Themes: Depression, Recession, Economy
They’re wrong. We’re right.
Now the Wall Street Journal says “recovery likely in second half.”
And Goldman Sachs calls for a stock market rally similar to the rally in 1982.
Who are we to say they are wrong?
Well... we’re the Daily Reckoning, that’s who. And we’ll say it: they’re wrong.
This ‘recession’ is already the second longest since the first leg down of the Great Depression. That downturn of the early ‘30s went on for 43 months. This one is now at 19 months – officially – which makes it longer than any other since the Great Depression.
Is it over? Is it going away? Is that all there is?
Nope. Nope. Nope.
Instead, we are merely proceeding as we should... into a “deepening structural depression,” as John Williams puts it.
Yes, he uses the D word too. Because a D is what we have. Not an R.
It’s a depression because it requires major structural change. A recession only requires time. And not even much time... just a few months to work down inventories. But a depression takes a lot of time...to restructure industries and rebuild balance sheets. Debt needs to be paid down – or inflated away. And businesses need to redirect their efforts towards a more profitable line of activity.
Both the increase in unemployment and the slump in industrial production are worst than at any time since 1945. As for retail sales and housing starts, they’re the worst in the post-war record books.
The figures tell us that something important is going on. But what’s the key to understanding what it is? And how will it be cured?
This key is to understand that this is a major structural depression. It can’t be cured by more stimulus, because stimulus is what caused it.
This time, we need a real cure... bankruptcies, workouts, deflation, defaults... and maybe, eventually, hyperinflation.
None of those things happen easily or quickly. Businesses don’t want to go bust. Families don’t want to lose their houses. So if they get a lifeline from the feds, they grab it and hold on. And the longer they hold on, the longer it takes to make the structural changes that the economy needs.
The length of time spent in unemployment is now longest since 1948. And consumer debt, at only 12% in 1982, is now at 18% of GDP. “With that kind of debt, there is no question that the feds will implement a tight money policy,” said Marc Faber in his speech here in Vancouver yesterday. Instead, look for easier... and easier... money policies, he says.
We learned – was it yesterday? – that the feds have put up an amount equal to more than 150% to GDP to bailing out Wall Street -- $23 trillion. No wonder Goldman is reporting record bonuses!
“We have to spend money to keep from going broke,” says Joe Biden, a man who is out of his depth in the bathtub.
But when you’ve got that kind of money covering your mistakes... how much restructuring are you going to do? Not much.
“Wall Street Learned Nothing,” is a headline at Forbes, making the obvious point.
The feds still believe in stimulus. And Wall Street still smiles and takes it. That’s why the recovery is still a long way off. Now, the feds are in charge of the money... and in charge of key industries, including automobiles, banking, insurance... and soon, healthcare. They’ll block innovation. They’ll prop up ailing institutions. They’ll provide more and more stimulus.
A growing group of analysts and strategists now calls for another big stimulus package. You see, the current stimulus program hasn’t worked. Why not? Well, because it was not enough... or not properly focused, say economists. In either case, the solution is not hard to figure out. Even Nouriel Roubini says “more stimulus is needed.”
So more stimulus is what we will have... and a collapsing economy... and a falling dollar... and more!
More news from a sceptical Manraaj Singh:
“At the end of last week, analysts were predicting that US companies’ earnings would drop by 35.7% this year. After the recent round of upgrades from analysts, corporate earnings this year are now forecast to fall by just… 35.2%.
“Anyone who thinks that justifies a rally in share prices ought to be put in a padded cell. Wall Street has got it wrong. And the City doesn’t know any better. Still, after the drubbing that investors have taken, you can’t blame them for jumping on every sign that things are a little less bad then expected. What comes to mind is that old Richard Fariña cult novel, “Been down so long it looks like up to me.”
“Just listen to JPMorgan Chase & Co. equity strategist Thomas Lee. He is the most bullish of the Wall Street strategists followed by Bloomberg News. Yesterday he put out a report accusing his fellow analysts of being slow to boost their estimates out of concern that the recession will linger. He said that is similar to what happened during the stock market recovery in 2002.
“Lee has hit the nail on the head. Not because he is right but because he is dead wrong. His reference to 2002 shows us how far from reality the thinking on Wall Street is right now. All these analysts are still looking at minor recessions in the recent past for ideas on what the markets are going to do. We aren’t in 2002. This isn’t the bursting of the dot.com bubble. This is a complete realignment in global economic power that we are witnessing.
“The drivers for economic growth in the US and UK since the start of the decade – financial services and rising property prices – have broken down. The drivers of future global economic growth – industrial production, infrastructure spending and control of natural resources – are located in the emerging markets.
“As far as understanding where markets are going next, I honestly think that you could bin 99% of the analysts’ reports that come out of Wall Street and the City and not be any the worse off for it as an investor.”
Editor’s note: Manraaj Singh is Chief Investment Strategist at Profit Hunter, a service that picks undervalued shares in undiscovered sectors and “special situations”. Access his latest recommendations here.
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