Guest Post: EXTEND & PRETEND: Stage I Comes to an End! The Dog Ate my Report Card
Submitted by Gordon T. Long of Tipping Points
EXTEND & PRETEND: Stage I Comes to an End! The Dog Ate my Report Card
Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.
Whether an unimpressed and insufficiently loyal army general, a fleeing cabinet budget chief or G20 peers going the austerity route, all are non-confidence votes for the Obama administration’s present policies. A day after the courts slapped down President Obama’s six month gulf drilling moratorium, the markets were unpatriotically signaling a classic head and shoulders topping pattern. With an employment rebound still a non-starter, President Obama as expected was found to be asking for yet another $50B in unemployment extensions and state budget assistance to avoid teacher layoffs. However, the gig is up: the policy of Extend and Pretend has no time left on the shot clock nor for another round of unemployment benefit extensions. A congress that is now clearly frightened of what it sees looming in the fall midterm elections is running for cover on any further spending initiatives. The US electorate has been sending an unmistakable message in all elections nationwide.
The housing market is rolling over as fully expected and predicted by almost everyone except the White House and its lap-dog press corp. Noted analyst Meredith Whitney says a double dip in housing is a ‘no brainer’ with the government’s HAMP program clearly a bust as one third of participants are now dropping out. The leading economic indicator (ECRI) has abruptly turned lower, signaling the economy is slowing rapidly without the $1T per month stimulus addiction, which has kept the extend and pretend economy on life support.
The gulf oil spill that was initially stated as 1000 barrels per day has been revised upwards faster than the oil can reach the surface. It now appears to be north of 100,000 barrels per day. A 100 percent miss is about in line with the miss on how many jobs the American Recovery and Reinvestment Act of 2009 (ARRA) was going to create. Also, it appears the administration can’t even get its hands around the basics of administration management during any crisis event. Teleprompter politics doesn’t work when real problems must be resolved. There is no credibility left for Extend & Pretend nor for this president and his congressional majority.
In foreign policy the Chinese decided to ‘unpeg’ the Yuan from the US dollar, days prior to the G20 summit in Toronto, taking the wind out of the US administration’s attack plan. Congress had been expectantly raising the rhetoric levels and making the Chinese Yuan the culprit. The market sold off hard the day the Chinese made the announcement, which tells you all you need to know about this administration’s understanding and abilities to formulate effective foreign and domestic public policy.
White House policies are unmistakably in shambles. We are rudderless with terribly outdated Keynesian zealots at the helm as the storm continues to worsen. Stage I of Extend & Pretend is over – RIP!
REPORT CARD: AMERICAN RECOVERY & REINVESTMENT ACT OF 2009 (ARRA)
Before we can identify what needs to be done, what the administration is likely to do and how we can preserve and protect our wealth through it, we need to first determine where we are going wrong. Surprisingly, no one has assessed the results of the American Recovery & Reinvestment Act 2009 (ARRA) which was this administration’s cornerstone program to place the US back on the post financial crisis road to recovery. Let’s briefly review it.
The chart above was one of the central charts used in persuading the public that the ARRA was absolutely necessary. This chart assisted in convincing the public that something they would previously have never accepted was the required course of action. I tried to find this chart on the ARRA’s touted Recovery.gov web site and found that it has disappeared, including the links to the original discussion papers. Is it any wonder? It was like a school child telling his parents the dog ate his report card. Fortunately, I had a copy in my database.
It isn’t just the failure to achieve the zero line in the second chart above that should be frightening. The failure to achieve the required 150K to 200K level which adds the new entrants from college, immigration, military personnel returning to civilian work force etc. indicates we are still in seriously rough waters. The falling Civilian Employment rate below is the correct way to assess the ARRA’s results.
GRADE FOR EMPLOYMENT: FAILURE E-
As analyst David Rosenberg at Gluskin-Scheff reports:
“the ECRI index moved closer to fully discounting a recession. The spot index fell 0.6% in the June 25th week to 122.2 – the lowest level since the week of July 29th of last year when the S&P 500 was 975, so please, do not tell us that 1,000+ is still somehow a “cheap” level. The growth rate in the ECRI index dropped further, to -7.7% from -6.9% on June 18th and -5.8% on June 11th – this was the eighth week in a row of deterioration. It may end up being different this time, but never before has a -7.7% print sent off a “head fake”. In fact, the only two false signals occurred at levels that were not as negative as what we have on our hands today: the -4.5% print in 1998 after the LTCM debacle and -6.8% in the aftermath of the crash of ’87.”
GRADE FOR ECONOMIC REBOUND: MARGINAL D+
We can safely conclude either:
- The administration completely under estimated the extent of the economic crisis, even though we were well into it when the ARRA was introduced.
- The administration was unable to secure the actually required stimulus amount which was likely 4-5 times that approved.
- The administration failed to implement the program in a timely manner.
- The administration failed to diagnose the problem correctly and that in fact it is a structural problem versus a cyclical and liquidity problem, as they still insist it to be.
I personally believe it is all four of the above.
PUBLIC POLICY CHOICES
The recent G20 meeting in Toronto may very well have been a historical cusp. For the first time at a major summit the leaders refused en mass to follow US leadership. G20 leaders chose ‘austerity’, while the US firmly advocated ‘stimulus spending’.
The politically crafted joint release outlined ‘austerity, once the recovery was in place’. How this will be determined is conspicuously missing, and to me it says no agreement was reached.
Ironically, political pressures from a disgruntled electorate in the US indicates further stimulus spending is not likely to fly, while in Europe the austerity cuts are threatening the very fabric of the European social net which the public has begun rioting against. We have both conflicting approaches between G20 camps while in turn they have conflicts with their own electorate base. Maybe we should give Obama to the Europeans and we take Cameron or Merkel?
This is absolutely not the time for a failure to reach a fully agreed to and globally coordinated policy initiative that will arrest the current financial malaise. The lack of a clear understanding of what will work, what needs to be done and how it is to be done with an agreement amongst country leaders does not bode well for a successful outcome.
We must conclude that the first post-globalization crisis has been met with a resounding failure of coordination. Similarly, this was also the earmark of the political wrangling during the early stages of the 1930’s Great Depression.
ELECTORATE WON’T ACCEPT MORE SPENDING – AUSTERITY “IS IN”
Keynesianism has failed! Somewhat unknowingly there is a sense growing that these are not cyclical problems but rather are in fact structural problems - a belief that the financial crisis was not an unexpected event but rather a product of deeper and serious underlying strategic problems. President Obama and his Economic team remain in a shrinking camp of zealots who believe that further stimulus spending is still required. There is an overwhelming shift towards austerity which was evident by the recent G20 summit with one lone exception – the US.
When the Bank of International Settlements (BIS), ECB President Jean Claude Trichet and even former Democratic cabinet faithful Robert Reich come out publically strongly advocating austerity, you know opinion has changed. The last spike however had to have been when Mr. Bubbles himself, former Fed Chairman Alan Greenspan, wrote in a June 18th Wall Street Op-Ed piece.
“OUR ECONOMY CAN NOT AFFORD A MAJOR MISTAKE IN UNDERSTANDING THE CORROSIVE MOMENTUM OF THIS FISCAL CRISIS. OUR POLICY FOCUS THEREFORE MUST ERR SIGNIFICANTLY ON THE SIDE OF RESTRAINT.
Alan Greenspan, former Chairman , Federal Reserve
Wall Street Journal 06-18-10
As the primary architect of stimulus and easy money to fight everything that even remotely smelled of a slow down or problem from the 1997 Asian Crisis, Y2K, the Tech Bubble through to 911 it is an amazing turnaround and of significance from Alan Greenspan to go so publically on the record. For former followers of ‘Green-Speak’ it is unusually crystal clear!
Even CNBC recently had troubles corralling the lone voice of sanity amongst its cadre of empty headed parrots when Rick Santelli in an off CNBC private interview on an Eric King interview was heard saying:
- On Spending Cuts: "Listeners, this is going to be the most important thing I am going to say: we need to maintain the focus on spending, the politicians in my lifetime always spend. If we end up spending way more than we can take in, in essence the deficit panel becomes a tax panel. We must stop spending before we talk about VAT taxes or taxing Americans more, we need to get spending under control. The ratings of congress are the lowest they have been in history”.
- On Austerity: "Nobody wants that. But there is a silver lining - the UK have conditions in their economy worse than the US, but they came up with an austerity plan, and we see that their currency has been rewarded. The GDP has risen about 10% in a very short period of time."
- On Keynesianism: "The Keynesians are both right and wrong. I don't think Keynes advocated the kind of helicopter-Ben spending that many say he promoted. He promoted the kind of stimulus that created jobs, that's more the medicine for a cyclical downturn, we have a structural issue because of the bubble credit scenario." ”
SO WHAT IS TO BE DONE?
Extend & Pretend was intended to give banks the time to restore their balance sheets versus the very politically unpopular choice of nationalization, which was debated during the height of the 2008 financial crisis. It was also intended to give time for the massive stimulus injections and the $13T of Lend, Spend and Bend (Guarantee) initiatives to ignite a rebound in the economy. It didn’t and the gig is now up!
The problem is actually pretty simple. We have more debt than productive growth can support. Debt has been losing its marginal productivity for years now and it no longer increases GDP. Rather, we abruptly reached debt saturation and now growth in debt reduces GDP. We have such levels of mal-investment and excess balance sheet gearing that increased debt now directly subtracts from productive money. Stimulus spending no longer will add sustained job growth.
PEOPLE WILL WANT SECURITY
The general public worries about two things: Having money to spend and having a job with which to earn the money. Everything else evolves or springs from having these first two. Politicians’ foremost job, if they are to get re-elected, is to deliver on this. Americans vote with their pocketbook.
They say that in a depression everyone is a Keynesian. That may be true until it is evident that it doesn’t work. Never have we had such debt levels from which to test this saying. What hasn’t changed is that when people are frightened they reach out to anyone that offers security or a sellable chance of restoring pre-crisis status quo stability - a person or administration that represents a chance to return things to the way they were. What was once unacceptable, even deplorable, is suddenly seen to be an option. The messenger of the solution is seen to be some sort of hero or messiah. This was precisely what led to the ascent of Adolf Hitler and many other now hated villains of history. They offered hope through new policy initiatives when none other did. They are now villains because their solutions turned out to be horribly wrong. Even if they were wrong headed ideas, if they were expedient they were latched onto by a desperate public. Are we fast approaching such a period over the next two years in America or are we already there?
A ‘GULF OF TONKIN’ & FALSE FLAGS
Powerful countries have a tendency to solve inevitable political conflicts and/or inabilities to persuade the electorate through the use of geo-political events. These events act as catalysts that force a direction to be taken and politically unpopular measures to be enacted.
There are many examples of this occurring, but one that is well documented with recorded first hand testimony and achieved a major political initiative is the Vietnam War era “Gulf of Tonkin” incident. President Lyndon Johnson staged and manipulated this ‘false flag’ event to secure the dramatic escalation of troops and funding of the Vietnam War against overwhelming public and political resistance. It gave the administration the cover to execute its predetermined agenda. The public was intentionally hoodwinked.
I fully expect something like this to occur within the next 90 days and prior to the fall midterm elections. Whether it is Iran, Korea, a BP triggered financial collapse, a cyber attack, or some other geo-political event – expect the fallout to move public opinion towards further ‘stimulus spending’.
The government must find an excuse to push another $5T (minimum) into the US economy.
I suspect the Federal Reserve and White House Administration are now convinced that without further massive stimulus, the US economy is headed into a deflationary depression.
We are presently at the cusp as shown in the chart below, which I have labeled as a “Critical Point” or more technically a “Chaotic Transient”. We can go either way. The determination is a function of the public policy initiatives which the administration chooses.
AUSTERITY & WAR
I would like to offer another illustration by SocGen's Dylan Grice in his latest weekly piece "Double dips, siren calls and inflationary bias of policy." It was recently published by Zero Hedge. I have inserted three charts and links to make the message clearer within today’s geo-political tensions.
Margaret Thatcher, who came to power oddly enough on a "mandate to smash inflation, smash the unions and downsize government", saw her popularity immediately slide to 25% as people realized the very real pain associated with austerity and a regime fighting run away government. On very rare occasions, the people of a country do end up making the decision to take on hardship, instead of kicking the can down the road. Yet they promptly grow to regret their decision. So what was it that saved the government, and allowed the Conservatives a second term in which to complete the painful austerity project?
The declaration of war by Argentina's General Galtieri over the Falkland Islands. The result was soaring popularity for the Iron Lady, and the rest is history.
Looking forward, now that all of Europe is gripped in austerity, (and make no mistake - this very same austerity is coming to the US on very short notice with crashing popularity ratings for all political parties), has the political G-8/20 elite focused a little too much on a Falkland war? Is war precisely the diversion that Europe and soon America hope to use in order to deflect anger from policies such as Schwarzenegger’s imposition of minimum wage salaries? Is there a Gallup or some other polling "unpopularity" threshold that the G-20 is waiting for before letting loose all those aircraft carriers recently parked  next to the Persian Gulf, the Israeli jets in Saudi Arabia  or the recent US troop buildup  on the Iran border?  (Italics is my addition: see the charts I have added for [X] locations. I have also added  for the highly symbolic July 4th weekend visit of Hillary Clinton to Georgia, Azerbaijan and Armenia)
MID EAST PROVACATION MAP
US MILITARY FORCES IN MIDDLE EAST (circa 2002-2003)
Troops have been removed from Saudi Arabia and there are bases in Iraq
Like the World Cup, if you can goad your opponent into reacting, you may be awarded the winning penalty shot.
Continuing from Mr. Grice:
The Thatcher experience shows how fragile support for painful economic policies can be even when the democratic mandate for those polices has been won. Like the Canadian and Scandinavian austerity experience in the 1990s, the painful programs adopted succeeded as much by luck as by political bravery. And this is what worries me. It's not that I'm ideologically wedded to one side or the other, it's that the precedents just aren't encouraging. The required austerity will be deeply painful and politically risky. Policymakers won't make it happen, so the bond market will make it happen instead.
EXTEND & PRETEND: STAGE I ENDS
38.2% FIBONACCI RETRACEMENT
The financial market charts reflect the current geo-political situation perfectly. The markets have now reached our targeted 38.2% Fibonacci retracement projection, which I have been calling for in my monthly newsletter.
What happens next? It is either one of the following alternatives, which future political policy decisions and actions will determine.
1- A MINSKY MELT-UP & INCREASING VELOCITY OF MONEY
We will get a dramatic insertion of new Federal Reserve stimulus in the amount of $5T. This will be the last element required in the manufacturing of a Minsky Melt-Up (see: EXTEND & PRETEND - Manufacturing a Minsky Melt-Up). An accelerating Velocity of Money will bring on inflation in the items we “need to have” versus the things we think “we want”. It will be a time of PROTECTING your wealth from the ravages of inflation or possibly hyperinflation.
It is important to appreciate, and contrary to popular perception, it isn’t solely the printing of money that will bring on elevated inflation. It is also the result of a stealth supply shock in basic necessities coupled with a demand shock associated with population. Let me explain.
When the 2008 financial crisis hit, businesses began immediately preserving cash. Capital expenditures were slashed and new projects placed on hold or shelved indefinitely. For industries with long lead times to bring on new and increased production, such as is common in mining, food processing and generally overall in basic commodity businesses, this crimps their abilities to meet ramp ups for any near-to-intermediate term demand. Meanwhile, the Asian and Emerging markets of the world continue to be able to afford to eat better and consume larger quantities of the basic staples of life. These economies have not been hit as hard as the developed economies. This combination along with a future weakening US dollar is going to seriously propel consumer inflation in the US and accelerate Money Velocity when the Fed overlays QE II.
2- PLUNGING MARKETS AND ASSETS VALUES
If the government is not successful in its reflation efforts, then we can expect a dramatic sell-off in financial assets. The market will retest and break through the 2008 lows of 666 in the S&P 500. It will be a time to PRESERVE your wealth from the onslaught of asset devaluation.
PRESERVE & PROTECT BEGINS
We have now entered into Stage II of Extend & Pretend or what I would prefer to call Preserve and Protect. We must watch key events extremely closely as they unfold, but with a clear understanding of the framework in which they happen. Government policy initiatives, geo-political events and economic trigger points must all be scrutinized.
For those wanting to follow this PRESERVE & PROTECT stage, and to know which Tipping Points will mark the way, then sign-up for e-mail notification of the releases of the Preserve and Protect article series and follow daily developments at Tipping Points.
It is going to prove to be one of the most interesting times in history. Let it be one of the most profitable for you and not the devastating period it will be for most.
The ‘dog ate my report card’ didn’t work in school and it didn’t work again!
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