Are We Entering An Economic “Ice Age”? – OpEd
By Mike Whitney
Stocks fell sharply on Friday losing 172 points on the Dow Jones capping a 6-week slide that wiped out more than $1 trillion from US equities markets. The winding down of the Fed’s monetary easing program (QE2) and the increasingly gloomy economic data has roused Wall Street’s bears and sent the bulls into full retreat. Market analysts continue to trim their estimates of growth for the second quarter (Q2) as signs of weakness in manufacturing, employment, housing, and consumer confidence cloud the long-term outlook and create more uncertainty about the strength of the recovery. Troubles in Japan, the eurozone and China have only added to the pessimism fueling a bond market rally that’s pushed yields on the benchmark 10-year Treasury below 3 percent. Low yields on the 10-year are a blinking red light indicating distress in the broader economy and growing investor fear. It’s a sign that the mood on Wall Street has darkened. This is from Barron’s:
“From Asia to Europe to the U.S., all the important economic indicators are rolling over. Some blame the Japanese tragedy; others, the weather. It is more than that. It is the result of policy decisions. Economic growth could slow to a crawl well into early next year. The stock market isn’t priced for that. Analysts will cut their earnings estimates. There is 20% downside risk from the market’s intraday May high. Once the economic news turns decisively disappointing, the authorities will come to the rescue and try to stimulate again.” (Barron’s mid-year roundtable, Felix Zulauf in this week’s Barron’s mid-year roundtable, via Credit Writedowns)
Slower growth means less activity and poorer earnings. It means there will be more layoffs, more cutbacks, and more retrenching. WSJ journalists Liz Moyer and Brett Philbin have already dubbed the coming months as “Wall Street’s Summer of Pain”, a moniker that draws from the fact that the present downturn is already “the longest slump since 2002” and has seen the Dow drop below 12,000. Even Fed chairman Ben Bernanke has called the recovery “frustratingly slow”, although his assessment appears to be vastly understated. The housing market is already double dipping and Yale’s Robert Shiller figures the worst is yet to come. This is from the Financial Post:
“My gut feeling is we might see a continuation of the decline” in home prices, Shiller said earlier Thursday at a Standard & Poor’s housing summit. He added that a 10% to 25% slump in real home prices “wouldn’t surprise me at all,” though he cautioned that was not a forecast.
Shiller pointed to the glut of unsold homes on the market and the large amount of homeowners under water on their mortgages as pressuring prices.
As for when home prices might bottom, Shiller told Insider that was unclear and it was possible prices could slide for 20 years.
“We’ve seen five years of decline already since the peak in 2006 and I don’t see evidence that we’re coming out of it,” he said.” (“America at tipping point, warns Shiller”, Financial Post)
SocGen’s Albert Edwards is even bleaker than Shiller opining that “We have entered a long valuation bear market which should end in extreme levels of cheapness consistent with an S&P around 400.” Edwards predicts an economic “Ice Age” which will crush equities markets and see bond yields dip below 2 percent. Here’s a clip from an article by James Sunshine at the Huffington Post which sums up the public’s reaction to the deluge of grim news:
“Approximately 48 percent of Americans say they think that a Great Depression is either very or somewhat likely to occur within the year, according to a CNN Opinion Research Poll, the highest percentage of respondents that have stated that level of certainty since CNN first started asking the question in October 2008….
That Americans seem apprehensive about their economic futures should not be surprising considering the recently lackluster job creation. Last month, the private sector created only 54,000 net jobs while public sector employment actually saw a net decrease in jobs, according to the Bureau of Labor Statistics. Housing prices have also continued to fall, reaching new lows during 2011’s first quarter according to Standard & Poor’s/Case-Shiller Index.
Confidence in the future is essential for economic growth, says economist Thomas Boston. “If you are concerned about job security, you are not likely to make the purchase, no matter how low interest rates might be.” (“Nearly Half Of America Says U.S. Nearing Great Depression: CNN Poll, James Sunshine, Huffington Post)
For working people, conditions have never been worse. The Fed’s bond purchasing program (QE2) send food and gas prices soaring, while home equity has continued to decline for 4 years straight. That’s forced more people onto food stamps (44 million) while a “record number of Americans are using retirement funds as a source of immediate cash”. (Zero Hedge) Here’s an excerpt from the post:
“On… Thursday, financial journalist and Newsweek columnist Joanne Lipman said, “Right now we have 30 percent of people who have 401(k)s have loans against their 401(k)s, which is a historic high. And the problem is, it’s growing like crazy: By 2014, we’re expecting to see 30 million people take loans against their 401(k)s.” The raiding of the last ditch piggybank is on, and who can blame them?” (“30% Of People With A 401(k) Have Taken Out A Loan Against It: New All Time Record”, Zero Hedge)
For many people, there’s simply no other choice. Their access to easy credit has been blunted by tougher lending requirements while their wages have stayed flat. Where else can they get the money they need to maintain their present standard of living? All the gains in productivity in the last decade have gone to management leaving workers hanging on by their fingernails. And it’s going to get a lot worse when the government cuts back on spending in an attempt to reduce the deficits. That will further intensify household deleveraging and trigger another painful round of debt deflation.
The Fed’s Flow of Funds report, which was released last week, illustrates how tenuous our present situation really is. While the media has focused on the declining value of residential real estate (which fell $339 billion to $16.1 trillion in the first quarter) and on the rise in stock prices which were turbo-charged by Bernanke’s bond-buying program, QE2. The real meat in the report is in “The Growth in Nonfinancial Debt” chart. The chart confirms that households are still deleveraging as they have been since early 2009. It also shows that the federal government’s share of new debt is steadily shrinking as Obama’s fiscal stimulus program (ARRA) winds down and Congress pushes for new belt tightening measures to trim the deficits. But what’s interesting (and ominous) in the report is that business investment actually surged in the last quarter. (Business investment tends to be more volatile that personal consumption.) This suggests that business leaders were taken in by the uptick in manufacturing, employment and confidence that took place in late 2010 thinking that another expansion was underway. So, they doubled down and beefed up their investments. But now that the data has taken a turn for the worse and the 10-year has dropped below 3 percent, business investment will be severely slashed. When that happens, GDP will fall sharply (probably below 1 percent) and the failure of Obama’s $800 billion fiscal stimulus program to spark a rebound will be clear to everyone. That will put the Democrats into panic-mode at the worst possible time, just before the 2012 elections. If the economy stumbles, there’s a good chance that the GOP will take the White House and both Houses of congress.
A GOP landslide in 2012 would be a disaster. Republican deficit hawks want to cut spending immediately which will inevitably lead to another excruciating slump. Check out this brief summary of Republican proposals by the Tax Policy Center. It helps to reveal the hidden risks of austerity measures:
“…more than 100 House Republicans have proposed to cut federal spending by $550 billion in 2012…..This is an amazing number. It implies a 15 percent reduction in government spending in a single year—in the midst of a weak economy with unemployment that exceeds 9 percent. It is an austerity budget of historic proportions….
What would $550 billion in across-the-board spending cuts mean? A 15 percent reduction in Social Security benefits would cut monthly payments for a typical retiree by $180…..Does anybody think doctors would treat Medicare patients or that nursing homes would accept Medicaid residents in the wake of a 15 percent payment cut?” (“Rx for a Double-dip Recession: Cut Government Spending by 15 Percent”, Tax Policy Center)
Even though Obama’s stimulus (ARRA) was too small and poorly targeted to get the economy back on track, it does show that his advisors have a basic grasp of economics. The same cannot be said about the Republican plan. It is sheer madness. If the GOP takes the White House in 2012, there will be another Great Depression. There’s no doubt about it.
Note: The moniker economic “Ice Age” is credited to SocGen’s Albert Edwards – https://www.sgresearch.com/