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.
The euro zone's private-sector output growth slowed sharply to a seven-month low
in September and is likely to decelerate further in the fourth quarter, a survey
showed Thursday. The flash euro-zone composite-output index, a measure of private-sector activity
based on about 85% of replies from a monthly survey of firms, dropped to 53.8 in
September from 56.2 in August, according to preliminary results from
financial-information company Markit.
The reading above the neutral 50 level indicates output is growing. Economists
were expecting a drop to 55.9 in September.
"Although the survey suggests that [gross domestic product] will have risen by
around 0.6% for the third quarter…the weak September reading sets the scene for
a further slowing in the final quarter of the year to a pace more in the region
of 0.3%," said Chris Williamson, Markit's chief economist. German output growth slowed to an eight-month low in September while France
decelerated to a six-month low, Markit said.
"However, outside of these two countries, double-dip
recession fears will be heightened by a renewed
contraction of economic activity and accelerating job
losses in September," Mr. Williamson said.
Solvency concerns are again on the rise there
Last week’s catalyst was Ireland where banking issues
are a serious worry. But the underlying problems are
deeper and more complex.
Market measures of risk for peripheral European
countries (Greece, Ireland, Portugal and Spain) are at or
near danger levels… despite exceptional support from the
ECB, EU and IMF, and despite the implementation of
adjustment measures on the part of some.
The failure to reduce risk spreads means that the
public sector bailout is not working. Rather than provide
assurances of better times ahead and, thus, encourage new
ECB/EU/IMF support funding is being used by existing
investors to exit their exposures to the most vulnerable
peripheral European countries.
This situation cannot be sustained forever. It
undermines any chance that the most vulnerable countries
(e.g., Greece) have of limiting the collapse in their GDP
and maintaining social cohesion; it contaminates the
balance sheet of the ECB; it exposes the revolving nature
of IMF resources to considerable risk; and it raises the
risk of renewed contagion.
Ireland's economy contracted in the second quarter, startling investors worried
about the country's banks and fueling fears that Prime Minister Brian Cowen's
government may need even tougher austerity measures to tackle a massive budget
deficit. On Thursday, Ireland's Central Statistics Office said gross domestic product, a
broad measure of the value of goods and services produced by the economy,
dropped 1.2% from the first three months of the year. Economists had forecast a
0.5% growth rate, which would have extended a brief expansion of the Irish
economy that began in the first quarter.
To borrow from the capital
markets, Ireland now pays an interest rate that is 4.25
percentage points higher than Germany, the euro-zone's
benchmark—the highest so-called risk premium since the
introduction of the euro in 1999.
Ireland's gloomy prospects
mean the government may have to make even deeper cuts this
winter to reduce its budget deficit, which is expected to
surpass 25% of GDP this year, the biggest in the 16-nation
euro area by that measure. The possible doubling in the
deficit—now about 12% of GDP—is due largely to the cost of
bailing out its most troubled bank, Anglo Irish Bank Corp.
Ireland is struggling to recover from one of
Europe's messiest real-estate busts, which has left its
banks awash in souring loans to property developers that
likely won't be paid.
It now costs roughly $475,000
a year to insure $10 million of Irish bonds for five
years, according to data provider Markit. Earlier
Thursday, Ireland's credit-insurance costs hit $500,000
for the first time.
Bookings for goods like computers and communications
gear climbed 4.1 percent after a 5.3 percent decline in
July that was smaller than previously estimated, figures
from the Commerce Department showed today in Washington.
Total orders dropped 1.3 percent, depressed by
volatile demand for aircraft, and bookings excluding
transportation equipment rose more than forecast.
Manufacturing, which led the U.S. out of the worst
recession since the 1930s, may hold up as companies use
the surge in profits to replace outdated equipment. The
figures may ease concern at the Federal Reserve, which
this week citied a slowdown in business investment in
announcing they were willing to take additional measures
to spur the economy.
“This is reassuring news,” said
Dean Maki, chief U.S. economist at Barclays Capital
Inc. in New York. “Capital goods spending still seems to
be on a very solid underlying trend.”
Fewer U.S. new homes than forecast were sold in August,
signaling the housing market remains depressed even as
mortgage rates dropped.
Purchases were unchanged at a 288,000 annual pace,
matching July as the second-lowest in data going back to
1963, figures from the Commerce Department showed today in
Washington. The median price fell to the lowest level in
more than six years.
Credit-default swaps on U.S. Treasuries climbed 1.7 basis
points, the biggest increase in more than three weeks, to 49.4,
according to data provider CMA. The Fed said Tuesday that slowing
inflation and sluggish growth may require further action.
The statement positioned the central bank to expand its
near-record $2.3 trillion balance sheet as soon as their November
meeting - just in time for a Santa Clause boost for the markets
Take a look at Chart 1, in this post-bubble credit collapse
everything is mean reverting from P/E ratios, to savings rates, to
debt/income ratios, to homeownership rates and the process is
going to take more time and extract more domestic demand growth
and pricing power out of the economy. We closed the 1930s with a
2% long bond yield, which makes perfect sense to us since the
typical spread between the 30-year and the overnight rate is
around 200 basis points. It won’t be a straight line, and based on
past long interest rate cycles, which can last up to 32 years, we
could be looking at a bottom roughly two years from now. So we
wouldn’t quibble with the view that the secular bull market in
bonds is in the mature stage. But it ain’t over yet.
As a matter of fact, things are so bad that I believe banks
will have a perverse incentive to actually walk away. Now wouldn’t
that be something??? Next, we take a look into the home builder
that makes more money doing distressed investing than it does
building and selling homes.
U.S. home prices dropped 3.3 percent in July from a year
earlier, the eighth consecutive
decline, as foreclosed properties flooded the market.
Prices fell 0.5 percent from June, the Federal Housing Finance
Agency in Washington said in a report today. Economists had
projected prices to fall 0.2 percent from the previous month,
based on the average of 15 estimates in a Bloomberg survey. The
agency revised the previously reported May-to-June decline to 1.2
percent from 0.3 percent.
Foreclosures are boosting the supply of available properties
and reducing prices, even as mortgage rates tumble to
record lows. The time it would take to clear the market of
homes for sale was
12.5 months in July, the highest in more than a decade of
data, according to the National Association of Realtors. Banks
seized a record 95,364 properties from delinquent borrowers in
August, according to RealtyTrac Inc., an Irvine, California-based
seller of housing data.
Microsoft just issued some ridiculously cheap debt. Investors
only asked to receive 0.875% in interest per year to lend money to
Mr. Softy for three years.
Econompic takes it a step even further... The chart below
shows that Microsoft issues debt almost as cheaply as the U.S.
government does, even for longer maturity bonds. Microsoft's
tie with those of Johnson & Johnson as having the lowest
coupons of any corporate debt on the market, at just 4.5%.
An appreciation of 20 percent in China's currency would cause
widespread bankruptcies in China's export sector, where firms
operate on thin margins, Chinese Premier Wen Jiabao said on
"The conditions for a major appreciation of the
renminbi do not exist," Wen said in a speech to U.S. businessmen
in New York. He said the appreciation of China's currency demanded
by U.S. lawmakers would not bring jobs back to the United States
because U.S. firms no longer make such labor-intensive products.
The Premier is in New York to get his ass kissed by Obama while
we pretend to get tough on Chinese currency. China has stopped
buying US Treasuries and, for the moment, Japan is filling the
gap - but how long will that last as Japan is pressured to apply
more stimulus at home?
Steven Thomma of McClatchy news asked Gibbs to
specify what he meant by an “enormous mount of time.”
“On the economy,” said Thomma, “you said earlier this is going
to take an ‘enormous amount of time.’ How long?”
“Well,” said Gibbs, “I think it’s going to take several
years from–I think getting through a recession as deep as
the one that we were faced with, the sheer amount of job loss, the
shock to the system, shock to our financial system, the change in
our housing market. We’re dealing with, in many ways, if you look
at what happened and what cascaded downward all at a certain
period of time, you’re dealing with sort of the perfect storm.”
If that's true, then Obama is toast in 2012. He can't win with
the economy still not "recovered" for most people.
Here are a few recent comments about the new economic reality:
"[New Jersey Governor] Christie spelled out the details of
his proposal Tuesday. They include: repealing an increase in
benefits approved years ago; eliminating automatic
cost-of-living adjustments; raising the retirement age to 65
from 60 in many cases; reducing pension payouts for many
future retirees; and requiring some employees to contribute
more to their pensions." -- Associated Press (Sept. 15)
"U.S. Home Prices Face Three-Year Drop as Inventory Surge
Looms" -- Bloomberg (Sept. 15)
"Atlanta Awash in Empty Offices Struggles to Recover From
Building Binge" -- Bloomberg (Sept. 14)
"The world economy faces a long, hard slog toward recovery
and could slide into deflation and financial instability if
leaders fail to deliver on promises of reform." -- Reuters
"Deflation seems to have the upper hand lately in the
debate among investors about inflation versus deflation." --
Marketwatch (Sept. 8)
"With the release of the August sales figures, one thing
is clear for car shoppers -- it's a buyer's market." --
Edmunds (Sept. 2)
"20 Funds to Guard Against Deflation" -- Smartmoney
"Dividend-Yield Signal Screams Deflation" -- Forbes
Last week, Japan intervened massively to stop its currency from
appreciating. It did so in a unilateral fashion and, immediately,
faced criticisms from Europe and the US.
Meanwhile, in a sharply-worded testimony to Congress, Treasury
Secretary Geithner provided lots of data to those that feel that
the US should have already labeled China a currency manipulator.
And while China has recently accelerated the rate of its managed
appreciation — 1% in the last week compared to just 1.6% since the
country declared great “flexibility” back in June — this is
proving insufficient to counter growing currency tensions.
These latest foreign exchange developments bring to the fore an
inconvenient reality. While not all industrial countries wish to
make it explicit, they are happy (indeed eager) to see their
currencies depreciate. They see this as helping them address the
extremely difficult challenges associated with a protracted period
of low growth, high unemployment, and limited policy
The list of industrial countries wishing to depreciate their
currencies is not matched by a list of emerging economies happy to
let their currencies appreciate significantly. As a result,
foreign exchange tensions are mounting, and the price of gold has
been driven to a new record level.
This week will shed light on whether policymakers can do
anything to deal with these two issues. If they continue to
stumble and hesitate, what has been simmering may well come to a
full boil in the next few months.
“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>
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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