Knight Reading

by CC July 17, 2011 11:40 pm • Commentary


Monday: Earnings come faster and furiouser this week. Halliburton, Wynn, IBM and Hasbro tell us how things are rolling. On the economic front, the National Association of Home Builders tells us that the housing market still stinks.

Tuesday: Sexy tech earnings (Apple!) compete with dour financial earnings (Bank of America, Wells Fargo, Goldman Sachs, Bank of New York Mellon, Keycorp) for our attention. Others reporting include: Johnson & Johnson, Harley-Davidson, CSX, Yahoo! and Chipotle Group. Economic news includes Housing Starts and Building Permits. In other words, more cheery home-front news.

Wednesday: More tech — Intel, Ebay, Xylinx, Qualcomm — but still plenty of finance, including American Express, PNC and U.S. Bancorp. Altria, Abbott and United Technologies also report. Smoke ‘em if you got ‘em. Economics: Existing Home Sales (ack).

Thursday: Initial weekly jobless claims (below 400K?) and still more earnings, including Advanced Micro Devices, Lilly, Nucor, Microsoft and Morgan Stanley. Fed Chief Ben Bernanke talks about Dodd-Frank in DC, the Index of Leading Indicators will lead us in a bearish direction and Philly Fed regional survey will do likewise.

Friday: Honeywell, Verizon, Caterpillar, McDonald’s and GE highlight a light-ish but crucial earnings day. Economic news is scant. Expect folks to race to the beach on Friday afternoon.


Credit bubbles are different

Not only are credit crises different from other cycles, they also differ from other bubbles.

As Dan Gross explained in “Pop! Why Bubbles Are Great for the Economy,” the typical investing bubble leaves behind something of value. Whether it was thousands of miles of railroad tracks in the 19th century or thousands of miles of fiber-optic cables in the 1990s, usable infrastructure survives the bubble. Assets get scooped up out of bankruptcy for pennies on the dollar. Eventually, all of this overinvestment in the bubble du jour becomes a productive part of the economy. All that cable laid by Global Crossing and Metromedia Fiber and other bankrupt firms? Today, it is the bandwidth infrastructure that supports Google Maps, Netflix streaming video and Twitter.

Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities.

Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.

Confusion about this is already taking a toll across the pond. The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth. In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, its offset by public-sector job cuts.


THERE is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs: The deficit is too big. The stimulus was flawed. China is overtaking us. Businesses are overregulated. Wall Street is underregulated.

But the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.

The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.

The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.