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The court came down on Bernie Madoff like a brick on a bald head. Madoff, convicted of lying to investors, drew a sentence that only a sea turtle or a swamp oak could complete. And now, Americans pack their suntan lotions and head off to the beach for their Independence Day holiday. Their demand for vengeance satisfied, they pose themselves a question. With the shark in jail, is it safe to go in the water?
Monday of this week brought shrieks of joy. Like children playing in the sea, investors were teased by one wave of good news... and tickled by the next.
Bloomberg reported that "Wall Street's largest bond-trading firms say the worst may be over for investors..." Then, General Electric's CEO, Jeffrey Immelt, told them that the crisis is "behind us" and that growth will begin again next year. Finally, analyst John Dorfman opined that the stockmarket would be a safe place for their money at least through the end of the year.
But amid these tidings of comfort and joy, if you listen carefully, you can hear a gurgling sound. It is the world economy, drowning.
As we reported in this space, the feds' bail-outs, boondoggles and bankers' bonus plans aren't working. Unemployment is going up. Global trade is collapsing; exports from Germany and Japan are down about 40% from a year before. Prices are going down too – with a report on Wednesday that the entire eurozone has slipped into negative inflation (see page 7). In Britain, data showed a contraction of 2.4% in the first quarter, bringing the year-to-year decline to nearly 5%. "Economy shrinks at 1930s rates," said the headline in Wednesday's Daily Telegraph.
In America, the Fed's own 'Beige Book' reported last month that there were no signs of any recovery in most of the 12 Fed regions. Looking deeper into the facts and examining the figures, we discover why.
As to employment numbers, we feel like a school doctor. We would call the authorities, except it was the authorities who should be arrested. After the feds got finished with them, the numbers told of a better-than-expected drop in May US payrolls. The key to this uplifting news was not a genuine improvement, but new and improved techniques in torture. Water-boarded with seasonal adjustments and birth/death models, the numbers began to see jobs everywhere. As for 'discouraged workers' – those who gave up looking because they couldn't find a job – they disappeared from the jobless figures altogether.
John William's Shadow Government Statistics reports that without these twists, the numbers tell the same story they've been telling all year – unemployment is still getting worse, at about the same pace as earlier in the year. "The unadjusted annual decline in May payrolls was the worst since May 1958," says Williams. And if they were allowed to speak freely – as they did in the 1930s – the figures would show real unemployment at over 20% of the workforce – or about 30 million people. That approaches Great Depression levels, and it's getting worse. As for those still working, an additional 1.5 million US workers have been "forced into part time work", according to the Financial Times.
Analysts compare these sharp drops in trade, prices and employment to what happened after World War II. Come 1946 and the world had little use for so many soldiers, machine guns and artillery shells. Millions of young men were 'de-mobbed' and joined the unemployed. And smokestacks suddenly stopped smoking. But that was at the very beginning of a 62-year period of credit expansion. Consumers had pent up demand for goods and services, and wartime savings to spend. Even so, it took three years of adjustment after the war before the stockmarket began to turn up.
Now, we are at the beginning of a major credit contraction, with no pent-up demand, no savings, and too much capacity to turn out too much stuff that too many people don't have the money to buy.
Meanwhile, housing prices are still going down in America – and with housing goes the lenders' collateral. US residential property prices have gone down for 33 months in a row. The number of houses 'underwater' is increasing, leading to inevitable growth in foreclosures. US mortgage loans typically call for 'down the road modifications' that lead homeowners into a kind of financial cul-de-sac with no way out except foreclosure. According to a study by T2 Partners, there are three more big waves of foreclosures still ahead – including those in prime loans, home equity lines of credit, and in commercial real estate.
"When [these mortgage loans] start adjusting upward it will turn millions of homeowners into over-levered, underwater renters, and ensure housing is a dead asset class for years to come," says Mark Hanson of the Field Check Group. With incomes falling and house prices weak, consumers will miss payments, default, and cut back spending. Business earnings will decline; bankruptcies will increase. This is the economic undertow that will kill investors. Madoff is a distraction.
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Bill Bonner
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