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Guest Post: Fact Vs. Fiction On Today's Economy
Submitted by David Galland at The Casey Report
There is a lot of “noise” being tossed out by the politicos and their
preferred pundits about how the U.S. economy is on the mend. Thus it is
important to try and separate fact from fiction about where things
really stand.
FICTION: Though sporadic, the U.S. economy will continue to improve.
FACT: The U.S. is headed for a currency crisis.
While having learned to cover their butts by adding some modest
modifiers to their generally rosy forecasts, the administration’s
shills (Geithner, Bernanke, Summers, et al.) are unified in telling us
that the worst is over.
The fact is that the U.S., nay, the world, is headed for fiat currency crash. Let me push forward some evidence in support of that contention.
In this fiscal year, the U.S. government will run its second
trillion-dollar-plus deficit. Concerned about the political heat going
into the November elections, the Democrats have been making noise about
cleaning up their sloppy spending.
A couple of months back, El Presidente of this banana republic intoned
that his government… …[cannot] continue to spend as if deficits don’t
have consequences… as if the hard-earned tax dollars of the American
people can be treated like Monopoly money.
Which is to say, he acknowledged that the deficits have consequences. And what might those consequences be?
For starters, rising interest rates. Because in order to finance its
hyperactive spending, the government will have to sell a lot of debt –
and because all the developed nations find themselves in the same boat,
they’ll have to manage those sales in an increasingly competitive
environment.
Of course, higher interest rates put yet more pressure on the many
businesses that rely on access to capital to sustain themselves. And
higher rates crush borrowing for houses and other large-ticket items…
which means, they crush the economy. Especially one perched on a
foundation of debt.
Inflation is another consequence, because when the prospective debt
buyers begin to stay home or, more likely, agree to show up but only
for a more attractive yield, the Fed will increasingly be forced to
monetize the debt. Leading to the demand for even higher yields. Once
the monetization begins in earnest, and in plain sight, Obama’s
high-speed spending train will find itself on very wiggly tracks,
leading in relatively short order to a debt-fueled currency crash.
The point is that the only real hope for the country starts with deep
cuts in government spending. Now, I am not talking about talking about
cutting spending – you know, where you stand in front of a warmed-up
audience and talk about spending cuts. But honest-to-goodness, real spending cuts.
Which brings me to Mars.
On April 15, the president gave a speech at Cape Canaveral where, ahead
of time, it was advertised that he would announce serious cuts in the
space program. That was the fiction spun out to the pundits.
Instead, when it came time to stand and deliver, Obama delivered a $6
billion boost in NASA’s budget, then offset the cancellation of a
program that would once again send men to the moon by announcing a new
program to land astronauts on Mars… and drop in on an asteroid as well.
Over the course of my days on this remarkable planet of ours, I have
had the opportunity to get to know all manner of personality types. One
of the most troubled have been the serial spenders… deluded individuals
that simply can’t help but buy all that their hearts desire, no matter
how much pain results from their debt-financed spending. That describes
today’s political class.
Unless and until you start hearing the president making speeches about
not going to Mars, followed by wishing legions of government employees
the best of luck as they enter the private sector, the only conclusion
to be drawn is that a space ship isn’t the only thing headed for outer
space, but government debt as well.
The spending is unsustainable and so won’t be sustained.
FICTION: You can count on the mainstream financial media for unbiased information.
FACT: They’re lying to you.
It’s important to do your own due diligence and trust only your own
calculations when confronted with cheery financial headlines.
A couple weeks ago, for instance, the Fed’s national industrial index
was positively reported on as having continued to improve. By 0.1%.
That’s an improvement of .001, or roughly the width of a whisker on a
gnat. And even that vaporous improvement came on numbers that are still
deep in the post-crash dumps.
But even if we use the Fed’s own numbers, we see that the
month-over-month rate of improvements is losing steam, not gaining
traction. This is an economy we can believe in?
That’s not to say that there aren’t some improvements in the economy.
There clearly are. But I contend these improvements are largely
selective.
For instance, the mining sector is doing quite well – and is now
running at a capacity utilization rate of 90%, versus the broader
manufacturing sector, which is bumping along at just 70%. Crude oil
production is also running hot, at a capacity utilization of 87.4% in
March, versus finished goods at an anemic 71.8%.
In other words, the stuff that the world actually needs to chug along
is still in strong demand – but the rest of the economy is just limping
along.
Anecdotally, I have had conversations with managers/owners in three different industries over the past month.
A developer of low-income housing said that while things were slightly
better compared to this time last year, they were still a disaster and
there was no real recovery in sight. The manager of a high-end boat/RV
retailer, whose lot is chock-a-block full of expensive motor homes and
boats, was trying to be optimistic going into his traditional big sales
season, and he had clearly boosted inventory. But as the sales season
is still not quite underway, his guarded optimism is based on nothing
more than hope at this point. When I asked him about the availability
of credit, he said that people with very good credit can get financing,
but everyone else can forget about it. Oops, there goes the majority of
his potential buyers.
Then, the other day, I had a beer with fellow Casey Researchers Olivier
Garret and Alex Daley down at a local pub/restaurant/hotel. The owner
popped around to say hi, and I asked him if he was seeing an
improvement in the economy. His reply, “Oh, there is an economy? Could
of fooled me!” While he made the comment as something of a joke, the
establishment remained largely empty well into the traditional cocktail
hour when we left.
As an aside on the topic of restaurants, I have noted that the
better-run restaurants – the ones that provide value for money – are
doing reasonably well in the New England resort town that hosts the
headquarters of Casey Research.
Rather than confirming a broadly improving economy, however, I suspect
this is not unlike the phenomenon where, for a brief period, chickens
are able to run around without the benefit of their heads. Which is to
say, dining out seems to be a reflexive action taken by people who
still have jobs and who may have seen some improvement in their stock
portfolios.
We humans really don’t like change and typically resist embracing it.
Thus, those not forced by personal circumstances to hunker down – i.e.,
those still receiving paychecks – are following the boom-year custom of
regularly dining out, and to a lesser degree, using their still active
credit cards to buy stuff they really could do without.
My grandfather, a young man during the Great Depression, was a lifelong
skinflint as a result of his experience. One of his favorite sayings
when resisting one of the grandkids trying to put the touch on him for
one toy or another was, “Money doesn’t grow on trees.” By the time this
is over, people will be saying, “Money doesn’t sprout from credit
cards.” Back on the topic of the financial media… I don’t watch the
financial cable shows. For one thing, I don’t have cable. But even if I
did, I wouldn’t, because almost to a person these people missed the
crash. So, why should I listen to them today?
Most of the pundits are talking their own book. And all of the
financial news programs know that the stock houses and funds that buy
the ads will bolt if their programs take a steadily dim view on the
outlook for the economy and stock market.
FICTION: The housing market is improving.
FACT: Would you like to buy a bridge in Brooklyn?
In mid-April, Bloomberg reported that “Builders broke
ground on more U.S. homes in March than anticipated and took out
permits at the fastest pace in more than a year, a sign of growing
confidence that sales will stabilize.
“Housing starts climbed to an annual rate of 626,000 last month, up 1.6
percent from February’s revised 616,000 pace that was higher than
initially estimated, Commerce Department figures showed today in
Washington.”
On the other side of the ledger, the Financial Times
stated, “Whitehall Street International, Goldman Sachs’ international
real estate investment fund, has lost almost all of its $1.8bn of
equity following soured property investments in the US, Germany and
Japan, according to the Fund’s estimates.
“By the end of 2009, the fund was down to its last $30m, a paper loss
of about 98 cents on the dollar, an annual report sent to investors
last month said.”
If the world’s most successful investment house can lose essentially
all its equity in a real estate fund, you know we’re not in Kansas
anymore.
Fox Business presented another dose of realism, saying that
“Commercial real estate is showing few signs of leveling out nationwide
and several regions continue to get hammered by declining values.”
I can tell you that around here, the commercial space that was empty a
year ago is still empty today. And I’m talking even about the prime
locations.
So, how to explain the upbeat housing articles in Bloomberg,
when the facts on the ground seem to indicate the exact opposite? Other
than the steady evidence that Bloomberg has taken on a cheerleader role
for the Democratic machine its boss is a solid cog in, builders may be
looking to build simply because that is what they do.
What they’ll actually be doing is assuring their future bankruptcies.
The following is an excerpt from an email from Jim B., a Casey
subscriber and regular correspondent, shedding light on the matter
(emphasis mine).
Down here in Austin, there's a housing construction recovery in bloom.
I spoke to one of the contractors today. He was very happy to have his
ten workers back to work after over a year of no work at all. One minor problem: the home construction company wasn't paying him.
I'm guessing the companies are using their subcontractors as lenders
and will repay the "loans" if/when the houses are sold. Their credit
must still be in the toilet, so it can't get any worse. This looks
ominous.
I buy distressed property, mostly foreclosures. The usual number of
houses in foreclosure in Travis County in the mid-‘90s was around 325
per month. Of those, about 30 had enough equity to make a deal work.
The number of foreclosures about six months ago was about 825, and the
number of good deals was still about 30. So, about 500 houses per month
above the normal rate are being dumped into the Austin real estate
market. Just how new construction will overcome this competition is a
drama I'm waiting to see.
At some point, real estate will again be a great investment – but for
now, holding fire on new purchases seems the right thing to do. As for
buying housing industry stocks or bonds – not hardly.
FICTION: The U.S. government has everything under control.
FACT: The U.S. government is on tilt.
At this point the list of hastily conceived, politically motivated
spit-and-plaster fixes that have been cobbled together by the
government in an attempt to fix the economy – versus just getting the
hell out of the way and letting the economy fix itself – could fill a
book. The only thing that matters to the administration and its allies
is to corral a sufficient number of votes to get through the November
elections on their collectivist feet.
And now Goldman Sachs has been charged with one of its many frauds. I
should have seen this coming, as they had become – in the minds of
Obama’s core constituents – the poster child of Wall Street’s greed. In
addition, the firm has very, very deep pockets – just as Drexel Burnham
Lambert did when the government laid them low with a $700 million fine…
virtually none of which was then passed on to the purported victims of
their indiscretions.
In the case of Goldman Sachs, I suspect that they may have become too
clever by half – and that they’ve crossed some lines that will now be
used by their erstwhile friends in Washington to string them up. And,
in so doing, provide Team Obama with a win-win of appearing as a
staunch opponent of Wall Street fat cats, while simultaneously
confiscating another several billion to be cycled into the furnace of
federal spending.
At this point, the only sane way to view the government is as an
out-of-control gorilla that is wildly grabbing in all directions. As
Goldman Sachs may be about to learn, once the gorilla has caught a hold
of you, you’ve got real problems.
Unfortunately, the gorilla has grown so large that at this point it has
its arms around the most of the economy. Counterproductive tax hikes
are already baked in the cake and, if the administration has its way,
it will soon try to layer on the mother of all tax increases in the
form of a VAT. (I think at that point we might actually see riots in
the streets.) Therefore our constant admonitions to be careful and to
be largely in cash just now, combined with very carefully selected
stocks that will weather even a Category 4 economic hurricane. Words to
the wise.
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Now sitback and watch the fireworks..
http://www.youtube.com/watch?v=Ue3F3isiCvQ
I like. Double plus good stuff, except I can't believe GS is going to do the perp walk. I'd love to see it, tho.
I'm no fan of Goldman, but I'll believe that when I see it.
They are being used as the current scapegoat by Congress to make it seem is if they are "doing something" to Wall Street.
It will end with a slap on the wrist.
Lying Bastards.
The next TIPS auction is going to be a disaster. I wouldn't be surprised if they cancel it altogether and try to sell more 10 and 30yrs. Who would buy a TIPS right now or and I-bond when they are manipulating the CPI to negative territory to send a false sense of no inflation.
You said it right there.As long AS THEY ARE THE ONES CALCULATING THE CPI, fuck tips.To much "fuzzy math" to get involved in that..
the government management of inflation goes to the core of their fasicist business model. forget diddling those CPI numbers, how about putting controls on speculators who drive up the price of oil, how about using the SPR to paint a false number on enterprise storage (which is why traders ignore inventory reports) and they have the USDA make false and rosy crop predictions, knowing the global agricultural market will probably make up the difference, when the reports fall short. Manipulating CPI is childs play to these people, food prices are falling, but the equity value of the ag companies have been on a bull run. (check out the Moo:Cow spread)
if economics worked the way it was supposed to it would be the other way around. you suppose people would riot, add some high food and fuel prices, right now they're only hoping they can keep the lid on this thing. Going to Mars, might be necessary for them.
Food prices are falling? LOL. You must not eat much.
I have seen only price increases. Companies cut during the downturn to try to resurrect volumes but at this point they have no choice but to raise prices to be profitable.
Credit deflation will mean LESS income for all of us in the system. Don't expect real price declines except in discretionary goods.
+1
I always thought TIPS was a good idea, but the very concept that you would trust the government (who sold you the TIPS) to not "cook the books" to ensure you lose every time ... well, it just defies all logic. They need to scam you, because they don't have the money to pay you.
Just look at payment adjustments to Social Security and Medicare. They can't afford it, so they scam you (just not pay what they originally agreed). They continuously back-date their changes to the rules to which you never agreed.
We have tremendous history of cooking the books, adjusting statistics without normalizing to previous formulae, and outright fraudulent data collections, data adjustments, and data reporting. Trust the CPI? Sure, if you don't live anywhere and don't drive.
remember its an auction, if the bid allows it the paper will sell at a discount. would you accept $1000 worth of paper for $950?? the only problem is the Fed throws a bid under this paper, so i am staying out. as for the CPI you can buy into the Pimco bond fund which doesn't use the CPI, it uses its own proprietary measure. the TIP auction wouldn't be a disaster if Bernanke and co would quit buying their own stuff.
++
intellectually, i want the truth - the un-spun facts - and i believe i can manage my world from there.
realistically, if i was told what was *really* going on... i'm not so sure there would be much left to worry about.
what *if* they stopped extending and pretending? maybe i really don't want to know...
great post - tnx.
I would like to submit (fully braced for the catcalls, of course) that it's quite possible that this is an "outside" job. It could be (not saying it is) that our government and GS are actually (this is painful, indeed) the GOOD guys. At least, for us.
If an enemy wanted to destroy the United States - a tribe of mis-matched, divisive, independent (sort of) thinkers - how would an enemy go about that?
An enemy would seek to plant seeds of mistrust and doubt. An enemy would seek to create fears and worries where there were none. An enemy might try to undermine the "leaders" of said society. An enemy might attempt to divide an already divided country.
It is possible that this administration, working in collusion with the big players in the money market, may actually be trying to save our asses from financial hell, rather than leading us into it.
My biggest fears are that you are right, Tyler. My hopes are that you are wrong about all of it.
We all have choices, don't we? We can be positive or we can be negative. Is it foolish to be positive given everything we now think we know?
Who knows for certain?
financial hell is what we have now. result of decades of indoctrination and nepotism.
Well, that's certainly a possibility, I suppose. But when you have the Chief of Staff to the President of the United States quoted in public as having said something to the effect that You Should Never Let a Good Crisis Go To Waste I find it really hard to believe that these are "The Good Guys".
I generally try to avoid alleging malice when simple stupidity will do - but this Administration and the entire Fraud Street cabal sure have done everything they can to make it look like they're doing this on purpose, whereas I think the previous administration was simply moronic beyond all reason.
no catcalls - sometimes the concept that we are fighting a BRIC-like force outside the NY-city boundries is the *only* way some of this crap *does* make sense.
i honestly wish i knew who we're shooting at here. i might even help.
He wasn't talking about the BRICs. First clue was use of "tribe."
like a tribe that might want to plant a 13 story "victory mosque" near ground zero in NYC?
no argument
regardless the foe, that "the battle" isn't what we think it is, is a most interesting concept. twists my perceived agendas around. current agendas/actions don't make sense to me these days.
i think the stated premise of dividing us from the inside trivializes an important core american (human) characteristic: "i can talk about my ma, but you don't go talkin' about my ma" - which is to say if any cultural force, external or internal, was clearly established as intentionally attacking us, our petty internal bickering would end (for a while) and left-right-middle would galvanize in a way that i think would surpise the world.
that said, if a financial enemy (vs cultural) were to do this... i bet lots of great financial commentary websites would pop up and ...
Bitch - That is a fairly ridiculous thought. While plausible in theory as a method in which the U.S. might be vulnerable, noone could create the disastrous situation we have other than ourselves. Any seeds of distrust that may be planted by this enemy not only are warranted but really are not relevant. If our government was trustworthy then people would trust them, alas they are far from it. We can easily replace our current leaders with new leaders, there is no reason to try to further undermine. One could in theory try to bring down the system through the methods you mention, but it simply isn't necessary and would be futile, the people of this country already hate the system but are too lazy and stupid to know what to do about it. In fact, they would actually be doing us a favor by fueling our anger into general unrest which could allow for the substantial change we need.
John Quincy Adams: “We have conquered the enemy. We occupy their hill, but we have become the enemy.”
We are the enemy of ourselves and ignorance, stupidity, fear of short-term hardship for the long-term gain and corporate political spending. We have planted the seeds of our own destruction, we don't need the help.
By the way, as long as we have democrats, republicans and corporate spending on elections, this will never change. To get elected you inherently cannot be good at what you do, because if you were honest about your opinions, encorporated all ideas and simply chose the best ones for your country, people of your "party" would call you a traitor, corporations wouldn't fund you and you'd never get the votes again.
That the US government is working to preserve the US primacy (which does not mean it will benefit each US citizen, far from it) is obvious.
That an enemy could lead a work of disinformation is unneeded. The situation is here. An enemy can exploit the situation. The enemy does not need to create it.
Hey there Bitch Tits
It is also possible that Goldman is the enemy, awarded themselves billions in bonuses, and have since squirreled the money away out of the country. It is also possible that Obama received millions in contributions from Goldman (naturally all this money was possibly stolen from the taxpayer during Hank Paulson's daylight robbery).
And it is also possible that you are not a Goldman plant nor apologist.
If you want to find the "enemy" of this nation, it is those who have destroyed the American Middle Class in one generation.
@bitch tits
Are you doing market research for the morons in charge?
I feel like we are still stuck in the same rut, bouncing off the sides. What is sad is if one wanted to find a location on this planet that one could grow a business, where would you go?
North America: Mexico is chaos, US in denial and Canada too boring
South America: Either too corrupt or too reliant on expanding resources for surplus factories
Europe: Nuff Said
Asia: China about to implode (communists better at Capitalism? WTF?,)India, well OK, but not the most hospitable place to live, Thailand / Malaysia / Indonesia-too unstable, Japan-zombie-like, Russia (yes, I know it is partly in Europe, but Peter the Great was never successful in making it totally European)-too scary
So that leaves S. Africa, picking pinapples in the Pacific or moving to Australia!
"if one wanted to find a location on this planet that one could grow a business, where would you go?"
You may have something there, Recovery. It's possible that this whole situation, as some have said in the past, is a political ploy for absolute power.
State vs. Business.
But why then, is State so accommodating to the financial industry? Could it be that the "private" financial industry is actually the State?
Hmmm, I think that's exactly what ZH has been saying all along.
you ever get the feeling that we're all bouncing around in a peanut-butter jar, worried about trying to get out, when the 747 that jar is flying in is heading straight into a mountain?
i think i'm spending too much time in ZH :^)
btw - your posts are great, but you need an avatar - see leo or robo for ideas...
Yes, but the financial industry is far removed from our economy. My CRE business is dead due to the financial industry more interested in making money from the Gov rather than letting creative Destruction do its magic. No wonder this recession has punished so many producers and benefited the moocher class immensely.
Canada, "boring"? Is that the best you can do?
New York, the city where a licence is required for people to dance in bars or clubs?
Or LA, where you could shoot a cannon down almost all major streets at 2am and not hit a single person.
And these are the exciting cities of America.
Give me Montreal any day.
Good article, but I think more thought needs to be applied to the issue of a currency crisis. Not that I do not believe there already is one, but on how it's going to play out.
I disagree there will be an "interest rate war" to get funding because who in their right mind is going to lend money that won't be repaid?
If there hasn't already been a failed auction or three, the time is short till it happens...only we won't be told when it does because the extend and pretend crowd control the results and can always supply sufficient invisible bids to cover.
There is simply not enough "investable wealth" in the world to fund existing sovereign debt and the increasing sovereign deficits.
It's going to be very ugly and many people are going to be very angry.
Unemployment is one area where the rhetoric is thick. Up to 400,000 a month will be exhausting unemployment benefits. There is only one job opening for every six unemployed. There are nearly 3,000,000 discouraged workers that aren't even counted as long term unemployed. There is a 20% - 22% unemployed/underemployed rate. Yet all we hear from the fed is 9.9% unemployment. the birth/death business numbers reported by the BLS were absolutely insane this past month with the addition of 188,000 imaginary jobs out of the 290,000 that were supposedly added.
http://www.examiner.com/x-27052-Rochester-Unemployment-Examiner~y2010m5d15-Tier-5-and-extended-unemployment-how-the-media-ignore-up-to-29-million-long-term-unemployed
http://www.examiner.com/x-27052-Rochester-Unemployment-Examiner~y2010m5d7-Unemployment-rate-increases-to-99-with-the-addition-of-290000-jobs
While I do agree with the author on the need to cut spending, I cannot say that releasing the public workers into the private workforce as a step in the right direction. With the severe lack of jobs for the numurous educated unemployed currently; by releasing the mass of non-educated to edcuated workers would put too much strain on the public unemployment systems. It would drive many states into insolvencey (even though many technically are insolvent), therefore driving up public spending further. While I do see it as a money saving move, it is something that would have to be done in an actual recovering economy, and not this inflated "matrix economy" we live in today. We need to cut into the pork barreling that is still rampant in this country.
Release them! Then they will go from making $50K a year plus $20K in benefits to living off of cheaper unemployment benefits and food-stamps. That's saving money right there! There is no reason an average Public worker should earn more for the same private job, what Public worker is more productive?
fuck the red tape dispensers
OK, folks. Get a good look at that rocket shot at the close today, coupled with the raping of the shorts that happened this morning, and tell me with a straight the entire "free market" on Fraud Street isn't exactly that, a fraud.
Doug Casey gave an interview to Howestreet.com recently:
http://www.howestreet.com/audio/doug_casey_2010_0518.mp3
There may be some self-selection at work here.
Maybe people with very good credit have good credit because they are not attracted to ego-boosting toys with little practical purpose or value retention. Which makes them unlikely to show up at this guy's sales lot.
I would disagree with the "interest rates will have to rise" meme. There is no evidence for that being inevitable, by that I mean we've been spending like a drunken sailor for a decade and interest rates have fallen. As long as the government can buy its own debt, interest rates will not rise.
Yes.
Virtually NOBODY understands why yields have fallen.
It's because they have to.
Core yields are driven by the level of ROI achievable using the loan.
If activity can only generate a 4% yield, a bank CANNOT source ANY loans at 5%. Nobody would borrow at 5% to go do the 4% activity. Credit is a supply and demand instrument.
What the secular decline in yields is telling us is that entropy is taking over globally. We've wrung as much profit as we can out of most places and like a parasite, are moving onto to others.
Think about a supply curve, like an EROI curve for an oil well. Rises, then peaks. At that point, you are at maximum net energy extraction. Or think about the law of diminishing returns or any asymptote-bound curve. Yields are declining because there is NO DEMAND FOR MONEY at higher rates.
Bubble 3.0 almost finished and brief 'super deflation', then welcome Bubble 4.0
The chart is over a year old.
How about a current one?
Good story.
The March 2009 lows won't hold.
Updated DOW daily and weekly charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1