THE ECONOMIC NEWS IS BAD, BUT MARKETS ARE RALLYING IN SPITE OF THE NEWS
This letter discusses a number of problems facing the world economy. At the present time, the global economic background is bleak. However, the short-term market outlook in many countries is not nearly so bleak. We believe that many of the world’s markets are currently in rally mode. After experiencing large declines for months, we expect the prices of shares in many countries, gold, foods, and foreign currencies to continue to rally for the next few weeks.
Volatility and fear will continue to dominate as markets move higher. There may be days that make us doubt our thesis, yet we are sticking to our expectations for stronger stocks, gold, and foreign currencies in the near term. We discuss this more in our summary.
THE NEWS IS FULL OF THE DETROIT AUTOMAKER BAILOUT
The Detroit spectacle includes lengthy questioning by congressmen and senators. This is a very demoralizing process to watch; not so much because of the questions or answers, but because it is a sideshow to the main problem we are currently facing. In our opinion, the congressional members are missing the main point. This is not surprising because they are primarily lawyers, and few have been trained in business or economics.
THE BIG DECREASE IN JOBS
Last Friday, a large increase in job losses was announced for the month of November. The announcement also included restatements from October and September. Since January 1, 2008, the U.S. economy has lost an estimated 1.9 million, and by the time the year is over, it could be well over 2.2 million jobs lost. In our opinion, these numbers may well be understated.
As our readers know, we have long been fans of Shadowstats.com, an economic consultancy run by John Williams. Mr. Williams and his staff do an excellent job of pointing out how the government’s reported statistics and the revisions are manipulated to make the data look better. Shadowstats even goes so far as to reconstruct the government statistics on items such as unemployment, inflation, and GDP as they used to be calculated, before the reporting became so political in the in the 1980’s. According to Shadowstats.com, the current job figures and GDP figures are considerably misstated. For example, according to Shadowstats, if one were to go back and adjust for discouraged workers who have ceased looking for work, the unemployment rate is currently well over 10%. This compares to the 6.7% announced by the Bureau of Labor Statistics.
IN OUR OPINION, THE REAL NUMBERS PROVE THAT OUR CALL FOR A SERIOUS RECESSION/DEPRESSION IS ON TRACK TO BEING FULFILLED
THE SCARY SCENARIO IS THAT THE BANKING SYSTEM IS STILL NOT BEING RE-LIQUEFIED
It is true that the large bank bailouts began just three months ago, and that each week, several more countries have been lowering interest rates. However, given all the stimulus to the banking system, we had hoped to see much more liquidity returning to the economic system.
It is too early to cry wolf and announce that a much more severe recession/depression is in the cards, but with each passing day, it is harder to stay optimistic about the long term future of the world economy. As of today, almost everyone agrees that 2009 will be a difficult year for the world economy, but we are speaking about 2010…and beyond. Liquidity must return to the world banking system soon, for the world economy to begin a recovery in 2010.
THE BIG NEWS IS THAT THE BANKING SYSTEM HAS NOT RESUMED FLOWING LIQUIDITY TO THE ECONOMY
THIS IS BIG NEWS, BUT IT IS GETTING LITTLE MENTION…PROBABLY BECAUSE IT IS PERCEIVED TO BE TOO COMPLICATED FOR THE AVERAGE PERSON TO FULLY GRASP
The banking system’s “pipes” remain plugged, and all of the capital and guarantees spent and promised so far have not been enough to revive lending and the increase flow of credit which is essential for economic growth.
The reason is that the banks still have a very severe capital shortage. The U.S. government’s $800 billion of TARP money has not been sufficient for the banks to continue to operate and make loans. Even those banks who have received capital injections from their respective governments continue to shrink their lending, because the capital on their balance sheets is not enough for them to stay solvent (given the amount of the bad loans the banks still hold).
Some think that in order for the banks to begin lending and creating liquidity for the economy, they need an additional $1 trillion in capital. In our opinion, the banking system needs another $2 trillion to keep functioning. As usual, there is a choice. In our opinion, the choice is $2 trillion now, or many more trillions later…after more and more companies are forced into bankruptcy, and even more massive layoffs have taken place.
THE DAILY FUNCTIONING OF ALL INDUSTRIAL, RETAIL AND FINANCIAL ORGANIZATIONS REQUIRES CAPITAL FROM THE BANKING SYSTEM
The availability of bank loans is a prerequisite for most companies to operate. Loans for inventories, supplies, leases, plant expansion, new product development, payrolls, and many other purposes is not presently available. Short term bank loans, which typically roll over every year (there is approximately $800 billion for corporate working capital) are at risk of not rolling over next year. If this happens, it will cause operating companies in many industries to lay off employees, shrink their payrolls, and produce less goods, thereby causing the economy to shrink further.
THESE SAME PROBLEMS EXIST IN MANY OTHER INDUSTRIALIZED COUNTRIES
WE CANNOT STRESS ENOUGH HOW IMPORTANT IT IS THAT THE GOVERNMENT OF EVERY DEVELOPED AND DEVELOPING COUNTRY WORK TOGETHER TO PROVIDE MORE CAPITAL TO THEIR RESPECTIVE BANKING SYSTEMS.
Today, the U.S. Government through the Federal Reserve and Treasury Department are the main U.S. lenders, either directly or through guarantees. If other lenders do not join in, then the only employer will be the governments. Companies will not be able to operate and employ people. Government could eventually become the only real lender and the major employer in the economy…which is frightening.
FREE TRADE IS A NECESSITY
If countries get involved in erecting trade barriers or competitively devaluing their currencies to stimulate trade, the global economic slowdown could become much worse.
Technically, the world markets could continue to drift upwards in an erratic manner for a few more weeks. For most of 2008, world market declines have been violent, and a relief rally is in order. That being said, it is hard to maintain a long term positive view about global markets. The problems enumerated above, and a general failure of policy makers and politicians globally to understand the crisis is frightening.
As I reflect on the situation, the current outcome is not surprising. Politicians and bureaucratic functionaries are not educated or experienced in financial and economic crisis management. In the current time of great stress, many of them have become altogether frozen, or have followed the path of doing too little, too late.
It is early to say, but we expect a renewed decline after the current rally finishes. We continue to see gold as an important insurance policy against the potential for a collapse in the U.S. dollar, and/or the failure of one or more countries as financial entities. Another national financial failure like Iceland will likely occur. The next national failure will be of a bigger country in Eastern Europe or one of the Baltic States. Globally, more banks will fail, and governments will eventually be forced to take the drastic action that we believe is currently warranted.
In general, base metals and commodities will remain weak for a few more months (and possibly longer) if banks are not re-liquefied.
The U.S. dollar rally has been strong, and is now beginning to show some cracks. We believe that the best one can hope for in the U.S. dollar is sideways price action. Longer term, we are of the opinion that the U.S. dollar will decline.
Thanks for listening.
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