The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
economic news has turned decidedly negative globally and a sense of
‘quiet before the storm’ permeates the financial headlines. Arcane
subjects such as a Hindenburg Omen now make mainline news. The retail
investor continues to flee the equity markets and in concert with the
institutional players relentlessly pile into the perceived safety of
yield instruments, though they are outrageously expensive by any
proven measure. Like trying to buy a pump during a storm flood, people
are apparently willing to pay any price. As a sailor it feels
like the ominous period where the crew is fastening down the hatches
and preparing for the squall that is clearly on the horizon. Few crew
mates are talking as everyone is checking preparations for any
eventuality. Are you prepared?
What if this is not a squall but a tropical storm, or even a hurricane?
Unlike sailors the financial markets do not have the forecasting
technology to protect it from such a possibility. Good sailors before
today’s technology advancements avoided this possibility through the use
of almanacs, shrewd observation of the climate and common sense. It
appears to this old salt that all three are missing in today’s financial
Looking through the misty haze though, I can see the following clearly
looming on the horizon.
Since President Nixon took the US off the Gold standard in 1971 the
increase in global fiat currency has been nothing short of breath taking.
It has grown unchecked and inevitably became unhinged from world
industrial production and the historical creators of real tangible wealth.
Months of supply decreased to 11.6 months in August
from 12.5 months in July. This is extremely high and
suggests prices, as measured by the repeat sales indexes
like Case-Shiller and CoreLogic, will continue to decline.
Ignore the median price! Double digit supply and the
low sales rate are the key stories.
The first graph shows the year-over-year (YoY) change
in reported existing home inventory and months-of-supply.
Inventory is not seasonally adjusted, so it really helps
to look at the YoY change.
Although inventory decreased slightly from July 2010
to August 2010, inventory increased 1.5% YoY in August.
Note: Usually July is the peak month for
The year-over-year increase in inventory
is especially bad news because the reported inventory is
already historically very high (around 4 million), and the
11.6 months of supply in August is far above normal.
Based on the MBA mortgage purchase applications index,
it appears there will be little increase in sales over the
next couple of months (sales will probably remain in the
low-to-mid 4 million SAAR range). That means we will see
double digit months-of-supply for some time - and that
suggests house prices will continue to fall. the second
graph shows existing home sales Not Seasonally Adjusted
The red columns are for 2010. Sales for the
last two months are significantly below the previous
years, and sales will probably be well below the previous
years for the remainder of 2010.
The bottom line:
Sales were very weak in August - almost exactly at the
levels I expected - and will continue to be weak for some
time. Inventory is very high, and that will put downward
pressure on house prices.
Says Ken Goldstein, economist at The Conference Board:
“While the recession officially ended in June 2009, the
recent pace of growth has been disappointingly slow,
fueling concern that the economic recovery could fade and
the U.S. could slide back into recession. However, latest
data from the U.S. LEI suggest little change in economic
conditions over the next few months. Expect more
of the same – a weak economy with little forward momentum
through 2010 and early 2011.”
The U.S. annual core inflation rate has
been stuck at 0.9% since April, but should soon
The U.S. headline CPI
index rose 0.3% in August on the back of higher
energy prices, but the core measure was flat from
July. Core goods inflation has been sticky in this
cycle, due to tobacco taxes and the bull market in
used cars and trucks. Nonetheless, the trend in
core inflation will be driven by the service
sector, particularly shelter. Inflation in the
non-energy shelter component (32% of total CPI)
remains in negative territory because of the
excess supply of housing. Given that the housing
market remains a mess, there is a high chance of a
temporary bout of outright deflation in the core
CPI measure in 2011. The economy is likely to
struggle to attain its potential rate of growth in
the near term, which means that the output gap
will remain wide. U.S. dollar weakness may
mitigate the deflationary pressures, but not by
much. Retailers have not been able to pass along
higher import prices to consumers for years.
Bottom line: The downward trend in core inflation,
high unemployment and weak money growth give the
Fed plenty of reasons to expand its balance sheet
further. For investors, the recent backup in
long-term CPI swap rates provides a good
opportunity to position for lower inflation
In his presentation, Shirakawa compares the two
economies, noting the correlations between Japan's lost
decade and the current U.S., comparing metrics like core
inflation, bank loans, and central bank balance sheets.
The du jour comparison of the U.S. and
Japanese economies has come under a lot of criticism for
its exclusion of cultural and demographic issues, but from
a purely economic standpoint, there is a lot for that
comparison to stand on.
What might be most alarming in this presentation is
what powered Japan's rebound: exports.
Who would consume those U.S. exports, remains to be
seen, as Europe is experiencing similar problems and the
emerging markets of China, India, and Brazil may not yet
be ready for prime time.
"About 11 p.m. customers start to come in and shop, fill
their grocery basket with basic items – baby formula,
milk, bread, eggs – and continue to shop and mill about
the store until midnight when government
electronic benefits cards get activated, and then the
checkout starts and occurs. And our sales for those first
few hours on the first of the month are substantially and
significantly higher." Wal-Mart CEO
State and local governments have borrowed $2.4 trillion as of mid-2010,
according to Federal Reserve data. That's up 35% from five years ago. State and local governments—which employ more workers (19.5 million) than
manufacturing and construction combined—have promised over $3 trillion in
retirement benefits, more by some estimates. Their pension assets are at least
$1 trillion shy of that, according to the Pew Center on the States. "It doesn't seem like the current path is sustainable without a dramatic jump in
economic growth," says Randal Picker, a University of Chicago bankruptcy-law
scholar. And the odds of that are slim. Property and sales-tax revenues aren't
likely to grow rapidly enough to solve the problem.
Reneging on debts remains a rarity among U.S. state and municipal governments.
Fewer than 250 of the nation's 89,000 local governmental units have filed for
bankruptcy since 1980. Recent close calls in Harrisburg, Pa., and Central Falls, R.I., spark
predictions that the next phase of the financial crisis will be a tsunami of
municipal bankruptcies and defaults. Muni-bond experts at rating agencies and
bankruptcy lawyers assure us that isn't likely. We've learned in the past few years to be skeptical of such assurances, but the
experts probably are right on this one. Not because state and local finances are
in good shape—they aren't—but because Chapter 9 of the bankruptcy code, the one
that applies to local governments, is so unwieldy.
Big U.S. banks are facing legal pressure to make up for losses tied to pools of
soured low-end mortgage loans. In the latest effort, a group of investors in 2,300 mortgage securities worth
roughly $500 billion is seeking to force several banks that originated or are
now servicing faulty subprime-mortgage loans to repurchase or modify them. The move follows other similar efforts. Bond and mortgage insurers, hard hit in
the housing crisis, have filed lawsuits accusing lenders and banks of sticking
them with flawed loans marred by poor underwriting and faulty appraisals. Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued Wall
Street banks, seeking to force them to buy back mortgage-backed bonds. In July,
the Federal Housing Finance Agency issued 64 subpoenas to obtain information
about loans underpinning securities sold to mortgage
The occupancy rate has fallen below the levels of 2008 again -
and 2008 was a tough year for the hotel industry!
though the occupancy rate is close to 2008 levels, 2010 is a much
more difficult year. The average daily rate (ADR) is off more than
10% from 2008 levels - so even with the similar occupancy rates,
hotel room revenue is off sharply compared to two years ago.
Companies rated at or below B3 with a negative outlook declined
to 195 as of Sept. 1 from a high of 288 in June 2009, Moody’s said
in a report. The B3 rating is six steps below investment grade.
Clear Channel Communications Inc. and
Energy Future Holdings Corp., formerly named TXU Corp., were
among the biggest companies on the list.
“What’s interesting is the snap back,”
David Keisman, senior vice president at Moody’s in New York,
said in a telephone interview. Increased liquidity is helping to
improve credit quality and lessen default risk, he said.
With mid-term elections a month and a half away, and the
expiration of the Bush tax cuts approaching at a rapid pace, the
stakes for Obama's dwindling administration on the tax cut
extension issue loom. And as Goldman's Alec Phillips demonstrates,
the costs of either decision are huge: on one hand, should Obama
go ahead and relent to extending all the tax cuts, he will almost
guaranteed not be around for a second term due to the avalanche of
disappointment in his electorate as he relents on this key
promise. On the other hand, should he and the republicans be
unable to find a compromise and all tax cuts expire, the impact to
the economy could be so vast that America's breezy depression will
become a full blown hurricane, possibly worse than anything the
nation has ever seen. Phillips' succinct summary of the downside
case is as follows: "Letting all of these provisions expire
would subtract nearly 10 percentage points from annualized
disposable income growth in Q1 2011, which could translate into a
nearly 2 percentage point decline in final demand and nearly that
large a drag on GDP in the first half of 2011." And it is
not just the Bush cuts that are at steak: the year end "cliff"
also sees the expiration of the “Making Work Pay” (MWP) payroll
tax credit enacted in ARRA, and the relief from the alternative
minimum tax (AMT). Yet with such key tax "experts" in the
administration as Romer, Orszag and now Summers all gone, Obama
will be very much clueless to evaluate the dramatic impact of all
these "cliff" developments until it is likely too late. One thing
is certain: if a stalemate prevails, GDP for H1 of 2011 will be
wildly negative. The summary of the case by case impact can be
seen on the chart below.
Yes, it's time to get radical on the economy and no,
I'm not talking about going full Karl Marx -- the
politicians in Washington appear well down THAT road..
The next set of bailouts could run $30 trillion (as I'll
explain in a bit) and that's probably not the end of it
because all the future government entitlements are well
over $100 trillion. This is not only unaffordable, any
attempt to make good on even a small portion of this is a
fool's errand. In addition to attempting an impossible
task that is doomed to fail, we're bailing out the wrong
people! Hopefully, this article will get you
thinking -- feel free to leave a comment and help our
I'm talking about taking a serious detour from the way
things have been done and proposing a radical
restructuring of the way government and money work, as
well as, a massive clean up of the mess we've gotten into.
What I am proposing will completely eliminate the Federal
debt, change the way government does business and end the
banking cartel that destroys countries, finances war and
and causes excessive consumer spending. It will
completely change the role of the Federal government and
restore liberty. It could be replicated wherever fiat
money systems are in force in almost any country.
The problem is one of debt and who gets debt relief.
Here is a back-of-an-envelope guess by David Greenlaw
at Morgan Stanley on what the Fed can expect from a second
blitz of bond purchases, or `Shock & Awe’ as he calls it.
If Ben Bernanke does a further $2
trillion (on top of the $1.7 trillion already in the bag)
the yield on 10-year US Treasuries will drop 50 basis
points to around 2.2pc.
GDP growth will be 0.3pc higher
than otherwise in 2011 and 0.4pc higher in 2012.
The unemployment rate will be
0.3pc lower in 2011 and 0.5pc lower in 2012 — (in other
words drop from 9.6pc to 9.1pc, ceteris paribus).
That looks like trivial returns
for a collosal adventure into the unknown, with risks of
dollar flight and mounting Chinese suspicions that the US
intends to default on its external debts by debasement.
I had dinner recently with a former Goldman Sachs hedge
fund guru, and while I can’t remember the exact details
through a fog of Mersault Premier Cru, I am pretty sure he
said it would take $30 trillion to do the job – given the
scale of wealth destruction from the US property crash and
ferocity of debt deleveraging still to come.
Resentment, frustration and anger are now ubiquitous
features of U.S. culture. This is the consequence of several
factors, none of them positive.
"Horn broken, watch for finger." This bumper
sticker perfectly captures the zeitgeist of the nation: the horn
is broken, and everyone is giving everyone else the finger.
Why are simmering resentment, frustration and anger now
ubiquitous features of U.S. culture? I would posit the following
1. A culture of entitlement: the U.S. is now a
culture of takers obsessed with getting their "fair share" of the
swag/borrowed money. "We were promised!" (public employees); "I
earned it!" (Social Security recipient, though only the first 3-4
years of benefits are drawn from his/her contributions, and
everything after that is welfare drawn from the hides of current
workers); "healthcare/income security/housing is a right!"
(everybody's got rights, but nobody seems to have any duties or
obligations); "it's for the children/elderly!" (that is, my
expense account, million-dollar pension, etc. are nominally
protected by the banner of "education" and/or "healthcare"), and
Those with access to "private welfare" such as CEOs are a
privileged class; most of us have to elbow our way to the crowded
public trough. The truly select feed at the Wall Street trough,
which combines private welfare skimmed from shareholders and
investors, and Central State welfare issued in unlimited billions
via bailouts, Fed purchases of toxic debt, backstops, loan
But like the story about the attractive young lady who
blushingly agrees to share her favors for $10,000, but balks when
the suitor downgrades his offer to a paltry $100 (with the
punchline being, "We've already established what you're willing to
sell, now we're just haggling over the price"), the recipient has
sacrificed autonomy in accepting the entitlement, regardless of
the source or size. This is how complicity to a host of
embezzlements, corruptions and exploitations is purchased.
2. A culture of victimhood: Victimhood is
rewarded, shouldering ones' own load and thrift are punished. Like
rats in a maze, Americans respond to incentives and disincentives:
as a result, everyone is shouting out their claim to victimhood.
The cacophony is reminiscent of a classroom of spoiled children
all claiming excuses for their odious behavior and poor
3. Unrealistic expectations: nobody wants to
do demanding physical labor, so skilled-craft jobs go begging and
companies have to train workers. Favored careers include sports
heroes, Web entrepreneurs (as long as the work isn't too arduous
and the cashout comes quickly), entertainers, film makers,
etc.--all highly desirable and all scarce in the real world.
Offers which don't meet Americans' lofty expectations of their
market value are rejected with a sniff (and good old American
optimism: "something better will come along soon").
Numerous financial websites offer up fare such as "how many
millions do you need to retire comfortably," as if saving hundreds
of thousands of dollars is even an option for the vast majority of
4. Hype, hypocrisy and propaganda dominate the nation's
politics and mainstream media: soaring rhetoric about
growth, recovery, the American can-do spirit, the benefits of
bailing out the Financial Power Elite, etc. have raised
expectations that have repeatedly been dashed by reality.
All these relentlessly glad tidings and admonishments flow from
the rentier-cartel Power Elites of the State/Plutocracy
partnership, which owns the MSM (mainstream media) and most of the
nation's productive wealth.
Thus we get billionaire Charlie Munger (one of a pair of
outstanding hypocrites at his firm) suggesting that "the little
people" need to "suck it in and cope," leaving him and Warren to
the task of reaping billions more from ongoing taxpayer bail-outs
of firms they bought into with State collusion.
The announcement that the Great Recession is over is simply the
latest in an unending line of increasingly meaningless
pronouncements transparently designed to persuade the public that
everything's really, really getting much, much better, and their
sour mood in the face of this outpouring of "good news" is
irrational and, well, downright annoying. Get with the program,
people! Everything's going great! (at least for billionaires who
were offered Goldman Sachs shares at the bottom.)
5. It's somebody else's fault: you can fill in
the perps, but leave the American public/consumer/voter as
hapless, helpless victims of nefarious forces.
6. The frustration of addicted debt-serfs: We
hate the nation's political class and the "up yours" service
provided by Corporate America, but we are seemingly powerless to
rid ourselves of these Overlords and leeches. Voters rail against
dysfunctional insiders, yet they re-elect the craven parasite in
their own district. They complain about cable TV providers but
don't cancel their service lest their addiction to the smack/coke
cocktail of TV be curtailed.
7. The 30-year erosion of the middle class:
this chart says it all:
The middle class filled the growing gap between stagnant
earnings and steep increases in living costs, healthcare (a.k.a.
sickcare), education, and housing with a second income (Mom,
aunty, sister and Grandma all entered the workforce en masse)
during the 1970s, and then they filled the still-widening gap in
the 80s, 90s and 2000s with ever-expanding debt.
The dot-com bubble provided the illusion that permanently
rising equities would painlessly fill the gap (pension plans were
happy to join in the mass delusion). When that fantasy imploded,
it was quickly replaced with the exact same fantasy, only this
time based on housing.
Now that the "housing never goes down" fantasy has
imploded, the dwindling remains of the once-great middle
class are slouching dejectedly through the ruins of the political
center (which cannot hold because there is no center, only a
State/Plutocracy Elite and a rabble of State dependents defending
their fiefdoms), filled with bitter resentments at this undeserved
plight--for isn't this the Greatest Empire the World Has Ever
Known?--beset by anxieties about the rough beasts (let us call
them austerity, restraint, humility, responsibility, patience,
sacrifice and thrift) whose hour has come round at last.
Our current leaders, mainstream academics, media pundits and
others have a fundamentally flawed perspective when discussing our
economic predicament and propsing solutions for returning to
credit-based "economic growth". There is no more time left to rely
on them, so we must build resilience at a personal and community
There are five general areas of resilience that
every individual and family should understand and take incremental
steps towards. These include food security, water security, energy
security, health security, and financial security. There are many
tremendous writers out there that have written and spoken volumes
on these issues and have generously shared their knowledge with
anyone willing to read or listen. One of these people is Chris
Martenson, who has taken the time to write an entire series on the
general steps anyone can take towards becoming more resilient and,
as a result, more peaceful in mind. Here are the links to seven of
the articles he has written to this date:
The quicker we individually
quit acting like deer caught in the headlights, and take actions
towards resilience, the better off we will be as a collective
species on a planetary system that has generously supported us,
and continues to do so. The upcoming years will truly be a unique,
eventful chapter in the history of human evolution. Perhaps in
whatever records of history that may survive this rapid
transformation, we will be known as the “peak generations” who
sacrificed their extraordinary wealth, lifestyles, and comforts
for a more simple form of social organization, where we
re-organized to create a sustainable, just society. More likely,
we will end up being the “peak generations” that fought
desperately to defy reality and ended up in a heap of our own
rubble. Either way, we should not focus on what society thinks
about us now or how we will be remembered in the future. We should
only be focused on doing what needs to be done, and then we should
do it with no regrets.
“The great enemy of the truth,” John
F. Kennedy declared in a 1962 commencement address at Yale
University, “is very often not the lie – deliberate, contrived and
dishonest – but the myth – persistent, persuasive and
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
This site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.
Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important