Navarro Provides ACUMA with Primer on Economic Forecasting
LAS VEGAS -- Dr. Peter Navarro gave ACUMA's Fall Leadership Conference attendees a lesson in Do-It-Yourself Economics.
Navarro, associate professor of economics and public policy at the University of California, Irvine, Paul Merage School of Business, likened it to the "learn to fish" analogy. "If you teach a man to forecast, you feed him for a lifetime," he joked. A lifetime of understanding the rate of growth in real GDP (which allows one to understand the business cycle, which is linked to the interest rate cycle) may seem esoteric for many, but isn't as nerdy as it seems, given the reality of making mortgage payments. The impact can be very personal, and CU mortgage officials here were deeply interested in Navarro's plain-speaking presentation.
First, he shattered the iconic image of former Fed Chairman Alan Greenspan. "I'm not a fan. He caused the last recession. He caused the tech bubble and he caused the present housing bubble. The Federal Reserve screws up more times than they get it right." He also bashed current Fed honcho Ben Bernanke. "I didn't think Bernanke would do it. I think 50 bps was the wrong thing to do. Only three weeks ago he was saying that the Fed wouldn't bail out speculative real estate investors and irrational lenders. But this game is about perception, and the perception he left with this cut is that we're really in deeper trouble than anyone wants to admit," said Navarro.
Like the old shell game, Navarro advised to keep an eye on the bond market and the value of the dollar. Therein lies the tale, he said. "Listen, credit unions can't do sophisticated hedging strategies and you are in a very interest rate-sensitive industry. You are in the crosshairs and are vulnerable to recession. So you must cultivate economic and financial literacy. That means, in real terms, being aware enough to take advantage of the business cycle." (See Business Cycle Graphic.)
"The Fed cuts rates in a recession and raises them in peak times," said Navarro. But how do you know peak from trough? Using the simple John Maynard Keynes Equation, anyone can do it and no PhD is required. It goes like this:
GDP + C + I + G + (IM -- X)
That's Gross Domestic Product plus Consumption plus Business Investment plus Government Spending plus Imports less Exports. The Fed's hold on monetary policy isn't absolute, however, as sometimes, well, things like recessions happen. Mountains of paper are written to explain why the Fed's actions or inaction caused or prevented it, but in the end it's not unlike the gaming tables in the casinos, Navarro posited. Still, it's a science labeled dismal for a reason; that being that people get very hurt by the wild swings and businesses crumble or soar on timing the cycles to borrowing and lending prudently.
The perception that people are wealthier than they really are may be at the core of what causes a recession. But first something has to happen to light the spark, like a real boost in technology and productivity (like that brought about by the computer revolution).
"Consumption went way up during the tech boom. People's stock portfolios hit the stratosphere," said Navarro. Home values soared after that and McMansions were built like Levittown subdivisions. Government went on a tax holiday and spent billions running up huge deficits in the process. "Greenspan said nothing about the second round of Bush tax cuts and now tries to deny he favored them in his new book. Those Bush deficits were fed by those tax cuts, the Iraq war and the Medicare Prescription Drug Benefit. Do you remember Paul O'Neil, the first Bush Treasury Secretary? He wanted to use the surplus Clinton left to fix Social Security, but they fired him."
People buoyed by home values used their houses like ATMs to fund their children's college tuition (which also soared) or installed marble kitchens and baths and the "irrational exuberance" alarm
clock was set to buzz American consumers awake with a start.
Oil price shocks and war on terror spending and drought and famine are the wild cards in the deck no one ever expects to pick, but these "exogenous shocks" also contribute to a possible recession,
"Now, consumer spending is at a low and retail sales are down. But credit card spending is way up," warned Navarro. The importance of consumption is key, because it is two-thirds of the GDP equation. GDP + Consumption plus Investment plus Government Spending plus Net Exports.
The American savings rate is negative, so there's no soft cushion to fall back on and home values are decreasing (except in a few areas). "Here in Vegas you have the speculative foreclosure center of America," he said. "There's a wave of forced refinancings coming your way," Navarro said. That's an opportunity of unprecedented proportions for credit unions. It'll be a seller's market for new home mortgages and as other lenders dwindle, you can step in."
Soft or Hard Landing?
Here's where the guessing gets tougher, Navarro stressed. The economy may have a "soft landing" if business (which pocketed lots of profit in the boom) takes up the slack left by consumer spending. "Business investment must replace consumer contraction." The "hard landing" will be likely if businesses opt for mergers and acquisitions over reinvestment in plant and equipment and saves cash by off-shoring more jobs. That landing will come with a real thud if the Fed's strategy leads to stagflation, Navarro said.