Sunday, August 09, 2009

10 Pins for the Stock Market Bubble

August 10, 2009


The "Recession is over" stock market rally is just another bubble awaiting a sharp pin. Here are ten such sharp little pins.

I really hate to pop anyone's bubble, but--oh, why try to hide it, I love popping bubbles, especially stock market, credit and housing bubbles. According to the standard-issue financial pundits (SIFPs), the stock market is not only in a new Bull Market but it's heading higher this month--S&P 500 is shooting to 1,200, guaranteed.

Before you join the euphoria, please consider these 10 sharp bubble-popping pins:

1. Structural unemployment is skyrocketing. Job Losses Moderate:

But structural unemployment worsened. The number of people who've been out of work longer than six months soared by a record 584,000 to 5 million, accounting for more than a third of all unemployment for the first time on record.

"Structural" is a polite way of saying there won't be any jobs for the long-term unemployed this year, next year, or the year after that.

2. The jobless rate declined because the work force shrank. This is typical smoke-and-mirrors statistics, courtesy of your Federal government: as people lose extended unemployment benefits, they are classified as "discouraged" and are no longer counted in the "headline" unemployment number.

Unemployment fell by 267,000 to 14.5 million, while employment fell by 155,000. The labor force declined by 422,000, which means the jobless rate declined because people dropped out of the work force, not because they got jobs. The employment-participation rate fell from 65.7% to 65.5%.

3. Everyone seems to have forgotten we need to create 250,000 jobs a month just to stay even with population growth. So while "only" 250,000 jobs were lost last month--never mind a big chunk of employment was linked to the "cash for clunkers" giveaway--that means we're still 500,000 jobs short of a return to a rising employment scenario.

4. The interest on all the debt the nation is taking on to bail out bankers and "stimulate" the dead credit-bubble model will place a drag on growth far into the future. At the end of March of 2009, Bloomberg reported that, "The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year." This amount "works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Even with today's dirt-cheap interest rates, the government spends over $400 billion on interest. Another couple hundred billion and we'll be paying more for interest than we are for Defense or Medicare.

5. Interest rates are set to double. A funny thing happened on the way to borrowing "free money" in the trillions; there isn't enough free money around for everyone to borrow unlimited amounts of it. So there's actually more demand for surplus cash than there is supply of surplus cash. That sets up a supply-demand imbalance which leads to higher costs of borrowing. Nothing fancy here--even the Fed economists understand this:

Seeking Alpha

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt The study is damning because Mr Laubach was the Fed’s economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down. As a result, the doubling in rates is the US central bank’s own prediction. +3.5% because of rising deficit.

That would imply a sharp rise in the interest payments mentioned above; suddenly, the positive feedback/runaway debt scenario looks not just plausible but inevitable: interest on the national debt rises to $650 billion, equal to the Pentagon/Intelligence and Social Security budgets. As tax revenues plummet then the only way to pay the interest is to borrow more, increasing the interest due.

Repeat annually until insolvency/default. Recall that the stimulus deficit is 13% of the entire U.S. GDP; 5% is widely considered unsustainable; Argentina defaulted when its deficit hit 3% of GDP.

6. Tax revenues are tanking. Government revenue is at its lowest level since the Depression, and most states are on the verge of bankruptcy. Tax revenues cannot be manipulated like unemployment and thus tax revenues and sales taxes are far more accurate measures of economic activity than other metrics.

Raising taxes is politically risky (see "insurrection" and "throw the bums out") so what's the only way to continue funding runaway spending? Print and borrow--which raises interest rates.

7. Normal accounting and reporting rules have been suspended. The U.S. financial markets are still a hall of mirrors; mark-to-market is still a pipe-dream; mark-to-fantasy reigns supreme as the easiest way to prop up insolvent banks' balance sheets.

8. Commercial Real Estate is spiraling round the drain. Even mark-to-fantasy might not save banks when the tsunami of bad CRE loans hits in the coming months. Anyone want a faded-glory, half-empty, money-losing mall or three?

9. Consumers are retrenching generationally, not for a few months. Consumer credit (revolving and non-revolving) dropped at a 4.9% annualized rate in June, double the expected pace, indicating consumers continue retrenching and saving. Total outstanding consumer credit in June was $2,485 billion, $70 billion less than the $2,556 billion in June of 2008.

In the long years of bogus "prosperity," consumer credit grew every month like clockwork. $70 billion isn't much, but it's the start of a trend which essentially dooms consumer-based, over-leveraged economies like the U.S. to years or decades of (at best) meager growth.

10. Residential housing is not healed; it's still bleeding profusely. Nearly half of U.S. mortgages seen underwater by 2011. No collateral (as in, no housing equity) means consumers cannot borrow more money, even if interest remains at absurdly low rates (and it won't).

Lagniappe pin: healthcare "reform" will not lower healthcare costs by any measurable degree. At 16% or 17% of the entire U.S. GDP, healthcare (a.k.a. sick-care) will remain in essence a stupendous tax on the few remaining productive sectors of the U.S. economy.

Recession over, and stock market ready to boom on rising sales and profits? Color me skeptical; 10 or 11 pins are about to be pushed into the latest bubble and we'll see how thick that Bullish membrane really is.

3 Comments:

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