Tuesday, February 3, 2009

Fiscal Stimulus a Disaster - Kalecki Levy Suggests SPX Annual Earnings of $27

The following rough grid outlines a breakdown of HR 1 ("The America Recovery and.....2009).
The actual cash flows:

Income transfer/support payments will be saved in this environment - so too with tax cuts assuming the businesses are still alive and turning a profit and the individuals have income to pay taxes upon.

That leads $29 billion in actual spend in 2009 and $120 billion in 2010.

In a typical Keynesian type of logic I use a Kalecki-Levy identity to figure out what the percentage of GDP will be corporate profits. (Go here if you wish to read on Kalecki-Levy http://ideas.repec.org/p/wpa/wuwpma/0004056.html )

For 2009 (which I provide a graph for below) the % of GDP corporate profits assuming an increase of savings to 7% and a fiscal spend of 29 billion is 4.75% for the usual 10% to 12%.

Calibrating that to SPX annual earnings, that moves the $70 to $90 corporate earnings to $27, down from the usual $70 to $90. At that point multiple will be no more than 10X, so the SPX will be less than 300, a drop of another 70% for 2009.

When the additional $117 billion kicks in during 2010, the psychology will be so dire such that savings will undoubtedly go well past 10% and the multiple contract further so any earnings increase will be offset by savings increase and then the decreasing multiple will likely make for negative returns for SPX in 2010.

The identities and formulation for Kalecki Levy is rather straight forward and we have more than enough real savings number, industrial production numbers, inventory , and other data that if we use the $29 billion as the independent variable - this is not a very strident or contorted conclusion.

1 comment:

  1. I found your site looking for Kalecki-Levy models. Great stuff. Keep up the good work. I started an invesment club recently and it's been quite a learning curve for newcomers to the financial world in a tough economy. After finding your post, I read Paul Krugman's Return of Depression Economics book to try and understand macroeconomics and why "stimulus" packages supposedly work at all. Krugman suggests that going the stimulus route is an all or nothing game and K-L analysis suggests that perhaps we didn't go far enough to instill consumer confidence and avert the savings trap. Thanks again.