skip to main |
skip to sidebar
Here is an interesting excerpt from the 2011 economic forecast from Piscataqua Research. Simple registration is required.
I am not sure I agree with their prescription to START with 4% short term rates and fiscal austerity, as I think it would shock the economy into a depression, even worse than the stagflation which seems to be unfolding already with today's CPI print and slack retail sales. A healthy diet and rigorous exercise are good, but not for a patient in critical condition and on life support after twenty years of medical quackery and drug addiction. America needs a twelve step plan with changes starting from the top down.
And as for fear, well, with the resurgence of a US stock bubble, and incessant happy talk in the mainstream media and the nation's thought leaders there does not appear to be any, unless you are poor, old, middle class, without savings, or recently unemployed. The bottom 95%.
I most certainly agree with Piscataqua's assessment of what they call 'debt-onomics' in both of its manifestations as unproductive stimulus spending and more tax cuts for the corporate trusts and the wealthiest few. Quantiative Easing without reform is creating further wealth disparity and another bubble in US financial assets. And this is made possible only by the extravagant privilege of the US holding the world's reserve currency. The new normal is a dangerous illusion; this will not end well.
None of these simple approaches will work because the economy is broken, and badly distorted, with a greatly oversized financial sector and a global monetary regime that is highly imbalanced and unstable.
Until there is reform, significant changes, nothing will work and there will be no sustainable recovery. Trickle down ultimately leads to debilitating and widening social dislocations (homelessness, unemployment, poor health) that are highly unproductive.
Let me emphasize this. Trickle down economics is nothing more than an old rationale for the destructive selfishness of the monied interests and a powerful status quo. And the theory of efficient self-regulating markets is sheer non-sensical propaganda.
The obsessive tendency of greed and corruption to its own ultimate destruction has been this Cafe's forecast since 2005, and so far nothing has fundamentally changed. The collapse of the US is starting to take on the character of the breakup of the former Soviet Union.
Piscataqua Research
Economic Projections Summary
January 3, 2011
In our January 2010 summary, we said: “For the third year in a row, our 2010 guesses are easy to reach… what looks to Ivy League economists like a recovering economy looks to us like a pre-bankruptcy debt ramp.”
Our guesses for 2010 were: real consumption would decline without further direct government support; real residential investment should bounce along the bottom; an unusual inflation/deflation should push commodity prices higher and consumer product margins lower; government budget and pension problems and federal debts should continue to mount; and mortgage rates should set more new lows.
We also suggested gold and oil would average much higher prices in 2010 than in 2009 and national home prices would be stable or higher! We did very well in 2010! In July with oil at $75, we wrote: “We will not be surprised if oil prices exceed $100 (or $150!) per barrel by next spring!” We are getting closer!
Our guesses for 2011 are also easy to reach. The cash flow model shows a high probability of major U.S. economic difficulties starting in early 2011. Our guesses are:
• Residential investment could approach 1933 as a percent of GDP;
• Commodity price volatility should rise significantly;
• The trade deficit should rise and possibly reach a new high;
• Mortgage rates should reach a long-term bottom in 2011; and
• Government budgets will be more challenged in 12 months than they are now.
On the optimistic side: 2011 should not bring deflation; higher mortgage rates; or lower home prices. Why do the fearmongers get so much press? Low 4% mortgage rates gone forever? Housing prices down another 20%? A Federal debt limit slowdown “catastrophic”? A big bear market? Uncontrolled inflation?
We do not fear interest rate increases crashing the economy; a Federal debt slowdown; a crashing dollar; or market crashes. Since there are no “bond vigilantes”, it can happen if the Fed lets or makes it happen.
It was no surprise to see the Debt Commission support a higher 2011 deficit while “fixing” the 2050 deficit! Their recommendation is pure debt-onomics - raise the debt flow to keep asset prices higher!
The reality is simple: the Federal Reserve has messed up the economy with low interest rates. Since 2005, economic investment has closely followed the 1927 to 1933 path. 2011 is the year that 1933 arrives. The path after 2011 should show the underlying mathematical structure of debt-onomics.
There are two main problems with debt-onomics: 1) it is a choice to consume now and not save later; and 2) it causes booms and busts by accelerating economic investment. Deb-tonomics creates high profits and high unemployment and concentrates income and wealth. It looks like capitalism, but it is not.
Our model points to 2011 as the meeting point of many difficult monetary and economic problems. This intersection should bind governmental and personal budgets in a vice as QE2 and tax cut stimulated inflation drives costs head first into a stone wall of limited tax revenue and personal income.
We wrote in January, 2010: “America has reached the point where there are only two paths. The first path is Bernanke’s and Obama’s: more debt and higher deficits…” The tax bill added about $900B to the deficit and took the path of “Obama’s higher deficits.” The bill also took the path of “Bernanke’s more debt.” In 5 years as Chair, federal debt increased by about $6 trillion and will increase by almost $8 trillion after 6 years.
There is now ONLY ONE WAY to fix the economy. The STARTING point is 4% short interest rates and balanced budgets. We forgot to mention: “and getting past the fear.” Those first steps are hard, but they start the journey! Budget surpluses and higher rates would work even faster! The math is easy.
In our model, 2011 is a true mess! Could we be right about mortgage rates again?! We will see!
As Al Jolson said, "Brother, you ain't seen nothing yet."
Welcome to Zombieland.
And yet there is hope, always.
"Time advances: facts accumulate; doubts arise. Faint glimpses of truth begin to appear, and shine more and more unto the perfect day. The highest intellects, like the tops of mountains, are the first to catch and to reflect the dawn. They are bright, while the plain below is still in darkness...The sound opinion, held for a time by the bold speculator, becomes the opinion of a small minority, then a strong minority, and finally a majority of mankind. Thus, the great work of progress goes on."
Thomas B. Macaulay
When I was attending classes at an engineering school in Cambridge Mass my professor used to say that a weak estimate without rigorous analytical underpinning was a 'Harvard handwave.' What they taught up the street was how to recognize that you had a problem, and then to run around waving your hands while you found someone who actually knows how to fix it. If you were in the Law School they taught you to wave with both hands, but with gravitas. Such is the bias of the engineering class towards modern professional management. As my Statistics and Probabilities prof Pandu The Formidable pithily observed, "It's all bullshit."
(By the way, a reader has been unkind enough to point out that Ben Bernanke received his Ph.D. in economics from MIT. I should like to rebut that he did his undergraduate economics degree at Harvard, and that economics as such is certainly not an engineering discipline, and probably not even a proper science. 'Financial engineering' is like 'nuclear sociology.' In addition, MIT also has a football team. Ben played the saxophone. Would you hold that against Charley Parker?)
So here is my own handwave forecast for 2011. After all, how can one apply analytical rigor when the data is largely hidden or even worse, fictional?
The general theme for 2011 is "I can't believe this. What are they thinking? Don't they know people are watching? Are they mad? Do they think we are idiots? How far do they think they can go?"
The US equity market has reached the target of 1251 futures basis, and has clearly priced in a recovery based on the most optimistic of forecasts for 2011. It is hard not to assume that this is a cynical exercise in painting the tape for year end bonuses and political spin.
I am having difficulty forecasting 2011 credibly for myself, because the normal metrics and fundamentals seem to have been left at the shore as we have set sail on the uncertain seas of quantitative easing and cargo cult economics promoted by highly mercenary think tanks and their demimonde in the mainstream media.
The great unalterable fact is that the system that delivered the financial crisis is still largely in place and insolvent, merely papered over with dollars in an unsustainable equilibrium. Frauds and fees are the major US domestic products.
For my thinking the great pivot is to what extent Ben and the US will attempt to maintain a pretense of virtue in the dollar while using it like a whore, fudging the economic results and by attacking all its competitors such as the Euro with short sales and downgrades. "They are all pigs, but ours is a little prettier" is the advertising jingle for a continuing dollar dominance. And they will attempt to continue to inflate what is going to be seen in retrospect as a new asset bubble in dollar denominated financial instruments.
As I have said in the past, the primary limiting factor on the Fed and the Treasury is the acceptability of the US bonds (and the dollar is a bond of zero maturity). They know this and are stretching it now as far as I thought they would, although the coordinated assault on the euro, gold and silver are starting to raise a few eyebrows.
Since Obama reminds one of a modern American CEO I suspect that they will take it to the limit if they can. With Larry Summers leaving though, one wonders if Timmy and Larry's replacement will be up to the task of actually pulling the right levers, or will they just keep dishing out the cash to their cronies on Wall Street and hope for the best.
As an aside, someone from the dark side of management philosophy once told me that honesty, loyalty, and enlightened self-interest in a subordinate is good, but blackmail is more reliable. This was why I did not obtain a position for which I quickly lost interest. It might not hurt to keep this principle in mind. After all it was the basis for Timmy, Ben, and Hank's presentation of TARP.
This could imply a higher SP 500 in 2011 than most people realize, and an earlier taste of hyperinflation lite. Gold and the euro will continue to be attacked, and the dichotomy between reality and the managed mainstream perception will continue to widen. Consider this the extension of current trends until something breaks.
Remember the shock people felt when, riding the tide of global good will and just cause, the US diverted from its mission in Afghanistan to suddenly start making the case for an invasion of Iraq which up to that point seemed to have no connection with events, and in retrospect, did not? Expect something like that to happen once again. Not the same, but similarly out of 'left field' as they say in the states.
And if and when the bough breaks it will be noticeable. There will be a panic liquidation and then a very interesting period of time. The limiting factor there is the Constitution, and how much people will mind it. I have not read many who really understand all that this implies.
The other primary course is to allow things to correct back to some sustainable trend, with the thought of actually rebuilding the system rather than just taking it up for another run at the stratosphere to see what happens. This will imply a weaker dollar, higher gold and commodities, and a grinding stagflation as the financial arsonists call for austerity for those on whom they have off laden their bad debts.
There are outliers naturally. The government could just 'take off the gloves' early on some pretext and declare price and currency controls and a type of martial law. I do not see Obama doing this, because I doubt the military would support him without a very solid pretext indeed, probably marked by smoking ruins. At that point December 2012 starts to play more prominently in my thinking.
I keep thinking that we will have features of both primary outcomes, a deflation and a further bubble, but the timing is difficult because it depends on the will of powerful men, and also exogenous events from other powerful men and the many who, at least for now, are sleepwalking into cattle cars. This is why I hold tight to the concept of portfolio diversity and keeping certain options open.
So what I am doing for myself is setting up pivots and trigger points to help determine which way the course of events will break, waiting for events to unfold in their own good time, preparing for the worst but hoping for the best. Things that are 'real' and 'lasting' offer the greatest safety now as they have done for the last ten years. Most of the time the future is just an extension of the past, the continuation of the obvious, until something happens.
The month of January will likely provide us a better window into the rest of the year, in which case the charts and forecasts will become more reliable.
If this seems gloomy it is. This is a tough fix, and the many, most people, are in denial, reaching for all the wrong solutions, rationalizing the irrational, holding on to the past, and grasping at straws. When they are betrayed by reality most will fall into despair, but some will be angry like the gangs of true believers that went around Berlin lynching draft dodgers while the Russians rolled their tanks across the Oder. I am hoping that this is a metaphorical example and not literal. How many lamposts are there in lower Manhattan anyway?
And yet I cannot say that I see one person in power, a great leader, in whom I would place any confident hope. So perhaps this is when one is most likely to rise up. And this is perhaps the most potentially frightening prospect of all. Great leaders are a very dicey affair.
Since people always want to trade some roadmap or system I have included some markers on the SP 500 Daily chart that show a likely path if we follow the second course of a correction and a serious attempt to fix things now rather than just take it to the limit and kick the can down the road for some other tomorrow. As Woody Allen might say, Our best hope is that things will be frightening and dangerous rather than desperate and horrific.
Dark humour aside, my primary forecast of a grinding stagflation remains intact. More of the same, with a twist. After all, the system has not changed with the exception of a few empty seats like Bernie Madoff and Lehman Brothers, relative bit players and outsiders. It is still highly geared towards wealth transference and fraud, merely searching for something to replace the housing bubble, and a new crop of suckers.
As I have said previously, I lost money in 2005-6 underestimating the reckless disregard for decency and the public good by the Fed and the US government in creating a massive housing bubble. I shall not make that mistake again, trying to get ahead of the market, and suggest you do not as well.
