Monday, August 10, 2009

The economy: neck-deep in the proverbial brown substance

I'm sure you've seen some of the optimistic headlines about the economy in the news media over the past few days. A selection:

CNN - "I think we're arriving at the turn," said Mark Zandi, chief economist at Moody's "I think we'll reach it this month, maybe September, but we'll look back and say this is the quarter the recession ended."

MSNBC - The Blue Chip Economic Indicators survey of private economists released on Monday showed about 90 percent of the respondents surveyed believe the economic downturn will be declared to have ended this quarter.

BBC - The European Central Bank (ECB) has said it expects to see growth returning to the global economy next year as it kept interest rates on hold at 1%. ... it said that there were signs the recession was "bottoming out" and that "positive growth" would return in 2010.

If you believe these forecasts, friends, there's a bridge in Brooklyn, New York City, that I'd like to sell you. Cash only, please, and in small bills.

To put it as bluntly and as honestly as possible: the financial market 'experts', and the Government figures responsible for this mess, are lying to all of us. The economy is not getting better - it's getting worse.

Not convinced? You think I'm full of it? Well, consider just these three reports, for a start.

The indispensable Karl Denninger points out:

The Stock Market has been on a tear, powered by printed money. Bernanke and his clowns have been monetizing debt - only $400 billion of the more than $2 trillion in market increase came out of money markets - the rest of the "firepower" - more than $1.5 trillion - came from "new bank reserves" used to buy mortgage-backed securities (Fannie and Freddie) and Treasuries - a figure that incidentally is close to the market's rise in terms of capitalization.

Annualized, the $181 billion deficit increase in July alone is approaching one half of the full year 2008 deficit - in one month - and Treasury has announced it is going to sell almost half that much again this week in new Treasury issuance - that is, yet more deficit (or addition to debt.)

Think about a personal example. You get a NOD [Notice of Default] in the mail and realize there is no chance you can pay the mortgage in full going forward. Therefore, you don't - on purpose.

Instead, you spend the mortgage money on consumption. You go out to eat every night, you take a cruise, you live the high life. Why not? You've got an extra $3,000 a month now, and by God you're going to spend it. Even better, since you know full well that eventually your credit card companies will discover you're not paying the mortgage, you go out and immediately run those up to the rafters, booking that exotic dream vacation you've always wanted but could never afford.

Your lifestyle goes from being cash-strapped and eating Mac-N-Cheese trying to pay your mortgage to that of a King! Why this is great - what could possibly go wrong?

This is what America's government has chosen to do under Barack Obama, Tim Geithner, Ben Bernanke and our Congress.

Let me ask: How does this end for you when you do it?

What makes you think it will be different for our nation?

The truth of this policy is found in the S&P 500's P/E [price/earnings ratio] - it was over 100 for the first quarter (a level never before reached in the index's history) and is over 140 today. There are those who claim that we must use "operating earnings", disregarding credit losses.

Those are the same folks who claim that their standard of living has greatly increased after they got the NOD and decided to ignore it, instead redirecting what should be a mortgage payment into an exotic vacation.

. . .

The true unemployment rate is closer to 20% than 9%, but you won't hear that reported on the evening news. You will see and hear it though around the shopping centers and malls of America.

Here's just one example: Where are all the people?

This is LAST FRIDAY night at the most popular outdoor mall in the Destin area. A very popular place, and as recently as a year ago it would have been mobbed with teens and families enjoying the fantastic summer evening, some from out of town on vacation, some local.

They're all gone, their money drained, their credit cards declined.

. . .

You're welcome to believe "green shoots" if you wish. You're welcome to pile into the market with a P/E on actual reported earnings well over 100, more than twice the highest level ever before recorded. You're welcome to buy into or remain in a market that is pricing in a 5% GDP growth rate for the next four sequential quarters - every quarter.

I find such prognostications and beliefs to be the mark of magical thinking, not analysis, and that's when I'm being particularly polite. During my impolite moments I will suggest something more sinister - a coordinated effort by Congress, The President, The Fed and some of our nation's largest financial institutions to manipulate the market higher in a desperate attempt to raise capital from you, the sheeple, so they do not have to declare what any honest examination of their books would show: their state of being bankrupt.

The hope was that by doing so you'd be left holding the bag, and debt-accumulation might re-ignite with you "feeling better."

The error in this thought process was that they forgot that you really did get that NOD last month, and worse, your credit card was declined at The Destin Commons Starbucks when you tried to buy a Latte Friday night.

I will go on record here and now and say that I don't believe for a minute that the strategy of the banks and government will work, because I don't believe it can work. There are too many NODs, too many jobs lost, too much debt and too much excess capacity in the economy. The pushers at The Fed and Government will keep supplying heroin until the victim (that's the economy for you and I) has a heart attack, and that event will come later this year or sometime in 2010, probably sooner rather than later.

Neither I or anyone else can predict the precise trigger for it all coming unraveled, but I can do the math, and I know that it is utterly impossible for the economy to see +5% GDP growth for the next four quarters sequentially.

That's not going to happen, yet that's what's priced in at today's S&P 500 level - not allowing for any further appreciation in stock prices at all.

Head's up!

There's more at the link. If you're not reading Mr. Denninger's 'Market Ticker' daily, you're missing one of the most valuable financial advice resources out there.

Another invaluable voice, Mike Shedlock, has this to say about the housing market in particular.

Not long ago, the US was once a nation of savers. Now that the housing bubble has crashed and the stock market along with it, the US is poised to become a nation of savers again.

Peak Credit and her twin sister Peak Earnings have arrived. Here is a snip from the former.

... That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.

Children whose parents are being destroyed by debt now, will keep those memories for a long time.

Deflation or Inflation?

The raging debate now is when (not if) the Fed's massive printing is going to spark a huge round of "inflation" forcing up interest rates. The fears are unfounded.

The key to sorting this endgame out is simple: Financial deleveraging constitutes deflation by definition.

Household debt via bankruptcies, foreclosures, credit card defaults, and walk-aways is falling faster than the Fed is "effectively printing". I use the term "effectively printing" because the Fed can print all it wants and if the money just sits as excess reserves, the velocity of that money will be zero and it will not affect the economy or prices.

Moreover, savings are rising, and banks have little impetus to lend, and consumers and businesses are reluctant to borrow.

Shattered Housing Dreams

In the long run, consumption cannot grow faster than income. Borrowing to support consumption only works as long as asset prices are rising. Consumers were willing to go deeper in debt and banks were willing to lend based on the now-shattered dreams of forever rising home prices.

In aggregate, consumers are now unable to service their debt, and the deflationary deleveraging process has started. Consumers will either default on debt, pay their debt down very slowly over time, or some combination of both.

Thus, the most likely result of Bernanke's printing press operation will be to drag the "job loss recovery" out for another decade, just as happened in Japan.

Again, there's more at the link. Mike's 'Global Economic Analysis' should also be part of your daily reading.

(And to see Karl Denninger's take on the housing market madness at the moment - and he's vitriolic! - click the link. It's very unhappy reading.)

Finally, the inimitable Peter Schiff, who foresaw the current crisis years in advance, has this to say about the current state of the stock market.

Sobering stuff . . . but all true, I fear. I follow Peter Schiff's YouTube channel for his weekly talks, and find them uniformly excellent.

I highly recommend Karl Denninger, Mike Shedlock and Peter Schiff as antidotes to the cheerful claptrap being 'spun' by the news media and the authorities. The three I've cited don't lie, and they don't try to sugar-coat the bitter pill. We're in for a long, hard ride, economically speaking, and to pretend otherwise is folly.

Now is the time to reduce personal and family debt to the irreducible minimum, batten down the financial hatches, and stand by for several years of hard times. That's reality.



Brad J (Kazrak) said...

Preach it, brother.

We started working to get ourselves out of debt a few years back - for those who need to work on this, I recommend at least looking at Dave Ramsey's stuff. (There's two kinds of personal finance books, just like there's two kinds of diet books: Magic Miracle Diet and Eat Less, Exercise More. Dave Ramsey is very much an Eat Less, Exercise More kind of guy.)

It's still got a long ways to go before it really gets better, although I'm sure we'll get a few shiny moments where it looks good between now and then.

Anonymous said...

It is impossible for America's economy to rebound under Obamarx and the rest of the Democratic clowns in charge of Congress. Just like in Atlas Shrugged, they will continue to make exactly the wrong decisions and will drive away any remaining vestiges of business or wealth.


raven said...

We now have the triple whammy in play- the debt/financial bomb, the babyboomer "bulge" ,and a Maxist Gov.

I have about given up talking to folks about what is coming- they do not ,or will not, let themselves think about it.

Inflation is coming- bet on it. As Milton Friedmann said, inflation is always and everywhere a monetary phenonomon. Many I read and respect greatly say as Mish does, no no no , we are in a deflationary enviroment- -the fact the money is not moving, does not mean it is not there- all it will take is a spark, generated by peoples lack of faith in the dollar or the GOVERNMENT THAT BACKS the dollar, to incite them to get rid of thier dollars as quickly as possible. There is no possible way to continue this course of action and not devalue the dollar.

Harry Baldwin said...

I agree!

I had some money left in a 401K from my last job, and about half of that was in the market; I moved it into bonds today. Unfortunately you can't make frequent changes in the 401K, but I have a feeling the market is not going to get above 10,000 in the near future. 10,000 will be a tipping point for those who felt they've taken a beating but stayed in; if the DOW comes anywhere near that, these people will see it as the best time to get out.

BTW, I realized that for a few years I had been laboring under the delusion that staying in the market might be a good idea if inflation is looming, as the market might ride up along with it. That, I've learned, is incorrect. When investors are alarmed by inflation, they pull their money out of the market and put it into bonds.