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DOWNTIME Part 12 – Talking Stock Versus Taking Stock

Some people keep talking stock, whether they’re right or wrong, and stay with their pollyanna beliefs. Others take stock of their own predictions, ignore what they want to believe, and look at reality square in the face. We’re now at a perfect time for taking stock of some recent predictions.

Talking Stock

Two weeks ago I wrote that National Review’s economics editor, Larry Kudlow, must have been on some powerful hallucinogens when he predicted, “The stock market is telling us the economy’s future is a lot brighter than its past.” He based his euphoria on the phantom hope that “the stock market looks ahead,” and the stock market had just turned upward upon hearing a very bad jobs report the same day. Thus, by Larry’s thinking, it must have sensed something the rest of us didn’t know. Larry looked for the silver lining that would explain the sage wisdom of the market in going up when it should have gone down.

If Larry was right that the upturn of the market following a dismal jobs report meant the market knew good times were on the horizon, in spite of the bad news, what does it mean now that the market made a major downturn right after Larry spoke, especially falling after what should have been positive news — that history’s greatest stimulus bill was signed into law? True oracles are not fickle. Clearly the stock market is more reactive than predictive and no wiser than the common masses that create it. If the stock market were our canary in the coal mine, we’d all be dead ahead of the canary.

No sooner had Larry finished his caviar after that last prediction, than GM and Chrysler headed back to the government for another thirty billion because things were far more grim than the needs they had first laid out. Then, barely two weeks past Larry’s forecast of silver linings, Leah Shnurr of Reuters reported, “Stocks slid within striking distance of the November bear-market low on Tuesday, as grim manufacturing data signaled the recession is worsening and warnings on risks facing European banks underscored the continuing toll of the financial crisis.” From the day Larry cooed over the warming of the stock market, stocks have done nothing but taken the polar-bear plunge to new lows.

Even U.S. bank stocks slid much further over the last two weeks, in spite of monumental efforts to shore them up with a 700-billion-dollar bailout that has failed to hold. So, in the last two weeks, the stock market has skidded all over the place, and the credit market remained on ice, in spite of largest stimulus package ever known to mankind. What does that tell you about the kind of speedy recovery Larry crooned about? All the little uptick showed us was that the market was still deep in denial.

The sliding was, in part, due to how faulty the stimulus bill looks and equally due to some major bad manufacturing news that started rolling in (the kind you seen in advance if you’re not blinded by denial). Meanwhile, the SEC reported more massive fraud — this time in Texas at Houston-based Stanford Financial Group. As I have been saying, we are certainly going to continue to find more major fraud. Madoff was the beginning, not the end. Fraud is rot, and it tends gives out under a heavy economic burden. You often don’t see it until it has to bear a load. Only the most obvious fraud shows up at first. Likewise, only the weakest institutions fail at first. So, there will be more fraud to be found and more institutions that were not quite as weak as the first to fold.

One day after Shnurrs article, Pedro Nicolaci da Costa (also of Reuters) reported that, “U.S. unemployment will top 9 percent before the recession is over, according to a Reuters poll of economists that points to a significantly bleaker economic outlook than just one month ago.”

I say Reuters’ selected economists are still too optimistic. We will easily hit double-digit unemployment before the present depression is over. Why? Because our present economic gurus are still basing their figures on what is before them on the immediate horizon, which anyone can see; but they are not factoring in how one domino falls against another. They are looking at only what has fallen and what is clearly likely to fall but not looking at what is going to be hit next by what is clearly likely to fall. Take off the blinders, and you can see what lies in the path of the next thing to fall.

There are, at last, a few voices familiar with the market that have stepped out of denial. Last week Reuters also reported, “Renowned investor George Soros said on Friday the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis. Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.
He said the bankruptcy of Lehman Brothers in September marked a turning point in the functioning of the market system…. There’s no sign that we are anywhere near a bottom.”

That’s what I said the day Lehman Brothers fell, not just because it was Lehman Brothers, but because of the realities underlying its fall; so now let’s take stock of the things that I’ve predicted. They’ve been in writing in this column. So, they’re not hard to follow. Go back, and you’ll see I leave nothing out in taking stock of my own words.

Taking Stock

People need to start listening to different voices than the old gurus. While few if any voices were talking economic depression seriously when I was a year ago, even the White House said unequivocally this week that there is no longer any doubt that this will be, in the very least, the longest economic downturn since the Great Depression. Not all depressions are equally great. That’s why we only call one of them “The Great Depression.” You don’t have to equal The Great Depression to be in a depression. On the other hand, remember, there was a time when we only called one war “The Great War.” Eventually, we had to number them.

Last month, I wrote that sales reports from major retailers would show abysmal drops by the end of January and the first part of February as fourth-quarter results came in. I said that would happen in spite of long lines in stores at Christmas. I said that sales volume was there, but that profits would be seriously lacking. It was the end-of-the-economy’s close-out sale. Not much materialized in January, but the data is now coming in at mid February:

Associated Press’s Stephen Bernard wrote last week, “Disappointing fourth-quarter earnings reports from Lowe’s and J.C. Penney provided new evidence that the recession is taking a heavy toll on U.S. businesses…. Lowe’s said its fourth-quarter profit dropped 60 percent after customers cut back on spending. Lowe’s also provided a 2009 earnings forecast that was short of analysts’ expectations. Department store chain J.C. Penney said its fourth-quarter profit tumbled 51 percent.”

I also predicted last year that the next wave of this economic tsunami that would hit us would be a manufacturing collapse as a result of the retail failure that would roar by in December. Right on schedule this week, due to all the bad news on the manufacturing end, the Dow Jones Industrial stocks broke the bottom of the last bear market and look like they don’t know when they’re going to stop.

NewsMax reported, “The move below [the 2002 bear market] dashed hopes that the doldrums of November would mark the ending point of a long slump in the market, which is now nearly halfway below the peak levels reached in October 2007. The market’s inability to rally signals that investors see no immediate end for the recession, which is already 14 months old and one of the most severe in decades.”

So much for the predictive wisdom of that little blip Larry got excited about. The present scene is less like experiencing the reassuring warmth of a thaw and more like the ice is cracking under our feet… but maybe not because it’s thawing; maybe it’s just moving. Other signs of the downturn in manufacturing: freighters that are now running half-empty are offering to haul cargo for just the cost of their fuel and handling so shipping companies can fill up the remainder of the ship, in essence running with half a payload and then offering sales on the rest of their space at bare cost just to help cover their fuel and get the ship out on time. Half of China’s 9,000 toy exporters have gone bust, mostly since Christmas, as predicted.

The Economist reported this week, “The destructive global power of the financial crisis became clear last year. The immensity of the manufacturing crisis is still sinking in…. In fact manufacturing is also caught up in a global whirlwind…. Industrial production is volatile, but the world has not seen a contraction like this since the first oil shock in the 1970s — and even that was not so widespread. Industry is collapsing in eastern Europe, as it is in Brazil, Malaysia and Turkey. Thousands of factories in southern China are now abandoned. Their workers went home to the countryside for the new year in January. Millions never came back.”

CNN reported last week that 70,000 factories have closed in China and 20-million workers have lost jobs. Some analysts are now suggesting that a rural revolution is imminent because the 20-million workers had migrated into cities from rural areas to get these jobs. This is not just a manufacturing decline. This is a MASSIVE manufacturing collapse.

Paul Volker, renowned for careful, non-alarmist, measured statements, even said with regard to manufacturing last week, “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

If you’ve been following my column, you’ll remember the order I predicted for the waves of the economic tsunami triggered by the housing collapse (triggered by it, but caused by too much debt everywhere): First, a financial market collapse worse than all but the oldest of us have seen; then a few manufacturing failures due to the credit crunch from the financial collapse (which happened with the big-three in the fall); then major retail failure over the holidays due to loss in housing values, the shrinking of credit, and the loss of jobs in banking and at a few major manufacturing closures; then a worldwide manufacturing collapse after Christmas, followed shortly or maybe simultaneously by a commercial real estate collapse (not yet seen but early signs are showing); and then a collapse of commercial banks that are less affected by housing than by commercial real estate, and then minor reverberations from all of that piling up.

Those are the dominoes that take each other out or the waves of the tsunami before this is all over. Four out of the six that I laid out have happened in exact order and on schedule like a train … wreck. Amidst all of that you have the less predictable effects of waves hitting one shore then bouncing off to another that I also spoke of. Thus, we are now seeing Europe crumble to its knees due to the U.S. collapse and not knowing how many ways that will feedback to the U.S. with protectionism, etc.

All of that is why there is still a lot more downtime to come. Stop listening to Lightheaded Larry, and listen to Knave Dave.

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