Green
Shoots or Greater Depression?
Bud Conrad/David Galland
The
Casey Report
Aug 26, 2009
While we aren't contrarian
for the sake of being contrary, more often than not that is the
position in which we find ourselves. Today, with the media falling
all over itself to paint a rosy outlook for the economy while
simultaneously voicing encouragement to the new administration
in its remake of the nation in previously unimaginable ways,
it's hard not to question our conviction that the worst is yet
to come.
Could the economy really recover
this quickly from the traumatic trifecta of a record real estate
bubble, leviathan levels of debt, and a global credit collapse?
We don't see it as remotely possible, but yet... but yet... there
for everyone to see are countless happy headlines and breathless
exhortations that the worst is behind us.
So, is it Green Shoots or Greater
Depression?
Getting the answer right is
critical, because from it flow serious consequences to each of
us. And not just in our investment portfolios but in how we organize
our lives.
Looking for an evidence trail
leading to the correct conclusion, Casey Chief Economist Bud
Conrad once again put in very long hours digging through the
data. Here's what he uncovered, about the claims of green shoots,
and what may actually be in store for the economy moving forward.
-David Galland
Rather than accepting the many
commentaries that our economy may be improving, let's focus for
a minute on the important forces that will play out over the
decade ahead, and the minor improvements - from disastrous levels
- that have given commentators such hope that the worst of our
problems are behind us.
What Do the "Green Shoots"
Really Look Like?
While some individual measures
of economic activity appear slightly less dire than previously,
it's important to understand that most improvements are largely
attributable to government intervention.
For example, at the onset of
this crisis, commercial paper spreads rose to the point that
this important source of corporate short-term funding had virtually
shut down. Today, those spreads have returned to almost normal
levels. But the bulk of this improvement is not due to a return
of confidence in the economic system but rather to the Federal
Reserve directly intervening in the market with several hundred
billions of dollars.
And mortgage interest rates,
which briefly dropped into the 4% range, did so not because of
a surge in creditworthy borrowers or eager lenders... but rather
because the Federal Reserve launched a program of buying $1.25
trillion of mortgage-backed securities. Doing its part, the Treasury
has poured billions into Fannie and Freddie and provides guarantees
for their mortgages.
In these and many other instances,
the "green shoots" that optimists have spotted are
really just the visible manifestations of the massive interventions
by an increasingly bankrupt government.
Indeed, the massive fiscal
stimulus provided by the federal government - and by the Fed,
which has slashed interest rates to near zero, purchased mountains
of toxic waste, and bought up Treasury debt with billions in
freshly printed money - are unprecedented in the history of the
U.S.
But even a cursory review of
key metrics reveals continuing declines in housing prices, rising
unemployment, and slowing consumption as measured by falling
retail sales, GDP, and the collapse of world trade. Sure, housing
unit sales recovered a little recently, but that's due mostly
to the distress sales of foreclosed homes and houses worth far
less than the outstanding mortgage. These are not signs of a
strong economy.
The only rational conclusion
to be drawn is that the crisis is far from over and that we are
not likely to see a strong recovery anytime soon. In fact, things
are likely to get much worse before they get better.
The massive debt expansion that played a crucial role in creating
the disastrously overleveraged economy is not shrinking. As you
can see in the chart here, it's growing ever bigger.
That debt growth was fostered
by U.S. government debt growth, which is now getting out of control.
(Don't just believe what you
hear about "green shoots," or you could lose some serious
money. To find out what's really going on and where all this
is leading, read
the rest of Bud's in-depth article here.)
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1998-2009 by Casey Research, LLC.
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