Thursday, January 14, 2010

The Gordon Gartrelle Replica Economy

It is Thursday and I had no idea that I have Monday off from work for Martin Luther King Day! Good deal. I noticed today that the Sun was staying up higher in the sky for once as I drove home and not going lower. Spring is right around the corner!

Reader Input
Besides some very kind words from a commenter last night, I also received a request to offer my take on a question. I love questions and encourage all to ask anything in the comments and I will work on it the best I can.

Loyal reader Watchtower asks:
Do you think that in the future the government will negate the benefits of a tax deferred account by changing the tax rules (I'm talking about IRA's)?
This question is actually multi faceted the more I thought about it.

My first reaction is that the small amount able to go into an IRA ($5k/year) would not attract the attention of tax increases. Of course across the entire country across all the accounts this would add up, but allow me to offer another avenue that fits our governments stealth way of taking your money for their own use.

If you have not seen this story from Jesse about 401k's and IRA's it is worth a look. My own take is a bit more sarcastic (of course!) so here goes:

-Any type of tax changes to either 401k/IRA will get people upset and very interested in the issue, thus I do not see the tax status being changed at all. For some reason people fail to see almost everything right in front of them when it comes to finance but they do get bent out of shape about tax changes, especially from "none" to "some amount".

What I envision in the near future instead is this kind of a letter you will get from your holding firm which will read something like this:
Dear XXXXXXX,
In accordance with the new regulations set forth by the Federal Reserve Act of Citizen Retirement Flexibility, 15% of your existing and future contributions will require settling in the Tax Deferred Retirement Protection Fund (TDRPF). This program has been established to offer long term protection for your retirement savings by providing automatic access to risk free financial instruments* at no cost to you. You do not have to do anything; no forms are required and no action is needed. The tax treatment of your investment has not changed. Thanks you for your attention.

*-Denotes 2,7,10 year US Treasury Bonds, FHA/FRE/FNM bonds, and other instruments as needed.

In this way the government would have access to plenty of cash to support debt sales and no tax increases would make the front page. As long as most people see "No tax changes" and more importantly "No action required" most will miss what junk 15% of their portfolio just got stuffed with.

Just my 2 cents. Let me know what you think.

The Gordon Gartrelle Replica Economy
Now for this section to work you are going to have indulge for a minute!

I was a big fan of "The Cosby Show" when I was younger. I was thinking about tonight's section for a while and I suddenly recalled a Cosby episode that summed up how I think about some things.

The season one episode "A Shirt Story" is summed up on Wiki as such:
Theo wants to impress a girl by wearing an expensive shirt by designer Gordon Gartrelle. Since Cliff and Clair will not pay for it, Denise offers to make a copy of the shirt for him. Guest appearance by Kadeem Hardison, who years later would portray Dwayne Wayne on the Cosby Show spinoff, A Different World.
(NOTE: The real Gordon Gartrelle is a writer/producer for The Cosby Show.)
That is the first part of the puzzle.

The second comes from the end of the episode where Theo has to wear the horrible replica of the shirt in front of the girl he was trying to impress and instead of being horrified the girl loves the shirt (see 5:55 mark):

Faced with a ridiculous shirt, the peanut gallery simply says it's awesome and all is well.

So what the heck does that episode have to do with anything? Great question.

You may recall that last week same store retail sales came out and everyone was excited about the "proof" of a turnaround as the numbers looked pretty good. The real proof is in the final aggregate numbers though, and today the December retail sales number was -0.3% (that's NEGATIVE) instead of the +0.5 positive print expected. Another "unexpected" number.

So what happened? Well it seems that in the spirit of the banks, who had never modelled serious home price depreciation as a possible event, it seems the old data points just are not applicable in a downturn like this one. The culprit here: same store sales were skewed by the huge number of store closings which boosted sales at the remaining stores, but there was no boost in aggregate purchases. Great take can be found here:
Here's How The December Retail Data Turned Out To Be Such A Disaster

To be even more frank, gasoline, due to higher prices, also made up most of any gains as can be seen on this EconomPic graph.

Now of course the markets could not be bothered with such information, but that leads me to my point. I swear there is one!

Just like the Gordon Gartrelle replica shirt was accepted by the character as "hot", data today is accepted as great no matter what with no care how it was made.

We have seen this kind of over reaction to all kinds of data since the rally began and many times before then. Items include:
-When mortgage brokers were closing doors by the hundreds, mortgage applications went up as people had to re-apply many places. The broken data point was cheered as a sign of housing recovery.
-Initial Unemployment claims are trending down because really, who is left to fire? This is a far cry from job gains (excluding the census workers to come!) but this data point is heralded as the next bull market instigator.
-Cash for Clunkers added car sales, who would have thought? As GM moved to ramp up production sales went right back to where they were. Another fake data point.

There are many more.

My point is that as long as some data point "beats expectations" or "is getting worse less quick" or "shows gains over last year" it is lauded. No attention is paid to the details. This is hardly a new game but the total reliance on funny numbers is a first.

Data right now is a cheap knock off that was stitched together and passed off a genuine. At first I think this was done for the whole "confidence" thing we hear so much about. Now I believe that being allowed to get away with it has emboldened market participants (see the VIX lately?) to bank on gaming the system in perpetuity.

Anytime players think they can place bets without losing something goes terribly wrong. One would think we would have learned something, anything, over the past 3 years but I guess that is a cheap knock off of an idea as well.

For more on this try "Simulacra and Simulation".

Have a good night.

7 comments:

watchtower said...

Thanks for your take GYSC on my question and I will check out the 'Jessie' link also.

getyourselfconnected said...

Watchtower,
no problem. I hope you found it interesting.

getyourselfconnected said...

This could be a problem and highlights my complaint about Keynesian ideas about "demand":

"Speaking to the Automotive News World Congress in Detroit, Marchionne said the global auto industry must reduce factory capacity in order to survive, especially in Europe.

World automakers can build 94 million cars and trucks a year, but that's 30 million more than it can sell, he said."

http://tinyurl.com/ykj77n9

Dave in Denver said...

Great post tonight!

getyourselfconnected said...

Dave,
Thanks, I have to say I liked it too!

sedentary state said...

Here's the punch line from Krugmans article today.

>it was also startling to hear Mr. Dimon (JP Morgan Chase) admit that his bank never even considered the possibility of a large decline in home prices.

Startling indeed. They had a guy at the top (and probably several) that were literally dumber than a box of rocks. It kinda spooks me when I agree with the Big K.

getyourselfconnected said...

sedentary,
it is the same thing across all lines;
-states never thought about large unemployment
-the FED never thought low rates for years would encourage risk taking (right)
-banks never thought ther were bad people trying to game the mortgage business (sure)

So much fault and no one to blame. Just like they like it.