Friday, December 21, 2012
Last night, when Speaker Boehner was unable to find enough votes to pass a tax bill, stocks had another flash crash and the S&P 500 index dropped 50 points for a few minutes. Some relatively benign news this morning on consumer spending and income has given stocks some buoyancy, but the Dow is still down about 150 points.
Wednesday, December 19, 2012
by Brandon Smith at Alt-Market.com
The markets, as most people reading this should now well know, no longer reflect in any way the true economic health of our country. If one was to measure the financial “recovery” of this nation by the strength of global stocks alone, he would probably come to the conclusion that the collapse of 2008 was a mere hiccup in the overall success of the worldwide economic system. However, electronically traded equities with little more to back their value than scraps of receipt paper and numbers on a screen have no bearing on what is going to happen to you, and to me, over the course of the coming year. The stock market is a sideshow, a popcorn movie, a façade. The real drama is going on behind the scenes and revealed in fundamentals that mainstream analysts no longer discuss…
The only advantage of a long drawn disintegration of the overall system is that as the years pass, it becomes possible to discover a pattern through which we can gauge where we really stand today and will stand tomorrow, giving us a chance (a narrow chance) to limit the eventual damage. Unfortunately, the pattern now in motion suggests that the next year will be exactly what we have been predicting over the past several months: Dismal.
The MSM refuses to discuss it at great length, but all signs show an epic global slowdown in demand and production, especially in the final quarter of 2012. This slowdown cannot be denied, nor can it be shrugged off as inconsequential. This development is exactly as I predicted in January of this year using the Baltic Dry Index as a guide. During that first quarter, the BDI fell to record lows, indicating an extreme decline in shipping demand around the world, which, in turn, indicated a fall in demand for raw goods, which, in turn, indicated a fall in demand for consumer goods. Mainstream pundits sought to distract the public from this fact by claiming that the BDI was collapsing due to an “oversupply of ships”, not rescinding demand. This disinformation was proven incorrect in the beginning of the third quarter of this year, when export nations from China, to Japan, to Germany all began reporting abysmal manufacturing numbers and steep faltering in overseas purchases.
Of course, we all know what happened next: The markets began to tank when they caught the scent of a slowdown, losing a thousand points within the span of a week. Not so unpredictably (since I also predicted it at the beginning of the year) the Federal Reserve leapt into action with its announcement of QE3 (QE Infinity).
QE3 has done little to change the problem of falling global demand, but it has certainly defibrillated stocks. In fact, I think it is safe to say that a majority of QE fiat funds are flowing (directly or indirectly) into the DOW, and not much else. International trade and consumption is starting to feel the pain, and respective countries are no longer able to hide it. Keep in mind that this slowdown is occurring right at the height of the Christmas season, when consumption is usually supposed to reignite.
Despite the sugar coated claims of insane Keynesians who only a few years ago were predicting a “resurgence” of American industry and exports due to the Federal Reserve’s ongoing devaluation of the dollar, production in the U.S. has remained pathetically weak, and continues to decline:
This is of course a direct result of slowing global demand, reducing potential markets all over the world, which is something deflation fear mongers apparently didn’t see coming. The reality is that demand is faltering EVERYWHERE, not just in the U.S., and this begs a particular question: In an interdependent economic system driven primarily by consumption, who is going to fill the void when all nations are dry of spending cash? That is to say, who is going to take up the slack, when obviously no one has the wealth to do so? Without a cultural cash engine, the globalized framework is destined to fail.
China’s export growth fell far more than expected in November, something which many Chinese economists are attributing to a complete lack of revival in American markets:
Manufacturing in the UK went into steep decline almost simultaneously, showing that sinking demand is striking both the Pacific and the Atlantic:
Germany, the largest economy in the EU and the only country still holding the absurd political entity together, has been shocked to discover that its own Bundesbank is forecasting a contraction in growth to near zero in 2013:
Japan’s economy suffered an annualized decline in GDP in November greater than that which occurred during the Fukushima disaster:
This contraction has recently caused Japan to install a new revamped government during elections this month, which unfortunately will be instituting almost identical policies to the last regime.
Finally, Brazil, a developing export nation with very important significance as a litmus test for world consumption, posted near zero growth in the third quarter of 2012, far below expectations but in line with the bigger picture. The global financial machine is grinding to a halt right under our very noses…
At the end of 2012, it is undeniable; the system is running out of steam, and not even constant fiat injections by central banks are reversing our current course.
In order to understand what is happening, I want you to imagine a quickly diminishing cycle. Imagine that in 2008, America was on the edge of a whirlpool, or a spinning vortex, and was suddenly caught in the outermost current. Today, we have circled the epicenter several times, each rotation becoming smaller and more volatile than the last. Eventually, the whirlpool will reach an end, and our economy will be sucked into the destructive funnel. One can see clear evidence of this decline in the Baltic Dry Index:
Notice how each year since 2008 there is a spike in shipping rates indicating a rise in demand for materials at the onset of the Christmas season, which is the natural progression of things. Yet, also notice that this spike in demand grows smaller with each passing year. In 2012, the increase has been almost nonexistent, meaning that we are likely very close to going down the drain.
Some pundits may argue that November’s Black Friday sales were tremendous, and this signals a recovery in spending and consumption. I would point out that such numbers are deceiving. High sales during the most discounted day of the Christmas buying season is not necessarily a good thing. What it really reveals is that a majority of shoppers were looking for the lowest prices possible because of a lack of personal savings. It is a sign of desperation, not revitalization. Full season numbers have not yet been released, but when they are, I believe we will see a fantastic spike in sales on Black Friday followed by a complete flatline for the rest of the year. Obviously high consumption has not been sustained, otherwise, worldwide manufacturing and shipping would be in much better shape.
The issue here is one of priorities. With multiplying distractions going on around the globe, including the fear of recent mass murders at home, will the public be able to keep track of the deadly financial tidal waves just off the coast, or will they even care when distracted by so many sharks in the water? The next two months will be very revealing. The so-called “fiscal cliff” is on the way, and the question of whether or not the U.S. government should kick the can down the road or take the sour medicine it needs and move on has arisen once again. This debate is and always has been an illusion. Whether we continue to increase government spending, taxation, and inflation, or we cut all spending and shut down the fiat presses, there is still going to be a collapse.
However, the “fiscal cliff” could be very dangerous in an entirely different respect…
The coming collapse will not be due to the indecision or partisan bickering of our politicians. They are in much closer agreement than the MSM would like to admit. Instead, the monolithic Catch-22 of our age will be the direct result of the actions of the private Federal Reserve and the peripheral international banking cartel; the engineers who gave birth to the toxic derivatives implosion in the first place. What I fear most is that the results of the fiscal cliff negotiation along with other triggers around the planet (Syria, Iran, the EU breakdown, etc.) will be used to veil the true weaknesses of our already imploding system, and eventually be exploited as scapegoat events for a disaster that has been in the making for decades, not just a few years. The omens are not good for 2013, and we can only circle the drain for so long…
Tuesday, December 18, 2012
Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age. We would not blame them if they felt a bit less than generous. The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a pro forma capitalism with de facto market totalitarianism. Can we have our free markets back please?
In today's Outside the Box I bring you two pieces that, at first
glance, may not seem to have much to do with each other. First, Bill
Gross, PIMCO managing director, runs down the fierce structural
headwinds that our hard-pedaling global economy faces over the next
decade. I am going to deal at length with not only his GDP projections
for the rest of the decade but those of Grantham and others in the last
two Thoughts from the Frontline of this year. This is a
challenging environment for traditional portfolio construction, but it’s
par for the course as we slog through the secular bear market I was
first writing about in 1999.
Then Charles Gave instructs us on the distortions in the measurement of risk that have been introduced as the "plain, boring and well-meaning economists working in the entrails of the world central banks" have supplanted the Marxist avant garde in the world's shift away from “scientific socialism” to "scientific capitalism."
However, when you think about it, these pieces dovetail in a very convincing – and somewhat frightening – manner. Because what they add up to – if the econocrats are yanking the rug out from under a capitalist system that is already reeling, as Gross says, from debt and deleveraging, a slowing of the locomotive of globalization, and dislocations in technology and demographics – is a profound, ongoing challenge to you and me as investors. Gross and Gave have their own ideas about how we get through this. I don’t agree with all their conclusions – this letter is not called Outside the Box for nothing – but I offer these essays because they’ll make us think through our own presuppositions. However you view their analysis, they do reinforce the idea that we're all going to have to be not only careful but very nimble.
I post this note from 35,000, feet flying back from Cleveland to Dallas. American Airlines has now put internet on nearly all of their domestic flights, and I find the time I spend read and respond without interruption up here some of the more productive time I get. Which is good, since the record shows that I have been on some 110-plus different planes this year, most of which were AA. (Lately, when I am asked where I live, I just say my closet is in Dallas.)
It is not just me but other “road warriors” who have noticed that the staff of AA have markedly stepped up their personal service levels (as opposed to United, when they were in similar financial difficulties). More than a few of their employees have gone far out of their way to make my difficult travel schedule a little bit easier and smoother, from frontline staff to their back-office phone mavens, who often perform a little bit of magic rearranging my schedule. And as they add newer planes to their fleet, seat 5B has almost become my home office. So here’s a tip of the hat to them and all the service people who make life on the road better. And may your own road be a little smoother these holidays.
I spent last night at Dr. Mike Roizen’s home before seeing a few doctors at the Cleveland Clinic. I rode in a limo with him to a speech in Youngstown, Ohio, and we had time to visit at length. Mike has become one of my dearest friends, and our times together are easy ones, deeply treasured. Without this peripatetic life I would not have so many good friends, far and wide. It is the best perk of traveling.
Mike is on the board of the Cleveland Clinic, and he is deeply worried about the fiscal cliff. Even assuming the “doc fix” is passed, as it always is, without an alteration or repeal of the current law, the Cleveland Clinic will be faced with an almost 9% budget cut on January 1. They will lose money on every Medicare and Medicaid patient they see. There are no good solutions other than deep budgets cuts. And since the largest portion of their budget is salaries?...
The CC is held up (rightly so) as one of the most efficient medical organizations in the world. They have no fat to cut. I met the lady, in my walking around at the clinic, who cut $24 million in energy costs and another $2 million in trash-removal costs, at some considerable effort and investment. They leave no dollar stone unturned in the pursuit of efficiency.
Mike and I talked deep into the night and much of the next day, when we could, about our healthcare system. It fills me with deep concern. I have asked Mike to give us an outline of his speech today for an Outside the Box. His five-step “solution” has lowered healthcare costs for the 43,000 CC staff and all firms that have adopted their plan. When you look at his numbers, you understand why the US spends more money on healthcare than Europe. We are indeed that much less healthy. The CC has found out that paying each staff member $2,000 to adopt a healthier lifestyle lowers overall costs by even more than that.
Smoking cigarettes may be your personal choice and God-given right, but it costs the American healthcare system and taxpayers multiple tens of billions. And the same goes for four other lifestyle habits. Want to live long and prosper? And be smarter and have better sex? Just eat right, exercise and avoid a few items. I hope Mike gets me that essay soon, as I want all my closest friends (that would be you!) to stay around with me for a long, long time.
Have a good week. I am looking forward to the holidays and home and family. And while I try to get exercise on the road, my home gym is still the best.
Your ready for a few good nights’ sleep in my own bed analyst,
John Mauldin, Editor
Outside the Box
Monday, December 17, 2012
Roach Motel Monetary Policy
John P. Hussman, Ph.D.
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