Tag Archives: Depression

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

Posted on October 8, 2015 | Leave a comment

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

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Crisis Progress Report (12): Zero Will be King, by Robert Gore

Posted on October 1, 2015 | 2 comments

THERE IS A NEW TAB AT THE TOP OF THE PAGE: DEBTONOMICS ARCHIVE. IN RESPONSE TO POPULAR DEMAND, READERS WILL HAVE A LINKED LIST OF ALL OF ROBERT GORE’S ARTICLES ON ECONOMICS SINCE SLL MOVED TO THE WORDPRESS PLATFORM LAST YEAR. AS YOU MAY SUSPECT, IT IS NOT BEING POSTED BECAUSE HE HAS BEEN WRONG.

“Markets make opinions” is a psychological truism. Current financial turbulence is putting investors and speculators on notice of economic perturbations that can neither be ignored nor remedied with the standard debt-based pixie dust. Even the permabulls are hedging their public comments and predictions, especially after both dovish and hawkish utterances from ringmaster Yellen sent markets reeling. The punditry and media deal in stories, which the unfolding debt deflation and depression are throwing off abundantly: China, Brazil, crashing commodities, big moves up and down (mostly down) in stock markets, credit spreads blowing out, bankruptcies, possible bankruptcies (Glencore) and Wise Men and Women from finance and governments opining on developments.

What the punditry, with some exceptions (see Blogroll), and the media don’t do is offer much in the way of analysis that either explains causes or predicts effects. They are a mirror into prevailing crowd psychology and emotion, but their so-called causes are generally superficial and don’t stand up to empirical verification. Their predictions are usually straight-line projections of more of whatever happens to be the current same.

That is not because the root causes of the present turmoil are too complicated and complex to ascertain. Quite the contrary, the explanation is simple. As SLL has stated since last year (see “Debtonomics: Robert Gore’s Economic Archive,” SLL) an unwind and contraction of a massive and unprecedented multi-decade debt expansion is underway. It takes no acuity to reach that conclusion, indeed it requires more effort to avoid reaching it.

Complex mental gymnastics are performed and transparently fallacious public statements are made, either to explain why what is obvious to many is not really happening, or to divert attention to irrelevant considerations. People tie themselves up in mental knots to evade reality for psychological reasons. It is not hard to understand why most avoid the debt contraction conclusion. Debt contractions, especially those that run their full course, are economically, financially, socially, and politically painful.

Debt contraction has not been allowed to run its full course since the Great Depression. Governments and central banks shot their wads rescuing the global financial system from the last one, consequently, this one will run its full course. Markets, at least in the short term, are exercises in crowd psychology. Two virtues are required for successful longer term investing: independence and patience. Although the crowd is starting to question, albeit not discard, what has passed for wisdom the last few years, the abandonment of complacency and capitulation to fear won’t happen until markets are much closer to an ultimate bottom. Indeed, such a herd reversal will be one of the telltale harbingers of that bottom. Independent and early recognition of what is transpiring—a full-fledged debt contraction—entails recognition that it will be a lengthy process.

One of the best analysts of stock market dynamics is John Hussman, of the Hussman funds. SLL has posted some of his weekly letters, most recently, “Valuations Not Only Mean-Revert; They Mean Invert,” 9/29/15. The upshot of his analysis is that markets not only revert to a mean, or average, level of valuation after a period of extreme overvaluation (e.g. the current stock market, even after it’s recent fall), but that they overshoot to a state of undervaluation, what he calls mean inversion. Markets being markets, their paths are not straight lines, but rather jagged, negatively-sloped progression within which there are substantial bear market advances, subsequently reversed. Historically, the entire progression from extreme overvaluation to extreme undervaluation can take almost two decades.

The recent demise of former market darlings health care and cable—industries encased in the government cocoons of Obamacare and net neutrality respectively—confirms that even the “best” companies, which in the crony capitalistic economy means most succored by the government, will succumb to the burgeoning debt contraction. However, both the dynamics of such contractions and Hussman’s analysis suggest that we are a long way from anything approaching a true “buying opportunity” for long-term investors. Prices have fallen and an estimated $13 trillion of global wealth has vanished. However, as Hussman notes, prices have not fallen nearly enough in percentage terms to create undervalued bargains, and there are more bankruptcies to come in commodities and across the rest of the economy. Any price above zero is too much to pay for companies whose equity is wiped out.

At this point, assuming your selling is done and you sit mostly in cash, with perhaps a little on the side for speculative shorts, the best investment advice is to be patient. It will probably take appreciably more opinion-making market downside before prominent permabulls switch to the bearish camp, the mainstream media proclaims a long running bear market, and the news is filled with dire headlines. The gloom will get so thick and one-sided that when nobody expects it, a rally will ignite. It won’t be a one-day or one-week wonder, either, it will span a month or two and will recoup a substantial percentage of the losses. The last crisis is instructive. The S&P index topped in October of 2007 and dropped for five months until a rally began, in March of 2008, that retraced half the drop. Such rallies are almost universally disbelieved when they start and almost universally embraced as the beginning of a new bull market when they end. Bullish belief had been restored in May of 2008 when that rally ended. The rest of the year was tears.

Catching the falling dagger has skewered more speculators than Vlad impaled Turks. If you are positioned correctly, stay away from nonstop news and market updates. Obsessing on the short term and watching screens tick by tick will distort or destroy your essential long-term thinking and planning. Use the time and psychological energy saved to write that great novel that everyone has inside them, or get to know your wife and kids. 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. While you will want to take profits on your speculative shorts, use the rally as an opportunity to reset those shorts at higher levels and avoid the temptation to try to scalp a few trades from the long side.

We are still at the beginning of this debt contraction and the first big move down is incomplete. Not until the next big move down, after the coming head fake rally, will recognition become almost universal that we are in a severe bear market. If you patiently preserve your fire power by ignoring the day-to-day squiggles and jiggles, your virtue will be rewarded. The invested herd will discover that there is something worse than the zero returns they so decry when they mock cash: negative returns. Deflationary depressions reprice virtually every asset class, real and financial, bestowing jaw-dropping bargains on those few who can plunk down cash on the barrelhead when the time is right. In the land of negative returns, zero will be king.

WHEN WAS THE LAST TIME YOU STAYED

UP ALL NIGHT READING A NOVEL?

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The “Hard-Landing” Has Arrived: Chinese Coal Company Fires 100,000, by Tyler Durden

Posted on September 27, 2015 | Leave a comment

Even for China, 100,000 workers is a lot of people to fire. From Tyler Durden at zerohedge.com:

The global commodity collapse is finally starting to take its toll on what China truly cares about: the employment of the tens of millions of currently employed and soon to be unemployed workers.

On Friday, in a move that would make even Hewlett-Packard’s Meg Whitman blush, Harbin-based Heilongjiang Longmay Mining Holding Group, or Longmay Group, the biggest met coal miner in northeast China which has been struggling to reduce massive losses in recent months as a result of the commodity collapse, just confirmed China’s “hard-landing” has arrived when it announced on its website it would cut 100,000 jobs or 40% of its entire 240,000-strong labor force.

Impacted by the slump in coal prices, the group saw its loss over January-August surged more than 1.1 billion yuan ($17.2 million) [$172 million]  from the year before. In the first half of 2015, the group closed eight coking coal mines most of which had approached the end of their mining lives, due to poor production margins amid bleak sales.

Chaiman of the group Wang Zhikui said the job losses were a way of helping the company “stop bleeding.” The heavily-indebted company also plans to sell its non-coal related businesses to help pay off its debts, said Wang. The State-owned mining group has subsidiaries in Jixi, Hegang, Shuangyashan and Qitaihe in Heilongjiang province, which account for about half the region’s coal production.

According to China Daily, last year, Longmay launched a management restructuring and cut thousands of jobs to stay profitable, amid the overall industry decline. However, the company still reported around 5 billion yuan ($815 million) in losses.

It has been a dramatic fall from grace for the company, which in 2011 reported 800 million yuan in profit with annual production exceeding 50 million metric tons.

Experts said staff costs remain a major reason for the company’s continued heavy losses. That, and the ongoing collapse in met coal prices of course.

To continue reading: The “Hard-Landing” Has Arrived

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Herd Extinct, by Robert Gore

Posted on September 24, 2015 | 10 comments

The crowd never thinks. People are only comfortable in a pack, and they’re most comfortable in one that’s racing off a cliff.

The Golden Pinnacle

Herd animals herd because there is safety in numbers. Even if the wolves or lions attack, they’re only going to get a small percentage of the herd. Such attacks even have an evolutionary advantage: they eliminate sick or weak members. Those who think humans are not herd animals labor under such vast misconceptions that they are beyond the reach of SLL.

One herd, Wall Street-Washington economists, surpass wildebeests and sheep. Their behavior, because it is so uniform, can easily be described. Membership in one of two subspecies is required: Keynesians or monetarists. Both have long histories of predictions that didn’t predict and policy remedies that didn’t remedy, but they all believe because they all believe. Intellectual foundations this shaky increase individual and group insecurity, so they base their work on the same set of statistics emanating from the government. The government’s assumptions, methodologies, and conclusions are never questioned, except by outcasts from the herd. After all, those assumptions, methodologies, and conclusions come from the herd itself.

The instinctive defensive tactics of the herd are the consensus and the wavering straight line. Economists are well aware of the expectations and predictions of other economists, and tend to cluster tightly around a given consensus. Occasionally an economist will deviate by a quarter or a half of a percentage point from the consensus, instead of the usual range of a tenth of a percent either way. It is thought by those who study these matters that this exaggerated and ostentatious display of independence can, if done only occasionally, make the individual stand out and thus promote advancement within the herd. Or perhaps it’s to attract a mate. Further study is required.

The wavering straight line projects the most recent past into the future. It is considered good form not to make perfectly linear projections, thus the “wavering.” The standard projection will be: We (as herd animals, plural pronouns are preferred) see GDP increasing from 2.2 to 2.4 percent this quarter. Or: We see inflation moderating from .3 to .2 percent. It is also considered good form to make projections that show increases in desirable variables and decreases in undesirable variables. What is not good form is to predict a clean break, a clearly nonlinear outcome, especially if it can be characterized as negative (e.g., the economy is headed into recession). Such a prediction will lead to expulsion from the herd, unless the prediction is correct, in which case the predictor will be killed.

The herd has called for an imminent “lift off” in the US economy, and it has been doing so for six years. During that time the US government has issued unprecedented amounts of debt (Keynesianism), the Federal Reserve has engaged in unprecedented debt monetization and interest rate suppression (monetarism), and the US has been unable to achieve even one year of the 3 percent annual growth that used to be routine. The herd has responded by either calling for more debt, monetization, and suppression, or positing that for some reason there have been structural changes in the US economy that have led to “secular stagnation.” The herd has not explored the possibility that all that debt, monetization, and suppression are part of the problem rather than the solution. Herds never question their own articles of faith.

However, just as the more astute and aware sheep and wildebeests will sense the wolves and lions stalking the herd, a few of the economists sense something amiss. Slow growth may not give way to lift off, but rather recession, or worse. Ominous portents are piling up.

Assurances have been given that the carnage in natural resources will remain contained, echoing assurances made in 2006 and 2007 concerning housing and mortgage finance. However, there has been no V-shaped recovery in oil, natural gas, copper, coal, fertilizer components, zinc, nickel, and other natural resources; the prices of many are still going down. Producers are reluctantly concluding that no happy outcomes are in the offing. Projects are being shelved and inventories and other assets dumped on the market at whatever prices they can fetch. Glencore, the Swiss mining company, has halted production at two huge African copper mines and pledging to sell up to $10 billion to cut its debt. It’s no sure thing that the company will survive; the exploding premiums on credit default swap (CDS) protection for its debt indicate substantial credit-market doubt.

Cutting debt has become all the rage. If you wanted to put together a fracking firm, now would be the time to do so. Prime drilling rigs and properties are available cheap as debt incurred when oil was $100 a barrel weighs heavily now that oil is in the forties (“Shale Drillers Turn to Asset Sales as Early Swagger Wanes,” by Bradley Olson, SLL, 9/11/15). Oil and gas producer Samson Resource Corp., midwifed by private equity firm KKR, just filed for bankruptcy. KKR and its partners will take a $4.1 billion hit, not chump change even for KKR. And so the not-contained carnage in natural resources ripples out in all directions. The losses inflicted on creditors are just one of the more obvious ripples.

The debt-fueled Chinese “miracle” is over. China was the engine of global demand on the way up; it’s at the epicenter of debt contraction on the way down. It was the dream of perpetual Chinese hyper-growth that led so many companies to take on debt and ramp up capital spending and production. China has built infrastructure and whole cities on spec, debt-funded malinvestment on command and control steroids. Even communists have their “uh oh” moments, when they realize that something has to give. Let a thousand, or a million, or a billion, debts contract. China’s demand is dropping like a stone and it is exporting goods—steel, aluminum, and diesel—that for years it imported. Everyone knows that its claimed 7 percent growth is fiction, but nobody knows what the real number is. Lurking within the state-dominated banking system is a lot of rancid debt. The cherry on the sundae: last year the government promoted a margin-fueled stock bubble that has now burst.

Not surprisingly, the money that flowed into China from trade surpluses and foreign investment has reversed as well, pressuring the yuan’s exchange value. In a stark illustration of the Command and Control Futility Principle (governments and central banks can control one, but not all variables in a multi-variable system), China needs to lower the yuan’s value to remain competitive in global trade, but needs to raise its value to keep capital from fleeing. It recently undertook a token devaluation against the dollar that precipitated global financial panic, but at the same time it has been selling some of its hoard of US Treasury debt to buy yuan to support its value. The Chinese government has made schizophrenia official policy because it is impotent against the great global debt contraction now underway. It feels compelled to do something because governments always do something, invariably making matters worse.

The Chinese ramifications aren’t ripples; they’re shockwaves. Brazil, its economy grown dependent on exports to China, has entered recession; had its debt rating knocked down to below investment grade; seen its currency make new lows almost daily, and has been rocked by a scandal implicating much of its elite—including President Dilma Rousseff, whose approval rating is a single digit—and the national oil company, Petrobras, upon whose massive debt, much of it dollar-denominated, traders are making book on bankruptcy. Brazil is the poster child for many China-dependent emerging market nations.

Will the world pull out of this debt contraction? Will plunging high-yield, equity, commodity, and emerging market currency markets reverse course? Can governments and central banks save the day? Will the economic tsunami miss US shores? Not a chance, not a chance, not a chance, and not a chance, no matter how many mainstream economists swear otherwise on their stacks of Keynes and Friedman.

World trade volumes and shipping rates are going from new lows to new lowers. In credit markets, the interest spread between what the US Treasury and bank borrowers of Eurodollars pay (a measure of bank risk) is growing, junk bond yields are rising, CDS spreads are widening, and default rates are notching up, tolling bells for other markets, especially equity markets. (The same things happened in 2007; the following year was not a good one for equities). Stock markets have sold off since the head of the world’s most important central bank put a dovish spin on her announcement that free money would not be terminated; the black magic no longer works.

In the US, second quarter S&P earnings growth was negative, even while corporations spent 108 percent of their free cash flow on dividends and buybacks (“Why Stocks Are Sliding: For The First Time Since 2009 Spending On Buybacks Surpasses Free Cash Flow,” by Tyler Durden, SLL, 9/23/15). Nothing offers a connect-the-dots illustration better than industrial bellwether Caterpillar, which makes many of the machines used around the world to extract minerals and build buildings and infrastructure. Today, after 33 straight months of declining year-over-year sales, it announced it will lay off 10,000 workers.

While the broad contours of what’s to come are visible, the details will only emerge over time. There is one certainty. When things have gotten considerably worse, a panicked cry will sound from the economist herd: Nobody could have seen this coming! It is to be hoped that it sounds just before they run off a cliff, extinguishing the species.

STEP OUT FROM THE HERD

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The Next Financial Crisis Won’t be Like the Last One, by Charles Hugh Smith

Posted on September 15, 2015 | Leave a comment

From Charles Hugh Smith at oftwominds.com:

It seems increasingly likely the next Global Financial Meltdown will arise in the FX/currency markets.

Central banks are like generals: they tend to fight the last war. The Great Financial meltdown of 2008 was centered in too big to fail, too big to jail transnational banks and other financial entities with enormous exposure to collateral risk (such as subprime mortgages), highly leveraged bets and counterparty risk (the guys who were supposed to pay off your portfolio insurance vanish in a puff of digital smoke, leaving you to absorb the loss).

In response, the central banks and treasuries of the major economies “did whatever it took” to save the private banking sector from insolvency and collapse. In effect, central banks launched a multi-pronged bailout of banks and other financial heavyweights (such as AIG) and hastily constructed a clumsy and costly Maginot Line to protect the now-indispensable private banks from a similar meltdown.

The problem with preparing to fight the last war is that crises arise not from what is visible to all but from what is largely invisible to the mainstream.

The other factor is what’s within the power of central banks to fix and what’s beyond their power to fix. Correspondent Mark G. and I refer to this as the set of problems that can be solved by printing a trillion dollars. It’s widely assumed that virtually any problem can be fixed by printing a trillion dollars (or multiple trillions) and throwing it at the problem.

Yes, the looming student-loan debacle can be fixed by printing a trillion dollars and paying down a majority of the existing student debt.

But lots of other problems are not fixed by printing a trillion dollars. Printing $1 trillion can pay for a lot of make-work jobs, but that’s not the same as boosting employment in a sustainable, organic fashion.

The ocean’s fisheries will not magically come back from being stripmined if a central bank prints $1 trillion. If the $1 trillion is spent wisely, perhaps in a decade or two fisheries can recover. But neither employment or ecosystems can be “saved” by printing money and throwing it at the usual vested interests.

So what else is beyond the easy fix of a quick $1 trillion printing/bailout? How about the foreign exchange (FX) market? Many a government and central bank has attempted to fix the foreign exchange market, but they fail for the simple reason that the FX market is too large to control for long.

To continue reading: The Next Financial Crisis Won’t be Like the Last One

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Say Goodbye to Normal, by James Howard Kunstler

Posted on August 31, 2015 | Leave a comment

Today’s prize for an apocalyptic vision goes to James Howard Kunstler at kunstler.com:

The tremors rattling markets are not exactly what they seem to be. A meme prevails that these movements represent a kind of financial peristalsis — regular wavelike workings of eternal progress toward an epic more of everything, especially profits! You can forget the supposedly “normal” cycles of the techno-industrial arrangement, which means, in particular, the business cycle of the standard economics textbooks. Those cycle [SIC} are dying.

They’re dying because there really are Limits to Growth and we are now solidly in grips of those limits. Only we can’t recognize the way it is expressing itself, especially in political terms. What’s afoot is a not “recession” but a permanent contraction of what has been normal for a little over two hundred years. There is not going to be more of everything, especially profits, and the stock buyback orgy that has animated the corporate executive suites will be recognized shortly for what it is: an assest-stripping operation.

What’s happening now is a permanent contraction. Well, of course, nothing lasts forever, and the contraction is one phase of a greater transition. The cornucopians and techno-narcissists would like to think that we are transitioning into an even more lavish era of techno-wonderama — life in a padded recliner tapping on a tablet for everything! I don’t think so. Rather, we’re going medieval, and we’re doing it the hard way because there’s just not enough to go around and the swollen populations of the world are going to be fighting over what’s left.

To continue reading: Say Goodbye to Normal

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The Shape of Things to Come, by Robert Gore

Posted on August 28, 2015 | 11 comments

Historical Natural Gas Prices - Natural Gas Price History Chart

Historical Natural Gas Prices - Natural Gas Price History Chart
Take a look at this natural gas price chart. Natural gas made its all-time high in 2008 at just above $13 per million British Thermal Units (BTUs). With the advent of natural gas fracking, money had poured in as the price rose, leading to an excess of supply. By September 2009, exacerbated by the financial crisis, the price had collapsed to below $3 per million BTUs. Since then, it has had two bounces to $6, but its nearby future closed Friday at $2.72 on the Nymex, and spot natural gas can be had for less than $1 at the most productive US natural gas field, the Marcellus Shale. At those prices nobody is making money in natural gas. Producer Quicksilver Resources filed for Chapter 11 bankruptcy in March, and much larger Samson Resources has scheduled a bankruptcy filing for September 15.

 

This is not an analysis of the natural gas market, but rather an explanation of why it’s price graph will be the shape of things to come, not just for natural resources, but for manufacturing and equities. At first, natural gas’s price rose even as a flood of capital was expanding production, precursor to what occurred in oil and other natural resources several years later. In a free market, speculative capital would have been attracted to the possibilities opened up by natural gas fracking. In a world in which central banks have for decades supplied more debt at cheaper interest rates than what would have prevailed in a free market, that flow of capital was amplified. Consequently, so too was the number of natural gas rigs put in operation, the amount of natural gas produced, and the subsequent crash in price. The same can be said for the progressions that came later in oil, iron ore, aluminum, coal, copper, and other extractive industries.

Abnormally cheap, abundant debt does not just distort supply, it distorts demand. The number one distortion is China. It has been on a multi-decade debt binge that has fueled capital spending, manufacturing, production, and an infrastructure build-out. China sucked in raw materials from all over the world, notably Latin America and Australia.

In the US and Europe, government and private debt primarily funded consumption, financial debt went into speculation, and corporations borrowed money to fund share buy backs and dividends. China and oil exporting nations engaged in vendor financing, recycling their trade surpluses into the debt of nations buying their exports. It was a virtuous circle of sorts: production of all manner of natural resources and manufactured goods, amped up by cheap debt, found end markets in countries where consumption had been amped up by cheap debt.

Total world debt increased far faster than the underlying growth rate of the global economy, which meant that assets and income streams became increasingly encumbered by debt claims. It also meant that despite low interest rates, the burden of debt service increased, exerting an ever-heavier drag on the real economy. A broad-based transition from debt expansion to debt contraction first manifested itself in commodities in 2014. The graphs for many natural resources took on the grim aspect of the above natural gas chart after 2008; their prices crashed.

Just as with natural gas, crashing prices impaired and in some cases impaled the ability of indebted producers to service their debts. Credit spreads in the natural resource sector have blown out. Several coal producers and oil fracking companies have gone bankrupt and more will follow. Contraction and financial stress are moving up the production chain. There are already gluts in steel and autos, and the bulk of growth registered in US GDP in the first and second quarters has been due to inventories building. Production cutbacks and layoffs are coming, followed by reductions in consumption by the newly unemployed and further cutbacks and layoffs.

Take another look at the natural gas chart. It’s been over seven years since the price topped out, and it is still only about 20 percent of what it was then. In the bad old days of something closer to dog-eat-dog free market capitalism, downturns were vicious, but they were comparatively short. Gluts in raw materials and crops, intermediate and finished goods, and employment were fixed by falling prices and wages, liquidation and bankruptcy, and newly cheap assets moving from the weak and indebted to the strong and solvent. The depression of 1920-1921 is the most recent example. It was brutal, but it was also over in less than two years (see The Forgotten Depression: 1921: The Crash That Cured Itself, James Grant, Simon and Schuster, 2014) as the government and the Federal Reserve sat on their hands. (The Fed actually raised rates!)

In today’s no-pain-allowed environment, it took seven years before two natural gas producers even went bankrupt. The chart illustrates the harm from the Fed’s ultra-low interest rates, now in their 80th month. They have been perpetual life support for terminally-ill companies for whom the machines should have been turned off long ago.

If you’re looking for when natural gas and other commodities might “recover” and regain their former highs, consider the Japanese stock market. Way back on December 29,1989, the Nikkei 225 made its all-time intra-day high at 38,957.44 and dropped for almost 20 years, 81.9 percent to 7054.98 on March 10, 2009. After rallying strongly the last two years, the Nikkei closed Friday at 19,136.32, which means that it still has to rally over 100 percent to regain its 26-year-old high. Nobody has gone in for government indebtedness, central bank monetization of assets (the Bank of Japan now buys equity ETFs as well as most of the government’s debt), and keeping zombie companies alive as long and with as much fervor as the Japanese, but nobody would argue that these nostrums have done anything but prolong the pain.

With governments’ and central banks’ “help,” the prices of natural gas, other natural resources, goods, and labor may remain depressed for years to come. As the greatest debt bubble in history unwinds, attempts will continue to forestall or prevent markets from making their painful, but necessary adjustments, However, gravity can only be fought for so long. With contraction and falling prices becoming the order of the day in the real economy, it takes a triumph of hope over experience to think financial assets will be immune. Bid farewell to the S&P’s all-time intraday high of 2134.72 on May 20, 2015. It may be a long, long time before the index sees that level again.

THE BEST WAY TO UNDERSTAND THE FUTURE

IS TO UNDERSTAND THE PAST. READ ROBERT GORE’S

MAGNIFICENT HISTORICAL NOVEL!

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He Said That? 8/27/15

Posted on August 27, 2015 | Leave a comment

From Murray Rothbard, American economist, from an article, “Reliving the Crash of ’29,” first published in Inquiry, November 12, 1979:

But there is another vital and very different problem. Given the crash, why did the recovery take so long? Usually, when a crash or financial panic strikes, the economic and financial depression, be it slight or severe, is over in a few months or a year or two at the most. After that, economic recovery will have arrived. The crucial difference between earlier depressions and that of 1929 was that the 1929 crash became chronic and seemed permanent.

What is seldom realized is that depressions, despite their evident hardship on so many, perform an important corrective function. They serve to eliminate the distortions introduced into the economy by an inflationary boom. When the boom is over, the many distortions that have entered the system become clear: prices and wage rates have been driven too high, and much unsound investment has taken place, particularly in capital-goods industries.

The recession or depression serves to lower the swollen prices and to liquidate the unsound and uneconomic investments; it directs resources into those areas and industries that will most-effectively serve consumer demands — and were not allowed to do so during the artificial boom. Workers previously misdirected into uneconomic production, unstable at best, will, as the economy corrects itself, end up in more secure and productive employment.

The recession must be allowed to perform its work of liquidation and restoration as quickly as possible, so that the economy can be allowed to recover from boom and depression and get back to a healthy footing. Before 1929, this hands-off policy was precisely what all US governments had followed, and hence depressions, however sharp, would disappear after a year or so.

https://mises.org/library/reliving-crash-29-0

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Get It Right, by Robert Gore

Posted on August 23, 2015 | 9 comments

The deflationary depression upon which the world has embarked has two central themes: debt, and the inability of government and central banks to control multiple variables and consequently, outcomes. Viewed through these prisms, everything that has happened and will happen is readily comprehensible.

The received wisdom before last week’s US stock market plunge was that China’s economic and financial problems would remain local. After the plunge, the revised received wisdom is that it’s all China’s fault. Neither analysis is correct. China has entered a debt contraction after one of the greatest, if not the greatest, debt expansions in history. Its problems are exacerbated by its lack of freedom and its command and control government (they’re communists, after all), which stands revealed as unable to dictate economic outcomes. It has its fingers crossed that its inability does not cross over into the political realm, probably a vain hope.

The US has entered the same debt contraction phase as China—just a few months later—after a debt expansion that dates back to the 1960’s, when Presidents Johnson and Nixon opted for guns and butter on the installment plan. Nixon cut the last fiscal tether to reality in 1971 when he closed the gold window. The US’s problems will not be solved by the command and control ministrations and manipulations of its government and central bank, any more than China’s have been.

Governments and central banks are the problem, not the solution. The market-based solutions of debt contraction, asset repricing, insolvency, bankruptcy, reorganization, economic contraction, reduced consumption, and unemployment are not planks of a platform designed to win next year’s US election or quell Chinese unrest. They will, however, happen regardless of who’s running things in either nation. The one certainty is that the powers that be in both nations will make matters worse.

The incompetence of governments and central banks renders absurd the debate about whether the Federal Reserve will abandoned its hinted-at plan to raise the federal funds rate target next month. For SLL’s money, it will not raise the rate in the face of crashing economies and financial markets; we’ll probably see the next iteration of quantitative easing before year’s end. And for SLL’s money, it won’t make a bit of difference what the Fed does. At the first hint that the rate won’t be raised we’ll see one of those one- or two-day wonder rallies that crucify the shorts. In the long run, it will be an almost imperceptible upward squiggle on a stock chart that bears a striking resemblance to that of the last crisis (except this one will have a steeper negative slope and a more precipitous drop).

Governments around the world are racing to make things worse as debt unravels. Financial markets, no longer faithful lap poodles, are registering the carnage. Currencies are being competitively devalued in a less-than-zero-sum race to the bottom that will have no winners, but which will impoverish citizens of any nation that imports anything. Repayment by governments and corporations of foreign currency debt becomes increasingly problematic as economies shrink and domestic currencies depreciate.

Economic contraction is killing exports for raw materials and finished goods, outweighing the transitory benefits from currency depreciation. Local stock markets have tended to follow local currencies, so it’s turning into a rough year for emerging market investors. Widening credit default swap spreads and rising interest rates indicate that it’s also going to be a rough year for emerging market creditors (see “This Is Not A ‘Correction’……..It’s The Beginning Of The Global Bubble Unwind,” by Doug Noland, SLL, 8/22/15). Emerging market travails should occasion no smugness among more developed nations. The former’s problems are the leading edge to which the latter will catch up.

SLL readily confesses to two systemic errors. SLL has always underestimated the desperate lengths governments and central banks will go to sustain the unsustainable. During the last financial crisis, SLL would have taken the other side of bets that: the Fed’s balance sheet would expand by four times; the ECB would do “what ever it takes” to keep the European afloat, including allowing as collateral all sorts of garbage debt; central banks would promote negative interest rates; China would go on its massive debt binge, and Japan’s central bank would monetize everything, including equity ETFs.

Nevertheless, all these things happened, which brings up SLL’s second systemic mistake: underestimating the willingness of financial markets, speculators, and investors to play along with incompetent, counterproductive market manipulation and economic policy. Perhaps no chart is more telling in this regard than one tracking the closely correlated size of the Federal Reserve balance sheet and the S&P stock index, even as the economy experience its weakest “recovery” since WWII. SLL predicts that correlation will soon be broken, but there is no denying that it has persisted for over six years, or about three years longer than SLL thought it would.

The looming financial and economic debacle will put those mistakes in the rear-view mirror, although new SLL mistakes will undoubtedly be made further down the road. For the time being, there is no need to make things complicated. We are in a debt contraction and economic depression that will be marked by widespread deflation in assets prices of all stripes. Virtually everything governments and central banks do to forestall or prevent these inevitable outcomes will only make things worse.

For those who are prepared and who get it right intellectually, there will be comic, even hilarious, moments. For example: as markets and economies crash, a long overdue comeuppance is at hand for maladroit, corrupt, rapacious elites. Hard as it is to believe, those who maintain that the bad guys and gals never get what’s coming to them may be too cynical. Picture politicians, central bankers, lobbyists, crony capitalists, and other scum in the dock or the hoosegow. To borrow from Oscar Wilde, you would have to have a heart of stone to witness such “tragedies” without laughing. If nothing else, satire flourishes during hard times, so the coming years should be a Golden Age. In addition to commentary and analysis, SLL will try to supply some of the laughs.

THE BEST FAMILY SAGA, HISTORICAL NOVEL OF THE INDUSTRIAL REVOLUTION PUBLISHED THIS CENTURY

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He Said That? 8/21/15

Posted on August 21, 2015 | Leave a comment

From Neil Dwane, head of European equities at Allianz Global Investors, which oversees €412 billion ($463 billion) of assets:

Commodity markets are telling us this is quite serious.

If Mr. Dwane had a clue, his statement would have read: “Commodity markets have been telling us this is quite serious.” Like most mainstream economists he had no idea that crashing commodity markets since last year were signaling financial turmoil, economic contraction, and falling asset prices. SLL and other sites have been calling falling commodity prices the canary in the coal mine for months (see “Oil Ushers in the Depression,” SLL, 12/1/14). His “quite serious” also manages to understate the dangers of debt contraction and its attendant consequences after the largest credit expansion in history. Multiple and interrelated bubbles popping in a world with over $200 trillion in debt promises to be no less than earthshaking (see “Crisis Progress Report (10): Bust,” SLL, 8/21/15).  Whatever Allianz Global Investors is paying Mr. Dwane, it’s too much. Investors should consider being among the first to remove their money from the €412 billion the firm oversees.

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