When Will We Learn? ... Apparently no time soon

Let me start by apologizing for not blogging in quite some time. I know one of the regular rules of being a successful blogger is doing regular entries. Nonetheless, I have been in a state of disbelief for some time and have not felt like speaking out. To be honest, I have questioned dearly whether my pessimistic predictions are totally off base. After all, the stock market since the March 9 lows has been rather consistently skyrocketing, sales this holiday season seem decent, manufacturing indicators seem on the rise and housing seems to have stabilized, if not improved, in most regions, so what is there to be down about? Well, let's talk.

I will begin again by saying I am not a perma-bear. I love a good bull market and love to do trading into them. But I want a true bull, which means things are improving fundamentally over the mid-to-long term. Still, I admit to some day trading during the dot.com bubble and making some profits there. It was a fun ride while it lasted. If you rode that ride I ask you to look back and see where the Nasdaq was then versus today. Almost a decade exactly ago it was around 5000, whereas today it is a little over half of that. So you say, this is but a small blip in the market history and we will return to normal soon. So let us look at Japan a moment.

I recall in the early 80s being highly disturbed about how the Japanese were taking over the U.S., buying up all our landmarks and quickly becoming the number one economy. The U.S. was in a mild state of shock/awe that we could be taken over economically so easily, but Japan beat us at our own game. And then their bubble burst as well. The Nikkei 20 years ago was roughly four times as high as it is today. And this is not for a lack of trying. The Japan government has been spending excessively to revive the economy there. So much so that predictions are the debt will reach 246% of the GDP in the years to come. To put that in economists' terms, they have a whole world of hurt ahead of them.

http://www.calculatedriskblog.com/2009/12/japan-twenty-years-later.html

Undoubtedly the U.S. can never go that far into an economic abyss - - right? Well, I hope so, but in my view our reaction to this recession has been very poor, even disastrous. Why do I say this?

You do not need a doctorate in economics or finance to understand that when you have too much debt the answer is the cut back, spend less and pay down the debt. Not fun, but necessary. Yet the Administration has been hell bent on getting us to spend and do so while increasing debt. I have no idea why other than a political desire to create the short-term appearance of a recovery. That is absolutely all it will do as in the mid to long term it is highly problematic.

It does also not take a degree to understand that a country cannot survive by simply buying things. We need some productive, fruitful endeavors. Spending money to buy stuff is not a productive endeavor. Yet 70% of our GDP has been just that, buying stuff. Moreover, we have bought this stuff with credit, increasing our enormous debt load.

So let's return to some basic math. Tax receipts from individuals are down just under 30% YOY. Now there are several variables here but I am going to assume that a 30% reduction in tax receipts equates roughly with a 30% reduction in income. This is on an individual basis as on a corporate level there are no tax receipts at all as they are generally losing money. So if income is down, be it 30%, 20% or even 10%, how can the stock market and economists be signaling a grand recovery? If consumer spending is 70% of GDP and consumer incomes are down around 30%, how can the GDP be sustained?

http://seekingalpha.com/article/180174-the-coming-economic-nightmare-part-1

There are only two possible answers. First, we are incurring more debt to buy stuff. With mortgage rates low and a lot of refinancing taking place this is possible, though certainly not sustainable. Second, we are purely doing this off of government stimulus, which is what the stimulus is meant to do. So I have to ask, is spending built on government stimulus a good thing? Well, I suppose if it works to restart the economy, yes. But I tend to think with the record levels of private debt load in this country and others, stimulus spending cannot stimulate what does not and cannot exist. Just like Japan is learning, we have spent our wad and need to hunker down, pay down debt and perhaps do something called saving. This will take many years and the government throwing money at it only makes the situation worse, not better.

Why worse? Because the government is running up massive debt and our creditors are not real happy right now. Now we built most of this debt propping up the jerks that caused the problems and that makes me sick, but that aside we have a massive public debt problem building in this country. The sovereigns who have been buying our debt are increasingly less willing to do so and increasingly shifting their investments to short term investments. This enables them to pull the plug faster and from what I can see they are in the process of pulling the plug. If, when, this happens the new bubble we are building will burst. There are plenty of other pins around this bubble that might burst it, but this is one of the sharpest.

So as the new year arrives, all I can say is to be careful out there.

Disclosures: None.