051609
A READ OF THE TEA LEAVES
By Stanley C. Clayton
May 16, 2009
As new evidence rolls in over time, the economic picture keeps looking worse - about in proportion to the U.S. stock market going up. The "green shoots" so much talked about recently serve only to focus attention on little insignificant and always present information. In research language, they are stray data bits or noise. Even in the darkest of times, there are specks of positive events just as in the best of times, there are specks of negative events.
Below is a pretty good list of the main current economic events as of about May 1 of this year (copied from a financial newsletter – citation info not available).
- Endless War spending could subsidize every household in America with $1000 per year
- Income is trending down in the United States, England, and Japan
- US banks loan loss reserves are at a 20-year low while profound losses continue
- Of the nearly 9000 US banks, 1575 of them posted a Q1 loss
- Bernanke claims $2 trillion is needed by the big US banks, but they pass the Stress Test
- Municipal bonds and state finances are disasters, as they each appeal for USGovt aid
- A shocking 20% of US homeowners have loan balances greater than their home values
- Half of modified loans result in foreclosure within several months
- Jobs report for April revealed jobless level at 8.9% (massaged) and 15.8% (actual)
- Jobs Report for April included 66k worse revised job losses for March and February
- Continuing jobless claims at 6.56 million, grew 220k just last week
- CALPERS pension fund is insolvent, USGovt pension PBGC guarantee fund in deep deficit
- FDIC requested $500 billion in additional funds to cover bank failures (giant failure coming)
- Car sales still down 40% annually, with steep Japanese car sales declines also
- Detroit car makers are closing down plants, with huge ripples through entire supply chain
- GM & Chrysler restructures are extremely likely to result in Chapter 7 liquidation in time
- GM burned $1.3B in Q1, burns $113 million per day, unable to transition to green cars
- Business investment down 38% in Q1, a RELIABLE LEADING INDICATOR
- Durable goods up 9% in Q1, but only after Q4 was pushed down from bank shock
- Inventory reduction not key, but rather inventory/sales ratio, since sales way down
- Economic contraction despite lower energy costs from crude oil, natural gas, gasoline
- Housing was false foundation since 2002, now in stubborn decline, the Giant Albatross
- Distress sales make up 40% of all housing sales, led by underwater sales and foreclosures
- Cramdown Law rejection means open season on foreclosures, more huge bank losses
- Banks admit that home loan are not modified after all, a revolving door to foreclosure
- Option ARMs, Jumbos, and Commercial mortgage defaults are ramping up fast
- Commercial mortgage bonds have $70-100 billion that cannot be refinanced, sure to default
- Staggering decline in consumer credit, -80% in Q3, minus $31.7B in Q4/Q1
The so called green shoots, in my view, are not as they are presented: they do not portend an economic up turn. It now appears to me that we have a long road of economic difficulties to work through making the secular bear market last until about 2016 (give or take a year or so) with market averages getting to lows that now seem impossible to most. There will be a number of rallies along the way, but they will fail with the markets dropping to yet new lows. As one writer put it, it will be like a rubber ball bouncing down a flight of stairs with some bounces rather high.
A few of the things I think we will see at the actual bottom: Most derivative contracts will have been unwound, unemployment stable, market rallies lead to higher lows, actual good news is ignored and thought of as just another cruel “head fake”. The markets may have a significant flat line (trading range) as we struggle to pay for the heavy government intervention. As usual, the intervention will have moderated the decline somewhat, but at the cost of extending the pain many years. We will have been reminded that Newton's law of an action has an equal opposite reaction is still alive and well. Not until rallies show a pattern of ending at higher lows will we know a new bull market is in the making. The analogy then is a child on a pogo-stick returning up the staircase carrying the rubber ball tucked under his shirt..
Longer Term
Before long, that bull market will run into trouble from insufficient natural resources left in the world - such as iron, copper, and even potable water. This will mark the end of what I think of as the age of plenty and shift to the beginning of an age of scarcity. Pockets of prosperity will still exist, but shift from resource consuming to resource selling countries as wealth is spent buying increasingly costly natural resources. As usual, 10% of the world population will have 90% of the wealth, but they will be new faces in different places. The new poor likely will learn new and beneficial ways to cope with their adversity. We can hope.
A parallel event is likely in China unless their current efforts succeed: buying foreign natural resource companies and establishing mutually beneficial trade relationships with natural resource countries - with the emphasis on “mutually”. Complimenting this is China’s strategic moves to establish their yuan as the regional currency making it a major player in the shift away from the U.S. dollar as the world reserve currency. Their first overt step was their recent authorization for Hong Kong to sell designated yuan denominated bonds. Unless they succumb to internal stresses such as population growth and potable water shortage, China seems destined to become the dominant player on the world stage. It is a high stakes game they have a reasonable chance of winning. If so, they will rise in wealth along with the natural resource countries. The United States could adopt a similar regional strategy in the Americas, but its strong ethnocentrism and culture of superiority are likely to postpone such a move until it is too late. With the wisdom of hindsight, it is likely to be heard saying, “If we had only ...”.
Caveat
As always, the wisdom of foresight pales in comparison to the wisdom of hindsight. Yet is it the former rather than the latter with which we must make our decisions. The best we can do is use hindsight in an effort to improve our foresight. Such is our struggle.
