Dodging Rocks & "The Recession is Over" - by Casey Research

http://day-trading-the-stock-market.blogspot.com/

Dodging Rocks...

Dear Reader,

As I write, the Fed is meeting, and Mr. Market waits with bated breath to see if the coven of central planners will change a sentence from the notes of their last meeting. According to Bloomberg:

Fifty-four of 63 economists in the survey said the central bank will leave unchanged a sentence saying high unemployment and low inflation warrant “exceptionally low” rates. The Fed has kept its benchmark interest rate in a range of zero to 0.25 percent since December 2008.

If the central planners do change the sentence, perhaps to something that suggests that maybe the Fed scents that the economy is actually improving, then Mr. Market might get all worried that rates will soon rise and the big bond bubble blow-up will begin.

Alternatively, if the central planners were to hint at the potential for a pocket of economic dead air ahead, then Mr. Market might jump to the conclusion that the rising calls for the Fed to create another $2 trillion to be used in buying up long-dated Treasuries at today’s suppressed rates will be answered. In that case the dollar’s fall, and gold’s recent rally, could really gather steam.

While no one can be certain what the Fed will do in today’s meeting – or in the next – one thing is certain: the business community and we as individuals have been reduced to the role of participants in a one-sided rock fight.

We watch the guys with the rocks – the Fed, the Treasury, Congress, and the many agencies I touched upon yesterday – and try to anticipate when and where they are going to throw the next rock so that we might duck.

This uncertainty makes it very, very hard to focus on other things – building businesses or making investments, for example. How can it be otherwise when you’re constantly trying to calculate where the next rock is coming from?

Get it right, and you might buy yourself a brief respite before the next rock comes flying your way. Get it wrong, however, and the consequences can be dire. I get a lot of emails from readers, many of them entrepreneurs, and many contain tales of woe, the result of running afoul of the rock throwers and ending up out of luck and out of business.

And the setup is much the same in all of the aging, degraded, and indebted democracies. An eye-opening case in point was sent over this morning by one dear UK correspondent in the form of an article out of the Daily Mail. As you’ll read, that country’s new coalition government is about to start throwing a lot of rocks at anyone with an income. Some relevant quotes…

Clegg tax war on the middle class: Families could face 'lie detector tests'

Middle-class families could be forced to undergo lie detector tests as part of a major crackdown on tax avoidance being spearheaded by Nick Clegg.

Tens of thousands will face intrusive new tax investigations under the plans unveiled by the Deputy Prime Minister yesterday.

…The moves, unveiled at the Liberal Democrat conference, were designed to guarantee Mr Clegg's popularity with mutinous grassroots members, but were described by critics as ‘bully boy tactics’.

…Today Mr Clegg will accuse middle class earners who pay accountants to minimise their tax bills of behaving like ‘benefit cheats’.

He will say that legal tax avoidance and illegal evasion are ‘just as bad’ as falsely claiming benefits, adding: ‘Both come down to stealing money from your neighbours.’

Tax evasion by the better off is to be aggressively pursued in a £900million drive which will see the number of people targeted for tax checks rise from 5,000 a year to 150,000.

Half of all the people paying the new 50p top rate of tax will have their tax affairs raked over by a dedicated team of investigators every year.

Lib Dem sources said the number of criminal prosecutions would increase five-fold. The tax crackdown will be undertaken by HM Revenue and Customs, the beleaguered department which recently admitted getting the tax codes of millions of workers wrong. A team of investigators will be created to catch those hiding money offshore.

They will use the benefits fraud model, which does include the use of lie detectors, as a template for what action they can take.

'Voice recognition analysis', which picks up when a caller sounds nervous on the phone, could be used to help work out if someone is misleading tax inspectors.

Read the full article here...

Maybe the British income earners will just suck up this latest effort by their own government to bean them, but if I were a UK resident, I can assure you that the minute they started rolling out the lie detectors, I’d begin shopping for flights elsewhere.

Which, at the end of the day, is pretty much the only rational thing for a business and individual to do when confronted by such manifestations of a dysfunctional, and ultimately doomed, democracy.

Simply, once the business/legal/regulatory/tax environment in a country becomes extraordinarily changeable, and therefore unpredictable, your choices boil down to continuing to try to dodge rocks or moving to a steadier clime.

What’s the Fed going to do in today’s meeting?

Frankly, Ben, I don’t give a damn.

Unless and until the government makes an honest attempt at slashing its expenses well below the level of current revenue – in the process bringing an abrupt halt to the endless cycle of both raising revenue and taxes, with a solid dose of expensive new regulation thrown in – then the ultimate outcome is carved in stone.

And that outcome is that the dollar and likely all of the fiat currencies are going to crash. That’s what gold is telling us, and it’s speaking very loudly just now.

Now, you may not believe me, but I’m not a gold bug per se. Rather, I am a raging fiat currency bear, and that only because I’m doubly bearish that the insane levels of debt now overhanging the large Western economies can be resolved without serious monetary, political, and social consequences.

Unfortunately, the rock throwing is only just beginning, and it’s only going to grow in tempo as the powers-that-be and the powers-that-wannabe increasingly are forced to do “whatever it takes” to maintain the status quo – as broken and bent as that may be.

Don’t forget to duck!...

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The Recession Is Over!

By Doug Hornig, Casey Research

Woo-hoo, break out the Moët et Chandon. The recession is over. That’s right, over. Officially.

You might not think so, what with continuing record foreclosure levels and double-digit unemployment and all the rest of the negative economic indicators. But you’d be wrong.

Because the National Bureau of Economic Research has declared an end to the recession, and they’re the ones who get to decide. A self-proclaimed “private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works,” the NBER makes the call because they know things that we don’t.

Here’s another thing we didn’t know: Not only is the recession over, it ended in June. Of 2009! And then the recovery began.

Skeptical? No need. It’s simply a matter of definition, you see. A recession begins with a period of at least two quarters of falling economic growth. And it ends when GDP hits its low point and returns to some form of growth, no matter how pitiful. The length and strength of the recovery seen during the past 15 months is sufficient, the NBER panel said.

The stock market rallied on the news, but the reaction from other quarters was less enthusiastic. In fact, one of the NBER panel members got a bit defensive, writing that “we are only saying that things started to get better in June 2009, not that times are good.”

It’s clear that they are not. True, GDP did bottom at -0.7% in the second quarter of ’09, and it then advanced to +1.6% in the third quarter and a seemingly robust +5% in the fourth. But at that point it stalled out and has been declining since, from +3.7% in 1Q10 back to +1.6% again, in 2Q10.

At that rate, job creation will be non-existent. The Organization for Economic Cooperation and Development figures the U.S. economy will wind up growing 2.6% this year. It would take growth twice that fast to drive down unemployment by a single percentage point.

While economists might accept the NBER’s conclusion that the recession is technically over, many acknowledge the possibility of a so-called “double dip” that others might see as merely a continuation. Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York, puts the chances of averting a double dip at no better than 50-50 at this point.

The NBER also pointed out that, at 18 months’ duration, the recession of 2007-2009 was the longest since the 3½-year downturn that ended in 1933. And the recovery from that one petered out in 1937, yielding to a second recession that lasted more than a year.

Whether we’re in for something similar is debatable. But consider this: June 2009 also marks the month when spending from the Recovery Act stimulus was at its maximum.

Which means what?

One conclusion is that the stimulus played an important role in bringing the recession to an end,” says Mark Zandi, chief economist at Moody’s Analytics.

But one might just as well conclude that the stimulus money masked the true extent of our economic weakness, and that as it eased we were destined to fall back to the anemic growth levels seen this year.

In which case the government response is likely to be déjà vu all over again. More “stimulus,” more intervention, and more and more debt...

http://www.caseyresearch.com/displayCdd.php?id=541

Britain Is the First To Choose Deflation:

http://day-trading-the-stock-market.blogspot.com/2010/06/britain-is-first-to-choose-deflation.html

by Rick Ackerman - Wednesday, June 9, 2010

Over the last three years, the Federal Reserve has conjured up trillions of dollars of funny money in an attempt to breathe some inflation back into the economy. The attempt has cleared failed...

Now, it would appear, Britain has become the first country to throw in the towel on fiscal and monetary black magic. In effect, the country has decided to let deflation take its course, allowing the chips to fall where they may. In the essay below, Cameron Fitzgerald, a frequent contributor to the Rick’s Picks forum, takes a close look at the decision and what it will mean not only for Britain, but the world. He concludes with a list that spells out what to expect, and the kind of pain we will experience as the world’s financial system comes very slowly back into balance in the years ahead. If his predictions are borne out, the standard of living is about to fall sharply for billions of people around the world.

David Cameron's new Government in England announced Tuesday that it will introduce austerity measures to begin paying down the estimated one trillion (U.S. value) in debts held by the British Government. Lets let that sink in for a moment, for it is a stunning announcement. Now repeat it: England will introduce austerity measures in order to eliminate the deficit and begin paying down the national debt. And that being said, we have just received the signal to an end to global stimulus measures -- one that puts a nail in the coffin of the debate on whether or not Britain would “print” her way out of the debt crisis. That would have virtually guaranteed an eventual hyperinflation that would have spread to all Western nations, destroying the U.S. dollar as the world’s reserve currency in the process and ending several hundred years of Western economic dominance.

This is actually a celebratory moment although it will not feel like it for most. But wait. The U.S. did not say it would pay down its debts. And anyway, everyone knows that debt pile is too large to ever be repaid. They are wrong. And the U.S. does not need to send any particular message at this time anyway. The U.S. has been in a deflationary spiral since 2006, having discovered that nothing, not even oil flooding the Gulf, a nuclear North Korea threatening war, campaigns in Afghanistan and Iraq, nor threats that Israel might one day bomb Iran and shut down the oil pipe, can pump up energy prices enough to drive future inflation or save the economy the old-fashioned way. Not nearly enough to escape the gravity of the housing and asset collapse anyway.

Out of Ammo

We have run out of the ammo of cynicism and old-style politics. Debts will have to be paid. Creditor arrangements will be made, concessions granted, standards of living will decline and countries will be sent to the table to bargain in a cooperative effort to resolve credit imbalances. There will be horse-trades, payments out of key commodities and access granted where previously it has been denied. There will be recovery eventually and it is a better future than what a hyperinflation would bring us all. And yes, the bills will be settled. Time to rejoice.

To my way of thinking, the U.S. will not, cannot, resort to regular debt monetization, printing press economics or the eventual and guaranteed destruction of their currency, economy and way of life before attempting first to harness what appear to be insurmountable debts and obligations. Particularly if European nations and England (first among them) begin taking serious steps toward fiscal discipline and bringing in measures of restraint. Many will argue against my theory. They will all be wrong. And so the English have opted to go with the devil they know. They have chosen a path that means their economy will contract, perhaps significantly. Where unemployment will surge as public sector layoffs and the elimination of programs are required to harness the debt bomb are enacted and all spending is carefully scrutinized, fleshed away, even eliminated.

Minimal Safety Net

Everything could conceivably be on the chopping block short of core government services, social service spending, basic medical services, pensions and the safety net itself. The debt is just so big that nothing less than all the efforts of Government and the cooperation of the majority of the public in accepting restraint will allow it to work. But what does this mean in the wider picture when one of the leading members of the G8 has deliberately chosen the path that signals a deflationary trend? Possibly even bringing on a global depression as an outcome of that choice?

As I said, the English have chosen the devil they know, and that is economic contraction. The last serious bout they experienced on that front was of course during the 1930's and again following the Second World War, but over the years Britain has seen many recessions. Some were deep, and folks may recall the Maggie Thatcher days of fiscal restraint, elimination of public programs and a sell-off to the private sector of everything from coal mines to railways and airlines.

Hyperinflation ‘Devil’

The devil the British does not know is hyperinflation -- not up-front, ugly and in their faces, anyway, but only anecdotally from the experience of others. No major modern economy in the West has ever hyperinflated. The exception, Germany, did so only under duress brought on by destructive and debilitating reparations following the First World War. Nobody wants a repeat of that. So this is actually a relatibrly safe move from that standpoint.

Those other nasty outcomes are already too well-known from readings of the history books out of the Weimar Republic. A complete destruction of the currency there resulted from ill-conceived “fixes” followed by a total failure of the financial, investment, banking and insurance systems. Printing press solutions led to widespread public misery and hunger. Bond and debt defaults were manifest and eventually the worst insult was when the country was saddled by an inability to borrow and rebuild following its confidence crisis. Last came radicalism and political instability as the people demanded solutions to all their problems.

Social Collapse Possible

We know too that hyperinflation can lead to chaos and social disorder. Nor is social collapse out of the question under that scenario -- particularly with so many people dependent on our existing system, and as the population ages and becomes more dependent on fewer folks of working age. No Brit wants that either. No Brit Government could survive it. The debt must be paid and the burden of that pain will be shared by all. It is the right decision. But at a high cost.

I think it is worth it. The likes of Russia, India, Brazil and China have been working in concert to develop an alternative world reserve currency, buying up gold in earnest, ostensibly to back their claim with real wealth under IMF auspices and the terms of Special Drawing Rights (SDRs). Success will give them the kind of collective bargaining power that until now has gone automatically to the U.S. because of the dollar’s status as the world’s reserve currency.

So, will we just sit back, punish our creditors through an inflationary default and thus hand them the power and influence to control a new and developing reserve currency; or will we defend our position, pay off our debts fairly (or by concessions) and retain the rights we hold dear? Let’s first ask ourselves the following question: Why must hyper-inflation be the only alternative to deflation? Answer: Because governments all over the globe have already tried stimulating their way out of the recent credit crisis and recession to little avail. They have attempted fruitlessly to generate even mild inflation despite huge stimulus efforts and pointless spending. All they have to show for it is massive additional debt and an unfolding currency time-bomb.

No Buying Our Way Out

Clearly, we cannot buy our way out our debt burden. It is that simple. It has been tried and it does not work. We cannot dig our way out of a hole either. So instead, consumption, the driver of our Western economies, remains sluggish at best, real estate is badly overpriced almost everywhere and personal indebtedness is strangling the middle classes while unemployment continues to rise and the tax burden and obligations grow by the day. It is an unsustainable exercise that will not end well. We now know it will not work, cannot work and won't likely be tried again in any significant way except by insane self-serving governments and those that have just run out of creative solutions. It is time to just pony up and pay the piper. This is simply the better (and only reasonable) solution to all the alternatives. But it will mean a long, slow and deliberate winding down until solvency is within reach. It will mean cities, states and counties will go bankrupt and not be rescued.

And it will be painful. Public spending will be cut. Consumption could decline precipitously. Unemployment numbers may skyrocket and bankruptcies will stun readers of daily blogs like this one. It will put the brakes on growth around the world. Oil prices will fall along with the prices of most other commodities. Gold could soar while food costs rise as a relative percentage of daily expenditures. The Dow will crash and there will be ripple effects across the European union and eventually the globe. Hardest hit will be major exporting nations like China and India who depend on Europe and the Americas for their bread and butter income. Aid programs to the Third world will be gutted, and I cannot yet imagine the consequences that will bring to the poorest people on earth.

Announcement ‘No Coincidence’

The significance of the decisions announced Tuesday will impact every nation on earth. And this is not happening in a vacuum, nor is the timing of the announcement just weeks prior to the G8 and G20 meetings coincidental. The statements made today are designed to lead and they will. The EU is also attempting to bring spending and fiscal controls to its member states. Greece is only the first to face the specter of a declining standard of living, much higher taxes and interest rates, controls imposed from outside its borders, and seriously reduced government spending. But the idea proposed now by the Cameron Government has real traction and will gain momentum. Britain is signing on voluntarily and has done so before, its back is to the wall and no good options other than strategic default. I applaud them.

And the idea will spread. But with a twist this time: Instead of protectionist stances between governments, there will be more free-trade arrangements implemented. Access to markets will open, not close. Canada itself is undertaking to establish a major trade agreement now with the European Union that would include among other things greater labor mobility and freedom from past employment barriers between the partners. Structural change is in the air too. It will also be in the interests of all nations to cooperate and not enter into conflicts or trade wars.

This Is the Big One

Anyone who thinks that the massive debts piled up by governments can be discharged easily while we go through a mild recession is flat-out wrong. This is the big one. Markets may respond positively at first, but then that sinking feeling will bring on some very bearish sentiments. This could well occur over the next few weeks. A major global economic contraction will without a doubt take the steam off almost all stocks as reality begins to set in. This is the expected outcome. It will come as a big surprise, though, to all who were certain that uncontrolled spending, stimulus and debt monetization would be the solution chosen by governments to satisfy the electorate. While spoiled and self absorbed, the electorate is not stupid. They will get on board with a solid plan if it is presented in a way that assures them their core interests are protected and offers hope and a better future.

A major reckoning is now a foregone conclusion. The word reset comes to mind -- and then a long, slow grind from the depths of debt insanity, followed perhaps by an agonizing return to prosperity and economic health. A decade may well be too optimistic a time frame to bring balance back to the old world and economies of the West. Let's get used to it. We are all in this one together.

So deflation it is. It will come to Canada eventually, too, so let’s start having a real debate about what that will look like and get familiar with the idea. We have already experienced stark restraint in this country in a program that was masterfully crafted by Jean Chretien and Paul Martin in the 1990's. Sanity was brought back to this country after three hard years of belt tightening. But this next phase will be a much more bitter pill to swallow. We need to look to our leadership to guide us through the crisis as it unfolds. The inflationist's camp can now leave the room because none of us can stand to hear their anguished cries, angry foot-stomping and teary, selfish objections. So pathetic.

What to Expect

Here is a very short list of what can be expected -- and trust me, this is a much more palatable list than the ones I have analyzed involving an unthinkable and devastating hyperinflation. So put away the placards and protest signs. We all need to get on board with paying down debt like any responsible citizen debtor would do. We owe big-time and this is but a taste of how it may cost us:

*Major employment reductions amongst those working in the public service
*Health care services that are rationed. Fewer nurses, health practitioners and support staff
*Larger class sizes in schools and large reductions in the number of teaching positions
*Reduced public pensions and benefits, including social service payments
*Interest rates that will gradually rise and eventually settle at around six percent
*Strikes, labor unrest and supply chain breakdowns
*Widespread unemployment affecting virtually every sector of the economy. None will be spared
*An expansion of public works programs, green initiatives
*Civil disobedience, arrests, targeting of threatening movements by security agencies and government
*Increasing taxation, particularly on the wealthy and buoyant businesses
*Shortages of all kinds and the loss of variety on store shelves
*An erosion in standards of living for most but particularly for those who are indebted
*Cutbacks in military spending, defense, coastal patrols and overseas engagements
*Cherished programs that Government usually support being completely eliminated
*Larger police forces, prison expansions and a judiciary that is strained to the breaking point
*Cities, states and counties denied bailouts, forcing them to bankrupt
*A reduction in services that protect the environment, animal rights and special interests
*Closures of universities
*The list could stretch on and on, but you get the picture.

It will be a very difficult and long-lasting correction that will purge waste and inefficiency from the system. Few will be happy, but the alternative is just too distressing to consider. The only thing that will give you true immunity in the mean time is a fat blanket of cash. Be sure to have some.


Be liquid. Pay off debts. Rejoice in your good decisions. And live free...

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