The Inside Scoop On Why A Double-Dip Is (or Is Not) Just Ahead
Do you want to forecast the economy more accurately than 90% of all economists? It’s easy. I have been doing it for 33 years, using my theory of credit and liquidity.
Watching financial television, you see the majority of Wall Street economists being bullish. I just heard one ridiculous argument: “You never have a recession without interest rates rising.” We have to forgive him, as he is fairly young. Early next year, there will be a lot of unemployed economists.
Economists so often get “cause and effect” reversed. They say, “low interest rates are bullish for businesses, low oil prices are bullish for the economy, low inflation is bullish for monetary policy, etc.” Actually, all these factors confirm the deflationary environment and are caused by that. They are confirmations of the bearish environment.
Here is how to do it better. First of all, forget the dozens of economic statistics, especially the ones published by the U.S. government. Many are “seasonally adjusted,” which simply means they are good for nothing. Then, several months later, they get substantially revised. How can you know what is important and what is not? Here is a guide you should copy and put on your trading computer.
Credit growth: The most important indicator is “credit growth” or lack thereof. Everything else follows. Actually, you could stop right there. However, there are two other factors to assist you, although they depend on credit growth.
Job growth: This is the most important economic factor dependent on credit growth. If there is no credit growth, then there will not be any sustainable job growth.
Consumer spending: For stock investors, the most important indicator is “consumer spending.” Consumer spending is a coincident indicator. When it declines, so does the stock market. It helped us identify the 2007 stock market top. If there is no job growth, then spending will depend on consumers who have jobs spending more. This can happen, but it can’t be sustainable. We have seen this over the past 16 months.
There you have it. Its simple. You can skip all the dozens of other economic numbers if you follow the above. That’s how I knew at the start of this year that the economy would falter. What is the economy doing now?
Credit card debt has been declining for 21 months and is now down about $150 billion dollars from its peak. Does anyone really believe that the retail sector can flourish with this shrinkage? Commercial & Industrial loans (to businesses) see no rise at all. There is no credit growth.
The latest job reports have been absolute disasters, confirming my view that the economy is doing very poorly. The theory of the “V-shaped” recovery is now being abandoned by the bulls. They are now changing their tune to “a soft patch” in the economy, just as I predicted. Some economists now mention a “square root-shaped” recovery. Soon, they will start considering a “double dip.” But that will also be the optimistic view. A “dip” infers a slight decline. However, it could be much deeper.
The U.S. economy added an average of less than 100,000 jobs a month in the first seven months of 2010. At least 125,000 to150,000 job are needed just to employ new people entering the labor force. About 250,000 new jobs are needed each month to have an average economic recovery. But the facts get worse. Read on.
There are now more than six million people unemployed for 27 weeks or longer. Such a dismal picture hasn’t been seen since the 1930s. The government’s estimates are much too optimistic as they guess the number of people getting jobs in small firms. That will be corrected for past numbers in February 2011. Watch for a nasty surprise. In the meantime, all the jobs numbers are distorted to the positive side.
The economists in the current administration are starting to abandon ship. Apparently, even the Keynesians can no longer support these disastrous policies. They don’t want to go down in history as the presidential economic advisors who presided over the greatest economic policy disasters since the 1930s.
Christina Romer, chair of the Council of Economic Advisers to the president, just resigned to return as a professor at UC Berkeley. She published a study several years ago that concluded that “an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%.”
Obviously, that study contradicts everything the White House is now trying to sell to Americans, namely that the huge, upcoming tax hikes won’t reduce economic growth.
When the administration was pushing to get the “stimulus” bill passed, Romer said that if it were passed, the unemployment rate would not go above8% . Now it’s 9.5%, above 16% if we count people who haven’t looked for a job for 30 days. Mrs. Romer now says she regrets ever having made that statement.
Another member of the White House economic team and director of the Office of Management and Budget, Peter Orszag, also resigned recently. It appears he doesn’t want to go down in history as the budget director who presided over out-of-control deficits that destroyed the U.S. economy. However, while at the White House, he was vociferous in his defense of the policies that caused the astronomical rise in the destructive deficits.
That’s the problem with all these political appointments; people feel so honored being chosen that they compromise all their principles.
Bottom Line: There is no credit growth, and therefore, according to my long-standing theory, there can be no sustainable economic growth unless and until miraculously credit starts growing. However, given current policies in Washington, that seems unlikely at this time.
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