Category Archives: depression

A decade without job gains

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From Chart of the Day:

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What was that about credit being the lifeblood of the economy? Well, the 2000s saw the greatest bubble ever, and all it got us was richer bankers. Robert Prechter often says that the depression started with the bursting of the dot-com bubble and deflation of social mood from the euphoria of the late ’90s. This chart, like the Dow:Gold ratio (down to 9 today from a peak of 44), give you and idea of what he’s talking about. After all, there was no net growth last decade — it was all a sham.

Eric Sprott: new lows ahead for S&P 500

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From Bloomberg:

Dec. 29 (Bloomberg) — The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.

The Toronto-based money manager, whose Sprott Hedge Fund returned 496 percent over the past nine years while the S&P 500 lost 32 percent, said the index’s 67 percent rally since March reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.

“We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.

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Here’s what a 20-year, deflationary bear market looks like (Nikkei 225):

Source: Yahoo! Finance

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Sprott also still likes gold, and from his perch in Canada he picks up smaller mining and exploration stocks. Although I like gold for the long term, I do take issue with the idea expressed here:

“If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Japan of course tripled its money supply and debt load in the aftermath of the bubble, but the central bank’s refusal to let bad debt and bad banks go under has locked the country into deflation and the Yen has remained strong. The debt situation in the US is much worse than in Japan, so our deflation should be even stronger. Japan was also bouyed through the ’90s and ’00s by strong exports as the rest of the world continued to grow, whereas the current bust is global. I do agree that after this deflationary stage clears the way, the government and central bank are bound to destroy the currency. The same could be said for the euro, pound and all of the rest, since none have any gold backing anymore.

The issue is timing — I have been saying since before the crash that deflation would be the situation for longer than almost anyone anticipates, myself included. This is because we have a credit system, not a cash system — in our economy it is credit issuance that controls the value of the currency unit, and credit will be contracting for years to come.

The 2000′s in one chart

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The Global Dow since 2001:

Source: wsj.com

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This chart makes it clear that the bubble still has a lot of air left.  The 2009 lows were well above those of 2002/3, and now stocks are back into boom-time 2006 valuations, as if the credit collapse and associated declines in earnings and dividends had never happened. This year demonstrates better than any other in modern times that stock market action has very little to do with economic reality.

Detroit, model for future US?

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Hat tip to Mish for this explanation of how government ruined one of the wealthiest cities in the world:

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Now, if the government had let Chrysler and GM go under, their factories would have been bought by Toyota and Honda and their employees would be turning out cars that people actually want, not gems like the Aztec:

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3rd Quarter GDP revised lower again

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The bulls cheered when the Department of Commerce told us GDP was 3.5%, but then the estimate was quietly lowered to 2.8%, and now we hear that 2.2% is a more like it. In reality of course, when you take away government expenditures, which should not be in GDP anyway as they are not Production, the economy continued to shrink. What else would you believe given that credit is still rapidly contracting and government is throwing sand into any market mechanisms that would clear away the bad debt?

David Rosenberg asks, “Can you handle the truth?”

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The Gluskin Sheff economist lays it all out in this end-of-year report. Click “Fullscreen” below to read the report. Subscribe to Rosenberg’s free daily emails here.

Special Report Year Ahead 121609 http://d1.scribdassets.com/ScribdViewer.swf?document_id=24216649&access_key=key-7ajim913ehdby1gxbei&page=1&version=1&viewMode=list

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Some take-aways:

- Mainstream economists called this downturn “The Great Recession”. But this is truly a gentle way of saying “Depression”

- Perhaps inflation is a consensus forecast, but deflation is the present day reality

- We believe that the dominant focus this coming year will be on capital preservation and income orientation

He sums up the buy-side consensus like this:

At the outset, let it be known that when I read everyone else’s year-ahead prognostications, all I can think of is, “where do I store this stuff for a year so I can look back and say ‘That was so wrong!’.” It’s not that the reports are always bullish every year; it is that they seem so contrived. And, as I mentioned in the December 10th edition of Breakfast with Dave, this year, probably like most years, there seems to be a remarkable level of agreement. Based on my reading, here is what I conclude the consensus views are as we head into 2010:

- Having read various Year-Ahead Reports, it sure seems like there is a remarkable level of agreement for 2010


- Muted recovery, but positive growth, for sure! No risk of a ‘double dip’.


- Equity markets up!


- A barbell strategy of domestic multinational blue chips and emerging market equities.


- The U.S. dollar is…neutral, but we did locate more bulls than bears (so much for the ‘carry trade’ thesis).


- Positive on commodities for the most part.


- Concerned about government balance sheets, and therefore…


…Bearish on long term government bonds because they are the ‘competition’ and, after all, who would tie their money up for 10 years at 3.5% when you can lose 22% in stocks? And, therefore…


…Bullish on spread product (as long as it’s not long-term). And, therefore…


…Really comfortable with high yield (just for the coupon and the view that default rates will come down).


- Certain that volatility will not be an impediment.


- The Fed will begin to raise rates in the second half of the year, but that this will have no impact since they will still be low.

Doug Casey and Tom Woods on government

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Video link from Lewrockwell.com

Here’s an excerpt from The Law, by Frederic Bastiat, a French classical liberal (today we would say libertarian) economist:

A Fatal Tendency of Mankind

Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.

But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others. This is no rash accusation. Nor does it come from a gloomy and uncharitable spirit. The annals of history bear witness to the truth of it: the incessant wars, mass migrations, religious persecutions, universal slavery, dishonesty in commerce, and monopolies. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain.

5th Avenue blues

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Hat tip Evilspeculator

They counted 48 vacant properties (I presume mostly street-front) from 59th to 14th Streets on 5th Avenue in Manhattan. I don’t have any stats to compare this to, but it is clear that times are not so good for landlords (and their banks) in NYC. I used to live on the same block as one very large storefront shown here, and I happen to know that that particular property has been vacant for over 18 months, ever since its former tenant, a nationwide retail chain, went bankrupt.

I have noticed that many of the “for rent” signs you see in Manhattan bear the name of Vornado or other such REITs. That sector is still doomed, though traders seem to have forgotten to ask, “where’s the equity?” I suspect that in most cases, an honest accounting would reveal that net of debt and marked to market, there is none at all.

Rosenberg: Latest employment and credit figures show deflationary depression unabated

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This morning’s Breakfast With Dave is good one.

There are so many headwinds confronting the U.S. consumer it’s not even funny. For a look at the new harsh reality of soaring usage of grocery vouchers, as well as other supplements to the household budget, have a look at the grim article on page 2 of the weekend FT (Families Take Up Food Stamps as Wages Shrink). On the very same page, there is an article on the latest trend in terms of 21st-century breadlines — Middle Classes Turn to Car Park Handouts. To think we still get asked why we aren’t more bullish over the outlook for spending. Truly amazing.

TREMENDOUS UNDEREMPLOYMENT

The U.S. economy is actually 9.4 million jobs short of being anywhere remotely close to being fully employed, which is why any inflation that can somehow be created by the Fed is simply going to be unsustainable noise along a fundamental downtrend in pricing power. After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.

MONEY AND CREDIT AGGREGATES ARE NOW DEFLATING

It is interesting that the equity market has begun to wobble (fade last Friday’s rally on such low volume) because we have noticed that some key liquidity indicators are not behaving very well, all of a sudden. M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.

So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

Scaredy bears

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Well, we’ve hit the first common Fibonacci retracement level (38.1%). We’ve now rallied 350 S&P points after a 904 point fall (1570 to 666). This is the best shorting opportunity since 12 months ago, IMO.

Source: Interactive Brokers

Nasdaq is nicely lagging, and the dollar is looking good. China could have topped already. The chatter on the boards is of scared bears and confident momentum chasers.

Next week could be nasty, maybe a drop to 950 before a rally to test 1000 again soon thereafter. Or maybe we slowly roll over and don’t break 950 til almost Labor Day (first week of Sept — when summer vacation ends in the US).

If this really is wave 3 down, it should be another 5 wave move, like wave 1. During the first wave, and even the second, most won’t believe the top is really in. Wave 1 could start from right here, since the momentum guys would be buying in on the decline and there would be few shorts to drive a squeeze to new highs. It would be seen as a “healthy correction.”