Ravengate Partners – Global insight by Patricia Chadwick

Government Stimulus in a Recession Can Do Good

Patricia — Tue, 10 Aug 2010 12:01:57 +0000

The Wall Street Journal’s weekend editorial “It Isn’t Working” lamented that “three years of spending and monetary stimulus haven’t helped jobs”. While making a number of valid points about lack of confidence and concern over costs as factors inhibiting firms from rehiring, it failed to point out that the Federal Government has provided a significant amount of valuable and essential stimulus to the economy with an important part of the stimulus program – namely, in refurbishing the highways.

All across New England (and I hear from friends around the country that the same is true in almost every state) there are thousands of private sector companies and individuals employed in long overdue construction and maintenance of our vast highway system. It is astonishing that it took an unprecedentedly deep recession to act as the catalyst in this matter. It is in fact a duty of our Federal Government, as the overseer of matters of interstate commerce, to keep our interstate highway system in proper order.

So it is fair to say that the stimulus program has indeed had some very salutary impact on both employment and on the transportation grid that is vital to the health of commerce in this country. The problem is that this critical obligation of the U.S. Government was funded only as an emergency measure in response to an attempt to provide temporary funds to tie the economy over until the private sector could get back on its feet. But in fact, the private sector on its own initiative does not and cannot undertake the indispensable maintenance of our roads and bridges. This spending which supplements the Highway Trust Fund should be a core element of the appropriation voted on by Congress each year. It should not be part of an emergency stimulus bill.

Highway construction, maintenance and repair are obligations of our government, just as the maintenance of capital plant and equipment are the obligation of private sector companies who produce goods. Since the invention of the wheel, successful economies have understood the unbreakable linkage between transport and safe roadways. It is a disgrace that the last several congresses and numerous administrations have declined to address the growing backlog of crumbling interstate infrastructure in favor of other spending.

Of course addressing the issue now begs the question of where the funds will be found. For starters, Congress could take all the stimulus money it earmarked for future projects that will do nothing to get us out of the current economic malaise and reallocate those funds to the here and now, making a significant down payment on our obligation by allowing highway refurbishment to continue well beyond its current scope. Those private sector jobs include architects, structural and transportation engineers, surveyors, construction workers and all manner of hi-tech modeling and planning operations that utilize the skills already developed in all fifty states. Many of these should be permanent jobs, not the whimsical beneficence of a nervous congress as a one-time event.

Fiscal stimulus is an important and valuable economic remedy that should indeed be employed by the Federal Government during periods of recession: the element of its timing makes it far more valuable to the national economy than routine discretionary outlays. Moreover, any addition to the existing deficit resulting such an investment is not inherently harmful to either the long term health of the economy or to the Government’s balance sheet.

During the recent recession and its timidly emerging recovery, I would argue that the Government has taken some very specific and importantly appropriate stimulative steps, and I would argue also that it should both extend that spending, particularly infrastructure spending and offer incentives – mainly through tax relief to small businesses – to enable them to grow and create new jobs.

Our gargantuan and staggering Federal budget deficit is a problem of a different nature, tied to gigantic issues as financing two wars with borrowed money, an aging population whose health care costs will increasingly fall on the shoulders of a younger and smaller workforce, and a social security system that urgently needs adjustment. Tackling those problems is essential if we are to reduce much less eliminate the deficit.

In the meantime, the roads and bridges that comprise the backbone of our continental economy must continue to be restored.

Patricia W. Chadwick

President

Ravengate Partners LLC

August 10, 2010

The Big Question – Are We Facing Inflation or Deflation?

Patricia — Tue, 03 Aug 2010 14:38:20 +0000

Some of the smartest and most successful investment brains are on opposite sides of that question. The right answer matters a whole lot.
A simple definition of inflation is too much money chasing too few goods. That’s easy to understand. If lots of people want the same thing and they all have money to buy it, then the seller is in the catbird seat. Looking at the action of the Fed, there is ample evidence that they are keeping monetary policy easy and flooding the system with money. There hope is that all that cheap money will encourage people to go out and buy things. But it is simply not happening.
In fact, the response to the monetary stimulus reminds me of Japan twenty years ago. The country was in a recession (something unknown in that country since the end of World War II) and the Government was literally giving money to people and asking them to spend it. But they wouldn’t. They put it under their mattresses (literally) and saved it. The Government’s plan to encourage the Japanese consumers to spend their way out of recession was a failure.
It was hard for us Americans to understand the response of the Japanese consumers. Not spend gift money? Unheard of! However, that response should not have been a surprise because the culture in Japan for generations was one of saving, not spending. The Japanese had a 20% savings rate at that time and the insecurity associated with the recession only encouraged them to save more, even when it was free money.
So let’s turn to the U.S. today. We have been a population of spenders, not savers. Heading into the recession from which we are only now emerging, we were spending more than we were saving, i.e. we had a negative savings rate. Then came the recession, with the highest unemployment rate in over a generation, and spending slowed sharply. In response, Congress acted enacted an enormous stimulus program to flood the economy with money. In addition, the Federal Reserve logically opened the money spigot to accommodate spending and hopefully to stimulate demand. With our propensity to consume instead of save, that should have been an easy solution. But nothing happened – or at least very little happened.
What is wrong? Why aren’t we, the greatest spending nation on earth, spending? Why is all that cheap money not chasing the goods and consuming them and forcing the prices up?
Because we, the biggest spending nation on earth, are broke. We owe too much money from the good old days when we borrowed and overspent and nobody told us we had to save. Now we are having to mend our ways by simultaneously paying off our debts and increasing our saving. Those two priorities are overriding our want and instinct to spend, and that is good. Well it is good for our financial health in the long run, but it is dreadful in the near term because it acts as a drag on consumer spending which is what this economy needs to gain more momentum.
So despite all the cheap money around, Americans are not, or better said, cannot take advantage of it, which means that there is not too much money chasing too few goods. Instead, there are too many goods – all the things consumers are NOT buying – chasing the few dollars left in consumers’ hands after they have paid their debt and tried to save. That is the opposite of an inflationary environment. That is deflation. And that is certainly what it appears we are experiencing now and will continue to face in the short run. Unfortunately, there is a positive correlation between paltry demand and high unemployment.
On the positive side, the American consumer appears to have accepted the necessity of restructuring his/her balance sheet and once the savings rate has increased and the debt has been reduced, there will be a significant amount of pent-up demand. Then and only then will the spectre of inflation raise its ugly head. That may be years from now.
Patricia W. Chadwick
President
Ravengate Partners LLC

August 3, 2010

Milwaukee is a Special Place

Patricia — Fri, 23 Jul 2010 14:25:57 +0000

“They’re calling it ‘the storm of the century’”, said the Clarion Hotel van driver as I boarded the vehicle at 5:15 this morning heading back to Milwaukee’s General Mitchell airport, “but funny thing is, it’s the third one in twelve years.” He chuckled.
Being stranded in ‘the storm of the century’ in Milwaukee was a novel experience for me, but not because I had never experienced such a storm or been stranded before. It was that I had just never been in Milwaukee for such an experience. And what a far cry from all my other ‘strandings’. So as not to disparage any person, airline or city, let me simply say that if you ever have to go through the hassle and frustration of a combination tornado watch/thunderstorm/flood which culminates in shutting down the airport twice in the course of two hours, make sure you are in Milwaukee.
Over my decades of travel, I have had some wild and woolly ‘airport’ experiences, but never have they been as “pleasant” as the one I am maneuvering at the moment.
From the attendant who came aboard the airplane last night to tell us in her charmingly mellifluous voice (I paraphrase) “Ladies and gentlemen, we need to evacuate the plane because there is a tornado watch. Please don’t panic and don’t run. I don’t want anyone to get hurt”, to the flight attendants on AirTran 514 who offered a continuous update on the status of the flight, the runway and the airport, they were the most pleasant, empathetic and stress-relieving travel professionals I have ever dealt with. When I was tempted to ‘abandon ship’, the flight attendant told me to hold off, because there was “one small window to get out”, and when that window was closed by a deluge of rain and a non-stop barrage of lightning, he told me we had lost “our window” and he helped me to get off the plane because I had rebooked for the morning.
As I write, the airport floor is lined with sleeping bodies, each with a pillow and a blanket in various shades of grey, blue or burgundy. The atmosphere is calm; those not sleeping are smiling, some standing in line to get breakfast, others sitting on the floor with their laptops. Wall plugs are few and far between, but there is no one complaining.
A loudspeaker has just announced, “All flights are cancelled until noon, because the airport is still officially closed. The runways are flooded no planes can land or take off.” The response from the hundreds (maybe thousands?) of people here has been silence. I am imagining what the response would be were this announcement to have been made in a New York airport. I am so pleased to be getting this dreadful news sitting in the Milwaukee Airport.
“Midwestern friendliness” has often seemed to me to be a platitude that was meant to contrast Midwesterners from New Yorkers and other East Coast “type A” personalities. But to witness the ease with which both professionals and passengers dealt with the stresses of the last 16 hours is to gain a new appreciation for what it means to be “Midwestern”. It is the opposite of the “ugly American”.

Patricia W Chadwick, President
Ravengate Partners LLC
July 23, 2010

In This Case, the President and the Democrats are Right!!

Patricia — Tue, 20 Jul 2010 14:11:05 +0000

Now is not the time to cut off unemployment benefits in this country. Admittedly, extending the benefits will add to the Federal budget deficit, but not doing so will add to mortgage delinquencies and homelessness and will only serve to impede the still fragile recovery currently under way.

Today’s Wall Street Journal’s editorial argues that “supporting jobless benefits on compassion grounds…..keep[s] people out of the job market”. That is a simplistic notion which may carry a logical appeal, but it is neither accurate nor is it applicable in this economic environment. If that were really the case, then why have so many people given up looking for a job? How will cutting off unemployment benefits make a job miraculously appear? It is spurious logic.

Each recession has different causes, and those causes affect the duration. The causes also require different solutions. The last two recessions in this country (1990/1991 and 2001) might be termed ‘mini’ recessions. They were of limited duration and scope, and peak unemployment was less than 8%. The scope and impact of this recession has been the worst since the Great Depression, and the level of unemployment is unprecedented since the Depression, except for the back to back recessions of 1980 and 1982.

It seems unnecessary and tautological to state that the higher the unemployment rate, the more difficult it is to find a job. The average monthly rate of unemployment over the last 12 months has been 9.7%. There has been only one other time in the last 60 years when the level of unemployment even reached, must less was sustained at that level. That was during the inflation busting and oil crash recession of 1980 – 1982.

The majority of Americans in the workforce today have not experienced a recession like this one. Many of them were either children or yet unborn in the 1980 recession. They want jobs but jobs are not to be had. They need jobs in order to put food on the table, clothe their children, pay their mortgages, reduce their debt and save for their retirement. They are looking for jobs, but the jobs aren’t there. We all know that.

This recession is slowly working its way into a sustained recovery. But it was not your ‘normal’ recession; rather it was a balance sheet recession, i.e. a recession brought about by too much debt on the part of both consumers and the banking system. The deleveraging of balance sheets is underway and that is good, but a balance sheet recovery will be slow because by its nature it impedes discretionary spending.

Extending unemployment benefits is not simply the compassionate thing to do, it is the economically responsible thing to do. Not doing so will only serve to hinder the recover now under way.

There are many ways in which the Federal Government can and must cut costs to reduce the dangerously high budget deficit. However, cutting unemployment benefits for the nearly 10% of the workforce which is trying to find a job is wrong on both moral and economic grounds.

Patricia W. Chadwick
President
Ravengate Partners LLC

July 20, 2010

Patricia — Mon, 19 Jul 2010 17:39:24 +0000

What’s With This Bipolar Stock Market?

Patricia — Mon, 19 Jul 2010 14:41:21 +0000

It seems that some days all news is good news to the stock market and the next day all news is bad news. And other times it seems as though the stock market extrapolates one single economic indicator as though it alone matters.

No doubt the May 6 “Flash Crash” has spooked many investors, most particularly individual investors who were just getting their sea legs after watching their life savings decimated in 2008 and early 2009.

It is evident that the economy is improving. But the momentum is too slow. What the market wants to see is substantive job growth – not public sector jobs but private sector jobs. Over the next several quarters, as the Federal Government’s stimulus program winds down, we will experience a decline in jobs that were funded by that program. I, for one, would be happy to see Congress forfeit all the pork it packed into the back end of the stimulus package (which is not stimulus at all) and spend that money now finishing what was some way overdue spending on roads and bridges across this country. That would be money well spent.

What we need now is new private sector jobs. Since the onset of the recession and so far through the first phase of the recovery, the corporate sector of the U. S. economy has done a masterful job of reducing costs, enhancing productivity, maintaining a pristine balance sheet and fortifying cash flow. But as a country and as an economy, we cannot be prosperous with an unemployment rate of anything close to 9% – 10%.

The US economy differs from economies in Europe in many ways, but most particularly in the fact that the primary driving force in our economy is capitalism, whereas in Europe, the role of Government is far more pervasive on economics and growth. As an example, for decades now the Government has provided the vast majority of the job growth in France.

Despite the increasing encroachment into the private sector of the U.S. economy by Government, through regulation, taxation or outright confiscation of authority, there is still a vast opportunity for private entrepreneurship, job creation and wealth in this country. It is a well known economic fact that in the U.S. job creation is derived from new, small companies. That will and aspiration has not died or even gone dormant. What it needs is some fuel.

Unfortunately, SBA (the Federal Government’s Small Business Administration) has sharply curtailed its spending. So too have private sector banks, as they try to get their overleveraged balance sheets back in shape.

But the corporate sector does indeed have cash and cash to lend. And so do credit unions. And it is encouraging to see that those non-traditional lending sources are opening up their spigots and providing funding for growth.

In the next few months, we will witness the shedding of Government jobs – seasonal census workers are already being dismissed and many state and municipal employees are likely to lose their jobs as state and local governments work to close their budget deficits. Those jobs should indeed be shed.

The U.S. economy is in far better shape than it was just two years ago – consumers have pared down their bloated balance sheets, have added to their savings and have started living within their means. That is good. On the production side on the economy, corporations have cut costs and have reaped the rewards in giant sized productivity gains as demand has slowly improved.

As growth continues, and I admit that the growth will be gradual, that stupendous improvement in productivity needs to be converted into new jobs. Only in that way will the growth feed on itself and be self sustaining. When the first inkling of solid new job creation is evident, I believe the stock market will break out on the upside.

Patricia W. Chadwick
President
Ravengate Partners LLC

July 19, 2010

The Problem is the Government, Not the Deficit

Patricia — Sat, 03 Jul 2010 14:09:31 +0000

There has been lots of haranguing and hand wringing about the level of U.S. debt, fiscal irresponsibility, the rampant printing of money and the ultimate inflationary impact from the profligacy of the current fiscal and monetary policies in this country.

But I think that view is missing some important points. Yes, the U.S. debt level is high and if spending continues unchecked, it will become a problem. But deficits and rising debt in the midst of a recession are inevitable. We have been there before – in fact many times since World War II. But we have reversed course when the economy improved and we can do the same this time as well.

Cutting off unemployment benefits will do absolutely no good and lots of harm. People who have been just holding on financially will fall off, and there is no economic benefit from that.

Raising taxes will only serve to impede economic growth. There must be concrete signs of real economic recovery before trying to solve the deficit. When the recovery has truly taken hold, then tax receipts will rise and tax rates can also be raised.

But the real problem that faces the public sector – Federal, State and local – is its lack of accountability, its lack of competitiveness and its bloated cost structure. That is where the knife needs to be used.

The private sector is lean. In fact, the corporate balance sheets of U.S. companies are in the best shape they have been for decades. Corporations are flush with cash; they don’t need to borrow and they can and are investing. Productivity continues apace, proving a point Jack Welch used to make over and over, “Productivity is infinite.”

Even the consumer is getting into better shape. Savings rates are up; spending is more in line with earnings and balance sheets are improving.

But the public sector – which is aggregating more power and scope, as the U.S. Government gets its tentacles into health care, banking, housing and energy – is a mess, to put it bluntly. Public sector wages and benefits exceed those in the private sector on a per capita basis!!! Featherbedding is the name of the game in the public sector and that, together with benefits that seem mindboggling to employees in industry, is what is wreaking havoc with deficits at every level from the White House to Main Street.

Once upon a time, public sector jobs paid less than private sector jobs – compensation for relative job security and guaranteed retirement benefits. Today, those same jobs command a premium in pay, but have foregone none of the benefits. The collective bargaining system in the public sector is broken. Elected officials at all levels of Government are beholden to the votes of union members, so there is little incentive for them to negotiate the kinds of cuts that are necessary to reduce costs and deficits.

It’s time for private industry to assume the management of entire chunks of the public sector. How about starting with the U.S. postal system at the Federal level and the Department of Motor Vehicles at the state level?

Patricia W. Chadwick

President, Ravengate Partners LLC

June 29, 2010

Patricia — Fri, 02 Jul 2010 21:36:44 +0000

Patricia on Squawk Box

Patricia — Fri, 11 Jun 2010 16:20:57 +0000

Whither the U.S. Economy?

Patricia — Fri, 11 Jun 2010 16:15:34 +0000

Last week’s employment numbers were worrying; this week the indication seems that maybe jobs are increasing. Next week will tell us more and the week after that some more.

Suddenly the market seems to be extra jittery about these numbers, and triple digit moves in the Dow Jones are a nearly daily occurrence. Why the sudden panic?

After a monumental depletion of inventory in our economy, with “nothing left on the shelves” so to speak, the U.S. economy has benefitted from a significant inventory rebuilding. It has added meaningfully to GDP over the last two quarters.

Now comes the moment of truth – will the consumer maintain the pace of acceleration in spending or are we entering a period of economic slowdown, incurring fears of a possible W shape to the economy (down, up and then down again before really getting back on track).

Retail investors, who have been guarded in their return to the markets over the last 18 months, appear spooked by the recent volatility as indicated by the significant redemptions in mutual funds. And they have reason to be, despite some really good news.

Here’s the good news:

Corporate balance sheets for American companies are in great shape. Continued productivity gains are enhancing companies’ cash flow and profits.

Earnings growth will be excellent this year and most likely again next year.

To the extent that the stock prices reflect profits and the trend in earnings, the market’s correction we have been experiencing over the last month provides a good opportunity for long term investors.

So what is the problem?

The problem lies in the vast middle of our economy – those small to medium sized companies that are not publicly traded, companies which cannot get the access to capital as large companies can. Without their participation in the recovery, unemployment will stay unacceptably high, because those are the companies that make most of the new hires.

In addition, State and local governments are being forced to make cut-backs because, unlike the private sector, their balance sheets are in bad shape and their cash flow is negative.

And to top it off, the economic stimulus program is going to be winding down just as Federal taxes take a giant step up.

I don’t believe these negative forces will result in another recession, but I am sure they will dampen demand at the margin. And the markets do not like uncertainty.

But relative to where the economy and the financial system stood only 18 months ago, this is heaven. From my standpoint, that means that panic selling is an opportunity to buy stocks. I think we may have quite a few of those opportunities over the next few quarters.