Rosenberg On The Visible Hand Of Central Planning

So you thought communist states go down without a fight? Wrong: here is Rosenberg who explains why both China and the US are now actively involved in the business of propping up anything and everything. And totally off topic, Rosie confirms that the liquidity trends in the mutual fund industry continue to deteriorate: "As for liquidity ratios, equity funds portfolio manages have theirs at an all-time low of 3.4%, down from 3.8% in June. Tack on the fact that there are really not very many shorts to be covered – since the market peaked in April, short interest is 4.3% of the S&P 500 market cap (in August 2008 it was 6%) and there’s not a whole lot of underlying fund-flow support for the stock market here." In other words, throw in a few more market down days, a few more weeks of redemptions (and at 16 weeks in a row, there is no reason why this should change), and the liquidation theme will promptly be added to the new normal.

THE VISIBLE HAND

The two largest economies in the world are being sustained by the long arm of the law. At least in China it’s to be expected that a communist country would be fuelled by command central, but in this miracle story, below the surface it is becoming abundantly clear that Beijing is becoming increasingly involved. The front page article of the Monday NYT uncovered how the economy is delivering its red-hot growth rates: “New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year ... investment by state-controlled companies skyrocketed, driven by hundreds of billions of government spending and state bank lending.” No wonder the Chinese economy and stock market have diverged.

Is it really much different in the U.S.A. today with every 1 in 6 Americans now receiving some form of government assistance? More than 50 million Americans, from food stamps, to Medicaid, to extended jobless benefits, are on one or more taxpayer-supported programs. This likely explains why this depression does not have that 1930s feel of despair to it. But a depression it is.

In a depression, radical changes occur in terms of social norms and spending behaviour. In recessions, people don’t cancel their life insurance policies — as one example. But in a depression, tragically, this is what happens — almost 35 million Americans now have no such coverage, up from 24 million five years a go. This reflects the focus by households to pay down their debts at all costs and how companies have bolstered profits — by eliminating benefits. See More Go Without Life Insurance on page C1 of the Monday WSJ.

It’s not just households and businesses that alter their behaviour in a depression. That goes for any entity with balance sheet constraints — like cash-strapped state and local governments who are closing hospitals en masse to cut costs (see Cash Poor Governments Ditching Public Hospitals on page C3 of Monday’s WSJ) and at the same time, boosting taxes (on the same page, see States See Pickup in Tax Revenue).