Let's stop and consider what it is that we're recovering from. After all, did we ever really have a recession? By official measures yes. It ended in late 2001 and was one of the mildest on record. This following the biggest credit expansion, monetary explosion and stock market bubble ever. Apparently the bigger they are the softer they fall! What a lucky break for us all!
The media speaks of a "recovery" as though we've paid the price for the 90s, as though we've suffered for years, and now we're all picking up the pieces, getting our acts together and heading off for sunnier skies. But I ask again, what are we recovering from?
Throughout this economic slowdown, consumers have gone on spending like there's no tomorrow. At the coaxing and prodding of Grand Master Bubble-Maker Alan "I didn't know it was a bubble" Greenspan, consumers have kept on borrowing and digging their financial graves still deeper. What are consumers recovering from? From an endless shopping spree? Recovering from the debilitating efforts of walking up and down the car lot, trying to decide what color of SUV to buy this year?
Sorry folks, but that's not the stuff that genuine recoveries are made of. Recoveries are made of getting the financial house in order and consumers building "pent-up demand" through fiscal restraint. What did we see prior to this recovery? We saw auto sales hit records. We saw consumers sell bigger pieces of their homes back to the mortgage company and trade them in for more toys and goodies and in many cases, simply to HELP MAKE ENDS MEET.
All the stuff that's supposed to be put in place for a recovery hasn't been put into place. You know why the stock market is higher? Why the data is coming in a bit better these days? Because the Fed has been pumping liquidity into the system like Rosie O'Donnell has been pumping Ho-Hos and Fruit Pies into her system.
Let me put it this way: When you blow up a balloon it can't help but stretch. But does anyone believe it's actually experiencing internal growth? Of course not. The expansion is caused by external force being pumped in.
Yeah, some things are looking a bit better these days. Is it a recovery? No! It's a knee-jerk reaction to cheap money. What happens when you give a credit-addicted consumer access to cheaper and easier cash? He spends it. That isn't a recovery. It's just an addict out enjoying his latest fix.
"But isn't that how a recovery works?", members of our astute readership query. "Isn't it the Fed's job to create looser monetary conditions so that folks will get back to spending and a recovery will ensue?" To which I reply "Yes, but again, a recovery from what?"
In order to have a recovery you need to lay a foundation for recovery. Look at where we are today. We've seen thirteen consecutive rate cuts, trillions of dollars worth of "money" created out of thin air, and a record budget deficit. This is an economic recovery like 'how many consecutive cigarettes a lung cancer patient can smoke' is a measure of the efficacy of his iron lung.
Of course the data are looking a bit better these days. How can they not blip up somewhat when trillions of electronic dollars have been generated out of thin air, flooded into the system and lobbed at the consumer?
Think of it this way: If next week the feds sent everyone a check for $500 and the following week retail sales spiked up a bit, would anyone be stupid enough to mistake that for a genuine recovery in retail sales? Well folks, that's pretty much what has happened between lower rates, refinancings and a few tax cuts. At some point folks were bound to hit the stores and the data was bound to blip upwards.
If you want to call that "recovery", so be it. But the trick to this gig is to spark a SUSTAINABLE recovery. Handing everyone a check for $500 stuffed inside a greeting card that says "Shop dingbat, shop!" doesn't generate a recovery. It simply generates parking lots full of dingbats.
Get this, dear reader: it has taken unprecedented and monumental efforts to cause the data to cough up a measly whimper of improvement. The buffoons at CNBC are giddily proclaiming "Well golly Gomer! That's great! Finally all those efforts are starting to show up in the numbers!"
What they should be asking is "Why is it that three years into this thing, with interest rates near record lows, government spending at record levels, following tax cuts and all kinds of other incentives, are we now witnessing only slight signs of improvement? Why has it required so much effort to create such sparse results?"
According to Jim Puplava it's taking $6 worth of debt to create $1 of GDP growth. What flavor of recovery are we likely to see when it takes six units of effort to produce one unit of progress? Methinks not the "sustained" flavor. Six steps backward for one step forward doesn't sound like a recipe for sustained growth.
It's taking A LOT of credit to generate only a smidge of growth. How long can that gig last? How long can consumers keep feeding at the easy money trough? The Mortgage Bankers Association reports that refinancings have dropped 78% since May. Where's the next six bucks of debt going to come from?
According to Asha Bangalore of Northern Trust, the household debt-asset ratio stood at a post WWII record of 18% as of the first quarter of this year. Undoubtedly with all the refinancing that went on mid-year the ratio is now perched at even more precarious heights. Shall we expect it to simply continue posting new records? Not likely. At some point the friendly folks from bankruptcy court will kindly request the consumer's presence.
Apparently they're already requesting because personal bankruptcies recently hit an all-time high for any 12-month period. Funny coincidence, isn't it? That bankruptcies are hitting records at the same time that the ratio of debt to assets is probing new highs? Not funny. It's reality. YOU DON'T GET SOMETHING FOR NOTHING IN THIS WORLD. All debts must eventually be reconciled and you can't expand credit indefinitely hoping that somehow a recovery will set in.
We're not witnessing a recovery. We're witnessing a desperate effort to reinflate the deflating bubble. We saw a similar process in the 30s while the stock market retraced 50% of the damage that started with the great crash. But it wasn't a recovery. That's why, the astute reader will note, the following period was referred to as the "Great DEPRESSION" and not the "Big 'Ol Kick-Booty Recovery."
Am I hinting at another depression? I don't know. My crystal ball stopped working after the third time I refinanced it. But a slowdown commensurate with the expansion seems appropriate, does it not? The bigger the expansion, the bigger the ensuing contraction.
There are similarities, mind you. It's said that the protectionist efforts of the Smoot-Hawley Tariff Act of 1930 turned a slowdown into a depression. Nowadays we're blaming the Chinese for everything. Demublicans Bayh, Durbin and Schumer and Republicrats Bunning, Dole and Graham are leading the warpath to impose tariffs on China if they fail to ease up the dollar/RMB peg.
You know why history repeats itself? Because people don't change. Put a country on a paper-money standard and central bankers can't help but inflate the living hell out of everything in site. Give people easy money and they can't help but spend it until they can't spend anymore. And when the day of reckoning arrives, blame some folks on the other side of the ocean and strive to punish them for OUR sins.
That, my friends, is the primary reason why it'd be so patently foolish to bet that the powers that be have generated a legitimate recovery after a mild slowdown in the wake of the biggest bubble on record. No one has learned a damn thing and the powers that be are as ignorant as ever. The markets are more efficient, technology is astounding and there's more money floating around than ever. But people are still people and they're still making the same mistakes as always.
Credit is still expanding like wildfire and big credit expansions have always led to big credit busts. History's most recent bunch of buffoons manning the controls at the Fed think they're going to avoid the fate that historically has never been avoided.
I say good luck to them. History, I'm afraid, won't be so generous.
Mark M. Rostenko
The Sovereign Strategist
September 19, 2003
Mark M. Rostenko, a veteran of Chicago's commodity exchanges and editor of The Sovereign Strategist, spends far too much of his time enthralled by the never-ending procession of inane prattle emanating from Wall Street. Nonetheless, it hasn't stood in the way of accurately forecasting the dollar's top, the beginning of the gold bull market, and nearly every significant turning point in the stock market since the bear market began. Please visit www.sovereignstrategist.com for a free sample issue and more commentary. And while you're there, feel free to join our international family of well-informed and successful investors.