The S&P has gotten very frothy, a sign that we're probably forming a top. That is, prices are likely to descend from here for a time. Meanwhile consumer confidence is dropping fast and Washington is headed rapidly for sequestration; the combination could perhaps push the US over into recession. I think it's a little early to proclaim that all our problems are behind us.
4th quarter GDP numbers came in, and the US economy contracted by .1%. Car and appliance sales were up 14%; consumer spending was up 2.2%. But government spending was down 15%, led by defense spending which was down by 22%. The DOD is getting ready for the sequester which will put them on a slowing spending track for several years. And consumers are getting scared. Broadly speaking, the stock markets track consumer confidence, one cannot go up while the other goes down, at least not for long. If consumers slow their spending at the same time as the government, things will get more than a little tight.
The French Secretary of Employment said this week of France that "There is a state but it is a totally bankrupt state." Immediately the French finance minister said in a news release "France is a really solvent country. France is a really credible country, France is a country that is starting to recover." No one makes great quotes like the French. The French daily newspaper Le Figaro immediately did a poll, and found that 80% of French agreed that France is bankrupt. I think so too. But in the modern world of easy money printing by the Fed, the European central bank, the Chinese central bank, the Japanese central bank, being bankrupt is no reason to stop or even slow spending. To the contrary, history teaches us that bankrupt countries would rather declare war on each other than admit they have a spending problem. France is currently getting mired down in a "military action" in Mali; Japan and China are squaring off, and the US, like a child that is never without their security blanket, seems to never be without a war somewhere. If you can't get reelected on policy, there's always patriotism.
The Euro, which needs to be down at about $1 if Europe is to ever have a chance at hiring someone, is trading up in the mid to high $1.30s. Japan's recent actions to drop the Yen have Germany very worried; Germany often competes against Japan (Mercedes v. Lexus for example) and now Japanese products suddenly have a 20% price advantage.
Markets in Spain and Italy tanked over a corruption scandal in Spain and fears of Italy's next election. The thinking has been that Super Mario Draghi and his European Central Bank have guaranteed the safety of the banks of Europe, and therefore the crisis is over. I'm here to tell you it ain't over until the fat lady has been laid off and decided to change her vote. We're slowly entering a new era in Europe where the governments are being destabilized. Super Mario can't do anything about jobs or governments. Spain, Portugal and Greece are experiencing something right now as bad or worse than the Great Depression; Italy is not far behind, and much of the rest of Europe is at risk, but what we're hearing is that the banks are fine. I think when 25% of your population is unemployed, the banks are not the things foremost in the people's minds. In Italy ex-prime minister Berlusconi offered Italians a $5.8 billion tax rebate if they voted for him in the elections coming in three weeks; Berlusconi is viewed by the rest of Europe as part of the problem, not part of the solution.
The New York Fed says that the payroll tax cut in 2011 had a much bigger economic boost than would have been anticipated. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by present bias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.
Boeing has a crisis on their hands. The new 787 Dreamliner has been grounded by a couple countries including the US, due to a couple battery fires. The new 787 uses a large lithium ion battery, similar to the batteries in the Chevy Volt and the Tesla cars. Unfortunately, while Chevy and Tesla were careful to design cooling systems for their batteries which are known to have a run-away heating problem, Boeing did not. Remember the Sony laptop fires of a couple years ago? Li-Ion batteries. Elon Musk, founder of Tesla, was shown one of Boeing's batteries and immediately said the lack of a cooling system would all but guarantee fires. Boeing is faced with designing a new battery which is water or air cooled, or replacing the battery with a larger and heavier Ni-Cad battery, then getting FAA certification for the new battery. The 787 could potentially be grounded for a year, which would represent a huge hit to Boeing profits as they would be forced to pay indemnities on the 50+ planes already delivered, not get the cash flow from the 100 or so planes scheduled to be delivered in the next year, and pay performance penalties on the remaining ordered planes that will be delivered late. I'm just some guy hanging out with a laptop and I knew these batteries required cooling systems, so I'm just flabbergasted that somehow Boeing missed this. You have to believe there are Boeing engineers who were writing memos about this but were over-ridden by some accountant / management dweeb. Today Boeing announced they were seeking permission from the FAA to fly their own 787s to try to further diagnose the problems.
There was a very interesting explosion in Iran, in the middle of one of their uranium seperation facilities, the Fordow complex. At first Iran denied the problem, but Google Maps sees all. Now they're blaming the Israelis, who claim complete innocence.
A bipartisan group of senators have proposed an immigration reform. Obama has been supportive. The main points of the reform:
Momentum Machines has announced a new robot that grinds meat into hamburger, cooks the meat, toasts a bun, then when the meat is cooked it slices some tomato and onion and lettuce and assembles a hamburger which is then wrapped and delivered to the customer by conveyor. The company says the machine will pay for itself with labor savings in one year. Initial testers say the burgers are pretty good. Even burger flipping jobs aren't safe anymore.