It's the Soil That's Bad, Not the Green Shoots

At the risk of being repetitive, if you look at the macro economic data and the upcoming political showdowns over taxing and spending, the markets are justified in listing with a negative bias, as we sail into the future.

Regrettably, this includes a shocking but probable casualty suffered by the U.S. debt obligation’s AAA credit rating, by 2012.

The massive selloff seen in Wednesday’s Treasury bond market rested on disclosed information communicated throughout the trading day, as well as what was unspoken; that deep down inside, short-term investors and long-term money managers alike do not believe in green shoots sprouting across America.

Let us review a few macro-economic facts that can poison US green shoots faster than eating the wrong part of a blowfish in a Sushi bar:

• The IRs reported that tax revenues fell by $138 billion or 34% in April versus a year ago.
• Some municipalities are contemplating disincorporation in the face of budget shortfalls.
• Forty-two states are facing at mid-year a $60 billion shortfall for FY 2009.
• In April 21 states saw unemployment fall, 11 unchanged, 18 states are still experiencing rising unemployment.
• TransUnion Credit reported individual credit scores, on average 6 points to 11 points, between the 3^rd quarter. of 2008 and the 1^st quarter of 2009.
• Consumer debt fell six out of eight months ending in March, which is up .1 per cent, the slowest growth in 17 years.
• Germany, the world’s largest exporter, economy is growing worse.
• The Federal Reserve Z1 statistical release shows household wealth fell $.5 trillion in 2007 and $11.8 trillion in 2008.
• The US will not be able to sell 2 trillion dollars in obligation, for FY 2009, without significantly higher interest rates.
• Higher interest rates will choke off any recovery and retard growth.
• The rebound in real estate is an aberrational illusion, which will peter out later this year, when move-up buyers fail to show up this fall.

I hate being the skunk at the summer picnic; however, to ignore these facts and promote the meme of “less bad is good” is a bit too Orwellian for my sensibilities. Losses are not equal to profits. Once you accept the premise that de-leveraging will continue for the next several years, it becomes easier to discern between green shoots and weeds, and what awaits future business trends.

Now is the time to exit most fixed rate debt in exchange for variable rate debt like TIPS.

What’s more ominous, though, is the unhealthy political climate to correct problems that do require sagacious political solutions and strong political leadership. The pervasive irrational mindset that the largest industrialize nation’s infrastructure can be had with niggardly taxation defies logic. Maintenance of our transportation system, our communication system, as well as our public/private healthcare and pension schemes, for too many years was paid for by dubious credit, OPM (other people’s money), or ignored altogether.

California is an exquisite example of bad politics. In the name of fiscal discipline and conservatism, California may allow the eighth largest economy in the world to fail, aided perhaps by the Obama administration’s refusal to be involved. California’s Legislative budget analyst projects a 2009-2010 budget deficit of $28 billion dollars.

Short-term, California is looking for a $15 billion dollar backstop in guarantees by the feds. That will help 38.2 million people, or 12.4% of the US population. California generates 13% of the nation’s GDP. How many green shoots will that strangle in its infancy?

If you think that this assessment is too gloomy, 2010 holds its own surprise for doubters of stagflation and global political drama.

Disclosure: No positions

Comments

[Jason Rines...:]

Don't forget the inevitable increases in energy and trickle downs as the dollar is devalued. 2012 will be a year of very interesting political change. Either we will have martial law and police state sliding from Feudalistic Fascism to Communism or voter revolution sweeps enough of the corrupt in Washington away to have an evolutionary restoration of the country. Hard to completely tell but the undercurrent of further globalization and NWO stuff of a global Gods and Clods society is getting harder to ignore.

May 28 10:36 AM

[_richard_:]

TIPs are a good suggestion. But the somewhat simplistics economic and political analysis--not to mention the mixed metaphors--can be comfortably skipped.

May 28 01:11 PM

[Nick_likes_...:]

Author: Not understanding this bullet, so I think you have a typo:

"TransUnion Credit reported individual credit scores, on average 6 points to 11 points, between the 3rd quarter. of 2008 and the 1st quarter of 2009."

May 28 01:22 PM

[Nick_likes_...:]

Author: Not understanding this bullet, so I think you have a typo:

"TransUnion Credit reported individual credit scores, on average 6 points to 11 points, between the 3rd quarter. of 2008 and the 1st quarter of 2009."

May 28 01:25 PM

[wtp:]

Agree with your sensible points about taxation. Since nobody wants an increase now, it might be a good time for restructure and simplification More of us might be willing to pay a tax we understood and considered mostly fair. Anyway, you're right, citizen participation is far more fertile soil than the "kindness of strangers" for the country's long-term viability -- and pride.

May 28 04:47 PM

[1RuleNoRules:]

>The pervasive irrational mindset that the largest industrialize >nation’s infrastructure can be had with niggardly taxation defies logic.


The source of this logic is increased revenue immediately after Kennedy, Reagan and Bush tax cuts, and decreased revenue following tax increases. WBO and CBO have consistently errored in its estimates of revenue after changes in tax rates. We have reached the logical limit of taxation and it is not at extremely high levels (See Laffer curve).

May 28 09:53 PM

[Marvin Clark:]

Supply-side economics is just a theory; don't treat as dogma.


On May 28 09:53 PM 1RuleNoRules wrote:

> >The pervasive irrational mindset that the largest industrialize
> >nation’s infrastructure can be had with niggardly taxation defies
> logic.
>
>
> The source of this logic is increased revenue immediately after Kennedy,
> Reagan and Bush tax cuts, and decreased revenue following tax increases.
> WBO and CBO have consistently errored in its estimates of revenue
> after changes in tax rates. We have reached the logical limit of
> taxation and it is not at extremely high levels (See Laffer curve).

May 29 08:08 AM

[Marvin Clark:]

So, when do we begin in this country?


On May 28 04:47 PM wtp wrote:

> Agree with your sensible points about taxation. Since nobody wants
> an increase now, it might be a good time for restructure and simplification
> More of us might be willing to pay a tax we understood and considered
> mostly fair. Anyway, you're right, citizen participation is far
> more fertile soil than the "kindness of strangers" for the country's
> long-term viability -- and pride.

May 29 08:09 AM

[Marvin Clark:]

Credit scores are down 6% to 11%. Consumers are becoming weaker.


On May 28 01:25 PM Nick_likes_ETFs wrote:

> Author: Not understanding this bullet, so I think you have a typo:
>
>
> "TransUnion Credit reported individual credit scores, on average
> 6 points to 11 points, between the 3rd quarter. of 2008 and the 1st
> quarter of 2009."

May 29 08:11 AM

[Marvin Clark:]

2010 should be an interesting year in politics.


On May 28 10:36 AM Jason Rines (iThinkBig) wrote:

> Don't forget the inevitable increases in energy and trickle downs
> as the dollar is devalued. 2012 will be a year of very interesting
> political change. Either we will have martial law and police state
> sliding from Feudalistic Fascism to Communism or voter revolution
> sweeps enough of the corrupt in Washington away to have an evolutionary
> restoration of the country. Hard to completely tell but the undercurrent
> of further globalization and NWO stuff of a global Gods and Clods
> society is getting harder to ignore.

May 29 08:13 AM