Sunday, June 5, 2011

"Heading Towards the Economic Abyss"

What if the stock market declined and nobody noticed. For the past five weeks the market averages have been declining. The strange part is that no one seems to be very concerned. Link here.

If the market were crashing, everyone would notice. We respond to dramatic events, like hemorrhages, but try to ignore slow bleeds, as though they will stop on their own.

Many people have been lulled back into the stock markets. They are fully invested, so they have adopted the buy, hold, and pray attitude.

Of course, the real basis for contrarian investment psychology is that once everyone is fully invested there is no new cash to keep buying stocks.

Besides, investors know that stocks are the only way to earn a return on their money. They have also become convinced that, if things take a serious turn for the worse the Federal Reserve will come dashing to the rescue with another round of quantitative easing.

Besides, where else are they going to put their money?

They are not going to put it into real estate. Speaking of slow bleeds, the housing market has fallen for just about every month for nearly five years. The dreaded double dip seems to be upon us. We have just learned that the recent decline in the price of homes surpasses the one suffered during the Great Depression.

The nation’s economic health is basically on life support. As James Grant suggested, and as I posted a while back, the only question is whether the collapse is going to be fast and ugly or slow and ugly. Link here.

While we all agree that the path to a solution lies in drastic cuts to the federal budget, to say nothing of the state and city, budgets, let’s not fool ourselves into thinking that this “fast and ugly” approach will not be painful.

As of now the stock market decline has been slow and ugly. Given the Fed’s past behavior there is no guarantee that it will become fast and ugly, but, once it does, it will be too late for many of us.

How bad is it? Writing in the London Telegraph Nile Gardiner entitles recent post:  “After 29 months of the most left-wing presidency in US history, the American superpower is heading towards the economic abyss.” Link here.

Gardiner offers a cogent analysis of the situation: “Years of profligate spending, massive bailouts and useless stimulus measures have made America poorer, not richer, and threaten the long-term economic foundations of this great country. President Obama’s big government experiment has been a dangerous failure, only further proof that the deadening hand of federal intervention is the last thing America needs at this time. The United States needs more economic freedom, less government regulation and spending, and lower taxes if it is to create jobs, wealth and prosperity, a message that seems to have been lost on the Obama presidency as it drives the United States towards the financial abyss.”

And then there is Marc Faber, market prognosticator, proprietor of the Gloom Doom and Boom report, who explains: “No I don’t think [Obama has his priorities straight]... because the priority would be to essentially make the US competitive, and by pursuing expansionary fiscal policies that enlarge the government, you atrophied the private sector. In other words, the private sector is hurt by too much government involvement.

“Like my friend... says, we have to pay more and more tax for government officials to harass us more and more and implement more and more regulation. And that of course is not a way to create prosperity. If you have a large corporation or a corporation, you are more likely to hire people outside the US than in the US.” Link here.

Given his propensity for gloomy predictions, Faber also explains that he believes Obama will be re-elected.

He reasons that if you put a majority of people on the government dole, they are not likely to vote to reduce their stipends.

In Faber’s words: “I think [Obama] will be reelected because we have some kind of a tyranny of the masses. You have essentially more people getting handouts than large tax payers. And so they are huge voting block. Then you have the unions, also large voting block. And then you have the government officials. They don’t want to have cutbacks in government and be fired. They essentially are paid more than the private sector. So again a large voting block.”

Obama’s legacy might involve a cultural transformation pitting the nation’s haves against the have-nots? In place of one America, Obama seems to want to produce two Americas where the gap between rich and poor becomes increasingly vast, and increasingly likely to produce conflict.

Does this make Obama a demagogue? Of course it does. By appealing to the baser human emotions, by making most of the country depend on the government, by channeling that nation’s anger against the wealthy, he is a classic demagogue.

Unfortunately, we use the word “demagogic” so often now that it has been drained of its meaning. Yet, no one has failed to notice that the Democratic party and its leader are demagoguing the Ryan budget, trying to make the Republicans into the party of privilege and the Democrats into the party of the masses.

The greater the chasm between rich and poor, the more the nation will be divided against itself.

If the Democrats can convince the elderly, many of whom are not poor, that rich Republicans want to take their Medicare and Social Security away, then they will win.

The classical example of the outcome of liberal policies is of course New York City, where 40,000 people pay half the taxes. And where the middle class is being driven into extinction.

After 29 months of Obama the national mood has deteriorated along with the nation's finances.

The Daily Beast has this to say when introducing a new poll coducted by Doug Schoen: “Gas and grocery prices are soaring, the housing market is crashing to new lows, and yet another dismal jobs report has confirmed a stubbornly high unemployment rate. Could the anger fueling the Arab Spring soon bring club-wielding protesters to America?

“According to an exclusive poll by Newsweek and The Daily Beast, reality is beginning to break down Americans' normally optimistic attitude. Three-quarters of our respondents think the country is on the wrong track. A majority say the anxiety wrought by this recession has caused relationship problems and sleep deficiency. Two-thirds even report being angry at God.”

Now that the decorum of Tea Party rallies has been replaced by the thuggery of pro-union rallies, it is clear that an irrational, virulent form of anger is on the march in America.

We have not gotten to the level of club-wielding protesters, but we are probably not that far away.

Let’s not underestimate how national leadership has been stoking this new and nasty outrage.

We have been watching the Middle East descend into chaos, engulfed by violent protests. The administration seems willing to validate these tactics, seeing them as an instance of the masses rising up against their oppressors.

It has no idea who the protesters and has no idea of how to manage the ensuing chaos.

In so doing, the Obama administration has been telling the world, and has been telling its constituents that violent protest are a valid and acceptable form of political action.

Good bye, civility. Welcome, days of rage.

Have a nice day!


JP said...

Market tops are usually somewhat lengthy processes.

What you are noticing with respect to the stock market is the creation of a possible market top, which, if it is a top, would herald the next cyclical bear market in this secular bear market.

This one is likely to be less severe than the last bear market with no true financial/credit crisis associated with it, although it will do quite a lot of damage to pensions and retirements.

Stuart Schneiderman said...

Thanks, JP, for the clarification. Surely, we are watching a complex topping process to the cyclical bull within the secular bear.

I suspect that it's going to be more severe, however, especially if there are problems with the dollar.

But, you probably know much more about this than I do.

JP said...

The Fed/Treasury sold the car crash and bought the cancer, so to speak. There were no good choices in 2008, just bad ones. Since they chose cancer, we are currenetly in economic/financial mud and can't get traction.

The dollar, being a product of the United States, depends on the political elite, who can choose to do anything they want with it, within the bounds of reality.

That is to say they can permit hyperinflation or allow deflation to take root. What they are trying to do right no is sustain nominal GDP growth to keep the financial system on life support. So far, that's kind of working because we are getting some job growth and financial valuations have been sustained. Low interest rates permit massive deficit expansion.

My guess is that what will occur is a financial market decline after the end of QEII, which will lay the groundwork for QEIII or QE 2.5 or something of the sort.

There are only probabilities here, since many decisions have not yet been made.

Stuart Schneiderman said...

I agree with you. As best as I can tell, and I know a lot less about this than you do, the Fed seems to fear deflation most... so it is likely that they will do whatever they have to do to stave it off.

A lot of investors believe right now that the Fed can perform a levitation trick and keep the markets afloat, no matter what.

That's the kind of complacency that scares me.