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Demeter

(85,373 posts)
16. Economic Slowdown Coming - Even for the Fatcats By Yves Smith
Fri Apr 26, 2013, 10:38 PM
Apr 2013
http://www.alternet.org/economy/economic-slowdown-coming-even-fatcats?akid=10356.227380.G_T6Sd&rd=1&src=newsletter828929&t=16&paging=off


...why shouldn’t the professional investors (as opposed to widows and orphans who can no longer rely on low risk bond investments to produce adequate income) be pleased as punch? This recovery may be nothing to write home about, but it sure has served those at the very top of the food chain extremely well. Remember, the income gains in this tepid rebound have gone entirely to the top 1% while the rest of us as a whole have lost ground. And aggregates like that mask increasing distress among at the bottom of the economic ladder. For instance, in New York, a city that has benefited more from the tender ministrations of the Federal Reserve and Treasury than most cities in the US, the number of poor and near-poor increased in 2011. From the New York Times:

The rise in New York City’s poverty rate as a result of the recession has apparently eased, but not before pushing nearly half of the city’s population into the ranks of the poor or near-poor in 2011, according to an analysis by the Bloomberg administration.

That year, according to the city’s measure, about 46 percent of New Yorkers were making less than 150 percent of the poverty threshold, a benchmark used to describe people who are not officially poor but who still struggle to get by. That represents a rise of more than three percentage points since 2009, when the nation’s recession officially ended.


And with so many left out of the fruits of what growth there has been, there’s a real possibility that the economy will move into stall speed. And the econopundits are finally waking up to the fact that the slowdown in the rest of the world will drag on the US. 25% of S&P earnings come from Europe, for instance. From theWall Street Journal:

Troubles overseas are threatening the U.S. recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

U.S. exports of goods to the European Union are declining outright. Growth in overall U.S. exports has been sputtering for months, after a three-year postrecession surge. And major U.S. companies are reporting increasingly dour overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.

“Every now and then you see a glimmer, things seem to improve, and then a little bit of bad news comes,” World Bank chief economist Kaushik Basu said….

And this is before you get to the fact that the gangrene of European austerity is reaching the core, yet the only debate among the powers that be is whether to ease up a bit, not whether to change course completely. And political fissures are widening. Italy is the one country that Germany can’t push around much because it could credibly leave the Eurozone. Luigi Bersani, the center-left leader that the Troika had hoped would win the Italian elections, was ousted by his own party in a series of votes over Parliamentary leadership, leading to the re-election of Giorgio Napolitano as President. This development is seen to favor Berlusconi, who has advocated leaving the eurozone. People came to the streets as the vote was announced and Beppe Grillo called for protests, although he said he could not travel in in time from the north to join.

Now the optimists are touting housing and shale gas as the drivers of recovery. Yet we are at risk of seeing a repeat of the pattern of 2010 through 2011, in which growth in the first three months fades, leading to the question as to how much of that growth was an artifact of seasonal adjustments that don’t fit well with an economy in a balance sheet recession. And the high profit levels that stock mavens have celebrated are part of the problem. We’ve never had a recovery where the labor share of GDP growth had been so low. Some stock-watchers have also pointed to Warren Buffett’s remark in 1999:

In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.

What appears to have changed since then is major industries becoming more concentrated (banking is a prime example), leading to oligopolistic pricing, which is rent extraction, pure and simple. In addition, Paul Krugman reminds us this evening that cutting government spending when the economy is less than robust is a sure path to a slowdown. And he stresses an angle that is often treated as secondary in policy discussions, namely, the way the long-term unemployed are effectively permanently unemployed. The usual excuse offered is that their skills have become stale, but Krugman contends that the real issue is pure and simple prejudice:

The key question is whether workers who have been unemployed for a long time eventually come to be seen as unemployable, tainted goods that nobody will buy. This could happen because their work skills atrophy, but a more likely reason is that potential employers assume that something must be wrong with people who can’t find a job, even if the real reason is simply the terrible economy. And there is, unfortunately, growing evidence that the tainting of the long-term unemployed is happening as we speak.

One piece of evidence comes from the relationship between job openings and unemployment. Normally these two numbers move inversely: the more job openings, the fewer Americans out of work. And this traditional relationship remains true if we look at short-term unemployment. But as William Dickens and Rand Ghayad of Northeastern University recently showed, the relationship has broken down for the long-term unemployed: a rising number of job openings doesn’t seem to do much to reduce their numbers. It’s as if employers don’t even bother looking at anyone who has been out of work for a long time.

To test this hypothesis, Mr. Ghayad then did an experiment, sending out résumés describing the qualifications and employment history of 4,800 fictitious workers. Who got called back? The answer was that workers who reported having been unemployed for six months or more got very few callbacks, even when all their other qualifications were better than those of workers who did attract employer interest.

So we are indeed creating a permanent class of jobless Americans.


Another open question is the odd continued rise of stock prices even as corporate earnings weaken. Why are investors paying more for companies whose earnings are declining in aggregate? In normal bull markets, you see a new leadership group emerge, and late in cycle, investors increasingly favor conservative stocks. This time the leaders are defensive plays, high quality companies that pay healthy dividends. While bulls say that this is predictable given ZIPR, we’ve had ZIPR for years now. Why should these stocks be worth more now? Now of course, the short answer is simple: it’s the momentum, stupid. Many fundamentally-oriented investors have been licking their wounds. And the nature of momentum-driven investing is that it can work longer than more sober-minded souls would think possible. When this disconnect ends is anyone’s guess. But markets like this suggest that even more caution than usual is warranted.


Yves Smith is the founder of Naked Capitalism and the author of 'ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.'
2 MORE BANKS BITE THE DUST Demeter Apr 2013 #1
I see someone noticed that we noticed they were not posting bank failures, well done. kickysnana Apr 2013 #17
I have to apologise for the tardiness of this thread Demeter Apr 2013 #2
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UNBELIEVABLE! Demeter Apr 2013 #6
Catherina on DU is the best source for Venezuela--see this! Demeter Apr 2013 #7
Our new Chair of the Florida Democratic Party was a lobbyist for ChoicePoint in 2000. Fuddnik Apr 2013 #31
wow Demeter Apr 2013 #32
Long past due. Fuddnik Apr 2013 #33
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Obama asks Supreme Court to review appointments ruling Demeter Apr 2013 #9
Congress passes plan to ease flight delays Demeter Apr 2013 #10
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The 1 Percent’s Solution By PAUL KRUGMAN Demeter Apr 2013 #12
Health Chaos Ahead By DAVID BROOKS Demeter Apr 2013 #13
Same here (n/t) bread_and_roses Apr 2013 #22
Consumers' shift to older iPhones raises concerns on Wall Street Demeter Apr 2013 #14
THE EUROMESS COMPENDIUM Demeter Apr 2013 #15
Economic Slowdown Coming - Even for the Fatcats By Yves Smith Demeter Apr 2013 #16
Also ex-mployees who have survived the worst will not do anything to keep their jobs. kickysnana Apr 2013 #18
Musical Interlude hamerfan Apr 2013 #19
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How One Tweet Almost Broke US Financial Markets By Nick Baumann MOTHER JONES Demeter Apr 2013 #23
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The Morose Middle Class By CHARLES M. BLOW Demeter Apr 2013 #25
With Winters Gone, Can We Be Far Behind? By DICK CAVETT FOLLOW-UP ON LAST WEE Demeter Apr 2013 #26
Duty calls Demeter Apr 2013 #28
Potty calls Fuddnik Apr 2013 #29
Musical Interlude II hamerfan Apr 2013 #30
Pool Time. Fuddnik Apr 2013 #34
South Africa’s Mines Union to Ask for Double-Digit Pay Increase xchrom Apr 2013 #35
China Industrial Companies’ Profit Growth Slows as Economy Cools xchrom Apr 2013 #36
Spain Is Beyond Doomed: The 2 Scariest Unemployment Charts Ever xchrom Apr 2013 #37
Germany's Greens lurch left in bid to beat Merkel xchrom Apr 2013 #38
Bank of Japan lifts economic forecasts xchrom Apr 2013 #39
Spain revises down its economic forecast xchrom Apr 2013 #40
Luxembourg Is Not The Next Cyprus xchrom Apr 2013 #41
Pull the plug on the Euro. Demeter Apr 2013 #46
Paul Farrell: Capitalism is killing our morals, our future DemReadingDU Apr 2013 #42
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PonziWorld: Ground and Pound On Global Ponzi Capitalism DemReadingDU Apr 2013 #44
"Feed the Children" Would be the start of a GREAT Platform Demeter Apr 2013 #45
Speechless Demeter Apr 2013 #47
Musical Interlude III hamerfan Apr 2013 #48
NEED HELP! TAKE NEXT WEEKEND--PLEASE! Demeter Apr 2013 #49
I could probably start things off Friday evening. Fuddnik Apr 2013 #51
My feet are not THAT big! Demeter Apr 2013 #52
It's Derby Week-end. I guess that will be the theme. Fuddnik Apr 2013 #53
EARNINGS REPORT: GOOD PROFITS, BAD REVENUES xchrom Apr 2013 #50
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