The Blog "All truth passes through three
stages:
First, it is ridiculed.
Second,
it is violently opposed.
Third, it is accepted as being self-evident." Arthur
Schopenhauer, (1788 - 1860)
The federal government generates
most of the data and statistics used to measure and analyze the
economy. This is unfortunate, because politicians are in the
business of convincing the public that conditions are better than seem
to be in order to stay in office. As the country began its decline,
about 40 years ago (see below); the government had greater and greater
incentives to fudge the numbers, so the amount of deception continued
to grow.
The statistics that they are most concerned about are unemployment,
inflation, and GDP; but unemployment is definitely the most critical.
When the government is forced to acknowledge a high degree of unemployment, the
people grow very angry and restless, and are apt to be in the mood to
"throw the bums out".
The web site Zero Hedge has apparently uncovered a new effort to
grossly understate the current unemployment rate. By examining reports
showing what the Treasury is actually paying out in unemployment
benefits, Zero
Hedge estimates that unemployment may be understated by as much as 32%!
This would put the headline unemployment rate at about 13.2%, instead
of 10%, and the broadest measure, U-6, at 22.4%, instead
of 17%!
The fallout from the real estate bubble is making the matter even
worse. Not only have Trillions of Dollars of precious capital been trapped in unneeded
residential and commercial real estate, but the inability to sell houses has
made the workforce much more immobile than any time since WWII which
will delay the recovery even longer. "Job
Growth Erodes as Housing Bust Pushes Mobility to Record Low"
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When
Did the Decline
Really Begin? 21
September 2009
Most people think that our current economic "troubles" began in 2008.
Some would point to the stock market top in October 2007, but a few
would
recognize that the overall market really topped in 2000, because the
NASDAQ did not come close to making a new high in 2007.
The latest data from the Census Bureau certainly supports a start date
long before 2008. Their analysis, that was shocking to some, found that
real median
household income in 2008 ($50,303) was LOWER than it was in
1998 ($51,295)! The
typical American household made less than the typical household did a
decade ago! Census
Bureau Annual Report (see Table A-1)
"In the four
decades that the Census Bureau has been tracking household income, there has never before been a
full decade in which median income failed to rise.
(The previous record was seven years, ending in 1985.) Other Census
data suggest that it also never happened between the late 1940s and the
late 1960s. So it
doesn’t seem to have happened since at least the 1930s.
And the streak
probably
won’t end in 2009, either. Unemployment has been rising all
year,
which is a strong sign income will fall.
What’s
going on here? It’s a combination of two trends. One, economic growth in the
current decade has been slower than in any decade since before World
War II. Two,
inequality has risen sharply, so much of the bounty from our growth has
gone to a relatively small slice of the population." A
Decade with No Income Gain
However, examining the Annual Report in more detail, using Table A-2,
shows that the median
real earnings for men peaked in 1973 ($48,452),
and they were actually down to $46,367 in 2008.
This means that the
real (inflation-adjusted) earnings of the typical American man have
declined 4.3% over the last 35 years!
During this same period, the median
real earnings of women INCREASED
30%! This huge difference in earnings growth seems to be
due primarily
to the number of women who have chosen jobs in education, government,
and medical care; which have shown the most income growth as the
private-sector has gone into decline. This disparity also
provides a hint as to how far back the national decline really
began! Census
Bureau Annual Report (see Table A-2) Census
Bureau Slide Show
A more thorough analysis of existing data finds that the decline
actually started about 1966, and by 1973, the country had entered an
unmistakable downtrend. There have been a lot of deceptive
ups and downs since then, but the long-term trend seems clear.
Look at how government employment has been replacing private-sector
employment.
After the immediate post WWII boom had faded, the
10-year rate of change of private-sector job growth hit its peak in
1973,
along with real median income for men. It's just about to turn negative!
Notice how payroll
growth has declined in every decade since the 1960's.
The current decade is the weakest of the bunch, by far!
The next graph tells the tale of the private-sector employment decline.
Capacity utilization, the percentage use of the country's manufacturing
base, was 90% in 1967,
but it has declined steadily, and has never come
close to 90% again since 1973. Today
it stands at less than 70%!
As the long decline set in, governments, businesses, and households
began their reliance on more and more debt to make up for their losses
in real income. From 1966 to 1973, households kept their debt, as a
percent
of their disposable income, well below 70%. Since then, it
has doubled!
As real income fell, and more and more debt was used to make up the
difference, the personal savings rate declined so much that it went
negative in 2005 right at the peak of the real
estate bubble.
A low rate leaves
households with no cash cushion during economic hard
times. Since then, it has climbed back up to 6% as people try
to adjust to the new economic reality.
Even with all of the debt consumers piled up over the last 40 years, to
maintain their spending, the rate of change of retail sales peaked way
back in 1973, and hasn't come close to the 16%
registered, at that time, in recent years. In 2008,
retail sales collapsed to the highest negative rate of change in the
last 60
years!
The massive downside
momentum shown by all of this data began to take hold 35-40 years ago,
and it will require major changes, over many years, to begin to reverse
this decline!
Why does a great nation fall into decline?
In this case, there are two reasons. Socialism has
corrupted the character of the American people. It has changed us from
self-reliant and independent to dependent and helpless. In addition,
the Federal Reserve
and the fractional-reserve banking system has corrupted the money of
the American people. As the money steadily loses its value, it has
changed us from savers, investors, and manufacturers to borrowers,
speculators, and importers.
Historians will most likely recognize that our fatal mistake, and our
ultimate folly, was in re-directing Trillions of Dollars of needed
investment from our manufacturing base into residential real estate.
Away from productive investment and into consumption.
There is no reason to believe that this decline will be reversed until
the things that caused it are changed.
The
P/E Ratio Explodes Upward! 17
September 2009
The P/E ratio is calculated by taking the price of a stock and dividing
it by its earnings. The P/E ratio for a stock index, like the
S&P 500,
can also be computed by using the index's price level divided by the
earnings
for all the stocks in the index.
A high P/E shows that a stock or index is over valued, a low P/E
indicates that bargains are to be had. The ratio rises when prices
rise,
and/or earnings fall. There is never a dispute over the price of
a stock or index, at any given point in time, but there is often
disagreement on how to quantify earnings. When the P/E is high,
it is difficult to make a bullish case, so bulls play games with the
earnings to try to make them look as high as possible, in order to
lower
the P/E ratio.
Sometimes trailings earnings are used for the prior five or ten years,
instead of current earnings, but the real controversy is between
"operating" earnings, and
"reported" earnings.
"Operating earnings exclude
write-offs, while reported earnings include write-offs. That is the
only difference, but it's a difference that is getting
much more important. As recently as the early 1990s, operating and
reported earnings were virtually the same. But then we entered the
greatest financial mania of all time, and the earnings numbers diverged.
There were so many
write-offs by companies making unwise investments and then undoing them
that operating earnings grew much faster than reported earnings. The
write-offs that had been sporadic and unusual became common for many
companies.
Using operating earnings is
now like playing in a golf tournament that doesn't count any penalty
strokes for hitting the ball into a water hazard or out of bounds." Barons
Standard & Poors shows that the second quarter P/E, using
operating earnings, was 26.24, but using reported earnings, it hit an
all-time high of 139.03! They estimate that the third
quarter numbers
will be
about the same. S&P
Spreadsheet
Bulls try to make the case that the P/E of 26.24, using operating
earnings, shows that the market is "undervalued". The
following
tables clearly demonstrate that a P/E of 26 is near the levels
of the great 1929 and 1966 Bull Market highs, when there was no
difference between operating and reported earnings. The S&P is
not truly under valued until the P/E drops below 8!
What the bulls really want everyone to ignore is the fact that the more accurate P/E,
using as reported earnings, has exploded to an all-time high of 139.03!
Four times as high as in 1929, almost six times as high as 1966, and
three times as high as in 2000! This should
provide a hint of
how much downside risk now exists.
Oh yes, the P/E on the NASDAQ did spike to about 250, in 2000, versus
only 42.87 on the S&P 500. That extreme P/E, on the NASDAQ,
lead
to a 78% collapse between 2000 and 2002, while the lower P/E on the
S&P 500 "only" lead to a 50% plunge; demonstrating how
an
extremely
high P/E eventually leads to extremely large losses. Now that the P/E
on the
S&P 500 has exceeded its level in 2000, by a factor of 3 to 1,
due to collapsing earnings; the
next leg down in the bear market has
more than the necessary and sufficient conditions to begin.
In other words, the Bear Market rally, since March, has not been a sign
that things are getting better, it merely served to put the market in
the perfect position for another major decline.
Some believe that if they select sectors or individual stocks with low
P/E
ratios, they will be protected, if and when a major collapse begins.
They could be right, but it is highly unlikely; a plunge in the major
averages should create so much downward pull that it will take
everything down with it.
This is also true of foreign stock markets. They may be acting as
temporary lifeboats near the ship that is taking on water, i.e the U.S.
market, but when the ship finally goes down, the undertow will probably
suck them under, too!
P.S. The Dividend
Yield on the S&P 500 is currently 2.05%, much
lower
than at the 1929 and 1966 Bull Market tops, confirming the message of
the P/E ratio.
Market technicians follow many measures of sentiment with great
interest. The
sentiment of traders and investors towards a specific
market is the most important indicator, so we pay very
close attention
to sentiment measures like the Daily
Sentiment Index (DSI) as applied
to the gold market, the bond market, the specific commodity markets,
each
foreign currency market, and, of course, the stock market.
However, the stock market is also
often a good proxy for the public mood toward the economy, and the
prospects for the country, so stock market sentiment can apply to
issues
beyond this specific market.
As expected, the Daily Sentiment Index, shown in the following
graph, registered only 2%
Bulls at the stock market bottom in March,
and
since then has pushed to 89%
Bulls which now exceeds the number of
Bulls at the October 2007 all-time highs! Therefore,
traders are wildly
optimistic about further gains in the stock market, in part, because
they believe that the U.S. is coming out of the recession, and will
easily solve the problems that it now faces, but, primarily,
because rising
prices make people Bullish, if they ignore everything
else.
The second type of sentiment is the so-called "consumer confidence"
indexes which attempt to
measure consumer attitudes toward spending money, job
security, if
the country is on the right track, as well as many other similar
metrics.
The Rasmussen
Consumer Index registered its all time high of
127.0
on 06 January 2004, but more recently hit a high water
mark of 89.5 in
January 2008. From there it declined into its all-time low of 54.7, on
10 March 2009. Like the DSI, the Rasmussen CI has climbed
off of its
March low, and recently
hit 80.0 in mid-August, but it has not equaled
its
previous levels of optimism. This tells us that the average consumer is
not nearly as optimistic about his economic situation, as the
typical stock market investor is about
the stock market, due to the current
Bear Market
rally.
The third type of sentiment index is the Presidential Approval Index
(PAI).
The country's attitude toward the President is the best
indication of the national mood. It represents
how people feel
about the state of the nation, and they express that as their
feelings about the President whether or not he deserves the blame or
the credit for how things are going.
Last year's election was unprecedented in many ways. Obama had the
total and unwavering support of the mainstream media, as well as the
usual liberal institutions, so he was able to run on the theme of "Hope
and Change" without defining what he intended to do in any specific
way.
Since many of his followers treated him as some kind of Messiah, market technicians could
naturally expect that his PAI would remain
very
high unless and until conditions got very bad.
After the election, with the mainstream media continuing to play
cheerleader, and with the difficulty of criticizing the President
without being labeled a racist; it was reasonable to assume that
Obama's PAI would keep climbing at least until the Bear Market rally
ended.
However, 3-4 weeks after election, far left Bush hater James
Howard Kunstler began to express some profound
buyer's remorse. The evil Bush had started
meaningless wars in
Iraq and Afghanistan, had pushed through the Patriot Act,
and had allowed his Wall Street appointees to bailout their
buddies. He was finally gone, but Obama was NOT reversing any of these
policies! In fact, his bailouts were even more ridiculous. As time wore
on, Kunstler became
more and more disillusioned
by the lack of positive change, but was he representative
of the
country as a whole?
The following graph of the Rasmussen
Presidential Approval Index shows
that Kunstler was indeed the canary in the coal mine, because something
completely unexpected was happening! Even with the
cult-of-personality
that assisted his victory, the day after the election the PAI only
reached +8. From there, "Hope" pushed it up dramatically to +30, on 22
January. However, even after one of the most dramatic Bear
Market
rallies in history, the PAI
has continued to decline from this high
water mark. With the
DSI on
the stock market sitting at a new high of 89%, Obama's PAI is now at a
new low of -14! That is an unbelievable divergence!
It must be remembered that this collapse
on the PAI of 44 points (+30
to -14) has taken place even as the mainstream media continue lockstep
support for this President and most criticism on alternative outlets is
still very muted in fear being labeled as racist. Many pollsters say
that the current
collapse in the PAI is the most
dramatic in history! What happened
to Hope and Change? Can you imagine what may happen to the national
mood, as expressed by the PAI, if and when things turn really bad, and
the self-censorship of Presidential criticism ends?
A similar divergence between the DSI, on the stock market, and the PAI
occurred between 2004 and 2007, when Bush was in office. The DSI
followed the stock market up to 88% at the October 2007 highs, even as
Bush's PAI plunged. That divergence ultimately resolved
itself in favor
of the PAI, with the start of the Bear Market, and the current
divergence will
most likely do the same, with a second leg down beginning soon.
No matter which side of the political barricades you are on, this data
shows a tsunami of
unacknowledged negative mood running through the
nation that will
profoundly impact our businesses, our investments, our culture, our
freedom, and our political system. When you see a wave of this size, it
is time to take action.
My good friend, Curt, lives on a volcano in the middle of the Pacific
Ocean known as Maui. He tells me that when they issue a tsunami
warning, everyone
runs for higher ground. That seems like good advice
at this point!
The
FDIC is Broke! 19 August 2009
Last week, the FDIC had about $641 million in its insurance pool. On
Friday, the 14th, they liquidated five banks for a total cost of $3,674
million. They're out of money!
I never thought this would happen this fast! 77 banks have failed so
far this year, and hundreds more are waiting to be shut
down. Nothing will appear to be different, for now. They will
just go quietly to Congress for a bailout. However, down the
road, when things get really tough, they will likely apply for more
bailouts that may not be forthcoming.
Consumer credit is collapsing at its fastest pace in 50 years. In the
long run, this is very good news as people pay down their debt. In the
short run, it is going to create a stiff headwind for any recovery.
In
a recent article, two economists, Barry Eichengreen and Kevin O'Rourke,
remind their readers that the Great Depression was a worldwide
phenomena, and that the current decline should be looked at in the same
way, instead of just focusing on the U.S.
All of their graphs track the changes after the peaks in worldwide
industrial production which occurred in June 1929, during the Great
Depression, and April 2008, in the current decline, rather than stock
market peaks.
Notice that the graph of world industrial output shows the current
output in red, with the last two months updated in green, versus the
blue line representing output during the Great Depression. At this
point, world industrial output is right in line with what happened
during the 1930's!
Although U.S. stock declines have not yet exceeded those of
the 1930's, the composite action of the world stock markets shows a decline much more
severe than during the Great Depression.
World trade is
falling much faster than during the Great Depression.
Other graphs in the article show: "German and
British industrial output are closely tracking their rate of fall in
the 1930s, while Italy and France are doing much worse.
The North
Americans (US & Canada) continue to see their industrial output
fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn
around.
Japan's industrial
output in February was 25 percentage points lower than at the
equivalent stage in the Great Depression. There was however a sharp
rebound in March."
"To sum up, globally
we are tracking or doing even worse than the Great
Depression, whether the metric is industrial production,
exports or
equity valuations. Focusing on the US causes one to minimize this
alarming fact. The "Great Recession" label may turn out to be too
optimistic. This is
a Depression-sized event." A
Tale of Two Depressions
Even though the authors demonstrate that worldwide conditions are
currently worse than in the Great Depression, they believe that central
banks and federal governments are responding better than they did back
then. I do NOT share that opinion!
Most measures of the U.S. economy are faring better than in
other
parts of the world, but many are already at their worst levels since
the Great Depression. If there is a second leg down, they should
easily exceed the measures of the 1930's.
Cocooning
and Crime 19 June 2009
Reports from retailers paint a fascinating picture of how consumers are
reacting to the Great Recession. Most purchases are centering on
the home, and keeping their vehicles running. However, many humans
continue to spend more lavishly on their pets than they do on
themselves!
People clearly see that they need to stay at home and cut
spending
drastically on vacations and travel, as well as entertainment in their
own city. They are making their homes as comfortable as possible
through home-improvement projects, and by purchasing things like
high-end TVs to allow them to enjoy movies and programs at home so they
don't have to go out. Even sales of popcorn poppers and popcorn are up.
More money is being spent on dining at home, and consumers are trading
down to lower grades of meat, and eating more carbohydrates in
lieu of protein. Some are growing vegetables and herbs to save money,
and many are buying more vitamins in a move to stay healthy.
Sales of alcohol and prescription drugs are rising in an apparent
attempt
to cope with rising stress, although there seems to be a shift
to drinking at home rather than in bars.
This move to "Cocooning"
does not bode well for restaurants, and other
leisure and travel industries, which is confirmed by very weak sales of
luggage. The
Recession; Walmart Style
"Most people do
not commit crimes because they have controls in their lives which mean
that the costs of crime far outweigh the benefits of crime. Such
controls include attachment to family (e.g., marriage and children),
commitment to a career, active involvement in a community and
reputation, and belief in rules and discipline. Certain groups, i.e.,
the young, the working class, the underclass, etc. are less likely to
have such controls in their lives and the benefits of crime clearly
outweigh the risks of being caught and punished." "Sociology",
by Steve Chapman
With more and more of people being forced into a lower economic strata
or worrying about their family's survival rather than "career
commitment" or personal reputation, we can expect to see more and more
people turning to crime as an acceptable alternative. The security
business that centers on protecting the home should be a big
beneficiary of these trends!
More
on Deflation 15 June 2009
There is still a great deal of confusion and controversy about
inflationary versus deflationary forces in the economy. Some prices are
rising, at least temporarily, but the focus needs to be on the total
amount of currency and credit, i.e. Dollars, in the system. As
mentioned in previous articles, the data will prove that the issue has
nothing to do with "printing money", because there is very little of
that going on.
The graph below shows that "Currency in Circulation" grew from $792
Billion at the end of 2007 to $853 Billion at the end of 2008;
an
increase of 7.7%. Hardly the stuff of legends that created the
"wheelbarrows full of money" which plagued the Wiemar Republic.
Data from the FED's 1Q
2009 Flow of Funds Report
page 84, Table L.204 estimates that the Currency in Circulation will
only grow a minuscule $20 Billion in 2009! This is not going
to
lead to hyperinflation!
Regardless of all of the talk about "printing money", what the
government is actually trying to do is to create Trillions of dollars
of new credit to offset the credit that is being destroyed. How well
are they doing? The 1Q 2009 Flow
of Funds Report shows a continuing credit collapse
of unprecedented proportions! "First and
foremost, the Fed's
numbers demonstrate, beyond a shadow of a doubt, that the credit market
meltdown, which struck with full force after the Lehman Brothers
failure last September, actually got a lot worse in the first quarter
of this year.
This directly
contradicts
Washington's thesis that the government's TARP program and the Fed's
massive rescue efforts began to have an impact early in the year.
In reality, the credit market shutdown
actually gained tremendous momentum in the first quarter.
And although it's natural to expect some temporary stabilization from
the government's massive interventions, the first quarter was so bad,
it's impossible for me to imagine any scenario in which the crisis
could be declared over." Martin
Weiss
We witnessed one
of the biggest
collapses of all time in "open market paper" — mostly
short-term
credit provided to finance mortgages, auto loans, and other businesses.
Instead of growing as it had in almost every prior quarter in history,
it collapsed at the annual rate of $662.5 billion. (See line 2.)
Banks lending went
into the
toilet. Even in the fourth quarter, when the meltdown struck, banks
were still growing their loan portfolios at an annual pace of $839.7
billion. But in the first quarter, they did far more than just cut back
on new lending. They actually took in loan repayments (or called in
existing loans) at a much faster pace than they extended new ones! They
literally pulled out of the credit markets at the astonishing pace of
$856.4 billion per year, their biggest cutback of all time (line 7).
Meanwhile, non
bank lenders (line 8) pulled out at the annual rate of $468 billion,
also the worst on record.
Mortgage lenders
(line 9) pulled out for a third straight month. (Their worst on record
was in the prior quarter.)
And consumers
(line 10) were shoved out of the market for credit at the annual pace
of $90.7 billion, the worst on record.
The ONLY major
player still
borrowing money in big amounts was the United States Treasury
Department (line 3), sopping up $1,442.8 billion of the credit
available — and leaving LESS than nothing for the private
sector
as a whole.
Excluding public sector borrowing (by the Treasury, government
agencies, states, and municipalities), private sector credit was
reduced at a mind boggling pace of $1,851.2 billion per year!
And even if you include all the government borrowing, the overall debt
pyramid in America shrunk at an annual rate of $255.3 billion (line 1)!
The first
quarter brought the greatest credit collapse of all time!
"With ALL of these
figures, we're not talking about a decline in new credit being
provided, which would be bad enough. We're
talking about a collapse that's so deep and pervasive, it actually
wipes out 100 percent of the new credit and brings about a net
reduction in the credit outstanding — a
veritable dismantling of America's once-immutable debt pyramid!
For the long-term
health of our
country, less debt is not a bad thing. But for 2009 and the years
ahead, it's likely to be traumatic" Martin
Weiss
What is the result of the credit collapse so far? The FED reports that
the net worth of households + non-profits has declined $13.87 TRILLION
since the top! Table
R.100 This does not include losses of at least $3 Trillion to
businesses.
The bottom line is this:
1. The economy does not suffer this kind of "body blow", hit bottom,
and bounce off the bottom into an energetic recovery. If we have
already seen the low, it could take years to start a real recovery.
Japan hit its high in 1989, and has had several false starts but no
recovery after 20 years; so far!
2. Virtually all government actions since the decline began in earnest
last year have made matters worse. The current administration has
elevated bad judgment to an art form. There seem to be no
limits
to what they will do to cripple the economy in the name of fixing it!
3. The forecast remains in place for a second, and more severe leg in
the credit collapse and economic contraction to begin, probably before
year end. There is nothing that would force a change in this outlook at
this time!
Forewarned is forearmed.
Crude
Oil Blowoff? 12 June 2008
If you've never watched a blowoff
in the commodity markets, it looks something like this:
Tops in commodities are usually propelled by fear, not by the greed
that builds stock market tops, so the final move goes vertical. After
the top is reached, prices crash back to the basing area.
If crude oil follows this pattern, the final high projects to between
$160 and $189 per barrel, which is 17-38% higher than today's price;
or roughly $4.68 to $5.52 per gallon of gasoline.
If crude oil prices do follow
this pattern, it's going to be a very
expensive summer, but the post blowoff collapse could bring crude back
to $50-79 per barrel, which could take gasoline down to around $2.00
per gallon. Is that possible? It
has happened before!
Where's
The Plunge? 02 June 2008
Some
people claim that the credit crisis is over and point to the fact that
the stock market hasn't plunged, yet; to prove their point. Do you want
to see the first plunge from the effects of the credit crisis?
The Economist is out with an article called "Dropping
a Brick" commenting on the graph shown
above. It seems that housing prices have already fallen more in the
last 12 months than they ever did in any previous 12-month period,
including 1932; the bottom
of the great Depression!
"And things are even worse
than they look. In the deflationary 1930s, America's
general price level was falling, so in real terms home prices declined
much less than they did nominally. Today inflation is running at a
brisk pace, so property prices have fallen by a staggering 18% in real
terms over the past year. In nominal terms, the average home is now
worth 16% less than at the peak in 2006, and the large overhang of
unsold houses suggests that prices have further to fall. If so, this
housing bust could well see a bigger cumulative fall in prices than the
26% real drop over the five years to 1933. Most people would call that
a pretty destabilizing contraction."
And,
keep in mind that the current recession is still in its early stages!
On another front, the FDIC is gearing up for rising bank failures. They
are calling retired staffers and asking them to come back to work,
because they see big trouble in the near future!
