Tuesday, July 28, 2009

Recovering diastrously, Part 1

It is July 28th, 2009, and I am officially announcing the beginning of The Depression of 2010. We have seen the George W. Bush ("Bush II") Recession working its way through, with desperate attempts to stabilize the economy, albeit at enormous cost.

This phase of wild flailing and mad money-printing is over, and the Federal Reserve has managed to avoid any inspection of the $5,000 billion they have 'created' to float the American economy. The financial sector is temporarily stabilized, waiting for the next disaster to befall them. And the Government band plays on, singing of 'little green shoots', as though their efforts will single-handedly refloat this boat, Titanically oblivious to the obvious.

But now, in July 2009, we see the true beginning of the failing of consumer confidence as the masses realize that things are not going to get better any time soon, if ever.

Now, we will watch as the economy steadily deflates as we move towards 2010. The US Federal tax take is going to become substantially lower than predicted. The States are going to also suffer the same fate, along with every county and city in the US. The Federal Reserve will no longer be able to 'print and lend' to resolve these problems. The result will be a reduction in Government spending, which will accelerate the decline.

The roots of the problem were there long before Bush II. He didn't start this mess. However, during his Presidency, every indicator was ignored, every accelerator was permitted to explode the damage, and Americans were distracted into factional focus on insanely expensive and unnecessary US military activity in the Middle East.

With sublime faith in 'free enterprise', and the willingness of investors to fund risky ventures, the government ignored the fact that the greatest return was gained from property investment. Government spending did not benefit small business and new enterprises. Angel venture capitalists, who fund early-stage ventures, were overwhelmed by the numbers of new business ventures that needed funding. About 1% of new ventures got any funding.

The picture was the same for the venture capital houses. Inundated with new opportunities, they funded a tiny percentage of them.

American innovation was strangled at birth.

Simultaneously, after 9/11/2001, the Federal Government changed the H1B visa process, stifling the usual immigration to the US of the world's best talent. With visas taking many months to issue, many of the best and brightest stayed home. Most Americans were, and still are, unaware that, for years, America has stayed ahead of the global pack by importing the very best brains from around the world to revitalize their new product development. Deprived of this asset, US industry has become more handicapped over the past 8 years, and the situation is now getting worse. With the recession in the US, the opportunities for foreign talent in their home countries is expanding dramatically. Although their earnings will be less in the short term, their opportunities are likely to be much greater, and they are likely to have far more influence and respect in their home countries when they return with their US experience. Just a couple of links: my friend Tom sent me this BusinessWeek story http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090724_178761_page_2.htm Here is an interview from the author of a d widely publicized survey published in March 2009 which underlines the opportunity that returning Indians and particularly Chinese are experiencing on their return home.

To top it all off, manufacturing jobs, which started departing American shores at an ever-accelerating pace in the 1980's, are not coming back. As Chinese manufacturing grew more competent and sophisticated, and US Government business intervention became ever more onerous, companies responded by moving more of their manufacturing off-shore, and concentrated on product distribution, taking advantage of the low cost of foreign manufacturing to subsidize glitzy new shopping environments.

So productivity in the US became building new houses and shopping centers so that Americans could spend their borrowed money on foreign manufacturing.

Now, all these chickens are coming home to roost simultaneously. As distribution fails with falling consumer spending, these overpriced commercial developments are going bankrupt at an accelerating rate. So this is the next big property bust. As occupancy drops, the huge run-up in commercial property prices becomes unsustainable, and when their financing falls due (commercial property is financed for much shorter terms than home mortgages) the loans will not be refinanced, and the properties will default on their loan repayments and go into bankruptcy. In July 2009, this process has already begun.

Meanwhile, the banks have a dirty little secret in the home mortgage market. Many of their mortgages are in default, but the banks are not foreclosing, because when they do, and they sell the houses the repossess, they will depress the property market even further. Worse, they would have to declare their losses. As long as they just hold on, and keep billing the homeowner for their payments, even though the homeowner doesn't pay, the banks can live on the fiction that the asset value on their books is still valid, even though it has no relation to current market value. This holds true of the other dodgy instruments they hold. (This was ratified by the new Congress and Senate when they said that banks don't have to reflect the true market value of their assets. http://en.wikipedia.org/wiki/Mark-to-market_accounting )

The banks are showing record profits currently by the simple expedient of borrowing from the Fed at 0.5% and lending at the highest interest rates they can get. With the biggest interest return in banking history, they are recording record loan profits. But they are not declaring their true losses in mortgages and securities for the time being, simply because they don't have to. They are hoping that there will be some kind of price recovery in the home market before the wheels fall off completely.

Who said ignorance is bliss? I think it was a famous lemming quote, and it is true, all the way to the cliff edge. That's when the wheels fall off! Completely!

The entire system is currently driven by Belief. All this Belief garbage about "little green shoots", while in fact we are buoyed along on this wave of Believing lemmings that are blithely heading towards the Cliff of Oblivion.

The US is dependent on keeping it's status as the holder of the world's assets based on US dollar values. To be a global currency, the US cannot limit mobility, or the currency becomes useless. Like having money that works in Texas but cannot be spent in California. So when the lemmings start going off the cliff, the US cannot protect the currency from global rebuke.

But don't worry! The problems have not really begun yet. The US is currently living on the money it prints and lends to itself, but the drunken-sailor-spending-model is still in full cry. The Military and George W. Bush-inspired overseas adventures are still burning money, the coming next-round-crash in the banking sector is not yet here, and the stock market plummet is yet to happen in earnest.

Meanwhile, the price of oil will not decline: the oil-producing countries will cut production to keep prices around $70 a barrel and above. The West cannot survive without oil, and if the US dollar devalues, oil will rise accordingly.

Here is a Skype conversation with my good friend Wayne, a fully accredited skeptic, knowledgeable enough to blow holes in any half-assed theory.

Me: In the news today, Tuesday the 28th of July. http://online.wsj.com/article/SB124877925179086469.html#mod=whats_news_free?mod=igoogle_wsj_gadgv1 Interestingly, with all the talk of little green shoots and economic recovery, consumer confidence is plummeting. Hmmmmm. Methinks the people are not as stoopid as the Government thinks they are.


(Aside: no point in looking at this link. The WSJ was saying that the drop in stock prices was related to the unexpected plunge in consumer confidence. Within an hour, the article had disappeared. The WSJ is so unnerved by what is happening, their analysis is good for about 5 minutes, if that. Instead, look at http://www.nytimes.com/2009/07/25/business/economy/25econ.html?_r=1&scp=1&sq=consumer%20confidence&st=cse )

Wayne: "The people who write these articles have no way of knowing whether changes in stock prices have anything to do with consumer confidence or anything else -- they are just pulling that stuff out of their ass." (Right on, Wayne!)

Me: Yes. I agree. And I think a lot of the stock prices are being manipulated by people making large trades, probably with Government underpinnings. I don't believe any of these guys or any of the markets. I think the Capitalist system has become so defined and predictable, it can be gamed by players if they are big enough, or all act together. The banking crisis shows that. The entire world money market was gamed. Now, this action seems to have moved to the stock market.

Wayne: "I think the people who say the economy now is tracking the economy of the early days of the great depression may be right."

Me: "And right now, I think the Government is running so scared at the prospect of economic collapse, they are doing things to the markets in every direction to try to stave off failure.

For what its worth, I think tax revenues are going to plummet for this year, which will put Federal spending in stark contrast, but since the deficit is already heading towards $2,000 billion, what's another $1,000 billion added to this?

And with the Feds getting to the point in a year or so where they can no longer credibly print more money, the hard decisions on "National Defense" and the military budgets, national health programs, etc etc, are going to become very uncertain and require a lot of rethinking.

Wayne: "Why won't the fed be able to print more money in a year? (or is the key word, 'credibly'?)"

Me: "The key word is 'credibly'. Continual dilution of the money supply has to result in falling value of the currency sooner or later. With a currency as credible as the US dollar, it is likely that this 'credibility barrier', once breached, will push the dollar into free-fall for a while."

As a further observation, it is likely that when the dam bursts, and the dollar plummets, it will fall below its true value, which will be a great time for currency speculators to make money, shorting while the currency is dropping, and buying at the bottom to get the upside on the bounce back.

Now why are things still holding together?

First, the Federal Reserve loaned out around $4,700 billion dollars to underpin things. You thought the TARP was big, at around $700 billion? Really. LOL. You weren't watching. They have been lending like drunken sailors, and are not even going to tell us who they have been lending to. http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY And to ensure that this is not investigated, President Obama has pulled the teeth of any oversight effort to find out what the Fed is really doing. Another great video, courtesy of my friend Tom, which nicely summarizes the current picture: http://dailybail.com/home/the-fed-under-fire-the-federal-reserve-is-the-black-hole-in.html

And the second reason is much more sinister. It looks like the 13 billion shares traded daily are being manipulated by some really big money. Have a look at this Bloomberg News video, and look at the explanation of market liquidity that accompanies the video. http://www.brasschecktv.com/page/671.html It seems there are some really big players out there, one of whom can account for as many as a billion shares a day. the market is moving up steadily, which is restoring thousands of billions of dollars of value to share portfolios. But it looks like some huge money is manipulating the market.

Now you may recall that recently, Goldman Sachs acknowledged they had software that could be used to manipulate the markets. It came to light after GS claimed a programmer stole it in July 2009. This programmer has a salary of $800,000 a year. His new employer, based in Russia, has offered him $1.2 million a year. So he is obviously pretty good.

And meanwhile, it looks like the markets can be manipulated, and the Federal Reserve is no longer going to be audited, and Goldman Sachs have come through the financial crisis looking stronger than ever, while their competition has been pretty much castrated by events.

Please tell me if I am missing something here. Or putting two and two together and getting eight.

Because I am suspicious.

I think the US is being set up for a fall. The modern American business mantra, "I've got mine", almost echoes out of this scenario.

Of course, I could be completely wrong.

Comments, please, dear readers. :)