Collapse Is Coming? Timing Difficult to
Pin
For a long time I had a misconception of how the financial sector worked
itself out of jams.
When the U.S. Congress refuted it's Constitutional authority and allowed
the Federal Reserve to run the money show, I thought he dollar's days were
numbered. After the U.S. formally renounced the gold standard, I knew the
dollar's days were numbered.
What I forgot to take into account was almost everyone else on the planet
had done the same thing. The currency wars raged over, essentially, the relative
worthlessness of one currency to another. But the financial sector appeared then
and appeared up to now to be doing well. What I missed, in those early decades,
was the power of perception of value overall against the inevitable
collapse.
Now, more than four decades after we dropped any pretense of a gold
standard, the birds I feared are coming home to roost. Across the globe nations
decide to devalue their currency at will either with a formal announcement or by
simply letting the central banker of choice print more of the fiat. Inflation
should be settling in like it did in the late 1970s in America, but it
hasn't.
The reason it hasn't is a three-headed beast.. First you have a decreasing
standard of living that has been accepted as the norm. Second the Earth's
resources could be counted on to yield more to advancing technology. A third
factor is the many manners in which the leadership found ways to deceive America
by cooking the books but that has always been a currency problem through
history.
Well-known American investor and businessman Jeremy Grantham, founder and
chief investment officer of GMO, wrote an interesting piece recently. He warned
that while Wall Street may be heading into a bear market, the volatility is not
a sign of the "big crash" like America experienced in 1929. He thinks the stock
market will recover from its recent drop and reinflate into a bigger bubble
before that finally pops.
Grantham wrote, "We can agree that uncertainties are far above average. I
must admit to feeling nervous for this year's equity outlook in the U.S. but I
am not entirely convinced. We can have a bear market, but the BIG
ONE? I doubt it."
He goes on to explain why he thinks the markets will do better than the
bears think because of the relatively low commodity prices--particularly natural
resources like energy--and the advantages of much larger capacity in labor and
machinery.
I am not so sure. I think people like Grantham always overestimate the
ability of the market because they have forgotten the lesson of having some
tangible standard of value for the fiat involved. They always think the central
bankers can and will jump in to reduce the total effects of a recession.
Besides, for the past year consumers have fooled the experts by not spending the
commodity savings.
Smoke and mirror will not help the markets now. The central bankers have
mostly exhausted the normally reliable means of averting a bear--printing fiat
at a reckless pace and dropping interest rates. While those worked in the
financial sectors, they did nothing to revive Main Streets around the
globe.
It is precisely because Main Streets are still feeling the pinch, the
financial sector is starting to feel the pinch of recession once again--hence
the volatility in the markets.
Average people who planned ahead got caught in the backwash from the
housing collapse. Those folks, either now at retirement age or nearly a decade
closer to the end of their working career, are not feeling as confident about
the government's ability to control the fiat or protect the dollar's value any
longer. That is a strange new problem that has never had to be dealt with before
on American soil.
Oh, people might have lost faith in the current Administration or the
current leadership from time to time, but it was always on to the next
election the problem could be fixed. That isn't the case now. The
anti-government or anti-Washington feeling sweeping the country is very close to
the antipathy the rural economy states felt for Washington in the 1850s. Only
this time we seem to have a more universal distaste for insiders.
A favorite slogan of the 1990s was "It is the economy, stupid." That is
more true today than it was then.
But we haven't had a Congress or an Administration who wanted to take back
the control they gave up to the Federal Reserve. We might be seeing a voting
population that wants to change direction because of the hardship they
are facing in their own pockets.
The financial sector is now trading, on average, below the financial crisis
levels instigated by the housing crash. In fact they are dangerously close to
the levels at which the government enacted TARP.
Despite what some top money managers are saying, I'm not certain that will
be the time to invest in either the financial or corporate bond sector. There
is that massive $2.6 quadrillion corporate bond derivative swaps trade already
weighing on many company decisions. That doesn't make those executives any
better than a government that has hit the $19 trillion debt level.
I'll give Grantham the benefit of the doubt and agree 2016 may not see the
collapse. But he agrees with me the collapse is near. That, in itself, is spooky
to a person who has spent 52 years trying to come to grips with a dollar that is
demonstrably proven to be supported by nothing but public perception.
"I have sworn on the altar of God eternal hostility
to every form of tyranny over the mind of man."--Thomas
Jefferson
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Economic Recession Closes
In
Just meandering through economic news reports yesterday gave a fistful of
problems yet the American markets rose again, demonstrating beyond a doubt the
disconnect between the markets and the economy while clearly showing direct
links instead to government.
Here are some of the troubling headlines:
Jobs Market Signals Loss of Momentum as Weekly Claims Rise;
Productivity Falls a Sharp 3%, Capping Fifth Year of Weak Growth; There's
Recession Warning in Utilities Results; and Euro Banks
Collapsing.
There were more but that foursome will serve as harbingers of the Four
Horsemen of the Economic Apocalypse for now.
While it seems everyone was fixated on the collapse in the oil markets (the
price is so low the ever vigilant Barack Obama proposed a $10 barrel tax hike to
generate more government revenue and revive his flagging green agenda) these
other little tidbits are what should be alarming the national leader wanna-bes.
But you heard nary a word from the campaign trail.
Actually the first two, rising unemployment claims and loss of
productivity, go hand-in-glove and are a rebuke of the policies we've lived with
for more than seven years. For some reason our government sees business as a
cash cow to tap for revenue when in actuality those businesses exist solely to
make money. As the Administration pushes for higher wages to generate "economic
growth" it failed to recognize increased regulation deprived those businesses of
discretionary income by increasing the amount of money they expended on
compliance.
This makes it difficult for business to continue existing. But the second
factor is more detrimental. If productivity falls, meaning the business has less
revenue to show for each employee, the only thing it can do is release
employees. So either headline, by itself, would have been a bad omen for the
economic future but together they make for a problem that has its answer in Main
Street woes but was created by both Wall Street and Washington over-reach.
The item about Utilities' results offering a warning on economic slowdown
should be given front-page headlines. Through the first month of the year
utilities are one of two sectors in the S&P 500 in positive territory and
far away the best performing sector. But Southern Company's fourth quarter
earnings report sent a shock wave rippling through this otherwise energetic
area.
While its actual earnings beat Street expectations the problem is about 31%
of Southern's retail electricity sales (mostly in Georgia and Alabama) go to
industrial customers. In the fourth quarter, those sales fell 2.74%. That's the
biggest year-over-year decline since the recession of 2008 so it rang some
warning bells. Digging deeper it was discovered Southern's industrial sales have
been slowing or in actual negative territory, year-over-year, for five straight
quarters.
While that is alarming what immediately caught my attention was the fact
there was one headline proclaiming a 3% drop in productivity and 2.74% drop in
industrial sales is awfully close to that. It is so close it provided another
direct link in the chain that was developing.
A quick glance at reasons given were laughably predictable. First was the
stronger dollar, China's economic struggles and lower commodity prices. The
stronger dollar is a secondary effect meaning Southern's customers are losing
customers abroad. The fact that much of the material going to these industries
originates now in China is further proof the GDP of America is falling which
means the economy is well overstated here.
If Southern was alone, that might indicate a regional problem, it wasn't.
Yet the market continues to make utilities the top sector and hasn't yet caught
onto the problems lurking to pounce on the unwary investor.
The key here is utilities' performances are usually where economic
recessions have finally been recognized over the past three and a half
decades. A slowdown in this arena that is 15 months in the making fits rather
well with the decline in both commodity and energy prices.
Finally we get to the concerns in the European banking sector. If there was
alarm coming from small, regional banks on the Continent it might be brushed
aside. The problem is these lowering values are coming from some of the
heavyweights through the first 31 days of this year. The listing was compiled by
Accuity from information available in the Banker's Almanac.
For example, try HSBC Holdings where value has dropped 14.8%, or Royal Bank
of Scotland (down 20.1%), or UBS Group (down 20.6%) or Barclay's PLC (down
21.1%) or Deutsche Bank (down 29.8%) or Credit Suisse (down 31.4%). These
losses were accumulated in 31 DAYS!!!! These are the among
the biggest banks in the world with asset holding listed in the trillions of
dollars. So their losses amount to hundreds of billions at best and stretch into
the trillion dollar level at worst.
Yet our stock markets had a decent day UP even after this was known to the financial
sector. It does not make sense. You did not hear this on CNBC, MSNBC, Fox or any
of the other news outlets. It was buried in internet print that was omitted by
the Wall Street Journal, the New York Times and Washington Post in a timely
fashion. "Rally around the market boys, we must keep up the illusion of economic
growth!"
Those are four indicators, again, that the economic collapse is not inching
ahead but is in a headlong gallop towards us.
This is a definite drop-dead bell for economic reality over fantasy. Get
prepared by thinking about a world in which fiat has lost all value. It isn't
like anything any American alive has known before.
"I have sworn on the altar of God eternal hostility
against every form of tyranny over the mind of man"--Thomas
Jefferson
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