Guest Post: Why The U.S. Economy Could Go Haywire

Tyler Durden's picture

Submitted by Dan Dorfman courtesy of TrimTabs Money Blog

Why The U.S. Economy Could Go Haywire

Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor.

Confused? How can you not be? But President Obama has to be elated at this widely perceived peppier economy. During much of his presidency, he’s been roasted by some critics as an economic illiterate, with one Internet poster recently reading: “Obama had a dream and we got a nightmare.” Now, though, thanks to the public’s growing acceptance of the idea that things are getting better, Obama’s approval ratings are on the rise. Even a number of his Wall Street critics are starting to acknowledge his chances of winning a second term have greatly improved and some believe he’s almost a shoo-in should the current economy continue to pick up steam.

The favorable economic news has also been a big plus for the stock market, what with equities off to a rousing start in 2012 and the Dow recently ballooning to a four-year-high of around the 13,000 level.

That also sounds great, but there’s still a lingering amount of economic scare talk around that’s probably a lot scarier than most haunted houses, namely the chatter and economic commentaries that raise such ominous prospects as a new U.S.  recession, a global depression and unemployment in the West (Europe and the U.S.) reaching 20% or more and further toppling of European  governments.

It all raises the obvious question: are we out of the woods yet?

No,  says James Dale Davidson, an editor of Strategic investment, a Florida newsletter, who writes in the latest issue that “the U.S. economy is staggering, like an over-the-hill boxer trying to shake off a jab to the chin.”

Of concern to Davidson, among other things, are an unfavorable demographic trend (an aging population) and a global debt crisis, both of which he views as essentially insoluble, a contraction here of real personal income,  a developing recession in Europe, which will mean a downturn in the U.S., and the prospective toppling of more European governments on top of the seven that have already toppled, a grave situation magnified by the shaky financial condition of European banks.

All told, there are about $87 trillion of assets in the world banking system, around $40 trillion of which are estimated to be in European banks. On average, Davidson points out, European banks are woefully insolvent and leveraged at 26 to 1, meaning, he said, a 4% loss would wipe out their capital. Conservatively, he points out, these banks are about $300 billion short of the capital needed just to make adequate provision for the sovereign debt they hold.

To our economic bear, the handwriting is on the wall, contending “there is no longer a question of whether Europe will fall into a downturn. It already has.”

Davidson further notes that slow growth (which is the case now) has always been an indication that the economy was sinking into a recession, was already in a recession, or was just emerging from a downturn. In this context, he believes the most likely scenario is that we will soon find ourselves in a recession since there is very little in recent data to encourage optimism about robust growth.

This year’s economic and financial news, as Davidson sees it, will detail the painful and gradual awakening of investors to the grim reality. Among what he sees as headline developments:

–Savings rates will rise again following a plunge in home equity values that the Financial Times estimates at $650 billion.

–P/E ratios will continue to be compressed as the prospects of real growth evaporates.

–We will move from “a rising tide lifts all boats” buy-and-hold market to a stock picker’s market.

–With median incomes falling and little prospects of real sustained growth, it will be a rare company that realizes significant gains in top line revenue. In essence, you’ll have to find the next Apple to capitalize on dynamic growth.

Davidson also serves up equally grim tidings for our nation’s retirees. “The welfare state is broke, busted, and the expectation of retirement for the majority of people will be exposed as, at best, an even more illusive dream, and, at worst, a hoax.”

With speculation rife that it’s only a matter of time before Greece defaults despite a recent bailout package, as well as the prospects of other countries also defaulting, it’s worth taking note of a frightening observation from Citibank’s chief economist, Willem Buiter.

Focusing on the threat of disorderly defaults–which we’ve already seen in such riot-torn nations as Greece and Italy–Buiter contends such disorderly defaults “would drag down not just the European banking system, but also the North Atlantic financial system and the internationally exposed parts of the rest of the global banking system that would likely last for years, with GDP falling by more than 10% and unemployment in the West reaching 20% or more. Emerging markets,” he observed, “would be dragged down, too.”

So there you have it, a slew of scary events, any of which could clobber the economy and the financial markets at any given moment. How real such risks are is anybody’s guess, but the message from our worrywarts is clear: there’s still plenty of economic danger ahead.

One of the more famous Yogi-isms might sum it up best: “It ain’t over till it’s over!”


What do you think? E-mail me at

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Future Tense's picture

Hugh Hendry made a public appearance this week in a Barron's interview.  He was talking about hyper-deflation and discussing the danger of owning "too much" gold.  Looks like his Japan bet is also paying off huge:

Citxmech's picture

Oh yeah - that's my problem: Too much gold.

The horror.

SilverIsKing's picture

If anyone feels they have too much gold, I'm willing to take the excess off your hands for a nominal fee.

I charge only $50/oz and for disposals larger than 5 oz, I will personally come and haul it away at your convenience at no additional charge.

ratso's picture

Well Mr. Dorfman could have noted that the stock market usually anticipates the actual economy by 6 months - but he didn't - he just quoted from someone, Dale Davidson (and who the hell is he??) who probably couldn't tie his shoe laces if he had three hands. 

The American people are and have always been an optimistic people with a belief in our ability to overcome adversity with our own efforts.  That has not changed.  Corporations and banks in the US have better balance sheets that at any time in this last decade. The opportunity for growth is within reach.

Yes, there are problems but not the kind laid out in this article.  EU countries will save EU banks - it is just that simple - they have already said so.  So draggin out the boogeyman of under capitlaized EU banks is just another attempt to drive fear into the equation when in fact things are actually looking.


economics1996's picture

I am going to get a job teaching economics in Peru, taking my guns and gold with me.

Here is what you need to know about the American economy.[1][id]=LNU01300000

ratso's picture

Well good luck with that - by the way, you might look into traffic laws in Peru before you drive a car in that country.  The Peruvians will welcome your gold but not your guns.

trav7777's picture

"this sucker could go down"

Leopold B. Scotch's picture

Americans are indeed known for their optimism... But that's adjusted from can-do optimism to entitlement optimism. 

the Wile E. Coyote moment nears, when the collective "we're U.S.A.!  The rules don't apply!" attitude is rudely acquainted with Economic Gravity 101.  (But as long as they refuse to look down and see they've missed the bend in the road, I guess they're OK...)

I think it was H.L. Mencken who said, "nobody ever went broke underestimating the intelligence of the American public."

Let's hope the thieves at the top don't make gold illegal, or tax it at 75%, or declare us all economic terrorists for taking down the God blessed currency of the U.S. of A.

rosiescenario's picture

""nobody ever went broke underestimating the intelligence of the American public."


....or was it, overestimating the unintelligence of the American public.

Seer's picture

Or: No one ever went broke overestimating the power of the marketing forces (nod to Edward Bernays) to program people to be stupid.

TruthInSunshine's picture

Operation Sock Puppet is in full action today.

Hello, Sock Puppets @ The Ministry of Interwebz Criticism of Dear Leader Refutation Office!

<waving my ballsack vigorously>

The Big Ching-aso's picture



"Beware of gallop that leave horseshit in wake."



dontgoforit's picture

Do you suppose they'll allow me to continue to work at the university when I'm 89?  Sounds like I may have to. 

Don Birnam's picture

As an aside: Yes, Dan Dorfman is still alive.

Vince Clortho's picture

Is this guy related to Kent Dorfman (Flounder)?

pods's picture

Fat, drunk and stupid is no way to go through life, son.

Don Birnam's picture

"Redo those buttons ! Dress that belt buckle ! Straighten that cap ! And goddamn it, tuck up those pajamas !"

francis_sawyer's picture

So I guess he's driving us to the Food King...

NotApplicable's picture

Maybe Hugh is trying to convince TPTB that he has no gold?

trav7777's picture

why would Japan sell foreign assets if there are domestic yen liabilities?  Just print the yen; that's what they do.

FlyoverCountrySchmuck's picture

"Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water."


Ignore it?? SURE YOU CAN!!!

Most American Sheeple will believe whatever the Magic Sqwauking Box they stare at in the living room every night tells them!

High gas prices? It's the fault of "EVIL SPECULATORS!" now. per Pelosi, not the Oil Whores In The White House!" like said in 2008!

Foodstamps?? That's just B.S. You don't see any food lines on the NBC Nightly News, do ya? No MSNBC Reporters reporting outside the gas station with the highest prices for miles around? No CBS stories about the homeless livingunder bridges?

Oh, and your kid's family living in your basement because he can't find a job? They don't actually EXIST, that's just FOX NEWS making things up again!

Smiley's picture

TV is for stupid people.


Every single one of Obama's speeches reiterates the same sentence:


GOSPLAN HERO's picture

What do you expect from a zambo?

Sudden Debt's picture

Obama will go down like a dotcom i'm telling ya!!!

resurger's picture

+1 Flyover

you know am really sad that only 30K or 40K people view ZH on daily basis where it should have at least 500K views per page... This tells me that there are so many idiots in this world!

We can not change our world unless we decide to change ourselves, it's very hard when you have people hooked on MSM induced stupor.

Trust me when the shit hit's the fan this website will become the New Bloomberg.. I trust the ZH's

  1. You don't ask questions.
  2. You don't ask questions.
  3. No excuses.
  4. No lies.
  5. You have to trust Tyler.




wee-weed up's picture

When the shit hits the fan - this website will cease to exist.

resurger's picture

When shit hit's the fan, you can come and browse the old archives




Debt-Is-Not-Money's picture

And so will the internet when they shut down the DNS servers like that "fix" for malicious software on or about 3-8-12.

Tyler: How about posting your TCP/IP addresse(s) so we can do an end-run around these government assholes?

economics1996's picture

That is to good to be true.

Tramp Stamper's picture

Are you looking into getting a tattoo of the Bernank on your lower back?

mikemcsaudi's picture

Zero Hedge is an incredible website ... my #1 stop each day.  However, for it to become a "go to" site for the masses it has to become more user friendly.  First off, it's a  financially technical website.  Most zombies don't even understand interest rates let alone hdge funds, PIIGS, ETFs and the such.  Iet personally took me about a year before I was able to understand what all you financial heads were talking about.  I'm StILL learning almost every day something new.  I love it!  But ...

If Tyler wants this to be a Go-To site he should take a page from the Drudge Report or Business Insider and have easy to understand headlines with a "so what?" for each headline.  Also, lots of pretty pictures work as well. :)

jjamppong's picture

I'm pretty content with the site as it is. The level of analysis is at a high level and to "dumb it down" for the masses would mean removing a large part of what makes this site so insightful and thought provoking.

Fukushima Sam's picture

I guess you want the Tylers to improve their grammar as well?

Fuck that.

Larry Dallas's picture

I think you need to keep your ignorance to yourself and get schooled up on these things.

No one wants to dumb-down this site. Its not for mass consumption. You can go to the Huffington Post if you'd like... Don't let the door hit you on the ass on your way out.

And if you like it, donate something.

Sudden Debt's picture

If it's not the kids living in the basement.... WHO IS!?!?.?!?!?!

yabadabadooooooo.... Scooby Doo where are you!!!

karzai_luver's picture

Everyone I know that wants to work and IS WORTH HIRING is working.


If you or your "friends" are not I suggest you get off your ass and make something of yourself.



dugorama's picture

but a whole lotta people I know have jobs with half the required skill set they used to hold.  If you used to do risk modeling and now you create MIS reports for 60% the money, yes, you're still employed.  But no, you ain't exactly happy about it.

slaughterer's picture

... and so, while the "US-economy-gone-haywire scenario" will be rife with unimaginable horrors, we believe that the "pre-haywire period" will be filled with unprecedented opportunities for profit...

LibertyIn2010's picture

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way--in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only." - Charles Dickens, A Tale of Two Cities, Book 1, Chapter 1

withnmeans's picture

Quote out of Kathimerini,

The United States, the biggest contributor to the IMF, welcomed the bailout deal, but said on Wednesday that Europe should do more to prevent any risk of contagion.

"We believe that the IMF should continue to play a constructive role in Europe, but IMF resources cannot be a substitute for a strong and credible firewall,» Lael Brainard, the U.S. Treasury Department's under secretary for international affairs, said before a Group of 20 meeting this weekend.


Hell lets bail everyone out, Its only ink and paper!!

NotApplicable's picture

You know, I think we should start calling bail-outs "bail-ins," as all they do are to suck the masses deeper into the hole.

ONO47's picture

It's not even ink and paper. It's a few keystrokes.

pkea's picture

What's let's say JPM leverage? 1:4 now?

pkea's picture

who cares that millions are underwater on their mortgages and food stamps from the big four bank perspectives. It is all peanuts. 80% marginally or even fully employed. they will continue their marginal spending. It's all about multinationals and dollar devaluation. and what sort of investors is he talking about? there are no investors, there are only big banks who take positions and the meager remaining trading community has to go along with them. the only real problems are the rising and soon to be skyrocketing energy costs, global debt, the european banks leverage and the US banks exposure to the Eu in general. is it around 17-20%? What is their leverage now?