Sunday, November 15, 2009

The economy is still a mess . . .

. . . despite all the wonderful-sounding prognostications from those who'd like to fool us (namely, our political lords and masters and their economic masters).

The indispensable Karl Denninger has been keeping his watchful eye on the reality of the present economic situation. In several posts this week, he's highlighted the wishful thinking being presented in many news media, and produced facts and figures to demonstrate the truth. Here are a few examples (bold print in all cases is Mr. Denninger's emphasis; all graphics reproduced from The Market Ticker).

On the stock market and the dollar:

"How do you know a politician is lying?"

"His lips are moving."

Geithner said:

"I believe deeply that it's very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar," he said at a roundtable discussion with Japanese reporters. "We bear special responsibility for trying to make sure that we are implementing policy in the U.S. that will sustain confidence not just among American investors and .. savers but investors around the world" that the U.S. will fix its budgetary problems as its economy improves.

Baloney. Geithner, Bernanke, and Obama all have intentionally promoted and created policies have that destroyed the value of the dollar, driving it lower since March of this year from 89.6 to 74.8, a decline of almost 20%.

Why? Because it has produced this:

That's the dollar and S&P 500. The correlation showed up on a consistent basis (dollar down, equities up) late in 2008, and in March of 2009 the correlation strengthened. In July it became nearly-perfect, and has remained so since, with many days being nearly-perfect even intraday, as I documented yesterday.

What happened in late 2008? The Fed set rates to zero on December 16th. This, along with repeated assertions that began in early 2009 that rates would remain at or near zero for "an extended period of time" caused the establishment of the dollar carry trade - the cause of the inverse correlation.

This was not an accident.

Bernanke and Geithner both watched Japan do the same thing by making the same interest rate move and commitment to "extended period" zero rates, with the same result.

Asian leaders are apparently unhappy with this:

At the Asia-Pacific Economic Cooperation forum summit, leaders will tell the U.S. that "we want a stronger dollar" and a more stable dollar, said the delegate, a senior official of an APEC government. "Nobody in Asia, and only some in Europe, will speak publicly about their worries, but they are worried," the delegate said. "The world -- not only APEC, but the world -- needs direction and the only country that can provide this direction is the United States. This can only be achieved through a stable U.S. currency."

Asian leaders better wake the hell up. The collapsing dollar is a policy. It is the means by which the stock market has been propped up in an insane attempt to "instill confidence" in "economic recovery" that, on balance, is clearly not occurring. As a consumption-based economy we cannot recover until and unless employment recovers and we replace debt-based consumption with earnings-based consumption.

A weaker dollar makes this impossible, as it destroys earnings power in real purchasing terms, since such a policy will inevitably flow through to the largest inputs we do and must import: energy. Since we cannot fix this at any time in the near future it is impossible for us to create sustainable economic growth in The United States except by strengthening the dollar and forcing (through various policy measures) higher-income jobs back here to the United States.

Instead our politicians are engaged in a puerile confidence game, trying to convince ordinary Americans that "things are getting better" when the Dow goes up 200 points.

. . .

To those Asian Central Banks: If you really mean what you say dump your dollar-denominated assets, particularly US Treasury Bonds.

Not as a means of "sending a message", but because our government is lying to you, the proof is right in front of your face, and as I have repeatedly chronicled in The Ticker over the last two and a half years our government simply doesn't give a damn about our balance of payments or for that matter the rule of law.

They will not stop this destructive cycle and thus the Asian Nations must act to protect themselves, The US be damned.

Even an increase of short-term rates to 2% would stop the carry and restore balance. But the longer the "zero rate" policy goes on the harder it gets to do it, and the more-severe the damage. If The Fed waits too long it will become literally impossible to raise interest rates and withdraw liquidity given the outstanding amount of Federal Debt without causing an immediate failure of The Federal Government.

Bernanke and Geithner know this. They also know that if they withdraw the liquidity and put a stop to the carry equity markets will come off their insane P/E of over 130 - perhaps by as much as half.

History says they will not act, unless forced, until backed into a corner, until it is too late and Federal Debt becomes impossible to finance in a proper liquidity and rate environment. At this point we will choose between economic destruction and monetary destruction as the immovable object meets the irresistible force. Who knows which path we will take at that point - both suck.

Look at history - recent history:

Our central bank will buy assets that black letter law says it cannot.

Our regulators and politicians have ignored banks that are clearly underwater to the point that the FDIC loses as much as 50% of a bank's alleged asset base, even though Prompt Corrective Action, black-letter law, should prevent any such loss from ever occurring. Let me be clear: Such losses can only happen due to massive, outrageous and intentional blindness to willful and intentional mis-marking of assets - that is, accounting fraud.

This very same willful blindness is how we got in this mess in the first place. Intentionally making loans that the banks and others involved knew could never be repaid on the original terms is an outrageous act of asset-stripping of ordinary Americans - the "seed corn" necessary for economic growth.

Our Congress puts forward 1,100 page bills to "fix" problems instead of demanding prosecution and prison time for those who committed fraud, leaving them free to do so again in the future. Our banksters peddled their crap far and wide - including to your very same central banks and investors - that they knew was worthless, as evidenced by the fact that some of them were shorting the very same instruments while selling them to you!

. . .

These sorts of distortions almost always go on longer than anyone thinks they can, but as Japan discovered when they unwind the damage to the global economy is severe. In our case if we do not put a stop to this destructive pattern the damage to our economy and monetary system will not be severe, it will be critical - and perhaps irreversible.

There's more at the link.

On the money supply:

The Fed is intentionally applying the wrong standard for the construction of the monetary base, because if it were to not it would have to recognize the asset price moves that underlay the actual economy in its economic numbers. This, in turn, would have led housing price increases to have been reflected in monetary aggregates and people would have freaked out starting in about 2004 - instantly derailing the bubble before it could get going.

As I have repeatedly argued if you get the original premise wrong everything else you do from that point forward is also wrong.

The monetary base in a credit-based monetary system is not "M0", "M1" or "M'" (M-prime.) It is the unencumbered assets against which one is both willing and able to borrow.

Further, the definition of sound lending is not predicated on some leverage limit or wildly-distorted view such as Basel-II. It is in fact very simple: if one never lends unsecured beyond one's capital there is never a systemic risk that can arise.

Here's the problem with all the games once one gets down to brass tacks: you cannot screw people indefinitely and expect them to come back for more abuse. Oh sure, you can occasionally con people a second time, but since these "big interests" rely on a continued volume of business.....

As just one example, how many municipalities will buy interest-rate derivatives from one of these "big banks" after the disclosure that Jefferson County overpaid by 400% - and a good part of that overpayment went to bribes? Further, it has become clear that the municipal government didn't understand the risks involved - and one can reasonably presume that was because those risks were intentionally hidden - probably by the bribing parties, the recipients of the bribes, or both.

There are solutions here but it is increasingly obvious that if Government doesn't step in the market will. All I have to do is look at volume - the percentage that is represented by "high frequency computer trades" has gone sky-high since last fall, yet volume has been dropping dramatically since March.

When the market degenerates down to a handful of trading houses with high-frequency trading computers passing the same 100 shares back and forth between themselves as the remainder of the market participants have gotten tired of getting reamed on a daily basis due to the cheating and decide to take their ball and go home, how do the "big trading houses" make money?

We're witnessing the destruction of the capital markets as the system is imploding from within as a direct and proximate consequence of willful blindness and outright fraud.

Again, there's more at the link.

On those touting 'improvements' in the economy:

"The recession ended in June": Dennis Kneale

"The recession was definitely over in September": Any one of a number of people.

Ok. Let's say that I accept all this at face value, even though while driving through my definitely-beach-oriented local town here this afternoon I noted even more closed-and-gone storefronts than there were a couple of weeks ago, and last night at the local open-air mall, although the evening was absolutely gorgeous, you could have fired a 155mm Howitzer down the "main drag" without killing anyone - because there was almost nobody there, and literally not one shopping bag was in evidence.

I simply have to ask the pundits and the carnival barkers, of which CNBC is the worst (but certainly not the only sinner) the following - why do we need any of these programs if in fact the economy is growing again:

* Zero interest rates from The Fed. Isn't 2%, 3%, 4%, 5% more consistent with economic growth? If indeed the economy is expanding, why do we need "funny money"?

* $8,000 home-buyer tax credits. And not just first-time credits either - those were recently expanded, and the NAR has said quite clearly that "but for this program housing would collapse." Is this consistent with an economic recovery?

* FHA underwriting mortgages at 3.5%, their default rate is going parabolic, their reserves are down to well under half of the mandatory minimum and there is no evidence in sight that their performance metrics are improving. With the aforementioned $8,000 "credit" and the FHA's willingness to monetize it, you can once again buy a home with "zero down", just as we did in the bubble. Is this consistent with an economic - and housing market - recovery?

* The dollar carry trade. It's obvious and starting in June of this year the correlation between the dollar's move and the S&P 500 became nearly 100% on an inverse basis. Consumer confidence numbers were far below expectations Friday, yet as soon as that hit the dollar, the market rose - into worsening economic data. Again, is this consistent with an economic recovery?

* "Cash for clunkers" - and oh, by the way, what happened to auto sales when it ended? Is the near-vertical drop-off in GM's sales as soon as the program ended consistent with an economic recovery? Is a claimed 10m expected 2010 units consistent with economic recovery when in 2005 and 2006 the industry sold nearly 17 and 16 million vehicles, respectively?

* 29.9% interest rates on credit cards via "jack-up" letters and other outrageous actions. Again, is this sort of gouging consistent with economic recovery?

* Declining consumer credit demand. ... Is this consistent with economic recovery?

. . .

Consumers are having none of it. Confidence came in dramatically below expectations, and the reason is simple: there are no good-paying jobs unless your idea of "employment" is playing games with other people's money by being an "investment banker." Call centers are all over in India, manufacturing is all over in China, we've got Starbucks coffee-servers, McDonalds' burger flippers and WalMart "greeters" - all jobs that pay 1/4 what the old manufacturing jobs did.

. . .

While the policies put in place sowed the seeds of our current disaster in the short term they were effective. But those same policies - zero interest rates (nearly so in 2001, truly so today) have failed to send consumer credit consumption - and true economic activity - higher.

Why not? Because in previous recessions we had a buffer between the carrying capacity of debt and the total amount outstanding in the consumer and business world. This is evidenced by the fact that these previous busts were inventory-led, not credit led. That is, they were a matter of oversupply in the market (e.g. the Nasdaq bubble, etc), not excessive leverage - that is, too much debt for the income available to service it.

In 2007 the latter situation asserted itself. That made the tonic prescribed by Bernanke and pals ineffective. They tried it anyway, and they continue to do so - even though there is no evidence that it has - or can - work.

The M1 "Money Multiplier", after appearing to stabilize just below 1.0, has resumed it's plunge. The tonic that was allegedly going to restore credit creation in the economy - the raw printing of money via "Quantitative Easing" - has done no such thing:

China has woken up to the danger of the US Dollar Carry, as evidenced here:

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Yep. It did not work in Japan and it won't work here. You cannot fix a drunk with a case of whiskey, and you cannot solve a credit-led problem with more credit - that is, more debt.

You can't replace consumer activity with government borrowing for very long. You can try in the short term but it won't work in the intermediate and longer term. More proof is found in our trade balance, which despite massive dollar devaluation is now at the worst since January, while the dollar has plummeted. Dollar devaluation was supposed to improve our balance of trade. It failed to do so, just as the printing of money has not spurred credit creation and capital formation as we were told it would.

It would be nice if the policy prescriptions followed thus far could work, but in a saturated debt market they cannot.

All modern monetary systems are credit-based.

This is about mathematics, not "feelings" or "beliefs."

All we have now is the carnival barkers claiming that "prosperity is returning!" even while storefronts are darkening and debt is defaulting.

It hasn't worked this time, and the policymakers know it, just as they knew it in 1930.

But policymakers didn't stop lying in the 1930s and it appears they're not going to now.

If any of the policymakers believed what they were selling neither the $8,000 homebuyers "tax credit" or the zero percent Fed Funds rate would still be in place.

. . .

Bernanke and the United States Government must stop their madness, and do so today. We have done nothing but made the pain and "creative destruction" that must come worse than it would have been in 2007, and far worse than it would have been in 2000.

Those who made the bad loans cannot be protected from their foibles and the just consequences of their bad decisions. We must ring-fence the Federal Government, withdraw the excess liquidity, and force rates high enough to kill the dollar carry - even if it hurts.

It is better to lose a limb than your life.

In economic terms that's the choice folks; the gangrene is spreading and if we do not amputate it will reach our torso.

If it does our economic and quite possibly our political system will die.

Again, more at the link.

I've quoted only from Mr. Denninger in this brief article. There are many other commentators out there who agree with him (and some who'd argue he's being conservative!). The fundamentals - sales figures, tax receipts, the real numbers underlying everything else in the economy - are as dismal as ever, or getting worse. As I've mentioned before, I consider myself economically well-educated, having been a director of companies, and holding a Masters degree in management. Everything I've learned and experienced says that Mr. Denninger and those who think like him have the right of it, and those trying to put a positive spin on the current situation are way out of line.

We're a long, long way from out of the economic woods yet, folks. Keep your heads down, and keep the hatches tightly fastened. If con artists, whether wearing a Government hat or a banker's, try to tell you that "All's well, so spend, spend, SPEND!" - give 'em the bum's rush. It's all they deserve.



Anonymous said...

RWR, where are you when we need you?


Rabbit said...

The whole problem is that if wiser heads truly prevailed and 'put a bullet in the head' of this abominable mess sooner, rather than later, the Administration (and politicians in general) will lose the last bit of confidence its supporters and lackeys ever gave it.

Some days a .gov Chapter 11 reorganization actually sounds like a plan, to these people.