Depression Still in the Cards
March 28, 2010
Economic Tea Leaves
The economy continues in the doldrums with pluses and minuses about neck and neck but with a slight upward bias. Indications are that bias is due to the government stimulus and little else. We see an endless flow of reports of low volume in the stock markets, people not only sitting on the sidelines but actively pulling money out of mutual funds, small business (creators of almost all jobs) do not trust this economy and consequently are not hiring, and such.
So much economic data is subject to manipulation that I like to look elsewhere such as how state and local governments are doing. Here we see reports that many states, counties and cities are on the brink of financial ruin: revenue is falling from income taxes, sales taxes, and property taxes to name the main income streams for these units of government necessarily resulting in draconian cuts in services. These are clear indications of an economy continuing to falter.
As has been typical in the past, the more government intervenes in the business cycle, the more it delays but does not change the outcome except perhaps for the worse. Greed is ever present though is it subdued by fear every once in a while. The more greed flourishes the more brazen we become at pushing the limits and transcending them. It eventually becomes so outlandish that it crashes the system. Left to its own devices, the socio-economic system crushes and banishes the most outlandish while the rest of us suffer through a depression. Then in time, the business cycle swings up and eventually we go through the same cleansing process yet again. We learn, but as those who went through the process eventually die off, their knowledge goes with them. What is left is what we can learn from history, but that has shown to be insufficient of quell runaway greed. As it rockets upward, the same old litany of rationalizations quell our fears and grease the tracks for evermore greed. Two good examples: "We know a lot more now and have it under control"; "Times are different now and the old rules don't apply". Sound familiar?
The fly in the ointment is government. When the system starts to crash and burn, government officials feel compelled to bring all of its power to bare on the problem under the illusion (usually prompted by one economic theory or another) they have the power to avert a depression. At great risk to society, government can delay a depression, and many have argued that government has shown that it can make the eventual depression even worse. Why?
Look at our current situation as an example. Most generally concur that outlandish greed within the financial system is what triggered our recent race toward depression. The usual rationalizations were heard. The government response has been to borrow heavily to save the very financial institutions that got us in this mess along with the executives of these institutions. This has been exceptional in its blocking of the cleansing process: most of the rascals are still there. Our government, at our expense, has saved them, and to no great surprise, they continue to do the same things that headed us toward depression a short while ago. The continuing response of government is to set up an expanded and improved set of rules for financial institutions. One little problem: the scoundrels and their financial institutions are still in place who have already demonstrated they have exceptional expertise in skirting rules to their own advantage. Now these scoundrels are newly rewarded and invigorated from their government bailout believing, I am sure, in the wonders and rightness of their abilities. Now what?
It seems reasonable to me to presume the scoundrels will persist and succeed in recreating (or continuing) the economic depression. This time, however, our government will be so far in debt that it will have little choice but to finally let it happen. How long will all this take? Not very long I suspect, as presently the scoundrels are hard at work. The high national debt load will also hamper and slow the recovery making it all the more painful for all of us.
It is important to remember, however, it is still possible the U.S. may somehow "muddle through" but the light at the end of that tunnel appears to be dimming.
Stock Market Tea Leaves
For the same reasons listed before, the market continues up. This is made all the more easy due to the low volume of trading. Many are on the sidelines waiting to see what happens next, and they show little interest in jumping in. There is a lot to be said for staying on the sidelines until the market looks very attractively priced. The rule of buy low and sell high carries far less risk than buy high and hope to sell even higher. About the only things I see that may be attractive, and only for the very adventurous, are some short and ultra short ETFs.
As a Sociologist, I look at the mood of our country and see anger in its many forms festering and growing in strength. It is still only an undercurrent, but further economic down trending will likely only make it worse. Keep an eye out for this breaking surface as this does not bode well for being long the markets. This is a far cry from expecting anarchy, a need to lock and load, or a need for survivalist training. It would mean, in my opinion, that a great many people would then be increasingly likely to take mostly lawful actions to promote substantial change. This could take the form of a shift away from political parties and toward independents, a strong "vote the rascals out" in local, state and national elections, and such. Democracy is by nature a flexible system, though sometimes it takes a serious wake-up call to get sweeping change. If all this fails, which seems unlikely from this perspective, only then does anarchy become all too possible. This seems the least of our concerns at this time.
Enough Said
This concludes A Read of the Tea Leaves. I have met my personal objectives and have laid out the dynamics of current markets as I understand them. To continue would largely result in repeating myself. I think once is enough. As noted earlier, I have not expected to be correct in everything - that would be totally unrealistic. It will be of interest to me to see how all this plays out over time.
I hope those who have read this have enjoyed the process and that it has increased you interest in reasoning through the markets. May your investing be beneficial.
