Wednesday, May 06, 2009

Please Welcome New Prosperity Magazine

May 6, 2009 

A new publication, "New Prosperity, the New Bull Market Magazine" celebrates the recovery of the U.S. economy and the return of the 26-year Bull market after an annoying 7-month long recession and Bear market.

Please welcome New Prosperity Magazine.

I'm sure you applaud the full restoration of "prosperity" to this fair land after a brutal four hours of national soul-searching and dispensation of justice.

Meanwhile, back in reality, the host of the thoughtful and practical blogtruthalyzer, Gib, posted the following comments on the Of Two Minds reader forumGib succinctly summarizes the realities which are unfolding beneath the hype, manipulation, misrepresentation and propaganda which is sustaining this "new Bull market" and its accompanying euphoric confidence that "the bottom is in" and the 26-year long Bull market is back on track:

Charles recently wrote that he is "one of the last public bears." I'm feeling bearish myself, and I'm not reluctant to go public and keep him company. He prudently qualifies his bearish point of view. "I may well be proven horrendously wrong; perhaps the stock market will shoot up this coming week in a stupendously irresistable Bull Market," he says. I recklessly proclaim that I could not care less what the stock market does in the short run. The market is to the economy what weather is to global climate. It matters not how often the former goes up and down, for the latter plods on in spite of it, tracing the path of its long term trends and cycles.

I believe that the economy is trending downward. Indeed, it may never "recover," in the sense of picking up where it left off. We may have to transform the economy to save it and ourselves. Here are some reasons I'm bearish on the economy:

1. Trillions of dollars in bad paper is still out there--mortgage-backed securities, collateralized debt obligations, and other toxic assets. The only buyer stepping forward is the government. Well, maybe a few private investors, too, but only if the government insures them against a loss. Gaither's plan won't make the bad paper go away, it will just transfer the worst of it from financial institutions to taxpayers. Both sides of the transactions are technically bankrupt now, and they will remain so after the paper changes hands. Talk about rearranging the deck chairs on the Titanic.

2. Housing has been a big driver of the American economy in recent years, so the economy is not going to recover until housing does. That seems unlikely, because even though housing prices have fallen considerably from their bubbly highs, they still remain out of synch with the earnings of buyers. Absent no money down deals, and liar loan financing, and interest only monthly payments, a lot of buyers just can't come up with enough money to buy homes. And many of those who can afford to buy are too worried about their jobs and 401(k)s and other matters to take the plunge. That's not a prescription for a quick economic recovery.

3. It isn't just houses that Americans aren't buying, it's autos and furniture and electronics and, well, just about everything. Businesses big and small are going under and taking employees with them, and those that are still afloat are throwing many employees overboard. These employees are the former buyers of autos and furniture and electronics and, well just about everything. Unemployment statistics have been finagled over the years to leave out those who are "discouraged" and "underemployed" and "self-employed," so as a result we have to double whatever the government reports. That means we're at about 17 percent unemployed right now, and that percentage increases every month. So if an economic recovery requires people to go out and buy all the stuff they used to, then it's not going to happen, because too many of them are either unemployed or worried about becoming unemployed.

4. Lately, China seems more inclined to buy gold than to buy American Treasury notes. Others have stayed away from Treasury auctions, as well. As is the case with pyramid schemes, when the marks stop putting money into it, the con artists running the scheme soon find themselves short of cash. They've already spent most of the money they've taken in and were counting on new deposits to meet their commitments. Of course, the perps can switch to another racket, printing money.

But can an economy propped up by one racket or another ever be considered strong? Of course, it's not just the government I am talking about. It is also the financial sector, and the purveyors of services, and all the others who make their livings off of intangibles who have displaced the makers of real things as the foundation of our economy. Back when America crafted things of substance, we had a strong economy. I don't think we can be strong again simply by running printing presses and tanning salons more hours a day.

5. But more important than any of the above is the fact that our economy, indeed our entire civilization, is based on an obviously false assumption that we can have growth without limits. Even if we were able to restart the economic engine and push the pedal to the floor, we would not get far before we ran out of gas. And fresh water. And fertile soil. And food. And a lot of other necessities of life that we have taken for granted, without consideration of the future. We live on a small planet with limited resources, and we are using them up at an alarming rate. In just my lifetime, our population has grown from 2.2 billion to 6.7 billion, over three hundred percent.

There's a kind of desperation that growth rate breeds. We need more houses, more TVs, more cars, more highways, more food, more iPods, more energy, more everything every year, to keep up with growth, to keep investors happy, to keep the economy thriving, to keep from . . . from what? Is it like that bus in "Speed," or that character in "Crank," that you die if you slow down? What if it's just the opposite? What if this economic downturn is nothing compared to the crash we were heading for if we had continued full speed? I don't think the economy will ever be what it was, but maybe that will force us to change our assumptions about what it should be.

Thank you, Gib, for this analysis, and thank you, Bill Murath, for your suggestion of "cat food prosperity" as a worthy topic. Thanks also to Cindy F. for suggesting the steeplechase analogy I worked up last week: Housing: the Steeplechase Analogy (April 30, 2009)

Analyst John Mauldin, who kindly provides free commentary to several million readers every month, recently published a report by Jim Welsh of Welsh Money Management. Here are particularly telling excerpts:

As noted last month, there is a good chance that GDP will post a positive print in the fourth quarter of this year, and maybe in the third quarter. Most of the 'gain' will be statistical nonsense, but that won't deter most economists from getting excited.

According to RealtyTrac, job losses result in a home foreclosure 10% to 15% of the time. If job losses narrow from the monthly average of 670,000 in the first quarter to 325,000, almost 3 million more jobs will be lost before year end. That will translate into another 300,000-450,000 foreclosures, and an unemployment rate of almost 11%. But what if that estimate of job losses is too optimistic?

Over the last week a number of banks have reported first quarter earnings, which was a pleasant surprise. Citigroup said it made $1.6 billion. One of the ways Citigroup achieved this gain was booking a profit of $2.7 billion on the decline in Citi's own debt. Say what? Under accounting rules, Citi was allowed to book a one-time gain equivalent to the decline in its bonds because, in theory, it could buy back its debt cheaply and save $2.7 billion over time. Of course, Citi didn't actually do that. Even though more consumer loans went bad in the first quarter, Citi reduced its loan loss reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first quarter, thereby picking up another $1.3 billion of 'earnings'. And the recent change in mark to market accounting enabled Citi to book an additional $413 million in 'profit' on impaired assets. Without these one-time adjustments, Citi's $1.6 billion in first quarter profit becomes a $2.8 billion loss. (CHS--emphasis added)

As I was raised in a deeply religious household, the first thing that comes to my mind after discovering exactly how Citicorp cooked up a "profit" is that the entire U.S. banking system and Wall Street are the modern-day equivalents of the biblical capitals of wickedness, Sodom and Gomorrah: (wikipedia)

In Genesis 18, God informs Abraham that he plans to destroy the city of Sodom because of its wickedness. Abraham pleads with God not to destroy Sodom, and God agrees that he would not destroy the city if there were 50 righteous people in it, then 45, then 30, then 20, or even ten righteous people. The Lord's two angels found only four righteous people living in Sodom, including Abraham's nephew Lot and his wife and two youngest daughters. Consequently, God destroyed the city.

Can anyone connected to Citicorp's financial statements, its fictional profits, its auditors, the Federal regulatory agencies tasked with oversight or the financial media which breathlessly trumpeted the wonderful news that Citicorp generated a stupendous profit truthfully claim to be righteous in any fiscally or ethically meaningful way?

Put another way: if there is anything remotely like karma or justice in this Universe, the entire corrupt banking and financial sector of the U.S. richly deserves to go down, if not by fire and brimestone then by bankruptcy and insolvency.

Read that paragraph on Citi's "earnings" again and try to disagree with reader John B.'s conclusion: We have become the most dishonest group of people to walk this world.

Oh, and welcome to the New Prosperity. 

Thank you, Allen C. ($50), for your extremely generous contribution to this site. I am greatly honored by your support and readership.

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