Epocalypse Soon: The Second Coming of the Great Recession is Near
It was the second nuclear explosion, not the first, that ended World War II; and so it will be with the nuclear-sized economic disaster that first struck the earth in 2008. The second strike will be more calamitous and have greater consequence than the first, and that nuclear bomb is about to go off with a relatively small detonator to set the reaction in motion. And that is what this will be … a “reaction” due to all the potential energy stored up.
This month will hardly be the first time the Federal Reserve has raised interest rates going into a declining economy only to cause an economic crash. The Fed looks at a narrow cluster of instruments to judge the state of economy and routinely misses the large picture all around it. It didn’t see the Great Recession coming in 2007, though major global economic collapse looked inevitable and obvious to me; and it doesn’t see the return of that recession coming now as it considers raising interest rates.
The second crash will be more calamitous than the first because so much more top pressure is bearing down from all the piled debt and because so many more economic structures around the world are in weak condition and because central banks have run out of additional ammo to fight a war of such scale any longer.
Barring some obvious jolt to the economy on one of the few instruments the Fed does understand how to read, it will raise rates at its December meeting. Some permabears like Peter Schiff have held resolutely to the opinion that the Fed will not raise rates because it cannot without causing economic collapse. Schiff says the Fed will go straight into a fourth round of quantitative easing. I disagree and have said it will raise rates this year. The Fed has never seen an economic collapse that it could not help cause. It is not exactly a coterie of the world’s wisest people.
The Fed may be bullish on its own recovery programs, but it has the dim vision of a bear. Its bull-headed attitude is its blind spot. It will raise rates to prove its critics wrong and its own programs a success only to prove its critics right by triggering the rapid end of the mirage of recovery its programs created. The Fed is dumb like that.
Those who are generally bullish now see a US recession directly ahead
Says investment-guide Axel Merk, who is by no means a permabear, as the Fed considers its rate increase, “What could possibly go wrong? A hell of a lot!” Merk sees rising “risk premiums” that will create headwinds to the stock market for, at least, 18 months and possibly for years to come:
We can’t help but be pessimistic:
…the majority of corporations did not meet revenue targets….
Share buybacks … a key driver of the market rally, become less attractive as interest rates rise.
We see classic symptoms of a stock market top, including a lack of breadth (few companies participating in rallies). (Newsmax)
The last time Axel Merk soured on the stock market was clear back in 2007. He hasn’t been bearish since until he said in August that he is taking more aggressive action this year to prepare for a bear market than he did back when the Great Recession was about to deliver its first nuclear bomb.
Citi, again far from being a bear, has stated that the risk of a US recession for 2016 is 65%. The outlook for the global economy is darkening, they say, and the two biggest clouds coming the global economy’s way are the US and China, both of which look quite gloomy.
Fortune magazine says that permabull Goldman Sachs has even become “incredibly depressing” in its predictions for the near economic future:
Goldman predicts the S&P 500 will go nowhere in the coming year, saying the market will hit a headwind of rising interest rates, a strengthening dollar, and stalled profitability.
Of course, for the always-full-of-bull Goldman, nowhere equates to a mere 3% rise, including dividends, which as I recall was what they predicted for the S&P 500 this year, which has risen so far only 1.5%. In their pessimism, they were too high a year ago, and they are too high now. One of the headwinds Goldman Sachs points to is …
Only 6% of the time during the last 40 years has the median stock traded at a p/e multiple higher than it does today…. What’s more, Goldman says p/e multiples tend to fall by 10% in the six months following a Fed’s first interest rate increase, which is widely believed to take place in December. Goldman says the Fed is likely to increase interest rates faster than expected.
Another problem: stalled profitability. Goldman says profit margins at most companies have been flat for the past few years…. Goldman predicts that even tech sector profit margins have probably peaked at this point.
Brazil’s boom went bust; its recession becomes depression
Goldman is far more negative about another part of the world. They have moved from calling Brazil an economy in recession to a full-on depression, choosing a term rarely used. Thus, they must have deliberately wanted to call to mind the Great Depression as being the kind of pit Brazil is now falling into. Brazil’s economy has contracted for three quarters in a row now with no hope on the horizon.
Consider that a couple of years ago Brazil was considered one of the shining lights among emerging markets. That hope is now completely extinguished. Since much of Brazil’s debt is in dollars, an interest-rate increase by the Fed will only blacken Brazil’s outlook all the faster.
Brazil now experiences double-digit inflation, and its central bank is caught in that vicious circle where raising interest rates to stop inflation’s rapid erosion of consumer spending power, further suppresses economic growth and swells the ranks of the unemployed, thereby also eroding consumer spending power. As one particle reacts off another, there is no way out of that cycle but through an all-out explosion.
What started as a recession driven by the adjustment needs of an economy that accumulated large macro imbalances is now mutating into an outright economic depression given the deep contraction of domestic demand.
Can you think of any other economies that have accumulated large macro imbalances, such as huge debts in proportion to their GDP? A nation’s debt slowly starts to glow in a threatening way as it builds up mass; but, if it reaches critical mass, it may turn into an unstoppable reaction.
“Investment … has fallen nine quarters in a row, but this year the big change is the substantial drop in consumption,” Carlos Kawall, chief economist at Banco Safra and former Treasury secretary, said by phone from Sao Paulo. “We have not seen such a string of bad numbers for consumption.”
Consumers are reeling back in Brazil because of fear that they may not have enough income in years ahead to service their existing debts. Given the momentum of its fall and the vicious circle now in play, Brazil’s economy is certain to shrink for a couple more years, and who knows how many more years after that it will take for the economy to crawl back out of its hole? The Olypmic Games, planned when things were booming, may help but will be a short-term shot in the arm at best … or they may just be an expense Brazil can ill afford.
Brazil is one of the top-ten global economies, so its economic depression will put weight on everyone to some degree. But that’s nothing: several other economies in the top-ten are also in recession or slipping into recession. Japan is solidly in recession. China’s growth is declining rapidly, but it is not in recession, although its manufacturing base is now in recession. (In fact, the manufacturing sector of all the emerging-market economies is in recession.) Russia’s economy is deeply in recession. Canada just entered recession, and it appears the US is sliding into recession, though many don’t see it. This article is one of many to help show it is.
Did I not say this was going to be a year of global economic collapse?
US recession pressures developing quickly
MarketWatch reports that the Intsitute of Supply Management says,
U.S. manufacturers turned in their worst performance in November since the current economic expansion that began in mid-2009.
A series of interconnected reactions have begun in the US economy. In October, GDP growth slowed to the barest of crawls. In November, manufacturing reversed into actual decline, bringing the ISM index to its lowest reading since the full depth of the Great Recession in 2009.
[Note: That is to say, manufacturing has slid back to the point of the Great Recession’s greatest known depth. Fact is, we’re still in the Great Recession, and we don’t know how deep it really is. The economy died years ago and is just being kept alive by artificial life support. I have always maintained the Great Recession is ongoing but has been bridged temporarily with the support of vast amounts of new, free money. The US might as well be counterfeiting its own money, as printing it at the recent pace creates the same problem that counterfeiting does. The Federal Reserve is going to pull the plug on that life support this month, letting the economy slide into its natural death. Of course, the Fed does not believe that will be the result, and it will try to jump back in with quick recovery measures at some point next year once it realizes that the crash that unfolds is not just a temporary shock; but its efforts then will be less effective than anything they’ve done to date. We have also cooked the books on unemployment numbers and, especially, on how we calculate GDP to make things look better than they are.]
Economists did not expect this reversal in manufacturing, which is now building a backup of inventory at the fastest pace since the official dates of the Great Recession. The economic shrinkage of US industry was broad based with ten out of eighteen industrial sectors of the US economy now in recession.
While the ISM indicated US consumers are saturated with goods, US manufacturers are also saturated with backed-up inventory, which guarantees the decline in manufacturing will last some time before this huge oversupply normalizes. The problem is not going away in the next year.
Now, here is a chart that screams of US recession. It is the velocity of money in the US:
The shaded areas mark US recessions. Note that in every recession above, except one, the velocity of money ran sharply downhill. More interestingly, note how the velocity of money recovered after each recession … except after the Great Recession of 2008-2009. After a brief uptick, the velocity of money has declined to its all-time record low through the period that has been called a recovery. (Just one more reason I say we are still in the Great Recession as there has been no recovery in the velocity of money. It is, in fact, the worst we have ever seen … in spite of the fact that there has been no time in history in which the US has created so much new money.)
Velocity of money refers to how fast or often money changes hands; i.e., how fast money is moving through the economy. So, slow velocity means very little economic activity. As the Federal Reserve has exponentially expanded the supply of money, the movement of money through the economy has stalled to its lowest speed on record. That’s because the money is pooling in the hands of very few rich people where it is being hoarded but is doing nothing to stimulate the actual economy.
If money is not moving easily with low viscosity through the economy but is congealing in a very small number of pockets, the economy is stagnating. We have never lived in a time where the quantity of money was so high and the flow of money through the economy was so slow.
Conclusion: The Great Recession is still here, and it is the end of a false recovery that is near
While the stock market is still skipping along just below the ceiling it established last year because that is where the hoarded money is pooling, the overall economy is deeply mired. So, will the Fed raise rates just as the US economy reaches a critical mass of internal reactions? Of course it will! It believes the glowing stock market is a proof of economic recovery, even as the actual economy (as opposed to the stock market) is cracking up.
At this point, apparent rallies in the stock market are nothing more than death spasms. They should not be seen a spurts of recovery but as preliminary bursts of explosive energy from something that is right on the edge of explosion.
In other words, a very limited number of people and insitutiitions are looking for safe places to invest free money while the free money lasts. This creates bursts of activity among a few large players. Speculators in the US stock market are now crowding into a rapidly diminishing number of safe havens. When they do, they bid those few stocks up so much (because there are so few worth buying) that it gives the market average a brief boost. There are probably some net gains to the market in these bursts due to money moving over from high-risk bonds that look even worse.
These rallies are nothing more than the final rapid movement in musical chairs where the number of chairs is few and so are the remaining players, but the game accelerates into greater intensity until the music stops one last time, and it’s over.
To put it in crystal-clear numbers, 490 of the S&P 500’s stocks have been sinking all year; but ten have done outrageously great, keeping the S&P average bounding along that ceiling. That means there are now ten remaining chairs out of a circle that had 500, as 490 of the chairs have been removed from play. The scramble for the ten remaining chairs is now a flurry of excitement, as the removal of a single chair out the remaining ten has far more significance than the removal of one chair out of 500.
The next time the music stops will be when the Fed announces its first interest-rate increase in 84 months. At that point, the stock speculators and robo-buyers will trip over each other so fast that they’ll knock the few remaining chairs down, and no one will have a good place to sit.
The end is near — the end of a fake economic recovery. And it will be detonated by the Fed, itself, because it believes its own baloney. It believes it has created recovery. Before the month is over, I will be writing, “The End is Here,” exactly as I said I would last spring. That end will take many months to find its bottom, but the initial jolt will be quite evident. August was just a foreshock.