The Feds keep Bailing out the Banks and Stimulating the Economy

Themes: Bank bailouts, Feds, Bankruptcies

Paris, France

Thursday, 2 July 2009

Everything is working out just like we thought it would. The stock market is performing as expected. The economy is on track. Even the politicians are doing what they thought they would.

Let’s begin with the stimulus/bailout/boondoggle/BS plan. As anticipated, it has failed. That is, the economy is getting worse, not better. It has failed the test set for it by its own creators. Back when the Obama Team was arguing for a big bailout bill, it warned that without a bailout unemployment would rise above 8% in 2009. ‘Pass this bill today,’ said Ben Bernanke, or words to that effect, ‘or there may not be a tomorrow for the US economy.’

Congress dutifully bent its back to the task of adding boondoggles to the bill and then okayed the measure. And here we are in the middle of 2009 and the unemployment rate is already at 9.4%.

It was obvious, even at the time, that the hacks in the administration had no idea what was going on. They were just guessing about the economy and taking advantage of the situation to pass out more money that taxpayers hadn’t even earned yet.

As predicted, the spending didn’t make the situation better; if anything, it probably made it worse – by delaying the process of destruction and hence retarding the process of creative reconstruction too.

We recall our other forecast too: when the bailout doesn’t work, they’ll pass another one. And so, in yesterday’s New York Times, there is David Leonhardt urging the pols to even bigger acts of absurdity:

“The economy really may need more help,” he says.

Yes, it will need more help. Especially if it keeps getting the kind of help it’s been getting.

The stock market is acting more or less as we thought it would too. The big bounce began on 9 March. It’s been almost 4 months now... and the bounce should be getting near its peak... and beginning to fall again. Just look at a chart of the Dow since March. You’ll see exactly that. Like a cannonball, it went up... and now it seems to be arching over for its fall to the ground.

Yesterday, the markets seemed to hang in mid air... The Dow was up 57Oil stayed at $69. Only gold seemed to know where it was going – rising $13.

As stocks roll over, the economic news rolls over too.

In the USA Today yesterday was a report that said small businesses are going broke faster than expected. Small businesses are supposed to be the survivors. Like mammals in the Ice Age, they replace the dinosaurs.

In a recession, big, costly, inflexible companies are supposed to get hit the hardest... leaving niches for small, nimble, low-cost competitors to slip into. These small businesses establish toeholds during the recession... hire people... and then scale up to the peak of commerce when the boom comes.

But this time it’s different. Small businesses are collapsing along with big ones. In April, for example, more than small 8,000 businesses went broke and filed for Chapter 11.

In addition to the business bankruptcies are the personal bankruptcies. According to the Los Angeles Times, the rate of personal bankruptcy is soaring in Southern California.

In April, according to David Rosenberg at Gluskin Sheff, the feds added $121 million (at an annual rate) in total stimulus to the consumer economy – including tax reduction and increased benefits. In May, the total stimulus rose to $163 million. How come so many bankruptcies when the feds were giving away so much money?

The answer, says Rosenberg, is that consumers didn’t spend the money; they saved it. Consumer spending rose just $1 billion April – despite $121 billion of stimulus. In May it rose $25 billion – despite a ‘stimulus’ 6 times that amount.

Meanwhile, the saving rate, which had been only 0.2% in March of 2008 exploded to nearly 7% in May 2009.

No consumer spending, no sales. No sales, no revenues. No revenues... no staying in business.

No small businesses. No new jobs. No new jobs, no economic recovery.

No economic recovery and the meddlers are back on the Hill asking for more power and money.

More news from small-cap expert Tom Bulford on how to profit from increasing deal flows in the City.

“Stockbroking is a business of feast and famine. Perhaps more so than any industry I can think of, it enjoys good times and bad in strict and predictable order. The old hands know this. When times are good they do not make the mistake of assuming they will last for ever.

“The real excitement (and cash) for stockbrokers comes when one of their companies does a deal. Perhaps it wants to raise money, perhaps it wants to acquire another company or – and this is the biggest money spinner of all – it could be a company that wants to see its shares traded on the stock market for the first time.

“This is when the City really wakes up! See the lawyers, the accountants, the PR advisers, the ‘nominated advisers’ and brokers spring into action! See the ££ signs flash before their eyes! See the juicy fees that are levied and the bonuses that are earned!

“Today’s generation of stockbrokers has seen a bear market alright, and they have reacted in time honoured fashion. Bonuses have become just a memory, salaries have been cut, and there have been redundancies galore. It has been a fight for survival but stockbrokers are hardy beasts.

“They don’t need much to survive. Just an office and a telephone and they can sit and wait for the good times to return… Now perhaps they are.”

Editor’s note: Tom has eight great ideas for investors on ways to play the “turning City cycle”. He wrote about this in his free e-letter, Penny Sleuth, on Tuesday. Click here to read this edition and see Tom’s ideas.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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The Feds keep Bailing out the Banks and Stimulating the Economy

When the Bailout Fails, the Feds Will Pass Another One