(May 6, 2009)
A new publication, "New Prosperity, the New Bull Market Magazine" celebrates the
recovery of the U.S. economy and the return of the 26-year Bull market after an
annoying 7-month long recession and Bear market.
Please welcome New Prosperity Magazine.
I'm sure you applaud the full restoration of "prosperity" to this fair land after
a brutal four hours of national soul-searching and dispensation of justice.
Meanwhile, back in reality, the host of the thoughtful and practical blog
truthalyzer, Gib, posted
the following comments on the
Of Two Minds reader forum.
Gib succinctly summarizes the realities which are unfolding beneath the hype, manipulation,
misrepresentation and propaganda which is sustaining this "new Bull market" and its
accompanying euphoric confidence that "the bottom is in" and the 26-year long Bull market
is back on track:
Charles recently wrote that he is "one of the last public bears." I'm feeling bearish myself,
and I'm not reluctant to go public and keep him company. He prudently qualifies his bearish
point of view. "I may well be proven horrendously wrong; perhaps the stock market will
shoot up this coming week in a stupendously irresistable Bull Market," he says.
I recklessly proclaim that I could not care less what the stock market does in the short run.
The market is to the economy what weather is to global climate. It matters not how often
the former goes up and down, for the latter plods on in spite of it, tracing the path of
its long term trends and cycles.
I believe that the economy is trending downward. Indeed,
it may never "recover," in the sense of picking up where it left off. We may have to
transform the economy to save it and ourselves. Here are some reasons I'm bearish on the
1. Trillions of dollars in bad paper is still out there--mortgage-backed securities,
collateralized debt obligations, and other toxic assets. The only buyer stepping forward
is the government. Well, maybe a few private investors, too, but only if the government
insures them against a loss. Gaither's plan won't make the bad paper go away, it will
just transfer the worst of it from financial institutions to taxpayers. Both sides of
the transactions are technically bankrupt now, and they will remain so after the paper
changes hands. Talk about rearranging the deck chairs on the Titanic.
2. Housing has been a big driver of the American economy in recent years, so the economy
is not going to recover until housing does. That seems unlikely, because even though
housing prices have fallen considerably from their bubbly highs, they still remain out
of synch with the earnings of buyers. Absent no money down deals, and liar loan financing,
and interest only monthly payments, a lot of buyers just can't come up with enough money
to buy homes. And many of those who can afford to buy are too worried about their jobs
and 401(k)s and other matters to take the plunge. That's not a prescription for a quick
3. It isn't just houses that Americans aren't buying, it's autos and furniture and
electronics and, well, just about everything. Businesses big and small are going under
and taking employees with them, and those that are still afloat are throwing many employees
overboard. These employees are the former buyers of autos and furniture and electronics
and, well just about everything. Unemployment statistics have been finagled over the
years to leave out those who are "discouraged" and "underemployed" and "self-employed,"
so as a result we have to double whatever the government reports. That means we're at
about 17 percent unemployed right now, and that percentage increases every month. So
if an economic recovery requires people to go out and buy all the stuff they used to,
then it's not going to happen, because too many of them are either unemployed or worried
about becoming unemployed.
4. Lately, China seems more inclined to buy gold than to buy American Treasury notes.
Others have stayed away from Treasury auctions, as well. As is the case with pyramid
schemes, when the marks stop putting money into it, the con artists running the scheme
soon find themselves short of cash. They've already spent most of the money they've taken
in and were counting on new deposits to meet their commitments. Of course, the perps
can switch to another racket, printing money.
But can an economy propped up by one racket
or another ever be considered strong? Of course, it's not just the government I am talking
about. It is also the financial sector, and the purveyors of services, and all the others
who make their livings off of intangibles who have displaced the makers of real things as
the foundation of our economy. Back when America crafted things of substance, we had a
strong economy. I don't think we can be strong again simply by running printing presses
and tanning salons more hours a day.
5. But more important than any of the above is the fact that our economy, indeed our
entire civilization, is based on an obviously false assumption that we can have growth
without limits. Even if we were able to restart the economic engine and push the pedal
to the floor, we would not get far before we ran out of gas. And fresh water. And fertile
soil. And food. And a lot of other necessities of life that we have taken for granted,
without consideration of the future. We live on a small planet with limited resources,
and we are using them up at an alarming rate. In just my lifetime, our population has
grown from 2.2 billion to 6.7 billion, over three hundred percent.
There's a kind of
desperation that growth rate breeds. We need more houses, more TVs, more cars, more
highways, more food, more iPods, more energy, more everything every year, to keep up
with growth, to keep investors happy, to keep the economy thriving, to keep from . . .
from what? Is it like that bus in "Speed," or that character in "Crank," that you die
if you slow down? What if it's just the opposite? What if this economic downturn is
nothing compared to the crash we were heading for if we had continued full speed? I
don't think the economy will ever be what it was, but maybe that will force us to change
our assumptions about what it should be.
Thank you, Gib, for this analysis, and thank you, Bill Murath, for your suggestion of
"cat food prosperity" as a worthy topic. Thanks also to Cindy F. for suggesting the
steeplechase analogy I worked up last week:
Housing: the Steeplechase Analogy (April 30, 2009)
Analyst John Mauldin, who kindly provides free commentary to several million readers
every month, recently published a report by Jim Welsh of Welsh Money Management.
Here are particularly telling excerpts:
As noted last month, there is a good chance that GDP will post a positive print in the
fourth quarter of this year, and maybe in the third quarter. Most of the 'gain' will be
statistical nonsense, but that won't deter most economists from getting excited.
According to RealtyTrac, job losses result in a home foreclosure 10% to 15% of the time.
If job losses narrow from the monthly average of 670,000 in the first quarter to 325,000,
almost 3 million more jobs will be lost before year end. That will translate into
another 300,000-450,000 foreclosures, and an unemployment rate of almost 11%. But what
if that estimate of job losses is too optimistic?
Over the last week a number of banks have reported first quarter earnings, which was a
pleasant surprise. Citigroup said it made $1.6 billion. One of the ways Citigroup
achieved this gain was booking a profit of $2.7 billion on the decline in Citi's own
debt. Say what? Under accounting rules, Citi was allowed to book a one-time gain
equivalent to the decline in its bonds because, in theory, it could buy back its debt
cheaply and save $2.7 billion over time. Of course, Citi didn't actually do that.
Even though more consumer loans went bad in the first quarter, Citi reduced its loan
loss reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first
quarter, thereby picking up another $1.3 billion of 'earnings'. And the recent change
in mark to market accounting enabled Citi to book an additional $413 million in 'profit'
on impaired assets. Without these one-time adjustments, Citi's $1.6 billion in first
quarter profit becomes a $2.8 billion loss. (CHS--emphasis added)
As I was raised in a deeply religious household, the first thing that comes to my mind
after discovering exactly how Citicorp cooked up a "profit" is that the entire U.S.
banking system and Wall Street are the modern-day equivalents of the biblical capitals
of wickedness, Sodom and Gomorrah: (wikipedia)
In Genesis 18, God informs Abraham that he plans to destroy the city of Sodom because
of its wickedness. Abraham pleads with God not to destroy Sodom, and God agrees that
he would not destroy the city if there were 50 righteous people in it, then 45, then 30,
then 20, or even ten righteous people. The Lord's two angels found only four righteous
people living in Sodom, including Abraham's nephew Lot and his wife and two youngest
daughters. Consequently, God destroyed the city.
Can anyone connected to Citicorp's financial statements, its fictional profits, its
auditors, the Federal regulatory agencies tasked with oversight or the financial media
which breathlessly trumpeted the wonderful news that Citicorp generated a stupendous
profit truthfully claim to be righteous in any fiscally or ethically meaningful way?
Put another way: if there is anything remotely like karma or justice in this Universe,
the entire corrupt banking and financial sector of the U.S. richly deserves to go down,
if not by fire and brimestone then by bankruptcy and insolvency.
Read that paragraph on Citi's "earnings" again and try to disagree with reader John B.'s conclusion:
We have become the most dishonest group of people to walk this world.
Oh, and welcome to the New Prosperity.
Looking for something new to read? Scan these recent additions to our "recommended" list:
(Many recommended by other readers)
The End of Overeating: Taking Control of the Insatiable American Appetite
Dark Age Ahead Jane Jacob
Coercion Douglas Ruskoff
The Limits to Capital, New Edition
(an explication of Marx's Capital)
It's a Long Road to a Tomato: Tales of an Organic Farmer Who Quit the Big City for the (Not So) Simple Life
Sustainable Energy - Without the Hot Air
I Will Bear Witness 1942-1945: A Diary of the Nazi Years
The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too
The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders
The Printing Press as an Agent of Change (Volumes 1 and 2 in One)
Our previous list of hot reading (check them out at your local
library if you don't want to own a copy) can be found at
Books and Films.
"This guy is THE leading visionary on reality.
He routinely discusses things which no one else has talked about, yet,
turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.
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