Demand Side Transcript

528 Wall Street with Gary Shilling

Today on the podcast, after a brief introduction, we have the relay of a conversation between A Gary Shilling and Bloomberg's Michael McKee.

Shilling has been making money for decades for his investor clients, operating with a clear Demand Side framework and telling it like it is. One practice has been to buy and hold Treasuries. "You can't make money in Treasuries," we've heard for decades. Well, when the price keeps going up and the coupon stays the same, you're profiting at both ends. When you're in safety and everyone else is in risk, you look like a fool until the bubble bursts.

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We'll set that up with the political business cycle. You'll notice in the interview Shilling points out a drop in defense spending, aircraft and exports in August. We have been recalling the political business cycle, which is the practice of the incumbent president to gin up the economic numbers in advance of the election, a practice which we said was being intentionally frustrated by the efforts of Congress. In any event, when we heard federal spending was down, we were concerned, and went looking. Has the political business cycle really been frustrated?

Rick Davis analysis at Econ Intersect reassured us:

"GDP Report: Improving Growth or Continued Weakness?"

In their first ("Advance") estimate of the US GDP for the third quarter of 2012 the Bureau of Economic Analysis (BEA) found that the economy was growing at a 2.02% annualized rate, some 0.76% higher than for the prior quarter and at very nearly the same level as reported for the first quarter of 2012.

... [skipping down here]

– Over 30% of the headline growth rate came from a $27 billion surge in Federal defense spending, possibly an artifact of fiscal year budgetary manipulations and advance contracting in anticipation of the “fiscal cliff.”

So with Rick Davis, link online:

http://econintersect.com/wordpress/?p=27582

And the report is also a mixed bag when looking at the details: the headline was boosted by a burst of Federal spending and an extremely favorable set of deflaters — while fixed investments weakened and exports collapsed. Even the consumer numbers were mixed, with the up-tick in goods spending at least partially offset by weakening growth in the consumption of services.

There were also surprises in the new numbers that probably merit caution moving forward:

– The sharp contraction in exported goods is not a good sign for the economy. This was the largest contraction in exports since the first quarter of 2009, and it is certainly a sign that the US economy is not immune to contagion from overseas.

– The contraction of per-capita disposable income simply means that households continue to be under pressure. As we have argued before the growth of consumer spending is not coming from fatter paychecks — it is coming instead from other sources, including refinancing, strategic defaults and student loans.
Frankly, we had expected the report to show an improving economy — although in this report the improvement is modest enough to be politically correct. Ultimately we find the headline 2.02% masking a somewhat weaker underlying reality.

So, you know the Demand Side Forecast, hasn't changed. Bouncing along the bottom, downside risks, financial crises, Europe, austerity politics, China.

Now on to Gary Shilling who begins with a few comments on the data.

Noting all our audio is edited, for form, not substance. Taking the repetitive "ah's" out of Joseph Stigltiz, for example, or excising repetition or half-finished thoughts. Thus the result is more concise and more accessible to the ear. That said, we do select for quality to begin with. You don't hear Dick Bove, Glen Hubbard, Greg Mankiw, or any one of more than 90 percent of American Economic Association Members -- further digression, join the World Economics Association -- You don't hear a laundry list of nonsense by people who were wrong, but still seem to dominate on the airwaves and in Academia.

SHILLING

There. A Gary Shilling.

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