 | | The Daily Reckoning | Monday, August 23, 2010 |
- Addicted to stimulus: Neo-Keynesians' Weapons of Economic Destruction,
- Markets head south as the "recovery" fades into distant memory,
- Plus, Bill Bonner on the shame in stocks, a US government default and other Milky Way meanderings...
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|  | | | No Messing With Texas Business | | Why the Lone Star State is weathering the economic downturn so well | |  | | Joel Bowman |
En route to New Orleans...
In seven out of the last eight recessions in the US, housing led the way to recovery. So then, what kind of recovery is this?
In short, it's a non-recovery; the kind that occurs when pundits, not market realities, are allowed to define the terms. It's the kind of recovery designed to sell papers and build political support before mid-term elections. It's manufactured, in other words. A sham.
We're continuing along our Coast-to-Coast Correction Tour today, heading east into the great Bayou State of Louisiana. We began our journey, as some readers may recall, back in California, home of the West Coast's subprime meltdown. If all goes to plan, we'll arrive in Miami, home of the East Coast's version of the same debacle, sometime in early September.
Compared to the situation on the ground in states like Arizona, Nevada and New Mexico, where unemployment and foreclosure statistics are at nation-toping levels, Texas appears to be fairing relatively well. With reasonably low state and local tax burdens (7th lowest in the nation), the Lone Star State is home to a disproportionately large number of the country's leading companies and is the preferred headquarters for more Fortune 500 outfits than any other state. As such, Texas enjoys the second highest GSP (Gross State Product) in the Union.
"This is a state for entrepreneurs," one fellow told us over a couple of Old Fashions last week. Your editor was invited to attend a cocktail reception for the senior management of a small, Houston-based energy company. The room was full of distinguished guests, many of whom had flown in from distant lands to attend the event.
"If you can stand the heat during the summer months," the gentleman continued, "you wouldn't want to be anywhere else in the country. Certainly not if you want to get any real business done."
"This state seems to be weathering the economic downturn better than most," we posited, keeping in mind the popular terms for what Daily Reckoning readers will recognize as The Great Correction.
"That's because we do real business here," the fellow asserted, "We make things. We drill. We bring to market the nation's energy supply. It's an enormous industry."
With around 5 billion barrels of the local "tea," Texas holds roughly one-quarter of the United States' proven oil reserves. Her refineries, including the Baytown Refinery, America's largest, can churn through over 4.5 million barrels per day.
Texas also produces one quarter of the nation's natural gas, boasts the largest wind farm in the world and, given its sheer size and scorching summers, has been cited as having the most potential for future solar power projects anywhere in the country.
Even with such a rich endowment of natural resources, the Gulf oil spill (and the subsequent legal mess currently putting the squeeze on the many of the state's smaller producers) has proven a major blow for the local economy and, by extension, the nation's economy.
"A few months ago, it would have been difficult to imagine a bigger disaster than the oil leak itself," another gentleman told us. "Then the federal government got involved. It's likely that the actions they've taken will have a more lasting, more devastating effect than the spill ever could have had on its own."
"How so?"
"The spill was a disaster, don't get me wrong. But revenue from oil and gas production in the Gulf represents an enormous portion of the federal government's income," the gentleman explained. "The cost of shutting that down, or even slowing it down, will be huge."
Indeed, analysis by IHS Global Insight estimates that offshore oil and gas development in the Gulf provides some 400,000 jobs for the region and contributes $70 billion in economic values and $20 billion in federal, state and local revenues. Almost half of that, according to the firm, comes from smaller, independent companies that, presumably, are less equipped to weather an ongoing political assault on their enterprises.
"Moreover," the fellow continued, "imported oil represents the largest chunk of the nation's trade deficit. In other words, when the government puts the brakes on domestic production, either through some kind of moratorium on deep water drilling or by refusing to issue permits for shallow water projects, it not only loses out on the revenue that sector provides, it also means the country must rely more heavily on foreign energy sources, which don't come cheap. This creates another kind of disaster altogether and one nobody seems to be talking about."
We'll have more for you as we travel along the Gulf coastline over the next week or so.
In the meantime, we invite you to enjoy today's guest essay, courtesy of our resident short selling expert, Dan Amoss. Details below...
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| | The Daily Reckoning Presents | | Earnings Aren't What They Used to Be | |  | | Dan Amoss |
As Wall Street's big money players return from the Hamptons in the coming weeks, they will have to reassess the earnings power of their portfolio companies. Last week, Staples confirmed the message we heard from Office Depot and Office Max: the small business sector as a whole isn't very healthy. Disappointing earnings from Dell dampen the mood even further.
The recent economic data adds to the case that the economy is slowing rapidly. It turns out that Obama stimulus plans didn't stimulate much of anything except the budget deficit.
Yet despite all we've been through, most policymakers and commentators remain confused and frustrated because they've misdiagnosed the root causes of the financial crisis. The seeds of today's economy were sown in the credit bubble of 2000s, which, thanks to government policies and central banks, grew far bigger than it ever could have grown if a free market truly existed.
We'll hear a lot more from policymakers about how the economy is approaching "stall speed," implying that it needs another shot of stimulus fuel. They haven't taken the time to consider how the original stimulus plan might have undermined the economy's foundational strength. The economy is not a machine to be tinkered with, but a complex, uncontrollable entity that seeks to allocate capital to its most needed uses.
The endless stream of Washington's tone-deaf policies makes it almost impossible to plan. Growing regulatory burdens for small businesses is a huge problem for the labor market. I've heard from a half dozen sources in the past few weeks about soaring premiums as health insurance plans come up for renewal. Thanks to the mandates in the newly signed healthcare law, premiums will keep rising. The law had the effect of increasing the cost of hiring new employees, so we shouldn't be surprised that layoffs still exceeding new hiring - even this far into "the recovery."
As much as I'd prefer a return to smaller government - for the sake of our economy's long-run health and competitiveness - here's what I expect to happen: further weakness in GDP, employment, and the stock market will reduce the political momentum behind fiscal responsibility, and sometime in 2011, we'll have another stimulus plan. Maybe it'll come in the form of extension of the Bush tax cuts, with a political compromise resulting in rebate checks or payroll tax holidays for working class voters who aren't paying much, if any tax as it is.
Perhaps, as a flanking maneuver in its war on deflation, the Fed will finance these checks with the printing press. Further quantitative easing in the bond markets to suppress the long end of the yield curve is nothing but a giveaway to the big banks' trading desks and a subsidy for government borrowing costs. So the Fed is probably thinking about ways to more effectively get newly printed money into the hands of consumers. But the Fed needs to be very careful about such novel, creative ways to steal from savers. It could spark a crash in confidence in the US dollar. It's a giant game of chicken, and it's dangerous.
But I doubt there will be much political support for these tactics until conditions in risk assets - stocks, corporate bonds, and housing prices - get much worse. I doubt that the average voter realizes what the economy would look like without the federal deficit running continuously at 10% of GDP, like it will this year. On the other hand, a slashed deficit would be extremely painful for every single household and business - even those that have behaved responsibly - because it would translate into less business sales, less desire to hire, and lower household income.
This is why you shouldn't get the economy addicted to harebrained schemes cooked up by economics professors in the first place. The professors espousing Keynesian stimulus are like street corner drug dealers, and they have the economy hooked to their product: stimulus injections.
As a result, the economy is still unable to produce legitimate economic growth or sustainable job creation. US stocks remain a very risky asset.
Dan Amoss,
for The Daily Reckoning
Joel's Note: For most investors, a crumbling economic landscape is something to fear. Not so for Dan. Over-leveraged banks...dishonest CEOs...dodgy earnings reports...these are exactly the kinds of shenanigans short sellers thrive on. If you're interested in learning more about what Dan does, and how some strategic short plays can help protect your portfolio, click here.
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| | | | Bill Bonner | | Why Bull Market Absurdities Disappear in Bear Markets | |  | | Bill Bonner |
Reckoning from Ouzilly, France...
It's summertime...and the livin' is still easy here in France.
But the children are all gone. The house is quiet. Our office - usually a hive of activity when the children and their friends are here, checking email...searching for cheap tickets...or just hanging out - is as dead as a tomb. The only sign of life is the clicking of computer keys as your editor prepares his Daily Reckoning.
And what is there to reckon with today?
Slowly, the idea of "recovery" is fading. People are beginning to realize that we are in a Great Correction, not a typical post-war recession.
"The Never Ending Recession," is one title in the financial news.
"Consumers slow to spend, businesses slow to hire," The Washington Post sums up the situation.
"US Restaurants Starved for Business," reports The Los Angeles Times.
The Dow fell 57 points on Friday, after a big down day on Thursday. Gold lost $6.
Are you invested in stocks, dear reader?
You are? Shame on you!
Of course, there are always one or two stocks that will buck the trend. And if you're willing to wait, say, 20 years, you might be okay.
But in the next few years, US stocks are not likely to pay off. The stock market entered a bear phase in January 2000. Since then, stock market investors have made some money and lost some money. Some are ahead a little. Some are behind. Most have gotten nowhere.
But the bear still hasn't fully expressed himself. The stock market still hasn't reached its rendezvous with desperation. That's when you will be able to buy stocks without worrying about further price erosion. That's when the sellers have sold and the typical person wants nothing more to do with stocks.
The ideas of "stocks for the long run" and "stocks for everyone" are not permanent, universal truths. They are merely cyclical fads. People believe in stocks when stocks have been doing well. They stop believing in them when they stop doing well.
There are times when most people believe they should never buy stocks at all. They think stocks are a specialists' game - for professionals who can take the time and trouble to figure out what is really going on in the companies they invest in. The notion that you can just buy a stock because you like the product...or because you've heard that the industry is doing well...is regarded as absurd. And it is absurd.
But it's an absurdity that comes around in a bull market and disappears in a bear market. We're in a bear market now. The next leg down should drive the last moms and pops out of the market and bring prices down to bargain levels.
The next leg down will also drive investors even further into the bond market. That's right, dear reader, investors will jump from the frying pan of equities into the fire of US Treasury debt. They'll be looking for a safe place for their money. And nothing will seem safer than the credits of the biggest economy on earth.
"Default?" "The US government?" "Don't make me laugh," they will say.
But the US will default - one way or another.
It has more financial obligations and commitments than it can bear. Somehow, someway, sometime they'll have to be sloughed off - probably by a combination of trimming, taxing, and inflating.
And sooner or later, those super safe bonds will lose half their real value. Probably not sooner. But maybe later.
And more thoughts...
"Well, I'll never forget this summer," said Henri, a 70-year-old neighbor, yesterday.
"And that's thanks to you."
Henri has a son who is in his 30s and unmarried. When he heard that our daughter Maria was visiting - with two of her actress friends - he quickly put two and two together.
"You should invite my son over..." he had suggested.
So we did. And the young people got along well. And the girls were soon hanging out at Henri's pool.
"It was such a pleasure," Henri reminisced, "the girls came over in their bathing suits. And they are so polite and nice. And I think one of them was from Australia. I don't know where the other one was from, but she was just as beautiful. And Maria had told them that the French always kiss each other on the cheek. So when I met them, I was prepared to shake their hands, but they each kissed me.
"And I can tell you frankly that that is something that doesn't happen every day at my house. After all, we're in La France Profonde here. This is not the Riviera. It's not every day that I am kissed by three lovely young actresses wearing bikinis.
"I hope they come back next summer!"
Alas, they are all gone now. The actresses. The aspiring doctor. The musician. Even the high school student. All have moved on...back to school...off with friends...on to their careers and companions.
And it is raining.
"Well, it is good and it is bad," said another neighbor. We had our four children visiting...with 12 grandchildren. I can tell you, things were pretty lively at our house. And what a pleasure it was to have them.
"But it's a pleasure when they leave too. You get to sit down...put things back in order in the house.
"They're not all gone yet. But they're leaving on a pilgrimage tomorrow. Each year we do a section of the route of St. Jacques de Compostelle with the children and grandchildren. You know, it's a hiking trail that goes all the way through France, then across the Pyrenees to Santiago. We hike for three days, normally, and do about 80 kilometers. We carry our backpacks and sleeping bags and sleep out under the stars. It's a great experience for everybody."
"What if it rains?" we wondered.
"Then, it's not so nice..."
For reference, here is John Adams on the St. James' Way...also known as the Milky Way, since it follows the general direction of the Milky Way, from Northern Europe to the Atlantic Coast of Spain.
Adams was sent to Paris to raise money for the American War of Independence. His ship started to leak so he was put ashore at Finisterre on the coast of Spain. From there, he and his two sons made their way to Paris by following the route of St. Jacques de Compostelle backwards:
I have always regretted that We could not find time to make a Pilgrimage to Saint Iago de Compostella. We were informed...that the Original of this Shrine and Temple of St. Iago was this. A certain Shepherd saw a bright Light there in the night. Afterwards it was revealed to an Archbishop that St. James was buried there. This laid the Foundation of a Church, and they have built an Altar on the Spot where the Shepherd saw the Light. In the time of the Moors, the People made a Vow, that if the Moors should be driven from this Country, they would give a certain portion of the Income of their Lands to Saint James. The Moors were defeated and expelled and it was reported and believed, that Saint James was in the Battle and fought with a drawn Sword at the head of the Spanish Troops, on Horseback. The People, believing that they owed the Victory to the Saint, very cheerfully fulfilled their Vows by paying the Tribute... Upon the Supposition that this is the place of the Sepulchre of Saint James, there are great numbers of Pilgrims, who visit it, every Year, from France, Spain, Italy and other parts of Europe, many of them on foot. Regards,
Bill Bonner
for The Daily Reckoning |
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