Let’s Get Real

Posted by Ray on July 25, 2011 under Economy, Main, Markets, Politics | Be the First to Comment

Listening to the talking heads TV and our political leaders about this debt crisis is merely subjecting you to unneeded heartburn. First and foremost, the USA is not “defaulting” on anything on August 2nd, period. The USA will not be downgraded on August 2nd by any of the ratings agencies, even though we should not be carrying the AAA rating to begin with. Bonds only default is interest or principal payments which will not happen on August 2nd as the Treasury brings in enough money to cover our debt payments on a monthly basis. Social Security checks and Medicaid/care checks will go out and the sun will rise in the East and set in the West.

All that happens on August 2nd is the Treasury Department looses the ability to issue new debt beyond the stated debt ceiling. I have not witnessed such scare tactics in my entire life and the misinformation the media and politicians are giving the public is shameful. In fact this entire debate is shameful as we are not having an honest discussion about debt and the US government. Everything you hear being discussed is merely kicking the can further down the road and I believe the markets will not let this can kicking continue on forever. Everything comes to an end at some point and our crazy spending will have to end and we all need to pay the Piper.

Let’s get real about our debt problem. We are hearing all sorts of nonsense about $4T in deficit reducing spending cuts or a combination of cuts with higher taxes over a ten year period. That means we are raising taxes or cutting spending, or a combination thereof, of $400B a year, big deal. If we subtract the $400B a year from our recent annual deficits we are still running $1 to $1.2T of deficits per year for as far as we can see. These tax hikes and spending cuts are meaningless to our long-term financial health and all the talk we are hearing from Washington or the other experts is meaningless until they lay out the facts like I just did. In my opinion even if we raised taxes and cut spending by $400B a year the USA will be downgraded within 2 years anyhow, which is what should have happened a long time ago.

The talk we are hearing from the left about wasted tax surpluses is so far off base it is ridiculous. The talk from the right about spending controls and how a 4% tax increase will kill jobs is equally as moronic. The surpluses in the late 1990’s and in 2000 were bogus to begin with. We had massive surpluses on Social Security and Medicare which the government simply took and replaced the entitlement surpluses with IOU’s and called them budget surpluses. It was accounting gimmickry and those surpluses should have remained in the entitlement programs. Do tax cuts really spur more jobs? I don’t think so and there is no proof that it does either. What spurred job growth in the 1990’s was technology. What spurred job growth in the 2000’s was housing, both bubbles I might add, but in both cases it was a new “killer app” that spurred economic growth and I do not believe we have anything like that in today’s world. Not to say we couldn’t have a new technology or other “killer app” materializes as fast as tomorrow, but there simply is nothing I see right now that will spur growth and jobs which is the real problem here.

Most people do not want to hear this, but taxes do need to go up, I hate taxes for the record. To prove my point we often hear the right complain that 47% of the USA’s citizens do not pay anything in taxes. Well, if you are going to use that line you simply cannot support tax cuts. Why would I say such a thing? Well, it was the Bush Tax cuts that caused 47% of people to not pay anything, which is not exactly true either, in taxes. The reductions in middle class tax rates were massive and the lowest tax bracket was erased. It is also important to realize that 20-30% of the population will never pay taxes because they do not earn enough to live on.

The Bush tax cuts, all of them, cost the USA $3.7T over a 10 year period or $370B a year, interesting figure don’t you think? The left says the rich need to pay more, but the rich in terms of the Bush tax cuts only account for $700B over 10 years. Raising the top income tax brackets only raises $70B a year which is nothing when we are spending $4T a year. Simply raising taxes on the rich will do nothing to solve our problems as it is the totality of the Bush tax cuts that are part of the problem. I do not like taxes, but let’s get real about this, OK? We cannot reduce our debt with phantom spending cuts and tax increases on a select few people, everyone needs to pay up.

We are in serious trouble and no one has put it all together yet. It is unreal to me that the President can say; “I cannot guarantee that Social Security checks will go out on August 3rd” and no one questioned him about why that would be. Social Security was supposed to be fine until 2036 and self funded but if we cannot issue new debt the checks will not go out… what! Well, our Einstein news anchors and the political talking heads simply do not want you to know that Social Security has no money in it, it is broke. I just talked about this earlier, our political leaders took the surpluses in Social Security and spent it replacing those surpluses with IOU’s. Since Social Security has only IOU’s in order for checks to go out the government must issue debt. That should scare you to death, we have to fund Social Security with debt. That is also why Social Security can never be privatized either. However, no one has put this together yet, unreal.

The fact that the US government cannot do anything without issuing new debt should be a real wake up call for the citizens of the USA, but no one seems to get it. The USA, the so called richest nation in the world, is bankrupt! If we cannot survive without using the credit card we are technically insolvent, if I am wrong what would you call it? The USA has also never paid of our debt, except for when Andrew Jackson was president, and simply rolled over all of our national debt year after year and this was hidden from you by using certain terms like we retired the 30 year treasury instead of we called in and paid off all of our 30 year treasuries, we simply rolled that debt into shorter term debt instruments. The USA also has “grown” our way out of recessions and past debt problems. Growing our GDP is a great way to hide the debt problem and it causes the government to do everything possible to always grow our GDP which is why hedonics accounts for over $2T of our annual GDP, hedonics is made up benefits for certain things like free checking, Google it.

You should be terrified about what you are seeing and not because we are going to “default” but because this whole show is basically telling you how bankrupt the USA really is. If our world shuts down because we cannot issue new debt we are in huge trouble and that is exactly what is happening now. The reasons I have listed here are the reason why everyone should own gold and silver as it is the ultimate hedge against out of control government spending and if the truth was ever told we have already defaulted on our debt through depreciation of the dollar and by simply rolling over old debt into new debt. If we ever really got real about our debt issues I can assure you that the story is even scarier than what I have just laid out. Luckily we have politicians that will always lie to us and hide the truth until it is so obvious you already knew it and it is too late to do anything about it. Good day and good luck.

Well, it has taken some time

Posted by Ray on August 24, 2010 under Economy, Main, Markets | Be the First to Comment

I have been writing about the decaying economic data for some time now and have taken some heat for being a pessimist or a permabear, but now it appears that I was correct. It is also striking that almost a year ago I called this current economic funk we are in a Depression. I said one of the reasons why we do not recognize a modern Depression is because there is no need for soup lines and the like. In today’s world everything is automated with food stamps, 40M Americans are currently on food stamps a huge YoY increase, we have unemployment benefits (99 weeks currently), the HAMP (loan modifications), energy assistance, public housing and a slew of other safety nets available to those in absolute need.

Since we have all of those programs our growing economic troubles can remain out of sight and mind. We can be told things are improving because the data says it is. Never mind the fact that unemployment is “only” at 9.5% because people are so discouraged that they left the workforce. To me the most telling sign is the food stamp data which is just unbelievably high with almost 12% of Americans in need of public assistance just to feed themselves, think about that for a minute. That kind of takes the wind out of my sails about being right about the current economic climate. I never wanted to be right, but the data was never strong nor did it point to a sustainable recovery, which was merely a statistical recovery to begin with.

I have been silent for a few weeks because I have not felt so hot and I was letting the data set in. I think it is clear now that the recovery was not really a recovery and when the stimulus stops we are in deep trouble. As Rosenberg said, when businesses are dependent upon government spending for growth we got serious problems, I am paraphrasing the statement, but it is close enough. He was right all along and the permabulls have a rude awakening coming their way in the near future. Whether it is the Hindenburg Omen or just a slew of bad data, which will get worse, stocks are way overpriced, period. We will or the market will correct this error for us by forcing a multiple compression and it will either happen all at once or over a period of days, but it is coming.

My last call was to look into leveraged ETF’s for long dated treasuries, UBT or TMF, and gold, GLD or physical. This trade was profitable, UBT, which I own, was about $86 and it is now $102.43 and GLD was about $116, it is currently $120. Those were good trades that required guts in the face of deflationary forces and the fact that you were looking at a leveraged ETF, which are very dangerous, but they worked. I suspect that it will continue to work, but I would not, besides gold, buy the pair trade here. The Fed told us what they were going to do, monetize some debt on the longer end of the curve, and I suspect they will continue in the near future, we might now Friday for sure, but if they do more QE look for a $1-2T figure.

Ben Bernanke wants to flatten the yield curve to force lending by banks, but it will not work. It is a good theory for Ben, but the reality is banks do not want to lend and consumers do not want to borrow. QE will also not do anything to boost money velocity and I am not sure why anyone would possibly think it would. Banks will merely do what they did before the credit crisis and take on more risk so they can play a different yield curve other than treasuries. As we know, that did not work the last time so why anyone would think it will work now is beyond me, but I am sure that banks will take more risk to boost profits. After all, they are too big to fail.

The outlook for the markets is not good as Ireland just got downgraded and I think we will see some weak data at 8:30 tomorrow as well. Unemployment claims, a leading indicator according to, well, me and PIMCO, are rising and another week +500K will be devastating. Also, the employment report survey was out the very week we saw that 500K print, not good news for the unemployment figure out a week from this Friday. The Philly Fed, Richmond Fed and the Empire Report’s were not very good and I think we will see close to 50 on the ISM survey out next week, perhaps lower than 50 so be ready. All the data is pointing to very, very weak near-term economic pain ahead, there is little doubt about that.

I realize that balance sheets are rich with cash right now, but that means nothing as companies are merely hoarding cash at this point. It is, the cash on hand, good for corporate bonds though, which I still love. The outlook from CEO’s is also becoming more mixed, John Chambers from Cisco was not optimistic, this should scare you because this guy is always optimistic. Basically, much like in 2000, CEO’s merely did not foresee a slowdown in the immediate future, which is very surprising and takes down the credibility of many corporate leaders, in my opinion.

Because of all of this I am more bearish now than I have ever been in the past. I am positioned for a correction and pulled most longs off the table. I am in longer duration treasuries along with my UBT play, long gold, silver, corporate bonds (no high yield to speak of), some international holdings (frontier markets), a few biotechs, and inverse ETF’s. My long holdings are all dividend paying stocks with very low P/E’s and strong balance sheets. Blind belief that the market is going to head higher is insane and, frankly, we have just seen an insane rise in equity prices to begin with. That time is now over and the bears will come back to take control. I find it difficult to believe no one saw this coming, I have written about it and many others as well. The data never lies, ever, but the people reading the data usually have a reason to spin it in their favor.

The trade of the decade?

Posted by Ray on July 31, 2010 under Economy, Main, The Federal Reserve | Read the First Comment

The 2Q10 GDP report came out and it was an eye opener for many people as it showed that the recession, depression, was deeper than most believed and things are surely not as rosy as we are being told. Aside from the inventory rebuild there is not much else going on, final sales are dead as a door nail and some firms, like Samsung, are reporting good earnings, but warning of weaker times ahead. I take the Samsung warning pretty seriously as they are a large or the largest supplier of electronics which had shown signs of strength recently. So when they say things may not be rosy in the near future I suspect that will apply to more than just TV sales.

What made the news cycle this week was a report by Fed President Bullard about the threat of a Japanese style deflation here in America. I am kind of shocked that people were caught so of guard by this news, about 10 economic data points already indicated this to be if not already occurring a very real near-term threat. I suspect we are in for some really tough times ahead and worse yet I suspect we will see the Fed start moving towards quantitative easing, again. As I have said, repeatedly, this will not do anything to boost economic demand as we must wait for the deleveraging cycle to be completed by the consumer before demand will return. Zero Hedge just wrote a piece about this tonight which illustrates exactly what I have been saying for a month now, but no one is listening. Here is what they said:

“In other words, all those who say QE2.0 will do nothing to stimulate the economy are correct, as all such a greenlighted action would encourage is the warehousing of yet more cash by banks. And since banks have no incremental incentives to lend it out, it doesn’t matter if the Fed’s liabilities are $2.5 trillion or $2.5 quadrillion. Instead of stimulating inflation, which is the end goal, all such an action would do is to create further doubts about the stability of the dollar, which in turn, as Ambrose Evans-Pritchard discussed, is a sure way to go to hyperinflation without first passing either Go, or inflation.”

They also indicate my thoughts exactly, we bypass money velocity inflation and go straight to dollar devaluation, i.e. currency crisis, hyperinflation. The irony is that you would only feel this pain on imported goods and we do consume 87% of what we produce domestically so it may take some time before any real currency devaluation hits home. Regardless, Bullard indicated along with prior reports by Ben Bernanke himself that QE is on the table. The question is what kind of QE, treasury purchases or other asset purchases? Also, how much, I bet $3-5T in total purchases, but who knows.

What we do know, compliments of David Rosenberg, is that Ben Bernanke said IF we hit a Japanese style deflation that the target rate on the 30 year treasury would be 2.5%. Rosenberg says that if we hit that rate, down from the current 4% yield, one would receive about a 30% rate of return. I think he is right and if one followed his recommendations of treasuries and gold, along with high yield stocks, you would have avoided much volatility this year and had nice returns. I am happy to say I bought 2’s and 5’s when the yield was 1.10% and well over 2% so I am happy. I suspect the rally in treasuries will continue and if QE happens, wow.

The trade of the century, although risky, would be to leverage a long position into the 20+ year treasury market, UBT (2X bull) or TMF (3X bull). IF Rosenberg and I are right and this happens, QE, deflation or a major selloff in equities, those positions would do very well. However, they are risky, they are leveraged ETF’s, but if you time it right I believe that you could do very well. I also believe that the bull market in bonds is in full force again, very similarly to the summer of 2008 I might add which adds a bit of mystery to the rally in treasuries. The mystery is, what is going on and is the bond market telling you that something really bad is coming?

A look at the chart above looks like there is something going on in the bond market. We broke above the 123/4 mark on the 30 year futures and now that is support. I believe it goes higher because of, at least, of deflationary pressures and, at worst, because of QE. However, while I am short-term bullish on treasuries I hate them long-term since it will be impossible for the U.S. to meet its long-term debt obligations which means they will default somehow in the future, in my opinion. I also believe, as stated earlier, that QE will wreck our currency maybe not now, but at some point in the near future which makes gold very attractive as well. If QE is announced treasuries will go nuts and so will gold. If one is levered into treasuries you could do well, if you want the risk.

What QE means for stocks, I do not know. I would think QE would be bad for stocks as it signals things are not good and the economy is weak, but we are living in bizzaro world where good news is fantastic and bad news is even better.

Forget the ‘dark cross’

Posted by Ray on July 18, 2010 under Economy, Markets | Be the First to Comment

Much has been made about the death cross of late, the 50 day moving average crossing through the 200 day moving average, although I think and know it is a significant event it is nothing compared to something else I have noticed. We are all aware of the primary reason of the bull run over the past 12 months, massively oversold markets, combined with marginally better economic data and, most importantly, a weakening dollar. Why the dollar weakened is important to note, quantitative easing via the Federal Reserve’s asset purchases or the printing of money. Although we will not know the long-term implications of QE for some time to come it is safe to assume it accomplished its goal, weaken the dollar and boost the economic data through negative interest rates, essentially.

We all know the market action of late, a horrendous selloff which was only a surprise to the parade of bulls on CNBC and those who kept their heads buried in the sand, but those out in the real world knew it was coming. What was unexpected was the 4^th of July rally that took us back up some 7% on the backdrop of pretty bad economic data. Some of the bounce was because of a technical bounce and some of it was because of the expectations of stronger earnings which started last week. I fully expected 2Q10 earnings to be good, but I expected to see more top line misses and the outlook from CEO’s to be downgraded as well. So far, it is a mixed bag, but the outlook or guidance remains very bullish for many firms, however, a look back through prior earning announcements, particularly 2000 releases, as Mark forwarded to me, shows that Intel did not foresee a slowdown there either, so trust the economic data rather than CEO guidance going forward.

Back to what is going on in the equities market and why the dark cross is less important than the other ‘grey swan’ that is going on. First, everyone and their grandmother knows or knew about the dark cross, not that it takes away from its importance, but when everyone knows about it very rarely does the market deliver the results we are looking for. Except the market kind of did deliver, but stopped short and rallied all the way back to some important moving averages where it failed to break through, very bearish from my lens. At the same time we saw the selloff begin the dollar was moving towards the 89 mark on the DXY, but it stalled after a dramatic breakout and reversed course. Not only did the DXY reverse course, but it got crushed moving down from 89ish to about 82.5, not an insignificant move.

Exhibit 1-1 2 Month DXY Chart

Why is this a big deal? It is a big deal because stocks went up on a weak dollar trend which meant a better environment for U.S. companies to sell products abroad. Basically, a weaker dollar is better for U.S. exports and sales as we become more competitive in the world. It made sense for the markets to not like the move of the DXY from the low 70’s to 89, but to not like the move from 89 to 82.5, well, I am perplexed. The market should love this and we should be flying to at least 1,100 on the S&P 500, but we are not. This is a huge warning sign that stocks cannot rally on a weak dollar and it means more than the dark cross.

Exhibit 1-2 1 Year S&P 500 and DXY

The charts show the trends pretty clearly, lower dollar higher equity prices, higher dollar, lower equity prices, but over the past couple of months things have been out of whack. What else is going on during this time period? Treasury yields are collapsing to historic lows. We have the 2 year treasury under .60%, the 10 year under 3% and the 30 year under 4% which is a sign of 2 things, risk aversion and fear of deflation. My belief is deflation is the clear danger as of right now, it is fairly evident from my lens and the market is pricing it in as we speak. The credit markets have been pricing it in for some time and will continue to, I am bullish on debt securities, have been for some time now, but the equities markets, well, it has not priced in any real deflationary pressure at all.

Exhibit 1-3 Yield Curve

Granted, we have not seen total deflation yet, just the beginning sign of it, but the evidence is pointing towards it. Here is the rub, everyone says the Fed will do QE2, but they won’t do it. See my other posts as to why they will not do it, but from my lens they would be insane to even attempt QE2 at this point. The problems in the U.S. economy has nothing to do with what is happening in Europe, a little I suppose, but not directly related. My past posts about Europe relate directly to actual defaults by countries and to corporate earnings. I think anyone will find it hard to believe that the Jones’s are not buying that new car because they are worried about Hungary being kicked out of the IMF-EU rescue package. They are not buying a car because they are worried about their job and do not want to take on much debt or because their credit score is so lousy they cannot get financing, 25% of Americans have a credit score below 600 now. Instead the Jones’s are paying off debt and buying what they need, not what they want which is deflationary.

This trend will continue and so far only the credit markets are pricing this in, the equity markets are in La-La Land, still. The DXY – S&P cross is very bearish if the trend continues and will mean a big correction in the near future especially if commodities head lower as well. Commodities are not performing well and that is reflected in the Baltic Dry Index and combine that in with the above information and it is putting the explanation point on the whole theory. So far the only strategist I know for sure who is putting all of these pieces together, and has been ridiculed relentlessly by the bulls on CNBC and such, is David Rosenberg. All of the rest of the strategists are telling you to buy the dips even when they see everything I presented to you, they know what it means and, to top it off, they know the ECRI is rolling over and housing is going down the tubes. It is incredible to say the least. Be ready for some fireworks soon unless this trend breaks.

What works in a deflationary environment? Income and dividends, pure and simple. I like (and own) the following: CTL, MO, PM, WM, PFE, MRK, LLY, BPT, RYU, PEY, INB, DNH, CGO, VZ, high quality corporate bonds, strategic income bond funds, emerging market debt funds (PCY has been good to me), short and intermediate term treasury funds. Many of the above mentioned stocks have underperformed, which I like, and pay very nice dividend yields, which I love, but may not do well in an inflationary environment. This is why one has to hedge with precious metals or, at the very least, TIPS.

The Death of M3

Posted by Ray on July 15, 2010 under Economy, Main, The Federal Reserve | Be the First to Comment

All the talk of the town is deflation, disinflation or disinflationary trends, what does all of this mean, is it bad and more importantly, should the Federal Reserve try to stop it? First, deflation is negative price growth year-over-year, we are not there yet even though I often say we are in a deflationary period, because we will get there, in my opinion. Disinflation or disinflationary trends are signals that show prices are declining and is how many economists or snarky bloggers, like myself, describe the trend before we hit outright deflation. In a nutshell, deflation is demand destruction or no end demand which means companies must drop prices in order to attract business. The most commonly referenced period of deflation is the 1930’s where, sadly, food was cheap, but people starved, houses were cheap, but people went homeless. Deflation has been framed as ugly, horrible and something that must be avoided at all costs.

Deflation during the good times is fine and we all reap the rewards, such as cheaper technology, i.e. cell phones or computers, which become cheaper because of competition from outsourcing and technological advances. No one minds paying lower prices during these periods of times and the Fed even doesn’t mind deflation during these periods, but they like it to remain in check. Because lower prices do not mean people are not buying the products, the opposite is typically true. Plus, other indicators usually show that only certain items are prone to deflation under normal conditions, usually technology related items. The Fed would only be concerned if they saw other items start to lose pricing power and the money supply shrinking, people saving more money, basically.

When people save their money, in an economy such as the U.S., it is devastating because such a large portion of our domestic growth comes from spending money freely on stuff we really don’t need. When we save we stop that wasteful spending this grinds our economy to a halt. In order to get sales going again companies start to offer incentives to get shoppers in the door. This usually means lower prices through either temporary or permanent sales on the price of the products they sell. Since these products are not selling the stores are not ordering new products which mean the raw materials to make the clothes or whatever begin to decline. Even if the product begins to move at reduced prices the company selling to the end user begins to demand lower prices for the product and even if they don’t ask for it the orders are so much smaller prices would fall anyhow. Essentially it is a chain reaction, this is pretty common knowledge, but it comes from one simple thing happening, people saving their money.

The other part of the equation of people saving their money is that money is taken out of circulation. This sounds counterintuitive to those who rail against the fractional reserve banking system since this system allows for more loans to be made if the deposit base grows. However, if the economy is bad banks simply do not make loans because they fear not getting repaid. Therefore, a higher savings rate means lower monetary circulation, commonly referred to as M3, which the Fed no longer produces by the way. In order to boost the money supply the Fed will try to encourage banks to make riskier loans by lowering interest rates. By lowering interest rates banks make lower rates of returns for doing nothing with their money so by loaning out the money to borrowers banks can make higher interest rates. In turn the borrower will go out and spend that money which will ultimately boost the money supply and, hopefully, boost final demand.

That is how things work in normal business cycles, but that is not what we have now. We have a very abnormal business cycle that happens once every few generations where we go through this huge leveraging cycle and then have to live through a period when we deleverage all the debt. The last time we went through this was in the 1930’s and the time before that was about 60 years before the 1930’s so about every 60 to 80 years we go through a super cycle of debt leverage that blows up. During these super cycles the consumer has so much debt that they just try to pay it off and does not waste much money on other items. This is bad for our economy which is built on a consumption model to the tune of 70% of our GDP. This lack of demand or demand destruction means people just will not spend unless it makes absolute sense to them, i.e. a generous tax credit from Uncle Sam. This demand destruction leads to lower prices which starts out as disinflationary forces, moves to deflation when prices finally start dropping YoY, which will happen soon.

No matter what the central bank does, the Fed, it on its own cannot change this deflationary trend when it has spent all of its ammo. When interest rates hit zero there is nothing the Fed can do to spur demand from a monetary policy point of view. Remember, this is a very unusual situation because in these super cycles not only are consumers saddled with debt, but so are the banks and the banks are usually saddled with worthless debts which make them insolvent. That was true 80 years ago and the same thing is true today because banks are not making loans nor do they want to. So what can the Fed do? They have insolvent banks and consumers that don’t want to spend and are trying to shed their debt loads.

Some people say more quantitative easing will be helpful. I ask how? We already did how much QE? $2T+ that we know of and that did nothing. In fact, mortgage rates have dropped even more after QE stopped and we have falling demand for housing so what will another round of QE do? All it would do is cripple the dollar and trust me, the dollar is going to be in trouble soon enough anyhow because of the bloated balance sheet the Fed has and our national debt load. QE will not boost money velocity at all. It might give banks more money for their balance sheets, but other than that it will not boost the overall money supply so I am totally perplexed as to why anyone thinks QE will work. We have no problem selling our debt right now either, so it is a total waste of time and resources. The negatives far outweigh the positives.

What else can the Fed do? Nothing. They are done or have done everything they can do. Sure, they can roll out with TALF again, but the market has no problem placing junk paper right now so what would the point be? The problem is simple, the consumer does not want to spend. Businesses do not want to spend. Does anyone know why this is happening? I think it is pretty simple, no one knows what is going to happen. The President is keeping everyone in the dark about where taxes are going to go, heck, we are not even going to get a budget for 2010, unreal! We still have no idea how health care reform is really going to impact us yet, how much will it cost, etc. The business environment is weak at best and CEO’s are too afraid to admit it, look how they get treated by the administration, as traitors!

The consumer, well, I wonder why they aren’t spending. We have weekly initial unemployment claims coming in at well over 400K, 4 week average is 455K. We have more firings than hiring’s going on right now. The work week declined and so did wages. There are 6 people for every open job. It is taking 35 weeks to find a new job if you get fired. People were feeling more secure about their job, but when initial claims began to heat up again that confidence disappeared, even H-P started laying people off again and I bet Google will announce layoffs very soon. Their debt loads are through the roof and banks raised all their fees on the consumer so it is taking longer to pay down debt. Foreclosures, delinquencies and now a story broke tat home owner associations are foreclosing on homes for pennies on the dollar over the dues not being paid, come on. To top it all off the Senate is not extending unemployment benefits, but they can pass a 2,300 page Fin Reg bill with no problem, what is wrong with those people?

It is fair to say that there are plenty of reasons to not spend money from the consumer’s point of view. From corporate America’s point of view there is also little reason to spend money and even if they did it is so little of GDP it doesn’t even matter. The bottom line is how do we get M3 to increase? Can money velocity get positive again and should we even try? In my opinion, I do not believe we can get money velocity to get positive again without a drastic event such as WWII. These super cycles have to work themselves out and that takes time and the more tinkering we do the longer it takes. Look at housing, if we did not do the tax credit we might have bottomed in housing prices already, but we will never know now.

The Depression lasted as long as it did because of the tinkering and those who say we had a relapse because stimulus was removed in 1937-38 simply do not get it. If we cannot attract buyers to the housing market at 4.5% interest rates and prices significantly lower than the peak it just is not going to happen for some time to come. The market has to find its own bottom and it will be painful, but we cannot simply throw money at it and hope it works out. We could do that in the 1930’s because we had savings and we had manufacturing, we have neither now. We started out in a horrible position, greatly in debt, and to get ourselves out we are advocating going much deeper in debt. The problem is we cannot grow our way out of the debt we have, we cannot afford another New Deal. The most important thing to remember about the New Deal to begin with was that it did not work, it was a majorly failed policy.

As painful as it is going to be I say we have to let it be. No more QE and I hope we do not do another stimulus, but we will, look for a Bush style check coming right around October. Money velocity will sort itself out when the deleveraging is over and that could be as fast as next year or as long as 2015, no one knows except the collective minds of the consumers. The bottom line is we may come out, the consumer and corporate America, stronger than when we came into this thing with less debt and important lessons learned. Our government and the Fed, well, I do not believe they learned anything and look for QE and stimulus money just in time to buy your vote in November.