Fact vs. Fiction on Today's Economy

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by David Galland: We're
All Comrades Now

 

 
 

There is a
lot of “noise” being tossed out by the politicos and their
preferred pundits about how the U.S. economy is on the mend. Thus
it is important to try and separate fact from fiction about where
things really stand.

FICTION:
Though sporadic, the U.S. economy will continue to improve.
FACT: The U.S. is headed for a currency crisis.

While having
learned to cover their butts by adding some modest modifiers to
their generally rosy forecasts, the administration’s shills
(Geithner, Bernanke, Summers, et al.) are unified in telling us
that the worst is over.

The fact is
that the U.S., nay, the world, is headed for fiat currency
crash. Let me push forward some evidence in support of that contention.

In this fiscal
year, the U.S. government will run its second trillion-dollar-plus
deficit. Concerned about the political heat going into the November
elections, the Democrats have been making noise about cleaning up
their sloppy spending.

A couple of
months back, El Presidente of this banana republic intoned that
his government… …[cannot] continue to spend as if deficits
don’t have consequences… as if the hard-earned tax dollars
of the American people can be treated like Monopoly money.

Which is to
say, he acknowledged that the deficits have consequences. And what
might those consequences be?

For starters,
rising interest rates. Because in order to finance its hyperactive
spending, the government will have to sell a lot of debt –
and because all the developed nations find themselves in the same
boat, they’ll have to manage those sales in an increasingly
competitive environment.

Of course,
higher interest rates put yet more pressure on the many businesses
that rely on access to capital to sustain themselves. And higher
rates crush borrowing for houses and other large-ticket items…
which means, they crush the economy. Especially one perched on a
foundation of debt.

Inflation is
another consequence, because when the prospective debt buyers begin
to stay home or, more likely, agree to show up but only for a more
attractive yield, the Fed will increasingly be forced to monetize
the debt. Leading to the demand for even higher yields. Once the
monetization begins in earnest, and in plain sight, Obama’s
high-speed spending train will find itself on very wiggly tracks,
leading in relatively short order to a debt-fueled currency crash.

The point is
that the only real hope for the country starts with deep cuts in
government spending. Now, I am not talking about cutting spending
– you know, where you stand in front of a warmed-up audience
and talk about spending cuts. But honest-to-goodness, real spending
cuts.

Which brings
me to Mars.

On April 15,
the president gave a speech at Cape Canaveral where, ahead of time,
it was advertised that he would announce serious cuts in the space
program. That was the fiction spun out to the pundits.

Instead, when
it came time to stand and deliver, Obama delivered a $6 billion
boost in NASA’s budget, then offset the cancellation of a program
that would once again send men to the moon by announcing a new program
to land astronauts on Mars… and drop in on an asteroid as well.

Over the course
of my days on this remarkable planet of ours, I have had the opportunity
to get to know all manner of personality types. One of the most
troubled have been the serial spenders… deluded individuals
that simply can’t help but buy all that their hearts desire,
no matter how much pain results from their debt-financed spending.
That describes today’s political class.

Unless and
until you start hearing the president making speeches about not
going to Mars, followed by wishing legions of government employees
the best of luck as they enter the private sector, the only conclusion
to be drawn is that a space ship isn’t the only thing headed
for outer space, but government debt as well.

The spending
is unsustainable and so won’t be sustained.

FICTION:
You can count on the mainstream financial media for unbiased information.
FACT: They’re lying to you.

It’s important
to do your own due diligence and trust only your own calculations
when confronted with cheery financial headlines.

A couple weeks
ago, for instance, the Fed’s national industrial index was
positively reported on as having continued to improve. By 0.1%.
That’s an improvement of .001, or roughly the width of a whisker
on a gnat. And even that vaporous improvement came on numbers that
are still deep in the post-crash dumps.

But even if
we use the Fed’s own numbers, we see that the month-over-month
rate of improvements is losing steam, not gaining traction. This
is an economy we can believe in?

That’s
not to say that there aren’t some improvements in the economy.
There clearly are. But I contend these improvements are largely
selective.

For instance,
the mining sector is doing quite well – and is now running
at a capacity utilization rate of 90%, versus the broader manufacturing
sector, which is bumping along at just 70%. Crude oil production
is also running hot, at a capacity utilization of 87.4% in March,
versus finished goods at an anemic 71.8%.

In other words,
the stuff that the world actually needs to chug along is still in
strong demand – but the rest of the economy is just limping
along.

Anecdotally,
I have had conversations with managers/owners in three different
industries over the past month.

A developer
of low-income housing said that while things were slightly better
compared to this time last year, they were still a disaster and
there was no real recovery in sight. The manager of a high-end boat/RV
retailer, whose lot is chock-a-block full of expensive motor homes
and boats, was trying to be optimistic going into his traditional
big sales season, and he had clearly boosted inventory. But as the
sales season is still not quite underway, his guarded optimism is
based on nothing more than hope at this point. When I asked him
about the availability of credit, he said that people with very
good credit can get financing, but everyone else can forget about
it. Oops, there goes the majority of his potential buyers.

Then, the other
day, I had a beer with fellow Casey Researchers Olivier Garret and
Alex Daley down at a local pub/restaurant/hotel. The owner popped
around to say hi, and I asked him if he was seeing an improvement
in the economy. His reply, “Oh, there is an economy? Could
of fooled me!” While he made the comment as something of a
joke, the establishment remained largely empty well into the traditional
cocktail hour when we left.

As an aside
on the topic of restaurants, I have noted that the better-run restaurants
– the ones that provide value for money – are doing reasonably
well in the New England resort town that hosts the headquarters
of Casey Research.

Rather than
confirming a broadly improving economy, however, I suspect this
is not unlike the phenomenon where, for a brief period, chickens
are able to run around without the benefit of their heads. Which
is to say, dining out seems to be a reflexive action taken by people
who still have jobs and who may have seen some improvement in their
stock portfolios.

We humans really
don’t like change and typically resist embracing it. Thus,
those not forced by personal circumstances to hunker down –
i.e., those still receiving paychecks – are following the boom-year
custom of regularly dining out, and to a lesser degree, using their
still active credit cards to buy stuff they really could do without.

My grandfather,
a young man during the Great Depression, was a lifelong skinflint
as a result of his experience. One of his favorite sayings when
resisting one of the grandkids trying to put the touch on him for
one toy or another was, “Money doesn’t grow on trees.”
By the time this is over, people will be saying, “Money doesn’t
sprout from credit cards.” Back on the topic of the financial
media… I don’t watch the financial cable shows. For one
thing, I don’t have cable. But even if I did, I wouldn’t,
because almost to a person these people missed the crash. So, why
should I listen to them today?

Most of the
pundits are talking their own book. And all of the financial news
programs know that the stock houses and funds that buy the ads will
bolt if their programs take a steadily dim view on the outlook for
the economy and stock market.

FICTION:
The housing market is improving.
FACT: Would you like to buy a bridge in Brooklyn?

In mid-April,
Bloomberg reported that “Builders broke ground on more U.S.
homes in March than anticipated and took out permits at the fastest
pace in more than a year, a sign of growing confidence that sales
will stabilize.

“Housing
starts climbed to an annual rate of 626,000 last month, up 1.6 percent
from February’s revised 616,000 pace that was higher than initially
estimated, Commerce Department figures showed today in Washington.”

On the other
side of the ledger, the Financial Times stated, “Whitehall
Street International, Goldman Sachs’ international real estate
investment fund, has lost almost all of its $1.8bn of equity following
soured property investments in the US, Germany and Japan, according
to the Fund’s estimates.

“By the
end of 2009, the fund was down to its last $30m, a paper loss of
about 98 cents on the dollar, an annual report sent to investors
last month said.”

If the world’s
most successful investment house can lose essentially all its equity
in a real estate fund, you know we’re not in Kansas anymore.

Fox Business
presented another dose of realism, saying that “Commercial
real estate is showing few signs of leveling out nationwide and
several regions continue to get hammered by declining values.”

I can tell
you that around here, the commercial space that was empty a year
ago is still empty today. And I’m talking even about the prime
locations.

So, how to
explain the upbeat housing articles in Bloomberg, when the
facts on the ground seem to indicate the exact opposite? Other than
the steady evidence that Bloomberg has taken on a cheerleader role
for the Democratic machine its boss is a solid cog in, builders
may be looking to build simply because that is what they do.

What they’ll
actually be doing is assuring their future bankruptcies. The following
is an excerpt from an email from Jim B., a Casey subscriber and
regular correspondent, shedding light on the matter (emphasis mine).

Down here
in Austin, there’s a housing construction recovery in bloom. I
spoke to one of the contractors today. He was very happy to have
his ten workers back to work after over a year of no work at all.
One minor problem: the home construction company wasn’t paying
him.
I’m guessing the companies are using their subcontractors
as lenders and will repay the "loans" if/when the houses
are sold. Their credit must still be in the toilet, so it can’t
get any worse. This looks ominous.

I buy distressed
property, mostly foreclosures. The usual number of houses in foreclosure
in Travis County in the mid-’90s was around 325 per month.
Of those, about 30 had enough equity to make a deal work. The
number of foreclosures about six months ago was about 825, and
the number of good deals was still about 30. So, about 500 houses
per month above the normal rate are being dumped into the Austin
real estate market. Just how new construction will overcome this
competition is a drama I’m waiting to see.

At some point,
real estate will again be a great investment – but for now,
holding fire on new purchases seems the right thing to do. As for
buying housing industry stocks or bonds – not hardly.

FICTION:
The U.S. government has everything under control.
FACT: The U.S. government is on tilt.

At this point
the list of hastily conceived, politically motivated spit-and-plaster
fixes that have been cobbled together by the government in an attempt
to fix the economy – versus just getting the hell out of the
way and letting the economy fix itself – could fill a book.
The only thing that matters to the administration and its allies
is to corral a sufficient number of votes to get through the November
elections on their collectivist feet.

And now Goldman
Sachs has been charged with one of its many frauds. I should have
seen this coming, as they had become – in the minds of Obama’s
core constituents – the poster child of Wall Street’s
greed. In addition, the firm has very, very deep pockets –
just as Drexel Burnham Lambert did when the government laid them
low with a $700 million fine… virtually none of which was then
passed on to the purported victims of their indiscretions.

In the case
of Goldman Sachs, I suspect that they may have become too clever
by half – and that they’ve crossed some lines that will
now be used by their erstwhile friends in Washington to string them
up. And, in so doing, provide Team Obama with a win-win of appearing
as a staunch opponent of Wall Street fat cats, while simultaneously
confiscating another several billion to be cycled into the furnace
of federal spending.

At this point,
the only sane way to view the government is as an out-of-control
gorilla that is wildly grabbing in all directions. As Goldman Sachs
may be about to learn, once the gorilla has caught a hold of you,
you’ve got real problems.

Unfortunately,
the gorilla has grown so large that at this point it has its arms
around the most of the economy. Counterproductive tax hikes are
already baked in the cake and, if the administration has its way,
it will soon try to layer on the mother of all tax increases in
the form of a VAT. (I think at that point we might actually see
riots in the streets.) Therefore our constant admonitions to be
careful and to be largely in cash just now, combined with very carefully
selected stocks that will weather even a Category 4 economic hurricane.
Words to the wise.

The
Casey Report
editors – Doug Casey and David Galland
among them – have predicted all the recent economic trends
months or even years before they happened: the bursting of the housing
bubble… major bank failures… the credit crisis… the
demise of the dollar… and many more. Learn how they do it and
how you can profit from budding trends, even in times of crisis.
Click
here for more.

David Galland
is the managing editor of Casey
Research
.

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