The Upside-Down Logic of Obama's Stimulus and Merrill's Depression Call

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Includes: GDX, SSRI, TRQ, VGZ
by: Kip Herriage

Planet Bizarro and Merrill Lynch Predicts a Depression

Seinfeld fans will remember the episode where Jerry refers to people that appear to be the exact opposites of George and Kramer as being from "Planet Bizarro". Planet Bizarro comes from a comic book featuring Superman and Batman. On Planet Bizarro, everything happens exactly opposite to what we are accustomed seeing on Earth. They see bad as good and good as bad. Superman and Batman are villains instead of heroes, and morality is upside down. Sound vaguely familiar to the daily news we're getting?

Bizarro also explains the details of Obama's stimulus package…completely upside down. The Congressional Budget Office (CBO) has pulled back the drapes and revealed that less than 40% of the total $800 billion will ever work its way into the economy, and that less than $80 billion will be spent in the 2009. So, over $300 billion of the stimulus will be wasted, and in the year that we need it most…2009…a paltry $80 billion will be passed around…meanwhile Citibank (NYSE:C) and AIG can get $80 billion with a simple email request. Planet Bizarro has arrived on Earth. And, no matter how you feel about government-funded family-planning programs, it's hard to believe they will actually help to stimulate the economy.

Yet House Speaker Nancy Pelosi is defending the stimulus packages spending of hundreds of millions of dollars on these kinds of programs as economic stimulus. And this is just one example of how the proposed package will waste our hard earned tax dollars. And just in case you were wondering, the CBO is headed up by Democrats. Complete details on the proposed stimulus package can be found here (.pdf):

Until our fearless leaders recognize the serious nature of this economic recession/depression, and cut taxes to ZERO for all businesses and individuals for one full year, the economy will continue in its decline.

Elsewhere on Planet Bizarro, Merrill Lynch handed out up to $4 billion in bonus payments to employees a month earlier than it usually does, and just three days before it was sold to Bank of America (NYSE:BAC). Forget John Thain's million dollar office expense…this is the real story. American taxpayers are funding billions upon billions of dollars to pay bonuses to corporate execs that have lost hundreds upon hundreds of billions. It gets no more bizarre than this.

And, earnings reports so far are a very mixed bag. More from Planet Bizarro: Many of the projected earnings gains in 2009 and 2010 will come from cost-cutting in the form of layoffs. Let me see if I understand this; corporate earnings will increase going forward because of a reduction in the number of employees. Sounds like a great long term business plan…and more bad news for the consumer. And this is by no means just a US problem…the global economy and corporate structure is in just as bad a shape.

MERRILL LYNCH PREDICTS A DEPRESSION

Well, it's finally happened. Outside of the VRA, not many are predicting that this recession could turn into a depression, but Merrill lynch just did. In a note titled "Some Inconvenient Truths", Merrill Lynch's top economist, David Rosenberg, shares the following:

Some Inconvenient Truths, By David Rosenberg

It shouldn't come as any big surprise that with such a provocative title, we would be saddled with questions as to how an economic depression is even defined. Of course, most portfolio managers still don't know that a recession is not defined as back-to-back quarters of negative real GDP prints (which we had neither in 2002 nor 2008) but instead the timing of the peaks in real sales activity, employment, industrial production and organic personal income growth.

As for depressions, there is no official definition, except to say that they have existed in the past. There were no fewer than four in the nineteenth century, one in the twentieth century, and we are very likely enduring another one today. Though this current one is muted by the fact that most countries have an elaborate social safety net (deposit insurance, unemployment benefits, welfare, and socialized health care).

Depressions are basically long recessions - they can last anywhere from three to seven years, while historically cyclical recessions last 18 months - and tend to follow years of leveraged prosperity of Gatsby-like proportions. Considering that in this most recent leveraged cycle from 2002-07, we reached a point where a record 40% of corporate profits were derived from financial activities, where household debt relative to income and assets surged to unprecedented levels and the personal savings rate briefly went negative at the height of the housing bubble, it is safe to say the down-cycle we are currently experiencing did indeed follow a classic elongated period of leveraged prosperity. It is now reverting to the mean.

And with regards to reverting to the mean, Rosenberg provides some rather scary numbers:

  • $6 trillion - The amount of private sector debt that needs to be eliminated (Based on ML data that total private sector credit market debt relative to national income is still near a record-high of 140 per cent vs a long-run norm of 80 per cent).
  • $1 trillion - The amount of excess capacity in the US economy.
  • $13 trillion - the cumulative loss of household net worth at the end of 2008.
  • 70% - The US's share of global consumer spending/GDP, which Rosenberg predicts will now revert to its long-run average of 64 per cent.

Final Thoughts and Market Update:

Finally we have a Wall Street firm saying what most of us already suspect. This is the just the beginning rather than the end, and while this bear market rally appears to have a little ways to go before the market once again tops out, it WILL top out and head lower… sooner than later. In the meantime, gold and silver continue to show great strength. Vista Gold (NYSEMKT:VGZ) is up more than 200% from where I recommended it last November (120% this year). Ivanhoe (IVN) is up more than 100% since November, and the same with Silver Standard (NASDAQ:SSRI) and the Gold Miner ETF (NYSEARCA:GDX). These continue to be great buys. Remember, these stocks are still down 50-70% from their 52 week highs, while gold is essentially unchanged. If there's a more compelling investing story to be found, I don't know of it.

Disclosure: long