Is An Economic Crisis Imminent?

The answer I would reply for the above question is that I don't know. I hope not! The stock market of the past few days suggests not! But based upon this article by Michael Snyder, perhaps so. He makes a good case on his website .here
Of the items Mr. Synder elucidated, here are a few that startled me:
According to the Federal Reserve Bank of New York, the probability that a recession will happen within the next 12 months is now the highest that it has been since the last financial crisis. 
Major U.S. retailers continue to shut down more stores, and we have continued to stay on a pace that would break the all-time record for sThe total number of bankruptcy filings in the United States has been steadily shooting uptore closings in a single year.

For the complete list, I recommend Mr. Synder's entire article. 

The Economic News Continues to Degrade

Stocks are up today! But the economic news isn't! I just read this quote by Michael Snyder:
"It is going to take a miracle for the U.S. economy to pull out of this tailspin, because the economic numbers are really starting to deteriorate very rapidly now.  On Tuesday we got some more new numbers, and they were just as bad as we thought they might be.  But even before today’s numbers all of the data were telling us the exact same thing.  The New York Fed’s Empire State manufacturing index just suffered the worst one month decline in U.S. history, Morgan Stanley’s Business Conditions Index just suffered the largest one month decline that we have ever seen, global trade numbers are the worst they have been since the last recession, and just last week I detailed the complete and utter “bloodbath” that we are witnessing in the U.S. trucking industry right now."
You can read his full article here.
And this is even more bad news:

Leading Economist Predicts Recession in 2016

Dr. Mark Skousen, who has a Ph.D. in  economics, and has been named as one of the world's leading economists, said the following on January 21st:


“Gross output (GO), the new measure of U. S. economic activity published by the Bureau of Economic Analysis, slowed significantly in the 3rd quarter of 2015. And the Skousen B2B Index actually fell slightly in real terms in the 3rdquarter. Both data suggest the possibility of a mild recession developing in 2016...
"In nominal terms, the adjusted GO growth rate declined from 6.3% in Q2 to 2.3% in Q3. In the same period GDP fell from 6.0% to 2.7%, illustrating the higher degree of volatility of GO compared to GDP (see chart below).  The higher volatility indicates that GO might be a better indicator of economic activity than GDP, since GO includes economic activity that GDP leaves out.”

Here's his own headline:

So Which Is It Marketwatch?

It's ironic that this morning, even as Marketwatch was reporting a disastrous jobs report, they had three reporters cheer-leading higher stock prices and a stronger economy. So which is it, Marketwatch? Is the economy weak, as jobs and other economic data indicate, or are your cheer-leading reporters correct in prophesying a stronger economy ahead? All these were screen captures from the same web page on the same day, April 3, 2015.
Marketwatch headlines:

Marketwatch reporters and editors:

 For the sake of Rex and other false prophets in the financial markets, let me counsel you this way: Predicting the future is for prophets, not profits!

Marketwatch, your cred... is dead!

Mauldin: State of Global Economy

Meanwhile, Back At the Ranch

It is simply hard to tear your eyes away from the slow-motion train wreck that is Europe. Historians will be writing about this moment in time for centuries, and with an ever-present media we see it unfold before our eyes. And yes, we need to tear our gaze away from Europe and look around at what is happening in the rest of the world. There is about to be an eerily near-simultaneous ending to the quantitative easing by the four major central banks while global growth is slowing down. And so, while the future of Europe is up for grabs, the true danger to global markets and growth may be elsewhere. But, let’s do start with the seemingly obligatory tour of Europe.

What If California Were Greece?

David Zervos is the managing director and chief market strategist of Jefferies and Company. He is an astute observer of Europe and brings a very interesting perspective to the trade, with his Greek heritage. I got an email this morning from him that I wish I had written. It is hard for many of us in the US to understand just how deeply flawed the structure of the European Monetary Union is (as opposed to the actual political union which, for all its flaws, seems to work quite well). David came up with a very fun analogy that makes the problem readily apparent. What if California behaved like Greece and the rest of the US was asked to pay for its debts and other obligations? What would ensue? So, rather than paraphrase what is already a very solid if short essay, let’s turn to David:

The Separation of Bank and State

By David Zervos

“The euro monetary system is flawed. It is a system that was cobbled together for political purposes; and sadly it was set up in such a way that each member state retained significant sovereign powers – most importantly the ability to exit the system and default on debts in times of stress. There is virtually NO federal power in the Union, as witnessed by the complete breakdown of the Maastrict and Lisbon treaties. In fact, what we are seeing today is that the structure of the monetary system is so poorly designed, it actually creates perverse fiscal linkages across member states that incentivize strategic default and exit. Our new leader of the Greek revolt, Mr CHEpras, has figured this one out. And in turn he is holding Angie hostage as we head into June 17th!
[JFM note: CHEpras is David’s tongue-in-cheek name for the 37-year-old leader of the Syriza Party, Alexis Tsipras, whose rhetoric does indeed resemble Che Guevara’s from time to time.]
“To better understand these flaws in the Eurosystem, let's assume the European monetary system was in place in the US. And then imagine that a US ‘member state’ were to head towards a bankruptcy or a restructuring of its debts – for example, California.
“So let's suppose California promised its citizens huge pensions, free health care, all-you can-eat baklava at beachside state parks, subsidized education, retirement at age 45, all-you-can-drink ouzo in town squares, and paid 2-week vacations during retirement. And let’s assume the authorities never come after anyone who doesn’t pay property, sales, or income taxes.
“Now it's probably safe to further assume that the suckers who bought California state and municipal debt in the past (because it had a zero risk weight) would quickly figure out that the state’s finances were unsustainable. In turn, these investors would dump the debt and crash the system.
“So what would happen next in our US member-state financial crisis? Well, the governor of California would head to the US Congress to ask for money – a bailout. Although there is a ‘no-bailout’ clause in the US Constitution, it would be overrun by political forces, as California would be deemed systemically important. The bailout would be granted and future reforms would be exchanged for current cash. The other states would not want to pay unless California reformed its profligate policies. But the prospect of no free baklava and ouzo would then send Californians into the streets, and rioting and looting would ensue.
“Next, the reforms agreed by the Governor fail to pass the state legislature. And as the bailout money slows to a trickle, the fed-up Californians elect a militant left-wing radical, Alexis (aka Alec) Baldwin, to lead them out of the mess!
“When Alexis takes office, US officials in DC get very worried. They cut off all California banks from funding at the Fed. But luckily, the "Central Bank of California" has an Emergency Liquidity Assistance Program. This gives the member-state central bank access to uncollaterized lending from the Fed – and the dollars and the ouzo keep flowing. But the Central Bank of California starts to run a huge deficit with the other US regional central banks in the Fed's Target2 system. As the crisis deepens, retail depositors begin to question the credit quality of California banks; and everyone starts to worry that the Fed might turn off the ELA for the Central Bank of California.
“Californians worry that their banks will not be able to access dollars, so they start to pull their funds and send them to internet banks based in ‘safe’ shale-gas towns up in North Dakota. Because, in this imaginary world, there is no FDIC insurance and resolution authority (just as in Europe), the California banks can only go to the Central Bank of California for dollars, and it obligingly continues to lend dollars to an insolvent banking system to pay out depositors. In order to reassure depositors, California announces a deposit-guarantee program; but with the state's credit rating at CCC, the guarantee does nothing to stem the deposit outflow.
“In this nightmare monetary scenario, with the other regional central banks, ELA, and Target2 unable to stop the bleeding – and no FDIC – the prospect of a California default FORCES a nationwide bank default. The banks automatically fall when the state plunges into financial turmoil, because of the built-in financial structure. A bank run is the only way to get to equilibrium in this system.
“There is sadly no separation of member-state financials and bank financials in our imaginary European-like financial system. So what's the end game? Well, after Californians take all their US dollars out of California banks, Alexis realizes that if the Central Bank of California defaults, along with the state itself and the rest of its banks, the long-suffering citizens can still preserve their dollar wealth and the state can start all over again by issuing new dollars with Mr. Baldwin's picture on them (or maybe Che's picture). This California competitive devaluation/default would leave a multi-trillion-dollar hole in the Fed’s balance sheet, and the remaining, more-responsible US states would have to pick up the tab. So Alexis goes back to Washington and threatens to exit unless the dollars and ouzo and baklava keep coming.
“And that’s where we stand with the current fracas in Europe!
“Can anyone in the US imagine ever designing a system so fundamentally flawed? It’s insane! Without some form of FDIC insurance and national banking resolution authority, the European Monetary System will surely tear itself to shreds. In fact, as Target2 imbalances rise, it is clear that Germany is already being placed on the hook for Greek and other peripheral deposits. The system has de facto insurance, and no one in the south is even paying a fee for it. Crazy!
“In the last couple days I have spent a bit of time trying to find any legal construct which would allow the ELA to be turned off for a member country. I can't. That doesn't mean it won't be done (as the Irish were threatened with this 18 months ago), but we are entering the twilight zone of the ECB legal department. Who knows what happens next?
“The reality is that European Monetary System was broken from the start. It just took a crisis to expose the flaws. Because the member nations failed to federalize early on, they created a structure that allows strategic default and exit to tear apart the entire financial system. If the Greek people get their euros out of the system, then there is very little pain of exit. With the banks and government insolvent, repudiating the debt and reintroducing the drachma is a winning strategy! The fact that this is even possible is amazing. The Greeks have nothing to lose if they can keep their deposits in euros and exit!
“Let's thank our lucky stars that US leaders were smart enough to federalize the banking system, thereby not allowing any individual state to threaten the integrity of our entire financial system. There is good reason for the separation of the banking system and the member states. And Europe will NEVER be a successful union until it converts to a state-independent, federalized bank structure. The good news is that our radical Greek friend Mr CHEpras will probably force a federalised structure very quickly. The bad news (for him) is that he will likely not be part of it! I suspect this Greek bank run will be just the ticket to precipiate a federalized, socialized, stabilized Europe. Then maybe we can get back to the recovery and growth path everyone in the US is so desperately seeking.
“Good luck trading.”

Coming Together or Flying Apart?

The debate among very knowledgeable individuals and institutions as to the future of Europe is intense. There are those who argue that the cost of breaking up the eurozone, even allowing Greece to leave, is so high that it will not be permitted to happen. Estimates abound of a cost of €1 trillion to European banks, governments, and businesses, just for the exit of Greece. And that does not include the cost of contagion as the markets wonder who is next. Keeping Spanish and Italian interest-rate costs at levels that can be sustained will cost even more trillions, as not just government debt but the entire banking system is at stake. Not to mention the pension and insurance funds. If the cost of Greece leaving is €1 trillion, then who can guess the cost of Spain or Italy?
A total Greek default wipes out more than twice the ECB balance sheet. That means the remaining countries will have to put twice as much into the ECB as their present commitment, just to get the ECB back to where it technically stands today (because theassumption is still that Greek debt is good, and so the ECB is still lending money to the Greek Central Bank).
Then there are those who argue there is no way Greece can stay in the eurozone. The political costs are just too high, not only to the Greek people but to the rest of Europe. How long can Greece demand that Europe cover its government deficits, when its own citizens are not diligent in paying taxes? Listen to Alexis Tsipras, the leader of Syriza, at a campaign rally:
“There's one real choice in these elections: the bailout or your dignity…
“We want all the peoples of Europe to hear us, and we want their leaders to hear us when we say that no [country] chooses to become servile, to lose their dignity or commit suicide... We are the political party that with the help of the people will fulfill our campaign promises and cancel this bankrupt bailout deal.”
The Syriza Party appears to be ahead in the polls as I write, but that has shifted several times this week. Not only do European leaders not know what will happen, apparently even the Greeks cannot make up their minds, if we are to believe the polls. They want to stay in the eurozone but don’t want to have to endure the cuts in spending that simply moving toward a balanced budget will requirs. This is a classic case of wanting to have your cake and eat it too.
I simply don’t know what the eurozone will do in the next year, or even the next month. If Syriza wins the elections and forms the government, how can Europe back down and give them what Tsipras is demanding? And if the Greeks continue to pull their money from Greek banks (and it is now billions a week), then it will not be very long before they have their euros everywhere but in Greece, and they will in fact have little reason to stay in the eurozone, as Zervos points out.
This latter fact will not be lost on Spanish and Italian voters. If there is not that great a cost to Greece for leaving; and especially if Greece, after a period of severe recession/depression, starts to rebound; then voters all over Europe will be paying close attention. Some will ask why they should not default as well, and others will wonder why they are paying taxes to support other countries that might leave.
Even if European leaders have no real idea what will actually happen, there are some things that are more likely than others. I think the whole idea of eurobonds is dead on arrival. Who would be responsible for paying that bond structure, which would soon be in the trillions of euros? Some European authority? The EU itself, which would then need to levy taxes and set national budgets? I can’t really see any country giving up control of its budget to Brussels, let alone give the EU the power to raise taxes. And if the eurozone has a problem raising a relatively paltry €400 billion for the ESM, etc., from the various governments, how can it expect to get the authority to raise trillions? Does anyone really think the German Bundestag will agree to their share of that?
That then leaves the options of either designating the ESM or some other entity as a bank that can borrow relatively unlimited amounts from the ECB, or having the ECB monetize the debts of various governments in trouble and saddling them with a program of budgetary reforms (which are clearly not popular if you are the one being reformed!).
I still think it is likely that Greece will leave the eurozone. It makes sense if you are Greece; and even though it will cost the other eurozone members huge sums of money, I think they are getting “Greek fatigue.” But let’s stay tuned, as they say.

Europe in Recession

Germany was able to sell €4.56 billion ($5.8 billion) of two-year bonds at a 0% coupon interest rate on Wednesday. That was not a typo. Why would people give Germany money to use for two years at no cost?
I can think of several reasons, but the one I think is most likely – and the one that will not be admitted in polite circles – is that it is basically a very low-cost call option on the possibility of Germany leaving the eurozone. If Germany left, they would likely denominate their bonds in Deutsche marks, which would rise in value over those of the countries that remained in the euro.
But this also points up the fact that Germany is falling into recession, hard on the heels of the rest of Europe, which is mostly already there – some countries severely so. Leading economic indicators as well as purchasing-manager indexes are down all across Europe. But the saddest statistic is that of youth unemployment. Below is a chart from Reuters (courtesy of Frank Holmes at US Global). Only Germany is seeing its youth unemployment rate fall below 10%.

Meanwhile, Back at the Ranch

This letter is translated into Chinese, Spanish, and Italian; so I have to write with an international audience in mind, and also remember that I am of a certain age. Some concepts may not translate well, either to other languages or across generations. So let me set up the theme for younger readers and those not familiar with early 20^th-century American culture. In the dawn of film, cowboy movies were all the rage. These were typically low-budget, and most were shot on the same set and ranch in southern California. The same saloons, jails, large rocks, and dirt roads kept showing up in movie after movie; but no one much noticed, back then. The magic of movies was still fresh.
You would watch your hero (you knew he was the good guy, because he wore a white hat) chase bank robbers and cattle rustlers and duke it out with gunslingers; and there was usually at least one pretty girl involved. In the era of silent movies, there would literally be a title graphic that said, “Meanwhile, Back at the Ranch” when there was a segue between the action involving the hero and the bad guys and the doings of the people back home on the ranch.

So then, “meanwhile, back at the global economy,” let’s look at a few graphs and some data to see what is happening in the rest of the world.
First of all, China is really beginning to slow down from its torrid pace of growth. Thr growth of their manufacturing output has fallen for seven straight months, and it is now contracting. Media reports everywhere are talking about actual statistics or anecdotal stories from Chinese merchants and businesses. Construction is under real pressure, as are real estate prices. Just as in the US or Europe, when construction starts to slow it affects all sorts of smaller businesses that supply products to people building or remodeling their homes.
A few data points. Deposit growth in China is slowing rapidly, and money supply suggests a decelerating economy. The ratio of M1 to M2 growth suggests an even weaker economy than the contracting purchasing manager’s index. The M1-M2 ratio is now back to where it was in the last financial crisis.
Let’s look at two charts from Credit Suisse. I have long been concerned about the very high percentage of GDP growth in China that is attributable to direct investment, bank loans, and infrastructure spending. While all of those are good things, the levels in China are without precedent anywhere in the world that I am familiar with, and have been there a long time.
What happens when you have to slow down investment and try to become a more consumer-driven economy? The transition is generally not smooth. And what happens when you try and do that when your largest customer (Europe) is in recession? And when the bank lending from Europe that finances the spending of many of the developing nations you sell to begins to dramatically shrink?

Reports from around the world show South African and Australian mines with lower sales, growth in Taiwan slowing and Great Britain in recession. The MSCI World Index, which tracks equity markets around the globe, is down more than 9% since mid-March.

A Slowing US Economy

The US economy is also starting to slow. Job growth is getting weaker. Food stamps are at an all-time high. The effects from stimulus spending have just about gone away, and there are large numbers of people falling off extended unemployment benefits. Lakshman Achuthan, of the Economic Cycle Research Institute (ECRI), has recently reaffirmed his belief that a return to economic contraction is likely in 2012, noting that the coincident data used to officially define economic-cycle boundaries continue to signal slowing growth. Achuthan is a very sober fellow, and you have to pay attention when he makes these calls. ECRI does not make them lightly.
Let’s also look at a couple charts from my friend Rich Yamarone, the chief economist at Bloomberg. (We will be together at a symposium at the University of Texas in Austin, on June 7, along with David Rosenberg.) Rich has also been stating that he believes the US economy is headed for recession, for a different set of reasons.
At our dinner meeting last week (as indeed he has been for months) he was talking about the fall in real disposable personal income. It is hard to get growth when incomes are not rising .

And he too is worried about the fact that government stimulus (transfer payments, unemployment benefits, welfare, food stamps, etc.) has had a major effect on consumer spending, but as people fall off extended unemployment benefits (and they are, by the hundreds of thousands each month) personal income could actually drop.

Where’s My Quantitative Easing?

The recent round of global quantitative easing is beginning to ebb. Europe, Great Britain, and the US are all wrapping up their stimulus and have not announced plans for any more. China is more or less on hold until the leadership changes in October (or that is what most observers I read seem to think).
The recent QE had provided a clear boost to commodity prices and stocks, and the anticipation of withdrawal seems to be having a depressive effect on market prices. This was the third round of global QE, and each round has resulted in less real benefit than the previous one. There is reason to believe that another round would continue that trend. While it is probable that the ECB will soon take action, as Europe is clearly in recession, there seems to be no such consensus as yet in the US. And with an election coming in November, if the Fed is going to do anything, they have just two meetings left (on June19-20 and August 1) before September, at which point the economy would have to be in very serious trouble for them to do anything before the election – which then takes us out to the December meeting.
Since the recent most QE will still be in effect at the time of the June meeting, that would leave August 1 for an announcement. We will only have two unemployment reports between now and that meeting. They will therefore be of more than usual importance. We will be watching.

ADP Disappoints, Only 119,000 Jobs

from Tyler Durden tweet from Zero Hedge:
Whisper number of 10 million people leaving the labor force in April, Unemployment rate to finally turn negative

Update: Goldman commentary which mirrors ours:

1. The ADP estimate of private employment growth was +119k for April, below the consensus expectation for a 170k gain (growth in February and March was also revised down slightly). As with the official BLS count of employment, we believe that a “payback” from warm weather earlier in the year could explain some of the slowing in the ADP measure in both March and April.
2. Results from the ADP report were mixed across industries. Employment at goods producing firms declined by 4k, with declines of 5k in both manufacturing and construction employment. The decline in manufacturing employment looks at odds with other information on the sector, such as yesterday’s ISM report. The drop in construction employment may be partly weather-related. Service sector employment rose by +123k, down from +158k in March and +184k in February.

Those hoping Goldman's NFP forecast of 125,000, well below consensus, is wrong, may have to reassess their thesis following the just released ADP number which came as a big disappointment to consensus of 170,000, instead printing at only +119,000, to 110,590. (The previous improvement was also downward revised from +209K to +201K). This was the lowest sequential change since September 2011, and confirms once again, the declining trends last seen in... 2011. It was also the biggest miss in 11 months. Luckily, as the scatterplot below shows, ADP is completely meaningless when predicting NFP so our gut reaction would be to expect a beat in NFP based on this print considering the whole Schrodinger economy and what not (see China). However, on an apples to apples basis, one thing is certain: record warm winter payback is a bitch. And finally, that whole Obama export renaissance is not doing all too hot: goods producing sector: -4,000 in April, while manufacturing jobs declined by -5,000. But, but, the soaring ISM..... oh forget it.


From the press release, where we find Hopium is back. How shocking that even ADP has been exposed to have a subjective, upward bias.

“According to data shown in the ADP National Employment Report, monthly employment gains averaged just over 200,000 during the first quarter of this year,” said Carlos Rodriguez, President and CEO of ADP. “This month’s modest increase of 119,000 jobs appears consistent with the first-quarter Gross Domestic Product growth of 2.2 percent.

We hope future rates of job creation will be more aggressive and sustained,” Rodriguez added.

According to Joel Prakken, Chairman of Macroeconomic Advisers, LLC, “While April’s increase was the twenty-seventh consecutive monthly advance, it nonetheless reflected a deceleration in the recent pace of hiring. This deceleration seems consistent with other incoming data, including a disappointingly weak report on first-quarter Gross Domestic Product, a recent back-up in initial unemployment claims, and last month’s relatively weak reading on establishment employment reported by the Bureau of Labor Statistics.”

Prakken added: “There is some evidence that unusually warm weather boosted employment during the winter months, with a “payback” now coming due. The modest rise in private employment suggests that the national unemployment rate probably did not decline in April unless there was a notable decline in the labor force.”

From the report:

Employment in the U.S. nonfarm private business sector increased by 119,000 from March to April on a seasonally adjusted basis. The estimated gain from February to March was revised down modestly, from the initial estimate of 209,000 to a revised estimate of 201,000.

Employment in the private, service-providing sector increased 123,000 in April, after rising 158,000 in March. Employment in the private, goods-producing sector declined 4,000 jobs in April. Manufacturing employment dropped 5,000 jobs, the first loss since September of last year.

Employment on large payrolls—those with 500 or more workers—increased 4,000 and employment on medium payrolls—those with 50 to 499 workers—rose 57,000 in April.

Employment on small payrolls—those with up to 49 workers—rose 58,000 that same period. Of the 57,000 jobs created by medium- sized businesses, 8,000 jobs were created by the goods-producing sector and 49,000 jobs were created by the service-providing sector.

Construction employment also fell by 5,000, the first decline in seven months and following healthy gains during the unusually warm winter months. Employment in the financial services sector increased 13,000 in April, marking nine consecutive monthly gains there.

Visually:

Biggest miss since May 2011:

Finally, courtesy of John Lohman, here is why this number is completely meaningless when predicting NFP:

Hussman Says, "Run, Don't Walk"!

"Run, Don't Walk"

Wall Street continues to focus on the idea that stocks are "cheap"...

As I noted in our September 8, 2008 comment Deja Vu (Again), which happened to be a week before Lehman failed and the market collapsed, "Currently, the S&P 500 is trading at about 15 times prior peak earnings, but that multiple is somewhat misleading because those prior peak earnings reflected extremely elevated profit margins on a historical basis. On normalized profit margins, the market's current valuation remains well above the level established at any prior bear market low, including 2002 (in fact, it is closer to levels established at most historical bull market peaks). Based on our standard methodology, the S&P 500 Index is priced to achieve expected total returns over the coming decade in the range of 4-6% annually." Present valuations are of course more elevated today than they were before that plunge.

On the economic front, the recent uptick in new unemployment claims is consistent with the leading economic measures and "unobserved components" estimates that we obtain from the broad economic data here...

As I noted a few months ago, "examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began. These were not small numbers... while robust job creation is no evidence at all that a recession is not directly ahead, a significant negative print on jobs is a fairly useful confirmation of the turning point, provided that leading recession indicators are already in place."

The upshot is that while I expect a weak April jobs report, we should hesitate to take leading information from what remains largely a short-lagging indicator. We're already seeing deterioration in economic data, but it remains largely dismissed as noise. An acceleration of economic deterioration as we move toward midyear would be more difficult to ignore. My impression is that investors and analysts don't recognize that we've never seen the ensemble of broad economic drivers and aggregate output (real personal income, real personal consumption, real final sales, global output, real GDP, and even employment growth) jointly as weak as they are now on a year-over-year basis, except in association with recession. All of these measures have negative standardized values here. My guess is that we'll eventually mark a new recession as beginning in April or May 2012...

What I am adamantly against is the idea that speculators can successfully "game" overvalued, overbought, overbullish markets - particularly in the face of numerous hostile syndromes, near-panic insider selling, speculation in new issues, and broad divergences in market internals, all of which we are now observing.

Read Hussman's entire economic commentary here.

Stocks Explode on Bad News

 

Europe news is awful.

 

Even U.S. economic news is bad.

15 Possible Black Swan Events That Could Trip Up the U.S. Economy

We live in a world that is becoming increasingly unstable, and the potential for an event that could cause "sudden change" to the U.S. economy is greater than ever.
There are dozens of potentially massive threats that could easily push the U.S. economy over the edge during the next 12 months.  A war in the Middle East, a financial collapse in Europe, a major derivatives crisis or a horrific natural disaster could all change our economic situation very rapidly.  Most of the time I write about the long-term economic trends that are slowly but surely ripping the U.S. economy to pieces, but the truth is that just a single really bad "black swan event" over the next 12 months could accelerate our economic problems dramatically.
If oil was cut off from the Middle East or a really bad natural disaster suddenly destroyed a major U.S. city, the U.S. economy would be thrown into a state of chaos.  Considering how bad the U.S. economy is currently performing, it would be easy to see how a major "shock to the system" could push us into the "next Great Depression" very easily.  Let us hope that none of these things actually happen over the next 12 months, but let us also understand that we live in a world that has become extremely chaotic and extremely unstable.
In the list below, you will find some "sudden change" events that are somewhat likely and some that are quite unlikely.  I have tried to include a broad range of potential "black swan events", but there are certainly dozens more massive threats that could potentially be listed.
The following are 15 potentially massive threats to the U.S. economy over the next 12 months....
#1 War With Syria - U.S. Senator John McCain is now publicly calling for U.S. airstrikes against Syria.  A military conflict with Syria becomes more likely with each passing day.
#2 War With Iran - A war in the Middle East involving Iran could literally erupt at any time.  The following is from a Reuters news report that was issued on Monday....

President Barack Obama appealed to Benjamin Netanyahu on Monday to give sanctions time to curb Iran's nuclear ambitions, but the Israeli prime minister offered no sign of backing away from possible military action, saying his country must be the "master of its fate."

#3 A Disorderly Greek Debt Default - Many reporters in Europe seem to think that this is becoming increasingly likely.  So what would a disorderly Greek debt default mean for the global financial system?  A leaked report that was authored by the Institute of International Finance says that a disorderly Greek debt default would have some very serious consequences.  You can read the full text of that leaked report right here.
#4 An Economic Collapse In Spain - Spain has one of the largest economies in Europe and it is rapidly becoming a basket case.  As I have written about previously, the unemployment rate in Spain has hit 19.9 percent, and the unemployment rate for workers under the age of 25 is up to 49.9 percent.  Unfortunately, the situation in Spain continues to deteriorate.  The following is from a recent article by Marc Chandler....

However, the devolution in Spain is particularly troubling. The new fiscal compact had just been signed last week, which includes somewhat more rigorous fiscal rule and enforcement, when Spain's PM Rajoy revealed that this year's deficit would come in around 5.8 percent of GDP rather the 4.4 percent target. This of course follows last year's 8.5 percent overshoot of the 6 percent target.
The problem that for Spain is that the 4.4 percent target was based on forecasts for more than 2 percent growth this year. However, in late February, the EU cuts its forecast to a 1 percent contraction. This still seems optimistic. The IMF forecasts a 1.7 percent contraction, which the Spanish government now accepts.

#5 The Price Of Gasoline - The average price of a gallon of gasoline in the United States has risen for 27 days in a row and is now up to $3.77.  Virtually all forms of economic activity are affected by the price of gasoline, and if the price of gas keeps going up it is eventually going to have dramatic consequences for the U.S. economy.
#6 The Student Loan Debt Bubble - Just like we saw with the housing bubble, the student loan debt bubble just continues to grow and grow and grow.  At some point the nearly 1 trillion dollar bubble is going to burst.  What effect will it have on our financial system when that finally happens?
#7 State And Local Government Debt Crisis - It is being reported that California is running out of cash again and there are cities all over the country that are on the verge of bankruptcy.  Could we see a significant municipal bond crisis in the next 12 months?
#8 The Collapse Of A Major U.S. Bank - A number of top U.S. banks are looking increasingly shaky.  In a recent article, David Trainer explained why he has such serious concerns about Bank of America right now....

In my opinion, there are four actions taken by financial services that signal the company is headed to serious trouble.
1. Management shake-up and major layoffs - lots of layoffs over the past year
2. Exploiting accounting rules to boost earnings - SFAS 159
3. Drawing down reserves to boost earnings: to the tune of $13.3 billion in 2011 and 2012
4. Bilking customers with new fees: tried it before and trying it again
Bank of America has taken all four steps.

#9 A Derivatives Crisis - The International Swaps and Derivatives Association recently ruled that the Greek debt deal will not trigger payouts on credit default swaps.  This is seriously shaking confidence in the global market for derivatives.  But the global financial system simply cannot afford a major derivatives crisis.
Estimates of the notional value of the worldwide derivatives market range from $600 trillion all the way up to $1.5 quadrillion.  The notional value of all derivatives held by Bank of America is approximately $75 trillion.  JPMorgan Chase is holding derivatives with a notional value of approximately $79 trillion.
When the derivatives bubble finally bursts it is going to be a financial horror show unlike anything we have ever seen.
#10 The Fall Of The Japanese Economy - The Japanese economy shrank at a 2.3 percent rate during the fourth quarter of 2011.  Japan has a debt to GDP ratio of over 200 percent and a major debt crisis involving Japan could erupt at any time.
#11 A "Solar Megastorm" - Scientists tell us that there is a "1 in 8 chance" that a "solar megastorm" will hit the earth by 2014.  A recent Daily Mail article detailed what some of the consequences of such an event would be....

'We live in a cyber cocoon enveloping the Earth. Imagine what the consequences might be,' Daniel Baker, of the University of Colorado's Laboratory for Atmospheric and Space Physics told National Geographic when asked about a potential 'megastorm'.

'Every time you purchase a gallon of gas with your credit card, that's a satellite transaction.

'Imagine large cities without power for a week, a month, or a year. The losses could be $1 to $2 trillion, and the effects could be felt for years.

#12 A Major West Coast Earthquake Or Volcanic Eruption - On Monday, there was a 4.0 earthquake in San Francisco and a 6.1 earthquake in Argentina.  Is the "Ring of Fire" waking up again?
#13 Tornado Damage To Major U.S. Cities - Last year, the U.S. experienced one of the worst tornado seasons of all time.  This year, we have already seen the worst tornado outbreak ever recorded in the United States in the month of March.  A couple of towns in Indiana were completely wiped out by that outbreak.  So what should we expect when we get to the heart of tornado season this year?
#14 Severe Drought In The United States - Last summer was one of the driest summers on record in the United States, and in many areas there is simply not enough water available for farmers this year.  Some are even projecting that we could see "dust bowl conditions" return to some areas of the country eventually.
#15 An Asteroid Strike In 2013 - Although scientists tell us that the probability is extremely low, the truth is that there is a slight chance that a sizeable asteroid could hit the earth in February 2013.  The asteroid is estimated to be between 60 and 100 meters wide, and it is projected to pass by our planet "at a distance of under 27,000 km".  If it did hit us (and scientists say that the odds of that happening are very low) it would potentially be as serious an event as the Tunguska Event in Siberia in 1908.  Mac Slavo of shtfplan.com recently described how awesome the Tunguska Event really was....

On June 30, 1908 an incoming meteor exploded approximately 5 miles above Siberia. The force of the air burst explosion, estimated at between 15 and 30 megatons, or about 1000 times bigger than the atomic bomb that destroyed Hiroshima, was so powerful that it annihilated everything in an 830 square mile area, and reports suggest that that explosion was heard up to 1000 miles away. Because of the remoteness of the impact zone, the Tunguska Event over Siberia had very little effect on the human population in the region, but the destruction of some 80 million trees in the area shows just how powerful a blast was created.

Of course there are so many other "sudden change" events that could potentially happen - a terror event in a major U.S. city, a deadly pandemic, an EMP attack, cyberterrorism or a major political scandal could all possibly cause a stock market crash and an economic collapse in the United States.
In the world that we are living in today, you just never know what is going to happen.
So what are all of you concerned about over the next 12 months?
Do you see the potential for some "black swan events" to happen?

Hussman Predicts a "Goat Rodeo"

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
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Goat Rodeo - Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed.

Over the years, of the most frequent phrases in these weekly comments has been "on average." Most of the investment conditions we observe are associated with a mix of positive and negative outcomes, so rather than making specific forecasts about future market direction, we generally align our investment position in proportion to the average return/risk outcome, recognizing that the actual outcome may be different than that average in any particular instance.

Increasingly however, we have observed sets of conditions that are so heavily skewed toward bad outcomes that they deserve the word "warning" (see Extreme Conditions and Typical Outcomes near the 2011 peak, Don't Mess with Aunt Minnie before the 2010 market break, Expecting a Recession in late 2007, A Who's Who of Awful Times to Invest at the 2007 market peak, and our shift from a modestly constructive investment position to a Crash Warning in October of 2000). While the downturns that followed have provoked increasingly large and desperate actions of central banks to kick the can down the road by preventing debt restructuring and financial deleveraging (in some cases by violating legal constraints - see The Case Against the Fed ), the fact is that the S&P 500 has achieved a total return of just 1.2% annually over the past 12 years, as a predictable outcome of rich valuations and still-unresolved economic imbalances.

I could admittedly do better, and would certainly have captured more upside from temporary speculation, had I committed myself to the principle that central banks will act strictly to defend the bondholders of the banks they represent, even if it means trespassing into fiscal policy, subordinating public interest, empowering the worst stewards of capital, violating legal restrictions, and inviting long-term instability. Still, none of those actions improve the long-term outcome for the markets, and more importantly, none have prevented repeated and serious downturns from occurring, despite all the can-kicking.

Once again, we now have a set of market conditions that is associated almost exclusively with steeply negative outcomes. In this case, we're observing an "exhaustion" syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo). Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. - despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels. Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.

My concern is that an improbably large number of things will have to go right in order to avoid a major decline in stock market value in the months ahead. We presently estimate that the S&P 500 is likely to achieve a 10-year total return (nominal) of only about 4.7% annually, which reduces the likelihood that further gains will be durable even if they persist for a while longer. In the context of present valuations and a probable Goat Rodeo in the months ahead, my impression is that the recent market advance may be a transitory gift.

Whipsaws, Noise and Exhaustion

In nearly all real-world data, there are short-term fluctuations, random effects, and other influences that create "noise" in the values that we observe. Typically, those sources of noise confound the "signal" that we want to identify, so unless the noise is filtered away, there is a risk of being misled by meaningless short-term fluctuations. In finance, there are countless approaches that essentially involve noise reduction. For example, a moving average is just a simple noise-reduction technique, where very short-term fluctuations ("high frequency components") are averaged away, leaving the smoother influence of longer-term fluctuations. Similarly, the Coppock Curve - the 10-month exponential smoothing of the averaged 11-month and 14-month rate of change of the market - is really just a "low-pass" filter that cuts away high frequency fluctuations and allows the market's long-term (low frequency) cycles to pass through.

In late October, I noted a condition that we characterize as a Whipsaw Trap - which essentially involves a breakdown in a broad set of market internals, followed by a recovery driven by some of the more volatile components (sectors such as financials and transportation stocks are good examples). I noted that only about 30% of these whipsaw traps were followed by further advances - a statistic that was based on subsequent market action over the following 6-8 week period. The real question is "What then?" The answer is both straightforward and troublesome. Specifically, whenever we've observed a whipsaw trap that then advances enough to a) drive the S&P 500 earnings yield below its level of 6 months earlier and b) raise advisory bullishness beyond 45% - or bearishness below 30%, the result has almost always been hostile. Essentially, what this combination picks up is an already fragile set of market internals that has enjoyed an "exhaustion rally" that both exceeds earnings growth and is met with overbullish sentiment.

The previous observations of this exhaustion syndrome, and the deepest decline from that point to the low of the next 7 months, on a weekly closing basis, were: November 1961 (-25%), August 1987 (-33%), July 1998 (-18%), July 1999 (-12%), August 2000 (-22%), May 2001 (-24%), March 2002 (-32%) and May 2008 (-43%). There were also two instances of this syndrome that were not associated with a market plunge: January 2006 during the housing bubble (which ultimately led to a market collapse well below those levels), and November 2010, just as the Fed was initiating QE2 (which still did not prevent the market from trading at lower levels about 9 months later).

If we think in terms of "exhaustion rallies," the syndrome we're observing here is a multiple indicator version of signals like the Coppock "killer wave" - which occurs when the Coppock Curve reaches a peak, declines, and the market then recruits an advance large enough to establish a second wave higher. Some technicians have debated how best to define the signal (e.g. the decline required to define a negative shift) - in our view, it's not a good idea to use a single indicator in the first place - but in any event, the selloffs from those exhaustion waves have often been brutal, and a few overlap the syndrome outlined here.

In short, market action is presently showing features associated with "exhaustion rallies", which have often been followed by deep losses over the following 6-7 month period.

As a side note, we've seen an similar whipsaw in various economic statistics recently, where I continue to view the modest but tepid "recovery" as a reflection of high-frequency noise. Here too, the underlying "signal" remains weak, but the more volatile components have been positive. Unfortunately, the typical result is that the divergence snaps shut in the direction of the signal.

[Geek's Note: What I call a "Whipsaw Trap" is basically a breakdown in a broad range of market internals, followed by an advance in more volatile, high-frequency components that isn't enough to survive moving averages and other low-pass filters. It's difficult to draw a true signal from noisy data unless you have a lot it, and unfortunately, the more data you need to use to infer a signal, the greater the "lag" there is in recognizing that signal. Think again of a moving average - the longer-term the moving average, the more it lags behind recent action. The better you want a microphone to cancel noise, the longer the delay you have to endure between the input and the output. Generally speaking, we get better and more rapid information about the true, underlying "signal" if we can draw that signal out of multiple indicators, each which carries part of that information. Methods to distinguish "signal" from "noise" run through much of my financial, economic, and scientific work, for example Market Efficiency and Inefficiency in Rational Expectations Equilibria , and A Noise-Reduction GWAS Analysis Implicates Altered Regulation of Neurite Outgrowth and Guidance in Autism . The benefit of inferring signals from multiple sources is why the rational expectations paper used vector ARMA models for inference, why the GWAS paper exploited the local correlation of association signals within the same chromosomal region across multiple data sets, and why good leading economic indices combine multiple series rather than using any single indicator as an acid test].

Recession risk remains high

Last week contained very little to alter our view that a global economic downturn is likely here. While we recognize the modest, low-level improvement in a variety of indicators (see Dodging a Bullet, from a Machine Gun ), and also estimate that recession risk is something less than 100%, this is far from a suspension of our recession concerns. To the contrary, a concerted global downturn that includes the U.S. remains the most likely outcome.

Last week, the Conference Board released its revised version of Leading Economic Indicators, which shows a sharply weaker trajectory than the former version if the LEI. Indeed, the revised LEI has already turned down, though to a lesser degree than just before previous recessions.

A few economic notes. In early 2010, we examined the seasonal adjustment factors used by the Bureau of Labor Statistics in the monthly employment report (see Notes on a Difficult Employment Outlook ). While we didn't observe any striking divergences between the BLS adjustment factors and our own estimates, I noted that the effect of those seasonal adjustments typically amounted to anywhere between +1.9 and -1.3 million jobs, depending on the month. Presently, we estimate that the effect of these adjustments range between +2.1 million and -1.1 million jobs in any given month (see When Positive Surprises are Surprisingly Meaningless ). These are strikingly large numbers compared with the typical range of forecasts that often surround the monthly employment numbers.

Think of it this way - if there is typically a great deal of temporary job creation in the fourth quarter of the year (and there is), the effect of seasonal adjustment will be to subtract off a certain proportion of actual employment in order to smooth that bulge down. Accordingly the October-December adjustment factors range between -0.6% and -0.8% of total non-seasonally adjusted employment. In contrast, if there is a great deal of job destruction in January and February (and there is), the effect of seasonal adjustment will be to add back some amount of phantom employment, amounting to between 1.1% and 1.6% of total nonfarm payroll jobs.

[Geek's note: In practice, most seasonal adjustment is done either with ARMA-type models or by working in the frequency domain. In monthly data, for example, the seasonal component is measured by the correlation of the data with a cosine wave that sweeps out 2*pi/12 radians per month (a wave that goes through exactly one full cycle per year). Seasonal adjustment then amounts to applying a "band pass " filter that squashes that particular frequency. In practice, seasonal adjustment methods also typically smooth the data as well (by attenuating higher frequencies), which can give users of economic data an unrealistic view of reality, and also invariably induces a lag (or "phase delay") in the adjusted data].

Given that virtually all economic series undergo some amount of seasonal adjustment, it isn't clear how much these adjustments may be affecting the month-to-month fluctuations we're observing in various economic series. Months where the data were very weak in recent years could understandably produce increases in the seasonal adjustment factors for those months. In any event, even without any skewed seasonal factors, the broad ensemble of leading economic evidence remains unfavorable here.

Finally, while we typically discourage drawing inferences from any single indicator, it's at least worth noting that with the release of Q4 GDP figures, the year-over-year growth rate of real U.S. GDP remains below 1.6% (denoted by the red line below). A decline in GDP growth to this level has always been associated with recession, usually coincident with that decline, though with a two-quarter lag in two instances (1956 and 2007), and with one post-recession dip in growth during the first quarter of 2003. As it happens, the GDP growth rate dropped below 1.6% in the third quarter of 2011.

Given the strong and rather obvious relationship between the most recent year-over-year rate of GDP growth and the prospect of oncoming recession, it's difficult to understand why Wall Street so completely rejects the likelihood of an economic downturn. Then again, that's exactly why we're expecting a Goat Rodeo.

Hoisington Calls for Recession in 2012

By Van R. Hoisington and Lacy H. Hunt, Ph.D.

High Debt Leads to Recession

As the U.S. economy enters 2012, the gross government debt to GDP ratio stands near 100% (Chart 1). Nominal GDP in the fourth quarter was an estimated $15.3 trillion, approximately equal to debt outstanding by the federal government. In an exhaustive historical study of high debt level economies around the world, (National Bureau of Economic Research Working Paper No. 15639 of January 2010, Growth in the Time of Debt), Professors Kenneth Rogoff and Carmen Reinhart econometrically demonstrated that when a country's gross government debt rises above 90% of GDP, "the median growth rates fall by one percent, and average growth falls considerably more." This study sheds considerable light on recent developments in the United States. After suffering the most serious recession since the 1930s, the U.S. has recorded an economic growth rate of only 2.4%. Subtracting 1% from this meager expansion suggests that the economy should expand no faster than 1.4% in real terms on a trend basis going forward, which is virtually identical with the economy's expansion in the past twelve months.

In highly indebted countries, governments have expansively taken resources from the private sector through taxing and borrowing. This leaves the private sector with less vigor to produce jobs and increase productivity, and subsequently wealth for its fellow citizens. This theory, which dates back to David Hume's essay, Of Public Credit published in 1752, is now being played out in real time in the United States. We judge that when an economy is expanding in such a meager fashion it is exposed to an increasing frequency of recessions. We expect such a recessionary event to emerge in 2012.

Contractionary Fiscal Policy

It would be difficult to devise a more horrendous set of fiscal policy parameters to spur economic growth than currently exist. Real federal government purchases of goods and services, which comprise 8% of real GDP, will decline by about 1% if the impartial projection of the Congressional Budget Office (CBO) for a fiscal 2012 deficit of about $1.3 trillion is in the ballpark. Defense spending will bear most of the decline in federal expenditures, but non-defense spending will, at best, be flat. In spite of record deficits since the spring quarter of 2009, real federal government purchases of goods and services have risen at an anemic 1.5% annual rate, confirmation that only a small amount of exploding expenditures went for infrastructure projects. The scant growth rate in the economy suggests a negative outlay multiplier.
Contrary to common belief, the massive deficits of recent years will actually reduce economic growth in 2012 through a subtle, but nevertheless credible channel consistent with the preponderance of economic research. Studies suggest the government expenditure multiplier is zero to slightly negative. Increased deficit spending does appear to provide a modest lift to GDP for three to five quarters, depending upon the initial conditions of the economy. However, following this small, transitory gain, deficit spending actually retards GDP growth and the economy returns to its starting point at the end of about twelve quarters. Based on our interpretation of these studies, the U.S. economy is now on the backside of the string of record deficits, and this will be a drag in 2012. Despite the massive spending, all that is left is an economy saddled with a higher level of debt, with more of its productive resources diverted to paying the non-productive elevated level of interest payments. According to the CBO, gross federal debt will rise to at least 103% by the end of 2013. However, if the FICA tax reduction is extended for the full year, and/or a recession ensues, as we expect, revenues and expenditure estimates by the CBO will prove to be too optimistic. Under current circumstances, no viable way exists to remove the increasing federal debt burden from the economy's growth trajectory. As such, the federal fiscal constraint is operative for the foreseeable future.
In the past three fiscal years, the budget deficit averaged 9.3% of GDP (Chart 2), the highest since 1943-45. Federal outlays were almost 25% of GDP (Chart 3), and also the highest since the final three years of WWII. Dr. Barry Eichengreen of the University of California at Berkeley, author of Exorbitant Privilage,estimates that after 2015 this outlay figure is headed to 40% over the next quarter century without major structural reforms in Social Security and Medicare. For Dr. Eichengreen this means that the current law cannot remain unchanged in spite of the lack of political will to deal with the issue. Dr. Eichengreen states: "The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified. These events will not happen tomorrow. But Europe's experience reminds us that we probably have less time than commonly supposed to take the steps needed to avert them. Doing so will require a combination of tax increases and expenditure cuts." He goes on to point out that, "At 19 percent of GDP, federal revenues are far below those raised by central governments in other advanced economies with spending on items other than health care, Social Security, and defense and interest on the debt having shrunk from 14 percent of GDP in the 1970s to 10 percent today, there is essentially no non-defense discretionary spending left to cut. One can imagine finding small savings within that 10 percent, but not cutting it by half or more in order to close the fiscal gap."


Consistent with this analysis, the Trustees of Social Security and Medicare have calculated that the present value of unfunded liabilities of these two programs totals $59.1 trillion. Additionally, there have been tabulations that all federal government liabilities, including those of Medicaid, veterans and other defense obligations, pension liabilities of government employees, and additional federal programs total $200 trillion at present cost.
These massive unfunded liabilities, when coupled with our present trillion dollar deficit, point to the stark reality that significant revenue increases and serious cuts in all programs will be shortly forthcoming. If these readjustments take advantage of current knowledge regarding tax and spending multipliers, the economic implications should not be severe. Clearly the only solution for our present predicament is to have a vigorous and rapidly expanding private sector and a shrinking public sector. As an investor concentrated solely in Treasury securities, our maturity structure will depend greatly upon the timely resolution of the country's present deficits.
State and local purchases of goods and services (10.9% of real GDP) has fallen at a 2.1% annual rate since mid 2009, and is poised to decline further in 2012. The fiscal condition of these levels of government has improved due to rising tax revenues and expenditure cuts. However, about one half of the states still face deficits in the final half of the current fiscal year and/or in the new fiscal year that begins in July 2012. Also, these budgets do not reflect the unfunded liabilities of their pension funds that are experiencing another year of investment returns that are considerably less than their actuarial assumptions. Further, a number of states enacted temporary tax increases that expire. Thus, state and local governments must continue to either cut spending or renew the taxes that politicians promised were temporary. The seeming improvement in state and local finance is an illusion, and this drag on economic activity will continue.

Forbes: Worst Recovery Since Great Depression

Thanks, Obama!

The recession started in December, 2007.  Go to the website of the National Bureau of Economic Research (www.nber.org) to see the complete history of America’s recessions.  What that history reveals is that before this last recession, since the Great Depression recessions in America have lasted an average of 10 months, with the longest previously lasting 16 months.
When President Obama entered office in January, 2009, the recession was already in its 13^th month.  His responsibility was to manage a timely, robust recovery to get America back on track again.  Based on the historical record, that recovery was imminent, within a couple of months or so.  Despite widespread fear, nothing fundamental had changed to deprive America of the long term, world-leading prosperity it had enjoyed going back 300 years.
Supposedly a forward looking progressive, Obama proved to be America’s first backward looking regressive.  His first act was to increase federal borrowing, the national debt and the deficit by nearly a trillion dollars to finance a supposed “stimulus” package, based on the discredited Keynesian theory left for dead 30 years ago holding that increased government spending, deficits and debt are what promote economic growth and recovery. That theory arose in the 1930s as the answer to the Great Depression, which, of course, never worked.

That was the beginning of President Obama’s Rip Van Winkle act, pretending not to know anything that happened over the previous 30 years proving the dramatic, historic success of the new, more modern, supply side economics, which holds that incentives for increased production are what promote economic growth and recovery.  Indeed, that Rip Van Winklism pretended not to remember the 1970s either, when double digit inflation and double digit unemployment proved Keynesian economics grievously wrong.
As should have been long expected, Obama’s trillion dollar Keynesian stimulus did nothing to promote recovery and growth, and almost surely delayed it.  That is because borrowing a trillion dollars out of the economy to spend a trillion back into it does nothing to promote the economy on net. Indeed, it is probably a net drag on the economy, because the private sector spends the money more productively and efficiently than the public sector.
The National Bureau of Economic Research scored the recession as ending in June, 2009.  Yet, today, in the 49^th month since the recession started, there has still been no real recovery, like recoveries from previous recessions in America.
Unemployment actually rose after June, 2009, and did not fall back down below that level until 18 months later in December, 2010.  Instead of a recovery, America has suffered the longest period of unemployment near 9% or above since the Great Depression, under President Obama’s public policy malpractice.  Even today, 49 months after the recession started, the U6 unemployment rate counting the unemployed, underemployed and discouraged workers is still 15.2%.  And that doesn’t include all the workers who have fled the workforce under Obama’s economic oppression.  The unemployment rate with the full measure of discouraged workers is reported at www.shadowstats.com as about 23%, which is depression level unemployment.
Today, over 4 years since the recession started, there are still almost 25 million Americans unemployed or underemployed.  That includes 5.6 million who are long-term unemployed for 27 weeks, or more than 6 months.  Under President Obama, America has suffered the longest period with so many in such long-term unemployment since the Great Depression.

Notably, blacks have been suffering another depression under Obama, with unemployment today, 49 months after the recession started, still at 15.8%. Black unemployment has been over 15% for 2 ½ years under Obama.  Black teenage unemployment today is over 40%, where it has persisted for over 2 years as well.
Hispanics have also been suffering a depression under Obama, with unemployment today still in double digits at 11%.  Hispanic unemployment has been in double digits for three years under President Obama.  Over one fourth of Hispanic youths remain unemployed today, which also has persisted for years.
The Census Bureau reported in September that more Americans are in poverty today than at any time in the entire history of Census tracking poverty. Americans dependent on food stamps are at an all time high as well.
Real wages and incomes have been falling so steadily under Obama and his confused, throwback, Keynesian/neo-Marxist Obamanomics, that the Census Bureau also reported that real median family income in America has fallen all the way back to 1996 levels.
Obama apologists cannot argue that this is because the recession was so bad, because the historical record in America is the worse the recession the stronger the recovery.  Based on historical precedent, we should at worst be finishing the second year of a booming recovery by now.
Compare Obama’s lack of a recovery 2 ½ years after the recession ended with the first 2 ½ years of the Reagan recovery.  In those years under Reagan, the American economy created 8 million new jobs, the unemployment rate fell by 3.6 percentage points, real wages and incomes were jumping, and poverty had reversed an upsurge started under Carter, beginning a long term decline.
While Obama crows about 200,000 jobs created last month, the most for a month during his entire Administration, in September, 1983 the Reagan recovery less than a year after it began created 1.1 million jobs in that one month alone.  Under Obama, we are still almost 6 million jobs below the peak before the recession started over 4 years ago! In the second year of the Reagan recovery, real economic growth boomed by 6.8%, the highest in 50 years.
The chief excuse of the Obama apologists is that what we have suffered was not just a recession, but a financial crisis, and, they argue, recovery from a financial crisis takes a lot longer than recovery from a recession.  But that is not the experience of the American, free market, capitalist economy.
The experience of the American economy is reported in full at the National Bureau of Economic Research, as cited above – recessions since the Great Depression previously have lasted an average of 10 months, with the longest previously 16 months, and the deeper the recession the stronger the recovery.  That is the standard by which the performance of Obamanomics is to be judged.  Which of those American recessions was a “financial crisis” that breaks the pattern?
The apologists cite in their support the book, This Time Is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth S. Rogoff. That book “covers sixty-six countries over nearly eight centuries.”  It “goes back as far as twelfth century China and medieval Europe.”  The data “come from Africa, Asia, Europe, Latin America, North America, and Oceania.”  The experience from 12^th century China, medieval Europe, spendthrift demagogues and socialist economies from Latin America, Europe, Africa and Asia, do not set the standard of expectations for post depression, free market, capitalist America over the last 70 years, the most powerful economic engine in the history of the world.
The data in the book is marshaled to explain why, in fact, “this time is different” is actually always wrong.  Seizing upon the data in the book to try to give some sort of pass to Obamanomics for failing the economic performance standards of American history is just political propaganda.
Indeed, exactly none of President Obama’s policies have been well designed to restore economic recovery and traditional American prosperity.  They have consistently been the opposite of everything that Reagan did to end the American decline of the 1970s, and restore booming growth for 25 years. That is why Rush Limbaugh is saying Obama deliberately wants to trash the economy, thinking the resulting dependency will lead a majority to continue to vote for the liberal political machine.  President Obama certainly thinks that traditional American, world leading prosperity is morally embarrassing because of the global inequality it represents.

The American economy will likely show continued, long overdue, signs of life in 2012, which will amount to way too little, way too late, based on historical standards.  But even worse than his first term is what Obama is brewing up for 2013 on his current course.
Most people do not know that already enacted in current law for 2013 are increases in the top tax rates of virtually every major federal tax.  That is because the tax increases of Obamacare become effective that year, and the Bush tax cuts expire, which Obama has refused to renew for singles reporting income over $200,000 per year, or couples reporting over $250,000 per year (in other words, the nation’s small businesses, job creators and investors, in plain English).
As a result, if the Bush tax cuts just expire for these upper income taxpayers, along with the Obamacare taxes, in 2013 the top two income tax rates will jump nearly 20%, the capital gains tax rate will soar by nearly 60%, the tax on corporate dividends will nearly triple, and the Medicare payroll tax will leap by 62% for those disfavored taxpayers.
This is on top of the U.S. corporate income tax rate, which is virtually the highest in the industrialized world.  The federal rate is 35%, with state corporate rates taking it close to 40% on average.  But even Communist China has a 25% rate.  The average rate in the social welfare states of the European Union is less than that.  Formerly socialist Canada has a 16.5% rate going down to 15% next year.
These U.S. corporate tax rates leave American companies uncompetitive in the global economy.  Yet under President Obama there is no relief in sight.  Instead, he has spent the past year barnstorming the country calling for still further tax increases on American business, large and small, investors, and job creators.
Higher tax rates mean producers can only keep a smaller percentage of what they produce.  So tax rate increases reduce the incentive for productive activities, such as saving, investment, starting businesses, expanding businesses, job creation, entrepreneurship and work, resulting in less of each. And that is what the tax tsunami of 2013 would do, which would once again swamp the weak economy.
Most small business profits are reported from households earning more than $200,000/$250,000 per year, and those small businesses produce more than half the new jobs.  So the 2013 tax tsunami effectively targets small business, and the nation’s job creators.  That will hurt working people the most, because they will lose the jobs and the wage income they need to maintain their basic standard of living.
In addition, the Obama administration is in the process of imposing a blizzard of new regulatory costs and barriers that will be building to a crescendo by 2013 as well. Academic studies estimate the total costs of regulation in the economy to be rapidly rising towards $2 trillion per year, or $8,000 per employee.  That is close to 10 times the corporate income tax burden, and double the individual income tax.  When the resulting effects on the economy are considered, the total losses due to regulatory burdens may total $3 trillion, or one fifth of our entire economy.
But by 2013 these regulatory costs will have exploded in unprecedented fashion.  That reflects the Obama Administration’s global warming crusade, assault on private energy production, the still oncoming Dodd-Frank regulatory burdens on the financial community, Obamacare regulations, particularly the job killing employer mandate, and many others.
By 2013, the Fed may be in contractionary mode as well.  If history is any guide, the Fed might decide that right after the election would be the perfect time to cut back on its historically loose monetary policy with record low interest rates that have persisted for years.  Adding rising interest rates to the above brew of soaring marginal tax rates across the board and exploding regulatory costs would accumulate to a powerful contractionary force.
Art Laffer predicted the Coming Crash of 2011 on the basis of the expiration of the Bush tax cuts on the upper income earners alone.  Those tax rate increases were extended to 2013 in December, 2010 out of fear that prediction was right.  But now in 2013 in addition to those tax rate increases we have all of the tax increases of Obamacare, the further exploding costs of Obama’s building regulatory blizzard, and the possible contractionary effect of the Fed’s monetary policies, all at the same time.  Unless we reverse course, the result may well be one big, bad crash in 2013.
Adding that on top of Obama’s first term, the entire period will look like an historical reenactment of the 1930s.  Unless the American people choose to change leadership this year, we will have achieved that result the old fashioned way – we will have earned it.