Friday, May 7, 2010

Why yesterday was not the bottom

There's a lot of talk going around about how yesterday was just a "glitch" or that it was just a normal market correction, albeit wild.

I disagree. I think it is the beginning of something more long-lasting.

Yesterday I was at Fox; they asked me to come on to talk about the call I made on shorting the euro. (Many of you have profited from that because you bought my special report, Euro Crash Alert!)

While I was there I was listening to the commentary coming from policy makers, business leaders and market analysts and there was a common thread in the remarks that went like this: The United States had better be careful because we could end up just like Greece.

There was ZERO understanding of the distinction between Greece--a currency user--and the U.S.--a currency issuer. Nada, none, zilch, a big goose egg.

Then I bumped into Ken Langone. For those of you who are not familiar with him, he was the co-founder of Home Depot. He's a billionaire but somewhat of a loudmouth who thinks he knows everything about everything. You see, that's what we do here in this country; if you have a lot of money you are considered to be brilliant. It doesn't matter if you don't know shit, if you have money most Americans will consider you a genius. (The media certainly will.) By the same token, Albert Einstein, who was probably the smartest person to ever walk the face of the earth, made about $60k in today's dollars. Making money...true genius...different skill set.

Langone is this kind of guy. He's rough and outspoken, a great money raiser in his day (that's how he got Home Depot off the ground: he was the Wall Street money guy), but, but hardly a policy genius.

Anyway, he was explaining to me how the country was "broke" and how we have to cut gov't workers' salaries, reduce benefits to people and make drastic spending cuts. I tried to make him understand that government payments to people comprise part of their incomes and that payments made to firms for the purchase of goods and services are part of the income of those firms allowing them to hire people and pay salaries, but he would have none of that. He just couldn't seem to grasp the idea that for every dollar the gov't spends it equates to a dollar in additional GDP. In fact, many people just can't seem to grasp it.

Like most people, Langone believes that the gov't is broke and when it spends it is spending money it doesn't have and that comes off the back of the private sector, blah, blah, blah. The same crap you hear every day.

So as I am talking to him it occurred to me that we have these very influential busines leaders, like Langone, who are out there pushing this view; that major cutbacks in spending must be made and that is the only way we will get back on the road to prosperty.

Whether they know it or not they are pushing the very same austerity measures the IMF is now imposing on Greece...measures that are absolutely designed to make things worse.

This is what we are facing here in the U.S. While the Greek situation should not have had even the smallest influence on our market or our economy, it will, simply because we will end up imposing on ourselves the very same, destructive conditions being imposed on Greece even though we are in a totally different situation.

It's crazy, but it's happening. Whether it is Obama's Debt Commission or the spending freeze or tax hikes to "pay" for healthcare, it's all coming full bore now and it will ensure that the long-term outlook for the economy will be one of persistent high unemployment, weak output and broadening poverty.

Making matters worse is the fact that we don't have the political climate anymore to pass a second stimulus--somnething that is urgently needed--so it's pretty much written in the cards that when we go down this time it will become very, very, ugly.

At some point the automatic stabilizers will kick in and support output and demand at some level, but as Warren Mosler has stated many times, that support will occur the "ugly way."

Bottom line: stocks are going a lot lower.


Tom Hickey said...

Stand by for 1937 redux.

mike norman said...


bubbleRefuge said...

I kind of agree about the economy but right now the deficit is growing. We haven't seen tax hikes yet. The question is, did the increasing deficit give us enough momentum to move us into a credit-expansion led growth that could keep us going for a while?

Also, this is kind of a personal anecdotal theory. Lots of people, I mean a large percentage of people in housing bust regions are not paying either mortgages or rent. When renters find out the landlord is not paying his mortgage, I believe, often times rent is either reduced via a mutual agreement or renters flat out stop paying. So, if I don't pay my rent or mortgage I still have money to pay my credit cards, auto loan, etc. What happens when this phenomena runs its course and many more people have to fork out 1K,2K etc for rent/mortgage?

Unknown said...

Mike - You are the most fundamentally unsound person I have ever seen on TV. Your comments that spending $2.8Trillion to get $400 MM in benefits proves your fundamentally wrong.

mike norman said...

I never said we only got $400 million. I said that household net worth (wealth) increased by $6 trillion since the stimulus. Listen up! Neil said it only increased by 440 million. There numbers are there...$6 trillion increase in household net worth increase since the stimulus in Q1 2009.

Matt Franko said...

Langone is another one like Pete Peterson. Why cant these men just take the money and run? Just retire and get out the limelight. As if it wasnt bad enough that they gamed our retirement funds to enrich themsleves...Why must we then be cursed by their harmful public advocacy? they think they are helping but they stand to ruin this economy that we are trying to operate within.

I have to admit, although we are "at war" with them, it looks like their ideas are winning for now. Im just going to keep watching your fiscal trends and let that provide some objective guidance going forward as to certain investment decisions.


Unknown said...

So you are saying that because we are a currency issuer we can spend and spend above our means and go into infinite debt because we can print ink on pieces of paper? Have you NO knowledge of currency issuers who in the past just printed more and more money to pay their increasing debts and their currency crashed? Those nations' paper currency was worth less than the paper it was printed on. I can't believe you call yourself an economist. Read some history books!

Matt Franko said...


Above our means? Tell that to the 18% un/underemployed; right there you have much "means" for addl labor. The 70% utitilzation rate by definition shows we have much unused capacity available for "means" of addl production.

Who needs the history lesson? We went off the gold standard in 1971, have you noticed now after going on almost 40 years?

All historic inflations you refer to (but do not mention any specifically btw) were under convertable currency regimes. A sovereign govt fiat currency issuer has never defaulted, ever.
there is your history lesson.

googleheim said...

Tonight on the MacLaughlin report they asked " will Greece default on it's sovereign debt ?"

they all said yes.

but the question is malformed - Greece is not a sovereign country with a sovereign currency.

It is more similar to Calfornia.

"Craig" above is wrong.

In world of physics there are called scale invariant phenomena - somethings that occur in the microscopic world - like a certain wave pattern - occur in the macroscopic world.

Everyday we hear on wall street that "the big money is moving out of a stock" - and this freezes the credit of that particular company and it falls in value.

We know about the massive Texas Superconductor Particle accelerator infrastructure project - the spending INTO which created a small boom in the east central Texas region, then a regional recession when the government money moved OUT.

We saw in late 2008 when the credit markets froze that commerce came to a stop, then picked up when credit markets eased.

We saw this post 1987 in the oil and general market crashes that the lack of liquidity and spending halted the economy.

When Greece cuts back in spending, then we will see reduction in revenues across Europe.

Same for Portugal and even California.

investment is a function of spending, and spending must be done correctly.

savings is a function of investment and that is why USA household savings is UP.

therefore across the scale of economies - whether upon an individual, a city, a contractor, a state, a country without ability to "print" money, and a company which "prints" it stock ...

hmmm, a company that "prints" it stock ... sounds kind of like a sovereign nation with it's own single issuing currency in a sea of other "nation" companies doing the same.

Greece lost it's ability to IPO it's stock or bonds.

If it takes the Drachma back,then it can take it's "costly" spending entitlements and make the debt their own ASSET.

Craig is wrong.

Unknown said...

Matt, are you saying that it's impossible for a sovereign currency issuer to never go bankrupt? When any borrower (even the U.S.) has so much debt that they cannot even pay the interest, then they have two options: 1) default on the debt, which will at best crush their credit and no one will lend them money again, or at worst will spark a physical war over the debt, and 2) print more cash, which will slash the value of the currency. This is simple economics. The U.S. is not immune to this. Being off the gold standard only works so long as other nations TRUST our nation to not go into massive debt that we can't pay without resorting to option 2 above. Sadly we are moving firmly in that direction. We MUST get our nation's debt (close to $13 trillion now) under control.

googleheim said...

No one is lending us any money.

Craig is leading to the preoccupied and nervous that "China won't buy our debt."

This is out of paradigm, or in other words not taking into consideration how government credits banks who in turn lend out these credits ( and never another depositor's deposits ).

China has never exchanged one single Renmibi Yuan for a dollar in order to buy Treasuries.

That would mean that we bought their crap in Renmibi Yuan.

Instead the Chinese sold us their crap while opening up Treasury accounts so we could hold their loot from selling the poisonous toys and all that. So they sold their stuff to us in U$D and got paid in U$D then they saved in U$D Treasuries - just like the Japanese who hold their massive savings outside their country due to last decade's effect on the Yen which is now acting the reverse as strong currency which is difficult for them to return to Japan since the U$D is now weaker than the Yen.

The banks must return this to the government and when they do, the treasury and fed make "profit" and erase the credits and create new ones based on their forcasted strategy and policy.

When Reagan out-spent all former administrations including Obama ( combined), he enlarged the economy and the total credit line ( or debt exposure ) of the USA much like an individual opens credit cards and has a credit limit.

Then Reagan smoked screened everyone with lower taxes which supposedly raised tax revenue.

BUT we know for a fact that he never raised enough tax revenue to pay off the "debt" he created through massive spending.

Tax revenue does not run the government nor the real economy.

Matt Franko said...

"Matt, are you saying that it's impossible for a sovereign currency issuer to never go bankrupt?"

YES, Bankrupt meaning the inability to pay interest on govt securities or redeem same.

"lend them money again":
They are not lending the Treasury money, they are buying Treasury Securities!

" print more cash, which will slash the value of the currency. "

They dont 'print'; all electronic now! Dollar is RALLYING! Dollar will take off here, but watch, THE
FED will intervene at about $1.24 per Euro and wont let it happen!

Wake up!

Unknown said...

Sigh... I can't believe what I'm hearing here. When we talk about the U.S. national debt, we are talking about the U.S. gov't being lent money through the 'sale' of Treasury Securities

mike norman said...


Get past your flawed belief system for a second and think about what the U.S. Government is being "lent." They're being lent dollars. But only the Government can create dollars. (Do you create dollars? Do the Chinese create dollars??) Therefore, the money to buy Treasuries is money that has already been spent into existence by the U.S. Government. That is the ONLY way for the non-government (both domestic and foreign) to obtain those dollars. Why would anyone need to borrow something that they can create without limit???? It is totally non-sensical.