“Jobs report dashes hopes on recovery,” says the International Herald Tribune this morning.

Oh?

Yes, dear reader…once again, we’re right and they’re wrong!

You’ll recall from yesterday, the feds said that their monster stimulus program would hold unemployment below 8% in 2009. The year’s not half over and the rate is already 9.5%.

Then, they said the numbers were getting better each month – inevitably leading to a recovery by the end of the year. They predicted a loss of 365,000 jobs in June – considerably fewer than in May. Instead, the figures – even after they had beaten them up – said 467,000 jobs had gone, which was considerably more than May’s figure. The important thing is that the trend that economists thought they were watching – which was leading to a recovery – has been broken. Instead of fewer job losses, we have more.

Ha ha…we laugh at them. We mock them. We turn up our noses to show our contempt. We turn our backs and point to our…oh, never mind…

But wait a minute. What are we saying? Hold the self-satisfied congratulations, please.

Yes, we were right: there ain’t no green shoots. But we’re not vain and stupid enough to think we know what is actually going on. Only morons think they know what is going on. And the more sure they are – the bigger dopes they are.

Where, exactly, is this economy headed? How is it going to get there? When?

Damned if we know. (And damned if we don’t!)

Okay, now…shush…now that we’ve thrown the jealous gods off our case…we whisper to you: well, we actually DO have an idea of where this economy is going…which we will reveal to you, dear reader, in hushed tones, little by little. For starters, you have to realize: this is a depression. It is not a recession. In a recession, an economy gets a cold and has to take a little bed-rest. In a depression, an economy drops dead. Businesses go broke. The whole structure of the economy changes as the corpses are dragged away and new enterprises take their places.

Economists were 100,000 off on their jobless predictions because they still don’t really understand what is going on. We knew the predictions of a recovery were dumb. This is a depression – meaning, it is a major change of direction…not merely a pause in an otherwise healthy economy. After more than half a century of debt expansion, debt is contracting. Businesses, households, investors and the government need to adjust. And that takes time – a lot more than the 20 months of recession we’ve had so far.

It would happen a lot faster of course, if the feds weren’t fighting it every step of the way.

“Rise of the Zombies,” is a headline in today’s Financial Times. It tells a familiar and predictable story: the feds have propped up businesses coast-to-coast. Instead of being allowed to fail, they are kept alive by the government…and continue to take resources that could be redirected to more promising competitors.

But don’t bother telling the feds that. They don’t care. The old, worn out zombie businesses still make campaign contributions and employ voters. The businesses of tomorrow don’t. The present votes. The future does not.

Investors are wondering if the forecasters know what they are talking about.

“Stock markets disoriented by the uncertainties of the recovery…” says an awkward headline in today’s French financial news.

The Dow itself lost 212 points yesterday. Oil fell to $66. Even gold dropped $10 as people fled back to the only asset they know they can count on – the U.S. dollar. Or more precisely, U.S. debt denominated in U.S. dollars.

Come Hell or high water, the Treasury will come through. When it’s time to pay the coupons, they’ll have the cash. You can count on it.

But what you can’t count on is how much that cash will really be worth. And there lies the great trap for the lumpen investoriat. The lumpen, as you know, get their investment ideas from TV and the newspapers. The poor rubes are the last to buy in a boom and the last to sell in a bust. A day late and a dollar short, they always get the worst deals. When the papers tell them there’s a recovery – they believe it. When the Fed chief tells them to use adjustable rate mortgages…the silly clumps do it. When a governor of a Federal Reserve banks urges them to “go out and buy an SUV” they head for the dealers.

But thank God for these patsies. Without them, where would we get candy? And where would the U.S. government get its trillions?

The lumpen – along with the sophisticated fund managers who pretend to know what they are doing – are financing the biggest government-borrowing spree in the history of mankind. You don’t have to dig too deeply to figure out why that won’t work. Financing a little spree of borrowing may turn out well; financing a big one is asking for trouble. Each dollar you lend weakens the borrower’s balance sheet. By the time he has gotten to the 12 trillionth dollar…you might as well be throwing the money down a well.

And thank God for Arnold Schwarzenegger. What an entertainer! He had it all. Money. A good wife from a bad family. A nice hairdo. And what did he do? He gave up a promising career in the motion picture business to launch himself into the slimy world of politics.

And now the poor man is groveling. Begging. Imploring the banks to take his state’s IOUs. He says they are “rock solid.” California is the world’s 6th largest economy. But it was a world-beater when it came to debt-based bubble illusions. And now its economy is falling apart. Economists can lie about the inflation rate. They can fudge the GDP. They can torture the unemployment numbers. But when the revenues come in, all they can do is count them up. And revenues are falling. Especially tax revenues.

The feds and the states are losing income. When businesses lose revenue they cut back expenses. But governments – at least those that are modern popular democracies – find that they need to increase spending. They have more people asking for help. And they have programs that become automatically more expensive – such as unemployment benefits – when the economy softens.

Let’s see. Expenses down, income up = happiness.

Expenses up, income down = misery.

See how simple it is?

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

When Zombies Attack

Bloomberg reported that “Wall Street’s largest bond-trading firms say the worst may be over for investors…” Then, General Electric’s CEO, Jeffrey Immelt and famous investor George Soros both said that the crisis is “behind us” and that growth will begin again next year. Finally, analyst John Dorfman opined that the stock market would be a safe place for their money at least through the end of the year.

And now comes the big American holiday – July 4th. Investors pack their suntan lotions and head off to the beach for Independence Day. With Jaws in a cage, they had judged it safe to go into the water. But then came Thursday’s news. Instead of going down as predicted, the number of job losses for June went up. Another 467,000 people became unemployed last month. The figure even surprised us; we didn’t think there were that many people who still had jobs.

And so…this weekend, investors walk along the beach deep in thought. Is it safe to go back into the water…or not? They should listen carefully. That gurgling sound they hear is not mermaids singing, it is the world economy, drowning.

As we reported in this space, the feds’ bailouts, boondoggles and bankers’ bonus plans aren’t working. At the end of last year, they predicted unemployment over 8% in 2009 – if the stimulus plan were not enacted. But it was enacted. Unemployment is at 9.5% already and it is still rising. It will be over 10% before the end of the year. Global trade is collapsing; exports from Germany and Japan are down about 40% from a year before. Prices are going down too – with a report this Wednesday that the entire Eurozone has slipped into negative inflation. And from Britain came data showing a contraction of 2.4% in the first quarter, bringing the year-to-year decline to nearly 5%. “Economy shrinks at 1930s rates,” said the headline in Wednesday’s Telegraph.

When we look at America’s employment numbers, we feel like a school doctor. We would call the authorities, except that it was the authorities who should be arrested. After the feds got finished with them, the numbers told of a better-than-expected drop in May U.S. payrolls. The key to this uplifting news was not a genuine improvement, but new and improved techniques in torture. Water-boarded with seasonal adjustments and birth/death models, the numbers began to see jobs everywhere. As for “discouraged workers”, meaning those who gave up looking because they couldn’t find a job, these unfortunate souls disappeared from the jobless figures altogether.

John William’s Shadow Government Statistics reports that without these twists, the numbers tell the same story they’ve been telling all year – unemployment is still getting worse, at about the same pace as earlier in the year. “The unadjusted annual decline in May payrolls was the worst since May 1958,” says Williams. And if they were allowed to speak freely – as they did in the ’30s – the figures would show real unemployment at over 20% of the workforce…or about 30 million people. That approaches Great Depression levels…and we’re still only in 1930, not 1932. As for those still working, an additional 1.5 million U.S. workers have been “forced into part time work” according to the Financial Times.

Analysts compare these sharp drops in trade, prices and employment to what happened after WWII. Come 1946 and the world had little use for so many soldiers, machine guns and artillery shells. Millions of young men were ‘de-mobed’ and joined the unemployed. And smokestacks suddenly stopped smoking. But that was at the very beginning of 62-year period of credit expansion. Consumers had pent up demand for houses, cars, and other goods and services…and they had the wartime savings to buy them with. Even so, it took three years of adjustment after the war before the stock market began to turn up.

Now, we are at the other end of the cycle – the beginning of a major credit contraction, with no pent-up demand, no savings, and too much capacity to turn out too much stuff that too many people don’t have the money to buy.

Meanwhile, housing prices are still going down in America…and with housing goes the lenders’ collateral. U.S. residential property prices have fallen 33 months in a row. So many houses are “underwater” that the United States is beginning to look like the lost continent of Atlantis.

More foreclosures are coming. U.S. mortgage loans typically call for “down the road modifications” that lead homeowners into a kind of financial cul de sac with no way out except foreclosure. According to a study by T2 Partners, there are three more big waves of foreclosures still ahead – including those in ‘prime” loans, home equity lines of credit, and in commercial real estate.

“When [these mortgage loans] start adjusting upward it will turn millions of homeowners into over-levered, underwater renters, and ensure housing is a dead asset class for years to come,” says Mark Hanson of the Field Check Group.

With incomes falling and house prices weak, consumers will miss payments, default, and cut back spending. Business earnings will decline; bankruptcies will increase. This economic undertow is treacherous. Investors should stay out of the water.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

Stay Out of the Water

Instead of this pathetic human-interest story, the Times reports that they come to this ugly “U.S.’s Debtor Status Worsens Dramatically” conclusion because the Commerce Department reported that “At the end of 2008, America’s net international investment position was minus $3.47 trillion. That represents the difference between the value of U.S. assets owned by foreigners ($23.36 trillion) and the value of foreign assets owned by Americans ($19.89 trillion).”

The net result is that “At the end of 2007, the U.S. net international investment position was minus $2.14 trillion. Thus, America’s net indebtedness with the rest of the world increased by $1.33 trillion, or 62 percent, during 2008”, which was, they say, “by far the biggest annual increase in data that go back to 1976.”

Well, I got a Hot Mogambo Bulletin (HMB) for these Times fellas, because during that same time the national debt was about $9.2 trillion at the end of 2007, and by the end of 2008 it was $10.7 trillion, for a gain of $1.5 trillion in SOMEBODY’S “net investment position”! Hahaha!

And Doug Noland of the Credit Bubble Bulletin reports, “Combined outstanding Treasury, GSE and MBS obligations surged $1.949 TN, or 15.3%, in 2008 to $14.709 TN.”

And perhaps it is this increase in foreigners’ “net investment positions” in dollar-denominated assets that is why, as Michael Kosares at usagold.com reports, “China recently expressed its interest in purchasing $80 billion in gold (about 2600 tonnes).”

Now, although I am a greedy guy who would love to be able to buy 2,600 tonnes of gold because I would be Set For Life (SFL), it is almost nothing in the Big Scheme Of Things (BSOT), and he notes that with “nearly $1.4 trillion in dollar-based assets, and almost $2 trillion in total reserves, $80 billion would consume a paltry 6% of China’s dollar reserves. At the same time 2600 tonnes translates to roughly one-third the U.S. gold reserve – a significant ambition by any measure.”

And if you think that the Chinese are bluffing, then it becomes hard to explain why although “China has quietly become the world’s leading gold producer”, it is also a fact that “most of that production never leaves China’s borders, but goes instead to the national reserves as a hedge against its currency holdings.”

This is where it becomes interesting, as “China, by the simple expedient of defending its own interest, accomplishes much for the gold mining industry as a whole. By posing as a gold buyer of last resort, ready, willing and able to scoop up any sizable offer, China may have very well put a floor under the market price”!

And it is not just gold, as Junior Mogambo Ranger (JMR) James R. sent an article titled “Chinese Strategic Plans; Control of the Supply of Rare Earth Metals” from the Contrarian Investor’s Journal.

The article says, “Rare earths are the 15 elements within the lanthanide series of the periodic table, plus the elements yttrium and scandium. The best known are lanthanum, cerium, neodymium, praseodymium, gadolinium, europium and samarium”, which I gotta tell ya, I never heard of any of them, but they have all kinds of important, specialized, strategic uses and blah, blah, blah, none of which I understand, and I would not be telling you about them now except that I am intrigued by the sentence “China is the largest producer of rare earths. In fact, it is said that China is the Saudi Arabia of rare earths.” Hmmm!

In fact, “While about 42% of worldwide rare earths resources are outside China, there are NO non-Chinese sites with any significant processing or refining capacity”, and it is likely to stay that way because although “Many people are looking at establishing alternative refineries and sources outside China”, they soon learn that “the investment is not necessarily a sound one because of the threat of price revenge by China. If new projects emerge, as they have recently in Malaysia and Australia, China could just drop its prices and force rivals out of business.”

This is, of course, predatory pricing, an illegal activity which is “an anti-competitive practice by monopolies to bankrupt their competitors by slashing price so much that everyone makes a loss. Since the loss-making monopoly will eventually outlast their loss-making competitors, it is only a matter of time until competition is eliminated and the monopoly can increase prices.”

This, then, is the kind of competitor that we face! And one that is keeping all its own gold and wants to buy more! Wow!

And you want to bravely face what looks like a developing gold standard yuan in the hands of ruthless, unrestrained Chinese competition with a fiat dollar in the hands of a corrupt, spendthrift American government and a Federal Reserve that thinks that creating more money and credit to reflate the bursting bubbles caused by creating too much money and credit is “prudent monetary policy”? Hahaha!

All I can tell you is that if you are not that brave, then forego those wistful, wishful ways, and buy gold, silver and oil, because that is what I am doing and I am not so brave as you!

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

Nothing Rare About Chinese Rare Earths

Well, well, well, what do we have here? It certainly looks like all those sounding the “all clear horn” have some egg on their collective faces this morning, eh? The egg thrower is the Jobs Jamboree that took place yesterday… Recall that I told you about how the forecasters had job losses pinned at -365,000? Well, the Bureau of Labor Statistics (BLS) reported job losses to be -467,000, which is far worse than that rose-colored glasses -365,000… But wait! If you act now, we’ll double the order! OK, I’m just having some fun with infomercials… But what I’m getting at is the fact that the BLS was at it again, folks! The BLS added 185,000 jobs to that -467,000! Again… The BLS seems to believe that there are businesses starting up in the depths of a recession that would amount to 185,000 new jobs being created! Really? Come on… Of that 185,000 jobs the BLS added, 31,000 were allocated to Construction Jobs… Which may or may not have happened, but wouldn’t it be better to wait-n-see, without affecting the markets this way?

OK… So… The “actual” real number was -652,000… I say that because, at sometime in the dark of night, when no one is paying attention, the BLS will make an adjustment to the overall unemployed number, and take all these jobs they created out of thin air, and remove them from the overall number… They will admit they were wrong, but not in public! Hey! I didn’t want to be in public, you threw me out in public!

So… As I stated yesterday, this has been the “lost decade” for jobs in the U.S. We now have approximately the same amount of people with jobs now that we had in May of 2000…

All the flag wavers for the recession being over have gone back to their padded rooms! This is why I wanted so badly for currencies to drop the link with stocks, because I truly feared a stock sell off that would be very bad…. I know, I know, it hasn’t happened yet, but it could be happening right now before our eyes!

All this government intervention is choking the patient they were trying to heal! Speaking of which, I was reading this new weekly e-letter that comes to me called, “Conversations With Casey” which, is Doug Casey, and old friend of ours here at EverBank World Markets… These are very interesting conversations, as Doug takes a question and just hammers home his thoughts… Well… Since I was mentioning the Government Intervention, it reminded me of his last letter, when he touched on this subject… Let’s listen in to what Doug Casey…

“The point I’m making is this: You’ve heard the old saying that history doesn’t repeat, but it rhymes? I’m afraid that for many reasons, the government is doing just about everything possible to push the economy over the edge. First of all, the government is much more powerful than in the 1930s. They are going to make exactly the same mistakes – but bigger this time.

They are going to wind up destroying the currency.

It’s probable that Americans will end up in a war, for a number of reasons.

What we’re looking at is something that’s going to be long, dismal, and really unpleasant – much worse than what happened in the ’30s and ’40s.”

Well… All this rot on the unemployment data’s vine, was not good for the currencies, and precious metals. This “new revelation” that the U.S. economy is still in shambles, caused the risk takers to head for the hills… Take profits and retreat to fight another battle on another day. The currency massacre at the hands of the Jobs Jamboree was widespread… I don’t think I saw A currency that survived….

The good news for currency holders though is the fact that while every currency was sold, the kingpin, Big Dog, euro held on to the 1.40 handle… Of course now that I’ve said that, it will fall below 1.40 for sure! The other thing going on in the overnight markets is the fact that the high yielders which saw the most selling yesterday, were able to recoup about 1/2 of their losses in the overnight trading.

The euro was supported somewhat by the European Central Bank (ECB) meeting where interest rates remained unchanged, and ECB President Trichet, gave no indication that rates would be moving lower any time in the near future. Trichet also tried to stir the banks in the Eurozone to “play their part in generating an economic recovery”… How would that do that, you ask? Well… Trichet pointed to the 442 Billion euros that the ECB made available for the next 12 months to Eurozone Banks back in June (reported here of course!) and believes that amount to be all that’s needed… So… No more rate cuts… No more stimulus… Make it work darn it!

Woops! There it goes… I just looked over at the currency screen, and saw the euro slip below 1.40! Told you I would jinx it!

So… With the U.S. stock market closed today, the markets will be paper thin once London closes their books and heads to the pubs… Wild swings can occur during these pre-holiday, Friday afternoons, when the currencies won’t pick up again until Sunday night, when Japan come back online…

Speaking of the stock market… Yesterday’s Jobs Jamboree caused some problems for stocks too, driving the S&P 500 down to its third-straight weekly loss.

OK… With the markets thinned out… And the data cupboard emptied out this week, I don’t have too much more to talk about today… So, with that in mind, I thought I would talk a bit about the 4th of July…

I’m a Yankee Doodle Dandy
A Yankee Doodle, do or die
A real live nephew of my Uncle Sam
Born on the Fourth of July

OK… I wasn’t born on the 4th of July… But I always get a kick when I hear that song. It just puts a smile on my face, like a Cheshire Cat! It always reminds me of my dad, who was a great patriot, and someone that would be as upset as I am at the direction this country is being taken… But, that’s not what I’m talking about now… I’m talking about the 4th of July!

WE THE PEOPLE!

I think that the Gov’t has forgotten that the Constitution is about WE THE PEOPLE! In case you’ve forgotten:
We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

I sure hope these “Tea Parties” going on all over the country tomorrow, get back to supporting the Constitution!

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

A Jobs Jamboree Debacle

Within the billions of sentences about the financial bailout there is one word notably absent, austerity. All talk is of payments, supports, subsidies, incurring more debt, stimulus packages. The thesis seems to be: If only we spend more the party can go on. True, only if the financial meltdown is a temporary mismatch and dislocation in housing and credit markets. But suppose there is something fundamentally wrong with the US economy. Then spending more will not fix it. Getting the diagnosis right means getting the treatment right. It may save us a trillion or two.

The subprime collapse is one symptom of years of little regulation, under-taxing, overspending, and massive debt. One way to understand what is happening in the United States is to look at what occurred time and again in Latin America and Asia, hotbeds of financial and banking crises. What we are living through happened time and again in Brazil, Argentina, and Mexico, as well as Korea and Thailand.

If there is too much debt, people lose confidence in the banks, then credit markets, currency, and government.

For more than a decade, the international financial cop, the International Monetary Fund, forecast a hurricane was heading toward US shores. As did many heads of the Treasury and the Fed. It is, to paraphrase a great writer, a chronicle of an agony foretold. There are five basic drivers of these crises, all based on excess: high income concentration, too much debt, too much reliance on foreign money, not enough tax revenue, and reckless government spending. Time after time governments believe they are different. They are bombarded by warnings but ignore, postpone, spend even more, and crash.

Over past decades, most US wages have fared poorly. Despite stagnant wages, consumer spending and debt increased, fueled by cheap credit. Companies also went on a debt binge. Careless deregulation allowed financial cowboys to run the system. Responsible CEOs who kept some cash, maintained moderate debt, invested for the long term, got pink slips. Financial chop shops did leveraged buyouts using a company’s own cash and credit. To survive, companies piled on debt.

Many politicians decided reelection depended on cutting taxes and offering more benefits. Increase Medicare, postpone Social Security reform, hire more bureaucrats, and pay for a two-front war. Debt grew to pay for this party. These were not true tax cuts, just postponed debt; now we owe more and the bill has come due with interest.

Complicating this crisis is US economic hegemony. There were few places to park a lot of money. Despite the euro, European policies on debts and deficits are not much to brag about. So foreigners have gorged on US debt. The United States continues importing more than it exports. Middle Easterners and Asians who save and invest bought dollars for decades, but some of this money is now fleeing. The dollar has dropped sharply. Gold and oil have skyrocketed. In financial crises, huge pools of capital cross borders very quickly; a few can make a great deal of money shorting the country’s currency.

The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement. Bailout and stimulus are a stopgap.

A solution requires the country to begin to spend what it earns, reduce its mountainous debt, and address massive liabilities, restructure Social Security, pension deficits, military, and Medicare. No wonder politicians would rather spend more of your money now rather than address these problems. Because we have been spending 5 to 7 percent more each year than we earn, a forced restructuring, triggered by a currency collapse, would have the same effect on wages and purchasing power that the housing collapse had on housing prices. So let’s learn from our Latin and Asian friends and act before it is too late.

Regards,

Juan Enriquez and Jorge Dominguez

for The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

What About Austerity?

Everything is working out just like we thought it would. The stock market is performing as expected. The economy is on track. Even the politicians are doing what they thought they would.

Let’s begin with the stimulus/bailout/boondoggle/BS plan. As anticipated, it has failed. That is, the economy is getting worse, not better. It has failed the test set for it by its own creators. Back when the Obama Team was arguing for a big bailout bill, it warned that without a bailout, unemployment would rise above 8% in 2009. ‘Pass this bill today,’ said Ben Bernanke, or words to that effect, ‘or there may not be a tomorrow for the US economy.’

Congress dutifully bent its back to the task of adding boondoggles to the bill and then okayed the measure. And here we are, in the middle of 2009, and the unemployment rate is already at 9.4%.

Even at the time, it was obvious that the hacks in the administration had no idea what was going on. They were just guessing about the economy and taking advantage of the situation to pass out more money that taxpayers hadn’t even earned yet.

As predicted, the spending didn’t make the situation better; if anything, it probably made it worse – by delaying the process of destruction, and hence retarding the process of creative reconstruction too.

We recall our other forecast too: when the bailout doesn’t work, they’ll pass another one. And so, in yesterday’s New York Times, there is David Leonhardt urging the pols to even bigger acts of absurdity:

“The economy really may need more help,” he says.

Yes, it will need more help. Especially if it keeps getting the kind of help it’s been getting.

The stock market is acting more or less as we thought it would too. The big bounce began on the 9th of March. It’s been almost four months now…and the bounce should be getting near its peak…and beginning to fall again. Just look at a chart of the Dow since March. You’ll see exactly that. Like a cannonball, it went up…and now it seems to be arching over for its fall to the ground.

As stocks roll over, the economic news rolls over too.

Yesterday’s issue of USA Today featured a report that said small businesses are going broke faster than expected. Small businesses are supposed to be the survivors. Like mammals in the Ice Age, they replace the dinosaurs. In a recession, big, costly, inflexible companies are supposed to get hit the hardest…leaving niches for small, nimble, low-cost competitors to slip into. These small businesses establish toeholds during the recession…hire people…and then scale up to the peak of commerce when the boom comes.

But this time it’s different. Small businesses are collapsing along with big ones. In April, for example, more than small 8,000 businesses went broke and filed for Chapter 11.

In addition to the business bankruptcies are the personal bankruptcies. According to the Los Angeles Times, the rate of personal bankruptcy is soaring in Southern California.

In April, according to David Rosenberg at Gluskin Sheff, the feds added $121 million (at an annual rate) in total stimulus to the consumer economy – including tax reduction and increased benefits. In May, the total stimulus rose to $163 million. How come so many bankruptcies when the feds were giving away so much money?

The answer, says Rosenberg, is that consumers didn’t spend the money; they saved it. Consumer spending rose just $1 billion April – despite $121 billion of stimulus. In May it rose $25 billion – despite a ‘stimulus’ 6 times that amount.

Meanwhile, the saving rate, which had been only 0.2% in March of 2008 exploded to nearly 7% in May 2009.

No consumer spending, no sales. No sales, no revenues. No revenues…no one can stay in business.

No small businesses. No new jobs. No new jobs, no economic recovery.

No economic recovery and the meddlers are back on the Hill asking for more power and money.

No surprise there.

Depressions take time. Bankruptcy rates don’t rise overnight. First, it takes businesses a while to realize their sales are falling. At first, they think it might be a fluke. Then, they talk to friends and read the papers. And then, the next month confirms the story.

Then, it takes time for them to react. They have to figure out where they can make cuts. Typically, this involves layoffs and job losses. Employees who will be let go need to be identified. Then, they actually have to be sent home.

Then, the employee collects benefits. He looks for another job. He draws down savings. It takes time for him to react too. He watches. He notices that it is hard to find another job. He realizes his resources are running out. He begins to cut back. Unnecessary expenses are eliminated. Then, he broadens his definition of ‘unnecessary.’ Finally, he lacks the money for the essentials. The mortgage goes unpaid. Credit card deadlines are missed. This provokes an inevitable response – warnings, more warnings, official action, and finally…defaults, foreclosures and bankruptcy filings.

We came back to Paris last night to celebrate our 25th wedding anniversary. It wasn’t much of a celebration…just a simple dinner for two in a simple restaurant in the old Palais Royale.

It was a hot day in Paris. We sat outside in the galleries of the old palace. Near to us was another couple. Middle aged, they seemed like people who were getting together for the first time, not a couple who had been married for a long time. The man reminded us of John Malkovich. The woman? She was not an especially attractive woman, with straight gray/black hair cut as short as a man’s. They held hands. They looked into each other’s eyes. They seemed to be making plans for a happy future.

When you’ve been married for a long time, on the other hand, you have to wonder if your happiness is not more past tense than future. You can recall the happy times you spent together…how the children were when they were little…how much fun you had when you were poor and starting out in life…and all you went through together to get to where you are now. But when you look ahead, your weary eyes fail. You may feel as though you’ve said all you had to say – and agreed to disagree. You may feel as though the grand adventure of your lives has peaked out – like a bull market – with nothing but the downward slope left for you. You may feel that the great mystery of coupling has been revealed. Getting to know someone and getting together…even fusing your flesh, blood and spirit to form fully new human beings…is there anything left to discover? Are there more surprises coming?

Inevitably, the conversation turned towards the sovereign state of South Carolina. The poor state has a jackass for a governor. Mark Sanford has become a laughingstock for the entire nation. Not because he had an illicit dalliance and lied about it – who can honestly say he hasn’t done that? – but because he is a cad. And the worst kind of cad – the kind who pretends to be sensitive and caring.

He’s found true love, he says, with an Argentine beauty. But rather than dump his wife and fly to his heartthrob…he dumps the love of his life and tells his wife that he will try to fall back in love with her. The bonehead betrays them all – his wife, his lover…and love itself. He’s even given romance a bad name. Meeting a woman who looks like Penelope Cruz on a dance floor in South America has an undeniable romantic appeal. When the story broke, there must have been hundreds of lonely middle-aged men in America booking their tickets and looking forward to tango. The Mark and Maria affair might have made the history books of star-crossed love, along with Tristan and Iseult, Antony and Cleopatra, Brad and Jennifer. But now, a week later, we know what kind of man Mark really is. Cancel the tickets. Any man who falls in love from now will feel like a sap.

As for us, we’ve been saps all our lives. Eventually, we’ll head for the romance of Buenos Aires too. But we’ll take our main squeeze with us, just to see what happens next.

Until tomorrow,

Bill Bonner

The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

Depressions Take Time

First, as we forecast yesterday, the Labor Department issued a worse-than-expected jobs report this morning. The U.S. economy shed 467,000 jobs in June, they claims. As this chart shows, the Street was betting on the current trend to stay intact. Job losses have decreased every month since their January peak… until now.

B-list data points from this morning’s jobs report were equally lousy: The average hourly workweek fell to 33 hours, but hourly wages stayed the same. Those out of work for six months or more now exceed a record 4.4 million. And continuing claims for unemployment benefits remained at 6.7 million, just below an all-time high.

By the government’s count, a record 14.7 million people are now unemployed. That makes for a 9.5% unemployment rate, a 26-year high.

On the housing front, mortgage applications have fallen to a seven-month low. According to the Mortgage Bankers Association, requests for new home loans fell 19% last week while refis plunged 30%, both to levels unseen since November. While mortgage rates are well off March’s 4.6% record low (30-year fixed), they’re still at a reasonable 5.3%, a full 100bps below the average rate this time last year.

And since it worked so well the first time around: The Obama administration announced they will expand the “make home affordable” program to an even wider range of deadbeat borrowers. Previously, homeowners with mortgages worth more than 105% of their home’s value did not qualify for President Obama’s manipulated refi rates. That limit has been bumped up to 125%… incredible.

Even more amazing: One in five mortgage borrowers are “underwater,” meaning the value of their loan is worth more than the price of their home. That’s nearly 20 million homeowners.

“Housing and jobs are the two cornerstones of American middle-class wealth,” reiterates Bill Bonner. “If they can’t hold the weight of a building economy, there is little chance of a broad recovery in the United States… or Britain.

“In Britain as in America, the real economy is falling off just as investors, analysts and commentators think they see a recovery. They think rising stock prices – U.S. stocks are up 40% since March 9 — predict and precede a growing economy. Stocks, they say, ‘look ahead.’

“People will believe anything. If stocks had been watching where the economy was going, they never would have traded at such high levels in ‘07. They clearly had no idea what was ahead. Nor do they now…

“What we see is this: The United States prospered in the 20th century not because of the Roosevelts, but in spite of them. The American economy was expanding… it was still young, strong, competitive and prosperous. The empire grew with economic power.

“But the years ahead are not likely to resemble the post-Roosevelt years. America’s position relative to the rest of the world is weak and in decline. She is not a creditor; she is a debtor. She is not a low-cost competitor; she is a high-cost competitor. She no longer has a free and flexible economy; she has one freighted with central planners, regulators and busybodies.”

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

The Two Most Important Measures

For awhile, I thought that I was the only guy in the world who could not believe that people are somehow saving so much money, and I was going to use this fact as an excuse to go to a bar and get really plastered since I obviously have no idea what in the hell is going on.

However, as I am heading towards the door, I see where Rob Parenteau of The Richebächer Letter writes, “Oddly, along with flat consumer spending, the gross personal saving rate has surged to nearly 7%, yet the unemployment rate has kept climbing. How is that combination possible? Specifically, where is the household sector getting the income growth to both increase saving and stabilize spending levels when job cuts remain alarmingly high?”

Well, the answer may be that they aren’t buying anything at all! I came to this startling conclusion from an email from Junior Mogambo Ranger (JMR) Diane S., who sent a spreadsheet that she said was “taken off the S&P website” at www2.standardandpoors.com that shows that the actual 12/31/08 “As reported earnings per share” for the S&P500 index is a startling loss of $23.25! Yow!

It takes a moment to sink in that the earnings of all 500 of the companies in the S&P500 index, the 500 biggest corporations in America, are negative, which, of course, makes the price-to-earnings ratio a negative number, which has the bizarre result of the P/E ratio now being the amount of money you will spend for a share of the S&P500 to buy a loss of $23.25! Hahahaha!

Then I thought to myself, “Hold on there, Mogambo! Maybe with all the drugs people can get or make these days, maybe there is enough brain damage extant in the world to make this work!”

Excitedly, and hastily, I left work, jumping into my car and speeding to the mall, radio blaring, whereupon I started offering people in the parking lot the latest Hot Mogambo Investment Idea (HMIA), which is, “Give me a dollar and I will give you a 23 cent loss!” which I quickly learned was a failure of a business venture, so I went inside and got some egg rolls from the food court and went back to work.

Pondering what went wrong, I see that maybe there is literally no money to invest in my HMIA, as JMR Diane S. notes, “they really buried it, but the estimated ‘As Reported’ P/E for the S&P500 is 1920 this quarter! For next quarter it’s a negative number, -436!! That’s beyond infinity!!!”

Her three exclamation point punctuation that really got my attention! This must be huge!

Intrigued, I took another look at the table in Barron’s, and I see that the P/E ratio for the S&P 500 is now an astounding 127.45, which is already so outlandish that I get the odd sensation that I am in some kind of dream world, a place where morons somehow get wads of cash and decide to spend it on an asset whose earnings are so low that it would bizarrely take 127 years to break even on buying the stock, and when the average lifespan of the average investor is less than 80% of that, which is such a weird, disorienting concept that it takes me Over The Freaking Line (OTFL) when it is all compounded by noting that the companies in the index are paying out $21.69 in dividends while only making $7.21 in earnings!! Gaaahhh!

So if you are one of those people who currently own the S&P500 and you are saying to yourself, “Yow! These guys are bankrupt! I gotta get out of stocks, and into something else! But what?” then let me tell you that all the other people in the last 4,500 years who came to this place in their lives either bought gold (and fared very well), or they did not (and did very badly, mostly starving to death in the streets and dying of exposure while the cries of their hungry children were ringing in their ears).

In short, “Whee! This investing stuff is easy!”

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

Dead Before You Break Even

When I left you yesterday, the currencies had rallied back and were waiting for more data… The data that printed was not very good, led by the ADP Employment Report for June, which came in with a greater number of job losses than was forecast (-473K VS -395 forecast)… So, according to ADP the bleeding continues… Now we have to wait for the Jobs Jamboree that will print later this morning, to see what “games people play now, every night and every day now”…

So, the currencies moved a bit more with the data printing and showing continued rot on the vine… For instance, the ISM Manufacturing Index remained below 45, which is recessionary to me… But the real blow to the dollar yesterday came when G-8 Sources announced that CHINA HAS ASKED FOR G8 ITALY SUMMIT TO DISCUSS ISSUE OF NEW GLOBAL RESERVE CURRENCY…

You should have seen the dollar selling at that point! OUCH! The euro climbed to 1.4175, and took the rest of the currencies along for the rides! This was HUGE folks! There it was… On the G-8 Agenda!

However, seeing the damage that this announcement had done so quickly, the Chinese had to do something quick… And quick they were… China’s Vice Foreign Minister said he is “not aware of any plan to discuss alternative reserve currencies at next week’s G-8 meeting.” And the turn-around was on!

So, overnight, the dollar is firmer, and the euro has lost that 1.41 handle once again… These probes to the 1.41 handle are becoming more frequent, but with little staying power. So… There you have it… One item made the currencies soar… And the denial made them come back to earth, all within 24 hours… Jack Bauer would be proud!

While I’m talk about China, I was wondering if you all caught the interview on Fox (I didn’t, of course, it was pointed out to me by a reader!) where U.S. Rep. Mark Kirk, was interviewed and asked questions about his accompanying U.S. Treasury Sec. Geithner on his Magical Currency Tour last month to China… In a private discussion with Chinese officials, Kirk was told that the Chinese were extremely concerned about the likely near term decline in the dollar because of the “explosion” of government debt. And… As a reaction to this concern, the Chinese Gov. was creating a “fund” / reserve to buy oil… And another $80 Billion worth of Gold!

OK! And did you see Gold trade higher yesterday by $15? Well, it’s lost $8.50 of that gain overnight… Profit taking, and the denial by the Chinese has caused this sell-off…

The euro is also seeing some pressure this morning, as the European Central Bank (ECB) is meeting and most likely will have to admit that they will keep rates at ultra / record lows for some time to come, as the Eurozone remains in a recession.

As I explained on Monday this week, the Jobs Jamboree was moved to today, to avoid the markets being thinned out tomorrow. Apparently, the Bureau of Labor Statistics (BLS) wants everyone to see their work! HA! The “experts” believe that the Jobs losses will have increased in June, adding 20,000 lost jobs to May’s “BLS adjusted” number of -345,000… I would have to think that if this prints as forecast, that the “risk takers” will be happy enough, and continue adding risk assets like stocks, currencies, precious metals… Anything greater would probably put a lid on their propensity to spend on risk assets… For now, at least!

Oh… And one more thing on the job losses for June that will print this morning… If the “forecast” number of lost jobs prints… It would mean that the number of people working today, in 2009, would be about the same number of people that were working in May of 2000! Talk about a Lost Decade!  I wonder if the major media will pick up this fact? Now wouldn’t that be a big surprise to all those folks that were surveyed last week for Consumer Confidence? It surprised me to see that fact! The Lost Decade… Strange but true…

The strangeness of today though will be the fact that the Weekly Initial Jobless Claims will print, and probably show that over 600,000 jobs were lost last week, and unemployment claims were filed… So… How does the BLS come up with “only” 365,000 jobs lost for the month, when one week was 600,000? The games people play now… Every night and every day now… Never meaning what they say now… Never saying what they mean… And they wile away the hours… In their ivory towers… Till they’re covered up with flowers…In the back of a black limousine… - Joe South…

I’ve gone over the do goody-good bull of the BLS so many times in the past it makes my head spin, so I won’t go there again today… But, it makes no sense to me what-so-ever that the BLS still uses a stupid “survey” when they have the ADP and Weekly Claims at their disposal… I think I know why… But again, it just doesn’t make sense to me!

So… Keep an eye on the Jobs Jamboree for today…

Recall earlier this week I told you that Sweden’s Riksbank would meet on Thursday, and I said that: “With internal rates at just .50%, I guess they could cut, but what would be the point?” Well… The Riksbank surprised the markets this morning, and did cut 25 BPS bringing their internal rate to just 25 BPS or 1/4%… I would think that any good that Swedish krona buyers saw in the past 5 days, will be wiped out by this news, as the rate cut at this time has to signal “bad stuff” for the economy… The only thing left for the Riksbank now is to implement Quantitative Easing, which if they aren’t afraid to cut rates to 25 BPS, they certainly won’t have any “moral” problems with Quantitative Easing…

And like I said for the U.K., Switzerland, and U.S. when they announced their Quantitative Easing… “Hey, Japan’s been doing it for over a decade now, and look how well it’s worked for their economy!” I shake my head in disgust, that anyone with an ounce of brain power would go down the same road as Japan with regards to how they responded to their economic meltdown of the 90’s… But we have… Step for step… Beginning with the $150 Billion in stimulus checks… And moving on to larger sized measures from there…

I’ve told you all this before, but for new readers they might not know… That in the 90’s I was a currency and foreign bond trader… I watched the Japanese introduce stimulus after stimulus, and budget gadgets after budget gadget! And, like I said, look at how well it worked in their economy?  History may not repeat itself, but it rhymes according to Mark Twain… And what we’re doing with our economy rhymes with what Japan did in the 90’s…

Oh! I know, the rose colored glasses wearers will say, “but Chuck, we reacted “much earlier” in the recession than the Japanese did” Yes… We did, so, what does that mean? That instead of a greater than decade economic funk that we’ll experience something shorter in time? OH, so a 5 year economic funk is worth adding Trillions to our National Debt? I don’t think so…

With regards to the interest rate policy that adds to these woes… Janet Yellen, president of the Federal Reserve Bank of San Francisco, went further than other policymakers in assuring that the Fed is not likely to push its interest rate up in the near future. Ms. Yellen was speaking to reporters and said.” it is “not outside the realm of possibility” that the central bank will let the interest rate remain close to zero for several years.”

Oh great! Just go ahead and fuel that future inflation… And rack up the deficits… We can go on like this forever, right? NOT! There’s no way this can go on forever! And… If the markets were doing their job, it wouldn’t be going on now, without major pain in the yield on Treasuries and the value of the dollar! When out of the 29 largest nations in the world, the U.S. has the worst debt/GDP ratio, you’ve got to take a step back and say Whoa, there partner! Unfortunately, no one (except Ron Paul) in Washington D.C. is doing that… This is getting completely out of control, folks… Completely out of control!

The markets always do what the markets should… Just not always when they should… I learned that a long time ago, from my old, old boss, Ed Bonawitz, and I’m reminded of that all the time…

Like remember when I was calling for an end to the Carry Trade, and a Japanese yen rally, 2-3 years before it finally happened? The markets finally did what they were supposed to do, it just took 2-3 years!

Well… The euro has been in a steady downward move since I came in this morning. I turned on the screens and the single unit was trading just below 1.41… It’s now moved down to 1.4060… No biggie, but a steady downward move in the past two hours…

A long time reader sent me a note yesterday regarding yesterday’s Pfennig… “Uriah Heep, The Ventures, Soros, Rivlin, Sylvester, and Lucy!   All in one Pfennig” It caused Cranium Spin!

Yes, I was on a roll yesterday… I don’t think I was on quite the same roll today…

And while I don’t like to head into the Big Finish on a “down note”, I’ll have to today, as it’s beginning to get late… The “down note” is from “down under” (get it?) Australia’s Trade Deficit widened in April to A$556 million ($448 million worth), as coal exports fell… This news caused a weakening in the A$ overnight… But remember, this is from April… And in April, China was just beginning to show signs of their stimulus working… I’ll bet a dollar to a Krispy Kreme that next month this number will be narrower and if not, then the following month we’ll see the narrowing… So, no need to be alarmed here, there’s nothing to see here, move along! It does provide cheaper levels of the A$ though!

And… I just noticed this, so I won’t end it on the A$ story… The price of Oil fell out of bed yesterday, moving from over $71 yesterday morning to $67.85 this morning… WOW!

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

A Lost Decade for the United States?

“I don’t know about the stockpile arguments,” Chris Mayer assures. “Seems too neat. There was a lot of stockpiling going on in molybdenum on the way up… and now the stockpiling is declining and the price is recovering.

“If all it took to forecast commodity prices was to peek through to stockpiling, then commodity investing would be easy. The real world is messier… Stockpiling happens when prices rise and when they fall. I don’t know how good a predictor stockpiling is. Count me deeply skeptical.

“The more relevant question is not so much about stockpiling, but how daily production has been taken out of the market.”

“You also want to consider what Bernanke and Geithner will do to debase the dollar in the coming years,” adds Dan Amoss. “If you’re a foreign creditor facing with this constant portfolio decision, which has higher marginal utility?:

1) US$2.32

or

2) 1 pound of copper

“The Chinese will probably go with No. 2, especially because copper (and oil, and iron ore) can be stored and used in infrastructure projects to keep the population somewhat placated with infrastructure jobs. Interestingly, we could actually see stockpiling/U.S. paper divestment accelerate if Chinese exporters remain in recession (which is likely).

“I think they’ll be in the market to stockpile on every dip and diversify out of U.S. paper as discretely as possible.”

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

A Commodity Warning Sign