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The Suits vs. the Green Shoots
By David Glenn Cox
Every day, every hour the government and the media are pursuing a two-pronged strategy to try and convince the public that the worst of the economic crisis is over. You can come out now; it's going to be all better.
They point with pride to the rising stock market averages and the profits turned in by the big banks. But they don’t believe it themselves, as illustrated by the ever-rising gold price. They are playing a double game of almost literally giving money to the banks for free and then pointing to their profits as proof that the economy is getting better. The banks can borrow millions of dollars from the Federal Reserve for .25%, and the Treasury then issues Treasury bills paying as high as 4.27% to cover the cost of the give away.
It is a lose/lose situation. With tighter standards in home mortgage lending, and a 10% reduction in the credit card market, the big banks have more money than they can lend but few places where they can safely lend it. To the Europeans specifically and the rest of the world in general, the American banking industry did not learn the lessons of the economic meltdown. The Europeans are taking concrete steps towards reining in shoddy lending practices without the "too big to fail" policy.
America’s budget deficit and trade deficit speed the decline of the value of the dollar. The recent Cash for Clunkers program cost the taxpayers $3 billion, and of that $3 billion some $2 billion was spent on Asian-built automobiles. The money was put on a boat and shipped overseas. So we spent $3 billion for $1 billion of actual stimulus to the American economy. Now consider that $2 billion was added to the trade deficit. That the original $3 billion was added to the budget deficit, and on top of it all, because fewer Americans can afford to buy new cars and Cash for Clunkers took the trade-ins off the road, it caused the price of used cars to rise.
But since America is the largest market for consumer goods, the Europeans and the Asian economies have a vested interest in keeping the US economy afloat. The Japanese have been buying up dollars trying to keep the dollar to yen relationship stable, and for their efforts they managed to temporally goose it from 88.5 to 91 yen to the dollar. But it was like airing up a leaking beach ball, and it has now leaked back down to 88.7.
Every yen the dollar ticks down makes Japanese products more expensive to the American consumer. So let's play Monopoly, only in this version of Monopoly when you pass go you must turn in 10% of all your cash. Call it the reduced value fee. You will still get your “New” $200 dollars when you pass Go, but if you still have it when you pass Go again you must pay the fee. So the only sane thing you can do with the cash is to spend it as fast as you can.
Now, in this version of Monopoly you can buy gold and the gold will always be redeemed at face value, So if you buy $200 in gold and travel around the board four times, that $200 cash would be worth only $131 while the gold is still worth $200. As we all know from Monopoly, eventually all the good properties have been purchased, and all that is left are the Water Works and the Electric Company.
Stocks for commodity companies have been on the rise because overseas investors can use the resources, while consumer stocks have languished. Gold has made a steady progression to over $1,000 an ounce, while oil can barely hold $80.00 a barrel. Oil is driven by demand, and since the unemployed don’t drive and businesses struggling to stay open don’t have deliveries to make nor shipments to receive, there is little pressure on oil other than deflating dollars.
Gold, on the other hand, is a fear indicator, and demand is driven by the fear that the economic hard times are not over. And it is also being used by foreign governments, buying gold, to unload those unstable dollars, exchanged for a stable commodity because the good stocks are already overvalued.
The President has gone to China to assure the Chinese that we will not adopt protectionist policies, after the WTO agreed with the US position that China was dumping tires in the American market. The President has asked nicely if the Chinese will peg their currency to the dollar. Because in the world of “Free” trade some players are freer than others. The Chinese, under the two systems one China policy, set the value of their currency under the communist system. It is not free floating like every other country.
It is protectionism by default. By setting the level arbitrarily, foreign goods will always be overpriced in the Chinese market. The only way to beat the system is for foreign manufacturers to produce their goods inside China. It's a win/win protectionism that spurs foreign investment. But it is a foreign investment and requires taking on a Chinese partner, to share with that partner all of your technology and your production methods and even trade secrets. Then the Chinese partner is free to develop their own products apart from the joint venture.
So, these green shoots are illusions; they are plasma bags dripping into the economy. It’s good news, for that other economy that doesn’t really involve you. Homes are still being lost at record rates. New claims for unemployment are still above 500,000 per week, and they’ve even begun to drop the pretense that 10.2% unemployment isn’t actually 17.5% unemployment.
Bloomberg -- “Production at factories, mines and utilities was forecast to increase 0.4 percent, according to the median estimate of 75 economists surveyed by Bloomberg News. Projections ranged from a gain of 1.2 percent to a drop of 0.3 percent."
That’s a pretty broad estimate; I estimate I will get somewhere between and A+ to a D- on the science test.
“The Fed revised September’s gain down to 0.6 percent from a previously reported 0.7 percent increase. The gain in capacity use left operating rates near June’s 68.3 percent, which was the lowest since records began in 1967, and below the 81.1 percent average over the past four decades.”
The lowest since records have been kept in almost half of a century are green shoots?
“Motor vehicle and parts production fell 1.7 percent following an 8.1 percent increase the prior month. Automobile production is moderating after surging in the three months through September as 'cash-for-clunkers' incentives to buy cars expired in late August."
But that only happened because we made it happen, and we paid for it to happen. It was CPR, not growth. But that’s what they call it.
"Excluding automobiles, manufacturing output decreased 0.1 percent."
Nov. 20 (Bloomberg) – “Federal Reserve officials are stepping up scrutiny of the biggest U.S. banks to ensure the lenders can withstand a reversal of soaring global-asset prices.
“Supervisors are examining whether banks such as JPMorgan Chase, Morgan Stanley and Goldman Sachs Group Inc. have enough capital for the risks they take, how much they know about the strength of their counterparts and whether risk managers have authority to influence bank practices and policies.
“The central bank’s monitoring takes on renewed urgency as Chairman Ben S Bernanke’s pledge to keep the benchmark interest rate near zero for 'an extended period' is helping to fuel a surge in assets. The MSCI AC World stock index is up 70 percent since hitting a recession low on March 9. Gold reached an all-time high of $1,150.60 an ounce today.
"The policy is raising the 'systemic risk' of new asset bubbles, Bill Gross, who runs the world’s largest bond fund at Pacific Investment Management Co., said in a note posted on the Newport Beach, California-based company’s Web site yesterday. Finance officials in Asia say a bubble fueled by the Fed’s low rates has already arrived.”
Bad news, for that other economy that really does involve you.
Double, double, toil and trouble;
Fire burn and cauldron bubble.
Fillet of a fenny snake,
In the cauldron boil and bake;
Eye of newt and toe of frog,
Wool of bat and tongue of dog,
Adder's fork and blind-worm’s sting,
Lizard's leg and howlet’s wing,
For a charm of powerful trouble,
Like a hell-broth boil and bubble.
They will pay attention to us once they can no longer cast their spells and incantations to protect their own illusions from their unseeing eyes.
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