August 30 - with late addition

"If you can't control the wind, adjust your sails."

S&P earnings: can we expect what they're expecting?
in 2008, 12mth operating earnings were 49.51, while reported earnings were 14.88
in 2009, they were 56.86 and 50.97, gains of 15% and 243%
analysts are estimating 2010 will come in at 83.04 and 70.36, which would be gains of 46% and 38%
and for 2011, estimates are for 94.31 and 80.20, which are gains of 14% for each

those are pretty robust E-gains compared with sales: sales per share were $232.38 in Q1, up 5% from the trough of $221.80 in Q1 of 2009, but still 17% below the level in the 2nd quarter of 2008; on a trailing 12-mth basis, sales through Q1 of $919 remain 15% below the peak level through Sept 2008 of $1080

so, given the underlying economic dynamics, can we expect sales growth to pick up enough to support those earnings growth estimates; or will companies have to squeeze even more blood from stones? how much more E-growth can be attained with tepid sales growth?

( chart from Doug Short)

and, why is sales growth tepid? consumer deleveraging and no income growth (see yesterday's chart)

late addition: why else should earnings growth be suspect? how about the chart Mish posted:

what this chart shows is the ratio of loan loss provisions to non-performing loans for all banks across the entire banking system; either banks think those non-performing loans are not a problem (so they haven't felt the need to provision for them and don't think that will come back to haunt them), or they were not provisioning for losses that are coming down the pipe because they wanted to boost earnings (any provisions would be a charge against earnings, so if you don't want to hurt E, you don't take provisions; easy, right? typical extend and pretend; Mish resumed the discussion here)

Monetarists follow Milton Friedman to the grave. Caroline Baum, Bloomberg.

Bernanke has gone out of his way to explain the Fed’s purchases of $1.4 trillion of agency mortgage- backed and debt securities as credit easing, not quantitative easing. Credit easing is by definition quantitative. It doesn’t matter what the Fed buys: Treasuries, Toyotas, toilets or Tootsie Rolls. It’s the act of buying something that creates money.

I like that line about Toyotas and tootsie rolls; but I disagree with the notion that the expansion of the Fed's balance sheet creates money; as discusses in earlier posts, its an asset swap; as van Hoisingon and Lacy Hunt so professorially explains, QE expands the monetary base, but the monetary base does not constitute money; and as Mish insists, "given that we have a fiat-based credit system, it is... silly to discuss inflation/deflation without paying attention to credit... I define inflation as a net expansion of money supply and credit, with credit marked-to-market. Deflation is a net contraction of money supply and credit, with credit marked-to-market."; so no matter what the monetary base is doing, as long as credit, which dwarves M2, keeps contraction, there's deflation in terms of the amount of "money" availabe and being used for spending

Warning: why cheaper money won't mean more jobs. Robert Reich.
individuals aren't taking on more debt; small business isn't; big business is; these corporations, however, aren't investing in the productive capacity of the domestic economy, they're either sitting on cash, or, worse, using their cash to expand productive capacity in cheaper abodes abroad, or they'll do M&A, which will lead to further contraction of productive capacity domestically

Chris Whalen is an expert on the U.S. financial sector and always worth listening to; he believes that the Bernanke Fed drives deflation with zero rate policy, via zerohedge

low rates are killing the U.S. economy and have created an interest rates trap for financial institutions and other fixed-income investors... Over the next year, banks, retirees and other interest rates sensitive investors are going to see their cash flow fall further as zero interest rate policy drains the NIM [net interest margin] from the dollar financial system. Not surprisingly, these same individuals and organizations are cutting expenditures to reflect falling cash flow on their investments.... By keeping interest rates at zero, the Fed is forcing individuals and corporations to save more.

On the other hand, and why I don't buy the notion that low interest rates lead to delfation, consider all the arguments by various authors that Mark Thoma links to in his post, The correspondence principle:

The proposition that a commitment by the Fed to maintain a low nominal interest rate indefinitely must lead to deflation (rather than accelerating inflation) defies common sense, economic intuition, and the monetarist models of an earlier generation.

This was was pointed out forcefully and in short order by Andy Harless, Nick Rowe, Robert Waldmann, Scott Sumner, Mark Thoma, Ryan Avent, Brad DeLong, Karl Smith, Paul Krugman and many other notables.

Germany's rebound is no cause for cheer. Wolfgang Munchau, FT.

on Germany's begger-thy-neighbour policies, and on its export-reliance being dependent on global growth; his conclusion?

Germany’s economic strength is likely to be persistent, toxic and quite possibly self-defeating in the long-run.

Letter to shareholders. John Hussman.

Given that GDP growth over the past year has amounted to $563 billion, while Federal government debt has increased by $1.6 trillion, there appears to be little evidence that the positive economic growth of recent quarters was driven by much else but the deficit spending of government and to a lesser extent, the aggressive purchase of mortgage securities by the Federal Reserve. Private sector demand, income less government transfer payments, employment growth, housing activity and other measures of "intrinsic" economic activity remain remarkably weak. With the impact of stimulus spending trailing off, and little evidence that debt has been restructured in proportion to the cash flows available to service that debt, expectations for economic expansion appear to be based more on hope than on a careful reading of economic history.

A report by Credit Suisse came out earlier this month which purported to "correct the understatement of income" in official statistics in China. The study argues that household income is about 30% higher than official stats say.

Michael Pettis discusses why one should not receive this as positive news, in Have we underestimated Chinese consumption?

even if income (hidden/gray/illegal) and consumption are truly higher than officially reported, underconsumption is an undeniable problem:

How do we know that China has an under-consumption problem? To answer that question it is unnecessary even to look at the consumption statistics. All you need to know is that China has a very high investment rate (perhaps the highest in the world) and a huge trade surplus.... The only way a country can run an extraordinarily high investment rate and an extraordinarily high trade surplus is if consumption is extraordinarily low.

also, the study implies that underconsumption is an even bigger problem than official stats suggest; rather than the (official) consumption rate of (an extraordinarily low) 36%, the # may be as low as 31%, because

So while Chinese household income might be significantly higher than we thought, most of that additional income goes to the high-savings rich. The Chinese savings rate, consequently, is also much higher and the Chinese consumption rate much lower than the official numbers suggest.

So, was that Credit Suisse study really good news, as some believed?

data:

ECRI WLI came out on Friday at -9.9; but, as usual, the previous week was revised down, to -10.1 from -10; also on Friday, UofM confidence fell to 68.9

today, personal income (up 0.2% in July), personal spending (up 0.4%), PCE deflator (1.5% YoY)and PCE core (up 1.4% YoY) showed no real surprises; and Dallas Fed manufacturing activity came in below expectations, at -13.5 (NAPM Milwaukee and Chicago purchasing manager tomorrow, ISM on Wed; 52.8 expected, down from 55.5)

other fare:
One lump or two? Kunstler.

Why Mr. Obama has turned out to be such a weenie remains a mystery... He certainly appears to be hostage of the more malign forces in society these days -- the medical insurance racket, the too-big-to-fail banks, the multi-national corporations. But I don't believe it's because he wants to suck up to them, or join their country clubs when his current job ends.

My own guess is that he's been informed that the system is so fragile that if he dares to disturb even one teensy-weensy part of it -- for instance, by throwing some executives from Goldman Sachs, Merrill Lynch, et cetera, into federal prison -- that said system will fly to pieces in a fortnight. So Obama's main task for a year and a half has been to desperately apply baling wire and duct tape to the banking system while telling fibs to the public about a wished-for recovery to a prior state.