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Thursday, July 2, 2009 The US unemployment rate is higher than anticipated… Is there another bailout in our future? Small businesses are taking a hit…not a good harbinger… Juan Enriquez wonders: what happened to austerity?...and more! --------------------- Special Offer --------------------------- The Fear Factor Strategy: For every $1 these stocks tank, you could pocket $3 to $7 It's proven to turn $1,000 into $2,619... $3,383... even $5,718. It could happen in the next 24 hours. Get in on the next play. Act now. --------------------------------------------------------------- Depressions Take Time By Bill Bonner Paris, France Everything is working out just like we thought it would. The stock market is performing as expected. The economy is on track. Even the politicians are doing what they thought they would. Let’s begin with the stimulus/bailout/boondoggle/BS plan. As anticipated, it has failed. That is, the economy is getting worse, not better. It has failed the test set for it by its own creators. Back when the Obama Team was arguing for a big bailout bill, it warned that without a bailout, unemployment would rise above 8% in 2009. ‘Pass this bill today,’ said Ben Bernanke, or words to that effect, ‘or there may not be a tomorrow for the US economy.’ Congress dutifully bent its back to the task of adding boondoggles to the bill and then okayed the measure. And here we are, in the middle of 2009, and the unemployment rate is already at 9.4%. Even at the time, it was obvious that the hacks in the administration had no idea what was going on. They were just guessing about the economy and taking advantage of the situation to pass out more money that taxpayers hadn’t even earned yet. As predicted, the spending didn’t make the situation better; if anything, it probably made it worse – by delaying the process of destruction, and hence retarding the process of creative reconstruction too. We recall our other forecast too: when the bailout doesn’t work, they’ll pass another one. And so, in yesterday’s New York Times, there is David Leonhardt urging the pols to even bigger acts of absurdity: “The economy really may need more help,” he says. Yes, it will need more help. Especially if it keeps getting the kind of help it’s been getting. The stock market is acting more or less as we thought it would too. The big bounce began on the 9th of March. It’s been almost four months now...and the bounce should be getting near its peak...and beginning to fall again. Just look at a chart of the Dow since March. You’ll see exactly that. Like a cannonball, it went up...and now it seems to be arching over for its fall to the ground. Yesterday, the markets seemed to hang in mid air... The Dow was up 57. Oil stayed at $69. Only gold seemed to know where it was going – rising $13. Are you following the yellow metal’s lead to the top? Now is your chance – don’t miss out on this golden opportunity…get the full report here: Set for Life: Eight Keys to Getting Rich with Gold. As stocks roll over, the economic news rolls over too. Yesterday’s issue of USA Today featured a report that said small businesses are going broke faster than expected. Small businesses are supposed to be the survivors. Like mammals in the Ice Age, they replace the dinosaurs. In a recession, big, costly, inflexible companies are supposed to get hit the hardest...leaving niches for small, nimble, low-cost competitors to slip into. These small businesses establish toeholds during the recession...hire people...and then scale up to the peak of commerce when the boom comes. But this time it’s different. Small businesses are collapsing along with big ones. In April, for example, more than small 8,000 businesses went broke and filed for Chapter 11. In addition to the business bankruptcies are the personal bankruptcies. According to the Los Angeles Times, the rate of personal bankruptcy is soaring in Southern California. In April, according to David Rosenberg at Gluskin Sheff, the feds added $121 million (at an annual rate) in total stimulus to the consumer economy – including tax reduction and increased benefits. In May, the total stimulus rose to $163 million. How come so many bankruptcies when the feds were giving away so much money? The answer, says Rosenberg, is that consumers didn’t spend the money; they saved it. Consumer spending rose just $1 billion April – despite $121 billion of stimulus. In May it rose $25 billion – despite a ‘stimulus’ 6 times that amount. Meanwhile, the saving rate, which had been only 0.2% in March of 2008 exploded to nearly 7% in May 2009. No consumer spending, no sales. No sales, no revenues. No revenues...no one can stay in business. No small businesses. No new jobs. No new jobs, no economic recovery. No economic recovery and the meddlers are back on the Hill asking for more power and money. No surprise there. More news from The 5 Min. Forecast: “We’ve said it before: This depression will be defined by two measures,” writes Ian Mathias in today’s issue of The 5 Min. Forecast. “Housing – most people’s largest store of wealth and employment – the backbone of any economy. Millions of people without jobs stuck in homes they can’t afford will not be able to ‘put the economy back on track,’ as the current administration likes to say. This morning, we see big news on both fronts… and it’s not so good. “First, as we forecast yesterday, the Labor Department issued a worse-than-expected jobs report this morning. The US economy shed 467,000 jobs in June, it claims. As this chart shows, the Street was betting on the current trend to stay intact. Job losses have decreased every month since their January peak… until now. “B-list data points from this morning’s jobs report were equally lousy: The average hourly work week fell to 33 hours, but hourly wages stayed the same. Those out of work for six months or more now exceed a record 4.4 million. And continuing claims for unemployment benefits remained at 6.7 million, just below an all-time high. “By the government’s count, a record 14.7 million people are now unemployed. That makes for a 9.5% unemployment rate, a 26-year high. “On the housing front, mortgage applications have fallen to a seven-month low. According to the Mortgage Bankers Association, requests for new home loans fell 19% last week while refis plunged 30%, both to levels unseen since November. While mortgage rates are well off March’s 4.6% record low (on a 30-year fixed), they’re still at a reasonable 5.3%, a full 100bps below the average rate this time last year. “And since it worked so well the first time around: The Obama administration announced they will expand the ‘make home affordable’ program to an even wider range of dead-beat borrowers. Previously, homeowners with mortgages worth more than 105% of their home’s value did not qualify for President Obama’s manipulated refi rates. That limit has been bumped up to 125%… incredible. “Even more amazing: One in five mortgage borrowers are ‘underwater,’ meaning the value of their loan is worth more than the price of their home. That’s nearly 20 million homeowners.” Colleague Rob Parenteau, over at The Richebacher Letter has been warning of this second wave of housing loan defaults that is headed our way – and judging from this data, it doesn’t look like his words of caution have been in vain. Read his full report on the second wave of wipeouts ahead, and learn how to prepare yourself (and your portfolio) before the housing tsunami takes the economy down. Get it here. And back to Bill, with more thoughts: Depressions take time. Bankruptcy rates don’t rise overnight. First, it takes businesses a while to realize their sales are falling. At first, they think it might be a fluke. Then, they talk to friends and read the papers. And then, the next month confirms the story. Then, it takes time for them to react. They have to figure out where they can make cuts. Typically, this involves layoffs and job losses. Employees who will be let go need to be identified. Then, they actually have to be sent home. Then, the employee collects benefits. He looks for another job. He draws down savings. It takes time for him to react too. He watches. He notices that it is hard to find another job. He realizes his resources are running out. He begins to cut back. Unnecessary expenses are eliminated. Then, he broadens his definition of ‘unnecessary.’ Finally, he lacks the money for the essentials. The mortgage goes unpaid. Credit card deadlines are missed. This provokes an inevitable response – warnings, more warnings, official action, and finally...defaults, foreclosures and bankruptcy filings. We expect unemployment and bankruptcy filings to edge up throughout the summer months. Then, by the autumn, asset prices should be going down again. (You don’t have to be a slave to the up and down markets…in fact, you can use the downturns to your advantage, just as you do with the upside. Read more here.) We came back to Paris last night to celebrate our 25th wedding anniversary. It wasn’t much of a celebration...just a simple dinner for two in a simple restaurant in the old Palais Royale. It was a hot day in Paris. We sat outside in the galleries of the old palace. Near to us was another couple. Middle aged, they seemed like people who were getting together for the first time, not a couple who had been married for a long time. The man reminded us of John Malkovich. The woman? She was not an especially attractive woman, with straight gray/black hair cut as short as a man’s. They held hands. They looked into each other’s eyes. They seemed to be making plans for a happy future. When you’ve been married for a long time, on the other hand, you have to wonder if your happiness is not more past tense than future. You can recall the happy times you spent together...how the children were when they were little...how much fun you had when you were poor and starting out in life...and all you went through together to get to where you are now. But when you look ahead, your weary eyes fail. You may feel as though you’ve said all you had to say – and agreed to disagree. You may feel as though the grand adventure of your lives has peaked out – like a bull market – with nothing but the downward slope left for you. You may feel that the great mystery of coupling has been revealed. Getting to know someone and getting together...even fusing your flesh, blood and spirit to form fully new human beings...is there anything left to discover? Are there more surprises coming? Inevitably, the conversation turned towards the sovereign state of South Carolina. The poor state has a jackass for a governor. Mark Sanford has become a laughingstock for the entire nation. Not because he had an illicit dalliance and lied about it – who can honestly say he hasn’t done that? – but because he is a cad. And the worst kind of cad – the kind who pretends to be sensitive and caring. He’s found true love, he says, with an Argentine beauty. But rather than dump his wife and fly to his heartthrob...he dumps the love of his life and tells his wife that he will try to fall back in love with her. The bonehead betrays them all – his wife, his lover...and love itself. He’s even given romance a bad name. Meeting a woman who looks like Penelope Cruz on a dance floor in South America has an undeniable romantic appeal. When the story broke, there must have been hundreds of lonely middle-aged men in America booking their tickets and looking forward to tango. The Mark and Maria affair might have made the history books of star-crossed love, along with Tristan and Iseult, Antony and Cleopatra, Brad and Jennifer. But now, a week later, we know what kind of man Mark really is. Cancel the tickets. Any man who falls in love from now will feel like a sap. As for us, we’ve been saps all our lives. Eventually, we’ll head for the romance of Buenos Aires too. But we’ll take our main squeeze with us, just to see what happens next. Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- With Gold, Who's Laughing Now? With all the flak you've taken for singing gold's praises, wouldn't it be nice to laugh back? Well, today's your lucky day... an opportunity to make up to 20X your money. We have a VERY FEW spots remaining – so get in now! --------------------------------------------------------------- The Daily Reckoning PRESENTS: The general consensus when it comes to the US bailout is that the more moolah we dump into the economy, the longer the party can go on. But perhaps the general consensus is missing something? Juan Enriquez and Jorge Dominguez explore, below… What About Austerity? By Juan Enriquez and Jorge Dominguez Boston, Massachusetts Within the billions of sentences about the financial bailout there is one word notably absent, austerity. All talk is of payments, supports, subsidies, incurring more debt, stimulus packages. The thesis seems to be: If only we spend more the party can go on. True, only if the financial meltdown is a temporary mismatch and dislocation in housing and credit markets. But suppose there is something fundamentally wrong with the US economy. Then spending more will not fix it. Getting the diagnosis right means getting the treatment right. It may save us a trillion or two. The subprime collapse is one symptom of years of little regulation, under-taxing, overspending, and massive debt. One way to understand what is happening in the United States is to look at what occurred time and again in Latin America and Asia, hotbeds of financial and banking crises. What we are living through happened time and again in Brazil, Argentina, and Mexico, as well as Korea and Thailand. If there is too much debt, people lose confidence in the banks, then credit markets, currency, and government. For more than a decade, the international financial cop, the International Monetary Fund, forecast a hurricane was heading toward US shores. As did many heads of the Treasury and the Fed. It is, to paraphrase a great writer, a chronicle of an agony foretold. There are five basic drivers of these crises, all based on excess: high income concentration, too much debt, too much reliance on foreign money, not enough tax revenue, and reckless government spending. Time after time governments believe they are different. They are bombarded by warnings but ignore, postpone, spend even more, and crash. Over past decades, most US wages have fared poorly. Despite stagnant wages, consumer spending and debt increased, fueled by cheap credit. Companies also went on a debt binge. Careless deregulation allowed financial cowboys to run the system. Responsible CEOs who kept some cash, maintained moderate debt, invested for the long term, got pink slips. Financial chop shops did leveraged buyouts using a company's own cash and credit. To survive, companies piled on debt. “The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement.” Many politicians decided reelection depended on cutting taxes and offering more benefits. Increase Medicare, postpone Social Security reform, hire more bureaucrats, and pay for a two-front war. Debt grew to pay for this party. These were not true tax cuts, just postponed debt; now we owe more and the bill has come due with interest. Complicating this crisis is US economic hegemony. There were few places to park a lot of money. Despite the euro, European policies on debts and deficits are not much to brag about. So foreigners have gorged on US debt. The United States continues importing more than it exports. Middle Easterners and Asians who save and invest bought dollars for decades, but some of this money is now fleeing. The dollar has dropped sharply. Gold and oil have skyrocketed. In financial crises, huge pools of capital cross borders very quickly; a few can make a great deal of money shorting the country's currency. The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement. Bailout and stimulus are a stopgap. A solution requires the country to begin to spend what it earns, reduce its mountainous debt, and address massive liabilities, restructure Social Security, pension deficits, military, and Medicare. No wonder politicians would rather spend more of your money now rather than address these problems. Because we have been spending 5 to 7 percent more each year than we earn, a forced restructuring, triggered by a currency collapse, would have the same effect on wages and purchasing power that the housing collapse had on housing prices. So let's learn from our Latin and Asian friends and act before it is too late. Regards, Juan Enriquez and Jorge Dominguez for The Daily Reckoning Editor’s Note: Jorge Dominguez is vice provost for international affairs and a professor of Mexican and Latin American Politics and Economics at Harvard University. Juan Enriquez is a best-selling author, businessman, and leading authority on the economic and political impact of life sciences. He is chairman and CEO of Biotechonomy, a life sciences research and investment firm, and managing director of Excel Medical Ventures, a venture capital fund. His BA and MBA are both with honors from Harvard.