Saturday, April 08, 2006

It was the best of times, it was the worst of times.

NEW YORK (AP - 4/8/06) -- Solid employment data (GOOD) sent stocks skidding (BAD) on Friday. --- Huh?

The U.S. economy turned in a solid performance last month, adding a net 211,000 new jobs and driving the unemployment rate back to its lowest point in the current expansion, the government reported. March's jobless rate fell to 4.7%, the lowest rate since July 2001.

At the close of trading Friday, the Dow Jones industrial average sank 96.46, or 0.86 percent, to 11,120. Broader stock indicators also fell after reaching five-year highs in the prior session. Bonds slumped alongside stocks.

Does anyone understand economics?

The first quarter was a pretty good YEAR, with Real Estate up 13.7% (compared to 11/7% for the entire year 2005), Small-cap growth up 12.7% (compared to 5.7%), Communications 10.2% (7.4%), Technology 7.6% (5.5%).

Never mind Asia! If these stay absolutely flat for the rest of 2006, I’ll be happy.

The fact that we've had some decent growth, as long as it isn't associated with inflation risk, is generally good for equity markets, said Michael Gregory, a senior economist at BMO Nesbitt Burns. But we did see that wage pressure remains elevated. From that perspective, (the report) is neutral.

OK, that explains it, I guess,… Nah, I don’t get it. But let me try.

The Bush tax cuts provide incentive for businesses to expand, hiring goes up and the jobless rate goes down, thus causing the Federal Reserve Board (Bless Alan Greenspan’s memory) to worry that competition for employees will drive up wages and prices (Oh Oh -- INFLATION), so the stock market believes that the Fed will raise the benchmark short term (overnight) interest rate another 0.25 percent (the 16th such increase in the last 16 months), because, SOMEHOW, the higher cost of money lowers the price of goods and services, keeping INFLATION in check. Got that?

In order to check out my theory I consulted my home economics textbook, Freakonomics, by Levitt and Dubner. I looked up INFLATION in the index, but it wasn’t there. The book did have chapters about why drug dealers still live with their moms and what school teachers and sumo wrestlers have in common. It’s no wonder I have no clue about economics.

But wait, looking further I did find incentives – economic, where I learned that people are humans and humans respond to incentives (p.7). Later, on page 20, I found that every economist believes the world has not invented a problem that he cannot fix if given a free hand to design the proper incentives scheme. Very smart these economists, and humble too.

But with the short term rates increasing due to Fed action while the long term rates (like mortgages) remain at historical lows, the possibility of an INVERSION looms. Just imagine if you could borrow money for 30 years cheaper than for 30 days. The world would be stood on its head.

Richard Yamarone, an economist, said the economy appears to have achieved what analysts call full employment -- a state where nearly every worker who wants a job can get one fairly easily.

But Roger Kubarych, an economist, said the markets have little to fear that what's good for workers will be bad for investors. Despite the low unemployment rate, wage pressures are modest.

Help!! Does anyone understand economics?


Anonymous Anonymous said...

Apparently you understand everything Bill. In your universe, everything's just fine with the economy. Thanks so much for teaching us, oh wise one. Xerox, your teacher, has taught you well.

7:50 AM  
Blogger Bill Lama said...

I fear that subtlety, irony, satire just fly over your head. If you could read and comprehend you would find that I was actually expressing perplexity at the mysterious, to me, workings of the market. Ah well, patronize away, it shows your nature.

11:29 AM  
Blogger fetching jen said...

Good answer... Bill (to anon).
Economics should be a mandatory class in high school. Children don't even understand their personal economics (I've still got checks left so how can I be overdrawn?)... how are they going to understand unemployment figures, market trends and the Dow?

2:11 PM  
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