What Will Fill Our Economic Desert?

At some point Americans will wake up. Based on the current legislation and the proposed Obama budget:

• America will have the largest deficit this year since 1945 measured as percent of GDP (11.9%).
• The debt held by the public as a percentage of GDP will be larger than any year since the late 1940’s if the new Obama Budget is implemented

The government recently has been putting out signals saying that all is well. The economic bulls are saying this economy is going on a Disney “E” ticket ride (in the ancient times an E ticket was needed for the more adventurous rides at Disneyland). Why is the debt going crazy if all is well?

Year to date US Government income (mostly from taxes) is off 14% year-over-year, while expenditures have increased 33%. Revenues are half of expenditures. They have spent about 1/3 of the bailout money, and essentially none of the stimulus (pork) yet. The budget busting shortfall is a hair short of a trillion dollars – or 7% percent of GDP in just the last six months alone.

All is not well. There are no fundamentals which support a strong economic recovery.

The servicing of debt and employment are the primary impediment to a normal recovery. There is only so much investor money lying around. It is not unlimited, and the government only can fill this gap in certain specific circumstances. I see no mechanism to build new jobs yet.

This is not a post WWII young vibrant nation which was one-half of the world’s economy. This is a more mature nation - now only 20% of the world’s economy and continuing to slide.

Instead of trying to redirect our PRODUCTIVE economic base, our leaders want to help the bankers and tell us stories of rainbows and wildflowers. Americans have been lied to so long by their government that any negative news from the government causes an over-reaction because things must be really bad.

Banks are not the economy. And neither is terraforming unless it creates jobs.

Additional Economic Events from this Past Week

I like looking at what is in the heads of the Federal Reserve. Their March 2009 Meeting minutes (released this week) focused on fixing what they see is wrong and little discussion or planning for future economic obstacles. It appears the members of the Fed have the same debates we are having on Seeking Alpha. Overall I was amazed that the Fed was surprised that the economy had deteriorated more than Fed policymakers had anticipated since their previous meeting in January. The following quotes were interesting:

In the view of one participant, financial markets--including those for asset-backed securities--were working reasonably well, given the current high level of pessimism and uncertainty about economic prospects and asset values. …Others noted that such programs [TALF] could have undesirable consequences if expanded too far or continued too long.

…Participants observed that many of the Federal Reserve's liquidity programs are priced so that they will become unattractive to borrowers as conditions in financial markets improve; these programs will shrink automatically. In other cases, the Federal Reserve eventually may have to take a more active role in scaling back programs by adjusting their terms and conditions.

…projections of real GDP growth in the second half of 2009 and in 2010 were revised upward slightly, reflecting greater monetary and fiscal stimulus as well as the effects of more moderate oil prices and long-term interest rates, but they continued to show no more than a gradual economic recovery.

…inflation in 2009 and 2010 were little changed, with growth in both core and overall PCE prices expected to be unusually low over the next few years in response to slack in resource utilization and relatively flat prices anticipated for many commodities and for imports.

….Participants were, however, quite uncertain about the [economic] outlook. All but a few saw the risks to growth as tilted to the downside; in light of financial stresses and tight credit conditions, they saw a significant risk that the economic recovery would be both delayed and initially quite weak. In particular, most participants saw the renewed deterioration in the banking sector's financial condition as posing a significant downside risk to the economic outlook absent additional initiatives to stabilize the banking system.

...unless the [tax] cuts were clearly perceived to be permanent, the boost to consumer spending might prove short-lived, as was the case with the tax rebates distributed in the spring of 2008.

…Participants saw no indication that the housing sector was beginning to stabilize. …participants did not expect foreign economies to rebound quickly, suggesting that net exports would not provide much support for U.S. economic activity in coming quarters.

…some noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve's liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve.

Benchmark crude for May delivery rose nearly 6 percent, or $2.86 to settle at $52.24 a barrel on the New York Mercantile Exchange at the end of this shortened week. Let me be blunt – it is not in anyone’s best interest for oil to be this low. The biggest reason is that it stops investments in exploration, drilling, and alternative energy. The longer the price stays low, the bigger the sledge hammer will hit the world when the supply / demand curves are crossed. The politicians and the economists want low prices at this time to aid in stimulating the economy.

Consumer credit decreased at an annual rate of 3.5% in February 2009. Revolving credit decreased at an annual rate of 9.75%, and non-revolving credit increased at an annual rate of 0.25%. This variation is insignificant in the scheme of things. I am waiting to see a significant change in the credit habits of Americans. To date, this only appears to be a recessionary pause. The only truth is that non-mortgage credit has not grown since 2Q 2008.

The mortgage loan application volume, increased 4.9% week over week and down 67.6% year over year. The four week moving average for the seasonally adjusted Market Index is up 13.3%. The refinance share of mortgage activity decreased to 77.9% of total applications from 79.1% the previous week.
We blame everything on Wal-Mart (WMT), and in February 2006 an increase in chain store sales of 0.2% year-over-year (1.0% if fuel sales are excluded) is their fault. If we exclude Wal-Mart, the year-over-year sales decreased by 3.5%. The wobble in this data report is the price of fuel which has fallen year-over-year which is included in the chain store prices. I can draw no conclusions from the data except that we are in a severe recession.

The trade gap closed a little in February 2009 to $26.0 billion, down from $36.2 billion in January. The January to February change in exports of goods reflected increases in consumer goods, automotive vehicles, parts, and engines, foods, feeds, and beverages, capital goods, and industrial supplies and materials. The January to February change in imports of goods reflected decreases in industrial supplies and materials, capital goods, consumer goods, automotive vehicles, parts, and engines, and foods, feeds, and beverages. The trade gap continues to narrow, however, this is a typical recessionary trend and has no legs yet for a long term fundamental change.

The Federal Open Market Committee (FOMC) has authorized new temporary reciprocal currency arrangements (foreign currency liquidity swap lines) with the Bank of England, the ECB, the Bank of Japan, and the Swiss National Bank. If drawn upon, these arrangements would support operations by the Federal Reserve to provide liquidity in sterling in amounts of up to £30 billion, in euro in amounts of up to €80 billion, in yen in amounts of up to ¥10 trillion, and in Swiss francs in amounts of up to CHF 40 billion. This was previously announced in the last FOMC meeting. The Fed claims that there is no need currently for this currency swap but they wanted to be ready just in case so that American institutions would have access to foreign currencies if needed.

Data analysis is difficult in real time – and is only simple in hindsight. The Conference board released their March 2009 employment index spouting a bunch of crap about the worst of the employment crisis being behind us. They may be correct, but chances are they are not. Their index is not proportionate at all to real job losses (ratios vary from 1 to 4 up to 1 to 7), or even it’s tracking against non-farm employment. Changes in direction of their index have proven to be false alarms. The moral of the story is do not react to individual indexes or month-over-month changes – and understand how that index relates to historical changes.

The rate of job destruction had a slight decrease for the week ending 04April2009 with the four week moving average with 657,250 jobs being lost every 4 weeks.

Economic Indicators Published this Past Week

The WLI from ECRI is beginning to show improvement in economic conditions within six months. In their statement Thursday, they said "With Weekly Leading Index growth recovering to a 24-week high, we are fast approaching an upturn in U.S. economic growth when the pace of recession will begin to slow. At the same time, growth in the Weekly Coincident Index fell to a record low of -8.8% in the week ending April 3. This follows the earlier plunge in WLI growth and confirms that we are in the worst recession since World War II." Direction or economic momentum is the basis of predictions. The momentum appears to be changing from static to improving.

As Seeking Alpha is an investing site, we need to understand how this future economic bottoming will effect our investments. I remain invested mostly in cash. I did purchase a moderate amount of ETF ISHARES TR Barclays TIPS Bonds (TIP) this week, as well as even a less amount of Payden Emerging Markets Bonds ((PYEMX)). Remember, I am essentially retired and living on my investments. At this point the stock market is volatile and defying fundamentals in its movements.

I am beginning to bet against low interest rates due to the large amount of debt. There has been a gentle climb since the beginning of April 2009 in Treasuries. With the IMF opening its imaginary Special Drawing Rights (SDR) window (which I believe was targeted at Eastern Europe), emerging market funds no longer seem like much of a risk to me.

Whatever you do if you are a boomer, you need to limit risk to capital. If I were 25, I would be up to my neck in risk right now – probably concentrating in food, commodity, electronic, and energy sector stocks. I would have my radar on to react to the market wind shifts.

Recovery is not here. Many sections of our economy are still falling. Some have bottomed. If the market goes up more, my bet is that it will go back down as it never fell low enough in this Great Recession. If it had, we might already have already seen the bottom.

This Great Recession is very complex. The very elements we are using to extricate us from this will be a lead weight to recovery. I personally believe we will have many years of a bear economy ahead of us. There are no fundamentals which will feed an economic growth engine.

If you would like a summary of all government financial indicators, click here.

Disclosures: Own TIP, PYEMX.

Comments

[Dave Wrixon]

Looks like you are getting there. If more Americans can get to grips with this then there is still a chance that this catastrophe can be at least mitigated.

The real problem is unserviceable levels or debt accompanied by an overvalued dollar. The inevitable outcome is steep depreciation of the dollar and very high inflation. The question is will the US have the leadership it did in the 1970's or is this a re-run of the Weimar Republic. Until the US shows the will to take its medicine all bets have to be on the latter, and time to show resolve is quickly running out.

2009 Apr 12 04:21 AM

[Donn Soderquist]

Similar to you at Age 68. Retired at Age 57. "Remember, I am essentially retired and living on my investments." My situation exactly. Went to super safe allocations September 2008.
Brokerage-Traded Bank CD's: 60% Total Portfolio. 10% Each.
All are FDIC-insured and in different banks.
3.500% 10/10/09
4.000% 04/08/10
4.200% 10/08/10
4.500% 10/08/11
4.750% 10/08/12
5.000% 10/08/13
GNMA Bond Funds: 40% Total Portfolio
Vanguard GNMA (VFIIX) 25% Total Portfolio
1994 only down year in past 27 years
Paying 4.699% based on last 12 months distributions.
Fidelity GNMA (FGMNX) 15% Total Portfolio
1994 only down year in past 22 years
Paying 4.730% based on last 12 months distributions.
I am looking for superior income with very low risk and share your negative outlook for the USA economy. National debt doubled in the past 8 years and looks like it will do it again. Financial fools are in charge of Government, independent of party affiliation.

2009 Apr 12 10:56 AM

[pickaroonwyo]

Good morning! Great content. Pleasant counterpoint to the financial blog world which is desert too!

I like your comment that we need to "redirect our PRODUCTIVE economic base...." This is certainly true. Once the banks are recapitalized with taxpayer dollars, how will the US economy create and add value? This is a huge issue.

2009 Apr 12 12:50 PM

[toobad41]

Here are just a few to fit in your economic desert.....Autozone, Advance Auto Parts,and O'Reilly. When cars are not selling you have to keep your old car running. The same may be said about keeping your old house (like mine) in good condition. So that makes Home Depot and Lowe's look good also. Just my opinion.

2009 Apr 12 12:54 PM

[SeekingTruth]

I live in a county near a city in which I was born.
Although I traveled the country and lived away for over three decades, including living overseas before returning here to live.
If the prevailing attitude, and incentive to be informed, and take informed action in this area is roughly typical of the United States at large, then we are doomed as a nation.

The typical citizen here is strapped to the gills, and is living virtually a subsistance existence.

The area is so impoverished that it is virtually impossible to have a vehicle inspection system in place because it would force thousands of "death trap" vehicles off the road and cause even more hardship for the poor.
The list of such examples could be expanded to fill an encyclopedia.

Aside from this , there is a contingent of extremely wealthy, and other very well off people here and they run things according to their desires and whims.
No one stands in their way .
For the most part, they are unable to do so.
The reasons are that the powerful are supported by a corrupt judicial system, "law " enforcement establishment, local government ,and business community.
Even the local university has chosen to be on the winning side, and is a stealth ally (sometimes not so stealthy) to the power structure. The ordinary citizen can depend on no one for honest objectivity or fair play.
The reason the wealthy contingent exists is basically for one reason alone, i.e. a steady supply of US Government money through one of the larger, perhaps the largest Gov. money condiut pipelines , in the entire country.
Although the greatest percentage of their wealth originates with the U.S. Government, the area is also one of the most conservative in the country.

This observation leads me to ask:
Just exactly what is it they are trying to "conserve"?

With certainty, at least four things are being conserved:
1. Wealth for the Wealthy.
2. Poverty for the Poor
3. Power for the Powerful
4. Ignorance for Everyone not in their circle of power and privilege for seizing public funds.

How typical is this in other areas of the country?
If it is typical, it is no surprise to me, nor should it be to anyone else, why there is no viable plan, or economic roadmap for recovery in this country.
The era of citizen passivity will have to end for anything to have a chance for true recovery.
This remains to be seen, but I would not rule it out entirely.

We must all do our part, and be aware that mere thoughts and mere words can only be a prelude to action, and not an alternative.
Thank you for a fine and informative article.

2009 Apr 12 02:34 PM

[PainfullyAware]

Unless the detriments to small business are reduced the recovery of jobs will be slow and shallow. Mandated Bureaucracy and Tax Structure are the greatest impediments to entrepreneurship.

There is nothing like being uncomfortable to pique interest in public affairs. The populous is getting more uncomfortable by the day.

We have a long way to go before recovery can begin. All actions by the government are to forestall the inevitable; none are to reform or fix.

To Assume Benevolence Is Foolish.

The Complexity Of Corruption Is Vast.

2009 Apr 12 06:46 PM