Economic Outlook

Why Even a Modest Disruption Will Shatter the Status Quo

Consider this clipping from the August 1932 San Francisco Chronicle newspaper:

“Reduction of salaries of municipal employees and limitation of city positions to only one member of a household will be sought by (Supervisor) Adolph Uhl in two amendments to the San Francisco charter. The salary reductions would run from 2.5% for the lowest bracket to 25% on salaries of $500 a month or more.”

Thanks to the handy BLS Inflation Calculator we know that $500 a month in 1932 is the equivalent of $8,680 per month (about $104,000) a year.

Imagine the tempest of fury and outrage that would arise should this be proposed the next time local governments run short of funding. Nowadays, the calls would not be for sacrifices from the highly paid public servants but for tax increases of 25% to maintain public-servant wages and benefits while the private sector economy implodes.

This unwillingness to sacrifice for the greater good is now endemic. This is the result of two powerful social forces:

  1. The loss of any shared sense of purpose or social good worthy of sacrifice.
  1. The ascendancy of maximizing private gain by whatever means are availableas the primary purpose and goal of the Status Quo.

The dominance of maximizing private gain by whatever means are availableleaves the Status Quo brittle and fragile. Since everyone reckons any sacrifice should fall on someone else, the only possible result is disunity and bitter conflict over modest sacrifices that are too inconsequential to save the system from collapse.

Wishful thinking, mindless optimism and blind adherence to failed ideas also make the Status Quo brittle and fragile. As Michael Grant noted in his book The Fall of the Roman Empire:

There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.

This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.

This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.

A dependence on debt, low interest rates and financial legerdemain also render the Status Quo extremely fragile when the debt become unpayable and low interest rates no longer boost additional borrowing.

The wishful thinking is that we can borrow limitless sums ad leave the debt burden on our children and grandchildren with no consequences. But once the system is dependent on massive borrowing, it becomes acutely sensitive to default, as consumption collapses once consumers can no longer borrow to consume, and asset bubbles engorged by debt-assets (bonds, student loans, mortgages, subprime auto loans, etc.) burst.

Lest you think this implosion from a modest decline in debt and new borrowing is preposterous, please examine this chart of total credit: that tiny wobble in 2008 very nearly collapsed the entire global financial system.

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Any modest reduction in debt, tax revenues, consumption or new borrowing will bring the entire Status Quo crashing down. This is the bitter fruit of rampant financialization and the ascendancy of maximizing private gain by whatever means are available.

Regards,

Charles Hugh Smith
for The Daily Reckoning

The World Economy – A Balancing Act Soon to Collapse?

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Governments have embraced Marx & Keynes because they argued that government had the RIGHT and the CAPACITY to manipulate society by the economy creating Utopia eliminating the business cycle. They create economic disasters, blame others, and then start wars to get out the mess. It is never our interests at stake – only their’s. The Free Market always wins and this age of Socialism where they decide how to spend your money (usually on themselves), is coming to an abrupt end just as did communism. This balancing act has been a disaster because they assumed they had the power to control something they have no clue about how it even functions. Sorry but Smith and Schumpeter win.

Is Turkey Trying to Distract the World From its Debt Crisis Shooting Down a Russian Plane?

UnknownThere is something not quite right about this entire incident of Turkey shooting down the Russian fighter jet and then attacking the rescue helicopter. Sorry, but Turkey is way out of line when they KNEW that Russia had no intention of attacking Turkey. A argument that Turkey will defend its borders implies there is a threat to Turkey, not simply a drive-by. There was plainly no reason for Turkey to take such action. They assume they are a NATO member and thus Russia cannot fire back without starting World War III. This is a totally reckless incident and unimaginable conduct of Turkey under these conditions when they clearly knew they were NOT under attack from Russia no less a single fighter jet.

This Week on the Frontiers: Grow Slow

FrontiersSub-Saharan Africa’s economies are experiencing the lowest growth rate in six years, the IMF announced in its twice-yearly Regional Economic Outlook report. The fund said sub-Saharan Africa’s economies would collectively grow by 3.75% this year. That represents a dramatic downward revision of two percentage points from the IMF’s prediction a year ago, Matina Stevis writes, and 0.75 percentage points off its most recent prediction in April.

“The strong growth momentum evident in the region in recent years has dissipated in quite a few cases,” the IMF said.

According to the IMF’s World Economic Outlook database, just four of the world’s 10 fastest-growing economies are in Africa now…. CLICK HERE for the complete article

Retail Earnings Disaster Points To Gathering Storm

The big retail chains are generally seen as pretty good barometers of the health of “the consumer.” And since — in today’s late-cycle debt-binge pseudo-capitalism — the consumer drives the economy, the numbers coming out of the aforementioned retail chains should be cause for worry.

ddddFirst Macy’s got our attention: 

Macy’s Sounds a Holiday Alarm, and Retailers Brace for Heavy Discounting

(New York Times) – When Macy’s, a store closely associated with Christmas, says there is trouble brewing ahead of the holidays, it is enough to send the world of shopping into a tailspin.

The retailer of “Miracle on 34th Street” warned Wednesday that its stores were awash with merchandise after a sluggish fall season and that slow business would force it to go all-out on discounts during the holidays.

Macy’s shares plunged about 14 percent, dragging other retailers down, too. The Hudson’s Bay Company, which owns Saks Fifth Avenue and Lord & Taylor, fell 5 percent, as did Kohl’s. Burlington Stores fell about 7 percent.

Then Nordstrom dropped a bomb: 

Nordstrom Shares Plunge After Profit Misses Analysts’ Estimates

(Bloomberg) – Nordstrom Inc. fell as much as 18 percent in late trading after missing third-quarter earnings estimates and cutting its annual forecast, renewing concerns about a slump in the department-store industry.

Profit amounted to 42 cents in the period ended Oct. 31, Nordstrom said in a statement Thursday. Excluding some items, the earnings came to 57 cents. Analysts had projected 72 cents on average, according to data compiled by Bloomberg.

Nordstrom follows Macy’s Inc. in reporting disappointing results, underscoring a broader slowdown for department stores. Consumers are spending less of their money on apparel and accessories, shifting their budgets to cars, homes and technology. Retailers and clothing suppliers also have struggled to pare down excess inventories, forcing them to rely more on discounts.

The results reflected “softer sales trends that were generally consistent across channels and merchandise categories,” the Seattle-based company said in the statement.

The shares tumbled as much as $11.68 to $51.79 in late trading in New York. Nordstrom already had slid 20 percent this year through the close of regular trading Thursday.

Nordstrom’s same-store sales, a closely watched benchmark, grew just 0.9 percent last quarter. Analysts had estimated 3.6 percent, according to Consensus Metrix. The Rack outlet business, a former bright spot for the business, also suffered in the period. Same-store sales fell 2.2 percent, missing a projection for growth of 2.8 percent.

What does this mean?

First, e-commerce is winning big. Amazon, eBay, et al, have eaten the big-box stores for lunch, and they’re still hungry. Unless Telsa puts a car showroom in every mall in America, most malls are toast — and mall REITS are great short sale candidates.

Second, the surge in sub-prime auto loans wasn’t such a good thing after all, since those car mortgage payments apparently leave less disposable income for whatever it is people buy at Macy’s and Nordstrom. 

Third, the overall economy is, as analysts in the sound money community keep saying, way weaker than the headline government numbers imply. The jobs being created obviously don’t pay enough to enable workers to buy new clothes — even though as a waiter/bartender you do have to look sharp. 

Last but not least, stock prices are more vulnerable than you might think from watching CNBC. US equities fell hard today, and though there were several explanations being tossed around (China’s slowdown, a Fed rate increase), the implications of a “profit recession” should be in the mix. Because really, has there ever been a bull market when corporate earnings were falling?

 

About John Rubino and dollarcollapse.com

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

U.S. Manufacturing Renaissance Turns Into the Dark Ages

imagesgovernment’s abrogation of free markets will ultimately result in economic chaos and entropy”

The October ISM Manufacturing Index, which has been the official barometer of the U.S. manufacturing sector since 1915, came in with a reading of just 50.1. This was a level barely above contraction.

Of the 18 industries surveyed in the Regional Manufacturing Survey, 9 reported contraction in October: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Machinery; Transportation Equipment; Wood Products; and Computer & Electronic Products.

And of those nine, the energy market in particular continues to struggle the most. One respondent in the survey noted that the effects of the weak energy market are now beginning to bleed into other areas of the economy.

In addition to this, new orders for U.S. factory goods fell for a second straight month in September (down 1.0 %), confirming the manufacturing sector in the United States has hit a downturn.

In fact, U.S. Factory Orders have fallen y/y for 11 of last 14 months; and contracted 6.9% from September 2014.

Furthermore, demand for durable goods fell 1.2% in September. While demand for nondurable goods (goods not expected to last more than three years) fell 0.8%. This placed downward pressure on GDP in the third quarter leading to a disappointing 1.5% GDP read.

During the month of September a majority of U.S. states reported jobs losses, as the slowing manufacturing sector weighed on hiring nationwide. The Labor Department recently announced that 27 states actually lost jobs in the month of September. This data belies the rosy headline 271k Non-Farm Payroll report issued for October: the Labor Department releases individual state data a month in arrears.

All this bad news begs the question: Has the former manufacturing renaissance in the United States officially turned back into the dark ages?

Despite huge kudo’s to U.S. ingenuity for inventing fracking and horizontal drilling technologies, the viability of these innovations depends upon an unsustainable bubble in oil prices. Fracking is just one example of the misallocation of capital resulting from faulty price signals derived from central banks’ manipulation of interest rates.

And this failure isn’t limited to our Federal Reserve. The strategies of central banks all over the world are failing.

The European Central Bank (ECB) to date is in the process of printing the equivalent of $67 billion of QE per month, which will amount to a total of $1.2 trillion (or 1.1 trillion euros) by the time Mario Draghi’s QE program is slated to end in September of 2016.

Considering all that money printing, GDP in the Eurozone was only a pathetic 1.2% larger than it was one year ago.

Once the star of the Eurozone economy, German GDP disappointed with growth of 0.4% for the second quarter instead of the 0.5% analysts had been expecting. The French figure came in completely flat, and Italy, the Eurozone’s third biggest economy, disappointed with growth of just 0.2%.

Italy’s unemployment rate managed to fall in September, even as its economy lost 36,000 jobs during the month. This was because more discouraged workers left the workforce. As growth rates languish and economies lose jobs, central banks are getting more and more desperate to create inflation, which they like to masquerade as growth.

But the sad truth is even with over a trillion Euros of new money printed, governments are not achieving the inflation rates or the GDP growth they are seeking.

And then we have Japan, which is entering into its 3rd recession since the Abenomics regime took control in December 2012. The BOJ has been in the habit of printing 80 trillion yen each year! Nevertheless, its debt to GDP is approaching 250%, and annual deficits are 8% of GDP. The BOJ is buying 90% of all the bonds issued, and now owns half of all Japanese ETF’s. Yet despite a train wreck of an economy and horrific debt and deficits the 10 year note-in a perfect example of a central bank distorting economic reality–is yielding just 0.3%.

Our Fed has printed $3.5 trillion since 2008 in a futile attempt to get the economy growing at what Keynesians term as escape velocity. However, we have only averaged 2% growth since 2010. And growth in 2015 appears to be even less, as the all-important manufacturing sector is now clearly in a recession, and is now dragging down the rest of the economy.

Today, there are no free markets left anywhere in the world. Governments control the fixed income, equity and real estate sectors; and therefore control the entire economy. And what was once touted as the U.S. manufacturing renaissance has morphed into another example of how government’s abrogation of free markets will ultimately result in economic chaos and entropy.


Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”