FedUpUSA

Archive for the ‘Depression’ Category

Global Recession, Right Here, Right Now: Japan’s Capital Spending Plummets; Eurozone PMI, UK PMI, US ISM ex-Inventory, China Exports in Contraction

It’s time to stop debating whether or not the US or Europe is headed into recession. The facts show the entire global economy is in recession.

Global Recession Supporting Data-Points

• Euro zone’s manufacturing purchasing managers’ index fell to a two-year low of 49.0 in August, down from a preliminary reading of 49.7. (Business Insider)
• PMI’s contractions in Ireland, France, Italy, Spain and Greece. (Business Insider)
• Germany’s manufacturing PMI slowed to its lowest level since September 2009, slumping to 50.9, well below an initial estimate of 52.0. (Business Insider)
• US Manufacturing ISM ex-inventory Growth in contraction (Mish)
• Japan’s PMI fell at three-month low (Financial Times)
• PMI Readings in Switzerland, Sweden Drop (Financial Times)
• British manufacturing PMI falls 49, a 26-month low, in contraction (MarketWatch)
• Germany private consumption fell for first time since Q4 2009, Manufacturing growth slowest in 23 months (Reuters)
• Japan Capital Spending Plummets 7.8% In Q2, Expectations were 1% Increase (RTT)
• US Construction Declines 3.5% vs. Same period in 2010 (US Census Bureau)
• China exports to US contract, PMI barely above contraction (Reuters)
• Container traffic at Port of Long Beach drops 3.17% smack in face of normal Christmas season ramp-up (Bloomberg)
• Canada GDP unexpectedly declines led by a 2.1% drop in exports(Bloomberg)
• Brazil Unexpectedly cuts interest rates .5% to combat recession.62 of 62 Analysts Miss Call on rate cut (Mish)
• Taiwan’s PMI dropped to 45.2 in August, the lowest reading since January 2009 (Reuters)
• German economy grew just 0.1 percent in the second quarter (Reuters)
• Switzerland, economy grew at its slowest pace since 2009, as a record strong Swiss franc also bites into exports. (Reuters)
• Retail Giant in Australia Warns of Massive Price Deflation and Falling Sales, “Hardest Christmas in Retailer Lives” Coming Up (Mish)
• US Zero Jobs Growth, Unemployment Rate Flat at 9.1%; Charts, Graphs, Details (Mish)

Ten Things to Remember

1. Prior stimulus in the US is dead, having run its full course
2. There is no incentive in the US Congress for more stimulus
3. Austerity measures have yet to hit Italy and France
4. Austerity measures will continue to bite Spain, Greece, Ireland
5. Germany export machine will die without the rest of Europe
6. QE3 will fail much sooner than QE2 as interest rates already extremely accommodating
7. Gold may respond well to competitive currency devaluation schemes
8. The Eurozone is highly likely to breakup although timing is unknown
9. Global equities and commodities are priced for perfection.
10. Perfection is not happening.

Additional Reads

Talk of avoiding recession when the global economy is clearly in one and fundamentals are horrendous is sheer lunacy.

In case you missed them, please consider ….

• US In Recession Right Here, Right Now
• Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Mike  “Mish”  Shedlock

Global Economic Analysis

Do you have friends, neighbors and relatives that can’t find work?  Well, unfortunately the current U.S. jobs famine is about to get a whole lot worse.  Right now there are approximately 13.9 million unemployed Americans.  That does not count those that “are not looking for work”.  That does not count those that are working part-time jobs but that are desperate for full-time work.  The truth is that we need tens of millions more full-time jobs in order to give one to everyone that wants one.  Sadly, the long-term trends that have caused this mess continue to get worse.  Unless truly dramatic changes are made, the U.S. economy is going to continue to bleed jobs and that is going to suck the hope right out of this country.  It is time to wake up America!  It is not a big mystery why we don’t have enough jobs.  But sadly, very few of our leaders are talking about the real issues.

Something has got to be done.  Unemployment is already at epidemic levels, and this country can’t afford for things to get much worse.  Just check out how a recent article in The Wall Street Journal summarized our current predicament….

There are more unemployed than the combined populations of Wyoming, Vermont, North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island, Hawaii, Maine, New Hampshire, Idaho and the District of Columbia.

If they were a country, the 13.9 million unemployed Americans would be the 68^th largest country in the world, bigger than the population of Greece or Portugal (each of which has 10.8 million people) and more than twice the population of Norway (4.7 million.)

Isn’t that incredible?

The number of unemployed Americans is larger than the entire population of Greece.

There are millions of Americans that will be sitting at home in front of their televisions tonight wondering why they can’t find jobs.  Last month, only 58.1% of Americans over the age of 16 were employed.  Our economy should be able to do far better than that.

All over the Internet there are stories of people that have sent out hundreds (or even thousands) of resumes and nobody even wants to interview them.  One recent survey found that approximately 80 percent of all Americans believe that it is “difficult” to find a job right now.

Unfortunately, things are going to get much, much worse before all this is over.

The following are 10 very obvious reasons why the devastating U.S. jobs famine is going to suck the hope right out of America….

#1 Our politicians simply do not care that America is bleeding jobs.  Amazingly, even with rampant unemployment plaguing this nation, Obama administration officials continue to declare that it is okay that we are losing manufacturing jobs because a lot of cheaper products are things that “we don’t want to make in America” anyway.  The following is what U.S. Trade Representative Ron Kirk told Tim Robertson of the Huffington Post the other day….

Let’s increase our competitiveness… the reality is about half of our imports, our trade deficit is because of how much oil [we import], so you take that out of the equation, you look at what percentage of it are things that frankly, we don’t want to make in America, you know, cheaper products, low-skill jobs that frankly college kids that are graduating from, you know, UC Cal and Hastings [don't want], but what we do want is to capture those next generation jobs and build on our investments in our young people, our education infrastructure.

The economic negligence that recent administrations have demonstrated has been absolutely mind boggling.  Blue collar male workers in particular are being absolutely devastated by the loss of manufacturing jobs.  Back in 1967, 97 percent of men with a high school degree between the ages of 30 and 50 had jobs.  Today, that figure is down to 76 percent.

#2 The Obama administration has now instituted a policy of “backdoor amnesty” for illegal immigrants by executive fiat.  Janet Napolitano has announced that from now on there will be a case-by-case review of all deportation cases.  Cases involving criminals will be prioritized and most others will be thrown out.  A list of 19 factors that will allow government officials to use “prosecutorial discretion” in immigration cases has been distributed.  Recently, I listed a few of those “factors” on The American Dream website….

-arrival in the U.S. as a young child

-actively “pursuing an education”

-serving or served in the U.S. military

-spouse of someone in the U.S. military

-18 years old or younger

-”elderly”

-pregnant or nursing

-victim of a “serious crime”

-serious disability or health problem

-caring for a family member with a serious disability or health problem

Obviously, it is not going to be too difficult for most illegal immigrants to fit into at least one of those categories.

On top of everything else the Obama administration has announced that it will now allow illegal immigrants to apply for work permits….

Illegal aliens living in the United States typically don’t apply for work permits for fear of deportation, but under the new policy, they could apply for work permits if granted deferred action or parole and compete with 22 million Americans who can’t find a full-time job.

So now blue collar Americans workers will have even more competition for the dwindling number of jobs.

#3 State and local governments all over the country are dead broke, and an atmosphere of austerity is sweeping the nation.  Right now state and local governments are slashing jobs at an unprecedented rate.

In the past, government jobs were considered to be very secure and they definitely paid a lot higher than average.  But now that era is coming to an end, at least on the state and local government levels.

According to the Center on Budget and Policy Priorities, state and local governments have eliminated more than half a million jobs since August 2008.  UBS Investment Research is projecting that state and local governments in the U.S. will cut 450,000 more jobs by the end of 2012.

#4 U.S. businesses are being absolutely crushed by mountains of nightmarish regulations, and yet the federal government, the state governments and local governments just continue to pile them on.  For example, the U.S. Food and Drug Administration is projecting that the food service industry will have to spend an additional 14 million hours every single year just to comply with new federal regulations that mandate that all vending machine operators and chain restaurants must label all products that they sell with a calorie count in a location visible to the consumer.  Due to these kinds of ridiculous regulations, many business owners have simply given up and many other potential business owners figure that owning a business is just not worth the hassle.

#5 As I have written about so many times before, the “global economy” is really bad for American workers.  When we merged our economy with the economies of nations where it is legal to pay slave labor wages, we made it inevitable that we would start losing massive amounts of jobs.

Why would a giant corporation pay a U.S. worker 10 to 20 times as much as a worker on the other side of the globe?  Investors actually expect big companies to have an “outsourcing” strategy today.  When more jobs get shipped out of the country, profits go up, stock prices go up and executive bonuses go up.

Big corporations don’t exist to provide you with jobs.  They exist to maximize shareholder wealth.  If taking your job away and giving it to someone in Asia will make more money for them, then that it exactly what they are going to do.

#6 Unfair trade is absolutely killing our economy.  It would be one thing if the U.S. was running a massive trade deficit solely because we were incompetent.  But the truth is that a big factor is that a number of our “trade partners” are economic predators that are purposely trying to prey on us.

The other day, I wrote about some of the things that China does to steal our jobs, our factories and our wealth….

China massively subsidizes their biggest corporations, they brazenly steal technology from anyone that they can, they openly manipulate exchange rates and they allow their workers to be paid slave labor wages.

Today, we spend about 4 dollars on imports from China for every 1 dollar that China spends on imports from us.  China now even makes more beer than we do.  Even the new Martin Luther King, Jr. Memorial on the National Mall was made in China.

Until our politicians start insisting on a level playing field, all of this is going to continue.

#7 Small businesses are traditionally one of the primary engines of job growth in this country.  But right now, small businesses all over America are having a really hard time getting anyone to loan them money.  A big reason for this is that the Federal Reserve is actually paying banks not to make loans.  Unfortunately, if small businesses can’t get the money that they need, then they can’t hire people.

#8 A lot of people may not want to hear this, but businesses in the United States are being absolutely taxed into oblivion.  The U.S. now has the highest corporate tax rate in the world, but that is only a very small part of the story.

Michael Fleischer, the President of Bogen Communications, wrote an op-ed last year for the Wall Street Journal entitled “Why I’m Not Hiring”.  The following is how Paul Hollrah of Family Security Matters summarized the nightmarish taxes that are imposed when Fleischer hires a new worker….

According to Fleischer, Sally grosses $59,000 a year, which shrinks to less than $44,000 after taxes and other payroll deductions. The $15,311 deducted from Sally’s gross pay is comprised of New Jersey state income tax: $1,893; Social Security taxes: $3,661; state unemployment insurance: $126; disability insurance: $149; Medicare insurance: $856; federal withholding tax: $6,250; and her share of medical and dental insurance: $2,376. Roughly 25.9 percent of Sally’s income is siphoned off by Washington and Trenton before she receives her paychecks.

But then there are the additional costs of employing Sally. In addition to her gross salary, her employer must pay the lion’s share of her healthcare insurance premiums: $9,561; life and other insurance premiums: $153; federal unemployment insurance: $56; disability insurance: $149; worker’s comp insurance: $300; New Jersey state unemployment insurance: $505; Medicare insurance: $856; and the employer’s share of Social Security taxes: $3,661.

Over and above her gross salary, Bogen Communications must pay an additional $15,241 in benefits and state and federal taxes, bringing the total cost of employing Sally to approximately $74,241 per year. Sally gets to keep $43,689, or just 58.8% of that total.

After reading all that, can you really blame business owners for not wanting to hire additional workers?

#9 The national debt is like a giant albatross around the neck of the economy. The U.S. national debt has increased by more than 4 trillion dollars since Barack Obama took office.  The rampant government spending that has been going on has not done much to create new jobs, but it will be a massive burden that will weigh down economic growth for many years to come.

When a nation is drowning in debt, a tremendous amount of economic resources must go to servicing that debt.  Right now, hundreds of billions of dollars a year that could be used to build up our economy are instead being used to pay interest on the national debt.  If interest rates go up significantly, we could soon be paying over a trillion dollars a year just in interest on the national debt.

#10 Right now America is very deeply divided and a tremendous sense of pessimism has set in.  One recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.  With such a negative feeling in the air, it is going to make it even less likely that business owners will be in the mood to hire people.

I know that I pick on Detroit a lot, but it really is a microcosm of what is happening to America.  The following video contains some absolutely amazing footage of the ruins of Detroit….

Sadly, what is happening to Detroit is happening in hundreds of other communities across the United States.

All over America, neighborhoods that were once teeming with hope and prosperity are now falling apart.  Hopelessness is rampant and it is spreading.  The number of Americans on food stamps has increased 74% since 2007.  If not for our increasingly overwhelmed “safety net”, we would already have mass rioting in the streets.

Sadly, we are already seeing all sorts of signs that society is collapsing.  As the economy continues to fall apart, the violence in our neighborhoods is going to get even worse.

The following is one very shocking recent example from the Chicago Tribune….

Moments before she was slain last week on Chicago’s Southwest Side, 17-year-old Charinez Jefferson begged the gunman not to shoot because she was pregnant, prosecutors said today.

Despite her plea, Timothy Jones, 18, opened fire on Jefferson anyway, yelling an expletive at her as he shot her in the head, prosecutors said. He then stood over her as she lay on the ground and fired several more times, striking her in the chest and back.

America is changing.  The country that so many of us have loved all of our lives is becoming unrecognizable.  Large numbers of communities have had all of the hope sucked right out of them.  Tens of millions of Americans that want to do things the “right way” are rapidly losing faith in the system.

When you can’t get a decent job after months and months of trying it can be absolutely soul-crushing.

What do you tell someone that has spent a year sending out resumes and has used up all of their savings?

The era of endless prosperity for America is at an end.  The cold, hard consequences of decades of bad decisions are starting to set in.

Unless a dramatic change of course happens, the long-term trends noted above are going to get progressively worse.  It won’t matter who is running Congress and it won’t matter who is in the White House.

Right now our economy is rapidly hurtling downhill on a bus without breaks and we are headed directly for a cliff.

Please wake up America.

The Economic Collapse

I hope you are.

Today (August 22, 2011) proved one thing – oversold doesn’t mean jack.  The ~20 handle pop into the open was sold into immediately, despite the market’s severely-oversold condition.

A condition that is worse than during the height of the 08/09 crash.

Drill that into your head folks: The government doesn’t get it, exactly as they didn’t get it in early 2008.  They are, right now, squandering the opportunity to take effective action.  I know this for a fact because the Republican Caucus has refused to address the issue and I know they’re aware of it.

This weekend I listened to McCain with his condescending bullcrap on talk TV.  Let me remind you, this is the same Senator McCain who I sent this letter to in 2008 predicting what was going to happen in the election if he did not act.  He did not, and he lost.  In fact, today he still claims that he couldn’t see it coming.  Not only did he see it coming, his campaign manager was in receipt of that letter and Governor Ridge personally told me at that campaign event that they knew full well it was all driven from greed and scams.  In short, not only did he lie about what he knew at the time he’s still lying.

This is the GOP.  This is what it has done and is doing.  The GOP is proving time and time again that it will not get in front of these issues because doing so means kneecapping the banksters that have trashed our economy and continue to do so today.

Not that Obama, Pelosi and Reid are any better, of course.

The GOP doesn’t care, the Democrats don’t care, and you’re going to get creamed.

There is no way to avoid what’s coming.  We have added roughly $4.5 trillion in debt to the Federal balance sheet trying to paper it over and have failed.  Even the “good” banks like JP Morgan and Goldman are failing to make progress.  The poorer ones such as Citibank, Morgan Stanley and Bank of America are seeing their market prices collapse.  The XLF, the composite of the large banks, is back to where it was in the summer of 2009.  Should it break below these levels it is likely going for the spring 2009 lows.

All the fraudulent accounting games, shifting Granny’s earnings on her CDs to the banks through zero-interest rates and money printing have been used up as policy tools.  There are few if any weapons left in the arsenal to combat what is coming.

This is where we are, and where we’re going.

I’m sure this will be scoffed at.  We’ll see.  Go have a look at 2000 if you’d like.  It’s pretty similar.  Through the mid-bolinger on the monthly, a bounce back, often off or near the lower bolinger, then a collapse that loses half or more of the market’s value.  Twice, and now we’re setting up for it again.  It’s as clear as day and the reasons for it are just as clear now as they were before.

The time in that chart is probably not quite to scale, but I bet the price move is.

Impossible?  Oh no it’s not.  The Nikkei stood at 40,000 before it collapsed.  It now trades under 10,000 – a 75% loss – decades later.  It has not recovered and neither will we because we refuse as a nation and as a government to force recognition of bogus debt that cannot be paid while destroying capital formation and interest margins with zero interest rates.

400 is roughly where the S&P was before the “great bull market of fraud” began in 1995.  To think we can’t return there when the fraud collapses is utter folly.  We not only can, we probably will.

But instead of putting a stop to the games we choose to allow crazy derivative schemes, balance sheets that do not reflect reality and the repeated asset-stripping from savers and productive members of society, all to protect the “gilded ones” on Wall Street from the just consequences of their own 30-year old foibles and scams.

Now let me explain what happens “down there”, because it is my unbroken opinion, going back to 2007, that’s where we’re headed irrespective of attempts to stop it (and we’ve already seen how fast those attempts unwind when they fail, haven’t we?)

• Every pension fund blows up.  All of them.  Many doubled into the decline and will be utterly destroyed.  Chief among them will be big municipal funds like CALPERs.  If you have a pension of some sort, ask the pension administrator what happens to your pension if the S&P goes to 400 and stays there.  He’ll poo-poo your question – but I bet he won’t answer it.
• Annuities and insurance companies blow up.  You don’t think they can pay when they’re figuring on an 8% annualized return, do you?  Well, no they can’t.  Oh yeah, your state insurance on those is $100,000 in most states – the rest of your principal is “at risk.”  This, of course, assumes the State has the $100,000 too.  Did you know this in advance or are you learning it now (let’s not hope the latter is true!)
• The FDIC has no prayer of covering it.  The good news is that if they act now they can shut the banks that are exposed and cram down debt to equity.  The bad news is that they have a horrible record in doing that in a timely manner and of late the losses have been anywhere from 20-40% of assets, which is both a violation of the law (“Prompt Corrective Action” is supposed to prevent this from happening) and they have no way to cover it should it become a widespread problem.  It will.  Oh yeah, you can’t sue the government either.  Have a nice day.
• The government Ponzi blows up.  Unemployment will reach 20% or more.  Tax receipts will get cut in half.  Deficit spending will be impossible.  Instead of a 40% “draconian” cut in government spending we will have to cut spending by 60% or more.  Entitlements will be decimated; retirement entitlements will go last, but go they will.  Food stamps, Section 8, Medicaid, all gone.  Bet on it.

• All the other things that depend on the government Ponzi blow up.  Medical care as we know it, education, state programs, all gone.  We will return to a simpler time whether we like it or not, and we won’t like it.  That much I’m sure of.
• Best guess on whether civil order is lost.  In some places I’m sure things will be fine in that regard, likely in places where self-defense is recognized as the unalienable right that it is.  In others?  Not so much.  If you live in a big city – or an “unfriendly” place in regards to self-defense, you need to be thinking about this quite-seriously.  Yesterday would have been a good time to consider it and figure out what you’re going to do about it.
• Short-term and minor to moderate disruptions in what would be considered “essential” goods and services are likely.  Go down the list and figure out what you must have and what you can do without.  Be realistic.  Most people won’t be, which will put you one step in front of them.
• The world will recognize the Depression we have tried to cover up.  This is not a US-centric story.  The Eurozone will get the unemployment and tax consequences too.  Germany will be forced to choose between propping up the entire rest of the Euro (which it can’t) and detonating it and going back to the Deutsche Mark (which it will be forced to.)  There is a very high probability of war that comes out of this, although the exact trigger is not something I can forecast.  War is the classical solution to these problems, and it is unlikely to be different this time.

This is going to be a rough time folks.  Our government has refused to deal with the basic mathematical constructs that underlay all economies and debt.  It’s not a matter of competing theoretical ideas – it’s a matter of basic mathematical laws.  We are now running into the end game where entire nations are coming unglued along with their various patrons and parasites, as the cold, hard mathematical facts run into the fantasy conjurations of people like Bernanke, Geithner and Obama, along with the chortling harpies on Wall Street.

If they manage to “sticksave” things once again, and you can bet they’ll try, you’ve lost nothing by being prepared.  But even if they do pull another rabbit from the hat, instead of a burning stick of dynamite, there are a limited number of rabbits, there are sticks of dynamite in the hat, one will eventually be inadvertently selected and the games will end.

The only real choice is whether that option will take place voluntarily and now, or involuntarily and later.

Either way it’s going to suck, but a voluntary acceptance of reality will both suck less and be over sooner, along with being able to be mitigated.  An uncontrolled event – which is what we’re headed for at the present time – will be most unpleasant.

PS: Yes, this is an update to the “What’s Broken” ticker….  The last time they reached into the hat they got a rabbit – and made the problem worse.  How many more pulls do you think they’ll get before the burning stick of dynamite pops out?

We’re done folks.

Responses to the Business Outlook Survey this month suggest that regional manufacturing activity has dipped significantly. The survey’s broad indicators for activity, shipments, and new orders all declined sharply from last month. Firms indicated that employment and average work hours are lower this month. Price indexes continued to show a trend of moderating price pressures. The broadest indicator of future activity also weakened markedly, but firms still expect overall growth in shipments, new orders, and employment over the next six months. The collection period for this month’s survey ran from August 8-16, overlapping a week of unusually high volatility in both domestic and international financial markets.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 (see Chart).

This resulted in an immediate dive in the market, which was already down 300+, to more than -450.

The fraud and phony games are over.

The “Tea Party” claims to have taken the high ground.  They’re lying.

All I hear is Bachmann and others wrapping themselves in the “cause of the day” but failing to stop it, and the idea that somehow “Guns, Gays and God” will carry the day or that we should have “Dominionism” in the Federal Government is an outrage.  That’s utter and complete bullshit; having “dominion” over a smoking crater will be cold comfort in January of 2013.

Where the hell were these people in 2008?  Where were they in 2009?  Where was the attempt to stop Bush, Paulson or Kanjorski?  Oh I know, they were all elected in 2010.  Ok, it’s 2011 now and I’ll give you the benefit of the doubt in that you can’t do anything until you get into office (despite, I note, your utter refusal to run on these issues in 2010 – I did call you all out on that) so let’s start there.

Has anyone heard any demands to lock up the fraudsters stealing homes with fraudulent documents?  To break up the “too big to fail” banks and toss their executives in prison where they belong?  To put a stop to the fraudulent issuance of credit economy-wide?  To take Bernanke out behind the woodshed and stuff a sock in his mouth via adding an “or else” to The Federal Reserve Act so that he cannot debase the currency and he and his cohorts will all be imprisoned (or hang on The Mall, which seems more appropriate to me) if they do?  To enforce a zero-inflation mandate?  To end ZIRP and distortions in the bond market?  To balance the budget right damn now, and quit playing Ponzi with the Federal Budget, Medicare, Medicaid, Student Loans and more?  To tell the truth to our Seniors and everyone else – you will NOT GET what you were promised, because YOU CAN’T – the money does not exist!

No.

You have not heard any of this.  Not one damn word.

Oh sure, there are the token claims, such as those from Southerland and Bachmann.  That’s very nice, but it’s both insufficient and immaterial.  Without legislation and regulation, which means punishment for those who have screwed the American public serially for 30 years none of this will change and you will keep getting bent over the table and serially violated.

Unfortunately for Congress it’s too damn late now.  In 2007 I faxed a letter to all 535 members of Congress.  I urged them to set aside a couple hundred billion dollars – cash, not bogus credit – to provide “three hots and a cot” for up to 25% of the population for a period of at least one year.  NOT subsidy via unemployment, food stamps or any such thing.  A soup line, a bunch of cots in formerly-closed military base hangers and barracks, and a place to take a shower and a crap.  One quarter – or less – than what we would spend now on the same thing.  This would have allowed the housing market to collapse and subsequently clear, the banks would have blown to bits, but from the rubble entrepreneurs would have started new banks, houses would have been resold into the market to new owners and the economy would have cleared the bad debt on its own through bankruptcy and liquidation, which is the essential purpose of recession.

I was not only ignored I was called a lunatic and crazy, that things couldn’t get that bad.

Then 2008 happened and some eyes opened – a bit, because it sure looked like it might get that bad.  The response?  More fraud.

By 2009 the callers of “fool”, “lunatic”, “haha” and “clown” began again.

Well, how’s it look now folks?

Need it in pictures?  Here it is:

Gee, almost back to the depths-of-hell 2009 lows, eh?  So what’s this crap about “no recession”?

Oh wait – there’s no recession: This is a continuing Depression that our government, conspiring with the banksters and media, have intentionally and fraudulently covered up and it is no longer working.

Did you get back into the market America?

More to the point if you did get back in: Did you get out in time this time around or were you listening to “Tout TV” again?

Gee, all bad numbers in that table on the current situation.  New orders collapsed by twenty-six points, shipments collapsed by almost ten points, and both employee count and workweek collapsed by nearly 14 and 9 points, respectively.

Worse, on a forward basis inventories, delivery times, unfilled orders and the employee workweek collapsed on a six-month forward look, with employment numbers remaining only mildly positive.

This means that personal income is going to collapse as well and with it tax receipts, exactly as I have forecast.  The government’s revenue forecasts, to be blunt, are screwed.

To our government: Either get your arms around this now and consolidate, meaning massive cuts in spending and a fundamental reorganization of tax and trade policy (and no, not more “free trade” either), or we will go “overcenter” on that nasty little debt table I’ve been talking about – at which point there will be nothing you can do about it.

This is a massive downgrade on the economy folks….

Release Date: August 9, 2011

For immediate release

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.  Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable.

The economy is going to hell.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

In other words, we’re back in recession.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

ZIRP for at least two more years.  Therefore:

• If you’re a saver, you’re screwed.  Buy stocks and lose half or more of your money or accept nothing (less, of course, any actual inflation.) Senior citizens should be literally in the streets on this announcement.
• The economy is going to suck. That’s The Fed’s projection.  If you’re long the market, you’re in the wrong place.  Oh sure, we might get more bounce for a while, but if the economic outlook really justifies zero interest rates then profits have peaked – period.
• The banks are dead. NIM is going to get destroyed.  The start of ZIRP looks good for banks but the numerical spread, not the percentage spread, collapses as it goes on.  Look at Japan and their JGBs! Now about that profit you think banks are going to earn….. exactly how are they going to earn it lending money with no spread?

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

This is REAL dissent – three, not one.

The market is trying to figure out whether to crap or go blind, but the bottom line here is that not only does The Fed expect a short term slowdown in the economy they have basically said that their expectation is that the economy is going to suck for at least the next two years.

“The 5-year Treasury has become the new 2-year; the 2 year note has become an overnight T-Bill and the 1-year note has become….hell, I dunno.”

Systemic causes of global financial instability include the “normalcy bias,” super-low interest rates, central-bank induced inflation and loss of faith in institutions.

Some causal factors of global financial instability are mental constructs, others are pernicious policies. Money is the ultimate mental construct, of course; it is our faith in the promises issued by central banks and governments that gives paper money its value.

The same can be said of markets: it is our faith in their transparency which makes them “free markets.” Once we discern that a market is manipulated, then we lose trust in it and exit that market for good.

The most pernicious policy is central-bank engineered inflation, which rewards debtors and punishes capital accumulation, a.k.a. savings. Push these incentives to debt hard and long enough, and you get a crippled, top-heavy economy like the U.S. economy, crushed by debts so staggering that the only way to service the debt is to borrow more money at insanely low rates of interest.

This is an excerpt from my new book An Unconventional Guide to Investing in Troubled Times which has just been issued in Kindle ebook format; a print edition will follow in September. (You can read the ebook now on any computer, smart phone, iPad, etc.–see below.The 30% discount expires tonight.)

Here are six systemic causes of global financial instability. (Here is yesterday’s list: The Coming Global Instability, Part I.)

1) The human mind has a number of default settings which have proven advantageous as “short cuts” in most circumstances, one of which is called “the normalcy bias.”  As events spiral out of control and dangers rise exponentially, our tendency is to underestimate the risks and potential losses. As long as a few shreds of normalcy remain intact, we view these as evidence that “it’s really not so bad.”

Most of the time, this trait pays off as most systems are self-correcting and catastrophe is avoided. But when self-reinforcing negative trends take hold, this complacency is ultimately self-destructive.

2) The financial Status Quo, already discredited in the eyes of most well-informed observers, will eventually lose all credibility, and global stock markets will languish as participants abandon them.

If this sounds farfetched, recall that 70% of all shares traded in the U.S. stock market are exchanged in opaque “dark pools” operated by Wall Street and “too big to fail” banks, and high-frequency trading executed by “black box” algorithms account for the majority of the remaining 30% of publicly traded shares.  This means that some 90% of stock market activity is hidden from non-insider investors.

The idea that we can rely on opaque markets for our financial security will increasingly be discredited.  As  heavy-handed interventions fail to restore stability, public faith in these institutions will decline. This delegitimization will further destabilize global markets, and those who accepted the implicit guarantees of stability, transparency and liquidity may find instead that their financial security has vanished in a cloud of “impossible” disruptions and dislocations.

This loss of faith is already evident.  As the U.S. stock market doubled from its March 2009 lows, U.S. households withdrew hundreds of billions of dollars from domestic equity mutual funds, and quadrupled their holdings of “safe” U.S. Treasury bonds.  If you look at a 10-year chart of volume in U.S. stocks, you will see a steady erosion of participation in the stock market.  These are the actions of people who have lost faith in the stock market, the nation’s financial and political institutions and the official “story” of permanently rising prosperity.

Once trust is lost, it cannot be won back easily or quickly.

As the financial authorities attempt to keep the system from crumbling beneath their feet, they will take increasingly drastic actions as markets destabilize: investment rules that were presumed to be eternal will be changed overnight, without warning, and then changed again. Decades of low volatility that encouraged people to buy long-term bonds, annuities and dividend-paying stocks will be upended by unprecedented financial and political volatility.  Seemingly permanent low interest rates that lured investors to pile into high-risk gambles will suddenly leap up, wiping out gamblers who weren’t even aware they were playing a game rigged in favor of the “house.”

Such expectations are well-grounded in history. Most investors have forgotten that the U.S. stock market was summarily closed for months during World War I, and that in 1933, the Federal government seized “hoarded” privately held gold.  These actions were, at the time, considered necessary and prudent by the authorities. More recently, in 2008 speculating that banking stocks would decline (that is, shorting banking stocks) was summarily banned. The rules governing the market were changed to defend the Status Quo, and speculation was only allowed if it flowed in one direction—the one favored by the financial authorities.

3) Stripped of mumbo-jumbo, central banks and States have only two buttons to push: Keynesian fiscal stimulus, i.e. governments borrowing and spending vast sums in an effort to stimulate demand and the “animal spirits” that drive private borrowing, and monetary easing, i.e. lowering interest rates to near-zero, and printing or creating credit electronically to flood the economy with “liquid,” easy-to-borrow money.

Central banks and States are hitting these two buttons like frenzied laboratory rats, but the machine is out of cocaine-laced pellets.  In effect, central banks and Central States are both addicted to exponential expansion of credit, intervention and Central State borrowing and spending. Each is only exacerbating the system’s risks, and as the authorities ratchet up these interventions to ever-higher levels, they’re insuring an even greater collapse.

There is a pernicious agenda at work in setting interest rates near zero while  boosting money supply and deficit spending to create inflation. By robbing savers of any return on their savings and sparking “sustainable, orderly” inflation of around 4%, central banks are in effect transferring 4% from the owners of cash to reduce the debt of the central bank/State by this same amount every year.  In a decade of this monetary scheme, savers’ wealth will be reduced by roughly 50% while the debt created by the central bank/State will decline by 50%.

“Purchasing power” is a concept while helps us understand the results of low interest rates and “politically benign” inflation: the owner of cash will find their money buys only half of what it did ten years before, while the government debt has also fallen in half.  The net result of this slight-of-hand is that government debt that was crushing becomes manageable again as savers’ wealth was invisibly transferred via carefully engineered inflation.

The key phrase in this sub rosa agenda of transferring private wealth to reduce government/central bank debt is “politically benign:” since the loss of wealth and the rise in consumer prices is “only” 4% a year, the consequences are not severe enough to trigger political resistance.  Financial and political authorities know that people quickly habituate to an “orderly” reduction in wealth and an “orderly” inflation in prices; that is, this erosion of purchasing power soon becomes “the new normal” and people plan around it.

The purpose of this central bank/State agenda is to avoid the two endgames that would destabilize the Status Quo: outright default on the Status Quo’s staggering debts, and hyperinflation, or loss of faith in a paper (fiat) currency. Either of these events would destroy the credit markets that form the foundation of the global economy.

We can see how successful this strategy of engineering orderly, “normal” inflation has been: 30 years ago, a Federal debt of $15 trillion would have unimaginable. Today, it is accepted as “sustainable” because it will never be paid back in today’s dollars, and low interest rates insure that the carrying costs of that debt remains small enough that no other government spending need be sacrificed to pay the annual interest.

This agenda has worked like magic for the past 30 years, but beneath the apparent success, the foundations of the current system– cheap energy, globalization, financialization, monetary expansion, fiscal stimulus, opaque markets and constant State/central bank intervention–are all eroding. As they dissolve then so too will the Status Quo’s implicit promises of permanent stability, low interest rates and limitless growth.

The point here that the levels of intervention required to create inflation in a  deflationary, deleveraging-of-debt era are not just stupendous– they must ratchet up to ever higher levels to maintain superficial stability as the system becomes increasingly precarious.  Ironically, increasing the heavy-handed centralized interventions only  increases the system’s precariousness—the exact opposite of the Central Planners’ intentions. This is the result of trying to manage non-linear systems with linear-system tools: all that manipulation can achieve is to extend surface stability at the cost of a more severe system crash later on.

4) The investment world is keen on probabilities as reliable guides to the future. But low-probability events occur with remarkable regularity, so it’s prudent not to put too much faith in statistical or probabilistic reassurances. All such models are based on the idea that the recent past is a reliable guide to the future. But if the thesis that the next 20 years will necessarily be very different from the previous 60 years, then this faith that the recent past offers a roadmap of the future is dangerously misleading.

5) The uneven, unpredictable process of destabilization and devolution will play out over many years as periods of apparent stability are punctuated by the re-emergence of crises which were supposedly resolved in the previous cycle of central bank/government intervention. Every era of stability will be less enduring than the last, and come to rest at a lower level of security and prosperity than the last. Every intervention will be larger, more desperate and more intrusive than the last, and much less effective.

6) Periods of creative destruction are inherent to Capitalism, indeed, essential  to its long-term success. Just as we cannot fool Mother Nature for long–for example, by reckoning we can eliminate forest fires–we cannot manipulate the global economy to eliminate creative destruction.  All the unprecedented efforts of central financial authorities to eliminate risk and instability are simply piling up more deadwood in an already tinderbox forest.

Financial risk is like water in a closed system: it cannot be compressed. As pressure mounts, the risk builds up and eventually escapes, often through whatever part of the system was considered “safe.”

Periods of great transition in which existing systems are consumed by creative destruction and a new paradigm emerges offer great opportunities as well as great risks.

If I had to summarize this book in a few sentences, I would say this: Money is a  tool; make it work for you. Don’t invest in Wall Street’s false promises, invest  with an unblinking eye on systemic risk. Invest in your own life and in the lives of others. This book explores how to do just that.

Of Two Minds

Charles Hugh Smith’s new book An Unconventional Guide to Investing in Troubled Times is available in Kindle ebook format.