ECRI Managing Director Lakshman Achuthan on Bloomberg Radio
By Ken PrewittAssociated PressThursday, November 05, 2009
Digg Delicious Google It furl It Technorati Email Print Share [-] Text [+] Read/Post Comments
xfdfw BLOOMBERG-TV-05
ADVERTISEMENT
ECRI MANAGING DIRECTOR LAKSHMAN ACHUTHAN ON BLOOMBERG RADIONOVEMBER 05, 2009
SPEAKERS: LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH INSTITUTE
KEN PREWITT, BLOOMBERG NEWS
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
07:07
KEN PREWITT, BLOOMBERG NEWS: Our guest host this morning is Lakshman Achuthan of Economic Cycle Research. He's in the studio with us just in time to comment on the Bank of England, which says the pickup in UK economic activity may soon be evident; it's going to keep the size of asset purchases under review. It's raised its asset purchase target to 200 billion pounds and maintained its benchmark interest rate at five-tenths of 1%, so no change, which pretty much echoes what the Federal Reserve did yesterday, right?
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH INSTITUTE: Yes, absolutely. All of these central banks are trying to thread the needle here and not stress anybody out with any fears that they're pulling back quickly, but on the other hand they are watching the evidence coming in that things are getting not only less bad, but better. And they're certainly hopeful that that will - whatever they're doing they don't want to mess that up.
PREWITT: Well, that's one of our big stories this morning and the other big story has not to do with the UK, it has to do with the Bronx where the Yankees won the World Series, Jerry Azar is here.
PREWITT: Our guest host, Lakshman Achuthan of Economic Cycle Research. Well, exactly where are we in the cycle here?
ACHUTHAN: Isn't that it? Exactly where are we?
PREWITT: Yes, there's still a cycle, right? There's another deal.
ACHUTHAN: Yes, yes, yes. Cycle is very, very present and what's so funny, or not funny, but what we're going through here is that every single piece of data comes in and we, the collective we the market looks at it as though just because it's really fresh, it came out just a couple of minutes ago that it must be incredibly prescient and that's not always the case. There's a lot of things in there that are going to ebb and flow and move in directions that might have not that much to do with the cycle and so it's tough to read the tea leaves, as it were. But these big, big numbers coming in on production and jobs and profits; those are really important for the cycle and they do seem to have made a turn and that's in the big picture the really important thing.
PREWITT: Well, what's the single most optimistic piece of evidence you've seen?
ACHUTHAN: Probably profitability; that's a critical underpinning of why an economy would expand. If you think of the logic of your running a business, be it large or small, if you're profitable you are thinking about ways to get bigger. So you can make more money. That's the fundamental kind of incentive under the capitalistic market economy. And so if profits are growing, good things often follow in its wake like higher production and higher employment and higher income, although it very often may be two steps forward one step back.
PREWITT: So much of that profit growth we see though comes from cost cutting though, not from actual sales.
ACHUTHAN: Well, yes and that's actually what a recession is in a way. It's - if you can make the rapid adjustment to become profitable in a very tough environment then you're a survivor. And you are going to be lean and mean going into the next upswing of the cycle. You'll be more profitable quicker and when top line growth stabilizes and increases, your profits multiply. And we're seeing that in a few cases for example with some of these company announcements.
PREWITT: So we see Research in Motion buying back $1.2 billion worth of stock, Stanley Works buys Black and Decker, Warren Buffet buys Burlington Northern; it's all part of the same thing.
ACHUTHAN: Well they're all saying, look these business plans are profitable here, what about the profits once the economy starts to recover? I want to be part of that. And they're gaining exposure to those things that they know well or have more comfort with.
PREWITT: Well, there's been a lot of talk about that Wall Street Journal piece earlier in the week about all the cash that corporations are sitting on. Is what you're saying here that they're going to stop sitting on it and actually start spending it?
ACHUTHAN: Well at some point. I don't think that's today, that's later on maybe next year. It's also part of the reason why I'm a little less freaked out by slow loan growth because people have cash, corporations have cash. Right now they also have excess capacity that's idle, that's why inflation pressures aren't running away and they don't need to borrow a lot of money in order to increase capacity or production if they wanted to because of that cash. So in a roundabout way I'm saying its normal that credit growth slows even though the recovery is underway; that's a normal cyclical pattern and in that sense it's very normal today even though there's these very large question about the overall credit markets.
PREWITT: Our guest host is Lakshman Achuthan of Economic Cycle Research. Coming up in about less than thirty minutes we'll be talking gold with Thomas Winmill of Midas Management. Gold of course hit a record, at least in nominal dollars, of 1,098.50 in early trading yesterday, right now 1,089.50, it's up $2.20 over yesterday's close in New York. Well, as we were saying corporations have lots of cash, banks have lots of cash -
ACHUTHAN: Yes.
PREWITT: But again, they're not lending it.
ACHUTHAN: Not lending and here remember, I mean it's hard to forget, that many of the banks that are still around are around because they survived a near-death experience and under those circumstances they are very risk averse, hesitant to get exposed and be undercapitalized. To the contrary they're going the other way. There was a story about Citibank sitting on just oodles of money.
PREWITT: Sure.
ACHUTHAN: To protect itself in essence and to get its capital requirements well above the minimums. Also there's the demand for loans, right? As we were saying on the corporate side you don't have a large demand yet because they have cash and on the household side, you see actually people increasing their savings; kind of the opposite of borrowing money. And that's again a normal pattern in the early stages, the first few quarters of the recovery. That can't go on indefinitely but in the early stages not at all unusual. So I think on balance a healthy development.
PREWITT: Well we had this situation that surfaced earlier this week, Lakshman, where the banks say yes we're building up all these cash reserves, we're sitting on all this money because federal regulators want us too.
ACHUTHAN: Right.
PREWITT: And then we have Treasury Secretary Geithner, one of the federal regulators appearing on Meet the Press Sunday afternoon, you can hear it here on Bloomberg Radio, saying come on, banks you've got to start lending the money to get the economy moving again. So how do you reconcile those two?
ACHUTHAN: You don't reconcile those and this the big, big hypocrisy in what's going on. On the one hand we partially got into this mess, this credit crisis and this financial panic and the associated recession because of sloppy lending in essence. Right? There's all these technical terms for it, but basically people were a little too loose with their money.
PREWITT: Because there was plenty of cash around.
ACHUTHAN: Yes, and so the answer, right, the tonic for all of this is to give people even more money and in essence that with the government extending credit and TARP and low interest rates you are introducing all kinds of cash liquidity into the market, it's trying to find a place to go and on the margin you are seeing some things. There's questions, for example, we're going to talk about gold in a little while. Is part of the reason its going up simply because of all this cash sitting around? Is it this risk trade where money is essentially costs you zero to hold so why don't you put it on something that's rising like gold, and the so called risk trade going up? Any price that is rising gets further inflated because of these low rates. So in a round about way what I'm saying is that the cure here is - brings with it a huge risk of another bubble, which those things don't tend to end very well.
PREWITT: Our guest host is Lakshman Achuthan of Economic Cycle Research.
(BREAK)
PREWITT: Lakshman Achuthan of Economic Cycle Research is our guest host. Tom Keene is back tomorrow. Tomorrow we get the big number on the economy, Lakshman, the unemployment rate for October.
ACHUTHAN: Sure.
PREWITT: 9.9 are what our survey says.
ACHUTHAN: Boy, you get pretty close to 10 it sounds like to me. And it could easily, look it could easily pop there. We should be fully prepared for it and not surprised by it reaching 10% rate because it often rises into a recovery.
PREWITT: Explain how that works that it rises through a recovery.
ACHUTHAN: Well, unemployment can be a so called lagging indicator. It's slightly behind where the overall economy is. Also, there's a few technical issues, just demographics, people entering the workforce as a result of the population growing require that 125,000 or so new jobs are created each month in order to tread water, in order for that number to stay stable you need to do that. And finally, as it becomes clearer to everyone that the economy's a bit more stable than it was say a couple of quarters ago, you're incentivized to go out and look for a job and you start to get picked up again in the way that unemployment statistics are calculated. So all those reasons drive it up in the early stage of a recovery. I'll point out, it's not the happiest example here, but I'll point out that we've seen very high unemployment rates into the beginning of a recovery. In March of 1933, when that first leg of the Great Depression was going on, you had unemployment roughly the way we calculate it today, at 25% and rising. And we had just begun a 4-year business cycle expansion where the economy grew, started growing at 10% and kept it up every year, 10% and unemployment started falling at a 3% rate. So when it's - it's darkest before dawn. That's how I'll sum it up.
PREWITT: Sure. And this is a point at which we like to point out that the economy today is very different from the economy in the early 1930's.
ACHUTHAN: Huge, hugely different. Hugely different and even though we've had some nice news on the manufacturing front where things have become a bit stronger than people expected and even with the jobs situation there it looks a little bit more stable, I wouldn't bet on that. I think fundamentally there are structural things going on in manufacturing unemployment that won't be cured by recovery and so I think rustbelt once again those jobs market will still hurt.
PREWITT: Lakshman Achuthan of Economic Cycle Research is our guest host.
07:24
By Ken PrewittAssociated PressThursday, November 05, 2009
Digg Delicious Google It furl It Technorati Email Print Share [-] Text [+] Read/Post Comments
xfdfw BLOOMBERG-TV-05
ADVERTISEMENT
ECRI MANAGING DIRECTOR LAKSHMAN ACHUTHAN ON BLOOMBERG RADIONOVEMBER 05, 2009
SPEAKERS: LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH INSTITUTE
KEN PREWITT, BLOOMBERG NEWS
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
07:07
KEN PREWITT, BLOOMBERG NEWS: Our guest host this morning is Lakshman Achuthan of Economic Cycle Research. He's in the studio with us just in time to comment on the Bank of England, which says the pickup in UK economic activity may soon be evident; it's going to keep the size of asset purchases under review. It's raised its asset purchase target to 200 billion pounds and maintained its benchmark interest rate at five-tenths of 1%, so no change, which pretty much echoes what the Federal Reserve did yesterday, right?
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH INSTITUTE: Yes, absolutely. All of these central banks are trying to thread the needle here and not stress anybody out with any fears that they're pulling back quickly, but on the other hand they are watching the evidence coming in that things are getting not only less bad, but better. And they're certainly hopeful that that will - whatever they're doing they don't want to mess that up.
PREWITT: Well, that's one of our big stories this morning and the other big story has not to do with the UK, it has to do with the Bronx where the Yankees won the World Series, Jerry Azar is here.
PREWITT: Our guest host, Lakshman Achuthan of Economic Cycle Research. Well, exactly where are we in the cycle here?
ACHUTHAN: Isn't that it? Exactly where are we?
PREWITT: Yes, there's still a cycle, right? There's another deal.
ACHUTHAN: Yes, yes, yes. Cycle is very, very present and what's so funny, or not funny, but what we're going through here is that every single piece of data comes in and we, the collective we the market looks at it as though just because it's really fresh, it came out just a couple of minutes ago that it must be incredibly prescient and that's not always the case. There's a lot of things in there that are going to ebb and flow and move in directions that might have not that much to do with the cycle and so it's tough to read the tea leaves, as it were. But these big, big numbers coming in on production and jobs and profits; those are really important for the cycle and they do seem to have made a turn and that's in the big picture the really important thing.
PREWITT: Well, what's the single most optimistic piece of evidence you've seen?
ACHUTHAN: Probably profitability; that's a critical underpinning of why an economy would expand. If you think of the logic of your running a business, be it large or small, if you're profitable you are thinking about ways to get bigger. So you can make more money. That's the fundamental kind of incentive under the capitalistic market economy. And so if profits are growing, good things often follow in its wake like higher production and higher employment and higher income, although it very often may be two steps forward one step back.
PREWITT: So much of that profit growth we see though comes from cost cutting though, not from actual sales.
ACHUTHAN: Well, yes and that's actually what a recession is in a way. It's - if you can make the rapid adjustment to become profitable in a very tough environment then you're a survivor. And you are going to be lean and mean going into the next upswing of the cycle. You'll be more profitable quicker and when top line growth stabilizes and increases, your profits multiply. And we're seeing that in a few cases for example with some of these company announcements.
PREWITT: So we see Research in Motion buying back $1.2 billion worth of stock, Stanley Works buys Black and Decker, Warren Buffet buys Burlington Northern; it's all part of the same thing.
ACHUTHAN: Well they're all saying, look these business plans are profitable here, what about the profits once the economy starts to recover? I want to be part of that. And they're gaining exposure to those things that they know well or have more comfort with.
PREWITT: Well, there's been a lot of talk about that Wall Street Journal piece earlier in the week about all the cash that corporations are sitting on. Is what you're saying here that they're going to stop sitting on it and actually start spending it?
ACHUTHAN: Well at some point. I don't think that's today, that's later on maybe next year. It's also part of the reason why I'm a little less freaked out by slow loan growth because people have cash, corporations have cash. Right now they also have excess capacity that's idle, that's why inflation pressures aren't running away and they don't need to borrow a lot of money in order to increase capacity or production if they wanted to because of that cash. So in a roundabout way I'm saying its normal that credit growth slows even though the recovery is underway; that's a normal cyclical pattern and in that sense it's very normal today even though there's these very large question about the overall credit markets.
PREWITT: Our guest host is Lakshman Achuthan of Economic Cycle Research. Coming up in about less than thirty minutes we'll be talking gold with Thomas Winmill of Midas Management. Gold of course hit a record, at least in nominal dollars, of 1,098.50 in early trading yesterday, right now 1,089.50, it's up $2.20 over yesterday's close in New York. Well, as we were saying corporations have lots of cash, banks have lots of cash -
ACHUTHAN: Yes.
PREWITT: But again, they're not lending it.
ACHUTHAN: Not lending and here remember, I mean it's hard to forget, that many of the banks that are still around are around because they survived a near-death experience and under those circumstances they are very risk averse, hesitant to get exposed and be undercapitalized. To the contrary they're going the other way. There was a story about Citibank sitting on just oodles of money.
PREWITT: Sure.
ACHUTHAN: To protect itself in essence and to get its capital requirements well above the minimums. Also there's the demand for loans, right? As we were saying on the corporate side you don't have a large demand yet because they have cash and on the household side, you see actually people increasing their savings; kind of the opposite of borrowing money. And that's again a normal pattern in the early stages, the first few quarters of the recovery. That can't go on indefinitely but in the early stages not at all unusual. So I think on balance a healthy development.
PREWITT: Well we had this situation that surfaced earlier this week, Lakshman, where the banks say yes we're building up all these cash reserves, we're sitting on all this money because federal regulators want us too.
ACHUTHAN: Right.
PREWITT: And then we have Treasury Secretary Geithner, one of the federal regulators appearing on Meet the Press Sunday afternoon, you can hear it here on Bloomberg Radio, saying come on, banks you've got to start lending the money to get the economy moving again. So how do you reconcile those two?
ACHUTHAN: You don't reconcile those and this the big, big hypocrisy in what's going on. On the one hand we partially got into this mess, this credit crisis and this financial panic and the associated recession because of sloppy lending in essence. Right? There's all these technical terms for it, but basically people were a little too loose with their money.
PREWITT: Because there was plenty of cash around.
ACHUTHAN: Yes, and so the answer, right, the tonic for all of this is to give people even more money and in essence that with the government extending credit and TARP and low interest rates you are introducing all kinds of cash liquidity into the market, it's trying to find a place to go and on the margin you are seeing some things. There's questions, for example, we're going to talk about gold in a little while. Is part of the reason its going up simply because of all this cash sitting around? Is it this risk trade where money is essentially costs you zero to hold so why don't you put it on something that's rising like gold, and the so called risk trade going up? Any price that is rising gets further inflated because of these low rates. So in a round about way what I'm saying is that the cure here is - brings with it a huge risk of another bubble, which those things don't tend to end very well.
PREWITT: Our guest host is Lakshman Achuthan of Economic Cycle Research.
(BREAK)
PREWITT: Lakshman Achuthan of Economic Cycle Research is our guest host. Tom Keene is back tomorrow. Tomorrow we get the big number on the economy, Lakshman, the unemployment rate for October.
ACHUTHAN: Sure.
PREWITT: 9.9 are what our survey says.
ACHUTHAN: Boy, you get pretty close to 10 it sounds like to me. And it could easily, look it could easily pop there. We should be fully prepared for it and not surprised by it reaching 10% rate because it often rises into a recovery.
PREWITT: Explain how that works that it rises through a recovery.
ACHUTHAN: Well, unemployment can be a so called lagging indicator. It's slightly behind where the overall economy is. Also, there's a few technical issues, just demographics, people entering the workforce as a result of the population growing require that 125,000 or so new jobs are created each month in order to tread water, in order for that number to stay stable you need to do that. And finally, as it becomes clearer to everyone that the economy's a bit more stable than it was say a couple of quarters ago, you're incentivized to go out and look for a job and you start to get picked up again in the way that unemployment statistics are calculated. So all those reasons drive it up in the early stage of a recovery. I'll point out, it's not the happiest example here, but I'll point out that we've seen very high unemployment rates into the beginning of a recovery. In March of 1933, when that first leg of the Great Depression was going on, you had unemployment roughly the way we calculate it today, at 25% and rising. And we had just begun a 4-year business cycle expansion where the economy grew, started growing at 10% and kept it up every year, 10% and unemployment started falling at a 3% rate. So when it's - it's darkest before dawn. That's how I'll sum it up.
PREWITT: Sure. And this is a point at which we like to point out that the economy today is very different from the economy in the early 1930's.
ACHUTHAN: Huge, hugely different. Hugely different and even though we've had some nice news on the manufacturing front where things have become a bit stronger than people expected and even with the jobs situation there it looks a little bit more stable, I wouldn't bet on that. I think fundamentally there are structural things going on in manufacturing unemployment that won't be cured by recovery and so I think rustbelt once again those jobs market will still hurt.
PREWITT: Lakshman Achuthan of Economic Cycle Research is our guest host.
07:24
选择“Disable on www.wenxuecity.com”
选择“don't run on pages on this domain”
