FedUpUSA

Archive for June, 2010

By Karl Denninger

ADP’s report blew, to be blunt.  +13,000 private employment, losses in small business (duh.)

This was a surprise?  Apparently for the futures it was, as they dove by roughly 8 points in the SPX (0.8%) instantly on release.

CNBS has been running nonsense all morning trying to find a silver lining and a way to keep the party going, likely in fear of this:

And that’s just a start.

Of course we know that there will be every attempt made to void that pattern. But here’s the problem – what arrows are left in the quiver?

Policy rates are zero, QE hasn’t done much of anything if anything at all (other than creating more and new problems) and now we’re debating “what do we do about the fact that employment has refused to respond?”

I am constantly amazed how so-called “mainstream” commentators refuse to have a debate on the actual issue – that is, the fact that the government and Fed have done this:

And then after striking the lighter they’re freaking out about how to stop the combustion that results.

Uh, gentlemen.  A proper debate would center on why you were so focking stupid as to pour the gasoline on yourself!

We blow a housing bubble, then cry about the bursting of it instead of locking up those engaged in the fraudulent activities that led to it.

Just like we blew an Internet Bubble, but those who were involved in pumping companies with no possible chance of ever making an honest profit walk off into the sunset with millions in investor funds (and the investors wind up with nothing.)

Certainly individual greed had a lot to do with both problems.  But also certainly intentional and fraudulent misrepresentation, including most specifically that by government officials and regulators, was a major part of it.

Indeed the oil in the gulf has as a major cause not just private corporate greed (BP) but in addition willful and intentional malfeasance by government regulators.  Specifically, it is now clear from the record that the government’s regulators knew of the casing design changes and that legal requirements for certification of safety systems were not complied with, yet they did nothing.

If it’s against the law to rob banks but when you do so the government refuses to arrest you, then you will be incented to rob more and more banks! 

This is not hard to figure out.

We’ve spent 20+ years deluding ourselves, as I noted Monday on Blogtalk.  We’ve also spent 20+ years forgetting that the Declaration of Independence contains all of the ingredients to fix all of this crap – if we demand that it be enforced.

But we have a problem with doing that, and simply put, it means we have to stop being leaches.  We like the idea of being able to force the costs of our idiocy on other people.  We refuse to drill for oil off our coasts in the general sense, and demand that other, little people take the risk so we can drive our cars and our leaders can fly to places like Toronto for the G20 and G8.

We like the idea of “owning” houses, so we countenance and go forward with mass delusional behavior, including lying about income, claiming that we “own” a house while being forced to pay “property taxes” amounting to the entire value of the house again over the time of the mortgage, permitting the creation of fraudulent artifices called “Securitizations” where the representations and warranties in the prospectuses are routinely violated and the creation of naked shorts against these instruments with no collateral being posted at all – that is, a bet without ability to pay.

Reality is this folks: A huge percentage of what we have claimed is “economic activity” has in fact been a scam.  It has been nothing more than pulling forward demand from tomorrow.  The facts are what they are, and whether we like it or not economics tends to follow the laws of thermodynamics – that is, you can’t win and in fact you can’t break even – there is always loss. 

Mass-delusions happen because we allow them to.  We trade individualism and personal responsibility for a government tit.  We believe we can suckle on that tit while someone else will refill it. 

The facts, however, don’t care how deluded you are. 

And in fact that government tit always must get its milk from you, and by recycling it through the government, the principles of thermodynamics guarantee you will get LESS.

The end of this rope is now in sight.

One month of poor employment numbers is not a trend, but two are dangerously close to one.  One failed auction is not a trend but multiple ones are a warning.

We’re now seeing those rumblings, and the fact remains that on-balance all the screwing around we’ve done has solved exactly nothing, exactly as I and a few others said would occur back in 2007.

The medicine in the spoon is not only still there, but the spoon has turned into a gallon jug and if we keep refusing to chug it, we will eventually die of systemic poisoning from the medicine itself – and if we don’t, we’ll die from the disease.

The Market-Ticker

By Karl Denninger

By Paul Vigna

Just in case you’re still hung over from the weekend, the Dallas Fed has a bucket of cold water for you. The regional bank came out with its June manufacturing survey this morning, and as bad as the numbers are, and they are bad, the comments are even worse.

The general business activity index fell to negative 4 from 2.9, the company outlook index fell to negative 2.8 from 19.6. The production index fell to negative 1.9 from 20.8 in May; capacity utilization fell to positive 2.7 from 18.7 in May. New orders fell to negative 8.2 from 15.8 in May. Go all the way down the line, the numbers are all down from a month ago. But even more so than the numbers, the comments from businesses surveyed are the real tell here, and it seems to me the Fed wouldn’t have any reason to cherry pick especially bad comments, so this is probably a pretty good take on where things stand.

You really need to read the whole thing to get the total picture:

Comments from Survey Respondents
These comments were selected from respondents’ completed surveys and have been edited for publication.

Wood Product Manufacturing
After skyrocketing in February through April, the North American lumber market has collapsed, indicative of the slowdown at U.S. job sites. Small and medium businesses here in “the trenches” are hurting every bit as much as last year. Much of the downturn is a result of the stimulus ending and the typical midyear slowdown that occurs in the building and construction industry.

Paper Manufacturing
A third price increase on linerboard is a possibility within the next couple of months. If this occurs, it will cause a major uproar with our customers. They will all be going out for bids, causing margins to erode.

Chemical Manufacturing
We are not optimistic about the next couple years.  There are too many negative factors in the world of finance right now.

Plastics and Rubber Products Manufacturing
As a business, we are just trying to hold on until the upturn comes.

The availability of skilled technicians and toolmakers is scarce, particularly in the 20- to 40-year-old age group.

Nonmetallic Mineral Product Manufacturing
Housing activity has had some pullback with the expiration of the home-buyer tax credit. The recovery will be lengthy and slow in coming, and it will be subject to improved employment levels and an upturn in the credit markets.

Fabricated Metal Product Manufacturing
After two consecutive months of increased activity, we have seen a dramatic drop in new business, with no backlog for July and beyond. We are having considerable trouble with our bank; although we are not in default and are making all payments, the bank has not executed a loan facility renewal after almost 90 days past our renewal date. There is a high degree of uncertainty in the marketplace, with owners and their designated contractors and design engineers seeing a dramatic reluctance to initiate planned projects, both maintenance and capital expenditure.

We have yet to see any evidence in Texas or across the country of an economic recovery.

Overall business has improved. There seems to be more onshoring of manufacturing due to risk control, inventory management and short lead times. Increased business expenses created by state tax increases are causing pressure on cost competitiveness. It is still very challenging to obtain financing for capital expenditure and growth.

Economic activity remains tenuous for building materials manufacturers.  Financing and demand for capital goods will determine the strength of the recovery as it relates to construction.

Machinery Manufacturing
We are quite concerned about the trends in general business activity. It feels like we are slowing down, not speeding up. I don’t see much that is encouraging at this point.

Our outlook for the next six months has improved due to our company broadening its product offerings, not necessarily due to improved economic conditions.

Demand for capital goods in the food service industry remains at a very low level.

Computer and Electronic Product Manufacturing
Right now business looks steady, but we’re stepping lightly.

Furniture and Related Product Manufacturing
Business has worsened this month. Retail activity has gone down, damaging the hope for improvement among retailers.

Beverage and Tobacco Product Manufacturing
2009 was great, but the wheels came off a little bit in the first quarter of 2010. The second quarter has been better, but not great.

MarketTalk

The economic crisis has ushered in the end of a generation long bull market.  Most average investors ignore the fact that heavy market volatility is a sign of an unhealthy stock market.  The stock market since the lows reached in 2009 has been on an unstoppable bull run.  Yet the real economy where most Americans work and spend money has not reflected any of this irrational exuberance.  The S&P 500 has rallied 53 percent from the lows reached in early 2009 and that is including the current retracement back.  On Tuesday the stock market pulled back on data showing consumer confidence plunging from what analysts had expected.  Outside of Wall Street the economy is walking on eggshells.

If we look at S&P 500 data we find that we have entered into a new era:

The above chart highlights milestones for the S&P 500 dating back to 1968.  For the S&P 500 to double from 100 to 200, it took a slow 17 years.  From 200 to 400 it took 6 years, an incredibly quick jump.  Another 6 years after that and the S&P 500 was riding high at 800.  From 1997 to 2007 the S&P 500 went from 800 to 1,576 in the intraday high that is now far in the past.  It almost doubled yet again in a 10 year horizon.  Yet that trend has been broken.  The S&P 500 is now back to 1,041 and has pulled back to levels seen in 1998.  Does anyone really see the S&P 500 going to 2,000 any time soon?

“The stock market needs to reflect the underlying health and productivity of the overall economy and not simply the gambling penchant of Wall Street banks.”

Most of America is dealing with the new austerity that is being thrust on them from an unforgiving economy and a government that seems to be preoccupied with helping out the financial industry before setting things right with the average worker.  In other words, the middle class is being thrown to the wolves in this crisis.  The government is serving the interest of big money at the detriment of the middle class.

If we look at the volatility of the S&P 500 over the past 22 years we’ll notice two different stories.  From 1988 to 2000, the stock market enjoyed a once in a lifetime bull run.  There were virtually no negative years and some incredible year over year gains.  Keep in mind that we are looking at a 12 year timeframe on a tiny chart but this is over a decade of mental conditioning here.  If we look from 2000 to our present day, the massive amount of volatility has sent the S&P 500 to levels seen in 1998:

2008 was the worst stock market year since the Great Depression.  That is how bad that one year turned out for investors.  This large amount of volatility simply reflects a weak real economy and the recent stock market run to the peak of the mountain was super charged by taxpayer money going into large investment banks who in return went into the stock market and gambled your hard earned money.  Clearly it hasn’t done much for consumer confidence, aiding in the foreclosure crisis, or bringing jobs back.  What then did all this money really accomplish?

If we look at the VIX which looks at option trading volume and is a good sign of volatility we also see this recent stock market reshuffling:

What we can gather from all this volatility is a new paradigm has arrived.  Most popular financial books that hype compound interest always focus on a convenient 7 to 10 percent annualized gain in the stock market.  That may have been the case from 1968 to 2000 but that isn’t the case anymore.  What are you going to invest in when U.S. Treasuries are barely offering any interest and bank accounts are offering rates of 0.01 percent on savings accounts?  Your mattress would rival some of these rates.

The stock market right now is one large casino.  No real reform has taken place and that is why we see no real changes in the economy yet trillions of dollars funneled into a financial abyss.  Someone got this money but clearly it wasn’t the middle class.  The public was told that money was going to go to shore up the housing market (didn’t happen) and to keep lending to the public going (didn’t happen).  So what did happen was that big investment banks used taxpayer money and gambled to bolster their own profits.  That was basically the smoke and mirrors campaign that we have gone through.

The middle class is largely a casualty of this all.  9 out of the top 10 jobs in this country are in low paying service sector work.  We hear this rhetoric about a double dip but the middle and working class never got out of the first dip to begin with.  Who is this double dip for?  Wall Street gamblers who have funneled taxpayer money into the casino?  Must be nice for their 53 percent rally but sadly none of that is reflected in the real economy.  If we want to be happy about gambling why not talk about the person who just won the lottery last night.   Wall Street certainly won the lottery here at the expense of the taxpayers.  The collapse of consumer confidence is merely a reflection of what most of us already know.  The real economy has never recovered.

This is the end of a generational bull run just like the 1920s came crashing down with the Great Depression.  Unlike that time, we have allowed the banks and Wall Street to continue to pollute our real economy with their gambling schemes.  Can you believe that no real reform has taken place?  No wonder why average Americans are displeased with both political parties and are furious at Wall Street.

My Budget360

By Karl Denninger

By Karl Denninger