Sunday, June 28, 2009

The Water Gets Muddier

The bulls have been running now for over 3 months. The best question is, running where? Bernanke speaks of green shoots, but the unemployment claims continue to exceed 600,000 a week, a number that is roughly 1/2 of 1% of the US labor force. If 2% of the US labor force is losing their job on a monthly basis, then the idea that consumer spending is holding up is a long shot, despite the numbers. Also failing to support this idea is the fact that Japanese and Chinese exports are down between 20% and 40%. Being these 2 countries are the source of much of the US consumer goods, it would stand to reason that US consumer spending is down significantly. The same is true of an Asian economic rebound.

The story is the great rally in stocks around the world. The truth is the US market, save the speculative Nasdaq, is either flat or down for the year. The Chinese market, which began to rally earlier is not even to the 50% point, down from the top more severely than the US market. Commodities have rallied, but again this is an inflation play of massive speculation and not due to real supply and demand problems. In fact, oil is piling up in surplus around the world, being hoarded in tankers and OPEC is holding down production to boot. I believe any short term US demand rebound is due mainly to filling gas tanks to avoid the run up in prices. All the while Goldman Sachs promises record bonuses. Wonder who is behind the movement in price and who is going to be the next bailout by the government due to systematic risk?

I don't believe many understand where we are in the economic cycle. We are at a history changing juncture. The phenomenon of fractional reserve banking creates 2 problems, an imbalance of have money and have not monies and a mathematical problem of uncollectable capital. By that, I mean the money to make up the capital reserves on the balance sheets does not exist. This is why we have losses as far as the eye can see in the financial markets and why I don't believe the bailouts are over. They are over only because they might not be politically feasible. It is also why I believe Goldman will be the next systematic event, in that they won't have anyone to pass the bag to this time. For whatever reason and I suspect fraud, AIG took it last time. Their customers can only be fleeced so many times before they cease to be customers.

Much is made of the purchase of bonds and mortgage backs by the Fed and how this is printing money. It is no more printing money than using your Visa. Plus, where is all the money the Fed has printed in the past? My contention is it no longer exists in the banking system, which has been barren for years of socalled reserves, but instead has been withdrawn and put in hiding in third world countries for years. In the meantime the banks have been without money to pay each other and thus we have the credit crunch that won't let up. The banking system is giving up its best assets in this series of transactions while getting assets in return that don't pay any interest. Money don't exist in banks only in bank accounts.

There are a few things different between this time and the 1970's. One is we are not following up the collapse of Bretton Woods with 30 years of currency adjustments in a mere 5 years or so. Second, we are at the end of a worldwide spending spree, something that was just beginning in the 1970's. The oldest boomers in 1970 were not even 25 while the youngest were still in grade school. That generation created a wave whereever it progressed and it was progressing to adulthood in the 1970's wher it was going to need cars, furniture, homes, capital goods for jobs and social services. It didn't hurt that the world bank had loaned hundreds of billions for emerging markets to spend as well. Remember the financial crisis then was the banks going broke on loans to these countries going into default.

Today we have an overpaid generation X and a busted boomer generation. The boomers are now in panic and not about to continue to spend as they had in the past. The generation Xers are about to see their gravytrains derailed and their credit cards maxed out. Where is the demand to push prices higher going to come from? I highly doubt it will be China, where the socalled savings rate has very little to do with the population and a lot to do with the confiscatory corporate and financial system. Absent demand, the capital goods business in China goes into a shell.

There is a lot of mud in the water. All I write is as speculative as what we are seeing in the stock market. Until people as a whole start getting free money or new, financially irresponsible people begin to get more credit cards than the other financially irresponsible people are losing I find it hard to see where the money makes the cycle. The speculator needs someone to take the bag from him whether he is dealing in stocks, commodities or manufacturing inventory. In the meantime, 600,000 people a week are applying for unemployment in the US, exports that create jobs and income are remaining depressed overseas and massive bets are being placed against the trend on green shoots.