Kicking the Can - Some Things Never Change

I was just looking back at some of my old posts that made it to Seeking Alpha.  Here is one from May 7, 2010 that was a bit prescient, if I do say so myself, and still in my view 100% on target.  There are a few references to Greece in there, for those who are counting, including a prediction it would eventually default or need a debt haircut as its debt load was simply unsustainable.  Ah, but no one listens to me.  I repeat it in full below:

Once Again, Kicking the Can Down the Road

May 7, 2010 2:48 AM ET  |  2 comments  |  Includes: DIA, QQQ, SPY by: Craig Brown

 

So while sitting at a conference in NYC, one of the speakers noted that his partner just emailed him that the Dow was down over 900 and the partner was wondering what he had done in NYC to cause this. Everyone chuckled and everyone pulled out their respective mobile devices to see if it was true and not just a joke. After all, I looked before I went to the conference on Thursday morning and futures were pretty much flat, but he was not joking about the Dow. I responded,"Wow, I did not see that coming."

Well, actually, I did. I have seen it coming since March 9, 2009, when the market started its incredible climb off the recession lows. I was not sure exactly when, how or what the precipitating event would be, but looking at fundamentals it was just a matter of time. Now everything could be honky dory tomorrow or next week. I have totally given up trying to figure the market in the short to medium term as there are simply too many variables to consider, but I am still a bear in the long term and my investment strategy this year has totally focused on long term fundamentals.

The world debt problem has not been corrected. It has shifted to government coffers in many countries but is still there. Greece is one somewhat extreme example of it, but is by no means alone. This is a worldwide problem and few countries are immune. Even the "immune" countries, i.e. those with no real internal debt issues, are going to feel it as trading partners suffer. It ain't going to be pretty folks.

So what happens next? Undoubtedly governments in Europe, the U.S. and elsewhere will put new assurances in place that everything is fine to calm the markets. Perhaps a few billion more here or there will be spent to calm fears and we will have a recovery of sorts from the current anxiety. The VIX will go back down, credit markets will calm and all will be fine - at least on the surface. But then we will catch up to that damn can again. Each time it seems the can gets bigger and heavier and we cannot kick it as far as last time. When we catch up we will try to kick it again and will probably succeed a bit, but eventually we will not. Eventually it will be time to pay for our foolishness. Greece is already there and some other countries are not far behind. Eventually, virtually all of us will be there-- including the good old U.S. of A.

You see, this is what happens when you do not take your medicine. When you do not try, in an orderly fashion, to dismantle corrupt companies that caused the problem and do not deserve to survive, and instead spend hundreds of billions to keep them alive, continuing to do a lot of the same stuff that got us here. This is what happens when you try to solve a debt crisis with more debt. This is what happens when you have policies in place that promote people, corporations and governments living wildly beyond their means. This is what happens when you focus on short term gains over long term stability, which we have easily done for at least a generation.

So here is where I see things unfolding. As noted above, given the market woes this week, you will see some government support coming out; it could be the EU, IMF, U.S. or whoever, but some, probably many, officials will be making a lot of public statements on how the situation is controlled and Greece will be fine. The folks in Greece will, meanwhile, continue to riot as their lifestyles just got flushed down the toilet. Mind you, none of us would like this to happen to us, so I understand, but the truth is they made their bed - we all did. Greece will then be followed by other countries facing the same situations. It could be the other PIIGS, it could easily be the UK or the U.S., or it could be Japan. We could also see a bubble or two soon popping in China. There are so many ifs here no one can say, but I can say I do not see many rosy scenarios.

Debt is only going away if either those owing - either individuals, companies or governments - default, modify, or pay it down. I think default is in the long term cards for Greece and a few other countries, as the people simply will not live with the relatively long term pain of paying down the debt. The middle ground of some negotiated modifications, i.e. haircuts, is certainly possible and probably a good middle ground, but that still will cause some havoc in the markets as a lot of financial institutions - you know, the ones we just saved - hold a lot of this public debt. It is going to be painful any way you look at it.

So what do we do in the U.S.? It is not rocket science folks. Dismantle companies that should not survive. Put in place policies that promote people spending less, paying off debts and, God forbid, saving some money. But politicians cannot fathom this. If people spend within their means we cannot possibly support an economy built on excesses. The housing market depends on people spending beyond their means. Retailers do too, as do all those commercial real estate landlords. We would most certainly suffer a long and hard recession. It would be absolutely horrific if we have to live within our means as our U.S. economy would take a hit of several percentage points on the GDP. We, like those in Greece, do not have the tolerance for such financial pain. After all, we love our stuff. I am not immune, I love my stuff. I do not want to live without my stuff. No one does. And so, we incur more government debt and we kick the can again.

I don't know about you, but my toe is beginning to hurt.

It Was A Terrible, Horrible, Awful Economic Time in the U.S.

Walk with me as we think back to a rather unpleasant economic time here in the United States.  Virtually a million people all stopped working, looking for work or lost their full time jobs in a single month.  Factory orders dropped monthly over 5% month-after-month-after-month-after-month . . ..  Countries around the world were suffering equal or worse economic demise, unable to pay their staggering debts and with vast unemployment exceeding 25% in numerous places and over 50% for the young and eager to work.  The economic bastions of old were virtually all in decline and struggling to find answers.  The year - 2015.

The following link to an article by Lance Roberts is interesting as a whole but I focused on the second point about employment.  While part time employment went up in June nicely, full time jobs declined nearly 350,000 and a staggering 640,000 dropped out of the workforce altogether, which accounted for the lowering of the U-3 unemployment rate to 5.3%.  Yes, a dropping unemployment rate can be a bad thing if it is measured like U-3 is measured.

http://seekingalpha.com/article/3301655-3-things-valuations-employment-sectors?ifp=0&app=1

On the factory orders front, here is an interesting post on Seeking Alpha that is an eye-opener regarding factory orders.  They have been solidly in one direction this year - down.  Say what you want about other supposedly rosy numbers, if people ain't buyin' it they ain't buidlin' it and from these numbers, not much is being built.  Now this is in part due to inventory buildups in the rosier past of 2014, but reality should have set in for businesses long before now.  Down 8% in May and a six month average of down 5.5%.  This is consistently bad.

http://seekingalpha.com/article/3301425-factory-orders-fall-now-8-percent-economists-unconvinced

Now we just need to wait and see how long it takes the U.S. stock markets to start dealing with these realities.  They know the realities, but they also have ZIRP and lots of hedge funds soaking this rally for everything they can while they bow out (and short out).

Bush v. Clinton

There is a reasonable chance that next year we will see another Bush v. Clinton battle.  On the highly erroneous, not saying it is so, have absolutely no support for it, totally made-up, what if category of discussion, let me hypothesize that the present Bush and Clinton perform in the Oval Office similarly to their family members.  After all, Jeb is of the same blood as the other two and was raised by the same parents as W with likely similar values being instilled.  And Hill is - well - she does have the same last name and is married to the guy, so just play along and assume she performs like him (and I mean in the Oval Office, not the bedroom. Okay, okay, so he probably did that in the Oval Office too, but you know what I mean).  Assuming - and you know what it means to assume - that this is the case, let's look into the crystal ball and see what is in store.

Let's start with private sector employment, shall we.  The two Bushes were collectively in office 12 years.  They collectively added - drum roll please - 1,047,000 private sector jobs.  That is a whopping 87,250 jobs per year.  Billy, in eight years, did a little better, adding 20,957,000 private sector jobs, averaging 218,000 per month.  Just a sliiiiight difference here.

http://www.calculatedriskblog.com/2015/07/public-and-private-sector-payroll-jobs.html

Deficit

Now we are off looking at ye old deficit spending.  GHW added $1.554 trillion during his four years and his son W added a whopping $5.849 trillion, for a total over 12 years of $7.403 trillion, which is .617 trillion per year.  Bill added $1.396 trillion in his eight years, or .237 trillion per year. 

http://useconomy.about.com/od/usdebtanddeficit/p/US-Debt-by-President.htm

Keep in mind folks that his is a Bush vs. Clinton discussion, not a Republican vs. Democrat discussion.  If you want to go there, Democrats should not be getting on their high horse just yet as Obama has spent $6.167 trillion through 2014 and has another two years of damage to inflict.  And though Obama's job creation has been better than the two Bushes, me thinks the last year and a half of his second term could change that quite a bit.  And, let's not forget, his job creation has been meager at best anyway given it is virtually all low paying part time jobs.

 

Greece is Small Potatoes

Well, everyone seems to be so captivated with little old Greece that no one seems to have noticed a slightly bigger problem - China.  Let's compare.  Greece at the end of 2013 (and it has vastly slid downhill since) captured .30% of the world GDP.  China, just a tad more at 15.4%.  For you math whizzes in the audience, that puts China GDP at over 50 times that of Greece.  One might surmise from this that problems in China may mean a bit more to us here in the U.S. than problems in Greece.  Long term, problems in Greece could be the first domino in festering issues in the EU rearing their ugly head and that is the true danger there and eventually here as well, but for the immediate future, the second largest economy in the world deserves more focus.

And as I was thinking about China not getting the attention it deserves just yesterday, I saw two articles today on the very same point, including this one by Lance Roberts, who I like to follow in Seeking Alpha:

http://seekingalpha.com/article/3296315-chart-of-the-day-is-china-sending-a-warning?ifp=0&app=1

If you did not notice, China is officially in a bear market and, despite some strong government intervention this weekend in terms of a reduced rate and reserve requirements, it is still struggling this week.  It lost 5% yesterday and as I write is down at the start of Thursday, complete with a whole lot of volatility.

I will not drone on about all the problems China is facing, but suffice it to say it does not have a booming economy right now to save the day, so things are quite likely to get a whole lot worse before they get better.  Simply couple that with EU problems and a less than stellar economy in the U.S. to support its highly overvalued market and you get the picture.

Update 7.2.15

Over four hours of trading left for Friday in China and the Shanghai market is down another 5% already, bringing the total drop to more than 27% and counting.  Lots of bubbles around and China is the porcupine in the room.

Update 7.3.15

And here is Zero Hedge noting much of the same.  He gives nice specifics on government attempts to stop the slide, including suspending some short sellers, i.e. the only ones making money in China, and launching an investigation into suspicious and possibly illegal market manipulation - like everything was above board and not suspicious at all during the markets meteoric rise.  And I hope he is right in believing brokerages will not utilize the new margin lending process that allows investors to use their house as collateral.  They are letting investors now use their house to support margin buying - seriously!!?

http://www.zerohedge.com/news/2015-07-03/chinese-stocks-plummet-despite-government-threats-shorts-europe-lower-us-closed

And to put it in perspective, David Stockman notes that the Chinese stock market in the past three weeks has lost in value 10 times the entire GDP of Greece.  Referendum that.

http://davidstockmanscontracorner.com/chinese-stocks-just-lost-10-times-greeces-gdp/

"Unemployment" Finally Explained

I saw this at Zero Hedge and had to share it.  The best explanation ever for the officially cited "unemployment" numbers in the U.S.

h/t Feral Irishman via Jim Quinn's Burning Platform blog,

COSTELLO:  I want to talk about the unemployment rate in America  .

ABBOTT: Good Subject.  Terrible Times.  It’s 5.6%.

COSTELLO:  That many people are out of work?

ABBOTT: No, that’s 23%.

COSTELLO: You just said 5.6%.

ABBOTT:  5.6% Unemployed.

COSTELLO:  Right 5.6% out of work.

ABBOTT: No, that’s 23%.

COSTELLO: Okay, so it’s  23% unemployed.

ABBOTT: No, that’s 5.6%.

COSTELLO:  WAIT A MINUTE. Is it 5.6% or 23%? 

ABBOTT: 5.6% are unemployed.  23% are out of work.

COSTELLO: If you are out of work you are unemployed.

ABBOTT:  No, Congress said you can’t count the “Out of Work” as the unemployed.  You have to look for work to be unemployed.

COSTELLO: BUT THEY ARE OUT OF WORK!!!

ABBOTT: No, you miss his point.

COSTELLO:  What point?

ABBOTT:  Someone who doesn’t look for work can’t be counted with those who look for work. It wouldn’t be fair. 

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But ALL of them are out of work.

ABBOTT: No, the unemployed are actively looking for work. Those who are out of work gave up looking and if you give up, you are no longer in the ranks of the unemployed. 

COSTELLO: So if you’re off the unemployment roles that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment just goes down because you don’t look for work?

ABBOTT: Absolutely it goes  down. That’s how it gets to 5.6%. Otherwise it would be 23%.
COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?  

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.

ABBOTT: Now you’re thinking like an Economist. 

COSTELLO:  I don’t even know what the hell I just said!  

ABBOTT: Now you’re thinking like a Politician.

A Holiday Gift From the Feds This Year

So Bloomberg is referring to Yellen now as a "Decemberist," suggesting a rate hike is not likely in the offing until the end of the year. 

http://www.bloomberg.com/news/articles/2015-06-18/three-hints-yellen-dropped-that-the-fed-might-not-raise-rates-in-September

So first we were looking at one in June and one later in the year, and then none in June but pretty sure one in September, and now we are thinking maybe December, with two of 17 fed members against any this year.  Looks like my prediction of no increase this year - and probably none next year -that I made back in April is looking pretty good at the moment.  Mind you, I said back then they should do an increase - and should have years ago - but given their Keynesian thinking and the direction of things economically I did not see it in the cards then and do not see it in them now.

Of course, with the Nasdaq setting new records today, I guess never say never, but that was in no small part due to the Fed standing pat for longer, so unlikely a market reaction to the "good" news from the Fed is going to cause the Fed to change its tune.  I do not see the stock rise lasting too long either way.  The DAX in Germany is in an official correction (albeit only back to levels seen in February and still over 10% over where it started the year),  and China markets are having the worst weekly drop in six years, so things are starting to pop.  Just a matter of time my friends, just a matter of time.

Hot News - Greece Economy Has Prospered Due To Its EU Membership!

So the Bank of Greece, which notably is not under Greek Government control but rather is more closely aligned to the ECB, submitted a monetary policy report to the Greek Cabinet and Parliament this morning.  While its message is clear, I am not so clear on where the Bank of Greece gets the support for one line in it.  I will not spoil the suspense for you.  Go ahead and see if you can figure out for yourself which line confuses me:

"As the Bank of Greece had assessed in its Governor’s Report for the year 2014, the conclusion of a new agreement with our partners is of the utmost importance to fend off the immediate risks to the economy, reduce uncertainty and ensure a sustainable growth outlook for Greece.

Failure to reach an agreement would, on the contrary, mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and – most likely – from the European Union. A manageable debt crisis, as the one that we are currently addressing with the help of our partners, would snowball into an uncontrollable crisis, with great risks for the banking system and financial stability. An exit from the euro would only compound the already adverse environment, as the ensuing acute exchange rate crisis would send inflation soaring.

All this would imply deep recession, a dramatic decline in income levels, an exponential rise in unemployment and a collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership. From its position as a core member of Europe, Greece would see itself relegated to the rank of a poor country in the European South.

This is why the Bank of Greece firmly believes that striking an agreement with our partners is a historical imperative that we cannot afford to ignore."

Figure out yet the line that confuses me?  I think you have.

Let's consider a few stats and see if we all agree.  The EU was formed in late 1993.  Around that time the Greece unemployment rate was hovering around 9%, which is not great but it is much better than where it is today at around 25%.  At the time the EU was formed Greek government debt to GDP ratio was under 80% and now is well over twice that, pushing 180%.  Indeed, even before the great recession they were already over 100%, so you cannot blame it all on the recession.  Private sector debt as a percentage of GDP has also more than doubled. 

We could go on, but there is plenty of press out there about how bleak the situation is in Greece today.  And let me add that if it were not part of the EU it would not have to face collective creditor demands on austerity and could have negotiated bigger haircuts long ago in my view, or at least dealt with the debt by devaluing its currency and incurring some short term high inflation, kind of like Iceland did, which the IMF, one of Greece's creditors, cites as exemplar.  But hey, with things going so swimmingly in the EU, why would they ever want to do that.