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Thread: Hey-Liberals who didn't take economics

  1. #1
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    From noted VRWC publication , the Washington Post-

    Federal Deficit Likely to Narrow by $100 Billion
    Tax Receipts Pare Borrowing
    By Jonathan Weisman
    Washington Post Staff Writer
    Tuesday, May 4, 2004; Page E01


    Smaller-than-expected tax refunds and rising individual tax receipts will pare back federal borrowing significantly for the first half of this year and could reduce the $521 billion deficit projected for the fiscal year by as much as $100 billion, Treasury and congressional budget officials said yesterday.



    The Treasury Department's borrowing estimates may prove to be more good news for President Bush on the economic front, as opponents attempt to make his fiscal stewardship a campaign issue. The $184 billion the government is now expected to borrow through June is a 27 percent improvement from Treasury's February projection of $252 billion, the department said.

    G. William Hoagland, a senior economic aide to Senate Majority Leader Bill Frist (R-Tenn.), said he dashed off a memo to GOP leadership predicting the 2004 deficit could be trimmed to $420 billion, a record in dollar terms but considerably lower than the White House's $521 billion projection.

    "This is better than what everybody expected," Hoagland said.

    Democratic and Republican budget aides in the House warned yesterday that it was too early to reach conclusions. Spending could still take an unexpected jump because of surging hostilities in Iraq. The improving federal borrowing picture, they said, may just be bringing the administration's $521 billion deficit forecast more into line with the $477 billion deficit predicted by the nonpartisan Congressional Budget Office, Capitol Hill's official budget scorekeeper.

    Individual disappointments last month could prove to be to the government's fiscal advantage. Earlier this year, Bush had boasted that this year's average income tax refund would be $300 larger than it would have been without last year's tax cut. But refunds have fallen well short of that mark. Treasury officials also cited lower-than-expected government spending and higher payroll and individual income taxes as reasons that less borrowing may be needed.

    All of this indicates that the improving economy is beginning to slow a three-year slide in overall tax receipts.

    "The 5.5 percent average [economic growth] pace in the latest three quarters was the largest since 1984," said Mark J. Warshawsky, assistant Treasury secretary for economic policy, in a statement to the department's borrowing advisory committee. "With the assistance of tax cuts, growth has become self-sustaining."

    An improving picture could strengthen the political hands of the president and House Republican leaders as they wrangle with the Senate over more tax cuts and a budget blueprint for the fiscal year that begins Oct. 1. For weeks, the negotiations have been stalled, with a majority of the Senate demanding new procedural hurdles for further tax cutting and the House and White House steadfastly refusing.

    The latest compromise would mandate that tax cuts over the next three years be offset by equal tax increases or spending cuts, unless 60 Senate votes could be mustered to set the restriction aside. However, under the compromise being floated, some tax cuts -- $92 billion worth in 2005 -- would be exempted from that restriction under Congress's annual budget resolution.

    So far, House tax cutters have been undaunted by federal red ink. Last week, lawmakers in both parties voted overwhelmingly to make permanent Bush's tax cuts for married couples, a bill that would cost the Treasury $105 billion over 10 years. For the next three weeks, the House has scheduled successive votes on more tax cuts totaling hundreds of billions of dollars.


    2004 The Washington Post Company

  2. #2
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    Bugg that's good news... however its only a matter of days before Bush asks for that 100B to pay for the war...

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    [quote][i]Originally posted by bitonti[/i]@May 4 2004, 11:33 AM
    [b] Bugg that's good news... however its only a matter of days before Bush asks for that 100B to pay for the war... [/b][/quote]
    How much of this recovery (GDP growth) is due to asset appreciation and how much to real increases in wages and income? Consumers are spending, yes. Stock prices and home prices are rising, yes. Employment is improving, yes. However, people's debt levels are becoming absurdly high due to the fact that money is cheap right now and real wages haven't imporved that much at all, slightly less then 1% since the "low."

    People are borrowing like crazy cause it's cheap and because their assets (stocks and homes) are inflated presently. However, assets fluctuate while debt is fixed. This causes a huge problem for borrowers when their debt exceeds or meets the value of their assets or harms creditors when inflation chips away at their base. The rates will go up - they HAVE to. We need to watch out for inflation (though the Fed seems to have belatedly realized it) and the housing market will contract, and money will become more expensive, and people will start comsuming less. We need to tighten the money supply a bit, so we can stop the bleeding BEFORE it gets too bad (which it likely will). We waited too long in the late 70's and early 80's to do so and I think Greenspan has been slow, even during the TMT bubble and now during the housing bubble. The Fed is a perpetual bubble-blower! Raise the f*cking rates, Alan! Perhaps Alan is waiting to tighten the money supply until after the election, since no one wants to put the brakes on this economy during an election cycle. But the issue aside, it should have happened by now. No matter who wins this election, 2005 and 2006 will see recession and its companion of higher unemployment.

    Our economy is very durable, amazingly so at times. But I still feel very strongly that stock prices have a lot farther to fall to get to fair value. What's the P/E of the S&P at these days? Low-to-mid 20's or something? Bugg? 16 or 17 is the historical average and unless a new paradigm exists (which I doubt) this is merely a "dead cat bounce" and the market will still fall. Also, every bubble in history has fallen PAST fair value on it's way down, only to come back upwards after. So, there is more pain on the horizon. Don't be surprised if we see a P/E of 14 or so in mid to late 2005. The REAL returns of US equities (nominal return less inflation) will not be impressive over the next few years, IMO.

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    So we should all be excited that even though we have a record defecit we should rejoice because it is not as astronomical as once expected? And like Bit said, does anyone honestly think the spending spree is over? Besides as Cheney said, Regean taught us that deficits don't matter.

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    [quote][i]Originally posted by Section109Row15[/i]@May 4 2004, 01:09 PM
    [b] So we should all be excited that even though we have a record defecit we should rejoice because it is not as astronomical as once expected? And like Bit said, does anyone honestly think the spending spree is over? Besides as Cheney said, Regean taught us that deficits don't matter. [/b][/quote]
    It's not a record deficit, Section. We've had bigger ones.

    Liberals whining about spending...I never thought I'd see the day!

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    [quote][i]Originally posted by jets5ever+May 4 2004, 11:45 AM--></span><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td>[b]QUOTE[/b] (jets5ever @ May 4 2004, 11:45 AM)</td></tr><tr><td id='QUOTE'> <!--QuoteBegin--bitonti[/i]@May 4 2004, 11:33 AM
    [b] Bugg that&#39;s good news... however its only a matter of days before Bush asks for that 100B to pay for the war... [/b][/quote]
    How much of this recovery (GDP growth) is due to asset appreciation and how much to real increases in wages and income? Consumers are spending, yes. Stock prices and home prices are rising, yes. Employment is improving, yes. However, people&#39;s debt levels are becoming absurdly high due to the fact that money is cheap right now and real wages haven&#39;t imporved that much at all, slightly less then 1% since the "low."

    People are borrowing like crazy cause it&#39;s cheap and because their assets (stocks and homes) are inflated presently. However, assets fluctuate while debt is fixed. This causes a huge problem for borrowers when their debt exceeds or meets the value of their assets or harms creditors when inflation chips away at their base. The rates will go up - they HAVE to. We need to watch out for inflation (though the Fed seems to have belatedly realized it) and the housing market will contract, and money will become more expensive, and people will start comsuming less. We need to tighten the money supply a bit, so we can stop the bleeding BEFORE it gets too bad (which it likely will). We waited too long in the late 70&#39;s and early 80&#39;s to do so and I think Greenspan has been slow, even during the TMT bubble and now during the housing bubble. The Fed is a perpetual bubble-blower&#33; Raise the f*cking rates, Alan&#33; Perhaps Alan is waiting to tighten the money supply until after the election, since no one wants to put the brakes on this economy during an election cycle. But the issue aside, it should have happened by now. No matter who wins this election, 2005 and 2006 will see recession and its companion of higher unemployment.

    Our economy is very durable, amazingly so at times. But I still feel very strongly that stock prices have a lot farther to fall to get to fair value. What&#39;s the P/E of the S&P at these days? Low-to-mid 20&#39;s or something? Bugg? 16 or 17 is the historical average and unless a new paradigm exists (which I doubt) this is merely a "dead cat bounce" and the market will still fall. Also, every bubble in history has fallen PAST fair value on it&#39;s way down, only to come back upwards after. So, there is more pain on the horizon. Don&#39;t be surprised if we see a P/E of 14 or so in mid to late 2005. The REAL returns of US equities (nominal return less inflation) will not be impressive over the next few years, IMO. [/b][/quote]
    Very interesting analysis and agree with some. However, I disagree on a few points. You note debt levels are "people&#39;s debt levels are becoming absurdly high due to the fact that money is cheap right now." I&#39;d like to know how much of that is new debt or merely refinanced debt. Secondly, how much of that debt is building equity. Without looking it up, I would tend to think a good portion of it is building equity. Some people are using cheap money to invest in things such as inflated commodity prices. These people will lose their shirts due to the combination of a strengthened dollar due to rising interest rates and the cooling down of China&#39;s economy, as indicated by China&#39;s apparent interest rate increase.

    Especially in the US service orientated, as opposed to manufacturing, economy, Wage increase and inflation are highly correlated. It is to the point that unit labor cost is probably the single biggest indicator that the Fed will use to dicate policy.

    I believe that the Fed should start to raise rates. A few months back, the Economist made the argument that as longs as interest rates remain below GDP, we have an accomidative policy. I dont think we will have will have a housing "bubble" if the fed starts to raise rates now. We can have a best of both world economy for the next few months (accomidative, yet holding inflationary pressures in check)by modestly raising rates over the next year and a half or so.

    Ive read today that the stock market has already priced in a 2.25% Fed funds rate, ill post it right after I conclude.

    As for the stock market being overvalued, I dont think its fair to use a historical P/E ratio in and of itself. Since we have such an accdomidative fiscal policy and multinationals are making more because of the currency exchange rates, companies have been easily beating estimates. Even using a forward looking P/E ration wouldnt be fair since most sompanies are easily beating estimates and rasing guidance.

  7. #7
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    How Much Will Rising Rates Hurt the Stock Market?

    [Briefing.com - Dick Green] The prospect of rising interest rates has kept the S&P 500 Index in check. This isn&#39;t about to change. Yet, the market has priced in much if not all of the rise in rates that is likely for the year ahead. This leaves a very mixed outlook for the index through the summer months.

    An Unimpressive Market
    The stock market&#39;s action has not been good recently.

    The S&P 500 Index has remained in trading range the past three months. The 50-day moving average has been very flat, as shown by the light blue line in the chart below. The Index broke below this line in recent days, which is a negative short-term indicator. This has occurred despite extraordinarily strong earnings news.


    The reason for the poor behavior of the market is clear - there is great concern over the likelihood of higher interest rates.

    To traders and extremely active investors, these conditions might warrant taking a neutral to bearish stance. To long-term investors, however, the fundamentals have not shifted enough to warrant a significant change in approach.

    Quantifying the Interest Rate Impact
    There is little doubt that interest rates are going higher. This is a negative for stock valuations. Yet, the fears associated with higher interest rates may be exaggerated.

    The math indicates that the market has already priced all the Fed tightening that is likely to occur over the next nine to twelve months, and the associated change in bond rates.

    This statement is based on analysis using the so-called Fed model for stock valuation. It is a very simply model and by no means precise, but it does make an excellent starting point for overall market valuation.

    The model assumes the projected earnings yield on the S&P 500 for the next twelve months should equal the 10-year note yield. Or, using it in reverse, the projected earnings for the next twelve months and the current level of the S&P 500 can be used to show what the market is assuming for a fair 10-year note yield.

    The aggregate as-reported earnings (including all charges) on the S&P 500 for 2003 was &#036;49.08. Earnings forecasts for 2004 have been rising steadily in recent weeks. First quarter earnings now look like they will be up about 25%. Incorporating that into the numbers takes earnings to about &#036;51.72. Wall Street projections for the second quarter are now over 15%, and the third and fourth quarter are expected to continue at about a 13% pace. For the twelve months ahead, a conservative 12% is a reasonable estimate. That takes earnings to &#036;57.93 for the next four quarters.

    Given the closing level of 1,107 on the S&P 500 Index on Friday, that projected &#036;57.93 in earnings computes to a 5.23% earnings yield. That means that the stock market, using the Fed model of stock valuation, is priced for a 5.23% 10-year note yield. On Friday, the 10-year note yield closed at 4.50%.

    The 10-year note over the long runs runs about 3% (300 basis points) above the fed funds rate. The funds rate target as set by the Fed is currently 1%. This implies that the stock market is assuming the Fed will raise the funds rate to about 2 1/4% over the next year.

    How High Will Rates Go?
    Right now, there is a great deal of concern about inflation. Inflation has clearly bottomed. Yet, there are also still plenty of reasons to believe that inflation is not about to take off.

    Unit labor costs, which are the main cost factor for production of goods and services, remain negative. Commodity prices are rising, but that is a significantly smaller component of the cost structure for most businesses. The focus right now is on what is pushing inflation higher, but that is only a small part of the overall picture.

    Currently, most of the year-over-year measures of inflation are running about 1 1/2% (CPI, PPI, GDP deflator). It is our estimate that in a year, these measures will rise to about 2 1/2%. However, at that time, the higher level of interest rates will have slowed down economic activity, and inflation will probably stabilize near that rate. Current conditions of higher commodity prices but stable labor input costs, suggest a bounce in inflation rates, not a return the 1970s conditions of rates of higher and higher rates of inflation.

    What it All Means
    The short term outlook for the stock market is neutral, and perhaps even slightly bearish. The focus this week will be on the Fed&#39;s FOMC policy announcement on Tuesday. The likelihood is that the statement will indicate that rates will be going higher later this year.

    There is a chance that the stock market reacts positively to the announcement, indicating that the bad news is in the market. Over the intermediate term, however, the Damocles&#39; sword of higher interest rates will remain.

    For the longer-term investor, staying with a conservative approach remains preferred. The Briefing.com list of conservative stocks still has appeal. Each one of the eight stocks is up since inclusion on November 14 of last year. Of course, since that date, the S&P Index is up as well.

    Since the start of this year, half of the stocks are up and half down. The gains average out to very close to unchanged, essentially matching the S&P Index, which is now down 0.4% on the year. (Interestingly, the best performing stocks are Bank of America and Verizon. These are high yielding stocks that each pay a dividend of about 4%.)

    It is our view that maintaining a conservative approach to stocks is still very much warranted. This was first discussed in our January 5 Big Picture article, and again in several articles including the March 22 article titled Stay Conservative. And, as we have stressed, this is definitely not a time to be playing with hot money, trying to ride an uptrend in high flying stocks or the Nasdaq.

    There is an old saying in the market, Sell in May and go away. This reflects the fact that over decades, the vast bulk of the gains in the market have been achieved in the October to March time frame. The summer months have not been historically strong. This year may fit that historical pattern.

    Nevertheless, the prospect of higher interest rates does not mean the stock market is about to crash. Most of the likely rise in interest rates is already priced into the market. There is no need to panic, and to sell everything in the 401k. Cash and bonds do not provide attractive alternatives at this time. This is period where long-term investors need to think long term, and to sit through what could well be an unexciting summer for the stock market.

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    Lawyers - good points. I agree about raising the rates, obviously. I am doing some reserach on the debt issue, about the % used to build equity...

    About the P/E we will have to simply disagree. You raise some valid points, no doubt. However, stock prices do have a historical relationship to earnings and profitability. I believe and my research has shown me, that over the long-term, markets, asset classes and stocks are priced according to fair value, which my firm has estimated at around 16.7 p/e historically. However, in the short term, the market is driven by investor sentiment which is based on human emotions, most notably fear and greed, which causes prices and value to be out of alignment on either the up or down side. We were called dinosaurs when everyone talked about the "new" and "efficient" market at the height of the TMT bubble, because we simply refused to invest in that speculative nonsense. We have since been proven to be prescient. Academics always seem to point to this or that as a big, new "change" in the paradigm. But EVERY bubble we have ever researched has reverted to the mean, and all of them have fallen down past fair value on their way down. There has never been an exception. My belief in mean reversion approaches almost religious levels. I can&#39;t say when they will revert, or at what rate, but I know that they will. We use this analogy when talking to clients who say that since we don&#39;t know what the short term holds, but profess to know the long term (which is really just a few short terms clumped together):

    Say you stand on a building and throw 100 feathers into the air. You don&#39;t know when or how fast any [i]one [/i]of them will fall, and the wind may even carry them higher for a period. All you know is that they all will fall, eventually. And so it goes with prices.....

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    [quote][i]Originally posted by jets5ever[/i]@May 4 2004, 03:08 PM
    [b] Lawyers - good points. I agree about raising the rates, obviously. I am doing some reserach on the debt issue, about the % used to build equity...

    About the P/E we will have to simply disagree. You raise some valid points, no doubt. However, stock prices do have a historical relationship to earnings and profitability. I believe and my research has shown me, that over the long-term, markets, asset classes and stocks are priced according to fair value, which my firm has estimated at around 16.7 p/e historically. However, in the short term, the market is driven by investor sentiment which is based on human emotions, most notably fear and greed, which causes prices and value to be out of alignment on either the up or down side. We were called dinosaurs when everyone talked about the "new" and "efficient" market at the height of the TMT bubble, because we simply refused to invest in that speculative nonsense. We have since been proven to be prescient. Academics always seem to point to this or that as a big, new "change" in the paradigm. But EVERY bubble we have ever researched has reverted to the mean, and all of them have fallen down past fair value on their way down. There has never been an exception. My belief in mean reversion approaches almost religious levels. I can&#39;t say when they will revert, or at what rate, but I know that they will. We use this analogy when talking to clients who say that since we don&#39;t know what the short term holds, but profess to know the long term (which is really just a few short terms clumped together):

    Say you stand on a building and throw 100 feathers into the air. You don&#39;t know when or how fast any [i]one [/i]of them will fall, and the wind may even carry them higher for a period. All you know is that they all will fall, eventually. And so it goes with prices..... [/b][/quote]
    5

    I agree that we will revert to the mean, I just think due to, amoungst other things, accomidative fiscal and monetary policy, that the denominator will increase, not the numerator falling, bringing us to historic P/E levels, ceritus parabus.(I hope you can follow that last run on sentence, my writing is terrible.) Now, to be honest and fair, I haven&#39;t done the nesessary research to find out what exactly how realistic S&P 500 earning of approx &#036;67 is(using current S&p and your firms estimates.) But in an accomidative enviorment, I would be comfortable owning stocks at a P/E slightly higher than historical means simply because earning will most likely easily beat estimates.

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    [img]http://www.whps.org/schools/hall/highlights/archive/1998spoof/jaffee.jpg[/img]

    "I&#39;m ready for some [i]bare ass twistah&#33;[/i]"

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