Have Fed Policy Errors Pushed Us Into a Stagflationary Depression?

As we noted at the end of 2007, there is little doubt we entered a recession in 2007. The only question was how long and how well the Fed might conceal it, and mask its effects on the financial markets and banking system which is their first priority no matter what else they might say, for a variety of reasons.

Depending on how one wishes to define it, and how one wishes to measure our monetary inflation, we have probably been in a technical recession starting early in 2007 and perhaps late 2006.

The recession is growing stronger and deeper because of the Fed and Treasury policy errors, squandering valuable national capital on a financial sector that requires reform, not welfare support.

Their errors are so large and so misguided that they may have condemned the US to a stagflationary depression. The equally misguided efforts of several national central banks may drag a good part of the developed world down with us for several years.

This study is a significant focus of our inquiries at this time, our intellectual raison d'être now that the question of recession is settled. Its no longer a question of 'how long and how deep' but the evlving nature of this downturn, the actions of the Fed and Treasury in reaction and the manner in which they prolong and mutate it. We may be watching something truly exceptional, and are seeking to understand it.

It will probably be the employment numbers that eventually make the difference in definition, although as we have previously shown that the government is actively revising those numbers many years back on a regular basis.

The major stock markets deflated by an appropriate contra-dollar measure also are consistent with the view that we are entering the recessionary aftermath of a market crash that occurred in 2000-3. We have never legitimately recovered. The Fed has been engaged in a protracted monetary experiment. We await the outcome of their gamble with keen interest, as the stakes of the wage are severe.

A significant challenge is the lack of transparency and reliable government and private statistics, and the willing complacency of most economists.

This may be an historic event. It is entirely consistent with what occurred in 1929-31 that it is happening largely unnoticed by a complacent public until they are swept away by it, with revelation after revelation that they have been deceived and misled.

What about the theory that if we pretend there is no recession or inflation then we won't have one? If we pretend that reality doesn't matter we will simply and slowly go collectively insane. There is some precedent for countries that do this.

So what ought one to do? Get in there and short the financial markets? That is like running down on the beach to sell flotation devices for an incoming tsunami.

When the tsunami is coming, get off the beach. The 'beaches' in this case are dollar denominated financial assets and financial assets dependent on the US economy.

We hope that the vectors of our data analysis are not correct. May God have mercy if they are.


U.S. Recession May Have Begun in Last Quarter of 2007
By Timothy R. Homan

July 31 (Bloomberg) -- The U.S. economy may have slipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened, revised government figures indicated.

The world's largest economy contracted at a 0.2 percent annual pace in the fourth quarter of last year compared with a previously reported 0.6 percent gain, the Commerce Department said today in Washington. Growth for the period from 2005 through 2007 was also trimmed.

The revisions now reinforce measures such as employment and production that already signaled the economy was shrinking. The National Bureau of Economic Research, the Cambridge, Massachusetts-based arbiter of economic cycles, defines a recession as a ``significant'' decrease in activity over a sustained period of time. The declines would be visible in GDP, payrolls, production, sales and incomes.

``We're in a recession,'' Allen Sinai, chief economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. ``It's going to widen, it's going to deepen.''

The government also said incomes grew less than previously thought, raising the risk that consumer spending will again stumble after getting a temporary boost from the tax rebates last quarter....


Today's GDP Number Will Be Revised Lower - April 28

Why the US Has Really Gone Broke - April 28

Jobs Numbers Revised Back to 2003: Confirm Recession - April 4

The Potemkin Economy Just Fell Over - March 7

SP 500 Tops in Recessions

ISM Numbers As Indicators of Recession - February 6

Are We In A Recession? - February 4

Fed Policy Actions in Anticipation of a Recession - January 7

Recession, Straight Up with a Twist - December 8

Dow Jones Industrial Average Since 1999



Dow Jones Industrial Average Since 1999 Deflated by Gold



Shadow Government Statistics Estimates of Real GDP



Shadow Government Statistics Estimates of Consumer Inflation

Of Government Intervention and Why I Write This Blog

A brief treatise in which Jesse questions the reason for this blog among other things

Most people will read only the subject title of this essay and then immediately begin composing their own off-the-cuff thoughts which they will rush to either email to us or slap on some chatboard or blog somewhere. Or they might even scan it for a daytrade and then discard it. But one or two will read it and think about it, and become links in a chain, and the spirit of knowledge will grow, little by little.

The government is intervening in the various markets. There is little or no question about it, if you allow that actively changing, with intent, the rules, money supply, short term liquidity, interest rates, methods by which key statistics are tallied, spin and other information that might impolitely be called 'propaganda' is manipulating the markets. And it often is.

They admit it. The evidence is there. If you don't know about it you have not been keeping up with current events. So it becomes a question of when, where, and why.

On the other hand, there are those who think every market move is active government intervention. This just is not the case. In the short term markets are more like rugby scrums than chess or even a well-managed game of limit poker, and the bigger players spend a great deal of time putting up bluffs and bullying the smaller player using their better access to information and bigger stacks of chips, especially when government regulation is lax and inefficient, with society ruled by narcissism and greed, as it is today.

The action of the past two days in the US stock markets is a almost classic end-of-month paint job by the fund managers and other-people's-money crowd, who are able to influence the grade on their own reports cards by buying the market and driving certain prices up after selling their losers three days before the end of the month. Their motive is their bonus, and the lax regulation with light penalties, and their general lack of compunction against cheating which they have likely done in school, in sports, in relationships, in most of their lives.

It is very hard to look at a specific market at a specific time and say with certainty "Aha, this is explicit government intervention" as opposed to something else. Governments work through third parties and hide their tracks, except when it suits them to be blatant. Often big third parties are just flush with hot money from the Feds and looking to shove some market for the short term trade.

But they do it, both directly and indirectly. If you are a momentum player it doesn't really matter, and if you are an investor you will see it only in sustained efforts that last some time, and usually involve a multi-faceted approach. We call these 'reflations' and try to point them out as we think they are occurring.

Speculating about when, specific markets on specific days, and the why, their long term motivations, is fun because its like gossip. It also can have some value if it causes us to look at things more deeply and examine the evidence, which may be easily dismissed by the public. Spotting effort to suppress or inflate markets can be exceptionally rewarding, since they often fail and sometimes spectacularly so. And motive is a key companion to opportunity, means, and any other circumstantial evidence.

But more often in questioning long term motivations we are asking a question that cannot be answered objectively except after a very very long time, even if then. Its like arguing about whether or not God exists, or aliens are visiting us, or what is the best beer, or who all shot Kennedy, or which is the greatest football team. Sometimes these discussions are fruitful and scandals are uncovered. They do exist. But often they degenerate into recreational discussion and faux expertise.

What makes it fun is that you can just yell about it endlessly, and believe what you want, because what cannot be proved cannot be disproved.

It is a way to pass the time relatively effortlessly, like griping and bitching at work. It can be a trap because anytime you are wrong you can retreat into the rationale of external forces. How can you be responsible for your actions if 'they' are doing it to you. Sometimes it can be a crutch. But so many things are.

As a general rule an objective person doesn't take credit for being right unless they know why they were right and can explain it. Otherwise they might just have been lucky, and it not only does not add to our knowledge but may reduce it.

If the Fed is indeed making policy errors, then we will take one path versus another. Then one should do one thing versus another. Those things can be examined, can be dissected, can be studied, but they take work and effort, and one can be right or wrong. But they add to a body of knowledge. And often this work is dismissed by those doing the behind the scenes work as recreational gossip. They seek to raise the bar so high that no possible proof can be provided without subpoenas and wiretaps.

Speculation based on evidence is the heart on the scientific method. Yesterday's radical theory scoffed at and discouraged by the established view is tomorrow's generally accepted truth. The difference is free discussion and evidence, above all, strong comprehensible evidence.

The value we get from even pointless disagreements is that it causes us to think and define thoughts which otherwise are all too easily just parked in our minds, and never really given any vigor or life.

Besides the relentless impulse of humanism, this is a major reason for this blog. We used to look for valuable feedback and discussion on the specifics, but that's beyond hope.

Those who are in-the-know are in denial and hiding, trying to line their pockets and curry favor with whomever they think will be in power next.

Those who don't know are running around waving their hands, shouting slogans and hearing only their own voices, or just ignoring it all getting loaded on whatever happens to be handy.

All in all, a nice microcosm. Life imitates high school so often in our experience, and one's best recourse is essere umano, to be human throughout it, and perhaps give the bastards a swift kick just to let them know you're still out there.

In the meanwhile there are important and interesting questions to investigate as best one can. Its not clear yet exactly which way this thing goes, and the variables interact with one another, and are many more than can listed here:

A. Will our government become a better democratic Republic, Fascist, or Socialist, and the related broader question of the Individual vs. the State which tends to modify all the general types.

B. When and how the dollar will be further devalued and how fiat currencies can be sustained without being destroyed by inflation? (By the way in all history none have succeeded}.

C. How will the world's reserve currency evolve? Can a greater centralization of power and control be avoided gracefully? Can freedoms be maintained if it cannot?

D. How deep and protracted will the recession be and will it cross a threshold into a depression through Fed policy errors and how and when will we know it?

E. Will there be a 'moment of clarity' when the failure becomes evident and things move with alarming speed, or will this be a damp fizzling decline into an ignoble whimper.

We will continue to explore all these areas with what we hope is a bias to objective analysis and pertinent data, laced heavily with humour, satire, charts, and pictures.

Little by little, there is progress, and the body of knowledge grows, and life is renewed, and creation is made more orderly, and liberty and the spirit is restored.

The Future of Financials

Here is a video well worth watching.

The Future of Financials - Meredith Whitney

Meredith, in a polite and somewhat understated way, makes some excellent points as an independent analyst, but probably of necessity treads lightly around some serious issues and deeper economic problems.

The real economy must pay a significant 'tax' to support the financial sector as it is now, and an incredibly large tax to restore it to its former excesses. Don't forget this, especially when the government tries to argue that there is no money for human services, and health, and basic infrastructure.

It is a matter of our priorities. We can choose to pay that tax, and let our children pay it, or we can try to restrain the banks again and bring the economy back into balance. A healthy economy requires a finacial sector that functions as a capital accumulation and allocation system with price discovery in an open, honest and transparent system of transactions, with the minimum 'friction' of overhead and corruption.

We will have no sustained recovery overall until we move much further towards a balanced system as set forth in our Constitution, and establish rational, peaceful, and equitable policies for our nation.

So we must roll up our sleeves, let go of our fears, gather ourselves together, and move forward.

Just How Accurate is the ADP Payroll Report?

Not as accurate as we had thought it appears. Most assume that the monthly ADP employment report is based on actual data from the business sector on jobs additions, merely excluding the government sector, but a good "hard data" source indicative of the Non-Farm Payrolls Report.

We have this piece of information in an email from a capital asset fund manager:

"I just called an economist at MacroEconomic Advisors, the local St. Louis firm that compiles the monthly ADP (private) employment data which was reported today for the month of July. Please keep in mind that this firm has ties to former St. Louis Fed Governor Laurence Meyer. The statistic was a "shocking" +9000 JOB GAIN!!! This promptly pushed the equity futures market (and U.S. dollar) sharply higher at 8:15EDT. The DJIA after a half hour of trading is up 122 pts.

Now, are you sitting down? A component of this very suspicious report showed that Financial firms INCREASED employment by +4000 jobs. I promptly told this "economist" that there was no way in God's Green Earth that banks, brokerages, mortgage companies, and any other financial institutions had increased employment by 4000 jobs in July. He candidly told me that the firm had probably overestimated that sector for many months. Upon hearing that, I asked him why they don't change their methodology in compiling their data? He indicated that they were doing that but that it was a "monumental task!"

So, we have a sharp rally this morning in the equity market and U.S. dollar, based on data that even the reporting firm questions. I think we've seen it all!"

No we haven't seen it all yet. But we're on our way.

ADP Payroll Report or not, this stocks rally is frivolous.

The market was predisposed to rally however, otherwise it would not have. It was looking for an excuse, since the fund managers must have their fatter bonuses, and hot money must be consumed by mispriced beta.

To give the rally a little credit we'd allow that optimists are grasping at straws looking for a turn, a bottom. Some may be sincere in their hopes, like some of the financial media may be. Who wouldn't?

But we are watching people who are most likely about to lose real money, with real consequences, based on a system with too little in the way of transparency and integrity.

Until the banks are restrained and the proper regulation is restored there can be no recovery, no restoration of a sound economy based on sustainable values. We have no objective price discovery mechanism to determine the wheat from the chaff, the flawed from the viable, the foundation from the sand.