Five Things You Need to Know: A Chicken in Every Pot
President Bush didn't exactly promise the chicken pot car garage thing, but it was close.
Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Bush Offers a Chicken in Every Pot and Car in Every Garage
OK, President Bush didn't exactly promise the chicken pot car garage thing, but it was close. The details of his proposal, though still a big vague, basically amounted to this:
1) $1,600 tax rebate for households
2) $800 for individuals
We saw a summary on Bloomberg noting that Treasury Secretary Henry Paulson said on the "Today" show (clever outlet for reaching Main St.) the administration is focusing on consumers. "A big part of the program should be focused on consumers, individuals, families, getting money to them because they will spend it,'' Paulson said on the show.
No, they won't spend it. That's the key. That's the disconnect. As the Congressional Budget Office in their review of potential fiscal stimulus responses noted, "a household's propensity to consume appears to vary with its income and depends on expectations of the household of what will happen to that income over the longer term."
2. The Global Economy REALLY IS a Two-Way Street
According to a European Central Bank survey, borrowing by eurozone businesses and consumers is being severely crimped by the global credit squeeze, the Financial Times reported.
Interestingly, the eurozone is seeing not only a tightening in lending standards, but also a sharp demand for loans.
3. The "Real" Leading Economic Indicator
This morning General Electric (GE) said fourth-quarter profit rose 15%, mostly due to international sales. The stock managed to jump 3.5% on the earnings release, but it's the larger picture that concerns us.
General Electric remains a significant broad market tell, especially for the S&P 500, because it still carries such a significant weighting in that index, 2.87%.
Note that it was GE that really put the nail in the coffin for all stocks in January 2001 when the stock broke a major point and figure trendline... similar to the one it just broke recently on the point and figure chart below.
Even with today's 3.5% bump, the larger point and figure trend for GE is negative. The chart won't even reverse back into a column of Xs until the stock hits 36. Today's earnings bounce isn't the final chapter in this story. Back in 2001, the last time GE broke a long-term multi-year point and figure trendline, it took the stock two years, and nearly 50%, to make a low.
CLICK TO ENLARGE
4. The End of Consumption
The book by Robert Frank, "Falling Behind: How Rising Inequality Harms the Middle Class," is an interesting critique of consumer behavior. The book makes the claim that increased concentrations of wealth at the top of the economic pyramid have set off "expenditure cascades" that raise the cost of achieving many basic goals for the middle class.
Don't worry, the housing boom does not go untouched; part of the increasing "rush to disassociate" we have chronicled in Five Things. According to Frank, the choices by families at the top of the economic pyramid to purchase larger and larger houses leads families in the middle to spend a greater percentage of their own income on housing, thus leaving less and less money left over for "important' categories. This is "relative consumption" of "positional goods," or goods that are valued in comparison to others. Fair enough.
But it's not as if Robert Frank just discovered income inequality and is choosing now to point it out to the rest of us. So why now? The answer lies in social mood. Remember, it is social mood that drives changes in social actions, not vice versa. Social mood, in the aggregate, is what lays the groundwork for "solving" the problem of income inequality.
This is not to say that at all times there won't be someone concerned about income inequality, regardless of social mood. Rather, it suggests that social mood is what allows, say, a book that advocates taxing consumption and eliminating taxation on savings (as Frank's does) appealing to a broad audience.
5. The Return of Public Works Projects
Finally, related to fiscal stimulus proposals, we recently read rumblings about possible public works projects in the offing.
This is an issue we first looked at last spring in Five Things (May 9, 2007, Number Four: The Return of Public Works Projects). The impetus was a report released by the Urban Land Institute and Ernst & Young projecting a U.S. deficit of $1.6 trillion through 2010 for basic infrastructure repairs and maintenance. In a sense, we viewed that shortfall as "good" news.
How could a $1.6 trillion shortfall in infrastructure spending possible be "good' news? Easy. During economic depressions caused by mal-investment and magnified by intervention and perversion of the normal business cycle, the ensuing widespread layoffs create vast societal upheaval as displaced workers and former homeowners turn desperate in order to feed their families and get by.
Fortunately, all this deteriorating infrastructure is perfect for expensive, government-paid public works projects.
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