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The Great Puzzlements:
Economic Realities, Market Misinterpretations and Government Policy
By Dave Livingston, Managing Principal, Llinlithgow Associates (www.llinlithgow.com)
 Dave is a management consultant primarily focused on improving enterprise performance by coupling strategy with execution thru the design and implementation of workable, integrated  management systems. He blogs on this and related issues in Economics, Markets & Investments and specific industries and companies atwww.llinlithwo.com/bizzx
 
 , his BizzXceleration blog.
 
Over the last two years we’ve all been puzzled, even frightened, by the behavior of the economy andhow the markets have reacted to them. We’ve also faced the biggest public policy challenges and actionssince the Great Depression and World War 2. However, our argument is that the economy is not quite ashard to understand as most think if you have the right toolkit. Nor is market behavior, for similarreasons. And the two are directly linked, though often in incomprehensible ways. This essay collectionis a survey of the economic situation, how the markets interpreted the data (or mis-interpreted it as thecase likely is) and government policy on the credit markets, monetary policy and public spending – andhow they not only influenced the last year but saved us from falling into the abyss of Great Depression2.0. Which still leaves us with the Great Recession and a wildly distorted Market as well as publicpolicy actions that leave many apprehensive and confused.In this collection you’ll find a running series of blog postings presenting economic data straight-forwardly using some easy to grasp graphical tools that make it possible for everyone to be their owneconomist to some extent. They cover the period May through August 2009 and ground our currentcircumstances with a lot of reusable machinery and still applicable data.Inter-mixed are posts on the state of the markets, now they are behaving and their linkages, or not, to theeconomic data. Finally there are posts on fiscal and monetary policy as well as some discussions of thestructure of the stimulus package and the prospects and sources of deficits and debts. You’ll find ouranalysis is vastly different from the headlines, the talking heads of the commentariats and the politicalpartisans who are selling their positions and not necessarily what helps the country or your position.You’ll also find discussions of investment strategy and why the old simple rules no longer hold and youneed to dramatically re-think your own investing.Taken all together the collection of data, tools and machinery, analysis and interpretations andconceptual graphics and explanations provide a comprehensive survey that we don’t think is duplicatedelsewhere. And a fairly complete toolkit for you to use to your own advantage.As always with our essays they are largely drawn from an inventory of blog postings built up over threeyears. For each essay the URL is listed and each post generally contains a very extensive list of 
 
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background reading excerpts. These not only document the issues and companies but provide a libraryof resources for you in your own investigations.
Table of Contents
1. Real Data Interlude I: Econ-ecostructure (GDP to Trade) 32. Real Data Interlude II: QtQ vs YoY and Economic 83. What's It All Mean: Economic Landscape 104. From Economy to Markets: More Bubble Busting Due? 135. The Long Dark Veil: Economy, Markets, Business 166. They See What We See: Weak Recovery, De-Leveraging, Strategic Change 197. What the Markets See: Yellow Weeds Thru Rosy Coke Bottles 218. The Vast, Ignored Difference: Economic Bottoming vs Recovery 259. Time to Fold 'em: Market Outlook vs Investment Strategies 2710. Drugged Wallabies, Crop Circles and World Economies 3111. Brown Shoots, Weak Markets, Resilient Business? 3412. Beyond the CRE "Bombshell": Real Stress Testing for Finance 3613. Realities vs Rhetorics: Economy, Policy, Real Data 3914. About Llinlithgow Associates 42
 
 
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May 07, 2009
Real Data Interlude I: Econ-ecostructure (GDP to Trade)
http://llinlithgow.com/bizzX/2009/05/real_data_interlude_i_econecos.html Now even Schwab has called March 9 as a marketbottom (we'll revisit that) and suggested buying thedips; all based on the hypothesis that we've seen somany green shoots that the worst is over. As we keepsaying there's at least two huge problems with tellingthe difference between them and yellow weeds. Firstoff is what does the data really say and second what'sthe long-term outlook. When everybody fromBernanke to the CBO to the acronymics (OECD,IMF,World Bank) tells us that the long-term outlook isvery week for years somethings wrong. We visitedthis point in a prior post on deconstructing GDP (WillThe Real Economy Stand Up? : GDP, Consumption,Investment) but thought we'd take another detour intothe real data and try and offer up some foundations.Just for the record YoY GDP dropped much worse in Q1 than in Q4, as you can see from the table below.At thispoint in case you're wondering why do I care - we'll let the cartoon composite speak for us and our argumentssubliminally. Judging from friends, neighbors and acquaintances it pretty well captures the general response. Thesad fact is that much of this was avoidable but that's a long-term structural statement so never mind. The sadderfact is that most of it was dodgable if you'd paid attention to the warning signs. And that didn't require majornational policy changes - just a good dashboard of properly filtered and structured indicators.
ADP Private Employment: Real Trends
Also just for the record everybody got all excitedabout ADP's private employment report but thereality is that, again YoY, it went down -2.4, -2.9, -3.4, -4.0 and -4.3% YoY in the last five months.Not only wasn't that good news from last month tothis but that looks like an accelerating downtrendto us.The key problem is quick hit headlines andsounds bites that report on the MtM instead of theYoY changes. To try and show you what thereporting covers vs. what we think you should belooking at we've built this chart of the MtMchanges annualized vs. the YoY% changes.Take a moment and see how warm and fuzzy youfeel about all that; us, we go back to the cartoonas capturing the spirit of the moment. TheZeitgeist is shock and awe but we're probably all too burned out by adrenaline surges to panic anymore. So wethought we'd dig thru the real data and trying and frame the situation a little better in a couple of posts. This onewill give you some background on the structure and components of the economy and we'll follow it up for each ofthese components with a post comparing QtQ vs YoY as soon as tomorrow's employment numbers come in.
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BizzX

Just published a current update on the markets, the economy, policy and talking head nonsense: Markets in a Policy-Driven Economy: Turbulence, Data and Idiocies at http://llinlithgow.com/bizzX/2009/11/... This is a current view of the situation surveyed in "The Great Puzzlement".

reply11 / 23 / 2009
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