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Friday, September 30, 2011

And Now The TGIF Good News

The case for a slower, more restrained US downturn lies in two reports today, not to mention the hope for next year in housing. Chicago PMI (concentrates on heartland production) is PDG, and so is NACM.

Neither of these reports show anything that can prevent the US from entering a downturn - far too much of our economy is based on consumer spending at levels disassociated with increases in real incomes and government spending at levels disassociated with the levels of taxation that the real economy can bear without buckling. In short, our only long-term hope is to restructure.

Nonetheless, the relative strength in these two reports does suggest that there are some underlying positives that could limit the scope of a downturn and also tend to suggest that there is enough base-level strength in low financial costs and a slow reindustrialization to support a non-catastrophic restructuring.

We should not do the jobs thingie - we should look at the relative strengths we have and try to accentuate them. We probably should raise FICA withholding back to its normal level in 2012, restore and increase the MWP to $500 with all other terms left. This would represent a large tax increase on the higher income households, but they can stand it and the relative strength it would insert into the economy from the lower levels would greatly help.

The Euro crash will not last forever - trying to pretend unpayable sovereign debt will be paid is a parasite that will either kill its host or be killed. The situation cannot drag on for more than the middle of 2013, and as soon as it is resolved the US will come under fire.

We need to make sure we are strong enough at that time to reassure investors. I think we can pull it off if we just use some common sense. Common sense in an election year in the US is hard to come by, but perhaps we've suffered enough to fall back to something that will work.

So to our feckless president I would say "If you can't lead then follow, and if you can't follow then get out of the way."

2012 will be a tough year for the global economy, but price adjustments will happen and at the end of the year the situation will look different. It's up to us whether we are willing to put aside the fantasy phase of US politics and buckle down to achievable real-world progress.

The markets have the appearance of a managed sell off the past 6 weeks.
Thought I'd already posted this - weren't you expecting oil down to the $60s and that was it?
Shtove - there's an adjust zone when pricing can correct and the economy will correct somewhat with it, which tends to clip off the lows.

I think we outran that zone globally. Things are tighter than they appear and I never really trust Chinese stats too much.

Ron - I don't think so. I think everyone was waiting for QE3 and then that didn't happen, and Mr. Market is coming to terms with the European debt problems.

We have increasing inflation, which is cutting real incomes and makes stimulus of many types very iffy. We still seem to have increasing inflation coming via exports - that's why I listed the Chinese comments.

The markets confidently expected the Fed to step in and throw some more dollars, and this is the natural result of both Euro problems and the Fed's choice of another action, plus the economic data.

Shtove - another thing - the US has not been bubbling. Thus there is less far for our economy to fall, and I don't think China can keep it up.
The question I want to know iOS how much are China,
India, and the rest of the world willing to subsidize their
workers through currency manipulation and trade barriers ?
If they continue that path then American labor is screwed
and that will kill any recovery.
This is what the past 5 months have looked like in terms of Monthly S&P500 closes:


With bond returns so low, I shudder to think of what pension fund ratios will be like next year. An ebbing tide lowers all boats!
Good point MOM, the exits do look a bit crowded these days!
The markets want QE3, and they know Bernanke wants to give it to them. There will be counter-rallies, but the direction is down until we get the cash.

Not that I expect QE3 to do any good for the base-load economy.

"An ebbing tide lowers all boats!"

New Home Price Trend Failure

My WV is jolydra.

Watch out Christmas monster. Heracles is coming for you.

Lernaean Hydra

"The Hydra of Lerna was killed by Heracles as the second of his Twelve Labours."
I ran across this, which I find terrifying:

He says "If we do not take {the} government contraction that is required today ... we're going to get to the point where we can't take it as it will be effectively a 100% reduction (ex-interest.) It is already more than half, assuming you intend to pay the interest bill - more than double what it was just four years ago.
In four more years at present rates it will be an effective 100% and the game will be over. There's your timeline."

He talks about everything that must be cut, and the sharply-reduced way we'll have to live.

Is this the way you see it, M-O-M?

M_O_M didn't answer, but I kinda want to take a crack at this. Denninger didn't show his work, so it's possible I misunderstood. But...

1) That article seems to be saying that we have to cut the Federal budget enough to pay the net present value of Federal pension obligations RIGHT NOW. And then we're not going to pay the pensions, after all. I don't follow his math there.

2) I don't see why the housing market has to be conducted on a cash-only basis. Is he saying that because banks are going to go under, fractional reserve banking must cease? Again, I don't follow the logic.

3) Is it really necessary to cut primary education back to the 4th grade, with no math beyond long division and no technology higher than pencils? Personally, I'd cut back to rice and beans just to keep my kids out of his schools.

Denninger seems to assume that the status quo institutions are the only possible institutions. That since current institutions are unfinanceable, we will simply ride the status quo down to oblivion rather than rebuild something better. I call BS.
Thanks, Neil. Maybe I'll put the razor blades & cache of sleeping pills away for now...
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