Hope against Hope

Hey folks,

As much as I am a fan of Obama’s message of the power of Hope, to be honest, I am troubled, and worried, and not just about the looney teabaggers and Dick Armey’s xenophobic brown-shirts. Maybe it’s because last year I read John Kenneth Galbraith’s “The Great Depression”, and have now just finished John Steinbeck’s “The Grapes of Wrath”, and all that talk about collapse amidst economist assertions that “The Fundamentals of the Economy are Sound”, and all the folks leaving their homes and farms and hitting the road got me into a bit of a funk.

But I don’t think so. There have been times lately when I’ve had the feeling that we are all just like the poor coyote in the “Road Runner” cartoons, and have just run off the road at the top of the mesa and as we speak are in that surreal span of ten or twenty seconds it takes for the coyote to realize that he has no ground to stand on, looks out to the audience with a doomed expression as he realizes that Gravity is Now in Effect.

Okay, so everybody now seems to be saying that the economy is on the upswing, the stock market has been shooting up since March, and gold is now over a 1000 dollars an ounce because everyone thinks that all these dollars pumped into the economy will result in a decay of the value of the dollar with resulting price increases. The worst case that anyone on main street seems to be talking about is a Carter-level “stagflation” where prices would start going up but the economy would remain stagnant. And as the market continues its current rally the government continues to pump in more stimulus and we have “turned the corner.”

Hmm.

Am I the only one around here (besides Gigi and her “Housing Bubble Blog” friends) who still has a bad feeling that we might be heading for something much worse? It’s hard to tell; it seems that on odd days I live in a world where we have hit the bottom, the market is turning around and the recovery is a big V for Victory, and then on even days we are in the same sucker’s rally of that occurred in the Great Depression, just before the market tanked. And during the weekend I straddle both worlds, and am only able to tell whether I am in the evil world or not by checking to see if Spock has a goatee.

Anyway, here’s a scrapbook of articles that I’ve been assembling over the last year or two — and many of which are from just last week.

Just thought I’d share the misery…

Part I The Big Picture: collapse of the debt-inflation bubble still in progress

The Start of It All: Gigi showed me this 2007 Credit-Suisse report that ultimately prompted me to move my 401K money out of stocks and into cash just before the market crashed. I have to take this report seriously as it saved me hundreds of thousands of dollars in retirement account. To this day my 401K remains in cash.

Page 47 of that report has this now-famous graph, which I have annotated for your convenience (click to expand):

If I read this report and graph correctly, so far we have only weathered the first “Katrina” storm of Subprime, and are only now entering the Rita of Alt-A and Option ARMs. Even Prime ARM’s should be considered at risk, given that many of those folks also lost their jobs this past year.

Some Wonky Econ Talk

Back in the old days, I always thought that “inflation” and “price increases” were synonymous. Eventually it was explained to me that “inflation” refers only to the increase in the money supply, either by literally printing dollars or extending credit to banks — which is pretty much the same thing. What the doom-sayers have been explaining lately is that even though prices have been fairly constant this past decade, we have actually undergone a huge inflation of the money supply through the extension of very cheap credit — made even cheaper by hiding or obscuring the true risk in bundled securitized packages. Now that these highly risky debts have all started to go sour, we really have no choice but allow all the bad debt to go away — and with it all of those dollars that were manufactured to back the loan in the first place.

In other words, the current crisis is a problem of too much bad money, and the only way to cure the problem is to make the money go away, which is to say Deflation. Another way to think about it is, all of the current bad debt (toxic assets as well as more bad news to come) are negative dollars, or “anti-dollars” in the current economy. And the reason that all of this new money being pumped into the economy by the stimulus package is not and will not result in price increases is that those new dollars are not chasing goods and services: they are being used to fill the holes created by the “anti dollars”. People aren’t going on spending sprees, they are saving, and paying down debt.

I read an item from McClatchy news recently about how Commercial Real Estate is considered the next threat. This is a real problem. It’s not so visible out here in Utah, but during our visit to Long Beach last week I saw a lot of empty buildings, including many that were old, long-time concerns, such as a lamp store on PCH that must have been there since the 50’s. With the current downturn, and nobody buying stuff, who is going to be leasing all these huge empty commercial properties in the next few years ?

So, this next economic storm could be a foreclosure Rita plus a Hurricane Camille.

Am I missing something?

Part II What US Recovery? What Inflation?
The Consumer Confidence index is holding steady at *negative* 216, meaning most people are still gloomy about present and future. (I know I am; how about you?) Most people are increasing their savings, and are reluctant to spend money, in an American economy which is based on domestic consumer activity, not export. Can you say “Paradox of Thrift” ?

Next: The Federal Reserve Bank of San Francisco issued a report earlier this year giving odds of 85% chance of Deflation in 2010.

The only prices I’ve seen edge up occasionally lately have been oil, but here is news of further downward pressure on oil. So I am very dubious. Who uses their car anymore, unless they have to? Most big companies that I know of (including mine) have been cutting way back on business travel, in favor of teleconferencing. As seen below, the big cargo ships are staying in port, so other than the Russian oligarchs with their new Hummers, who else is burning all this oil?

Part III: Deflation and/or Economic Contraction Worldwide

Sure doesn’t look like there is any other country in the world that going to be able to save our bacon, either. I ran a few google searches on the terms “inflation” and “deflation”, and paired each with a long list of countries. The bottom line is, there really aren’t too many countries that are seeing much inflation right now. Let’s go through a short version of this list, in no particular order:

• In Canada: Deflation is expected to continue.
• In Germany: First price decline in 22 years. “Won’t last”, experts say.
• In Spain: Prices Fall for Sixth Straight Month.
• In Japan: Japan logs record deflation as demand slides.
• In China: China risks deflation and bursting bubbles in 2009. So far China has been cranking out the stimulus money like crazy to keep afloat, but how long can it last?
• In India: India Enters Deflation as Economy slows.
• In Russia: Russian Economy will shrink 6% in 2009. The ruble is inflating, but the economy has tanked. Even with all those Hummers and arms sales to Venezuela.

Even Zimbabwe, which was going through a sextillion-percent hyperinflation, is no longer doing so. This is because they finally gave up on their own currency and (as of April of 2009) only use foreign currencies for exchange, such as US dollars. Somehow I don’t think that is really such a good thing, and it certainly doesn’t do us much good, as increased demand for dollars only increases their value and buying power (deflation).

International Trade

A while back Gigi directed my attention to this little-known but important thing called The Baltic Dry Index, which measures prices and demand for those large container ships used in international trade. It is considered a leading indicator of future global trends, and it remains down. Not much shipping going on across the sea in those big container ships, many of which are now parked and dormant in Singapore. Not much trade going on anywhere, worldwide.

Oh, well, at least we still have our health, right?

Other Threats to Recovery

More cheery news; H1N1: Could Flu Pandemic trigger deflation?

I really look forward to someone talking me out of this bad mood that I’m in. And I really, really look forward to being proved wrong in the coming year, and will be more than happy to say that I was wrong, and will buy you all a beer and clink glasses over what turned to be just me worrying a lot about nothing.

Here’s to the power of Hope. Ching-ching.