Strange creatures…strange events…strange thoughts… Zombieland is getting weird.
We are expected to believe six impossible things before breakfast, and another half dozen before lunch.
“…the current rebound in the economy is a statistical mirage,” writes David Rosenberg. It is “orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.”
But investors and voters seem willing to believe anything. Why else would anyone lend the feds money…or back their 2,400-page health care ‘reform’ bill?
We’re expected to believe that the same feds who couldn’t see the subprime fastball coming…
..and who struck out completely when they started to get overleveraged curve balls coming their way (they thought derivatives made the system more stable!)…
..have now hit a home run, with the bases loaded.
Yes, we’re expected to believe that the bad news bears – Bernanke, Summers, Geithner et al – have now won the World Series…by not only preventing a depression…but putting the economy back on track for growth and prosperity.
And now the feds are going to improve the whole system of health care, too. And we’re expected to believe that the $1 trillion program will not cost us a cent…and that the deficit will actually go down…that insurance companies will charge less…that doctors and nurses will work harder…that cripples will walk…that the blind will see…and that even teenagers with acne will suddenly have peachy-perfect skin.
We’re also expected to believe the Greek’s debt problems have gone away (thanks to a deal cut with the Germans)…and that America’s debt problems never even existed.
Why else would so many people lend the US so much money at such low interest rates?
Yes, dear reader, the crisis of ’07-’09 gave us a fright. But it’s all behind us now. How do we know? We just read the paper!
“Record volume of junk bonds sold,” says a news headline.
That’s pretty curious in itself. It means that investors think nothing can go wrong. If they thought something might go wrong, they wouldn’t want to buy junk bonds. ‘Cause they’re the first to go south when trouble comes.
What are they thinking? What can go wrong? Everything… Everyone should be battening down the hatches and locking up the firearms.
Instead, they’re opening up the liquor cabinet and putting on the music. Consumer spending is up for the 5th month in a row.
Hey wait a minute. Why are consumers spending? Unemployment is still up around 10% officially. Unofficially, it’s much higher.
So how is it possible for people without jobs to increase spending? Strange, don’t you think?
And what’s this?
“Personal income drops across the country,” reports The Wall Street Journal.
This is becoming curiouser and curiouser….
Unemployed people whose incomes are falling are nevertheless spending more money. What are they spending?
Yes, it’s refund season. And a lot of people are asking for refunds. People who lost their jobs, for example.
Yes, it’s the feds to the rescue again. They’re sending back money to the taxpayers who earned it. We have no quarrel with that. And it certainly gives some air to the folks who are trapped underwater in their sinking ships. But that oxygen was earmarked for other spending. And so now the feds have to borrow more.
We’re expected to believe that they can borrow as much as they want for as long as they want without ever getting into trouble? And we’re expected to believe that an economy that sank under the weight of private sector borrowing can now be refloated with more debt in the public sector…
..but that’s not all.
And more strange goings-on:
Probably the strangest things of all are the conclusions and advice given by some of the smartest economists in the business. We mentioned it on Friday. But our mouth is still open and our eyes are still glazed. In the run-up to the crisis of ’07-’09, almost everybody made mistakes. The spenders spent too much. The savers over-did it too. They built too much capacity.
Both need to make corrections. That’s what a Great Correction is for.
But the advice given Martin Wolf, Paul Krugman and others is the kind of thing that is hard not to laugh at. When the bubble blew up, everyone lost. But some lost a lot more than others. The spenders were in debt and broke, while the producers had money and factories (they didn’t know what to do with). So what do Wolf and Krugman suggest? They advise the winners to act more like the losers. Germany and China (the countries with savings…) should spend more money and stop working so hard.
Readers will note that Krugman is an American economist. Martin Wolf, the lead economist at The Financial Times, is English. They represent the losers, of course.
Wouldn’t it make sense to follow the winning strategies, not the losing ones? Wouldn’t it make sense to listen to the winning economists – those in Germany and China, not those in the spendthrift economies?
Nah, those economists may not understand the secret to a healthy economy – spend, spend, spend. That’s the secret…stimulate spending. Consumers spend. Government spends. Business spends. Everyone spends until they run out of savings…then, they spend till they run out of credit. And then they’re busted.
Hey, what kind of secret is this? Well…that’s what’s so strange about it.
Now, there’s a new federal program.
“Expanded mortgage aid should cut foreclosures,” says another headline. The new aid program requires lenders to reduce mortgage payments when a borrower loses his job.
Now the feds are using their brains. Let’s see, if you lose your job your mortgage payments go down… But what happens to the money you were supposed to pay? Wasn’t it owed to someone? What are they going to do?
Well, one thing they’re going to do is to be a little more careful before making any more mortgage loans.
But the number of foreclosures is still going up anyway. There are now 4.5 million houses in the process of foreclosure or 90 days delinquent.
A Great Correction takes time. Stocks go down. Revenues go down. A business gets in trouble. It sends out dismissal notices. Then, the ex- employees get unemployment comp. They run down their savings. And then they fall behind on their mortgage payments. And then, with their house worth less than the mortgage, they give up and move out.
And then the house price falls.
Maybe Porter is right. Maybe we’re wrong. Maybe there’s no voluntary de-leveraging going on, after all. The most recent numbers show the savings rate in a decline.
Maybe that’s the way it works. Maybe nobody ever really tightens his belt unless he absolutely has to. Maybe it takes a crisis…a catastrophe…a disaster. Maybe that’s the way of the world. Maybe thinking doesn’t matter at all. Maybe markets make opinions after all.
In the businesses where we’re directly involved, in 2009 we paid down debt, stopped making capital investments, reduced the payroll and saved every penny. Now, we’re starting to lighten up again. We’re considering new investments. And the payroll has climbed back almost to where it was before the crisis.
for The Daily Reckoning Australia