Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
SPX/Gold, Long-term Yields & Yield Curve 3 Amigos Update - 22nd Jun 18
Gold - How Long Can This Last? - 22nd Jun 18
Dow Has Fallen 8 days in a Row. Medium-long Term Bullish for Stocks - 22nd Jun 18
Trouble Spotting Market Trends? This Can Help - 22nd Jun 18
Financial Markets Analysis and Trend Forecasts 2018 - A Message from Nadeem Walayat - 21st Jun 18
SPX Bouncing Above Support - 21st Jun 18
Things You Need To Know If You Want To Invest In Bitcoin Now - 21st Jun 18
The NASDAQ’s Outperformance vs. the Dow is Very Bullish - 21st Jun 18
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Policymakers Have Made Another Economic Depression Unavoidable

Economics / Great Depression II Jun 05, 2011 - 10:06 AM GMT

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleEquities markets have been battered all week by bad economic data sending investors piling into "risk free" Treasuries. The Dow Jones slipped 276 points on Wednesday followed by a 41 point loss on Thursday. The benchmark 10-year Treasury has ducked below 3 percent repeatedly signally a slowdown that could lead to another recession.


On Wednesday, the S&P/CaseShiller home price index confirmed that 5-year long housing crash was still gaining pace. Home prices have fallen to their lowest level in 8 years with no end in sight. Meanwhile the Chicago Manufacturing Gauge recorded its biggest decline in 2.5 years while factory orders dropped in April by the most since May, 2010. There was also bad news on the unemployment front where privately-owned businesses hired only 38,000 workers from April to May, nearly 100,000 less jobs than analysts had predicted. Also, consumer confidence fell to its lowest reading in six months.

So, housing, manufacturing, unemployment and consumer confidence are all down, down, down and down.

Friday's unemployment report was also worse than expected. The Bureau of Labor Statistics (BLS) reported that unemployment rose to 9.1 percent while the Labor Force Participation Rate remained stuck at 64.2%, well below the normal rate of 67%. According to Calculated Risk, "The current employment recession is by far the worst recession since WWII in percentage terms...(The BLS report) was well below expectations for payroll jobs, and the unemployment rate was higher than expected."

So, no new jobs are being created and the economy is quickly decelerating. It's all bad.

On Friday, the chairman of RIT Capital Partners Jacob Rothschild issued a warning about the fragility of world markets and the bleak prospects for future growth. He said,

“The risks ahead are glaring and global. It is likely that the withdrawal of the fiscal and monetary stimuli which will surely come soon will have an impact on global growth. Indeed there is already evidence of some slowing down."

Commodities have already been walloped, but the real carnage is yet to come. This is from Bloomberg:

"Commodities plunged yesterday as investors accelerated sales following year-to-date gains through April of more than 23 percent for silver, oil, gasoline and coffee. The Standard & Poor's GSCI index of 24 commodities sank 6.5 percent in the biggest one-day drop since January 2009, bringing its loss this week to 9.9 percent.

"It was a train wreck waiting to happen," Michael Mullaney, portfolio manager at Boston-based Fiduciary Trust, said in a telephone interview. Speculation drove commodity prices well above reasonable levels, "and we are going to see it shake out some more before we get back to normal prices," said Mullaney, who helps manage $9.5 billion."

Even a whiff of deflation will send commodities tumbling, which is why investors should be worried about the recent data. The economy is quickly losing steam and troubles in China, Japan and the eurozone have only added to the uncertainty. According to Bloomberg:

"A 'sudden' slowdown in China may lead commodity prices to fall as much as 75 percent from current levels, Standard & Poor’s said.
Unexpected shifts in government policies or problems in the banking sector may trigger such a slowdown, S&P said in a report e-mailed today.....“Given the extent to which China has bolstered commodity prices, that’s something that we have to be concerned about,” S&P analyst Scott Sprinzen said by telephone from New York.".....(Bloomberg)

The fact that 10-year Treasuries have dipped below 3 percent should also be of concern, because it's an indication that the policy is wrong. This is the real problem. When investors are still so scared that they're still loading up on "risk free" assets a full 3 years after the crisis began, then something is fundamentally wrong. The 10-year is saying quite clearly, "Whatever you are doing is not working, so stop it."

The Fed's bond buying program (QE2) has done nothing to increase activity, lower unemployment, stimulate growth, restore confidence or expand credit. It has been the biggest policy bust in Fed history, and now the economy is slipping back into a coma.

Remember, the economy is not a sentient being. It does not consider whether a policy is good or bad. Like any system it merely responds to input. If spending increases, incomes will increase, demand will increase, employment will increase and the economy will grow.

Conversely, contractionary policies are contractionary. This is something the deficit hawks don't seem to grasp. If you slash government spending, lay off workers, and trim the deficits, then spending will slow, incomes will shrivel, GDP will wither, and the economy will slip back into recession. In other words, if you take steps to shrink the economy, then the economy will shrink. This is why the economy has lost momentum, because congress and the White House have cut the blood flow of stimulus to the patient, so now we are headed back into ICU.

The Republican mantra, "job killing stimulus" is an oxymoron like "military intelligence" or "jumbo shrimp". It is idiocy squared. The economy needs stimulus because stimulus IS spending...government spending. And, as we noted earlier, the economy does not care "who spends"; it merely responds to input. And the input that's needed now is more spending. Government spending will do just fine.

Consumers are still deleveraging from the losses they sustained during the financial crisis, so they've cut back on their borrowing and spending. This creates a problem, because consumer spending represents 70% of GDP. So if consumers don't load up on debt again, there will be no recovery. (Every recovery since WW2 has been the result of a credit expansion.) This is why Fed chairman Bernanke has tried to induce more borrowing by lowering rates to zero and buying US Treasuries from the banks (which, in effect, creates negative interest rates) But it hasn't worked. Negative rates have not sparked another credit expansion because there are times when people will not borrow regardless of the rates or the inducements. John Maynard Keynes figured this out more than 80 years ago, but Bernanke has "unlearned" the lessons of the past. As a result, we are headed for another slump.

Consumers aren't spending, businesses aren't investing, and credit is not expanding. At the same time, state and federal governments are trimming budgets and laying off workers. So, all the main players are cutting, cutting, cutting. Naturally, the economy has responded in kind; housing prices are falling, unemployment is rising, manufacturing is stalling and consumer confidence is dropping.

There's nothing here that should surprise us. We are headed into a Depression because policymakers have made another Depression unavoidable. A policy-driven Depression is different than a financial crisis. It is a matter of choice. It means that the objectives of the people who control the system are different than our own. There are those who will benefit from another severe downturn, but most of us will only needlessly suffer.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2011 Copyright Mike Whitney - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.
Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules