The concept of decoupling is dead on arrival. The financial crisis is affecting every country throughout the world. It is seeping into the real economy in every nation. Export orders have fallen off a cliff just as consumer buying has. In every nation the crisis has spread into the real economy via both unemployment and inflation. The economists and analysts who scoffed at us almost two years ago when we announced that the recession, are all stumbling over themselves in announcing we may have a depression. Already there is talk that exporters like Japan and China may not recover for years.
As you are aware we believe corporate earnings will be on a level in 2009 with that of a 6,000 Dow Jones Industrial Average. We also believe that the consumer will take a holiday taking personal consumption down from 70% to 72% of GDP to 69% or less. We believe the global economy and financial markets will stay depressed for some time to come. You cannot use previous recessions or depressions as a yardstick. This failure is nothing like we have seen in the past few hundred years. The average post-war recession lasted about 10 months. By our calculations we are into the 23rd month and there is no end in sight. In fact, we are really just getting underway. Thus far this recession is similar to 1982, but much more like 1974 so far. They lasted 16 months respectively. This implies little to us. As we said, we have only just begun.
Unemployment is going to be the over-riding factor in the economy. The official Labor Department report was that in December there was a massive 524,000 decline in non-farm payrolls putting the unemployment rate at 7.2%, the highest rate in 16 years. What is compelling is that these statistics are lies. This game of falsification has been going on since 1980. As usual we were treated to more downward revisions, which totaled 154,000. October’s decline of 320,000 increased to 423,000 and November’s total of 533,000 rose to 584,000. That is a total job loss of 678,000. For the year of 2008 “official” net job losses were 2.6 million, which we estimate to be well over 4 million. Incidentally, that is the highest since 1945. These bogus figures are the result of birth/death modeling, which is simply a government tool to make the numbers whatever the government wants them to be. Over 6 million jobs have been lost in the past eight years in great part due to free trade, globalization, offshoring and outsourcing. In December another 149,000 manufacturing jobs were lost. The only way this can be reversed is by Congress implementing tariffs on goods and services. If we do not have such legislation, America cannot survive as a first-class nation.
Other employment areas hit hard were trade, utilities, transportation and professional and business services. The additions were 45,000 in the health care industry, which will help increase costs and 7,000 government jobs.
We ask, how long can state, county, city and local governments continue to hire when half the states are broke?
In the pursuit of employment and stability the Obama New Deal will end up just as unsuccessful as FDR’s was. Controlled planning similar to that of Soviet or Fascist models didn’t work in the 1930s in America and they won’t work now. Nationalization and cartelization didn’t work then and won’t work now. Economic growth from 1933 to 1939 went nowhere. Per capita GDP was lower in 1939 than it was in 1929. Unemployment in 1939 was 17.2%, which was higher than in 1931. Today U6 official unemployment is 13.5% and long-term unemployment is 17-1/2%. This was despite 100% increases in monetary expansion. Taxes had been tripled. Employing people became more expensive due to unions and national income guarantees. This kind of formula inhibits growth. There were make-work projects - not projects that created permanent jobs. Laws were passed that inhibited small and medium-sized companies from competing. Those who dissented were pursued by government. This went on straight through World War II. FDR’s economic and financial policies simply didn’t work and when the elitists saw that they had FDR lead us into war. Just read John T. Flynn’s book, “The Roosevelt Myth.”
What you saw in the 1930s and what you will see over the next several years is a power grab by elitist sources behind government. You will see depression, hyperinflation and another contrived war.
Those who tell you that liquidation of assets offer you a fantastic buying opportunity are either dumb or they are deceiving you. We see no immediate chance of deflation getting an upper hand, although in time it will. The Fed has expanded its balance sheet to $1.2 trillion. Reserve balances are at $600 billion. Over the past month bank reserves are up over $300 billion. This is immediately monetized. This is money created out of thin air.
The insiders who want a show of inflation are still frightened by deflation and well they should be. Their long-term inflation in the end will destroy them.
The real estate markets throughout the world will struggle to find a bottom for sometime to come. The world’s biggest market is southern California, a region covered in distressed properties. The inventory overhang is monumental. The mantra of the region that real estate never goes down is dead. The psychology has been broken and may never prevail again. The good years were great. Where could you buy a home for 20% down for $35,000 and 20 years later sell a home for $1 million? That happened to many others, and us but that game has come to an end. The resetting of billions of dollars in Option ARMs, pick-and-pay loans have begun to hit the upper end of the market in full force. The forced sale of these homes will devastate an already crippled market. As California goes so goes the nation.
Currently more than 50% of sales to mostly speculators are distress sales. The affects of SB1137, which delays the foreclosure process, will see its effects vastly dissipate very shortly. It will end up like all price controls causing more harm than good. This reality will send prices exceedingly lower. Bottom line is this market should be reached in 2011 or 2012, if the state and federal governments do not interfere. If they do it could last longer. Not only are ARMs resetting but also unemployment is spiking upward, the state is bankrupt, inventory continues to rise as well as foreclosures and the economy is falling apart.
Sixty percent of Option ARM loans are upside down and a majority of them are in California. Unless you come up with the cash difference between equity and the loan you are not getting refinanced. The economy the way it is will make it very difficult for many people to re-qualify. In fact, more than 50% won’t re-qualify.
It’s not that politicians do not get it. It is because the bankers, Wall Street and transnational corporations control the politicians with campaign donations and a bevy of other illegal perks. Politicians do as they are told and that is approving things such as TARP to enrich the rich.
S&P Case Shiller sees Southern California home prices off 24.9% in 2009 and 5.1% in 2010; a net 50% drop is seen and perhaps as much as 70% from the peak prices. That puts the $550,000 home at $275,000 or $165,000.
It is no wonder that observers of the economic and financial scene are concerned when the net worth of US households fell by $2.8 trillion in the third quarter alone and by $7 trillion in 2008. This is the worst adjustment since the 1930s. As we are seeing the net result is the public is finally reducing debt. Unfortunately, the reduction in credit deflates the quantity of money in circulation and forces the Fed to print even more money. In the third quarter mortgage and consumer credit together fell $117.4 billion yoy.
Now we have interest rates at zero as the Fed pushes on a string, and they are blindly followed by every major nation, all of which are waiting to get buried. Wait until you see the dislocation when the Fed attempts to borrow $2 trillion in 2009. In 2008, in real estate, stocks and commodities worldwide, $70 trillion has been lost. These events have put the smell of panic in the air, both by individuals and corporations of government, all of which as yet have not totally grasped the gravity and seriousness of their problems.
As we have often said since June 2002, the Fed is in a box and they cannot get out without allowing the system to be purged. Barron’s is right, US Treasuries are a bubble and they will in time collapse taking yields considerably higher. Investors are about to find out that there is no safety in US Treasuries. Before the year is out these higher yields will force the stock market lower as well as real estate and other yield bearing entities. As this transpires taxes will rise as government extortion continues apace and inflation will rage.
Government debt is no longer safe in America and that means neither is corporate or personal debt. All the stimulation has costs - the costs of future debt service and inflation. As yields rise, the face value of bonds fall and there is a loss. Foreign nations hold 64.5% of their foreign exchange reserves in US dollars. That means a contraction of the value of their reserves, which forces their interest rates up as well. While these events occur the value of the dollar will fall creating a double whammy on foreign central bank reserves. At this juncture some foreign central banks and professional investors will panic and when that happens the reserve status of the US dollar – the world’s reserve currency – will be invalidated.
We have talked about a fiscal 2009 US fiscal budget deficit of $1.3 to $2 trillion. In finality we will see a deficit of about $2.3 trillion a tribute to the incompetence to the moron who is leaving the White House.
How can any sane investor accept a negative return or even 0.25% on Treasury bills when inflation is 11%? Stop and think for a second, interest rates cannot go any lower. They can only go higher. Even though this situation exists foreigners lend 60% of their savings to US entities. Needless to say, this cannot continue and as a result foreigners are in the process of pulling funds out of dollar denominated assets. We do not have fourth quarter figures as yet, but for the nine months in 2008 foreigners withdrew $324 billion.
Unemployment is soaring mainly due to free trade, globalization, offshoring and outsourcing. We once had a manufacturing base that supplied 28% of GDP. Today it is 11% and falling. During that period the financial service sector rose form 12% to 25%. The result is the most indebted nation in modern history and the destruction of a high paying job industrial base. We as a result owe foreigners almost $17 trillion.
The US can never recover unless trade tariffs on goods and services are implemented. Without that America is doomed to be a second world nation as is England. Even with tariffs debt default has to happen and it will happen and it will occur within the next three years. There is simply no way out. This is why during this inflationary and hyperinflationary period you have to be almost totally in gold and silver related assets and eventually only in gold bullion coins.
A new stimulus package of $800 billion to $1 trillion isn’t going to solve the problem. It is a package that should have happened two years ago, but our government, Wall Street, banking, economists and analysts refused to recognize the recession that began 23 months ago. It wasn’t politically acceptable and professionals were intimated from calling the economic situation what it was and is. Most still have not publicly declared recession. The package will come and go. A quick jolt will be delivered to the economy lasting six months to a year. It avoids addressing the systemic problems. No jobs and a purging of the system. That will come later with currency controls and debt default. Remember, the US bond market is ten times the size of the US stock market and if the flow of funds in and out of the country is curtailed the financial world will be bedlam and the world economy will probably collapse. Even with devaluation and a default, who will buy Treasury paper? That means debt internally will be all monetization and the US will be Weimarized.
We are not going to say much at this juncture about deflation and what will happen when it arrives. All we will say is that it will be horrible. That is why your gold and silver coins, freeze dry and dehydrated foods, gardens, water filters and ammo and weapons are so important. They are your insurance policy to survival. Prices on everything will plunge 80% or 90%, as will income and the value of fiat Federal Reserve notes. The once rich will suddenly become poor and you will survive. This will happen worldwide. When the world bond market collapses it will make the stock market and real estate collapses look trivial. All we can say is that worldwide more than $100 trillion will be lost and the world economic and financial system will come crashing down. The clue will be when foreigners finally stop buying US government debt.