Inevitably, It’s All Falling Apart

For a few years I have been warning that there can be no recovery. The passage of time has not changed my opinion but is beginning to change the opinions of others who previously believed the government recovery propaganda. Even Keynesians tip their hands as to the real state of the economy when they claim the stimulus was not big enough. Faulty economic methodology rather than size never seems to cross their minds.

The recession, according to the National Bureau of Economic Research, started in December 2007 and ended in June 2009. To many Americans, heralding that the recession was over and a recovery was underway was a cruel joke. There has been no recovery, at least in any normal sense. In the US GDP has grown pitifully. The end of a recession is usually followed by very rapid quarterly GDP growth in the range of 6 – 8%.  That has not occurred.   Last quarter was a puny 1.9%. If anything, expect to hear increasing talk about a dreaded double-dip. If we never got out of the first downturn, which I believe, how is it possible to have a double-dip?

The NBER’s recession may be over but the people’s recession is not — 59% recently polled said we are in a recession. That is a remarkable number given the media’s rose-colored reporting and cheerleading. Apparently people believe their own eyes instead of what they are being told to believe. How dare they!

The May jobs report, issued earlier today, was simply a disaster! Jobs created were expected to be 150,000 which is no big deal. That number would only be enough to meet new entrants into the labor force each month. Instead, the report was only 69,000. Additionally, the now laughable unemployment statistic rose to 8.2%. Zerohedge reported:

It may take a little while for the realization to soak in. The actual number of +69,000 was a massive miss to both the expectation of 150,-00, and the whisper number 100,000, and a drop from the massively revised April 77K, which was 115K before. And that is with a 204,000 addition from Birth Death. Just a total disaster for Obama who has decided to sacrifice the perception of an improving economy just so he can give Bernanke a green light to goose the stock market.

For other unflattering news regarding the economy see James Pethokoukis’s summary.

The economy is stuck in the mud. There can be no escape without a massive repudiation (liquidation) of debt. The levels of debt are simply too high to be supported.

The political class and their Keynesian economist-pygmies are unwilling to deal with the debt problem. Inadequate demand, always the bogeyman in the Keynesian eye, is not the problem. Excess leverage is and Keynes himself never dealt with that. Until the debt imbalance is corrected, the economy will not grow and jobs will not be created. To remedy the problem requires a Depression-type adjustment which gets bigger by the day as government tries to solve a debt problem by adding more debt. Government is unwilling to allow a Depression, but they no longer have a choice. Markets are stronger than governments and will prevail.

The economic crisis cannot be “papered over,” which is what the government has attempted to do. Governments around the world desperately try to hide the true conditions of their economies by throwing money at the problem. The US has added $5 Trillion in debt to support excess government spending to combat the (let’s face it) Depression. Never mind that the Dolt-In-Chief squandered much of this on political cronies. Didn’t Keynesians tell us that paying people to dig holes and fill them in would be stimulative? Paul Krugman has suggested that a war with aliens from outer space would be stimulative. Even Obama’s corrupt stimulus made better use of funds than these two alternatives.

The Federal Reserve has engaged in stimulus of untold Trillions. The best estimate of their actions is the nearly quadrupling in the size of their balance sheet which increased by about $2.2 Trillion dollars. That represents an increase in the monetary base. These funds, if fully used by the fractional-reserve banking system, represent a potential $20 to $30 Trillion expansion in the money supply! Banks have not aggressively loaned out anywhere near the amount they could (fortunately), although the funds are in their hands and will not be removed from the system unless they buy back the bad assets they foisted off on the Fed. That is not going to happen in my or my children’s lifetime. Thus the money sits in the banking system like dry timber waiting for some spark to ignite it.

Jeff Cox reporting on Citigroup’s strategist Hans Lorenzen analysis, tells us that central banks are forcing banks to use their excess liquidity to buy government debt:

US and European regulators are essentially forcing banks to buy up their own government’s debt—a move that could end up making the debt crisis even worse, a Citigroup analysis says.

Regulators are allowing banks to escape counting their country’s debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says.

While that helps governments issue more and more debt, the strategy could ultimately explode if the governments are unable to make the bond payments, leaving the banks with billions of toxic debt, says Citigroup strategist Hans Lorenzen.

“Captive bank demand can buy time and can help keep domestic yields low,” Lorenzen wrote in an analysis for clients. “However, the distortions that build up over time can sow the seeds of an even bigger crisis, if the time bought isn’t used very prudently.”

This is more chicanery on the part of governments, a kind of hidden quantitative easing. Government spending is not sustainable because it can no longer be funded via tax revenues and traditional debt markets. Instead of cutting spending, government wants to play Santa Claus for a while longer. They would like to not have to announce a new round of Quantitative Easing (although it is coming as sure as the sun will rise tomorrow). Instead, they are forcing the excess reserves in the banking system to do the job (temporarily) for them. That solves nothing because the money now moves into circulation. Plus, there is not enough of it to fund the voracious spending of governments for very long.

As the day began, I was working on a piece that began as follows:

That the Dow-Jones remains above 10,000 surprises me and many others. If you believe that a financial apocalypse lies ahead, then you too must wonder why the market levitates like Wiley Coyote who has left terra firma.

The political world has reached its desperation zone where all governments are engaged in propping up everything that is falling apart. Sadly, what is falling apart is virtually everything and everything cannot be propped up for long. Economies are dysfunctional, not growing and not creating jobs. Governments have made promises which cannot be honored. Major private and public institutions are in danger of failure.

The employment report this morning made this piece irrelevant. It shocked markets back to reality.

As I wrap this piece up, the Dow is off by 250 points and the S&P 30 points. Everything except precious metals, at least what I monitor, is off dramatically. Gold is up over $60 and several gold mining stocks are up over 10%. Whether this is just one day of what I would consider sanity or not remains to be seen. Tomorrow is another day and for stock investors it can’t come too soon. Money is leaving the stock market into Treasuries and precious metals. At some point, the foolishness of thinking Treasuries a safe haven will be punished.

The terrible economic news seems to have triggered a “more QE is coming” response, at least with respect to precious metals. Contrary to popular belief, at least today, it has not been good for stocks. We will learn more next week. Have a good weekend which you have a better chance of achieving if you aren’t heavily in the stock market.

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3 Comments

  1. Well Monty, I said last fall that it would be this summer. Just a stab in the dark, perhaps, the plain truth is that worldwide ignorance knows no bounds and as long as governments can keep pretending they will. Don’t know if the “big one” is here or not, the world is a complex place and they’ll keep pretending as long as they can. It appeared that from reading and listening to talking heads, that as long as government and the Bernanke keep using the right words (lies) regardless of what is actually happening and plain to see by any who would perform even a superficial examination, that all seems well. Lie about the unemployment situation, no problem, 8.1 is better than 8.5. Rave about Tbill interest rates at near rock bottom, great!!! Doesn’t matter that its our own banks being forced to borrow the money to hide the truth, can’t allow interest rates to rise.

    Been on vacation this week, just loafing around the house, got a lot of mowing done. Bought some weekly SLV Calls yesterday, strike price 27.00 for $32 per contract, thought I’d roll the dice. This morning after PM’s switched directions I was ecstatic (sorry, United States, you asked for Obama, hope he chokes on his own BS). Screwed up big time by selecting a limit price to sell instead of a stop price which I intended, made a few bucks but watched a very handsome return slip through my fingers as SLV kept going up by the second. I have July 31 calls left, hope silver goes to 40 bucks by then. Well, anyway Monty, keep up the good work.

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