CNBC Coins Term "Suburban Depression"

Rosenberg: A Modern-Day Depression

 "It's Time To Start Calling This For What It Is: A Modern Day Depression"-- David Rosenberg

Headed for Hyperinflationary Depression?

"The world is now staring into the abyss and we are most likely entering the Dark Years which I wrote about two years ago. The consequences will almost certainly be unlimited money printing and a hyperinflationary depression." -- Egon Von Greyerz

It's Getting Worse! Even Dollar Stores Feeling Pinched!

Wow! Check out that headline from CBS:

LOS ANGELES (CBS) —  More stores across the U.S. that offer deeply-discounted products are seeing their sales decline after years of growth amid America’s “Great Recession” — and one analyst said on Monday it’s another sign of even deeper downturn.
While the demand at stores like the 99-Cent Store or Dollar Tree is still relatively high, the biggest chains in the nation have fallen short of Wall Street’s expectations for several months, a trend that may prove even more ominous for the economy at large.
“I think what’s going on in those stores is that we are in a depression for 80 percent of Americans,” top retail analyst Howard Davidowitz told KNX 1070.
America’s three largest discount chains — Dollar General Corp., Family Dollar Stores Inc. and Dollar Tree Inc. —  all recently missed their quarterly earnings targets.
Davidowitz pointed to the weakness of the dollar and a gloomy consumer outlook as some of the factors behind the stores’ slump.
“In those stores, somebody comes in with $12 to do all their shopping,” said Davidowitz. “The person who used to come in with $12 now comes in with $8.”
“In other words, the economy is continuing to be worse, the Obama depression continues to explode,” he added.
Analysts say rising food and transportation prices are likely eating into the profit margins of discount stores, which risk driving away price-sensitive customers with any potential price hikes.
Core customers at most U.S. discount chains typically have a household income of $40,000 or less.

"We're on the verge of a great, great depression" --Peter Yastrow, market strategist for Yastrow Origer

from CNBC:

Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.

"What we’ve got right now is almost near panic going on with money managers and people who are responsible for money," he said. "They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.

"We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake."

Stocks extended losses after the manufacturing fell below expectations in May and the private sector added only 38,000 jobs during the month.

"Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything," Yastrow said. "We’re on the verge of a great, great depression. The [Federal Reserve] knows it. 

"We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer."

However, he said he wouldn’t sell stocks.

"Any bears out there better be careful because the dividend yields on these stocks look awesome relative to all the other investment vehicles out there," Yastrow said. "So bears are going to have to find a new way to express their discontent with the U.S. economy."

Apres Nous, Le Deluge

From Egon von Greyerz of Matterhorn Asset Management
 
Apres Nous, Le Deluge

Happy days are here again! Stock markets are strong, company profits are up, bankers are making record profits and bonuses, unemployment is declining, and inflation is non-existent. Obama and Bernanke are the dream team making the US into the Superpower it once was.

Yes, it is amazing the castles in the air that can be built with paper money and deceitful manipulation of all economic data.  And Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. They both know that, in their holy alliance, they are committing a cardinal sin. But clinging to power is more important than the good of the country.  An economic and social disaster is imminent for the US and a major part of the world and Bernanke de Pompadour and Louis XV Obama are praying that it won’t happen during their reign: “Après nous le déluge”. (Warm thanks to my good friend the artist Leo Lein).

Moral and financial decadence

A deluge of an unprecedented magnitude is both inevitable and imminent. The consequences of the economic and political mismanagement will have a devastating impact on the world for a very long time. And the consequences will touch most corners of the world in so many different areas; economic, financial, social, political and geopolitical. The adjustment that the world will undergo in the next decade or longer, will be of such colossal magnitude that life will be very different for coming generations compared to the current social, financial and moral decadence. But history always gives us lessons and the one that is coming will be necessary and eventually good for the world. But the transition and adjustment will be extremely traumatic for most of us.

We have reached a degree of decadence that in many aspects equals what happened in the Roman Empire before its fall.  The family is no longer the kernel of society. More than 50% of children in the Western world grow up in a one parent home, either being born by a single mother or with divorced parents. Children are neither taught ethical or moral values nor discipline. Many children consider attending school as optional and education standards are declining precipitously.  Most families do not have a meal around the dinner table even once a week. Sex and violence are common place on television and in real life. Both press and television create totally false values and ideals. Everyone must be young and beautiful often enhanced by surgical or digital means. Old people have little value and their wisdom is not benefitting the younger generations.

The Golden Calf or materialism is the ultimate value that is worshipped and no means are eschewed to attain material goals. Since most of the prosperity that has been achieved in the last 40 years is based on printed money and debt, it is totally false and unsustainable. A major part of the Western world has improved their living standard, by exchanging services and swapping houses at ever rising prices financed by printed paper and credit. The perceived wealth that is created out of this is illusory and ephemeral. We have created a world economy which is based on debt and thin air.

The Gini coefficient of income and wealth is now reaching extremes in many countries. This measures the inequality between the rich and the poor. In the US the Gini coefficient is now at the same level as in the 1920s before the depression. In countries like the US, the rich are getting richer whilst 45 million people live below the poverty line, 43 million receive food stamps and over 700,000 are homeless. With a real unemployment rate of 22% and urban youth unemployment much higher, the US will soon experience social unrest.

But it is not only the US that will experience financial misery, famine and social unrest. This will also hit most European countries and in particular the UK, southern Europe, Eastern Europe and the Baltic States as well as African countries, the Middle East, Asia, yes in fact the whole world.

Are boom and busts inevitable?

Well if you listened to the former British Labour Prime Minster Gordon Brown, he proudly declared that he had abolished booms and busts and thus economic cycles. But he was expeditiously thrown out at the next bust which of course had nothing to do with him since he blamed the US sub-prime market for his ill-fated destiny.

Cycles or ebbs and flows are a natural part of both economic life and nature. And right at the point when something could be done to limit the damage, most nations seem to have the uncanny knack of selecting the political individuals who will put fuel on the fire and make the situation catastrophically worse.

Greenspan was one such individual. During his 19 years as Chairman of the Fed, he could have limited the economic and social damage that the US would suffer. Instead he took every single measure possible to ensure that there would be a catastrophe with uncontrollable consequences. But we shouldn’t just blame the incompetence of Greenspan. It was sickening to watch every sycophantic congressman and senator licking Greenspan’s boots and praising his wisdom. Because Greenspan’s money printing and incompetent interest rate management created one of the biggest financial bubbles in world economic history. But the politicians loved this. It made the stock market boom, and house prices surge. Thus the politicians were all loved by their voters who did not understand the dire consequences that were looming. And Bernanke de Pompadour is continuing the same disastrous policies of creating money out of thin air. When will they ever learn that creating money out of thin air and running astronomical deficits that never will be repaid with normal money leads to the road of total ruin? When will they ever learn? The very sad answer is that they won’t and therefore they are leading the world into a hyperinflationary depression that will have uncontrollable and cataclysmic consequences for current and future generations.

Empty stomachs are rioting

We have for years warned about hyperinflation leading to famine, misery and social unrest. Well, this is exactly what is happening in many parts of the world. The protests and overthrowing of regimes in Tunisia, Egypt and Libya are primarily due to a major part of the peoples of these nations having no job, no money and little food. It is their empty stomachs that are rioting. In addition they are protesting against the leaders of these countries stealing from the people.

It is virtually certain that these riots will spread to many countries in the Middle East, Africa and the developing world. This will lead to new regimes and new political orders that could either be far left or far right politically or religious extremists. But the new regimes will not be in a position to change the root of the problem which is famine and poverty.  In Egypt for example there has been a quiet military coup. It is unlikely that a democratic regime will take over from the military. So the people will protest again and again. And this will be the same in most countries. Eventually the people will take the law into their own hands since no regime will be able to give them the food that they need.

The hyperinflationary deluge is imminent

Although food and fuel inflation is rampant worldwide already, we are only seeing the very beginning. Massive oil price rises are likely to continue as a result of the geopolitical situation as well as peak-oil. The Middle East is a time bomb waiting to go off. Israel is in an extremely precarious position and the involvement or non-involvement of the US in this conflict would both have dire consequences for Israel and peace in the world. Food prices will continue to rise dramatically. Major parts of the world are living below the poverty line today and this will increase exponentially.

The lethal concoction of rising food and fuel prices is already affecting the Western world. The Continuous Commodity Index – CCI, (60% food, 17% energy and 23% metals) has almost doubled since the low in early 2009 and has gone up 42% in the last 12 months. The almost vertical rise of the CCI is one of the best indicators of hyperinflation being imminent. A catastrophe of astronomical proportions is looming. This will hit the world at a time when there is no capacity whatsoever to take any real measures that could alleviate the problems.

(Click image to enlarge)

Most countries are already running major deficits which will increase dramatically in the next few years. The banking system is bankrupt and is only holding together due to false valuations of toxic debt and derivatives. This is done with the blessing of governments since virtually no major bank could face an honest valuation of its assets. Unemployment and especially youth unemployment is currently a problem worldwide and it will get much worse. In 2010, the US government spent 60% more than its revenues. In order to balance the budget individual and corporate income taxes would have to double.

Never before in history has the world run out of real money as well as (affordable) food and fuel simultaneously. But his is exactly what is happening now and it will get substantially worse in the next few months and years.

Financial misery, famine and high unemployment combined with governments that will not be in a position to give real help are a recipe for disaster that will lead to social unrest and revolutions not only in developing countries but also in the West. Hungry people are desperate people and desperate people do desperate deeds. We could see already in 2011 food shortages, and riots both in Europe and in the US.

Hyperinflation Watch

The following are INDISPUTALBLE FACTS:

• The US dollar is down 82% against gold since 1999
• The US dollar is down 49% against the Swiss Francs since 2001
• The Dow Jones is down 81% against gold since 1999
• The Continuous Commodity Index is up 100% since 2009

The above facts are clear evidence of an economy that has been totally mismanaged. But more importantly most of these trends are now starting to accelerate – a clear sign that hyperinflation is just around the corner.

With years of negative net worth and negative cash flow, the US is bankrupt today. The Federal deficit is forecast to increase by at least another $ 5 trillion in the next 5-7 years.  Add to this the State deficits, the Municipal and City deficits that are rising at a galloping rate and we have a country that is going to haemorrhage to death in the next few years. One wonders when the totally ineffective and clueless rating agencies are going to fathom this. Not that it will matter if they once do.  One also wonders what Mme Bernanke de Pompadour and his court are thinking. “She” and her courtiers should have above average intelligence and could not possibly avoid seeing the facts that we all see today (of course, some of us have seen it coming for over a decade). But “she” has to please her master King Louis XV Obama and her devotion to the king goes above all reasonable common sense, or rationale. So the two of them will continue to crank up the printing press and drown their people and the world in worthless paper.

Stock Market

To believe that the current money printing liquidity boom is real and sustainable would be a very serious and expensive mistake. The temporary and illusionary pickup that we are now seeing in the economy and stock market is the normal initial phase of a hyperinflationary economy. It must not be mistaken for a real improvement in the economy.

The normal pattern at the beginning of a hyperinflationary period is that stock markets surge. This is the result of the increased liquidity and a flight to more inflation proof assets. This was the case in for example the Weimar Republic and Zimbabwe.  Just look at the chart below of the Zimbabwe stock exchange that went from 1,420 in January 2005 to 5.4 trillion in June 2008, a 3 billion per cent increase.  That was of course in Zimbabwe dollars. In US dollars the stock exchange went sideways with major volatility.  So in hyperinflationary terms stock markets could continue to rise initially thus making them a better investment than cash. However, measured against real money, the Dow has gone down 82% against gold since 1999 and 86% against silver since 2001 (see chart above). We are currently seeing a dead cat bounce but we expect the Dow to decline a further 90%, at least, against gold in the next few years. So even if stock market investments will initially give the illusion of protecting investors, it will be a very poor hedge against the ravages of hyperinflation in real terms.

ZIMBABWE STOCK INDEX 2007-2008

Bond market

In January 2009, we warned investors that long term interest rates were bottoming. Since then the 30 year bond yield is up from 2.6% to 4.6% an 80% rise. But more importantly the 30 year is currently in the process of breaking a 17 year downtrend line which dates back to 1994. This confirms that rates will now start a major and rapid rise which is likely to reach the mid-teens or higher. Governments will attempt to keep short rates low due to weak economies but eventually the rising long rates will put strong upward pressure on the short rates.  So the flight to government bonds that we have seen in the last few years will soon reverse into a massive rush for the exit. This will coincide with rapidly increasing financing requirements by the US, UK, EU and many other governments. The poisonous concoction of rising rates and rising financing needs will create a vicious circle of collapsing bond markets and unsustainably high financing cost. This will continue to drive interest rates even higher which will further increase deficits and necessitate even faster running printing presses. Add to that a collapsing currency and the hyperinflationary picture is complete. It is our very strong view that investors should exit bond markets entirely if they want to avoid a total destruction of their assets.

Currency Market

As we have explained for many years, hyperinflation is created by the government destroying the currency as a result of money printing to finance deficits. This leads to the cost push inflation that we are now experiencing. Add to that, shortages in commodities worldwide, thus creating the perfect hyperinflationary scenario. The Dollar, the Pound, the Euro and many other currencies will continue to decline. They can’t all decline against each other at the same time so the market will take turns in attacking one currency at a time. But all currencies will continue to decline against gold. We believe that the dollar will soon start a very rapid fall against gold and against many currencies. Investors should exit the Dollar and also the Pound and the Euro. There is no currency better than gold or silver but for any small amounts of cash we prefer the Swiss Franc, the Norwegian Krone, the Singapore dollar and the Canadian dollar.

Wealth Protection

A hyperinflationary depression will destroy the value of money as well as most assets that were financed by the credit bubble (property, stock market).  Wealth protection is now critical and urgent. We see no better way of protecting assets against total destruction than physical gold and silver stored outside the banking system. Thereafter, precious metals, energy and food stocks are our preference.  But it must be remembered that any asset including stocks that is held through a bank is dependent on a sound and surviving banking system.

The real move in precious metals is still to come as we have outlined in many articles. Less than 1% of investors own gold. Before this economic cycle is over we are likely to see a mania in physical precious metals that will drive prices exponentially higher. And luckily for investors, this is a mania which is unlikely to end in a collapse since gold most probably will be part of a future reserve currency.

Finally we are again quoting von Mises who clearly understood that “le déluge” is inevitable:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

True Defict of $4-$5 Trillion/Year

"Eventually it is going to be a hyperinflationary great depression... The annual deficit is running $4-5 trillion a year, that includes the Y/Y change in the NPV of unfunded liabilities... There is no political will to deal with this." -- John Williams, economist, Shadowstats.com

Krugman: Right Conclusion, Wrong Causes

This guy is so grossly misguided by his keynesian dogma that while he reaches the right conclusions, he is still in denial of his keynesian culpability! Did Mr. Krugman miss that his economic philosophies have ruled for most of the past century (remember, "we're all keynesians now"!), but his contention is that we need more of it? He's convinced that we didn't do enough of it? What? We didn't administer enough poison to kill the patient? I think Koolaid Krugman is just trying to cover his rear end so he can later say, "I told you so."

Mr. Krugman's antidote throughout has been to create an ever larger black hole of debt, and now he's willing to suggest that a default of that debt he recommended is inevitable? What kind of warped, psychotic thinking is that?

Take a clue, Keynesian Krugman: You administered more than enough of your poisonous keynesian koolaid. Yes, the patient is dying, but at a slightly slower pace than we expected! And it was your keynesian koolaid that did it!

Krugman on NYT:

Not in ourselves.
I think it’s fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out. So, how does it end?
A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets.
The problem with this view is the fallacy of composition: when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.
So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.
And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift.
So basically, we can do this cleanly or we can do this ugly. And ugly is the way we’re going.

Empire In Decline

by Graham Summers at Phoenix Capital Research:

I look around me and I see an Empire in Decline.

The US economy is clearly in a depression… not a recession, not a recovery, but a DEPRESSION. More than 40 million Americans (12%) are on Food stamps. Nearly one in five of us are unemployed of underemployed. Folks go to Wal-Mart at 11PM waiting for their government checks to clear at midnight so they can buy baby formula, milk and other necessities.

Three out of every five Americans are overweight. One in five are obese. Indeed, there are only two areas (one state, Colorado, and Washington DC) where obesity rates are under 20%.

Nearly three in four of us don’t get enough sleep.  Almost one third of us report having trouble falling asleep EVERY night. And almost half of us report that day-time sleepiness interferes with normal activities including work.

Half of marriages end in divorce. One out of ten married couples report sleeping alone. The average American watches 28 hours of TV a week (enough to qualify for a part-time job). Two thirds of us eat dinner while watching TV, preferring the fake, sensationalized lives of others to engaging with our own families.

The TV and media are filled with foul, ungodly images of sex, violence, and hate. The most watched shows of the last decade all feature ordinary folks becoming superstars in lottery-esque competitions (American Idol, Survivor, Who Wants to be a Millionaire, etc) OR crime sagas detailing the most sordid and disgusting elements of society (CSI, Law and Order, etc) OR amoral social dramas in which notions of personal responsibility, fidelity, and common decency are unknown (Desperate Housewives, the Bachelorette, etc).

Today, brain dead, vapid human beings who have contributed nothing to society are idolized and followed as though they invented the wheel.  We’ve actually got two industries devoted to presenting the illusion and reality of celebrity: Hollywood shows the photo-shopped, CGI-enhanced, scripted version, while the paparazzi and weekly glossies reveal the drug-addicted, affair-crazed, family breaking, soul-less emptiness.

Sex or violence are plastered on virtually every flat surface available. Even the check-out lines at the grocery store feature endless images of barely clothed women along with headlines sensationalizing gruesome behavior, right out in the open for children to see. And if the kid can actually read the headlines… God only knows what ideas this stuff is putting into their heads.

Financially, we’re all pretty much bust or going bust (except those on Wall Street).

New home sales in July were a RECORD low. Not record as in for the year, but the lowest since 1963. The talking heads are high fiving because sales improved in August, but failed to note that they were still DOWN 19% from August 2009 levels.

Americans two primary assets for retirement (stocks and their homes) have both been absolute disasters. Home prices are down 30%, stocks haven’t produced gains in over a decade. Every moron on TV talks about the Dow 10,000 like it’s a miracle. But when you adjust the Dow for inflation, (using the BLS’ ridiculous CPI measure) the Dow is SUB-500 in terms of purchasing power.

Our money system is controlled by an elite banking oligarchy fronted by academics who have never run a business, invented anything, or had any interaction with commerce aside from vying for tenure. Our currency is now worth less than 1/20^th of what it was a century ago. And we are ALL in debt up to our eyeballs on a personal, corporate, local, state, and federal level.

Heck, even USA TODAY (not exactly the cutting edge in financial research) notes that in order to pay off our current liabilities, every US family would have to pay $31,000 a year… for 75 YEARS!!!

And we’re talking about an economic recovery?

According to David Rosenberg of Gluskin Sheff:

·      Wages & salaries are still down 3.7% from the prior peak;

·      Corporate profits are still down 20% from the peak;

·      Real GDP is still down 1.3% from the peak;

·      Industrial production is still down 7.2% from the peak;

·      Employment is still down 5.5% from the peak;

·      Retail sales are still down 4.5% from the peak;

·      Manufacturing orders are still down 22.1% from the peak;

·      Manufacturing shipments are still down 12.5% from the peak;

·      Exports are still down 9.2% from the peak;

·      Housing starts are still down 63.5% from the peak;

·      New home sales are still down 68.9% from the peak;

·      Existing home sales are still down 41.2% from the peak;

·      Non-residential construction is still down 35.7% from the peak.

The American Psychological Association reports that 73% of Americans cite money as a source of significant stress. Personal bankruptcies have fallen 8% month over month from July to August. However, August 2010 bankruptcies are up 6% from August 2009… so much for the recovery.

And yet, despite all of this, assumedly intelligent people write op-ed articles and appear on TV claiming that things are swell in the US, that we’re actually OK and that the recession is over. Some of these people even have advanced degrees or have won international prizes for economics.

Let’s be honest. Forget recessions, forget even Depressions, the US is an empire in decline.

You can literally see it crumbling right in front of you. Just start looking at how people live, eat, and act on a day to day basis. Look at how our Government runs itself, how it manages our affairs, how it spends our tax Dollars. Look at how our justice system works, who it protects and who it punishes.

It’s all out there, right in the open for you to see. You don’t need an expert degree or some kind of advanced education. It’s OBVIOUS to anyone who bothers looking around.

The fact we don’t admit it doesn’t mean it’s not true.

Another Scenario Causing a Hyperinflationary Depression

You see millions of websites devoted to the topic. These would mostly be the self-proclaimed “Gold bugs” who warn us that an impending hyperinflationary event, which would significantly boost prices of all precious metals and necessities such as food, would lead to chaos as the country’s savings would vanish literally over the course of a couple of weeks.  Riots would occur. Commodities would gain in value as Fiat currencies see their end game.  Overall it portrays a very ugly picture indeed (let me pull out that Mayan Calendar).  My definition of hyperinflation revolves around a deep and sharp loss of confidence in a currency. This is different than inflation where it is simply a function of too many dollars in the economic system; however, the line between high levels of inflation and hyperinflation is quite gray primarily dominated (in my view) by “future inflation expectations”. Quick upward movements in this metric would signal to me that the public is less confident in the purchasing power of their currency, a prerequisite to hyperinflation. Another reason that I’ve thought of, though not heard much about, would be a supply-side shock in important material resources.   Regardless, I’ll come out and say upfront that there are so many headwinds, crosswinds, you name it, that predicting whether hyperinflation would occur would be akin to throwing darts. However, this will not stop me from researching the reasons why such an event may occur.
First my stance: Overall I believe that the probability of a hyperinflationary event occurring due to a loss of confidence in the US dollar remains very remote.
The other reason for hyperinflation is more unique and deserves more attention. The Fed, for all intents and purposes, is becoming a growing national security threat in my view. My main reason for such a diatribe is rooted in its quantitative easing strategy in an attempt to avoid deflation. This strategy seems shortsighted in my view from a longer-term perspective. Given the last round of quantitative easing and the low rates that it produced it is now obvious that consumers are not keen on increasing demand for loans. Despite the Fed’s best attempts to restart lending and keep the credit machine growing, the consumer has made its intentions known. They are in the process of de-leveraging and saving. Decades of profligate spending are coming home to roost; the bill now needs repaying.  Retirees must save as their largest asset (home) has taken a beating and doesn’t seem to be bouncing back anytime soon. The consumer is looking to fix its balance sheet, translating to an overall period of secular weakness in the economy.  The fundamental question that I have is whether the Fed, and perhaps more importantly, policymakers see continued debasement of the dollar via quantitative easing as a viable strategy to combat our problems. If they do, quantitative easing will continue and if it continues, I see an increasing probability of the following long-term scenario unfolding.

We continue to experience a deflationary environment over the short and medium term. At first, as it does now, it will seem that pursing a quantitative easing strategy is a more viable strategy as we have strong deflationary forces in the form of deleveraging. However, this is where I see it getting interesting. China is taking the steps necessary to boost its domestic consumption and rebalance its economy. Social safety nets are in the process of being enacted. As a Chinese official, it obviously makes sense to boost the domestic sector given that growth in export demand is not likely to continue as developed economies repair their balance sheets. We also know that presently China accounts for a large portion of demand in commodities. Its population remains mostly rural with poor incomes. What this means is that there is large pent-up demand and the prospects for accelerated and prolonged growth phase are very favorable. The day/month/year that the Chinese consumer begins to loosen its wallet and see credit as a viable tool, leading towards increased demand will bring about the moment of reckoning. For starters, commodities such as oil, copper, gold, silver, platinum and palladium would see a large acceleration in demand.  Agricultural commodities would also increase as Chinese citizens upgrade their diets. Investors would see renewed opportunities in the US manufacturing sector as exports would grow to quench the demand of the massive Chinese consumer. Job growth would stage a comeback as well as wages. Capacity utilization would increase rapidly after years of trimming down excess fat, which would have resulted in a very lean manufacturing base. We would have a major supply side-shock from higher commodity prices, coupled with low industrial capacity as the major contributors to a major increase in inflation. In the end, China’s economic restructuring would be the key that unlocks the hyper inflationary box. While an increase in jobs and higher wages are good things, the effects that they would bring (sharp moves higher in inflationary expectations) would negatively affect the retiring baby boomers and the unemployed. Furthermore, any hint of higher inflation would be met with sharply rising yields as a massive supply of bonds, which were issued  as the US built up massive deficits, would begin to be sold. Overall, we would be in an environment where persistently high yields, coupled with higher commodity and food prices would continuously sap the purchasing power of the US consumer and suppress investment in the domestic economy.  We would be in a depression, but with very high inflation as Chinese demand would ensure that important commodities retain a very high premium, while only decreasing marginally in value should there be a sell-off.  Whether our population begins to panic over the purchasing power of their dollars will determine whether we have a very bad stagflationary or hyper-depressionary event.  That would be the major wildcard.

The top risk to delaying this sequence of events would be a bout of protectionism/trade war with the US, which I do see happening. However, this would only set back this process, not prevent it. As long as our politicians and the federal reserve continue on their quest to debase our currency, the threat of a hyper-depression remains. I personally do not believe this will happen, as there would eventually be enough opposition to quantitative easing to cease it, due to fear that it may result in destroying the savings or our baby boomer population and the financially prudent (the people who are actually important towards having a healthy and sustainable economy).   However, we may very well be in a situation where Fed officials don’t realize what they’re doing until it’s too late.

Harding and Coolidge: How to Handle a Depression

by Jim Powell from Washington Times:

Although the con- ventional wis- dom - backed by President Obama and the Democrats - is that government spending must go up in hard times, the 1920s began with a depression, and spending went down. Gross National Product (GNP) fell 23.9 percent from 1920 to 1921, compared with the 23.4 percent drop from 1931 to 1932 - the biggest annual GNP decline of the Great Depression. Unemployment doubled to 11 percent in 1921, compared with 24.9 percent in 1933, the worst unemployment level of the Great Depression.
Because pumping trillions into the economy hasn't worked this time, maybe we ought to reflect on the last time government spending was under control - back in the 1920s.
In every decade except one since then, federal spending has more than doubled. The exception (1980-1990) was a decade when spending nearly doubled. How was federal spending brought under control during the 1920s, and how does that relate to dramatically lowering unemployment?
Warren G. Harding, who won the 1920 presidential election, thought companies that prospered because of the war must find peacetime business or shut down. People had to find peacetime jobs. Harding thought that the faster adjustments were made, the better off everybody would be. He understood that the top priority was the recovery of private-sector employment because government didn't have any money other than what it extracted from taxpayers. Accordingly, Harding was determined to minimize taxpayer burdens. By the time he died in August 1923, he had cut spending almost 50 percent. He cut taxes almost 40 percent, and he began paying down the national debt. There were no big-government programs.
The result? The 1920 depression was over in just 18 months. The Roaring '20s boom began in 1922. The American middle class blossomed. Millions of people acquired their first telephone, first radio and first car. The Great Migration of blacks from the South, seeking better opportunities in Northern industrial cities, gained momentum during the 1920s. As a depression fighter, Harding was much more successful than Franklin D. Roosevelt, whose presidency during the 1930s was plagued by chronic double-digit unemployment.
Vice President Calvin Coolidge succeeded Harding and won a term of his own. He, too, was a strong believer in low spending, low taxes and minimum interference with the private sector. Coolidge further cut spending, down to $2.8 billion in 1927. Altogether, spending and taxes were cut 50 percent during the 1920s, and about 30 percent of the national debt was paid off. There were budget surpluses throughout the 1920s. Unemployment fell to 1.8 percent, the lowest U.S. peacetime level in more than 100 years.
There were three principal reasons why Harding and Coolidge were able to control spending, taxes and debt during the 1920s and achieve historically low unemployment.
First, there were no entitlements. The entitlement era in the United States began with Social Security in 1935. Today, entitlements account for more than half of federal spending, and unfunded entitlement liabilities exceed $100 trillion. Congress determines the qualifications for receiving entitlement payments, and the government is obligated to pay however many people show up with qualifications. Entitlement spending could be reduced by changing qualifications to reduce the number of people in a program, but any member of Congress who supported such changes would risk political suicide.
Second, Harding and Coolidge didn't have to deal with government employee unions. These began expanding rapidly during the 1960s. Now they're perhaps the most aggressive lobbyists for higher spending. Government employee unions have gained above-market compensation and gold-plated benefits - more than $5 trillion in federal liabilities. Unfunded state government employee liabilities are another $1 trillion.
Third, Harding and Coolidge believed the job of the military was to protect the United States. They didn't support anything like the current policy of subsidizing the defense of affluent nations in Europe and Asia that can afford to pay for their own defense, or entering other people's wars - especially civil wars - that don't involve a direct national security threat to the United States. Harding and Coolidge believed the United States could legitimately go to war after Congress debated the issues and voted for a declaration of war.
Because Harding and Coolidge were able to keep government spending low, they were able to minimize taxes, debt and government interference with the economy. The private sector flourished, productive jobs were abundant, and unemployment rates reached a historically low peacetime level that no big-government president has ever matched.
Jim Powell, a senior fellow at the Cato Institute, is author of "FDR's Folly," (Crown Forum, 2003) and "Wilson's War" (Crown Forum, 2005).

The Coming Crisis of the U.S. Government; "Hyperinflationary Depression"

Most market reporters, commentators and politicians continue to rely upon nothing but the same short-term "snapshots" which have caused them to be "surprised" by everything. However, it is a safe conclusion that even such rampant incompetence (combined with a strong "herd mentality"), could not and does not mean that the entire U.S. government remains in an oblivious state of ignorance regarding this re-acceleration of the collapse of the U.S. economy.
This begs an obvious question. Given that at least some elements of the U.S. government have known all along that the U.S. economy was not recovering and could not recover, why is it that only now are we hearing of tentative, new plans of more "life support" for the dying U.S. economy?
The answer is also obvious. As I pointed out when I originally denounced the Obama stimulus package, it was never anything more than a bad joke. The combination of the collapse of the U.S. housing sector, massive unemployment, and the largest credit-contraction in the history of the U.S. economy had combined to subtract approximately $2 trillion per year in consumer spending from this consumer economy.
The response of the Obama regime to this scenario was a one-time injection of $780 in stimulus, spread out over more than a year. Obviously, you can't replace $2 trillion with less than $800 billion and call it stimulus.
This brings us to the present dilemma of the U.S. government. The U.S. economy is much sicker than it was when Obama ascended the throne. Wall Street has continued to ruthlessly choke off all credit to the U.S. economy, meaning that tens of millions of American households and tens of thousands of businesses are much closer to the breaking point than they were in January of 2009.
The entire U.S. retail sector is in a terminal death-spiral, and its only response is to eliminate vast numbers of retail outlets, and herd consumers into more online retailing. While this cuts costs for these companies, most of those cuts will be reduced employment -- fueling the next leg lower for consumer demand, resulting in even more store closures, etc.
This means that the trivial "band-aids" being mused-about by government talking-heads are utterly meaningless. Simply, the Obama regime has to "go big, or go home." It must either engage in massive (genuine) stimulus of the U.S. economy -- meaning a multi-trillion dollar commitment, or simply allow the collapse to proceed (and feed upon itself). However, in even contemplating another, massive wave of spending, Obama faces two other problems (which he created for himself).
Throughout this "U.S. economic recovery," the U.S. government has continued to pretend that it was almost ready to begin some actual, fiscal restraint -- halting the exponential increase in federal government debt. That was the only thing propping up the U.S. dollar (putting aside the constant Euro-bashing by the U.S. propaganda-machine). Allow another sickening plunge in the U.S. dollar, and that will drive away the last, few chumps still insane enough to buy grossly over-priced U.S. Treasuries. This is the road that leads to hyperinflation.
If this was not bad enough, the Obama regime has continued to be successful in duping both the vast majority of sheep in the U.S. electorate, as well as Republican knuckle-draggers that the U.S. economy was "strong enough" to begin to curtail runaway spending. This pool of chumps is looking for spending cuts, not a multi-trillion spending spree.
Thus, the U.S. government is facing exactly the same scenario today as the Bush regime faced in the summer of 2008. In hindsight, we all know what choice the previous government made. Lehman Brothers was "assassinated" -- as the first step in a concerted effort to destroy commodities markets. The collapse in these vital markets, combined with the collusion among Western bankers to choke off all credit to credit-based Western economies achieved its desired objective: a global "economic collapse," and the expected panic which such an artificial crisis would naturally produce.
It was only through this panic that frightened sheep (i.e. U.S. citizens and government "leaders") meekly submitted to the largest "bail-out" in history for Wall Street: a combination of hand-outs, loans, and guarantees which exceeded every other corporate bailout in every country on Earth, throughout history, combined. The last estimate I heard of the nominal value of this bailout was approximately $14 trillion, matching "official" U.S. GDP. The number will continue to increase (even without any new bailouts), as all of the 0% money being "loaned" to Wall Street banks is yet another taxpayer subsidy (since even the U.S. government can't borrow at 0%).
Given the current circumstances of the U.S. government, and past history, the "plan" is clear: do nothing long enough for the U.S. propaganda-machine to whip-up public fear into another frenzy, and then (and only then) will it "act decisively" to address this new "crisis." There is a second audience at which this clumsy charade is aimed: the governments of other nations.
While we must presume that a small number of these other governments understand the true state of the U.S. economy (China leaps to mind), most of these governments have been quite content to "drink the Kool-aid" being dispensed by the U.S. government. Should the Obama regime simply announce ("out of the blue") a multi-trillion dollar spending package, these willing dupes would be forced to confront reality: that the U.S. government has clearly embarked upon the road to hyperinflation.
However, create a "crisis" first, and we can expect these "leaders" to instantly transform into a flock of Chicken-Littles -- desperate for some massive prop, to prevent the sky from falling upon them. Understand that for the ivory-tower leaders of our governments that a crisis means nothing more to them personally than being thrown out of their pampered, government posts -- and being forced to survive upon the extremely generous public-pensions they award themselves.
It is such "me-first" selfishness which inspires the most blind-panic in any crisis, and the U.S. government is clearly relying upon such a reaction. They can announce their multi-trillion rescue of the global economy, and maybe, just maybe the self-absorbed leaders of other countries will blind themselves to the hyperinflationary consequences of more print-and-spend insanity. There is no more money for the U.S. government to borrow, thus every penny used as a response to this pending crisis will be newly-printed Bernanke bills.
This sets the stage for another chaotic autumn for the global economy -- and even more chaos for markets. While I have outlined what I consider the most likely scenario, we are so close to the true collapse of the sickest economies that there are many dire scenarios possible.
The one scenario which I totally reject is another commodities meltdown which would come anywhere close to 2008. There are two reasons why this part of the pattern cannot repeat itself. To begin with, there is only a tiny amount of the "leverage" which existed in the rabidly bullish commodity markets of 2008. Secondly, the hyperinflationary consequences of more banker money-printing (and debt) are far more obvious today -- after two years of massive, deficit-spending have been factored into fiscal parameters.
The U.S. economy lurches closer and closer to the "hyperinflationary depression" which John Williams (Shadowstats.com ) first predicted in 2003. The precise effect of this collapse on the global economy cannot be predicted -- only its eventual result. We are heading toward a Great Divide: a division of the global economy into winners and losers.
This is not a new phenomenon. What is new is that most of the losers will come from the "Old Guard" economies (i.e. the U.S. and Western Europe). The citizens of these "loser economies" must act now to shield their diminishing wealth from the death of Western banker-paper which is almost upon us. As always, I remind investors that (for hundreds of years) precious metals have represented the best "insurance" against the depravity of bankers (and their servants in government).

David Rosenberg: "This is a Depression, Not a Recession"

Positive gross domestic product readings and other mildly hopeful signs are masking an ugly truth: The US economy is in a 1930s-style Depression, Gluskin Sheff economist David Rosenberg said Tuesday.

Writing in his daily briefing to investors, Rosenberg said the Great Depression also had its high points, with a series of positive GDP reports and sharp stock market gains.

But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.

Rosenberg calls current economic conditions "a depression, and not just some garden-variety recession," and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered "euphoric response."

"Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the market at all times," he said.

The 1929-33 recession saw six quarterly bounces in GDP with an average gain of 8 percent, sending the stock market to a 50 percent rally in early 1930 as investors thought the worst had passed.

"False premise," Rosenberg said. "And guess what? We may well be reliving history here. If you're keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%."

Rosenberg's warning comes as a slew of major analysts—Goldman Sachs and JPMorgan among them—have slashed GDP projections for 2010 to the 1.5 to 2 percent range.

Chicago Federal Reserve President Charles Evans said in a speech Tuesday that the risk of a double-dip recession has escalated. He said government programs to help distressed homeowners have been ineffective and aren't helping the pivotal housing sector recover.

The dour outlooks come on the same day that the National Association of Realtors said home sales reached a 15-year low in June, dousing hopes that the industry had reached a bottoming point.

Rosenberg points out that the "overall economic malaise" has come despite aggressive efforts by the Federal Reserve to stimulate the economy through rate cuts. The central bank itself has scaled back its economic projections, has held steady on its balance sheet, and could be announcing another round of quantitative easing measures at its Jackson Hole summit this week.

"How's that for a reality check," Rosenberg said. "It's not too late, by the way, to shift course if you have stayed long this market."

Dow Depression History Repeats Itself

The Dow Jones Industrial Average is repeating a pattern that appeared just before markets fell during the Great Depression, Daryl Guppy, CEO at Guppytraders.com, told CNBC Monday.

“Those who don’t remember history are doomed to repeat it…there was a head and shoulders pattern that developed before the Depression in 1929, then with the recovery in 1930 we had another head and shoulders pattern that preceded a fall in the market, and in the current Dow situation we see an exact repeat of that environment,” Guppy said.

The Dow retreated 457.33 points, or 4.5 percent last week, to close at 9,686 Friday. Guppy said a Dow fall below 9,800 confirmed the head and shoulders pattern.

The Shanghai Composite is seeing a very rapid collapse, falling below 2,500, which suggests the major fall in the Dow, he added.

In the European markets, Guppy says Frankfurt's Dax is witnessing a different pattern to London's FTSE.

Guppy uses the broad trading band as measurement- giving the Dax a downsize target of 1,500. The same head and shoulders pattern seen in the Dow can also being seen in the FTSE, he added.

Ambrose Evans-Pritchard: U.S. Trapped In Depression

People queue for a job fair in New York. The share of the US working-age population with jobs in June fell from 58.7pc to 58.5pc. The ratio was 63pc three years ago.
"The economy is still in the gravitational pull of the Great Recession," said Robert Reich, former US labour secretary. "All the booster rockets for getting us beyond it are failing."
"Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing," he said.
California is tightening faster than Greece. State workers have seen a 14pc fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19bn (£15bn) deficit.
Can Illinois be far behind? The state has a deficit of $12bn and is $5bn in arrears to schools, nursing homes, child care centres, and prisons. "It is getting worse every single day," said state comptroller Daniel Hynes. "We are not paying bills for absolutely essential services. That is obscene."
Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.
Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.
The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.
The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weninger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.
"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m."
Republicans on Capitol Hill are filibustering a bill to extend the dole for up to 1.2m jobless facing an imminent cut-off. Dean Heller from Vermont called them "hobos". This really is starting to feel like 1932.
Washington's fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.
The housing market is already crumbling as government props are pulled away. The expiry of homebuyers' tax credit led to a 30pc fall in the number of buyers signing contracts in May. "It is cataclysmic," said David Bloom from HSBC.
Federal tax rises are automatically baked into the pie. The Congressional Budget Office said fiscal policy will swing from
a net +2pc of GDP to -2pc by late 2011. The states and counties may have to cut as much as $180bn.
Investors are starting to chew over the awful possibility that America's recovery will stall just as Asia hits the buffers. China's manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.
On Friday, Jacques Cailloux from RBS put out a "double-dip alert" for Europe. "The risk is rising fast. Absent an effective policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011," he said.
It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.
The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2.
Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

M3 Money Supply Plunges, Giving Ominous Sign of Double Dip, Parallels to Great Depression

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

By Ambrose Evans-Pritchard at the Telegraph:

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.
David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.
The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.
Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.
Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, "failure begets failure" in fiscal policy as the logic of compound interest does its worst.
However, Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy "faces a liquidity trap" and the Fed is constrained by zero interest rates.
Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown "Friedmanite" monetary stimulus.
"Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty," he said.
Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who "despise traditional monetary theory and have a religious aversion to any mention of the quantity of money". The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust.
Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.
This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed raised rates - gave a second warning that the economy was about to go into a nosedive.
Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.
Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. "Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched," he said.
However, Mr Ashworth warned against a mechanical interpretation of money supply figures. "You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets," he said.
Events may soon tell us whether this is benign or malign. It is certainly remarkable.

The Depression No One Ever Heard Of

Mauldin's Most Morose Assessment Thus Far; Seems to Suggest a Depression Just Might Happen!

I didn't get this newsletter by email this time. I don't know why. This is the first time I've seen John Maulding or any of his guest opinions suggest that this whole economic collapse may end up in a depression. Mauldin has been remarkably bullish until now.

Watch Out For the Second Leg of the Downturn
by Tom Au

Do you think that the crash is over, as certain former bears do? This question arises as we have breached the first downside target, of Dow 7000, based on my proprietary investment value model, that was first published in thestreet.com October 24, 2007. It was less a forecast than an evaluation. The Dow has now vindicated this model by reaching "fair value," as one would expect from a simple definition. Does that represent a base for a new bull market? Or is it just one more stop to the nether regions?

To understand my model, note that a stock can be analyzed as a combination of a bond plus a call option. My proprietary investment value metric for a stock is book value plus ten times dividends. That is a Ben Graham like construct that treats stocks almost like bonds, and gives no effect to growth over and above the pro rata return from the reinvestment of retained earnings. On the other hand, many investors prize stocks, particularly tech stocks, for their "optionality," the hypothetical ability to generate "positive surprises" over and above what economic theory would support. At bottom, the belief in the new economy was a belief in "optionality," that random positive events that occur from time to time, and did so with particular frequency in the 1990s, will become a recurring fixture of the economic landscape.

But such a process can also work in reverse, as it has recently. We are now experiencing what my colleague Robert Marcin calls the Great Unwind. A turbocharged economy is most likely to become "unstuck" when the conditions that initially favored it no longer exist. When this happens, an economy can grow as much below trend as it was formerly above trend, a fact that is likely to be reflected in the financial markets. History is not very encouraging on this score. In past downturns, such as those of 1932 and 1974, the Dow troughed at one half of my investment value metric, reflecting then-prevailing investor beliefs for negative optionality; that the economy will be worse than normal economic forces would dictate. With investment value at 7000 (actually a rounded version of 6600) on the Dow, half of that would be 3300. And during the 1930s, this metric actually fell, meaning that the "ultimate" low could be half of a number lower than 6600.

So having completed a first downleg, the market is now working on a second one. And this would be fully reflective of economic forces. For instance, financial earnings used to represent some 40% earnings (if you count the financing arms of some old line "industrial" companies such as General Electric and General Motors). Thus, they made up $32 of what used to be normalized S& P earnings of $80. But most of those financial earnings have disappeared. That, by itself, would take the S&P earnings into the $50s.. But how many of those non-financial earnings (of $48) were tied to the finance bubbles such as the homebuilding and the "housing ATM?" At least 10%, or around $5, and that is being conservative. Thus, normalized S&P earnings are likely to be no more $50 a share, if that.

The problem comes at payback time. For instance, much of the borrowing was tied to the housing market, on the bogus theory that houses could be made twice as valuable (as a multiple of rent) as they were for all of American history if prices could be kept on steady incline. The problem was that valuations collapsed when house prices fell, or even failed to rise, bringing down the market with it. To make up the shortfall, the U.S. economy now has to consume less than it produces, for a time. But the formerly virtuous circle became a vicious circle when falling prices (and consumption) led to falling production in a self-reinforcing process of the kind best described by George Soros in the Alchemy of Finance. This is a process called underabsorption, which in its strongest form, is called disintermediation. When a major part of the economy becomes "unstuck, the rest of it doesn't merely go into retrograde. It has to fall apart also to keep pace.

But I can live with $50 trough earnings, say many. And at historical multiple of 14-16 times trough earnings, the S&P should stop its downside in the 700-800 range. But the point is, they're not trough earnings, they are the "new normal." And in the current "slow" (zero or worse) growth environment, a trough P/E of 6-8 times earnings is more likely. Put another way, we are about to get the worst of all worlds; below trend earnings, below trend growth from a depressed base, and below trend P/E, after having gotten the best of all worlds, astronomical P/Es on above-trend and rapidly growing earnings, about a decade ago. Warren Buffett now agrees, saying that we will get "almost the worst of all possible worlds..."

The bears-turned-bulls have taken the latter stance because the market now reflects at least a severe recession. One such commentator likened the recent market to 1938-1939, and feels that the latter represents a bottom. But the 1930s bottom was 1932, not 1939, which is to say that the market probably has further to fall. Having correctly dodged the "overvaluation" bullet earlier, the new bulls pin their hopes on the prospect that the current market represents everything bad short of the 1930s Depression. Unlike us, they aren't willing to grasp the nettle that the current crisis will likely be as bad as anything including the Great Depression.

7 Reasons the Bear Will Be Back

from Market Oracle:

1. The Banking Crisis Isn't Fixed - It's Getting Worse!
2. Job Losses Are the Worst Since the Great Depression
3. The Deleveraging of the U.S. Credit Bubble Has Already Begun. And It Isn't Pretty...
4. Credit Cards Are Imploding
5. It's Waaay Too Soon to Call a Bottom in the Housing Market
6. It's a GLOBAL Recession.
7. The market is bearish until proven otherwise.
   

Here is the full article.

2009 Economic Slowdown Worse Than Great Depression

from the Market Oracle:
Capital flows have also suddenly reversed causing turmoil in the currency markets. January's TIC data indicates that net capital outflows for the US were negative $148 billion in January. Capital is now fleeing the country. Financial protectionism has triggered the repatriation of foreign investment causing a sharp drop in the purchase of US sovereign debt. This is from Brad Setser, economist for the CFR:

"The obvious implication of the recent downturn in total reserve holdings — and the $180 billion fall in q4 wasn't driven by currency moves — is that the pace of growth in the world's dollar reserves has slowed dramatically...

The obvious implication: most of the 2009 US fiscal deficit WILL NEED TO BE FINANCED DOMESTICALLY. The Fed's custodial data indicates central banks are still buying Treasuries, though at a somewhat slower pace than in late 2008. But their demand hasn't kept up with issuance. (Foreign Central banks aren't going to finance much of the 2009 US fiscal deficit; Their reserves aren't growing anymore", Brad Setser, Council on Foreign Relations)

The United States does not have the reserves to finance it own massive deficits which will soar to $1.9 trillion by the end of 2009. The Fed will have to increase its purchases of US Treasuries and monetize the debt. Foreign holders of Treasuries and dollar-backed assets ($5 trillion overseas) will be watching carefully as Bernanke revs up the printing presses to fight the recession and meet government obligations. China, Russia, Venezuela and Iran have already called for a change in the world's reserve currency. It won't happen overnight, but the momentum is steadily growing.

The S&P 500 has soared 23 percent in the last four weeks, but the current bear market rally is misleading. The prospects for a quick recovery are remote at best. The fundamentals are all weak. Corporate profits are down, GDP is negative 6 percent, housing is in a shambles, and the banking system broken. The Fed has increased the money supply by 22 percent, but economic activity is at a standstill. The velocity at which money is spent is the slowest since 1987. Nothing is moving. The banks are hoarding, credit has dried up, and consumers are saving for the first time in 2 decades. The banks' credit-conduit cannot function properly until bad assets are removed from their balance sheets. But the magnitude of the losses make it impossible for the government to purchase them outright without bankrupting the country. According to the Times Online, the IMF has increased its estimates of how much toxic mortgage-backed paper the banks are holding:

"Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund (IMF) are set to suggest.

Here is the full article.