The Good, the Bad and the Ugly
In the 1966 classic “The Good, the Bad and the Ugly” by Sergio Leone, three gunslingers compete to find a fortune in buried Confederate gold amid the violent chaos of gunfights, hangings, American Civil War battles and prison camps. The movie develops three very different characters with a common cause that forces them to interact one way or another. In today’s post I want to evaluate three branches of the US economy which are all developing differently at the moment and thus, are worth watching on the economic screen. While we await important decisions about the size of money printing in DC next week(currently $4,250,000,000 per business day), the nomination of the future chair(wo)man of the Federal Reserve and the German election in two weeks, today is a good opportunity to sit back and ponder the economic realities while markets are calm.
Bloomberg reported this week that “Fracking Pushes U.S. Crude Output to Highest Level Since 1989”. in 2013, a stunning 87% of all energy needs by the US are met by domestic production. Furthermore, the state of Texas now produces more oil than the country of Iran. As a result, manufacturing in the US should receive a boost compared to higher input costs in other developed countries, especially Europe. In addition, the trade deficit will continue to contract supporting the dollar and lowering inflation. Take a look at the chart below that focuses on liquid fuels.
As you can see, the gap between production and consumption of oil that has to be met with imports is shrinking significantly. It’s good to be a Texan these days…
Small businesses (defined as having fewer than 500 employees) represent a major part of the economy and account for 50% of employment in the United States, and according to the U.S. Small Business Administration, create 60 to 80% of new jobs. The U.S. Bureau of the Census reports that of 113.4 million non-farm private sector workers in 2003*, small firms with fewer than 500 workers employed 57.4 million (50.6%). Firms with fewer than 100 employees employed 41.0 million (36%). Small business employment *(Note by the owl: yes, this is 10 years old but you get the picture)
Unfortunately, small business in America is still having a difficult time. Restricted credit, highly indebted consumers and increasing regulatory costs have made life for “mom and pop” stores and companies difficult if not impossible. This view is reflected in the chart below and should serve as a reminder that the economy has not recovered for roughly half of the working population.
CNBC reported this week that The student loan bubble is starting to burst. Major banks are retreating from offering loans to students as defaults are rising. In total, over a trillion $ have been lent out to students at very low interest rates and unless employment picks up significantly, there will be many defaults ahead as unemployed college graduates cannot service/repay their debt. Take a look at the charts below. The first one shows the increase in cost of tuition::
The next chart shows the discrepancy between tuition and income for those college graduates fortunate enough to find employment upon graduation:
Finally, you can see the trend in student debt in the following chart:
Along with public pensions and future entitlements, I currently find the student loan issue to be the biggest danger to the financial system. It will not disappear unless tuition falls meaningfully and income/employment rises to a level where the current trillion dollar debt load can be serviced and repaid.
Next week, we will find out how much more and longer the Federal Reserve will add fresh currency to “help” the economy. In the meantime, the SEC has concluded that it needs a kill switch from all exchanges within 60 days in case price action does not reflect the numbers that we all want to see. As Reuters reported this week U.S. SEC Chair calls for kill switch, other reforms for exchanges . What do they know about the markets that we don’t?