Tuesday, December 14, 2010

Minaynville: Any Talk of Recovery is False

An excellent piece on Minyanville by Jim Quinn who does a good job quantitatively explaining many of the things I speak about qualitatively and have spread over 100s of different entries on the website.  While I would not say the entire recovery is false - the U.S. economy is not a monolith; we have certain geographies doing well (i.e. upper plains states, Washington D.C. area, Manhattan, Stamford, CT, some parts of West Coast) and certain income strata doing well - much of it is bought and paid for via 'putting it on the credit card bill'.  Mr. Quinn does an excellent job by graphs, charts, and numbers showing many of the same things I've attempted to show - how the government ATM has replaced the house ATM as the way to hide the erosion of living standard happening for many in the middle and lower economic class.  Further many Americans continue to act little different than they did in the heydey of credit, because walking away or defaulting on debts is now not only acceptable but implicitly encouraged.  This is why interest rates must remain at 0% so that the saver class can subsidize the banker class and the debtor class (Bank analyst Chris Whalen calculates the current government/Fed policies cost the U.S. saver $750 BILLION a year, that is being transferred to the banks and debtors)

But as long as we can print, borrow, and hand out monies with no repercussion said mirage can continue.  We've just moved the center of dislocation out of the private sector (via housing) and directly into the government - hence how long we can keep the balls juggling is nearly impossible to judge.  The government cannot go bankrupt like General Motors, Lehman, or Bank of America err... well BAC is too big to fail so it cannot go bankrupt either. ;)

Let me also make clear NONE of this matters to the markets or indeed corporate profitability.  We have replaced 'wages' for many people with government spending - either direct or indirect - and hence things seem quite normal.  Corporate profits are being subsidized by the great federal government ATM - spending that used to come from wages now comes from government deficit spending - another $900B over 2 years is headed our way this week alone.  This is going to replace the $800B+ of deficit spending we agreed to in early 2009.  It's a permanent fix needed by the heroin patient.  And this is why the annual deficit is about 4x higher than it was pre recession, with no end in sight at deficit spending of 10-12% GDP per annum.  That inter-generational borrowing is where the 'real recovery' in our aggregate figures is coming from.

Some highlights below of the Minyanville piece - the full read is worthwhile.


Have you noticed the latest sound bites coming from the punditry in the corporate mainstream media? Here's the latest wisdom flowing from Wall Street, Washington DC, and mega corporations: 
The economy is recovering and employment is growing.  Consumers are deleveraging, saving, and using cash for purchases.  Retailers are doing fantastic as consumers increase spending.
How can consumers be deleveraging, saving, and increasing spending at the same time? Let's examine the facts.

1) The fallacy that the economy is recovering and employment is growing can be put to rest by an examination of the Bureau of Labor Statistics data:

The number of Americans employed over the last few years is as follows:

  • 2007 -- 146.0 million
  • 2008 -- 145.5 million
  • 2009 -- 139.9 million
  • 2010 -- 138.9 million
It seems there are 7.1 million less employed people than there were three years ago. Contrary to the spin from the White House, there are 1 million less people employed today than during the horrific 2009 year. Luckily, another 6 million people left the work force, or we'd really have a problem. (Mark's comment: I often cite how labor force participation is down to 64.5%, about 2% below normal or else our unemployment rate would be significantly higher - no one really knows what has happened to these people; maybe some combination of the underground economy, back to school - racking up more debts they will walk away from ;) , maybe back living with their parents as adults, maybe on permanent government assistance such as disability)

The truth is that if the government actually counted everyone in the country who wants a job, the unemployment rate isn't 9.8%, but 23% -- and it continues to rise.  (Mark's comment: I gave up the fight a long time ago trying to explain why the unemployment rate - if calculated as it was pre early 1990s - would be closer to 15% than 10%.  If interested there are probably 20 posts in 2007, 2008.  There have been multiple (ahem) adjustments made by the government since the early 90s but one key point is once you are not actively looking for 4 weeks you are no longer unemployed per the government.  Now Mr. Quinn takes the extreme view that marginally attached or part time workers should also be part of the unemployment rate, which I do not share as I'm trying to do an apples to apples comparison.  But 1981's 10% unemployment rate translates to 14% in today's terms - if the government still utilized the old methodology - which would be highly inconvenient)

2) The GDP of the US peaked at $14.5 trillion in the third quarter of 2008. Today it stands at $14.8 trillion, two years later. GDP has gone up for one reason and one reason only -- the federal government has borrowed trillions from future generations in order to artificially prop up a system already crumbling from the weight of too much debt. Highlights from the GDP calculation are:
  • Private investment is $216 billion lower today than it was in the third quarter of 2008
  • Exports are $80 billion lower today than they were in the third quarter of 2008.

You may ask yourself how can GDP  be higher if private businesses are investing less and exporting less. The answer, of course, is your friendly neighborhood Feds. The federal government is spending $128 billion more today than it was in 2008.

3) The last piece to the puzzle is the beloved consumer, who accounts for 70% of GDP. Good old Joe Sixpack has ramped up his spending by a good $470 billion since the first quarter of 2009. With this figure, we must be in a strong recovery. Larry Kudlow says so.

A little more digging on the BEA website reveals some interesting data:
  • Personal income has risen by $300 billion since the first quarter of 2008.
  • Strangely, private industry wages have declined by $213 billion since the first quarter of 2008.

It seems that personal income has risen due to two major items. You'll be glad to know that government wages have risen by $58 billion and, drum roll please, government entitlement transfers have increased by $523 billion since the first quarter of 2008. The federal government has borrowed hundreds of billions from future generations and paid it out in the form of unemployment benefits and other social programs so that consumers would spend it today. This is how you generate a positive GDP, without generating a real recovery.

4) (Mark's note - we've discussed this next topic a few times; the aggregate U.S. debt load is being paid off via default rather than people actually paying down their debts; indeed as people are defaulting on OLD credit card debt others are increasing new debt so total credit card debt is actually INCREASING - see WSJ: Defaults Account for Most of Pared Down Debt here)  Revolving consumer debt (credit cards) has declined by $173 billion in the last two years. This must mean that consumers are deleveraging.  Total consumer credit peaked at $13.9 trillion in the first quarter of 2008 and currently stands at $13.4 trillion. It sure looks like consumer deleveraging. Consumers must have paid off $500 billion of debt. But, the facts obliterate this fallacy. The Wall Street banks have written off in excess of $600 billion since the first quarter of 2008.  This means that consumers are actually charging more on their credit cards than they were in 2008.  Having your debt written off, rather than paying it off, says much about the great economic recovery of 2010.

5) The National Retail Federation has forecast November-December holiday sales will rise by 2.3% from a year ago, the most since 2006. A Bloomberg survey taken December 2 to December 8 showed economists raised projections for consumer purchases, the biggest part of the economy, to 2.6% for next year, up from their 2.3% estimate the prior month.

A little reality check about retail sales is in order. According to the US Census Bureau, total retail sales over the last few years are as follows:
  • 2007 -- $4.5 trillion
  • 2008 -- $4.4 trillion
  • 2009 -- $4.1 trillion
  • 2010 -- $4.4 trillion (estimated)
Not only that, but even using the government-manipulated CPI, inflation has risen 8% since 2007. On an inflation-adjusted basis, 2007 retail sales in today's dollars would be $4.9 trillion.

Using the real inflation rate of 20% over this time frame would generate an inflation-adjusted retail sales figure of $5.4 trillion. As you can see, the great retail recovery of 2010 is a sham.  Comparable store sales increases of 3% are inflation-adjusted decreases of 5%.


Nice job Mr. Quinn - I enjoyed your factoids.  However facts get in the way of a good story.  We now return to our regularly scheduled stock market rally (now non stop) while singing about the awesome organic recovery... preparing to receive my red pill.

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