Tag Archives: Depression

The Humungous Depression, by Robert Gore

SLL will be on vacation 5/17-5/21 and will not be posting. Posting will resume 5/22. 

Economic depressions unfold slowly, which obscures their analysis, although they are simple to understand. Governments and central banks turn recessions into depressions, which are preceded by unsustainable expansions of debt untethered from the real economy. The reduction and resolution of excess debt takes time, and governments and central banks usually act counterproductively, retarding necessary adjustments and lengthening the adjustment, and consequently, the depression.

If one dates the beginning of a depression from the beginning of the unsustainable expansion of debt that preceded it, then the current depression began in 1987. Newly installed chairman of the Federal Reserve Alan Greenspan quelled a stock market crash, flooding the financial system with fiat liquidity. It was a well from which he and his successors would draw repeatedly. Throughout the 1990s he would pump whenever it appeared the market and the US economy were about to dump. In 1999, he pumped because the Y2K computer transition might adversely affect the economy and financial system (it didn’t).

If one dates the beginning of a depression from the time when the benefits of debt are, in the aggregate, outweighed by its burdens, the depression began in 2000, with the implosion of the fiat-credit fueled, high-tech and Internet stock market bubble. Unsustainable debt and artificially low interest rates lower the rate of return on productive investment and saving, increasing the relative attractiveness of speculation. Central bankers and their minions refer to this as “forcing investors out on the risk curve,” crawling way out on a limb for fruitful returns. They have no term for when markets saw off the branch, as they did in 2000 and again in 2008.

Most people don’t see 2000 as the beginning of a depression, but Washington and Wall Street cloud their vision. Stock markets were once essential avenues for raising capital and valuing corporations. Since central bankers’ remit was broadened to their care and feeding, stock markets have become engines of obfuscation. The “wealth effect” supposedly justified solicitude for markets: a rising stock market would increase wealth, spending, and economic growth. For seven years a rising market has coexisted with an anemic rebound and one hears little about the wealth effect anymore. The stock market is the preeminent symbol of economic health, so keeping it afloat has become a political exercise. Sure, central bankers and governments know what they’re doing, just look at those stock indices.

Let’s look at those stock indices. They are measured in fiat debt units, the entirely elastic quantity of which is in the hands of governments and central banks. What if stock indices are valued in a less ephemeral currency, say gold, aka “real money”? By that measure, the DJIA divided by the price of an ounce of gold reached its all-time high of about 41 ounces in May 1999, or just before the depression began. That ratio collapsed to under 7 ounces in September 2011, and currently stands at about 14. If you paid for the Dow in 1999 with gold, you’ve lost 65 percent on your original investment.

There is a general awareness that real family incomes have gone nowhere since the turn of the century; it’s often offered as a reason for the Trump and Sanders ascendancies. Other, less well-known indicators have also deteriorated or declined. What David Stockman defines as “breadwinner” jobs in construction, manufacturing, white-collar professions, governments, and full-time private services, which on average pay more than $50,000 per year, peaked in January 2001 and are still about 3 percent below that peak. The growth in employment since 2001 has been in lower paying part-time jobs, restaurants, retail, medical services, and education, which explains the stagnation in incomes. Two other important measures—labor hour inputs and real net investment—have gone nowhere since 2001. An economy in which hours worked and real investment are not growing is an economy that is not growing.

The US economy has been losing altitude for sixteen years. While debt monetization and interest rate suppression have fueled housing and equity booms, they can’t mask the underlying deterioration. President Obama will be the first president to have presided over an economy that never achieves 3 percent annual growth. That’s by government figures, which must be taken with a shaker of salt. Employment statistics are especially dubious. To the public, they are right behind the stock market as an economic indicator. They are subject to a variety of pertinent criticisms, including their seasonal adjustments and the birth-death model of new business formation, which continues to add to employment although, sadly, more businesses are currently dying than are being born. The government also has a vested interest in understating inflation. Many of the benefits it pays are indexed to inflation, and interest rates on government debt incorporate an inflation premium. Understating inflation overstates the growth of real GDP, probably third on the list of statistics to which the public pays attention.

The Great Depression was not a straight downhill run. There were multiple, widely hailed “recoveries” and stock market rallies, but in 1938 the economy was in worse shape than when Franklin Roosevelt was elected in 1932, and the government was bigger, more intrusive, and more in debt (the same can be said about the government since 2000). Depressing it is to contemplate how government turning a recession into the Great Depression, but consideration of what Japan has done since its stock market topped out in 1989 can leave one pondering the choice of pills, noose, or handgun.

The Japanese have copied every page of the Keynesian and monetarist playbooks: government debt, public works spending, and regulatory expansion, and central bank monetization of assets and interest rate suppression. Multiple recoveries have been punctuated by multiple contractions. Capitalism has remarkable recuperative powers, but screw with an economy long enough and you not only prevent recuperation, you do lasting damage. Japan and Europe—also beset by persistent economic idiocy—have shown little growth or innovation for decades, leaving the economic idiots responsible muttering about supposed, self-exculpatory, secular stagnation. As the US economy glide paths into zero-and-below land, Washington, Wall Street, and the Ivy League’s best are muttering the same thing.

Nothing is more telling than birthrates, and in Europe, Japan, and the US, birthrates are below the replacement rate of 2.1 births per couple. When planned, having babies expresses confidence in the future. The Japanese buy more adult than baby diapers, illustrating the demographic crunch and falling dependency ratios (the ratio of able-bodied and employed workers to the population requiring outside support), which understandably increases pessimism and further decreases birth rates among the young.

They see a bleak future and they’re not wrong. The global economy hit stall speed with the commodities crash in 2014 and another rendezvous with terra firma looms. Never has the world been more in debt. True recovery won’t happen until most of it has been repudiated and written off. The current depression is already longer than the Great Depression. By the time it’s over, economic historians will be calling it the Humongous Depression.

This is Crisis Progress Report 18. For the first 17, see the Debtonomics Archive.

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Davos, Dalio, and a Depression?! by Bill Tilles and Len Hyman

From Bill Tilles and Len Hyman at wolfstreet.com:

When Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, referred to a possible economic depression as he was being interviewed at the World Economic Forum at Davos, it does not mean what most people think it means.

Most of us think about recessions and depressions in a linear way. That is, a depression is a really, really bad recession featuring even higher levels of unemployment and lower overall levels of economic activity.

But for Mr. Dalio, recessions are kind of normal, business-cycle related economic events that regularly occur every 5-10 years or so. The economy begins to overheat, the Fed raises rates in response (the removal of the “punch bowl”), business activity slows perhaps a bit too much in response, and voila! A recession results.

Depressions on the other hand are secular or long term, occurring much less frequently. That’s because according to Mr. Dalio, it takes a long time (perhaps decades) to accumulate the excess levels of corporate and government debt that end up triggering this type of economic event. A depression is a condition where more debt cannot be added to the system and instead it must be reduced, or as we say, deleveraging must occur. A depression always threatens systemic solvency.

There are several hallmarks of a systemic deleveraging or depression if you will:

  1. Various asset classes begin to be sold (like oil and gas wells today for example)
  2. As a result of these widespread asset sales, prices decline
  3. Equity levels decline as a result
  4. This triggers more selling of assets
  5. Since there is less worthwhile collateral available credit levels contract.
  6. Overall economic activity declines. In short, there isn’t enough cash flow being generated to service all the accumulated debt. As a result assets have to be sold, bankruptcies become more common

What makes this such a pernicious process is that it is a self-reinforcing cycle of economic negativity.

To continue reading: Davos, Dalio, and a Depression?!

What An Industrial Depression Looks Like: Photos From An Australian Heavy-Machinery Auction, by Tyler Durden

Who says there’s no deflation? What do you call a 99 percent discount on a Caterpillar Wheel Loader? Click the link at the end and check the photographs at the end of the stories for other massive discounts. From Tyler Durden at zerohedge.com:

Two weeks ago, when looking at the latest Caterpillar retail sales data…

… we said that “If Caterpillar’s Data Is Right, This Is A Global Industrial Depression.”

Today we get visual evidence of this, courtesy of an Australian heavy industrial equipment auction where machines such as a Caterpillar 992C wheel loader, which normally costs $2.9 million, can now be bought for just $15,000, a 99% discount!

As Australia’s ABC reports, now that the commodity bubble has burst for good, auctioneers are hard at work selling tens of millions of dollars of suddenly useless coal mining machinery for just a fraction of its original market value.

The reason is known: the severe downturn in the Australian resources sector (courtesy of China’s whose commodity imports are declining with every passing month) has led to a massive oversupply of equipment, and much of it is unsuitable for use in any other industry. This means unwanted excavators, trucks and sundry heavy machinery will end up as scrap, if not sold at auction.

ABC’s reporter visited just one such auction in New South Wales, which was owned by Big Rim, a mining services contractor which also collapsed after the miners it serviced also closed.

What he saw was stunning:

“At the moment we’ve probably got the worst downturn I’ve seen in 25 years,” said Chris Hassall, whose company is conducting the auction.

Peter Turner’s Gold Coast company Turner Engineering used to compete for contracts with Big Rim. “I’d be interested in at least 50 per cent of what’s here, and there are at least 100 machines here,” he said.

One of those machines was a large water tanker which Peter Turner was running the ruler over. “It’s not worth a lot. It’s worth $75,000 or something, but you can’t build the tank for that.”

Worse, when the auction began the owners of a once-thriving business were hoping this fire sale would at the very least cover their debts. No such luck as the photos of the epic discounts on the equipment show.

To continue reading: What An Industrial Depression Looks Like

Crisis Progress Report (13): Time for the Crash, by Robert Gore

From the last Crisis Progress Report, dated October 1: “Assume a rally like the one in 2008 is in the offing. If the 2008 rally’s timing is any guide, this one will start between now and New Year’s, but there are no assurances; it may begin next year.” SLL did not know then that the rally was already underway, the market having made its recent closing low on September 28. Now that the market has rallied, in the perverse way that markets work, Friday’s employment report, the best in some time, may well kick off the next down leg. October has had its share of market crashes, so with fear high at the beginning of the month, the market rallied and October was its best month in years. November and December are often strong, marked by end-of-the-year “Santa Claus” rallies. Again, in their perverse way, markets this year may leave a lump of high-sulfur-content, CO2-releasing, soon-to-be-outlawed coal in investors’ stockings.

This latest employment report will be revised multiple times; it is subject to a variety of abstruse statistical criticisms; it is seasonally and birth-death-model adjusted; it shows that almost all the jobs in October were taken by older workers, and finally, employment is, as any economist will tell you, a lagging indicator. Whatever the ambiguities in the employment report, there is no gainsaying that debt contraction is rolling through, and roiling, the global economy in textbook fashion. Global debt, central bank and government-force fed, approaches $225 trillion and has grown faster than global GDP for decades. It is the most massive in history, measured in either absolute terms or in relative terms against global GDP.

Debt is close to or at a high point that may not be exceeded for decades, but the underlying forces of contraction are in full flower. They first appeared in the most leveraged sector relative to its ability to repay: natural resources. China blew a debt-fueled bubble, and its economic “miracle” stoked investment in natural resources around the world. That investment binge was aided mightily by artificially low, central-bank suppressed interest rates. Once China’s bubble started to deflate, as all such bubbles must, investment that looked “opportunistic” on the way up has became malinvestment, with gluts in oil, iron ore, coal, aluminum, nickel, fertilizer, and a host of other raw materials.

Earlier this year, it was possible, if one was completely ignorant of debt dynamics, or “debtonomics” as SLL has christened them (see Debtonomics Archive), to argue that the raw materials situation would be contained. The same assurances were given in 2007 about the pending collapse of the housing and mortgage finance markets, and the present assurances will prove as spot off as those were. Natural resources are a far larger part of the global economy than the what proved to be earth-shaking US housing and mortgage finance market was in 2007. There are too many debt contraction ripples rippling out; the only way the contained argument can be made now is through willful ignorance. (SLL has been glutting its blog postings with stories on those ripples. Rather than clutter up this article with a multitude of links, readers who have missed those stories and are interested should scan through the blog over the last month.)

The glut of raw materials has led to a glut in raw materials transport. Tankers, bulk shipping vessels, and container ships are in oversupply and shipping rates have collapsed, in some cases to all time lows. China’s exports and imports are shrinking, as is overall global trade. The ripples are reaching US shores, where railroads are reporting shrinking volumes of not just natural resources, but chemicals, containers, and industrial products. The trucking industry is following suit; the US load-to-truck ratio just hit a 33-month low. Neither US railroads nor trucks are directly tied into China, but they are nevertheless being affected by reduced demand from China that is anything but “contained.”

Notice that the contraction has moved beyond raw materials. Cheap money and China’s supposedly perpetually expanding demand prompted fervid increases in Chinese and global industrial capacity, now overcapacity. Exhibit A is the steel industry, burdened with massive oversupply. Its raw material, iron ore, has gone from $154 per dry metric ton in February of 2013 to its current price below $50 per dry metric ton. It’s the same story with cement, finished aluminum and copper products, industrial machinery, tractors, and engines, to name a few. The segment of the global economy that makes things, especially the segment that makes things for other industrial users, is looking at gluts as devastating as those faced by producers of raw materials. Last month, Daniel Florness, the CEO of Fastenal, a US company that makes nuts, bolts, and other fasteners said, “The industrial environment is in a recession—I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.” (“‘Our Data Is Not Good’ – US Companies Warn That A Recession Is Coming,” by Tyler Durden, SLL, 10/26/15).

The fashionable refrain is that none of this will put the US in a recession because the US economy is based on services, not mining, manufacturing, and exports. The stock market has recovered most of its August and September losses, the housing market is holding up, and service sector statistics still show growth. This optimism is misplaced. The things-you-can-touch economy buys legal and financial services, communications, technology, insurance, consulting, office space, real estate, and advertising. The idea that significant cutbacks by America’s mining, manufacturing, transport, and distribution companies will have minimal impact on its service companies ignores the extensive commercial relationships between the two groups.

Layoffs have begun in mining, oil, and gas and will spread. The newly unemployed cut back on store trips, restaurants, entertainment, and other discretionary spending in the service economy. They may, heaven forbid, even cut back on their smart phone usage. Then we’ll know that things are really, really bad. About the only sector that may appear immune, at least for a while, is the government, but the relative health of this nonproductive—or more accurately, counterproductive—sector, will come, as it always does, at the expense of the rest of the economy.

One of the US’s world-beating service industries—the production, packaging, and distribution of debt—is already showing the strain. Fracking and mining companies are seeing their credit lines curtailed or eliminated, and bond financing unavailable or prohibitively priced. What started in the oil and gas corner of the bond market—widening credit spreads—has spread out to a general increase. The ultra-cheap interest rates that allowed companies to finance shareholder friendly dividends and buybacks are ratcheting up. Banks are cutting their commitments to both the investment grade and high-yield corporate bond markets. Constriction in credit markets often precedes significant stock market declines, but hey, things are different this time. Flinty creditors spend all their time looking at boring old balance sheets, revenues, expenses, and cash flows. Equity markets have hope and faith and central bank pixie dust!

They can ignore the writing on the wall, but not the wall. That would be the one into which the global economy is smashing. Pixie dust has probably taken US equity markets about as far as they’re going to go. A crash that begins before Christmas will surprise only those who still believe in Santa Claus.

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The Global Test Most Will Fail: Surviving the Bust That Inevitably Follows a Boom, by Charles Hugh Smith

From Charles Hugh Smith at oftwominds.com:

Now that virtually every nation is entering the bust phase, all are being tested.

Booms powered by credit, new markets and speculation are followed by busts as night follows day. This creates a very difficult test for every nation-state facing the inevitable bust: how does the leadership deal with the end of the boom?

As the world is about to learn once again, the “fix” may make the next bust even more destructive.

Let’s start by reviewing what conditions generate booms.

1. An undeveloped nation gains access to new credit, markets and resources and go through a “boost phase” much like a rocket lifting off when suddenly abundant finance capital ignites the country’s latent growth potential. When a country with little to no public or private debt suddenly gains access to essentially unlimited capital, growth explodes.

One variant of this is the discovery of vast new resources that quickly attract capital (for example, oil) or that generate new wealth (for example, gold).

The modern example of a developing nation gaining access to new credit, markets and resources is of course China, but this model also describes America in the 1790s and early 1800s, and many other nations in various phases of their development.

2. A new sector opens up in a developed nation’s economy. A recent example is the Internet, which exploded in a boost phase from 1995 to 2000. In these cases, the new sector simply didn’t exist, and the boost phase is as spectacular as the ones in newly developing economies.

Example from American history include the railroad-fueled boom of the 1870s and 1880s and the advent of electric light and later, radio.

3. A previously “safe” sector is financialized as the assets are collateralized into vast mountains of debt and leverage, both of which fuel runaway speculation.

The mortgage-backed-securities and subprime-fueled housing boom of 2002-2008 is a recent example of this: a safe, conservative sector (mortgages and housing) was rapidly financialized into a speculative frenzy.

Eventually this boost phase burns thru all the productive investments and moves into mal-investment, rampant speculation and outright fraud as insiders take advantage of new entrants. In the U.S., this occurred in the early 1890s once the construction of railroads had moved to the over-indebted, speculative mal-investment phase.

To continue reading: The Global Test Most Will Fail

If Caterpillar’s Data Is Right, This Is A Global Industrial Depression, by Tyler Durden

Reality is catching up to SLL’s prediction of an impending depression. From Tyler Durden at zerohedge.com:

Most cats bounce at least once when they die, but not this one: after CAT posted its first annual drop in retail sales in December of 2012, it has failed to see a rise in retail sales even once.

In fact, since then Caterpillar has seen 34 consecutive months of declining global sales, and 11 consecutive months of double digit declines!

Why is this important? Because a month ago we asked: “What On Earth Is Going On With Caterpillar Sales?”

We have been covering the ongoing collapse in global manufacturing as tracked by Caterpillar retail sales for so long that there is nothing much to add.

Below we show the latest monthly data from CAT which is once again in negative territory across the board, but more importantly, the global headline retail drop (down another 11% in August) has been contracting for 33 consecutive months! This is not a recession; in fact the nearly 3 year constant contraction – the longest negative stretch in company history – is beyond what most economists would deem a depression.
We got the answer just three days later when the industrial bellwether confirmed the world is now in an industrial recession, when it not only slashed its earnings outlook, but announced it would fire a record 10,000.

Moments ago, CAT reported its latest monthly retail sales and they were even worse than last month: in the month of September there was not a single region that posted either a increase of an unchanged print. This was the first month in all of 2015 in which every region posted a drop.

To continue reading: This Is A Global Industrial Depression

Why This Feels Like a Depression for Most People, from the Administrator at The Burning Platform

From the administrator at theburningplatform.com:

“And the little screaming fact that sounds through all history: repression works only to strengthen and knit the repressed.” – John Steinbeck, The Grapes of Wrath

Everyone has seen the pictures of the unemployed waiting in soup lines during the Great Depression. When you try to tell a propaganda believing, willfully ignorant, mainstream media watching, math challenged consumer we are in the midst of a Greater Depression, they act as if you’ve lost your mind. They will immediately bluster about the 5.1% unemployment rate, record corporate profits, and stock market near all-time highs. The cognitive dissonance of these people is only exceeded by their inability to understand basic mathematical concepts.

The reason you don’t see huge lines of people waiting in soup lines during this Greater Depression is because the government has figured out how to disguise suffering through modern technology. During the height of the Great Depression in 1933, there were 12.8 million Americans unemployed. These were the men pictured in the soup lines. Today, there are 46 million Americans in an electronic soup kitchen line, as their food is distributed through EBT cards (with that angel of mercy JP Morgan reaping billions in profits by processing the transactions).

These 46 million people represent 14% of the U.S. population. There are 23 million households on food stamps in a nation of 123 million households. Therefore, 19% of all households in the U.S. are so poor, they require food assistance to survive. In 1933 there were approximately 126 million Americans living in 30 million households. The government didn’t keep official unemployment records until 1940, but the Department of Labor estimated 12.8 million people were unemployed during the worst year of the Great Depression or 24.9% of the labor force. By 1937 it had fallen to 14.3% or approximately 8 million people.

The number of people unemployed during the 1930’s is an excellent representation of the number of households on government assistance during the Great Depression because 79% of all households were occupied by married couples with 4 people per household versus 48% married couple households today with 2.5 people per household. The unemployment rate averaged 19% during the heart of the Great Depression. Therefore, approximately 19% of all the households in the U.S. needed government assistance to feed themselves. That happens to be the exact percentage of households currently needing food stamps to feed themselves.

To continue reading: Why This Feels Like a Depression