Are We Headed For Another Recession?

Link- http://fivethirtyeight.com/features/are-we-headed-for-another-recession/

This article deals mainly with the thought that a recession is in the near future. According to The Washington Post and the Fortune, we seem to be due for another recession. Why? With the stock market off to the worst start of the year, people think it will happen. There are two different views as to why this recession will hit sooner than later. The first view is based on history, with the belief that it is time for another one. On average, post World War II economic expansions had lasted less than five years. This sounds reasonable, but the writer disagrees. We have had quite a range of expansions, the smallest one being a year and the biggest being ten years. Of course there will eventually be a recession, but we really have no idea when it will happen. The second view mainly looks at China. China took a hard hit with the start of the year with there stock market, and it is slowing down but still looks bad. This is causing China to reduce demand for everything which threatens to destabilize global financial markets.

The writer then goes on to talk about the State of the Union address Obama gave last Tuesday. He listed of good things, like the job market improving, minimum wages should be raised, and big corporations should pay their workers more. One interesting thing Obama talked about was making it easier for people to be able to switch jobs. The Affordable Care Act has helped this out, making available health insurance that does not evolve around a specific job. However, Americans have been changing jobs less than they have in the past. This worries economists because job changes help maximize productivity in the economy.

He ends of the article with two little paragraphs about how only seven percent of U.S. counties have fully recovered from the recession and how oil prices have dropped. Sounds extreme, with only seven percent, but the definition of "fully recovered" is a bit over the top. It measures jobs, unemployment rate, economic output and home prices. And with the oil prices, people are guessing that it might drop lower than 10 dollars a barrel, but we really don't know what will happen.

Republicans and Democrats Agree: We Hate Wall Street

With the 2016 election approaching, Republicans and Democrats have surprisingly been able to agree on something. That something is a general disdain for the banking industry. Big name candidates such as Bernie Sanders, Hillary Clinton, Marco Rubio, and Jeb Bush have launched a smear campaign against Wall Street. This issue was prominent in last nights Democratic debate, as Sanders called for a break up of "huge financial institutions", because they "have too much power". These presidential hopefuls accuse Wall Street of acting fraudulently, and acting only out of greed. 

Wall Street banks are now faced with many difficult decisions. How should they respond? Should they even respond? The truth is, Wall Street has no strategy as of now. Bankers from J.P. Morgan and Citigroup have called for the formation of a trade group to interact with candidates and stop the unfair portrayal. However, other industry leaders believe that this will make banks look even worse. People could view it as an attempt to shape the views of presidential candidates, which would cause a greater distrust of banks. As of now, the strategy for banks is to wait it out, and hope that the threats made by the candidates are hollow attempts at grabbing popularity, and not the beginning of a long list of new regulations aimed at cutting down their power.

My take: I think these statements are empty, and are simply meant to boost popularity. The statements made by the candidates portray pre-Great Recession banks that lacked adequate regulation. The current state of Wall Street, while not perfect, is much more resistant to fraud. Regulations like Dodd-Frank have successfully controlled the size and power of banks. The article does a fantastic job of pointing out the specific factual inaccuracies in the White House hopefuls statements. I expect banks to avoid confronting the candidates, because that will avoid further tarnishing their image. 

Link: http://www.wsj.com/articles/republicans-and-democrats-agree-we-hate-wall-street-1452681567

WHY SPORTS AUTHORITY MAY BE CLOSER TO GOING BANKRUPT

Sports Authority told Reuters, an international news agency in London, on Friday that it would miss another key debt interest payment.  They’re facing fierce competition from retailer giants, Wal-Mart and Amazon.com, which is really hurting their profits.  However, they have sufficient liquidity to pay back the mezzanine debt but the senior lenders elected to not make the payment and continue discussions about their competition.  There is speculation that the missed $20 million payment could lead to the first major bankruptcy of 2016.  Sports Authority has struggled with its operating performance over the past four plus years and have been struggling to cope with adverse weather and poor management.  They are estimated to have $1 billon dollars in debt but are working on operational improvement plans including store re-modeling, improving product stock levels, and e-commerce initiatives. Credit agencies warned that if those initiatives are not successful, Sports Authority could have trouble refinancing its capital structure.  

Link: http://fortune.com/2016/01/17/sports-authority-debt-payment/

The US economy is nowhere near a recession

By: Myles Undland 

The "r-word" is back. 

After the worst 10-day start to a year ever, investors are anxious about not just the prospects for financial markets but the US economy as a whole. 

And now, people are talking about recession. 

In an email on Friday, Torsten Sløk, chief international economist at Deutsche Bank, wrote, "Over the past six months I have heard more clients say that despite strong nonfarm payrolls we will soon have a recession. Call it the Groundhog Day recession call. Eventually we will get a recession but the question is if a recession is just around the corner."

But as Sløk noted, there are few signs from US consumers that something has gone awry in the economy.

One of the most influential post-financial-crisis books published was Atif Mian and Amir Sufi's "House of Debt," which argued that what really led the US into recession wasn't just an overheating of home prices but the way homeowners borrowed against these home values and eventually stretched themselves too thin, financially.

And so as US consumers began rolling over — cutting out all kinds of purchases in favor of paying debts (and then, in large numbers, eventually defaulting on those debts) — so too went the US economy. Currently, there are no signs that something similar is happening. 

FREDConsumer spending was rolling over about a year before the last recession really hit.

In a weekly email sent Friday, a separate analyst team at Deutsche Bank put Sløk's basic idea arguing against a recession in one clean paragraph, writing:

Falling markets induce recession forecasts quicker than you can scream sell. A Bloomberg survey puts the odds of a US slump this year at one-in-five, double three months ago. Really? In the 12 months leading up to each of the past five American recessions, annual auto sales growth was negative in at least eight months. No single such month so far. And cheap oil keeps those wheels turning. Growth in miles driven, which typically collapses before a recession, is near a decade-high. It’s not just cars Americans are getting around in – planes were also 85% full in December. Finally, for market watchers worried about a flattening yield curve, the ten year-two year spread fell to a post-2008 low of 1.15% this week. The last two times that happened a recession was at least three years away.

Looking at the "real" economy of car-buyers and plane-riders yields few signs that things are slowing down. And a reading on consumer confidence published Friday showed that Americans continue to feel good about their economic prospects. 

Alternatively, signs out of the financial economy indicate that we're still not nearing a recession anytime soon. 

In comments on CNBC on Friday, Larry Fink, the CEO of BlackRock — the world's largest investment firm — said that the market volatility we've experienced will likely lead to layoffs as corporate executives take a more negative view on their business prospects into the first part of this year. And maybe this will be so. 

Saying that the shocks from a financial market sell-off will rattle the confidence of corporate America, however, is a far cry from calling for an outright contraction in US economic activity. 

There are, no doubt, a number of issues US investors can worry about right now if they so choose.

There is an economic slowdown in China to contend with, the prospect of additional interest rate hikes from the Federal Reserve, and yet another quarter of poor earnings growth from the US's largest companies. 

But the US consumer is the heart of the economy, and right now there are few signs that this force is rolling over. 

Stock Prices Sink in a Rising Ocean of Oil

My article is about how the price of crude oil is falling due to the surplus of oil production around the world. The global political conditions are not helping the problem given that we are already over producing oil at a rate of 1 million extra barrels per day. If or when Iran gets its trade sanctions lifted we can be looking at an extra half a million barrels a day being added to the oil market. While the drop in oil prices by around 70 percent in the last 18 months sounds good to everyday consumers, companies and stocks are taking major hits. For example, the S&P 500 is down about 8 percent in the first two weeks of the year and chinese stocks have dropped 20% from their local peak. The article quotes Tom Kloza, the global head of energy analysis for the Oil Price Information Service, saying "Global financial damages trump the benefits of cheap oil at anything under $30 a barrel.”

Given this drop in oil price many smaller oil companies are being forced out of the market or being forced to operate at a loss to pay back loans they owe. Big operation in places such as the Gulf of Mexico also cannot be stopped because the constant pumping of oil is the only way the rigs can be profitable. Usually if this happened in the past, Saudi Arabia and OPEC would have cut production to allow the market price of oil to rise again. However, with the introduction of shale drilling in the United States, Saudi Arabia cannot risk losing their power in the market to the new shale oil companies in the US which have doubled american oil production since 2008. Currently we are looking at the greatest oversupply of oil since the late 1990's where oil prices dropped to less that $10 a barrel adjusted for current prices.

This being said, oil prices historically are known to be variable and change incredibly fast. We can see this in the early 2000's where the price per barrel shot up to about $150 after the demand in emerging markets increased dramatically, both the United States and Mexico were declining in production and political turmoil in developing nations which produced a sizable amount of oil.

There are many different scenarios that can occur that may shift the production of oil. Will reusable energy become accessible enough that oil is no longer demanded? Will conflict erupt in the Middle East and slow oil production in the region? Will developing nations demand more and more oil as they strive to grow to become an economic power? In any case, only time will tell the future of the market for oil.

Link to Article

Flooding the Oil Market: Iran's Reentry

Across the board, oil prices are dropping lower than we've ever seen. Reaching below $30 per barrel for the first time in over 12 years, oil prices are having profound effects on the global economy. In the Middle East, a region known for its outstanding oil production and capacity, the wealth of the majority of its countries has long been thriving on the ability to control most of the western world's supply of oil. However, with the United States' oil production nearly doubling over the past few years, foreign oil that once came to America now needs to be relocated to new markets with reduced prices.

The nation of Iran has been under international sanctions on its oil production for a decade due to its nuclear program. During this time, other oil-producing nations were able to enjoy a market with fewer suppliers and ever-increasing demanders. However, demand may be seeing a turn as more and more vehicles are moving to more energy-efficient means. And with an added player in Iran, the already full market will become flooded with more oil, potentially dropping barrel prices below their already-historic low.

The question remains: How will oil-producing nations cope with the drastic drop in prices? For over 40 years, the Gulf nations have thrived upon energy exports to support their markets. And for now, there is no answer. This past week, every major stock index in the Middle East (except for Tehran) fell, with governments continuing to cut benefits that citizens have enjoyed for years.

Looking abroad, we've already seen how reduced oil prices have affected global markets. With the addition of Iran, we could be seeing even further historic lows in an already pessimistic global economy. How will Middle Eastern nations cope with reduced incomes from oil? Will they be able to recover from dropping prices? What effects will this have beyond the Middle East?

Link: http://www.bloomberg.com/news/articles/2016-01-17/iran-to-make-life-worse-for-gulf-rivals-tormented-by-oil-slump

Is It Over Yet? Two Weeks In, 2016 Feels Like Year of the Bear

With growing concerns over the price of oil, the slowing of the Chinese economy, and the Dow Jones Industrial sinking further, investors might be bracing themselves for a tough winter. According to global chief investment strategist for BlackRock Inc., Russ Koesterich, "What people are afraid of is this isn't investors overreacting, but it reflects a fundamental deterioration in growth." Growth is essential and as we see in the Chinese economy, growth seems to be slowing.

Now this news does not indicate that investors need to sell off everything rather this is part of a "re-valuation in the market." Some things could happen to ease tensions, where banks could step in, consumers could cut back saving on energy costs and spend more elsewhere, and growth in China could always pick up.

There's optimism among big companies such as JPMorgan Chase and Wells Fargo Funds Management LLC that the economy will improve. According to various employees at these companies, "The US economy looks pretty good at this point, and that credit quality across card and commercial lending businesses is as good as its ever been." A solid earnings season could get things back on track and we'd see gradual improvement in the markets.

Elsewhere, debt investors in the US are paying exceedingly high costs to protect against defaulting. China has used a significant amount of its foreign exchange reserves last month to stop the yuan from plummeting. The Fed has raised interest rates for the first time in almost a decade. While things seem dire, there can always be a revival, as Brian Jacobson of Wells Fargo Funds Management LLC commented, "We just really need to get through this drop of sentiment, and get back to fundamentals."  

Link: http://www.bloomberg.com/news/articles/2016-01-15/retail-sales-in-u-s-decrease-to-end-weakest-year-since-2009

The Rising Interest Rate Effect in the Stock Market

After having the first increase in the short term interest rates by the Federal Reserve last month in December, many had originally speculated that we would see another increase at the start of the new year at their policy meeting that will occur later this month. However, as discussed in this article by Jon Hilsenrath in the Wall Street Journal, there are multiple indicators from December that are making many believe that the Fed will have to put their plans on hold for this month. Despite adding 292,000 new jobs in December, U.S. industrial production declined and real GDP did not meet many expectations. However, what has been getting a lot of the media’s attention as of late is the decline in the stock market.

I think that it is important to keep in mind that the economy is doing well as a whole, but what worries many is the Fed’s rising interest rate and what effect it will have on the stock market. This is the case despite the fact that the rate is still extremely low. I believe that people’s wariness of the rising Fed interest rate and the effect that it will have on the stock market is playing a more significant part in the performance of the stock market than many realize. Investors know that the interest rate is going to continue to rise, they just don’t know exactly when yet with the Federal Reserve’s tentativeness concerning the decision and what the effect will be with each increase. As the interest rate rises, bonds are going to become a larger temptation to many, both because of their increasing returns as the interest rate rises and because they are looking like a much safer investment especially with the uncertainty currently in the stock market. We have already seen an increase in yields especially in corporate bonds as the Fed’s interest rate has increased. With the return on bonds barely exceeding inflation in the past years, bonds may be making somewhat of a comeback now that interest rates are rising.  

While I do believe it is important for the Federal Reserve to evaluate its decision on whether to raise the interest rates this month or to put it off until March, they need to rely on economic indicators in their decision rather than considering the decreasing stock prices which have gotten so much attention. I believe that there will always be an aspect of uncertainty in the stock market until the interest rate becomes stable again with no immediate expectations of interest rate changes. Many are currently worried about what the impact of the Fed’s interest rate will have on the stock market and whether there will start to be a swing in demand for bonds as they become increasingly enticing, so in one way I believe the sooner the Fed’s interest rate becomes stable the sooner the stock market can return back to normal. The only way I see the uncertainty in the stock market going away completely is once the Fed has settled its interest rate. The stock market is not necessarily the best indicator of the general economy currently because of the uncertainty I have discussed. This is why I think it is more important for both the Federal Reserve, as well as the general population, to consider other economic indicators currently when evaluating the overall health of the economy (and when to raise interest rates) rather than focusing attention onto the decline in prices of the stock market.

http://www.wsj.com/articles/fed-almost-certain-to-keep-interest-rates-unchanged-at-next-meeting-1452882343

Wal-Mart Makes Rare Retreat on Home Turf

Walmart as well as other stores have begun to feel the astronomical effects e-commerce could ultimately have on the way consumers purchase goods. Walmart itself is projected to feel a 12% decrease in profits due mainly to e-commerce and a few other factors.

With this being said, Walmart has plans to close a total of 269 stores nationwide or 1% of their annual sales with 154 closing in the US.  While there has been larger numbers of stores close internationally, this is one of the first times we will see a large number of Walmart stores, superstores, and express stores closing domestically on Walmart's home turf.  The closings will eliminate 16,000 jobs resulting in 10,000 being from the US alone.

Looking forward, Walmart is looking to invest more heavily in the e-commerce business, invest more globally instead of heavily domestic, and also to give better wages to their employees in order to spur sales growth.  Walmart is also working to plan where to locate their establishments more strategically in this reconstructive phase in order to better position themselves for the future and make them aesthetically more pleasing to the customer.

Do you think this is all too little too late for Walmart? Do you agree with an investor who said, "this is not enough" and Walmart should invest more heavily in order to fix the problems the company has surrounding it and the workers who work there? Do you think an e-commerce approach would work for a grocery superstore?

http://www.wsj.com/articles/wal-mart-to-close-269-stores-globally-1452868122

Welcome to Rev. Trump's Church of Emotional Economics

The article goes on to detail the components of Donald Trump's tax plan, and the improbability of such a plan. Essentially, the tax plan falls in line with many mainstream candidates; cut the tax rate for the highest incomes, cut the corporate tax rate, and reduce the number of americans on the income tax roll. Where it goes off the rails is with how he essentially took Jeb's tax plan, and cut it FURTHER. Tax rate for top earners: 28% down to 25%. Corporate tax, 20% to 15%. The most staggering is the number of Americans being brought off the income tax. Jeb estimates his plan at 15 million being taken off, but Trump says "15 million? I don't get out of bed for less than 75 million!" Well, maybe not in those exact words, but thats what he's proposing.

So does Trump expect a rise in the deficit even though he has slashed nearly every tax in his path? Of course not! His camp states that the US economy would only need to grow 3% yearly during his presidency in order to remain deficit neutral. Besides some ambiguous and vague language, the plan doesn't really propose any way to bring in additional revenues. He is basing his entire plan on "good faith." With interest rates expected to rise, consistent growth isn't something you can really hang your hat on. The man is full of ambition, but also not the best ideas. I don't expect to see him "winning" in the White House, ever (hopefully).



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