Economists/Intellectuals - Are we hurting our children?

I took my economics class from Prof. Michael Brandl at the McCombs School of Business. Many a time in the he mentioned. (may not be the same words but this my interpretation of the essence).

"Not all government borrowing is the same. It depends on how the proceeds from the borrowing are spent. If the government borrows today and spends the money in a way that benefits the next generation, then that spending makes it easier for the next generation to repay the debt that has been created. But, if the government borrows today simple to increase current consumption, then the current generation is passing the bill for their spending onto the next generation. That is called a negative intergenerational transfer.".

To be honest, It did not fully sink into me the seriousness of the subject, until I started hearing and questioning myself on how the Stimulus money is going to be spent.

Today's news on "Cash for Clunkers" that the house rushes to approve 2B additional dollars really put me over the edge. I am really happy for the consumers who are taking advantage of the program to buy new vehicles. However, when buying the car, I am wondering if even one of them thought for moment - who is going to pay for the $4,500 that Gov't has convieniently agreed to pay these auto makers?

I guess, each one said or figured: "Not Me"; If it is not the guy who is buying the car, not the person who is actually selling the car, then who is? - Simple answer - That some body else is none other than our children or the collective us.

To a certain extent, shame on the "collective us" - the politicians who want to be populist, the citizens who just want to pass the buck or play ignorant, and the companies who lobby for incentives that benefits them at the cost to society.

So next time when you hear - We are going get the economy going by re-paving a road or putting more government officers on the streets - Question yourself - aren't these like paying for the maintenance your car, or paying for security system to protect your home; then why is it that we are borrowing money to pay for these, shouldn't they be paid for by current income ? To me this is classic Negative Intergenerational Transfer.

Going forward, when you hear an announcement about stimulus/borrowing - Think Again, Question it, Validate that it leads to a future benefit - if not we are just cheating ourselves and passing the pain to our children.

Thanks
Nagesh
The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for

Ramblings on Economy - Is it all good now ?

Link to Previous Post : My Views on Business and Technology: Ramblings on Economy - Is it all good now ?

Continuing ramblings on economy from yesterday, it is more of the same today

Exxon quarterly profit tumbles 66 percent, shares fall - (Recession - lower demand)

Motorola posts unexpected 2Q profit and says rest of year will see improvement - However on lower sales (missed revenue target), heavy cost cutting (over 8000 layoffs)

Colgate-Palmolive profit tops expectations - Again on Lower Sales and better cost management; Sales lower by 5.5%, volume of goods sold down by 1.5% - Lower consumption

Sony, Sharp post losses, Nintendo loses steam - Folks are not even buying a WII - that hurts

Eastman Kodak moves to 2Q loss as sales slide - Not sure this has anything to do with economy; this iconic company probably has lots of other issues, Still 29% lower sales - ouch

Kellogg profit rises 13 percent in 2Q - Reaping the benefits of downturn - I guess all of us have eat, it is better to eat at home than go out for breakfast. This is a direct result of consumers cutting spending.

Goodyear posts 2Q loss of $221 million, sales drop - Sales 25% lower

When you read more, it is apparent that most companies are giving good guidance on profit expectation for next quarter, however not much on sales guidance. This also makes me believe the companies are still focused on reducing costs aggressively to meet profit expectation and kind of shows the lack of confidence on projecting sales or growth. I feel this feeling of mine is again substantiated by report this morning that - New jobless claims raised more than expected.

As I said in the previous post - if we truly are waiting for stability in housing and homeowners, I feel this this trend has to change. At some point, we have start seeing growth from companies that actually produce goods and services that drive and consume labor.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for

Ramblings on Economy - Is it all good now ?

This earnings season, I started paying attention to what was being said while companies are releasing their earlier. My curiosity was directed to understanding whether we are headed in the direction where an average citizen can actually come back after a hard day of work and not fear if he going to have a job next day.

My motivation behind this was basically simple - pretty much the pundits have tied recovery in housing sector to recovery of economy and in my opinion the recovery of housing is based on whether we can safely bet the home owners will pay for mortages without defaulting, which then relies on the simple fact that homeowner responsible for mortage will stay gainfully employed and the unemployed homeowners have a reason to believe that jobs are getting created and are on the way;

Find below some Headlines Unfiltered, on which I am going base my opinions

Drugmaker Pfizer's 2Q profit plunges 19 percent
Boeing profit climbs in 2Q on strong defense sales
Delta reports $257 million 2Q loss (double digit revenue drop)
PepsiCo 2Q profit falls 2 pct on sales drop
Wells Fargo profit rises; credit losses up
Morgan Stanley posts 2Q loss of more than $1.2B
Dominos 2Q profit plummets 22 percent
Glaxo profits up 11 percent on emerging markets
Altria Group 2Q profit rises, boosts forecast (Lower Expenses offset dip in sales)
Eli Lilly 2Q profit rises 21 percent
Apple 3Q beats forecasts despite recession
Yahoo 2Q profit rises 8 pct despite weak ad sales
AK Steel posts $47M loss for 2Q as demand falls
Coca-Cola 2nd-quarter profit rises 43 percent (rapid overseas growth offsets falling domestic demand)
Caterpillar 2Q profit falls 66 pct on weak demand
DuPont 2Q profit plunges on sales drop, charges
Lockheed Martin 2Q profit down 17 percent
United Technologies 2Q profit falls 24 percent
Texas Instruments 2Q profit falls 56 percent
Bank of America posts 2Q profit, surpasses Street
Google's slowing 2Q ad sales overshadow earnings
Sony Ericsson posts another loss in 2Q
Electrolux 2Q profit jumps six-fold
Nokia posts 66 pct fall in Q2 profits, shares drop
JPMorgan earns whopping $2.7 billion
Goldman Sachs' Q2 Smashes Forecasts On Trading Revenue

Analysis:

1. Companies in Financial Sector (Goldman Sachs, JP Morgan, Bank of America etc. ) -made a killing ( Lots of Money ) : I am not sure I can call this extortion from the poor tax payer using government support, but sure seems like one. Thanks to government, In the guise of helping the economy, they are actually helping the bank executives look like hero's. So this should really not count in the +ves for the average consumer/homeowner


2. All brick and mortar companies who actually produce some thing useful - Dupont, Caterpillar, AK Steel, Texas Instruments, Delta Airlines, Dominos (pizza) etc. (sample of a wide cross-section of great companies across multiple industries) show dismal performance - revenues are down, profits are down. The implications to the economy -> we are having a tough time. Thanks to pretty smart people at wall street, the managed to set such low expectation that the these dismal earning's look good). However for the average consumer/homeowner the results probably mean that they are not looking to add any new work force and are probably still looking to cut costs.


3. The notable exceptions to the trend of lower sales and lower earnings in the brick and mortar space are Coca-Cola, Glaxo and Apple. Apple currently has really cool products, whereas Coca-Cola and Glaxo did very well due to focus on emerging markets not domestic markets. This really does not count as trend, as Apple is truly an exception to the trend and Management at Coca-Cola and Glaxo really focussed on where they could sell. (My recent post on this subject: Consumer Spending: Are we looking at the right consumer)
4. Some companies like yahoo!, Altria and IBM post better profits on lower sales, that is primarily due to cost cutting; which again does not look good from an employment perspective.
5. Finally, Google also showed stress on revenue (ad sales) - A darling of wall street also showing some cracks.

My Take
Net Net, looking at these results, I am not sure I see the average consumer/homeowner being confidant of paying the mortgage or being comfortable with their financial future as companies that need to thrive without any Government Support and produce real goods are really struggling, where as those that seem to support from government (unfairly??) seem to be raking in the dow (money). Finally, today's report on durable goods, which are down again by 2.5% clearly show the average consumer/homeowner's reluctance to spend and backs my belief.

One thing I have not done and will probably look into later this week is to correlate the earning's data to typical business cycles. That may shed some more light in why the market/analysts are considering every bit of news - good or bad as +ve. For now, My take is that we are really not out of the woods yet. May be the next earnings season will show results that we can all look into and feel comfortable that -- it is all good now !

Thank you reading, appreciate your feedback and comments. Additionally, if you do understand typical business cycles, would appreciate your thoughts on correlation of current economic data to typical business cycles.

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "Opinions of" any of the institutions I am associated with or have worked for

My Views on Business and Technology: Consumer Spending - Are we looking at the right consumer?

My Views on Business and Technology: Consumer Spending - Are we looking at the right consumer?

Today in WSJ : Drug Firms See Poorer Nations as Sales Cure

Finally, it looks like atleast drug companies are starting look into emerging markets alias poorer nations to boost sales. Very pertinent to the view I expressed in my earlier blog post on who is the consumer?

Click on this link for WSJ Article : "Drug Firms See Poorer Nations as Sales Cure"

Thanks
Nagesh
The views represented in this blog are my personal views and are not a "reflection of" or "Opinions of" any of the institutions I am associated with or have worked for