Smoke, Mirrors and Great Depression 2.0

The markets are forward indicators.  Investors and traders put their money where their mouth is by anticipating earnings and relative performance of various sectors.   Approaching investing using economic fundamentals is an important tool – as long as you leave off your rose colored glasses when looking at data.

When you look at economic data which is spun trying to convince you investing in a sector is green lighted – you are dumber than before you read the analysis.  Economic data must be reviewed critically and not cherry picked for the parts you like. 

The lesson is that the future is not always brighter.  Human nature continues to assume the future will be better.  All of the business and manufacturing surveys often show the future better than today.

Yet, history has shown the investing future is not always brighter – markets have gone through long cycles where the future turned out to be quite dim.  Econintersect’s long range investing outlook is not bright.   Long range is an indefinite period which ends when the current group of economic fundamentals change.

Demographics – the boomers are transforming from the driving force on the economy to the brakes.

Earnings – When the Great Recession hit, business was caught out of position, with difficulty in making adjustments for the New Normal.  We have seen great earnings recovery – much better than the economy.  But we are at the end of the high rate of earnings growth, and future growth will depend on real economic expansion.

Spending cuts (or tax increases) – Cutting back on government spending and increasing taxes do the same thing – slow (brake) the economy.

No Economic Driver – We are in a period of virtual growth that creates no jobs.  What could actually create growth:

  • Doubling the population growth to soak up home inventories and other economic slack – and create demand for new goods and services.
  • An event overseas – big war, big earthquake where destruction caused a realignment towards USA production
  • Technology advance which was not labor saving.  Inventing a machine to replace 10 workers will not cause growth.

This was NOT a good week for the markets – or for economic indicators for that matter.  My thought for the week was written in my review of ISM Non-Manufacturing:

Economic weakness is being signaled literally across all the indicators.  It is real easy for a pundit to start screaming recession.  When you have a mindset that the recovery was smoke and mirrors, and now that the stimulus is wearing off the economy is drifting back towards equilibrium.  We must consider that the real answer might be that the Great Recession never ended.

Will the current situation be recognized in hindsight as an early realization of The Great Depression 2.0?

Economic News this Week:

The Econintersect economic forecast for August 2011 indicated the soft patch will continue – and there will be little growth.  All elements of the Econintersect Economic Index as falling, with key indicators at contraction’s door.

This week the Weekly Leading Index (WLI) from ECRI rose from 2.0% to 2.1%.  This level implies the business conditions six months from now will be approximately the same compared to today. This index has been eroding and in a three month overall downtrend. However, this index was been holding for the previous three weeks, and now (the fourth week) has move upward.

Initial unemployment claims remains elevated and rose 1,000 to 401,000. The real gauge – the 4 week moving average – fell 6,750 to 407,750.  Because of the noise (week-to-week movements), the 4 week average remains the reliable gauge. Historically, claims exceeding 400,000 per week usually occurs when employment gains less than the workforce growth, resulting in an increasing unemployment rate.

The data released this week confirms the economic soft spot is continuing. The decline in rail traffic is troubling and is covered by Econintersect News (news here).

Weekly Economic Release Scorecard:

Item Headline Analysis
Post Debt Ceiling

Warren Mosler looks at implications for investors
GDP Revisions

Rick Davis is concerned the BEA data might not be accurate in real time
Consumer Credit

To be published no later than Saturday
July Employment Report
154,000 private growth
Remember no employment growth in 2nd half of year – non adjusted payrolls fell 4,000
ISM Service Industries Survey
less good
Certain elements are very close to recession
June Manufacturing
less good
Manufacturing remains strong YoY
July ADP Employment
114,000 growth
Growth continues to weaken

Michael Pettis worries poor debt solutions will cause capital misallocation
June Personal Consumption Expenditures
PCE has been contracting for three months
Coin Seigniorage
Scott Fullwiler adds to the growing debate showing seigniorage is not inflationary
Is American Idol similar to USA Democracy?

Frank Li broaches this subject

L. Randall Wray discusses the pitfalls of gutting the social safety net
Capitalism 4.0

Dirk Ehnts: a mixed but generally good review
Reserve Bank of India

Sunil Chandra looks at RBI Governor D. Subbarao last acts
Government Overspending

Warren Mosler warns:  worrying about overspending will cause the USA to be the next Japan

Andrew Butter:   austerity is not the right way to dig Europe out of crisis
Jobs Creation

Warren Mosler says consumers create jobs – business doesn’t
Dollar & Stocks

Avi Gilburt looks at Elliott Waves cycles for stocks and the $
USA Markets

Art Patten sees the fabled head and shoulders
Post Debt Ceiling

Jeff Miller thinks through investing environment post debt ceiling crisis
Risk Free Investments

Martin Hutchinson points to the death of risk free returns

Avi Gilburt says deflationary risks are growing
USA Market Cycles

Ed Easterling sees the end to the current earnings cycle growth

Bankruptcies this Week: Law Enforcement Associates, Integra Bank, City of Central Falls (Rhode Island), 155 East Tropicana

Bank Failures this Week: