London, England Friday,
3 July 2009
Big news yesterday:
“Jobs report dashes hopes on recovery,” says the International Herald Tribune this morning.
Oh?
Yes, dear reader... once again, we’re right and they’re wrong!
You’ll recall from yesterday, the feds said that their monster stimulus program would hold unemployment below 8% in 2009. The year’s not half over and the rate is already 9.5%.
Then, they said the numbers were getting better each month – inevitably leading to a recovery by the end of the year. They predicted a loss of 365,000 jobs in June – considerably fewer than in May. Instead, the figures – even after they had beaten them up – said 467,000 jobs had gone, which was considerably more than May’s figure. The important thing is that the trend economists thought they were watching – which led to a recovery – has been broken. Instead of fewer job losses, we have more.
Ha ha... we laugh at them. We mock them. We turn up our noses to show our contempt. We turn our backs and point to our... oh, never mind...
But wait a minute. What are we saying? Hold the self-satisfied congratulations, please. As Yu Faz put it: ‘Bury pride; or it will bury you.’
Yes, we were right: there ain’t no green shoots. But we’re not vain and stupid enough to think we know what is actually going on. Only morons think they know what is going on. And the more sure they are – the bigger dopes they are.
Where, exactly, is this economy headed? How is it going to get there? When?
Damned if we know. (And damned if we don’t!)
Okay... now... shush... now that we’ve thrown the jealous gods off our case... we whisper to you: well, we actually DO have an idea of where this economy is going, which we will reveal to you, dear reader, in hushed tones, little by little.
For starters, you have to realize: this is a depression. It is not a recession. In a recession, an economy gets a cold and has to take a little bed-rest. In a depression, an economy drops dead. Businesses go broke. The whole structure of the economy changes as the corpses are dragged away and new enterprises take their places.
Economists were 100,000 off on their jobless predictions because they still don’t really understand what is going on. We knew the predictions of a recovery were dumb. This is a depression – meaning, it is a major change of direction... not merely a pause in an otherwise healthy economy. After more than half a century of debt expansion, debt is contracting. Businesses, households, investors and the government need to adjust. And that takes time – a lot more than the 20 months of recession we’ve had so far.
It would happen a lot faster of course, if the feds weren’t fighting it every step of the way.
“Rise of the Zombies,” is a headline in today’s Financial Times. It tells a familiar and predictable story: the feds have propped up businesses coast to coast. Instead of being allowed to fail, they are kept alive by the government... and continue to take resources that could be redirected to more promising competitors.
But don’t bother telling the feds that. They don’t care. The old, worn out Zombie businesses still make campaign contributions and employ voters. The businesses of tomorrow don’t. The present votes. The future does not.
More news from Tom Bulford on why there are some fantastic opportunities to be had in the UK during a downturn.
“Like you, I’m prepared for a hard period... a sustained phase of slow economic growth in the UK. But you need to know that this is not necessarily bad for the stock market. Investing doesn’t pay off only during boom times. Rather, there are strong prospects to make profits even when an economy is not doing well.
“The long, debt-fuelled, expansion of the last decade has allowed companies over here to raise money all too easily, for projects built on over-optimistic assumptions. Economic growth makes corporate managers complacent and reckless - and investors are no better.
“Too much money is borrowed, too much new capacity is brought on stream, too many companies are acquired and too many clever corporate deals are done to whet the vanity of industrialists and financiers alike. In short, the world gets careless with its money, too bold in its assumptions and too complacent in its forecasts.
“Now the mood has swung. Recession breeds caution and caution means that people won’t part with their money unless they are pretty damn sure of a good return. Industrialists won’t make new investments unless the business case is watertight; bankers won’t lend unless they are certain of getting their money back; and investors, too, suddenly start to demand a margin of safety. In short, all of us who are shuffling money around the great world of finance start to insist upon a better deal.”
Editor’s note: Tom Bulford is Editor of investment newsletter Red Hot Penny Shares. He believes that as an investor, the odds are in your favour. He believes that share valuations are currently low and that there are many small-cap companies that are able to make you a good return on invested capital – even in difficult times. Click here to find out how you can read Tom’s latest issue.
And more thoughts...
*** Investors are wondering if the forecasters know what they are talking about.
“Stock markets disoriented by the uncertainties of the recovery... ” says an awkward headline in today’s French financial news.
The Dow itself lost 212 points yesterday. Oil fell to $66. Even gold dropped $10 as people fled back to the only asset they know they can count on -- the US dollar. Or more precisely, US debt denominated in US dollars.
Come hell or high water, the Treasury will come through. When it’s time to pay the coupons, they’ll have the cash. You can count on it.
But what you can’t count on is how much that cash will really be worth. And there lies the great trap for the lumpen investoriat. The lumpen, as you know, get their investment ideas from TV and the newspapers. The poor rubes are the last to buy in a boom and the last to sell in a bust. A day late and a dollar short, they always get the worst deals.
When the papers tell them there’s a recovery – they believe it. When the Fed chief tells them to use Adjustable Rate Mortgages... the silly clumps do it. When a governor of a Federal Reserve banks urges them to “go out and buy an SUV” they head for the dealers.
But thank God for these patsies. Without them, where would we get candy? And where would the US government get its trillions?
The lumpen – along with the sophisticated fund managers who pretend to know what they are doing – are financing the biggest government borrowing spree in the history of mankind. You don’t have to dig too deeply to figure out why that won’t work. Financing a little spree of borrowing may turn out well; financing a big one is asking for trouble. Each dollar you lend weakens the borrower’s balance sheet. By the time he has gotten to the 12 trillionth dollar... you might as well be throwing the money down a well.
*** And thank God for Arnold Schwarzenegger. What an entertainer! He had it all. Money. A good wife from a bad family. A nice hairdo. And what did he do? He gave up a promising career in the motion picture business to launch himself into the slimy world of politics.
And now the poor man is groveling. Begging. Imploring the banks to take his state’s I.O.Us. He says they are “rock solid.” California is the world’s 6th largest economy. But it was a world-beater when it came to debt-based bubble illusions. And now its economy is falling apart. Economists can lie about the inflation rate. They can fudge the GDP. They can torture the unemployment numbers. But when the revenues come in, all they can do is count them up. And revenues are falling. Especially tax revenues.
The feds and the states are losing income. When businesses lose revenue they cut back expenses. But governments – at least those that are modern popular democracies – find that they need to increase spending. They have more people asking for help. And they have programs that become automatically more expensive – such as unemployment benefits – when the economy softens.
Let’s see. Expenses down, income up = happiness.
Expenses up, income down = misery.
See how simple it is?
*** And here, from Seeking Alpha is a list of the reasons why we stick with our forecast. Before this correction is over, the Dow will trade below 5,000.
- Deleveraging Consumers and Businesses. Everyone (except for the government) is tightening their belt and reducing their consumption. Government alone cannot carry the economic load forever, and if consumers (or businesses) don’t quickly step in we may face a double-dip recession. The $64,000 question is: How does the private sector look (or what’s left of it)?
- Unemployment Is Above 9% and Climbing. Unemployment is a lagging-indicator, and historically continues to get worse even if the economy picks up. This bit of bad news is not going to get better anytime soon, even if you think the economy is recovering now!
- Depressed Wages. Many corporations take advantage of high unemployment levels to keep wages down for their existing employees. This makes sense for the firms (the weaker economy justifies lower wage growth) but it has the unintended consequence of reducing the purchasing power of those already employed.
- Demographic Disaster. If consumers are the engine of the US economy, then Baby-Boomers are the turbo-charger; since they make up such a large demographic. But Baby-Boomers are nearing retirement and even if the economy picks up this year they have a lot of saving to do in order to repair the massive damage to their wealth. In short, deleveraging consumers & businesses, unemployment, depressed wages, and fortifying baby-boomers cast doubt on the bulls believe the economy is going to rebound…at least not by the consumer.
- Catch 22. Corporations cannot lead a recovery until banks are healthy. But banks cannot repair their balance sheets until they can lend to consumers that are both financially sound (which they are not), and willing to borrow (which they do not). But if things continue as the current rate (or “improve” only slightly) then banks cannot rebuild their balance sheets because for every item a bank recapitalizes, it faces another default somewhere else (foreclosure, credit cards, etc).
- Government Tapped Out. The resources and credit-worthiness of the US government are almost unlimited. Almost. But there’s only so much the government can borrow before it too must tap-out. Furthermore, if the borrowing becomes too excessive, then the medicine will become worse than the disease. Too much borrow may eventually crowd out private sector borrowing, increase borrowing costs, place a huge burden on taxpayers which reduces future consumption and economic activity, etc.
- Global Economic Decline. The US cannot export itself out of this problem, because the rest of the world is in the same position (if not a lot worse). The BRICs (or any other emerging market) grow largely due to exports and not organic domestic-growth. The OECD nations are all sickly, one worse than the other. Unfortunately, bad economic news has come “not as spies, but as battalions”.
Recommended article: For Bill Bonner's views on claims that the financial 'Crisis is behind us' please click here
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