You must remember this period of time

All the talk about the double dip recession is being blamed on not enough stimulus, but that is not true since there is a lot of money being spent right now because of the stimulus. The final spending of the stimulus funds will end this year, right near the elections ironically enough, but it is clear it did not work. We now have Paul Krugman out railing about a deflationary depression because governments are cutting back stimulus efforts. My question to him is, if stimulus is the answer and we are spending it now why are we seeing disinflationary forces? His excuse does not hold water. It is the massive government intervention that is causing the problems, not a lack of stimulus, but too much stimulus.

I am in disbelief how anyone could not have seen these problems coming, the signs were everywhere. Employment was the best indicator, but look at money velocity, what you can piece together at least, and declining credit combined with higher foreclosures, bankruptcies and weak retail sales it is clear as day that at best we stabilized at less bad and at worst we are heading for really tough times. This is not something I wanted to happen I think you would be hard pressed to find anyone wishing pain and suffering on anyone, but the signs were all there. Not to mention the implications of Europe tightening its belt and trying to force China to revalue its currency, talk about insanity, we took it to the next level.

So, Krugman may be right and we may have a deflationary depression, but I am sure it will last for only a little while. Because Bernanke will not stand for a deflationary depression, which is ironic considering Ben is the Great Depression expert and he is creating another one, and he will print our way out settling for an inflationary depression. The unfortunate part is Mr. Krugman has the reasons wrong for the depression we are in and he doesn’t seem to understand that you cannot cure debt problems with more debt, it just doesn’t work. Our debt is so large that is will now be a complete drag on GDP which means lower growth, the new normal anyone? Again, his reasoning is flawed because we just spent $1T, give or take between all the programs, on stimulus and we are not even done spending and he is calling this a deflationary depression because there is no stimulus? Maybe he likes to confuse the less informed or something, but talk about being wrong, wow.

My point is that you need to remember today, what is going on, the money that is being spent, what politicians are saying and blaming because they will, whichever party, will point to right now saying we should have done more or we should have done less. The fact of the matter is we are doing both, stimulus is declining and we are not adding more to it, and keep in mind that the data we are all looking at is still coming from April or May when much more money was being spent. All that data, even further back then April, is also showing significant decline in economic activity when the stimulus was running full speed ahead. To clarify, just because the spending is slowing now don’t blame the negative data on that since the data was generated prior to the slowdown in stimulus spending. Furthermore, employment never recovered or even showed significant improvement given the price tag.

Will the decline of stimulus spending hurt? Yes, a lot, but it needs to stop somewhere. The problem with the stimulus is that it is cruel because it extends the bad periods much longer than they should have lasted by blocking the markets from finding a true bottom. The more you spend, the more it distorts reality and lures people into a false sense of security, but when it stops the real pain begins because those fooled may have to lay more people off and readjust for a post stimulus world. So not only do the long-term unemployed receive the proverbial shaft, but newly hired employees may also receive the same treatment after they thought they caught a break.

Right now you can see what worked and what did not, but in a few months many might not remember. They may point to the 5.6% GDP print and say remember how good things were then? Well, they weren’t that good to the unemployed or those in bankruptcy or losing their homes, but that is how it will e framed and there will be cries for more stimulus. Those cries must be rejected and the only government stimulus that must continue is unemployment insurance. You cannot dump millions of Americans who are not unwilling to find a job it is that no jobs exist for them.

We tend to have very short memories and forget things quickly because of who knows what, I blame TV. You cannot forget what is happening right now because if you do they might talk you into another round of stimulus or God knows what else. We are in trouble, I know this, but we tried Krugman’s way and it failed, let’s give it the “let’s not give it the college try” and see what happens. Besides all of that, we simply cannot afford more spending especially for mediocre results, I am being generous here. While Krugman is grabbing the headlines for using the “D” word, let’s not forget I started using the term depression months ago based on the employment figures, food stamp numbers and the way foreclosures and bankruptcies were growing because I was paying attention and not traveling to my vacation house in the tropics unlike some BY Times economist.

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Double Dip Surprise

How anyone is really surprised by the possibility of a further decline in economic activity is puzzling to me. Perhaps it is all the distortions in the data that is coming from the government supporting the economy. Maybe it is because their vested interest is to have you invest in their funds. Perhaps they just drank the Kool-Aid. No matter what it is almost a certainty, in terms of forecasting, that the economy will either stagnant here or decline.

The main indicator that has been telling us there were problems for some time now is the initial claims data and the lack of private payroll growth. Sure, we saw a bump up in payrolls with the 5%+ GDP print, thanks to inventory restocking, but 1Q10 GDP shows signs of significant weakness. What has held true is initial claims, first they got better with the big GDP print, but now they are soft with the constant downward revisions to 1Q10 GDP. The ECRI data also points to weakness in the economy as well which correlates with initial claims data. From my lens, employment is not a lagging indicator, I have been pounding the table on this for a year now, it is a leading indicator in a post credit collapse scenario.

Friday’s employment report is now being telegraphed by Bloomberg to be weak, -110K is the forecast, especially since the Census hiring is done and they are now laying off workers. All of this is not surprising if you track initial claims and use it as a leading indicator. To put the monthly initial claims data into perspective 1,850,000 are filing claims for the first time and that means there needs to be about 2M jobs created every month to offset the ones just lost and we also have to contend with population growth as well. To be blunt, full employment is a figment of one’s imagination at this point for at least the next 5-8 years. Unemployment will be our greatest problem for a long, long time and there is little the government can do since end demand is the issue.

There is simply no way the Fed can raise rates for the foreseeable future either since one of their mandates is full employment. Yes, I know they said they would raise rates before employment recovered, but they won’t for political reasons. Obviously, that might change depending on what happens in the future, but for right now there simply is no reason to raise interest rates, at all, from their perspective. Worse is the fact that the Senate did not extend unemployment insurance last week which means a million plus people will lose benefits very soon. After their drunken spending binge to bailout the banks after they created this it is beyond me how they would let a million people just wither and die. There are 6 people for every job opening out there so it is not like these people are actively NOT trying to find work, so enough with that whole theatrical display of utter idiocy. Keep in mind I am a deficit hawk, but there is a difference between government wasting money and government helping those who cannot find work.

The loss of those benefits will have a huge impact on the economy as a whole since that money will not be spent. Retail sales will continue to slide and foreclosures will continue to rise, how many of those million plus people are barely hanging on? I am not sure how so many people can claim that the unemployed are simply freeloaders looking to live the highlife on such a meager government stipend which is what you hear often on other blogs or by the ultra rightwing. Considering that there are so many people looking for work the competition for a job, any job, is extremely high which reduces the odds of a person actually getting a new job anytime soon. Not to mention that unemployment benefits are usually around $300 – $500 a week I find it hard to believe that anyone is living the highlife on such a low amount, but that is the case. I am sure that there are abuses, but this is one of those give me a break moments and I am definitely right of center.

The other reason many believe a double dip is out of the question is that companies have extraordinary amount f cash on their balance sheets. Well, all I have to say is how long has that cash been on their balance sheet and it has not gone to work yet? This is like the temporary employment is a bullish indicator, if it is not happened yet the odds of it happening anytime soon are dwindling. The cash on the balance sheet is also part of the deleveraging cycle as companies pay down debt and hoard cash. Perhaps the main reason that companies have so much cash on hand is they think that business is going to get very tough in the near future. After all, many of our best companies have roots going back beyond the Depression and they know the value of having cash on hand to make it through the storms. Of course, they could spend it all tomorrow, but I ask again, what are they waiting for and why hasn’t it happened yet?

The bottom line is that it is really shocking to see so many smart people caught off guard about a potential double dip recession. All of the signs have been around for a longtime that the thought should have entered their mind at some point in time in recent months. There is a chance that we could avoid it, but I do not see how. I should point out the fact that I never bought the idea that we actually made it out of the first one, other than a statistical recovery that is. Time will tell on this one, but if Friday’s report is worse than expectations we will be well on our way to S&P 900.

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457,000, Again

Initial claims came in at -457K this morning, this is not good, and last week’s figures were revised from -472K to 476K, really not good. This has little to do with the oil leak in the Gulf and anyone making that claim disqualifies themselves from the conversation. This has to do with a weak economy, pure and simple. We are entering a double dip recession and as the stimulus is pulled back it is going to get worse, much worse.

Your first warnings came from Best Buy and Fedex, but no one listened to what they had to say. Frankly, the real warnings were always in the weekly claims reports, but everyone dismissed them as a “lagging indicator” which is simply not true in a post credit collapse economy. If we were in a normal inventory recession I would agree that employment is a lagging indicator, but when the economy blows up because people cannot pay their bills, well, employment is a leading indicator. That is where economists missed the mark and failed to adjust their models, those that fail to change will go the way of the dinosaur, it is inevitable that natural selection weeds out the weak and that is what is happening now.

To top off the situation we did the worst thing possible, we tried to cure a debt problem with more debt. You cannot do that, it just doesn’t work. Take a look at Greek bonds, the 10 year is over 10% again, why? They have austerity measures in place. They have access to special funding, etc. yet their bonds are yielding over 10%. That is telling you there is no fix for the problem as the smart money is always, I cannot stress this enough, always in the credit markets. We have treasuries climbing with 2 year yields pushing .64%! Are you kidding me? This is not normal and while I bought when yields hit 1.10% on the 2 year, taking much flak from friends and family I might add, I figured the yield would drop to .77% or so, within the trading range, but they broke out. This is a sign that things are not as they seem and extreme caution is merited. Where treasury yields can go is the big question, certainly zero is not out of the question and negative yields have happened before, watch the credit markets.

Europe is a problem and will continue to be a problem, remember that the EU is China’s biggest market and the EU is responsible for 30% of the S&P 500’s earnings, not an issue for 2Q, but 3Q I would not be long in 3Q. Unemployment in the U.S. will climb higher, I am sad to report, especially as Europe deteriorates and much to Mr. Krugman’s chagrin forcing the EU members to increase their deficits is not a good idea. Their deficits are the problem and making them bigger will not solve their problems. Europe could lead to much higher unemployment in the U.S. and one has to remember that Europe did make the Depression much worse in America in the 1930’s as well, history does repeat itself.

To top it all off we do have the moratorium for drilling in the Gulf, it may get overturned again, but assume it will not. What does that mean? That means at least 10,000 jobs will be lost within the first few weeks. After that it could get worse as it creates a negative feed loop and the loss of one job means others will lose their jobs over time. From my lens the moratorium is insane. The leak is horrible, we all know that, but this is the first oil leak we have had in the region, ever, out of how many wells? Perhaps if the government puts a safety inspector on each rig that may solve the safety concerns, but that idea was rejected. Instead, let’s halt the entire industry and watch them all go to Mexico or Brazil instead so we can lose those jobs for years to come in the best case scenario or forever in the worst case scenario.

Employment is indicating things are mildly better, but merely stabilized at “less bad” which is not good overall. Housing, the release yesterday, solidified that we will have a double dip as housing is about 21% of GDP and we just saw the worst housing data since they started recording the data series. How much more evidence do we need to have? We also created false demand which means we had distorted housing data for the past year. How in the world are we supposed to know how far forward we pulled demand? Months? Years? This is the problem with Keynesian economics especially when it is used wrong, which we certainly did.

The bottom line is this, unemployment is going to grow outside of government rolls, period. Housing is going to go lower meaning GDP is going to be bad in the second half of this year, if not negative. The employment report, due out soon, will show more government jobs which will not be positive for the markets. The ISM surveys are rolling over. The leading indicators are pointing down, hard. Inflation is nil right now. Treasuries are telling you something big is going to happen. Europe is in major trouble. How you can believe the long only permabulls being paraded on the TV is beyond me. They get paid to have your money in their funds whether it goes up or down. I get nothing whether you invest or not. Frankly, the facts at this point are irrefutable.

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Initial Claims

Unreal, it is just unreal, here we are 2.5 years into this recession and we are still seeing initial claims well over 450K a week, how? The pundits told us that employment had turned the corner months ago and we are in a strong “V” shaped recovery, but employment is a lagging indicator and should show real strength by March 2010. Well, it is half way through June and the only sector showing strong job growth is temporary government jobs, some recovery.

The 4 week moving average of initial claims is at 464,000 people, this is unbelievable and is not a good sign. To put this into perspective every month 1,856,000 are filing for initial jobless claim benefits, that is twice the amount of people that live in the entire state of Montana or two thirds of the population of Las Vegas, three times the amount of people that live in Boston Ma, you get the picture now? That is a lot of people. This is not a sign of job creation or job growth so it is beyond me how the President could have stood on that podium a couple weeks ago and proclaimed there is proof that the economy is getting stronger everyday when so many people are losing their jobs every day, not getting jobs.

I may be bearish and all, but this is beyond what I would call bad news and downright scary. People are not leaving their jobs for greener pastures, they are being laid off because business stinks. The proof was n the CPI which shows clear lack of pricing power or deflation dropped .2%, even taking out energy prices were only higher by .1% which shows zero pricing power except for iPads. What this means is the market is severely overvalued as it deserves to be trading at much lower price multiples based on deflationary pressures. We are not in 1930’s type deflation, but we are certainly heading in that direction, especially with Europe in turmoil right now.

To say there was any strength in today’s figures is simply lying to yourself and trying to spin bad news. I am sure the market will head higher because, well, the market sees no bad news until it is sitting on its chest, but it is clear as day that GDP is rolling over and employment is worsening, not improving. Would I short the market? Yes, but if you do not want to go short sell into rallies and buy bonds or stay in cash because when the market realizes it needs to compress P/E multiples we will move from 1,100 on the S&P to 900 in the blink of an eye. The market is not the discounting mechanism everyone tells you it is, just remember September of 2007 we hit all time highs when the crisis was hitting full steam, so higher stock prices is not indicative of a healthy economy.

One final thing, the parade of bulls on CNBC are long only mutual fund asset managers, where is their bread buttered, by having your assets in cash or in their funds? Think about that when listening to them dish out their “timely advice.”

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Retail Sales, Better than They Appear?

The pundits came out to spin retail sales numbers as being not as bad as they looked, etc. However, they are actually worse than they appear when we take a step back and look at the big picture at what has changed over the past couple of years. It is interesting that anyone is trying to spin the retail figures as anything other than horrible, but I guess when you are long only mutual funds you know where your bread is buttered and it is not in showing how bad the data really is.

CNBC, the ultimate spin machine, they should change their name to Spin Co., liked to point out that electronic sales were up as well as furniture sales. Well, how about that 2 areas that went up out of how many? We won’t mention that, but the negative list is much longer. Here is what is important to note, electronics went up because prices keep dropping, check your email for discounts from Dell and Best Buy, but the real story is the iPad. What would happen if we subtract iPad sales out of the mix? I am willing to bet electronic sales look less rosy than the headline figure and the point is, how long will the iPad continue to sell so well? Who knows, but probably for a while. As far as furniture sales, well, you got me other than I am sure the sales were rich and prices are still dropping.

The real story, what even I forgot to think about when the figures were released, is the fact that there is much less competition than a year or so ago. Best Buy used to compete against Circuit City and Comp USA, granted they were smaller players, but still they are facing less competition than they once did. How about all the mom and pop stores that are gone? There are far less companies vying to all this business out there and the players that are left have zero pricing power which is downright scary in my opinion. On top of all of this many of the large stores closed down their less profitable stores as well so we had consolidation from a competitive point of view and consolidation from corporate point of view and sales are declining.

While this is not good news for the bulls, there is no way to really spin this, it is really bad news for the economy as consumer spending is such a large part of our GDP. However, I do see some positive things happening, people are spending less on junk they simply do not need. Let’s face it, the iPad may be cool, but does one really need one? This means that the less people spend on all of this junk, hopefully, the more they will save. While this makes many of your cringe, this is a very good thing. As a country we need to save more and spend less which is counterintuitive to most people, but with a higher savings rate we might be able to start fixing some of our fundamental problems in our country, like GDP being some 70% of GDP. Basically, we need to save more, produce more and spend less.

As far as the other “bright spot” on Friday, consumer sentiment reached a 2 ½ year high of 75.5. Surely this is fantastic news and a reason to buy, buy, buy, but this number is still in recession territory and diverges drastically from the ABC Weekly  Consumer Comfort Index. Of course polls are polls and will vary depending, but one thing is clear what appeared to be a huge upturn in the economy was a head fake. The data, most of it, is pointing towards another slowdown as the stimulus wears off. There is little political will to do another stimulus package, which is actually a good thing believe it or not. Things may get worse, but hiding problems are far worse than getting them out of the way.

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