Why the Markets fell last week?
This seems to be a good time to evaluate/assess what’s going on, since we’ve now gotten a bunch of key 1’st half of 2010 data to evaluate.
US GDP estimates have been lowered from 3% down to 2.7% and the investment markets slid nastily last week. Why?
1. Mess in Greece: The eruption of a decade long mess in Greece caused tightened credit and lowered manufacturing production due to financial worries caused by the Greek mess, which was caused by a decade of Greek lies and EU willingness to accept those lies, and the Greek public’s response of rioting and attacking the Finance Ministry vs. Latvia’s, Ireland’s etc public acceptance of austerity measures.
The Greek’s lying (lies willingly accepted and ignored by the EU powers – and our willingness to support the lies and bankrupting Olympics) and Greek’s ugly public reactions to the necessary economic austerity measures caused finance houses to tighten credit this past 2 months – tightening credit to manufacturers – which has caused manufacturers to cut back on plans to build inventories (cutting back on make more stuff) and to slow down on hiring.** A nasty little cycle started just 2 months ago…
2. Cookie Jars Raided: Congress gave housing and appliance tax credits, which artificially caused people to prematurely rush out and buy homes and appliances, which artificially and prematurely raised indications of economic recovery and falsely raised estimates of US GDP – because the tax credits caused consumers to (unnaturally) spend extra money in the last quarter of 2009, and first quarter of 2010, money that normally would have been spread over the rest of the year – making the first quarter look artificially strong = GDP estimates artificially inflated by govt give-aways.
**2’nd cookie jar raided: Manufacturers cranked up their processes in late 2009 and first quarter of 2010, to restock empty shelves that were previously reduced by nervous purchasing managers intentionally allowing their inventories to fall. Now that the shelves are re-stocked (at the industrial and distributor/wholesaler levels), that cookie-jar which was raided in the 2009 4’th quarter and 2010 1’st quarter is now empty, creating a current limited demand for manufactured goods and supplies.
The raiding of the US cookie jars made the first 2 quarters (first half) of 2010 look artificially good, falsely raising US GDP estimates. Those jars are now mostly empty, making the worldwide economic recovery unnecessarily shaky: 2010 US GDP estimates have been reduced by 10% and may fall further.
3. Limited growth due to too much a) Debt and b) Remaining (hidden?) economic problems:
a) Debt: which is making people save more and spend less (see the plot I sent last week on consumer saving vs consumer spending): over-leveraged consumers and over-leveraged govt will weigh down (slow) the recovery, where over-leveraged is a fancy word for too much debt. The lowered consumer spending will be a continuing drag on the recovery, until consumers recover their confidence – and this is really important, because the US economy is not due to big exports or big manufacturing, it depends on consumer spending …
This graph shows how mainstream (95%) US consumers are now saving more than spending.
b) Remaining Economic Weaknesses: There are sector-specific economic problems that the USA and her populace unwilling to address, and these remaining significant gaps in US economic strength that will limit/slow the growth/recovery: gaps in the economic net/web/system like the large number of home foreclosures in the pipe, lots of remaining (undetermined) bad (hidden?) loans (both home mortgages and Wall Street over-leveraged gunk) still to unwind – which partly explains why Freddie and Fannie are still bleeding cash and are still in deep trouble… problems the US has not had the will to address or solve.
The remaining bulk of over-building due to a decade of cheap Greenspan money & Congress-driven Freddie/Fannie cheap money creates a long-term hole for the key home-building industry = 2 months of lowered outlooks by the home building industry = a significant negative trend in the face of other recovering industries.
How deep are these holes?
No one in Govt or on Wall Street are able-to or willing-to say, because they just don’t know: remember how the TARP money was supposed to be used to buy “Toxic Assets” – yet we never got a report of how many toxic assets were (or are) out there, and the banks/Wall Street were not willing to i) report, ii) write-off or iii) sell-off their toxic assets (not willing to sell at a loss – instead hoping that the bad loans would recover and be paid-off), so, the TARP money was NOT spent on the intended purchase of Toxic Assets, because the banks/Wall Street were not willing to take the losses – meaning they are still holding a lot of this bad paper.
This is a big difference from the 1980’s S&L crisis, with its boat-loads of bad loans: Remember how the US banks acknowledged and got rid of their bad loans back then (eating the losses), went through the Resolution Trust Corp process, some got shut down, others got merged – but we cleaned up the messes by taking the bad tasting medicine (a big reason Bush the 1’st lost the election) and the economy recovered (plus there was a big Peace Dividend from the ending of the Cold War). The Japanese refused to admit their big losses in the banking industry, kept the bad loans secret (which we seem to be doing now), and their $11 trillion in bad loans/bad investments have strangled their economy due to creating an 18 year scarcity of money for small-medium business loans => 18 years of stagnation…
By keeping the Toxic Assets and making giant federal deficits, the USA has created some significant gaps in US economic strength – where some sectors are strong and other key sectors are very weak, making a situation where the “strong men” are dragging several balls and chains… and since there are no solutions nor the will to solve the problems in the key financial and housing industries, the US & European recoveries will struggle for years.
US Congress’s & Obama’s biggest economic mistakes:
Congress and Obama created huge un-heard-of deficits while not cleaning up the remaining pockets of bad loans and bad assets…. both will be drags on economic recovery and limit economic growth… RTC was painful, but necessary … and there is no Peace Dividend nor other economic anomaly on the horizon to rescue the USA or Europe…
The Financial Reform Bill: Ironically, it does not seem to address the real problems of hidden bad loans/bad investments. It does however reduce banking income for big bank corps by 10% (Wells Fargo) – 25% (IFC Bank)… and these losses will be made up by increasing fees to banking customers: e.g. When McDonalds is forced to cut the price of Cokes by Govt fiat, they raise their hamburger prices…
So, rather than cleaning up the real messes in finances, they seem to have made actions that initially make consumers/voters happy, but that 1. do not address the real problems, and 2. will be ultimately paid for by those same consumers.
We don’t think there will be a double dip recession, but instead there will be a nervous volatile bumpy (irrational ups & downs) slow increase – which may mean that many companies will not see clear indications of vigorous growth, and corporations’ hiring managers will hesitate to rehire heavily until there are clear sustained signs of recovery, making the reduction of 10% unemployment back to 5% likely slower/longer than my earlier 2015-2016 projection (past recessions took 6 years to recover job losses) – and this recovery seems more unsteady that the last 3, so, with the unusual weights that we have chosen to chain ourselves-to will drag on our recovery for years… bleah….
What do you-all think?
How does it tie in to Mexico and her economic future?
How does US/European stumbling affect Mexico and the economic futures for expats in Mexico?
Does a weaker US dollar mean a stronger Peso?
Are the brighter/stronger economies of Brasil, China, & India (11% – 12% projected 2010 growth) better indicators of Mexico’s economic future?
Is Mexico still (and inevitably?) in bed with the Elephant to the North?
I’m left with a bunch of unanswered questions and looking for help, since I’ve only lived here in Mexico for 4 years.
(and I have head-ache from trying to assess the status and futures of the European & US economies).
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© Steven M. Fry
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