Skip to comments.The All-Important Question, Are Major Economies in Recovery?
Posted on 05/15/2012 8:10:37 PM PDT by blam
The All-Important Question, Are Major Economies in Recovery?
Economics / Global Economy
May 15, 2012 - 04:58 PM
By: David Galland
David Galland, Casey Research writes: For pretty much everyone, no matter where they are located in the economic strata, few if any questions are more germane to making plans for the future than whether the US and other major global economies are in recovery.
Getting the answer to that question right is of special importance to investors and businesses.
Stating the obvious, if the broader economy really is in recovery, then investors would be well served by investing in the equities of solid companies positioned to take advantage. Similarly, those very same solid companies would be rewarded by increasing their productive capacity through investments in the plants and people necessary to meeting growing demand.
On the same side of the ledger, bond investors would want to begin shorting up their durations or leaving the bubbly bond market altogether, in anticipation that the flood of funds into fixed income would reverse, sending rates higher (and bond prices lower).
Conversely, if the recovery is a head fake, then an entirely different course of action is called for. For instance, one would want to adopt a cautious attitude about common stocks. And because of the nature of the crisis crushing levels of sovereign debt one would want to take advantage of pullbacks in precious metals to buy more, along with other so-called "tangibles." That way they would have some measure of protection against the inflation that fiat-currency powers make all but a certainty.
In addition, reducing personal and business spending in order to conserve rainy-day cash would be advised.
And what about US bonds in the no-recovery scenario? A sound case can be made for including them in a portfolio as that puts you in lockstep with the government's desperate need to keep interest rates down or, better yet, have them fall further still. Given the highly politicized nature of our economy, that seems reasonable and anyone who has been long bonds over the last few years has done very well, indeed.
While you'll have to make your own call on bonds, my own enthusiasm is curbed by looking at the charts of the upwards-spiking interest rates on the bonds of Spain, Greece, Italy, and so forth. When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.
Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that.
For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise?
Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.
So, what's it going to be? Recovery no recovery or worse, maybe even a crash?
We all have a lot riding on getting the answer right.
The Quest for Confidence
Ultimately, the purpose of searching for the truth about the recovery isn't about either fear or greed. It's about confidence.
If you really knew what's coming, then the right moves to make become obvious. You could then make those moves with the calmness of spirit that comes from certain knowledge and get on with your life. While others struggle or miss an opportunity by betting on the wrong future, you'd have set up your affairs to survive and prosper.
Of course, given that we are talking about a complex system the economy total certainty is never completely possible. But for reasons I'll share, the nature of the current crisis paradoxically allows for more certainty than would normally be the case.
And so I want to share my conclusion about how I believe things will unfold from here, followed with some support for that conclusion.
While, as readers of any duration are well aware, we at Casey Research foresaw the current crisis years in advance and have remained firm in our conviction that the recovery is a charade based on my own readings, and after spending the last two weeks in the company of a couple dozen very plugged-in economists, top-performing money managers, and top financial analysts, my conclusion is thus:
The world's largest economies, including the US, Europe, Japan, and China are speeding for the equivalent of a brick wall. In short, I believe that before this crisis is over, we will experience the Greater Depression my dear friend and business partner Doug Casey has long anticipated.
In case that conclusion fails to communicate my current view sufficiently clearly, I will condense it as follows:
The world's largest economies are screwed.
And I will even set my conclusion to music, in the form of the song Somebody That I Used to Know by Gotye, which seems appropriate because the economy that we used to know won't be back again for many years to come.
Trust me, stating an opinion on the direction of the economy in such unequivocal terms troubles me. For starters, I wish my conclusion could be otherwise because no one likes to be a harbinger of doom. Mostly, however, I have long resisted adopting a set-in-cement position on something as wiggly as the future. In my experience, anyone who absolutely, totally buys into a particular future is almost always proven wrong by time.
Yet, as my quest for certainty unfolded, I could come to no other conclusion than that the world as we know it is headed for an economic catastrophe.
Allow me to explain.
The quest started with our Casey Research Recovery Reality Check Summit, April 27-29, in Weston, Florida. We took our mandate of getting to the bottom of this matter of recovery seriously, including faculty members with a variety of perspectives to see if an overarching conclusion about the recovery could be ascertained.
In addition to our own team of Doug Casey, Bud Conrad, Terry Coxon, Louis James, Marin Katusa and Jeff Clark, included in the faculty were: Lacy Hunt, former economist with the Dallas Fed and the world's most successful bond manager; Jim Rickards, money manager and author of Currency Crisis; John Mauldin, best-selling author of Endgame and the just-released The Little Book of Bull's Eye Investing; John Williams of ShadowStats fame; Porter Stansberry, founder of Stansberry Research; Michael Lewitt, editor of The Credit Strategist; Gordon Chang, China analyst; Harry Dent, author of The Great Crash Ahead (who also debated James Rickards on the question of inflation or deflation); Andy Miller on real estate; Greg Weldon of the Weldon Report; John Hathaway of the Tocqueville Funds; resource market guru Rick Rule of Sprott Asset Management; Caesar Bryan, a senior portfolio manager for the Gabelli Fund group; and David Stockman, the head of the Office of Management and Budget during the Reagan administration.
(Plus, on the taking-action front, there was a special panel on international diversification as well as panels where a dozen or so experts on everything from gold stocks to uranium, to rare earths, to graphite, to technology, to energy gave their best picks.)
In other words, a full program.
Then, immediately following the conclusion of our summit, Olivier Garret, Casey Research CEO and partner, and I climbed on a plane for California and John Mauldin's Strategic Investment Conference.
John's event was geared more for hedge fund and very-high-net-worth investors and, as such, included a more mainstream slate of speakers, but what a slate it was.
For the better part of three days, Olivier and I hunkered down to hear presentations and meet with the likes of: David Rosenberg, the star analyst of Gluskin Sheff; H. "Woody" Brock, an economist with some of the deepest credentials in the business (you can Google any of these guys for bio info); economic historian and best-selling author Niall Ferguson; Marc Faber of the Gloom, Doom and Boom Report; David McWilliams, the popular and very erudite Irish economist; David Harding of Winton Capital Management; Jeffrey Gundlach of DoubleLine Capital; Lacy Hunt again and my favorite for this conference, Mohamed El-Erian of PIMCO fame.
In other words, for the better part of two weeks, I was immersed in presentations and one-on-one discussions with truly some of the smartest, best-studied people in the world today on economics and investment markets with the primary topic being whether the so-called recovery is real, and the consequences if it falters.
While the speakers used a variety of methodologies to approach the topic, when all was said, the only conclusion that could be reached was that the world is headed for a very challenging period.
That conclusion was for the most part derived from three aspects of the many presentations:
1. Hard data. Tallying up all the charts and tables I viewed and heard discussed over the last couple of weeks, if such a thing were possible, would produce a number well in excess of 1,000. While there were some that dealt in forward-looking projections, the vast majority dealt with the here and now, as well as the historical context of how we got here.
2. What wasn't said. For business reasons, many of the big-name money managers couldn't come right out and say that we were heading for a crash, but they all took pains to communicate in not so subtle ways that this was a likely outcome. Tellingly, not a single speaker over the entire two-week period at either event came out and said that we could expect a normal business-cycle recovery to continue.
3. The complete lack of practical discussion about how the world can avoid hitting the wall. While the pessimism was palpable, even among the usually perma-bull Wall Street types, at no point did anyone espouse a politically feasible solution to avoid the coming crash. The few who even attempted to point to a solution, at best, mumbled platitudes about the politicians finding the spine to adopt fiscal-austerity measures. One of the speakers something of a gas bag, it must be admitted pronounced in all seriousness that the only solution to the economic malaise was for everyone in America to rush out and read his book. As an aside, over the course of lunch with that same gas bag, we had a discussion that went something like this:
[Me] "All of the speakers, you included, point to the current trend of higher debts and deficits and say they are untenable, and so the big economies will hit a wall in the not-too-distant future. Yet hardly anyone actually then defines what hitting the wall will look like."
[Him] "Yes, well, things will likely get a bit messy if the politicians can't pull together to address the structural problems in the economy."
"But wouldn't you agree that, given the nature of our democracy, the odds of the politicians taking action before we hit the wall are almost nil?"
"Not at all. If everyone in this country would read my new book, they would understand the situation and rise up to force their elected representatives to take the right action."
"Seriously? The only way to avoid the next leg down is if everyone in the US reads your book? That's it?"
At which point I kid you not he picked up his plate and changed tables. (There's a reason I am only rarely allowed out in public.)
But the fact remains that other than perhaps Doug Casey and a small handful of other presenters at our conference, almost no one even attempted to anticipate just what happens when the crisis swells up to its full height and then comes crashing down.
Or, specifically, what the consequences are likely to be when the world's largest economies all hit the wall at more or less the same time. For the record, I have compiled a list of the ten largest economies in the world, and a reasonable assessment of their current situation follows in descending order by size of GDP:
United States screwed
China really screwed
Japan massively screwed
Germany pretty screwed, especially in that export economies take a big hit in a crisis
France le screwed!
Brazil somewhat screwed
United Kingdom blimey, screwed too
Italy properly screwed
Russia hardly screwed at all (lots of resources and next to no government debt)
Canada pretty screwed, eh?
As concerning as it is to see how many of the world's largest economies are in trouble, the biggest problem of all is that the central bank reserves of virtually every country in the world are stuffed with US government IOUs masquerading as tangible assets.
So, what happens when the world's reserve currency enters collapse and the dollar turns into a hot potato? Don't know, but I'm pretty sure we'll find out in the not-so-distant future.
The all important answering a question with a question:
What country now has our factories?
That’s the country with our former jobs.
And on what planet is this supposed recovery possibly happening?
Honestly? "Outlook not so good"
All I have been seeing from the “smart people” for half a year is this “shake me” answer
Facebook will rally the market come weeks end. /s
Do you know where a larger version of that image is located?
“What country now has our factories?”
That’s right; the economies of Asia have been developing for decades at a cost to us, and they’re still doing well.
No, that’s the only version I found.
Which countries are the still viable markets for those products from Asia?
Lately, I have been involved w/a project to buy and resell excess inventory. The world is awash in everything manufactured. The quantities are numbing and this inventory is clean shelf pulls and liquidations from some of the largest high end, mid price point and low end retailers. The liquidators have huge warehouses full of pallets and the prices keep dropping, just over the few months I have been researching this.
There are numerous businesses trying to sell this excess forward. Many are international. The liquidators themselves export cheerfully. But, where are the customers? In my area, the high end stores are empty, except when they run massive sales (before selling to the liquidators). The mid-price point operations are like graveyards on a day without a funeral. There are customers in the discount retailers, but often, only one out of 6-8 check out lines are open and they are not busy. Most of these retailers have online discount sales sites. The prices there also keep dropping.
There is absolutely nothing wrong with this inventory except the lack of people who are willing to buy it, even at 25% of the original price. So, Asia can produce it for American, British and EU manufacturers and can do so cheaply and all that is visible are mountains of all sorts of stuff. Asia profited because they were starting from a very low point. Without customers, at what point do they have to cease manufacturing? And what happens to the cheapest labor on the planet when the wealthy West stops consuming?
About all I can advise my associates in this project is to wait for the absolutely rock bottom price for the smallest amount offered for sale (time the surplus market), store the inventory safely and cheaply while building their marketing operation and then pray for a Western recovery and the hoped-for pent-up demand to manifest.
For those expecting a doomsday economic event, I would advise identifying the surplus inventory warehouses and, if they ever open up to sell by the piece to the final end user, that is a definite sign the collapse is at maximum. I suppose if one were to wait a bit beyond that point, they will just be available for the looting.
I agree that there is no longer any market here when nobody has any discretionary dollars; the effect will be the end of manufacturing for high-end goods in any quantities, and cheap, lead-poisoned, Red Chinese-made junk replacing the goods we used to use.
I am questioning if there is even much market left for the cheap inferior stuff.
In researching surplus distribution, look at how there are small level entrepreneurs who make a business out of buying what is left at the end of an estate sale. This used stuff is often superior to new junk. Even the smallest economically stressed area has more than one local liquidator of this sort. They are usually called flea markets. Tons of hard goods, still functioning, some of it 30 years or more old, mostly housewares, which are one of the most shoddily produced sectors we have today.
I am convinced that much of the Asian Miracle is already collapsing. Electronics perhaps are the exception and look how the prices of those items keeps falling, despite the use of rare earths and the need for high tech manufacturing processes.
At some point, more people will just keep their old model phone, tablet, book reader, etc, instead of rushing to be a first adapter of the next new thing, barring quantum improvements and totally new technologies, of course. Even the high tech areas are vulnerable in a consumer model.
Most of us own clothing that is really old and still in good, wearable condition. The same with most textiles that were well made: they last. The only impetus to buying something new is the need for novelty, some peer-pressure social force or other psychologically perceived need, like *fashion*.
Some things do wear out and many are designed to do so. The newer models can offer energy efficiency to counter the increased price and often have new, vastly improved functions. There is little of this available as surplus and while there is some reconditioned machinery/appliances available, there is less than there once was. However, the skills are there in nearly every community to recondition or salvage these items, were the demand for such services increase.
JMO, but I think we are drowning in a sea of stuff and some natural limit will soon occur.
France le screwed!
Canada - pretty screwed, eh?
The cheap inferior stuff will be the only stuff left on the market. Many of us are already at the point where we make do with what we have in terms of cars, appliances, gadgets, etc.; we’re only replacing them as needed, and have to settle for what is available.
The cheap inferior stuff is the “new normal”; the upper crust will be buying more reliable, better-made things.
I am not upper crust, but I recently had to replace my clothes dryer. I was able to contract for 12 months, no interest. Same thing happened in 2008, when both the oven and the fridge died. Both times, I was able to afford better quality than if I had to buy outright and I saved over having to put them on a card. We are folks who repair whatever, if possible, and by ourselves, if possible. I always pay more than the minimum payment on these no interest deals and usually pay them off early.
One nice thing about the net, is that replacement parts and tutorials are all online, these days. Not always worth it, though.
When our gadget that loosens jar lids died, we did without, which was difficult for me if my husband wasn’t around. Then, we found one in a thrift store for $2.50 that was perfect and we still have it. With gadgets, it helps to not be a first adapter and to not buy anywhere near a gift-giving holiday. That said, the stove and fridge both hit the wall 2 weeks before Thanksgiving and I had no choice.
However, this is just another reason to stay as debt free as possible, so when the need arises, you can access credit. In a depression economy, the retailer is ready to make deals, just to make the sale.
I’ve never had the very top of the line and I think what I do have is pretty good, considering. As the Euro declines, I expect there to be some decent prices for various appliances, too.
We have two older vehicles and I try really hard to put something away each month towards a replacement, when we are forced to that. It isn’t easy, but it is how we have always lived, even when times were easier,so I’m used to it. Between the credit union and the dealers, there are always some deals out there.
I know some folks who are very comfortable, don’t have to watch prices at all and those folks are sharp consumers, IMO. Even the well-to-do have multiple places to put their dollars and they shop accordingly.
“No, thats the only version I found.”
Oh, well. Win some, lose some, some get rained out.