Where's My Economic Recovery?

Separating facts from fictions
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Where's My Economic Recovery?

Postby Gnosty » 12 Oct 2009, 09:19

by Karl Denninger

We were promised one, you know.

Dennis Kneale, Larry Kudlow, hell, name a "mouthpiece" on ToutTV or in the sell-side of Fraud Street and you'll find someone claiming that "the recession is over."

But if it is, how can this be true?
Lockyer’s spoke before Controller John Chiang said state general fund revenue fell $1.1 billion below estimates during the first three months of the fiscal year that began July 1.

Let's boil this down a bit: Sales tax revenues came in at $99.8 million, or 4.5% lower than expected.

Income tax revenues were also off big, but remember that income taxes are (usually) progressive, so a loss in income translates into a larger drop in tax revenues (as an aside this, my friends, is why "tax the rich" only works when the rich are getting richer - when they start to get poorer as a consequence of your redistribution schemes and move down the tax ladder, your income tax receipts collapse!) while sales taxes are a straight percentage of sales, often with the only exception that would skew on an income basis being food.

This strongly implies that California saw gross consumer sales off about 4.5% from where they expected; this, of course, raises the question "what was expected?"

What we do know is that for the three months ending in June they had expected a 14.4% drop - and got an 18.75% one.

It's not just California either:
"It's crazy. It's really just unbelievable," said Scott Pattison, executive director of the National Association of State Budget Officers, and called the states' revenue situations "close to unprecedented."

Most states had been pessimistic in forecasting their tax revenues for the 2010 fiscal year, Pattison said. So far, collections have fallen below even those low targets.

The bubble economics games have severely damaged everyone for the benefit of only a very few, whether you participated in the purchase of a home during the boom or not. States were led to project budget numbers that were totally fraudulent and everyone who moved into (or within) a bubble area during those years was forced to participate by either having to rent or buy at artificially-high prices.

This wasn't limited to real estate either. Medical care, insurance, college costs - all were inflated dramatically by the obscene "bubblenomics" for the benefit of those "securitizing" that debt and selling it off to rubes - so-called "investors" who were defrauded on a grand scale by "models" that promised the mathematically impossible.

All of this was not only cheered on by Washington but deliberately enabled through perversions such as Barney Frank, who was caught admitting that having the FHA make bad loans on purpose was "a policy."

The markets generally cheered a "better than expected" initial unemployment and continuing claim number last week, but those numbers don't necessarily provide a good signal in an economic environment like this. For one, they completely ignore anyone who isn't eligible for unemployment compensation - which includes the self-employed. They also don't measure how hard it is to find a replacement job, which of course is the key metric if you find yourself unemployed. The employment report provided less-than-encouraging news in this regard, particularly the household survey which strongly suggests that we've lost a hell of a lot of jobs and are not, at present anyway, turning that corner:


Note that this indicator turned upward right near the end of the last "official" recession - and it also led the "official recession" beginning calls by about 12 months. There's no indication of recovery in this number - yet. Indeed, the flattening of this curve for a couple of months is probably a big part of what led a whole bunch of people to make those "bottom" calls, yet that is increasingly looking not like dawn approaching but rather an incoming meteor.

Then there's consumer credit, which contracted at a rate of about $10 billion last month. Most of it was in revolving (credit card) debt, which is no big surprise. Nor is it a surprise that September had a moderation of the decline in non-revolving (mostly car loan) debt outstanding. But "cash for clunkers" is now known to have massively pulled-forward demand and left a vacuum behind, as the most-recently posted auto sales were disastrously bad. This of course portends a resumption of credit contraction next month, never mind what may come from those who bought "clunker deals" but can't afford them. If you're looking for a new(er) car the best time to buy may well be in the late winter and spring of next year, when the lates have turned into repossessions and the lots are rather likely to be full of six-month-old cars with a few thousand miles on them clogging up dealer lots, destroying not only the poor fools who took on debt they can't afford but adding further punishment to new car sales (after all, why buy new when you can buy a six-month old vehicle at 30% - or more - off!) We won't get another Fed Z1 report until December 10th, but I strongly suspect that when we do it will show further deterioration, confirming credit contraction that is being reported by banks themselves (28% annualized contraction rate to businesses, 19% annualized across all segments of the economy.)

At the same time The Dollar is under attack - not from external causes as many would love to lay the blame upon (there are a lot of people who hate George Soros) but rather due to our own government and Fed policies. After all, printing over a trillion to buy likely-worthless securities in legally-questionable (at best) transactions to prop up two bankrupt companies (Fannie and Freddie) along with the administration's penchant to spend nearly double what it takes in via taxes has a habit of being currency negative. How negative? You judge:


Of particular problem here is that descending wedge. It should have broken upward according to the expectations of basic technical analysis. It didn't; instead it broke in a downward direction on extremely high volume, bounced back inside and then took a second stab at collapse.

Let me be quite clear: We are literally hanging by a thread. There is one final support level down around 72, but I don't think it is particularly meaningful. The "powers that be" clearly recognized the danger, as the jawbones came out in earnest overnight into Friday morning, along with some intervention in Asia.

While the Chinese might tolerate a slow deterioration of the dollar even though it screws with their export economy tremendously (never mind the Arabs and their oil) a collapse is another matter. Lest someone think this move has been "slow", let me point out that from March to today the index has fallen some 15%. This, of course, is about a 30% annualized rate. To put this in perspective the dollar is suffering a pace of decline this year about equal in the degree that the stock market did last year.

This move has been broadly supportive of stocks; indeed, stock prices are almost lock-step responsive to dollar moves intraday. Not only do prices look "cheaper" to foreigners but exports are helped by a falling currency.

There are only two rather large dragonflies in this ointment; not only are imports hurt (and we're a major importing nation) but worse, foreign capital suffers a direct loss when it repatriates. History says that weakening the currency never works as a means of getting out of a credit problem or covering insolvencies because capital flees faster than you can devalue and as a consequence you lose even if you're a net exporting economy (as was Japan); for a net-importing economy such as ours the ultimate outcome is disastrous.

Of course the incessant claim of support for a "strong dollar" has echoed from TurboTimmy the last couple of weeks, and of course The Fed has (as usual) disclaimed any interest in where the dollar stands. Both claims are flat lies.

For Treasury's part spending more than you make weakens your currency. Why? Because you must borrow that extra money, which weakens your nation's balance sheet. Since your currency is backed by that balance sheet, weakening it leads your currency to decline. It's that simple.

The Fed's words are even more outrageous; there is no more certain way to cause the price of something to decline than to produce more of it without commensurate demand. Yet that's what The Fed has done by effectively monetizing both Fannie and Freddie along with Treasury debt. These programs have amounted to "printing money", which increases supply into what is clearly slack demand for credit origination. Basic economic theory tells you that when you increase the supply of something while demand is falling price collapses.

Many are concerned about potential "inflation" and this has in turn driven gold to new highs in the last week. In my opinion this concern, to the extent it is for inflation, is misplaced. Rather, I'm quite concerned about the impoverishment of millions of Americans - those of middle class means and below, as the destruction of the currency's purchasing power is not able to be reflected back into wages due to offshoring of damn near everything. The consequence will be that standards of living fall, but not due to hyperinflation where nominal GDP rises. Rather the curse we've seen over the last two years looks to be poised to accelerate dramatically, with spending shifting hard into mandatory items (food, fuel, shelter) and away from virtually everything else. This in turn will place increasing pressure on GDP and the government's attempt to support output.

But how? For now government can borrow all the money it wants at near-zero cost, especially on the short end of the interest rate curve, and they have taken advantage of this, shifting down the curve in a dramatic fashion over the last two years. But there is grave danger herein; while last fiscal year's interest expense for the government was $383 billion (versus $451 billion in FY08) the deficit and outstanding debt exploded higher, with $1.743 trillion added in the last fiscal year.

The effective interest rate on the debt in FY08 was 7.7%. This last year it was 5.1%.

To put this in perspective the previous fiscal year saw $750 billion (or less than half as much) added and the year prior $206 billion.

See a pattern here?

What happens if our interest expense goes back to where it was in Fiscal Year 2008?

The interest cost would be $581 billion.

Can this game continue indefinitely? No, it cannot.

In Fiscal Year 2009 the government took in $2.1 trillion dollars (preliminary numbers from the CBO) This is a current coverage ratio of 18% (income to cover interest), which sounds reasonable. But should the cost of debt rise to FY 2008's level coverage would deteriorate to 28% - that is, from about one in six dollars going to interest to a bit more than one in four.

The Government did manage to add roughly four points and change to GDP last quarter, and it will also be adding positively this time around with Cash For Clunkers and similar "free money" schemes, but the broad question really is whether such "GDP additions" should count at all. There are valid arguments on both sides of this debate, with one side claiming that if you go to the bank and borrow $20,000 you haven't really added to output at all (since all you've done is pulled forward spending you'd otherwise do later) while others say that the "now" counts (but so does the hangover later.)

The latter is more mathematically defensible but the question becomes when the "hangover" will be realized, rather than drowned with yet another keg of whiskey. That prescription seems to work just fine for a while if you're a drunk, but eventually your liver shuts down and you die.

Such may be our fate if we do not stop to take our medicine soon, as a dollar collapse that really gets some legs under it could trigger all sorts of unfortunate consequences - including a war. I'm quite certain that neither Japan or China is going to sit by silently and watch us destroy nearly $3 trillion of their wealth, say much less what Saudi Arabia holds. Despite the view that we have them by the short hairs in truth we both are pointing pistols at each other's heads - the question becomes whether one of us develops a tick in our trigger finger.

Americans appear oblivious to this as they cheer the stock market but let's take a look at whether you should be cheering at all. Mathematics is a bitch and she's not being particularly kind to people in retirement accounts or, for that matter, anyone who doesn't trade actively - and guess right. Let's take the S&P 500 which topped at 1576 in October of 2007. It fell to 666 in March of 2009, a 58% loss. That's horrible.

It has since risen to 1071, a 61% gain. Great, right?

Uh, notice something folks?

32% of your money is still gone.

The Dow is in similar dire straits. It went from 14,000 to 6,469, a 54% loss. It has since recovered to 9,864, a 52% gain. Where's the rest of your money? Almost 30% of it is still missing!

Were you better in tech stocks? Let's look. The NDX (Nasdaq 100) went from 2,239 to 1,018, a loss of 55%. It has since recovered to 1,727, a monstrous 70% gain! You're in the money, right? Uh, wrong; 23% of your original money is still missing.

Then there are individual stocks. Yes, there are some crazy winners, including Alcoa which has nearly tripled. Or is it a winner? Alcoa lost 90% of its value from July of 2007, when it sold for $48.77. Today it sells for $14.24, an insane loss of 71%. Yes, buying it at $5 was a screaming deal - if they didn't go to zero (and still don't.)

The usual rubric is that "it's a stockpicker's market and you need professional advice." Oh really? How many of those so-called "pros" told you to get out in 2007? "What is none, Alex?"

Now I want you to consider the following - The DOW today, at 9,864, is back where it was in March of 1999. You've spent ten years and made nothing. That's bad.

What's worse is what has happened to the price of eggs, milk, cars, medical care, college tuition and more during those years. Most have doubled and some have tripled. Yet your stock portfolio is exactly where it was then.

In terms of purchasing power it has lost half or more over that decade, and the same story is told in the S&P 500.

Renewed economic growth? Where? Baby Boomers have had their retirements destroyed by the Fraud Street crowd. The 401k is, for most people, a scam and what's even worse is the concept of "saving" in a world where we have a government hellbent on destroying every saved dollar. We the Sheeple think this is great as our so-called "per-capita income" goes up, but has it really increased? Has our wealth really increased in terms of spending power? I'd argue no; we have instead been lied to about the future and about our nation and its economy, and have as a consequence been goaded into spending money we do not have and have no hope of being able to earn.

We have now discovered that we're in a huge hole, well over our heads, and Bernanke and Obama have shovels and are trying to make the damn thing deeper, all in the name of "trying to help."
In a crisis you need to make a choice. You can choose to solve the problem and protect the innocent from the results of the firestorm. Or you can try to teach them a lesson. You can't solve the problem by teaching people a lesson. That's not a strategy for solving the crisis. It's a strategy for inflicting a lot of damage.

That's a very nice thought from TurboTimmy, but it intentionally misses the point. Fraud Street and Washington have been running around with gasoline cans spraying gas everywhere in the financial system for more than 20 years. Someone threw away a lit cigarette and the firestorm erupted.

Timmy and the rest of Fraud Street and K Street then showed up with fire trucks and "put the fire out" - but they did so by smothering it with more gasoline! "Heh, if we can just get enough gas in here there won't be any oxygen and the fire will go out!" "Great idea, let's do it!"

Now the fire's out, but instead of a bit of gasoline on the floor we're now up to our chests in it and the oxygen is coming back into the room. Not only has nobody drained any of the gas off they're still adding more and while there are "no smoking" signs up everywhere eventually someone is going to create a spark, and this time it won't start a fire - there will be an explosion.

The fraudsters must be thrown out and prosecuted. Lying to people about your balance sheet and the structure of deals is a crime, not a mistake. Intentionally omitting people's incomes and plugging in "guesses" on liar loans into models is a crime, not a mistake. Intentionally holding short-term market rates negative in real terms through various liquidity schemes for the purpose of goading people into borrowing and lending irresponsibly isn't a mistake, it's an intentional act. Modeling indefinite 6, 7, 10% home price increases isn't a "reasonable estimate", it's an act of fraud, as a 7% increase annually (touted by many during the boom years) would mean that in a decade the price of all homes, added together, would be greater than that paid for every home cumulatively from the inception of America 230 years ago to the day that 10 year period began.

Jimmy Carter lost his job for saying this on national television for those of you who remember. He was referring to electricity use, which was at the time increasing by 7% a year. He was right - whether you wanted to hear it or not. He over-estimated the average American's intelligence; this, after all, is (really) sixth grade math. The next Presidential Election made clear that at least 51% of Americans failed that class.

We have deadly-serious issues facing our nation. They require serious solutions. The nation must stop promising that which it cannot deliver. We must stop allowing liars in our government, at The Fed and on Fraud Street in New York to run amok with impunity. That which cannot happen over long periods of time but is sold to investors as a "long term trend" must be prosecuted as the fraud that it is. Those who intentionally make loans they know have no reasonable expectation of being paid back must be prosecuted. Those banks that are intentionally holding assets at above-market values when those "values" were achieved via mathematically-unsustainable practices must be forced to write down those "assets" to their market price. If this causes them to fail, so be it.

We the people must stand up instead of sitting in front of our boob tube and watching American Idol. If you're unemployed and pissed off about it, or if you live in a house that is worth half of what your mortgage balance is, be aware that it was not an accident. You lost your job and your house's "value" spiked and then collapsed because of three decades of formal American policy promulgated by bankers and government officials resulting in production being offshored and the border left wide open for illegal immigrants, squeezing you on both ends. At the same time Greenspan, Bernanke and Congress all actively conspired to prop up asset values through intentionally-derelict fiscal and monetary policy decisions. This was the only way to make the books balance and keep justifying the debt issuance that was otherwise impossible to cover.

But now all the workers that can be offshored have been, and what's left are people making coffee at Starbucks, McJobs flipping burgers, unskilled labor cleaning rooms in hotels and of course Fraud Street "magicians" who claim to have found $105 in a $100 lending transaction through a computer model that takes the world's largest supercomputers a full day to run. That would be great if it was real but it isn't, any more than is cold fusion, turning lead into gold by alchemy, or as was discovered just a few years ago, the "complex adjustments" that Fannie Mae applied to their deals to "manage" their earnings (and which later blew up in their face, as it was bogus from the start.) If you're interested in exactly how ugly that was, complete with the emails documenting it, read that link - then consider that some of those referenced as allegedly "guilty" in those emails are STILL employed by the GSEs, FHFA and others in the securities and lending industry!)

Instead what we truly have left is a mountain of impossible-to-service debt and in a mad dash to avoid recognition of the facts we are now turning to outright scams with the full sanction of the government behind them - refusing to sell properties at auction, not initiating foreclosures for a year or more after the homeowner goes into default, "re-marketing" mortgages under government "approval" to people that the government knows can't pay and pretending that commercial loans are all going to be "money good" when there is no possible way for them to cash flow. The nearly-100 banks that have failed thus far in this crisis have proved this to be the rule rather than the exception - uncovered losses should simply never happen under our body of law, yet we continually see 20, 30, 40 even 50% losses against entire asset bases.

The game of "kick the can" has been played with a reasonable degree of success for the last 30 years, but the can is now full of cement. We cannot choose whether to take our medicine any longer - we can only choose whether to decide to do it now and have the outcome be bad, or try to put it off one more time and have the outcome be catastrophic.

Choose wisely America.

Source: http://market-ticker.denninger.net/arch ... overy.html

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