2010, Year of Sunshine

Hi y'all!

Captain Cheerful(TM) here: I've been taking advantage of time off to put a weather eye to economic data (predigested: I'm not a propeller-headed econ-boffin; I read other people's opinions having identified their biases and/or financial interests -- but so far I've been unpleasantly unsurprised, FWIW), and 2010 isn't looking so spiffy.

First, and foremost, here's the first thing everyone needs to know:

THE U.S. IS NOT OUT OF THE "PREVIOUS" RECESSION.

Fine print: the way that the financial stats are calculated, debt-based spending by the federal government counts as economic activity -- when you remove the amount that the Obama administration has run been running up the credit cards to stave off fiscal armageddon (and thankfully so: it has been giving the responsible among us time time to de-leverage our housholds before the shit REALLY hits the fan). The private economy is still collapsing like Eddie Izzard's proverbial "flan in a cupboard".

The second thing that everyone needs to understand is that, in spite of the fact that the economy is being propped up on Uncle Sam's credit-card, everyone else in the whole world either is panicking to issue more debt or is ceasing their overseas investing to focus on their own situation. For examples, check up on Greece or China, respectively. In order for the economy to continue collapsing like a flan in a cupboard (instead of collapsing faster), we need people to buy a ton of t-bonds. There are only a few ways this'll happen:

1) A collapse in the stock market. (This's probably overdue anyway -- folks have been cheering the return to overblown stock prices for a while now and, while I'm not enough of a fool to bet against the stock market directly (the famous saying is "the market can stay irrational longer than you can stay solvent"), my money's where my mouth is here -- what little we have for retirement's all in the sadly dreadful fixed-income market.) This would cause "main street" investors to panic again and flock to Treasuries as a "safe haven" investment. The open question here is whether or not, in such a scenario, that there will be enough extracted from the market "on the way down" to fund 2010's scheduled credit-card binge -- a lot would depend on how fast the market cratered. Let's not hope for this scenario.

2) A return of interest rates worth investing in. Tired of trying to fund your retirement on 1% returns? So are all the retirement fund managers out there who've been forced to borrow money to invest (capitalized by their client's investments) so they can eek a decent return out of the market. They'd love to be able to deleverage their funds without being put out of business when the fund next door shows five times their earnings while keeping its larger risk profile buried. This would get a lot of folks who're tired of waiting for the P/E bomb in equities to go off (P/E ratios have been insane for over a decade now and will get visibly worse with worsening economic conditions) while sitting in cash right now to plunk down for Treasuries and maybe keep armageddon from happening for another year, but the problem is that with so many households on the brink of ruin already, for Bernanke to decide to pull up on the interest-rate lever would be disastrous -- every household with significant floating-interest-rate debt would decrease their spending by the difference needed to pay the extra interest, assuming they don't default to such a huge extent that even the schmucks on Wall Street can't sweep the carnage under the rug. This would be like setting off a fusion bomb in the center of the economy. Lets not hope for this one, either.

3) For Treasury yields to increase. Unlike increasing the "official" interest rate (the "coupon" rate) of treasury bonds, the market could force the effective interest rates of treasuries to explod upwards simply by paying less for each bond at auction. This would be something that Bernanke & Geitner cannot control, but would have similar economic impacts on #2, above. This would also smash the prices of the T-bonds in people's existing portfolios -- and since the existing bonds scheduled interest payments are so miniscule, this would demolish a lot of pension funding. Another for the not-hoped-for bucket.

4) For complete cessation of all non-entitlement social spending and all spending on both Iraq and Afghanistan, effective immediately. This might cut out the need for the bond issuances in the first place (mostly -- Bush's medicare sellout to the grey-panthers will still bite us), but the political and, more importantly, diplomatic bloodletting that we'd suffer would be egregious in the extreme -- the government would lose all credibility both here and abroad. (The folks in Taiwan, for example, would buy a lot of Depends.) This one's not going to happen, nor, frankly should it. But even if it did, I'm not convinced that it'd keep the rate of collapse where it is.

5) Something happens that I'm not smart enough to think of, that either saves our bacon or at least kicks the can down the road so we can have an even greater mess a year from now. This would be great. Anyone feeling both smart and influential?

Personally, I'm rooting for #5.



P.S. If anyone thinks I'm just being a worry-wort here, put on your thinking cap and ponder what it means that, of all companies, Arrow Trucking(! WTBFF !) is going bankrupt. Anyone from a "flyover state", aka "where all the shit we take for granted comes from" will be racing for a malt whiskey right about now. Everyone else'll start to get it in about a week... .
P.P.S. "WTBFF" means "what the bloody flying fuck", an expletive that even potty-mouthed me generally holds in reserve for serious occasions.

A Horror Movie Only Blair Could Have Written

... and here I thought he was in Korea. He must be moonlighting.

The King's Singers Deconstructing Bach

(you'll want to turn the sound up, since it's keyed a little low)

A much needed breather

Everyone's busy arguing over whether we're going to have a "V" shaped recovery or a "W" shaped recovery (or an "L" shaped recovery). I've no greater clue than anyone else, but regardless of how it falls out, the similarity of our situation to that of Japan in the previous decade augurs for a double-dip at least, before anything long-run-positive occurs. If the boffins are right and we're going to have a rallying economy for the next year or so before the double-dip danger really rears its head, then this presents a much needed breather for households to repair their balance sheets and maybe accrue some savings. A second dip would likely be more violent than the first, as the "true disbelievers" would have all been shaken out by then, so savings cushions will be critical -- I don't know what the macro trend is looking like, but we're doing exactly what the average Japanese consumer did in the '90s: welding our wallets shut. Sure, it was bad for their retail sector and will be awful for ours (with commercial real estate to fall right on it's heels), but with baseline unemployment running 16%, deflation rampant and with equal risks of stag-disinflation and stagflation to follow, who cares?

But I'll take the breather.

It's Officially Here

That's YoY price changes; deflation is now here even when measured by price (the symptom thereof, not the real thing). It was already here, of course, but now we can expect to see people asking the government to find a way to keep prices from coming down (insanity...)

And in other fun, here's the first negative disposable personal income in 60 years:

(hat tip: the above from Mike Shedlock)


What kind of insanity might we expect people to ask from the government now that the chips are officially down? Price supports? Consumer dept-relief? Michael Moore in the White House (now that he's made all that money going after, to paraphrase Bill Hicks, "that anticapitalism dollar -- that's a great market!")? Whatever it's gonna be, hang onto yer hat and save your pennies, because money's getting more expensive, and that'll make debt even more so.



For more cheerfulness, head to EconomPic's latest labor force graphs.