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Tuesday, July 28, 2009


consumer confidence

via bloomberg econoday -- an unexpected july fall to 46.6, outside even the downside range of consensus forecasts. confidence would appear to be following the economy even as the stock market, a leader of confidence, rallies at a slower pace off the march low. the massive positive divergence between present situation and future expectations noted last month remains essentially intact -- however, future expectations did fall to 62.0 from 65.5, which had fallen from the may high of 71.5.

this is in marked contrast to the state street investor confidence index:

The report notes a building confidence that the global recession will ease more quickly than expected: "Investors are now adding risk to their portfolios at an impressive rate, faster than we have seen in several years."

UPDATE: pragmatic capitalist charts both the state street investor confidence series as well as the latest AAII survey.

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Something to really think about is the feedback loop. When companies attempt to shrink themselves to profitability on a grand scale, what do you suppose happens in the months afterwords? The former employees are faced with insurmountable problems. First, they cannot easily find a job precisely because companies in general are pursuing these massive cost cutting strategies. They are therefore unemployed for much longer periods of time than would otherwise be the case. Second, they cannot continue to live as they did before being let go. Drastic reductions in personal consumption must be made. This is particularly bad, and we've already seen the savings rate go parabolic to reflect this change in behavior, after a gigantic, prolonged credit bubble.

So if this were a turned based simulation with the following conditions:
- The economy employs 1000 workers.
- The mean income for each employee is 100 per round.
- The mean expenditure for each employee is 100 per turn, or 100%.

Round 1.
- There are 1000 workers employed, making $100 000, and spending $100 000, or 100%.

Round 2
- Companies fire 10% of the workers, or 100 workers.
- The economy employs 900 workers, making $90 000, and spending $90 000, or 100%.

Round 3
- Workers grow concerned over job security and decide to save money. They now spend only 90%.
- The economy employs 900 workers, making $90 000, and spending $81 000, or 90%.

Round 4
- Companies grow concerned over growth forecasts and decide to cut costs, firing another 100 workers.
- The economy employs 800 workers, making $80 000, and spending $72 000, or 90%.

Round 5
- Workers freak out! Dual income households are down to a single income. Everybody knows somebody that lost a job. Many are helping friends and family out. The savings rate increases again. Now only 80% of income is spent.
- The economy employs 800 workers, making $80 000, spending $64 000, 80%.

Round 6
- Companies freak out! They've been beating bottom line estimates by cutting jobs, but they can see their top lines getting hammered. With no end in sight, they cut another 100 people.
- The economy employs 700 workers, making $70 000, spending $56 000, or 80%.

Round 7
- Where and how this self fulfilling destructive cycle ends nobody can know for sure. It happened during The Great Depression and it was not pretty.

Sounds about right to me and where we are and where this is headed.
The Problem is and has been too much debt.


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