally while they sit around waiting for another disaster to hit. He’s been razzing the perma-bears with this gaudy stock market that keeps rising. He can’t seem to understand why people aren’t getting on board, regardless of any fundamental concerns.

I know Ritholtz a little, and I like him and respect him a lot, I think he’s a very, very smart guy, and often agree with his views on a range of subjects. But he’s got this one wrong. He knows why people aren’t jumping back into the stock market, despite the seemingly parabolic rise in stocks.

The simple answer is, people don’t trust the stock market anymore. This is something Ritholtz himself wrote a year or so ago (can’t find the link, but remember specifically reading it.) What’s that old saying? Fool me once, shame on me, fool me twice, shame on you. Well, mom and pop were fooled, twice, badly. In the wake of the credit crisis, Wall Street was exposed as a nearly habitually corrupt operation, and the everybody knows the market’s gains have more to do with the Fed pumping money than any fundamentals.

That brings me to the essay “Have Stocks Become a Sucker Bet?” by Peter Morici, an economics professor at the University of Maryland. I was going to just clip a few grafs, but it’s worth reading in its entirety. In a nutshell, Morici lays out why the average investor doesn’t stand a chance compared to the pros, who have the gamed the system to the point where any upside is captured long before it can trickle down to the retail investor. This is something people are coming to understand instinctively, I believe, given how much more information is available to today’s investor than to investors 10 or 20 years ago.

Actually, as one of the biggest and best financial blogs, The Big Picture has been a contributor to the distrust. Ritholtz has for years been deflating market myths used to lure in the suckers, and has provided time and time again the evidence to support to little guy’s mistrust.

From Morici:

With corporate profits breaking records, Wall Street anxiously anticipates the return of the individual investors to the stock market. It may be a long wait, because the little guy may have concluded investing in stocks is a sucker bet.

Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.

In February 1998, the S&P 500 first closed above 1000. From the first quarter of 1998 to third quarter of 2010, corporate profits were up 203 percent but the average daily close of the S&P 500 was up only 7 percent—about one half percent a year.

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Of course, you know, this means war!

President Obama, in full populist rhetoric, tsk-tsked the bankers today, and swore to make them pay for their “obscene” bonuses  — literally, by proposing his bonus tax, or whatever fancy name he’s given it. (For the record, they’re calling it a “financial crisis responsibility fee.” Sounds like they’re charging a fee for being responsible, no? Is that ironic or what?) He said he’s committed to getting back “every single dime” the American people are owed.

Don’t get me wrong,  I have no sympathy for the banking industry, which deserves its fair share of the blame for the financial meltdown. But the president’s little assault today is just a blatant attempt to draw some popular support, or at least deflect popular anger.

To be sure, in some ways, the banks brought this on themselves. As my colleague Madeleine Lim commented during today’s Tomorrow’s News Today (coming later this afternoon,) among all the various parties that bear some responsibility for the housing crash and credit crisis, the banks remain the most tin-eared.

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