Financial Armageddon

On Track...to a Train Wreck

2012-02-08T16:46:00-05:00

(Image: source)

For the bulls, yesterday's news of a much higher-than-anticipated jump in consumer borrowing is yet more proof that the recovery is on track:

"U.S. Consumer Credit Climbed by $19.3B in Dec." (Bloomberg)

Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans.

Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington. The gain topped the $7 billion median forecast of economists surveyed by Bloomberg News and followed a $20.4 billion advance the prior month.

Consumers “are willing to take on this debt because there is some increasing degree of confidence in the economy,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected credit would climb by $15 billion, the highest in the Bloomberg survey. “Consumers over the past several years have done a pretty good job of repairing their balance sheets.”

An improving job market may be giving households the courage to take on more debt in order to sustain spending, which accounts for about 70 percent of the economy. At the same time, increasing dependence on credit may be an indication the gains in employment have yet to push wages high enough to single- handedly give consumers the means to keep shopping.

Unfortunately, as the Rochester Democrat and Chronicle writes in "Report: Student Debt Could Be Next Economic Bomb," this particular track looks to be leading us to another train wreck.

Student debt is looming as a national problem that could have repercussions reminiscent of the mortgage crisis, says a new report by the National Association of Consumer Bankruptcy Attorneys.

The study, released Tuesday and based on a nationwide survey of 860 bankruptcy lawyers, said that bankruptcy attorneys nationwide are seeing at the ground level "what feels too much like what they saw before the foreclosure crisis crashed onto the national scene."

The report calls for a change in bankruptcy laws.

In the survey, 81 percent of respondents said that potential clients with student loan debt have increased "significantly" or "somewhat" in the last four years.

And 95 percent of respondents reported that few student loan debtors have any chance of discharging what they owe through a bankruptcy proceeding because they have to prove "undue hardship" — a standard that is difficult to meet.

The total debt from student loans is about $1 trillion, about 14 times more than 15 years ago and well above the estimated total credit card debt of $798 billion.

...

The report urges a change in bankruptcy laws so that those burdened with student debt would be on the same footing as others in debt facing bankruptcy.

"It's not fair and needs to be corrected," said U.S. Rep. Steve Cohen, D-Tenn., sponsor of legislation that would make changes sought in the report.

...

William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, offered a warning.

"Take it from those of us on the frontline of economic distress in America," he said. "This could very well be the next debt bomb for the U.S. economy."

Of course, Wall Street knows better -- right? Otherwise, why would they keep buying stocks?

It's Here -- Or Maybe Not

2012-02-07T16:42:00-05:00

In "Grumpy Old Permabear," I noted that "a growing number of commentators are suggesting that the worst is behind us," and included (among others) a link to a post by Calculated Risk, "The Housing Bottom is Here." While I certainly can't say for sure that Bill McBride is wrong (FWIW, I am a big fan of CR and have been a regular visitor since its earliest days), I did point out that "genuine bottoms have, historically at least, gone unrecognized until well after their arrival."

On the flipside, long, secular downturns -- like those that invariably follow bursting bubbles -- are littered with endless claims of a recovery being at hand. As it happens, Weakonomics has compiled an extensive collection of such pronouncements about the current bear market, stretching back almost six years, in "The Megalist of Calling the Housing Bottom." Here are some examples:

1/31/2012 Homeownership rates fall to 66% as downturn nears a bottom – USA Today
1/10/2012 Has The Housing Market Hit Its Bottom? – Forbes
12/8/2011 Is the Housing Bottom Finally in Sight? – Kiplinger (my favorite!)
9/27/2011 This Has To Be The Housing Bottom – Seeking Alpha
6/21/2011 The Housing Bottom Is Here: Economist Russell Price Explains – Daily Finance

...

2/8/2007 Housing still on down slope Economists say no recovery until midyear; prices face record fall – Market Watch
12/21/2006 Housing ‘close to bottom,’ realtor-group economist says – Market Watch
12/5/2006 Home builders see bottom of housing slump – CNN Money
11/15/2006 Housing slide may deepen; New forecast sees bottom in 2008 – Boston Globe
10/6/2006 Greenspan Says `Worst’ May Be Past in U.S. Housing – Bloomberg

Otherwise, it's been a while since I last highlighted a chart like the one that follows (the unedited original comes via Business Insider), but I thought it might be something worth noting to those who believe the Fed actually knows what it takes to look after or "fix" the economy (or whatever else Bernanke & Co. claim they are responsible for):

Grumpy Old Permabear

2012-02-06T21:03:05-05:00

Suddenly, a growing number of commentators are suggesting that the worst is behind us -- in housing, employment, manufacturing, the auto sector, the technology industry, and elsewhere in between.

Aside from the fact that, historically at least, bursting bubbles have generally been followed by drawn-out and messy overshoots to the downside (e.g., more than four years), while genuine bottoms have, historically at least, gone unrecognized until well after their arrival, I have one question: why are share prices approaching intermediate term highs at the same time that bonds yields are hovering near record lows?

(Source: The Globe and Mail)

The truth is that it doesn't make any (economic) sense -- unless, of course, you attribute the development to unprecedented central bank intervention. In that case, the notion that things are returning to "normal" would seem to be a complete crock of sh*t (if you'll pardon my English).

I know -- I'm just a grumpy old permabear. Grrrr.

A New Kind of Normal

2012-02-05T18:22:34-05:00

Once again, we have a dubious data point (see "Exceptable Jobs Report [sic]" for more on the subject) suggesting that things are returning to "normal."

And yet, we have realities like this (via John Mauldin's Thoughts from the Frontline) --

This chart, from Rich Yamarone of Bloomberg,...shows that government transfer payments have been an increasing share of disposable income since the beginning of 2008. Without that government spending, consumer spending would be much worse than it is. But then so is the federal deficit. There is no free lunch. --

and reports like this (via The Associated Press) --

In Buffalo, N.Y., Rosanne DiPizio, vice president of her family's DiPizio Construction, says there isn't enough work for her company to justify hiring right now. It relies mostly on government road-construction contracts. And governments have been cutting back.

DiPizio also runs a concrete plant that would normally employ 100. It's down to 85.

"We will employ more if we have more work," she says. "It's that simple."

In truth, now is not the time to be betting on Washington-Wall Street fantasies. Now is the time to be adjusting to a new kind of normal. For some insights on what that might mean, check out a recent article from the Christian Science Monitor, "The Job-Shifters: People Who Reinvent Themselves Mid-Career":

Reinventing oneself for a new career is seldom elegant. It's usually born of struggle, doubt, or loss. Sometimes all three. It's only afterward, as über-entrepreneur Steve Jobs once suggested, that you can look back and see how every step and stubbed toe made sense.

But from the turmoil come stories, sometimes dramatic narratives, of people who chuck the safety of a paycheck, either by necessity or choice, to craft a new life story worth telling. Often, the denouement involves less money and more fulfillment.

If the Great Recession and its chaotic aftermath have a story line, it goes something like this: The worst economic downturn in nearly 80 years throws millions of Americans out of work – 15.4 million are unemployed at the peak, 13.1 million are still without a job two years later.

Out of that crucible, an increasing number of workers are trying to reinvent themselves to fit in with a fragile, fast-moving world. For some, it's a voluntary change. For many, it isn't. It's a rough-and-tumble necessity. The future demands it.

"The status quo doesn't work anymore," says Pamela Mitchell, founder of the Reinvention Institute, a training and coaching firm in greater Miami and author of "The 10 Laws of Career Reinvention." Workers need to realize that there's no longer a "safe" industry where they can serve out a career. "The only true safety is for me to build my own personal job diversity," she says. "That's the 'aha!' [moment]. Job security comes from within."

Exceptable Jobs Report [sic]

2012-02-03T16:16:00-05:00

Today's jobs report -- really good...except for the fact that:

1. Full-time jobs (that is, the kind that offer benefits and which represent a genuine commitment by employers) only accounted for a fraction of the increase in employment

"Final Nail In Today's NFP Tragicomedy: Record Surge In Part-Time Workers" (Zero Hedge)

It appears the record surge in people not in the labor force is not the only outlier in today's data. For the other one we go to the Household Data Survey (Table 9), and specifically the breakdown between Full Time and Part Time Workers (defined as those "who usually work less than 35 hours per week"). We won't spend too much time on it, as it is self-explanatory. In January, the number of Part Time workers rose by 699K, the most ever, from 27,040K to 27,739K, the third highest number in the history of this series. How about Full time jobs? They went from 113,765 to 113,845. An 80K increase. So the epic January number of 141.6 million employed, which rose by 847K at the headline level: only about 10 % of that was full time jobs: surely an indicator of the resurgent US economy... in which employers can't even afford to give their workers full time employee benefits. We can't wait for Mr. Liesman to explain how this number, too, is unadulterated hogwash, and how it too is explained away to confirm economic strength.

2. Not much has changed for those who've had the hardest time finding employment

"El-Erian Pours Cold Water On Today's Jobs Report" (Business Insider)

PIMCO's Mohamed El-Erian told Bloomberg TV that we need to look beyond the headline numbers:

Long-term unemployment, those who have been unemployed for 27-weeks or longer, that is stuck, stubbornly stuck at 5.5 million again. And second, youth unemployment—unemployment among the 16 - 19 year olds, that is stuck again at 23 percent. So, we should welcome the headline numbers, they are really good, but we should not lose sight that we have structural issues that are not being dealt with. And that's going to be the question mark. Is this just a cyclical bounce or can this hand off into a secular bounce which the economy needs?

3. Seasonal and other adjustments probably exaggerated the labor market's underlying strength

"Economists React: Jobs Report ‘Positive in Every Way’" (Real Time Economics)

We would nonetheless caution that January results are dominated by the seasonal adjustment process and therefore we would not rush to extrapolate the rates of gain reported today. For instance, the unadjusted change in payrolls in the month was -2,689,000, which translated into the aforementioned +243,000 after seasonal adjustment. So, it only takes a small miss by the seasonal to inflate the reported seasonally adjusted gain. Such an outcome could be caused by significantly warmer/dryer weather than normal (certainly the case in many areas during the month) and/or an under-estimate of job losses by the “birth/death” adjustment. Although that statistical measure makes a large negative adjustment to the non-seasonally adjusted payroll figure in January (-367,000, or almost 14% of the reported decline in total payrolls), there is no guarantee that it is accurate, and in times of economic distress it could still be understating the “death” of businesses. –Joshua Shapiro, MFR Inc.

[For a bit more discussion on this topic, click here.]

4. Geopolitical, political, and weather-related disruptions (e.g., the Thailand floods) during 2011 likely pushed back some of the hiring that would have taken place earlier in the year

"The Hiring Hare Will Soon Morph Into a Tortoise" (Real Time Economics)

Businesses may have been catching up on their labor needs after they paused mid-year in response to production disruptions from the Japanese disasters and the uncertainty surrounding the debt-ceiling debate in Washington.

Never mind -- if the stock market is happy, that's all that matters. Right?

Yet-Another-Non-Sequitur Alert

2012-02-02T20:38:29-05:00

According to U.S. Treasury Secretary Timothy Geithner, the worst is well and truly behind us (via Business Insider):

"The U.S. financial system is stronger and getting stronger...we have shut down or restructured the weakest parts of our system... finally we've been able to dramatically reduce the expected cost of the financial crises to levels unthinkable in 2009...the financial system is much less vulnerable than it was and is much more able to manage a growing economy."

And yet, we have this --

"Treasury May Let Investors Pay to Lend to U.S. Government" (Reuters)

The U.S. government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

"It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible," according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.

The European debt crisis and worry about global prospects is fueling investor demand for safe assets like short-term U.S. government debt. Treasury said modifying its auction rules would require overcoming "operational issues" but they were related to accounting rather than to legal questions.

and this --

"REPORT: Prepare For A Giant New Wave Of US Bank Failures" (Business Insider)

Forget Europe — the weak U.S. recovery puts more than 750 domestic banks at risk of failure, according to a report from Invictus Consulting Group (via Business Wire).

Invictus, which stress tested all FDIC-insured banks, says 758 lenders could collapse in the next three years, forecasting a new wave of borrower defaults in the absence of a strong economic up-tick.

A disaster in Europe would probably make things much worse.

Invictus says the at-risk lenders — mostly regional banks or subsidiaries of the majors — won't be able to sustain themselves on current earnings, and will likely fail if they don't merge or raise "significant" amounts of new capital. --

and this --

"Treasury’s 2008 Financial Rescue Could Last Until 2017" (Real Time Economics)

The U.S. government’s rescue of the financial system could last for five more years as the Treasury Department unwinds its investments in hundreds of banks and other companies propped up in the aftermath of the 2008 financial crisis, a government watchdog said Thursday.

The Bush administration launched the financial rescue plan in the autumn of 2008 at the height of the financial crisis. At its launch, Congress authorized spending $700 billion on the bailout known as the Troubled Asset Relief Program, or TARP. The Treasury Department currently estimates that the final cost for TARP will be $68 billion.

As of the end of last year, about $414 billion had been spent through 13 programs, while $278 billion had been repaid and $51 billion was still available to be spent, according to a quarterly report to Congress by the special inspector general for the TARP program. The remaining institutions in the program include 455 banks and thrifts, plus insurer American International Group Inc., General Motors and Ally Financial Inc.

“TARP is not over,” said Christy Romero, the acting TARP special inspector general. “Some TARP programs last until 2017, and market volatility has slowed Treasury’s progress in unwinding its investments.”

The report also found that exiting these investments could be difficult in the coming years, as financial markets remain rocky and many community banks that receive federal aid continue to struggle.

Yep, things sure are looking good for the financial system.

Déjà Vu All Over Again?

2012-02-01T16:52:18-05:00

The last time we saw the sort of divergence we have now, where equity markets remain resilient as credit markets falter, was back in the period from mid-2007 until early-2008 -- which, as you'll recall, was not a particularly good time to be bullish on stocks.

Of course, this time may be different -- right?

Our So-Called Recovery

2012-01-31T21:18:43-05:00

Three recent articles (further) undermine the notion that we're seeing a light at the end of the tunnel.

The first examines the so-called rebound in growth:

"Dial 911 If This Story Makes Your Eyes Bleed" (New York Post)

In order to get to [the] 2.8 percent growth [reported last Friday,] the Commerce Department used a very unrealistic level of inflation in its calculations.

Let me explain: The government comes up with a figure on how much it thinks the economy grew, or shrunk. Friday’s figure was a first estimate for the fourth quarter, so most of the numbers used in the calculation are only guesstimates anyway. (But that’s for a different story.)

The government then takes that growth figure, subtracts the rate of inflation and comes up with the real growth it reports in its press release.

So, in other words, if inflation is rising it reduces the rate of actual, after inflation, growth — which is the figure that Washington reports.

In Friday’s number the government used 0.4 percent as the rate of inflation. Zero. Point. Four. Percent.

In which country is inflation that low? Certainly not in America. Absolutely not in the last four months of 2011.

The consumer price index, which is put out by the US Census Bureau, had prices up 3 percent for the year.

And the rate of inflation used in calculating the third-quarter 2011 GDP was 2.6 percent; in the first and second quarters, combined, the rate was 2.5 percent; it was 1.9 percent in the fourth quarter of 2010.

So how does the Zero-Point-Four-Freakin’ percent sound now?

That’s how Commerce got to the not-very-inspiring 2.8 percent growth it reported last Friday.

The second weighs in on the so-called fall in unemployment:

"Latest Congressional Budget Outlook For 2012-2022 Released, Says Real Unemployment Rate Is 10%" (Zero Hedge)

The unemployment rate would be even higher than it is now had participation in the labor force not declined as much as it has over the past few years. The rate of participation in the labor force fell from 66 percent in 2007 to an average of 64 percent in the second half of 2011, an unusually large decline over so short a time. About a third of that decline reflects factors other than the downturn, such as the aging of the baby-boom generation. But even with those factors removed, the estimated decline in that rate during the past four years is larger than has been typical of past downturns, even after accounting for the greater severity of this downturn. Had that portion of the decline in the labor force participation rate since 2007 that is attributable to neither the aging of the baby boomers nor the downturn in the business cycle (on the basis of the experience in previous downturns) not occurred, the unemployment rate in the fourth quarter of 2011 would have been about 1¼ percentage points higher than the actual rate of 8.7 percent. By CBO’s estimates, the rate of labor force participation will fall to slightly above 63 percent by 2017. The dampening effects of the increase in tax rates in 2013 scheduled under current law and additional retirements by baby boomers are projected to more than offset the strengthening effects of growing demand for labor as the economy recovers further.

And the last discusses the so-called turnaround in the property market:

"No Hope For Recovery As Housing Falls Deeper Down The Rabbit Hole" (Forbes)

Don’t expect housing to contribute to the so-called economic recovery any time soon. Home prices continue to drop month-after-month according to the latest S&P/Case-Shiller Home Price Index in the face of record low-mortgage interest rates, suggesting all of Bernanke’s attempts at reviving what he considers a key sector of the economy have been futile.

Tight lending standards and a record high number of foreclosed properties on bank’s balance sheets will continue to push down on prices and hamper any recovery.

The latest Case-Shiller data, which goes up to November 2011, shows both the 10 and 20-city composites falling further into the rabbit hole. The 10 and 20-city indices are down 3.6% and 3.7% respectively over the November 2010 as home prices remain stuck at mid-2003 levels.

Both indices are barely off their lows (10-city 1% above, while 20-city barely 0.6% north of its trough) and are down about 33% from the pre-crisis peak. “The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand,” said index chairman David Blitzer.

Welcome to our so-called recovery.

Different...Again?

2012-01-30T16:51:40-05:00

According to USA Today's most recent economic outlook survey, "Economists See Growth Slowing, Recession Risk Falling," the majority of experts are cautiously optimistic:

The risk of another U.S. recession is falling. The median estimate of USA TODAY's panel call it only a 22% probability in the next 12 months.
Europe's financial crisis will shave only a quarter of a percentage point from this year's U.S. growth, the economists said.
More than 90% of the economists think home prices have either already bottomed out or will by the end of this year.

And yet, as John Hussman notes in this week's Hussman Funds' Weekly Market Comment, "Warning: Goat Rodeo," the hard data paints a much less sanguine picture of the risks ahead.

While we typically discourage drawing inferences from any single indicator, it's at least worth noting that with the release of Q4 GDP figures, the year-over-year growth rate of real U.S. GDP remains below 1.6% (denoted by the red line below). A decline in GDP growth to this level has always been associated with recession, usually coincident with that decline, though with a two-quarter lag in two instances (1956 and 2007), and with one post-recession dip in growth during the first quarter of 2003. As it happens, the GDP growth rate dropped below 1.6% in the third quarter of 2011.

Given the strong and rather obvious relationship between the most recent year-over-year rate of GDP growth and the prospect of oncoming recession, it's difficult to understand why Wall Street so completely rejects the likelihood of an economic downturn.

Because this time it's different?

LOL!!

Funny Stuff

2012-01-29T20:10:19-05:00

Amid all the acronyms and jargon, propagandizing and lying, and delusional groupthink, it can difficult for most people (including me) to get a handle on events across the pond . However, one blogger has managed to clarify matters in hilarious fashion. In "The Laws of Economics for the Drinker and Banks," reszatonline brings us the definitive guide to what went wrong in Europe.

Helga is the proprietor of a bar.

She realizes that virtually all of her customers are unemployed alcoholics
and, as such, can no longer afford to patronize her bar.

To solve this problem, she comes up with a new marketing plan that allows
her customers to drink now, but pay later.

Helga keeps track of the drinks consumed on a ledger (thereby granting the
customers’ loans).

Word gets around about Helga’s “drink now, pay later” marketing strategy
and, as a result, increasing numbers of customers flood into Helga’s bar.

Soon she has the largest sales volume for any bar in town.

By providing her customers freedom from immediate payment demands, Helga
gets no resistance when, at regular intervals, she substantially increases
her prices for wine and beer, the most consumed beverages. Consequently, Helga’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these
customer debts constitute valuable future assets and increases Helga’s
borrowing limit.

He sees no reason for any undue concern, since

he has the debts of the unemployed alcoholics as collateral!!!

Of course, you know how it ends (if not, click here to read the rest).

(Via Capitalogix with a hat tip to Andy.)

P.S. I try not to be too political at Financial Armageddon -- mainly because I believe both sides have done an equally good job wrecking the American Dream -- but this cartoon (again, via Capitalogix) was just too funny to pass up:

Already There?

2012-01-27T17:17:50-05:00

Five more reasons why America is on the road to Banana Republicville (or are we already there?):

1. Those in charge don't feel constrained by the rules that apply to everyone else

"36 Obama Aides Owe $833,000 in Back Taxes" (Investors Business Daily)

How embarrassing this must be for President Obama, whose major speech theme so far this campaign season has been that every single American, no matter how rich, should pay their "fair share" of taxes.

Because how unfair -- indeed, un-American -- it is for an office worker like, say, Warren Buffet's secretary to dutifully pay her taxes, while some well-to-do people with better educations and higher incomes end up paying a much smaller tax rate.

Or, worse, skipping their taxes altogether.

A new report just out from the Internal Revenue Service reveals that 36 of President Obama's executive office staff owe the country $833,970 in back taxes. These people working for Mr. Fair Share apparently haven't paid any share, let alone their fair share.

Previous reports have shown how well-paid Obama's White House staff is, with 457 aides pulling down more than $37 million last year. That's up seven workers and nearly $4 million from the Bush administration's last year.

Nearly one-third of Obama's aides make more than $100,000 with 21 being paid the top White House salary of $172,200, each.

2. Those in charge increasingly censor and harass the media

"U.S Falls to 47th in Press Freedom Rankings after Occupy Crackdown" (Daily Mail)

Sweeping protests around the world made it an extremely difficult year for the media, and tested journalists as never before, the annual report into press freedom reveals.

The annual report by Reporters Without Borders has been released, showing the United States fell 27 points on the list due to the many arrests of journalists covering Occupy Wall Street protests.

The slide in the United States places it just behind Comoros and Taiwan in a group with Argentina and Romania.

3. Those in charge feel free to use public funds for private gain

"Parent Of Government-Backed Battery Maker Goes Bankrupt" (Associated Press)

The parent company of an electric car battery maker that received a $118 million grant from the Obama administration filed for Chapter 11 bankruptcy protection on Thursday.

New York-based Ener1 said it has been affected by competition from China and other countries.

Ener1 subsidiary EnerDel received a $118 million stimulus grant from the Energy Department in 2009, and Vice President Joe Biden visited the company's new battery plant in Indiana last year.

Ener1 is the third company to seek bankruptcy protection after receiving assistance from the Energy Department under the economic stimulus law. California solar panel maker Solyndra Inc. and Beacon Power, a Massachusetts energy-storage firm, declared bankruptcy last year. Solyndra received a $528 million federal loan, while Beacon Power got a $43 million loan guarantee.

4. Those in charge favor policies that benefit the few at the expense of the many

"How to Elude the Fed's Attack on Savers" (MarketWatch)

On the surface, the Fed's decision to keep rates at 300-year lows was spun as an effort to help the U.S. stay in its slow grind higher. But from a personal-finance standpoint, it is one of the most outrageous ripoffs of all time -- a massive theft from the savers and retirees of this country for the benefit of banks and big business.

You might think of Fed chief Ben Bernanke as a reverse Robin Hood -- stealing the savings from the older people who built this country into the powerhouse that it is today and giving it to enterprises that absolutely, positively do not need interest rates near zero to make their businesses work. And if they do, they don't deserve help anyway.

If you have money in a passbook savings account or certificate of deposit, or in Treasurys, as so many retirees do, then the Fed's decision Wednesday ensures that for the next two years, banks and the federal government will pay you less than 1%, which is in turn eroded by inflation, leaving you with -1%. You are thus essentially paying the banks to take your money, which they then pay to themselves as bonuses and lend primarily to the most creditworthy of their cronies, not to the small businesses that actually could use a hand.

Even worse, a lot of the savings that you are lending the banks and government for pennies under the zero interest rate policy, or ZIRP, is being shipped to Europe in the form of "swaps" and other arcane instruments they don't want you to understand to help bail out holders of Greek, Portuguese, Italian and Spanish debt.

5. Those in charge seek to keep greater tabs on what the masses are doing

"Drones: Another Tool of the Surveillance State" (The New American)

Evidence that New York City is considering using drones to keep an eye on its citizens is growing, according to Don Dahler of New York’s CBS Channel 2. Dahler quoted an email it obtained indicating that a detective in the New York Police Department’s counterterrorism division asked the Federal Aviation Administration “about the use of unmanned aerial vehicles [UAVs] as a law enforcement tool.”

Dahler noted that NYPD commissioner Joe Kelly suggested that drones would be useful: “In an extreme situation, you would [then] have some means to take down a plane.” A spokesman for the NYPD admitted that “We’re always looking at technology. Drones aren’t that exotic anymore. Brookstone sells them. We’ve looked at them but haven’t tested or deployed any [yet].”

A retired officer from the department said that the use of drones would help protect the police from physical danger: “Not only would it be a form of surveillance gathering to protect the public, it also in many respects removes the officers … from harm’s way.”

...

Drones are increasingly being used for citizen surveillance. Retired General Michael Kostelnik heads up the office that supervises the use of drones and said drones are routinely being used across the country. Predators are flown “in many areas around the country, not only for federal operators, but also for state and local law enforcement and emergency responders in times of crisis.”

Stay tuned for the next installment -- coming soon.

Wrong Again?

2012-01-26T22:32:58-05:00

According to one global manufacturing powerhouse, the outlook for 2012 is pretty rosey.

"There Won't Be a Global Recession, Caterpillar Says" (TheStreet)

Don't worry about a global recession. Caterpillar says it won't happen in 2012.

In an eventful week in which Apple surprised the world with outsized profit and sales gains, and the Federal Reserve said it would keep interest rates low for at least another three years, Caterpillar's results sneaked up on investors. The construction-equipment maker blew past earnings and revenue targets with its fourth-quarter results, raising its outlook for 2012 in the process.

"I'm surprised as well," says Oliver Pursche, president of Gary Goldberg Financial Services. Pursche manages the GMG Defensive Beta Fund, which counts Caterpillar as a top holding. "It's a positive surprise. We added to the position when it pulled back in the fall, but I don't think anyone can say they believed this would happen."

The best news in Caterpillar's report was the global company telling investors not to worry about another global recession, despite enduring questions over Europe's debt crisis and its effect on global growth in 2012.

"The eurozone public debt crisis has been a lingering negative, but it is unlikely to trigger a worldwide recession," Caterpillar said in its release Thursday. The company says the risk of a global recession has "diminished significantly" over the most recent quarter, although Caterpillar noted concern that central banks could slow economic growth if they raise interest rates prematurely.

Caterpillar enjoyed an improvement in sales volume in all geographic regions in nearly all of its business segments, driven by end-user demand.

"Any which way you slice it, the reality is that even if you have some softness in the economy this year and there is a slack in demand, the rate of which the world is growing, the infrastructure theme is more than alive and well in the long-run," Pursche says.

Unfortunately, you can't assume that the company knows what it is talking about. Here is what they had to say following the release of their quarterly results exactly four years ago:

"Caterpillar Affirms 2008 Outlook" (USA Today)

Construction-equipment maker and economic bellwether Caterpillar Inc. said Friday that it expects resilient overseas economies to drive strong sales and profit growth this year, even as the United States teeters toward recession.

...

Caterpillar Chief Executive Officer Jim Owens said strong economic growth outside the United States would offset weak domestic demand.

"Global markets for mining, energy and infrastructure development are booming," he said in a statement.

Caterpillar expects U.S. economic growth to slow to 1 percent this year, including continued weakness in home construction.

The company is predicting profits will grow by 5 percent to 15 percent in 2008, and sees revenue rising 5 percent to 10 percent year-over-year. The prediction implies 2008 profit of $5.64 to $6.18 per share on revenue of $44.06 billion to $46.16 billion.

"While we expect anemic growth in the U.S. economy, we continue to see positive conditions for our sales in most of the rest of the world," Owens said.

Of course, we know what happened after that. We saw the worst global economic downturn since the Great Depression (and Caterpillar's share price didn't fare particularly well, either).

Remember, even those who are at the economy's front lines don't always see the forest for the trees.

Another Day of Surreality on Wall Street

2012-01-25T16:41:53-05:00

OK, let's try and put this into terms that a fifth-grader (or even a Wall Street MBA) might understand.

If the economy is recovering -- or even close to doing so -- why is the Federal Reserve maintaining that short-term interest rates will remain "exceptionally low" until late-2014 -- that is, below the levels that prevailed at the beginning (or even the middle) of every single recovery in the post-war era, as well as below their multi-decade median of five percent?
Why are investors piling into stocks and growing increasingly bullish at a time when the Fed has essentially confirmed that their optimistic assumptions about the economy are not in synch with reality?
If, as Federal Reserve Chairman Bernanke says, there is still "enormous" negative equity in U.S. housing and, as U.S. Treasury Secretary Geithner says, "housing finance is still a mess," why did homebuilding stocks today rally more than twice as much as the overall market, and why have they gained nearly 90 percent since October?
And finally, if one assumes that today's developments will somehow help the economy to get back on its feet (an extremely dubious assumption in light of the experience of the past several years), why did stocks and bonds (with yields already approaching multi-year lows) end higher on the session?

Another day of surreality on Wall Street.

(The good news about today's announcement, of course, is that it should do wonders for sales of my new gag book, Modern Central Banking: Simplified).

Difference of Opinion

2012-01-24T17:04:50-05:00

Looks like some of the powers-that-be have not had their regular rations of economic Kool-Aid:

"Global Bosses Are Gloomy About the Economic Future" (BBC News)

Companies around the world are getting gloomier about the economic future again, according to an annual survey of global chief executives.

Nearly half of bosses interviewed by accounting firm PricewaterhouseCoopers are forecasting that the global economy will decline this year.

The number of business leaders that are "very confident" their firms will grow has also fallen, from 48% to 40%.

...

The confidence of chief executives "is decidedly down as they deal with the aftershocks to the recession," said Dennis Nally, chairman of PwC International. "The optimism that had been building cautiously since 2008 has begun to recede."

"IMF Cuts Growth Forecast; Sees Recession" (Bloomberg)

The International Monetary Fund cut its forecast for global growth and warned that the European debt crisis threatens to derail the world economy.

“The epicenter of the danger is Europe but the rest of the world is increasingly affected,” Olivier Blanchard, the fund’s chief economist, said today at a news conference in Washington. “There’s an even greater danger, namely that the European crisis intensifies. In this case the world could be plunged into another recession.”

The fund, in an update of its World Economic Outlook report, lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent. The expansion next year will be 3.9 percent, down from 4.5 percent. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. The U.S. outlook was unchanged at 1.8 percent growth.

Or perhaps they've simply started paying attention to Financial Armageddon?

Still, there are those who see things differently, including the so-called smart money:

"Goldman’s O’Neill Sees Investors Adopting His Bullish US Stance" (CNBC)

Goldman Sachs’ Jim O’Neill, famous for coining the term ‘BRIC’ to describe the major emerging markets, is bullish on the U.S. economy and, perhaps more importantly, senses more of his colleagues shifting their mood to his more positive tone.

“I spent most of this past week in New York, and to my slight surprise, there appears to be some shift in the mood about the state of life,” wrote O’Neill in his ‘Viewpoints’ letter to clients. “Whether this is because it is the start of the year, asset prices have been perkier or there is some recognition that the U.S. economy and other parts of the world are not as bleak as the second half of 2010 is not so clear. It was certainly quite nice to hear and, in my judgement, is more reflective of what is going on.”

Hmmm, I wonder who's right?

A Tad Unsettled

2012-01-23T20:12:24-05:00

Suddenly, global credit markets are looking, shall we say, a tad unsettled...

I wonder if we're (finally) beginning to see bond markets pricing in the post-financial-crisis orgy of fiscal recklessness (not to mention the tsunami of refinancing-related supply)?

If so, that's not going to be very good for the public finances of countries that decided high debt levels don't really matter, is it?

Oops.

My Latest Book

2012-01-22T16:56:05-05:00

With three serious books under my belt, I thought it was time for something a little different...

Modern Central Banking: Simplified is the perfect gag gift for that special gold bug (or non-economic-Kool-Aid-drinking realist) in your life. Two hundred pages of what Federal Reserve Chairman Ben Bernanke and his fellow central bankers do best.

Of course, this book is strictly for laughs (the joke is on us?).

Available now at CreateSpace, and at Amazon (and other book retailers) in the days to come.

Yet Another Reality Check

2012-01-20T16:39:00-05:00

"A picture is worth a thousand words."

If you're as befuddled as I am as to what the bulls are looking at, here's an ugly 3,000-word reality check.

Economy

(Source: Zero Hedge)

Government

Stock Market

(Source: Market Anthropology)

Feel free to pass these along to any of the delusionals you might know (not that it will matter, of course).

Public Service Announcement

2012-01-19T22:05:55-05:00

For those individuals who prefer the kinds of "insights" that mainstream "experts" typically dole out, here's a cheaper and more reliable source of assistance: the Random Financial Advice Generator (click image to see more):

(Hat tip to The Big Picture.)

Alternatively, you can simply click on the following (via YouTube):

No Solution

2012-01-18T20:26:34-05:00

In "On Borrowed Time," Barron's columnist Randall Forsyth further undermines the notion that persistent public profligacy can solve our problems:

Heavy debt loads slow the U.S. economy now and pose threat to the future.

Can a stimulant become a depressant? As with alcohol, government borrowing and spending initially can give a boost, but later becomes a drag. America has hit the downside of that progression.

So says Lacy H. Hunt, chief economist of Hoisington Investment Management (whose eponymous head, Van R. Hoisington, recently was interviewed in the print edition of Barron's.) The deficits that had aimed to stave off a rerun of the Great Depression after the 2008 financial crisis now are having a depressing effect on the U.S. economy, Hunt contends.

Many mainstream "analysts" would argue otherwise. In their view, even though the economy has yet to recover in any meaningful sense of the word, it's only a matter of time before the torrent of debt-financed pump-priming yields the intended results. Moreover, some would undoubtedly claim that the twitches of activity we've seen in the auto sector, for example, and in other areas of the economy are a sign that Keynesianism is working. Unfortunately, those views don't quite square with reality. In fact, writes Forsyth,

the opposite is happening. The multiplier from government spending is no better than zero, Hunt says on the basis of econometric evidence. If the economy is "shocked" with a deficit, gross domestic product will get a lift for three-to-five quarters. After 12 quarters, however, the original stimulus is spent, literally and figuratively. But the debt that was incurred to finance the spending remains, and has to be repaid, with interest. That requires a shift of assets from the private sector to the public sector.

Japan provides an example of this process. That nation's government debt has expanded during its "lost decades" to 200% of GDP from 50%. Meanwhile, nominal GDP in yen terms is basically unchanged. In other words, Japan's debt has quadrupled but has nothing to show for it -- except higher interest costs, which has to come out of the private sector.

Hunt cites the now-familiar conclusion that debt-to-GDP ratios over 90% retard growth from economists Kenneth Rogoff and Carmen Reinhart, authors of the popular This Time is Different: Eight Centuries of Financial Folly, who also presented that conclusion in a 2010 National Bureau of Economic Research working paper, Growth in the Time of Debt.

Hunt also points to an even more exhaustive study on the effects of debt from Stephen G. Cecchetti, M. S Mohanty and Fabrizio Zampolli from the Bank for International Settlements, presented at the Federal Reserve's Jackson Hole confab last year, The Real Effects of Debt , which takes into account the retarding effect of not only government but also corporate and household debt. Those imply "that the debt problems facing advanced economies are even worse than we thought," especially when unfunded future liabilities in the form of promises given by governments in retirement and medical benefits are counted.

Of course, if ivory-tower instilled dogma suggests something different, it's OK to ignore reality -- right?

A Normal Mirage

2012-01-17T17:26:57-05:00

(Image: source)

In "Not Flush," I suggested that "Americans had relied on what little cash they had left -- or didn't really have -- to buy what they wanted (needed?) in the run-up to the holidays."

Eight days later, we have a report out from Reuters, "US Recovery at Risk as Americans Raid Savings, Borrow Again," lending further weight to the notion that the so-called return of the consumer is only a mirage.

More than four years after the United States fell into recession, many Americans have resorted to raiding their savings to get them through the stop-start economic recovery.

In an ominous sign for America's economic growth prospects, workers are paring back contributions to college funds and growing numbers are borrowing from their retirement accounts.

Some policymakers worry that a recent spike in credit card usage could mean that people, many of whom are struggling on incomes that have lagged inflation, are taking out new debt just to meet the costs of day-to-day living.

American households "have been spending recently in a way that did not seem in line with income growth. So somehow they've been doing that through perhaps additional credit card usage," Chicago Federal Reserve President Charles Evans said on Friday.

"If they saw future income and employment increasing strongly then that would be reasonable. But I don't see that. So I've been puzzled by this," he said.

After a few years of relative frugality, the amount of money that Americans are saving has fallen back to its lowest level since December 2007 when the recession began. The personal saving rate dipped in November to 3.5 percent, down from 5.1 percent a year earlier, according to the U.S. Commerce Department.

Jeff Fielkow, an executive vice president at a recycling company in Milwaukee, Wisconsin, contributed less to retirement savings and significantly cut back on dining in restaurants and taking vacations in order to keep college savings on track for his two children. "We would love to save more," he said, "but we're doing the best we can."

Aside from that , it's hard to even comprehend how things could be seen as returning to "normal" in an economy where, as Real Time Economics writes, nearly half of the U.S lives in a household receiving government benefits:

The pool of Americans relying on government benefits rose to record highs last year as an increasing share of families tapped aid in a weak economy.

Some 48.6% of the population lived in a household receiving some type of government benefit in the second quarter of 2010, up a notch from 48.5% in the first quarter, according to Census data.

Expanding government programs combined with the worst downturn since the Great Depression have led to an explosion in the share of Americans relying on outside help. To combat prolonged economic weakness, Congress extended unemployment benefits to a record 99 weeks (up from the normal 26-weeks offered in most states). The food stamp program was tweaked so it was more generous. Americans flocked to Social Security disability, a last bastion of support for some of the long-term unemployed.

Sometimes I really do feel like I'm living in an alternative reality.