Saturday, February 14, 2009

From Barrons

Barron's Gene Epstein is following up on his spectacularly bad call in the October Cover Story, regarding recovery:
We assume, however, that the Treasury secretary will soon come up with a real plan to get credit to flow more freely. If so, Mike Astrachan, Israeli economist and former Federal Reserve staff member, is so impressed by the signs of turnaround that he thinks growth could resume as soon as the second quarter.

One of these signs was the unexpected 1% increase in January retail sales, reported Thursday, measured in nominal terms. Since overall prices were probably about flat in January, this means real retail sales also rose about 1%. This was right in line with the monthly ICSC/UBS index, which was also up 1% in January. The strength was widespread across sectors, including electronics, food and beverages, and clothing. The most surprising was motor-vehicle sales, up 1.6%.

The increase reverses only a small part of the weakness in retail spending, but it does highlight a potentially revealing pattern. In our Oct. 20 story, we had thought that the fall in energy prices would soon bring a rebound in consumer spending. We proved wrong; the energy dividend was not enough.

But now we see that the steepest drop in sales occurred from June to October, around the time of the energy shock and its effects, and that since October, the weakness was less severe. Real total sales still declined over the past three months.
It was rather obvious at the time that the April tax rebate went into people's gas tanks, and that the pessimism and issues from the commodity bubble were playing havoc with the economy.  This final bubble pushed the tottering economy over the cliff.  Reversing it wasn't enough to do the job, but it counted for something.  In December, the social security COLA was about 5%, putting another $50/month in a lot of retiree's pockets.  Lower interest rates cut both ways, and I suppose that retirees are earning less on savings.  However, all the programs to lower interest rates are going to start filtering into people's pockets.  Any ARM tied to LIBOR or a Treasury Index is going to reset at record low levels.  

What does this all mean?  About the time that Roubini becomes conventional wisdom, it is time to move on.  

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