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The Economy is On the Ropes and Going Down

Wednesday, September 28, 2011, 9:12 AM

The risk faced by those who are analyzing macro trends is sounding like a broken record. For those younger readers who have no idea what that phrase means, imagine an mp3 song that will stick on and endlessly repeat a random segment of the song you are listening to until you give your device a sharp knock on the side. That's what a broken record sounded like.

The world economy is on the ropes, and it won't ever recover, at least not to anything resembling its recent past. Neither the gleeful housing bubble nor the free-flowing credit that enabled that side bubble to emerge will return. The resources simply do not exist to repeat that final orgy of consumption. A new reality is upon us, and while -- fortunately -- more and more people are choosing to face our predicament rather than pretend the current risks and challenges do not really exist, the absolute numbers of such forerunners are still small, and for the most part they don't include any of our political leaders.

The macro trends of worsening public and private debt loads, a looming and unaddressed Peak Oil threat, exponentially increasing global population, resource depletion, and an all-too-human tendency to use the money printing machine to deal with tough economic problems all remain pointed firmly towards an uncomfortable conclusion: There's a future of less in store for most people.

Our best hope is for a negotiated decline to lower levels of economic activity that allow us to gracefully adjust our expectations to a new and lower level consumption that offers an even more enjoyable and purpose-filled existence. Our worst fear is that a stubborn insistence on business-as-usual by our leadership leads to a future shaped by disaster rather than design.

The fundamental issue is this: You can't solve a problem rooted in too much debt with more debt. It just doesn't pencil out.

"Here we go again…solving a debt problem with more debt has not solved the underlying problem. ...Can the US continue to depreciate the world's base currency?" 

    ~ Goldman strategist Alan Brazil     (Source)

Yet we now see that both Europe and the US are busily conceding to banker demands and coming up with all manner of fancy schemes, in an attempt to hide the fact that old debt is simply being replaced with new debt. 

Consider the confusing news about the European EFSF, the so-called rescue facility for the Eurozone, which is currently conceived to use leverage (to solve a debt problem!) and is thought to look something like this:

(Source) 

We could analyze the details of that flowchart and opine on the structure, but that really won't aid anything. Additional complexity and Jell-O redistribution will not change the basic fact that the debts simply cannot be paid back under current terms or out of any imaginable future economic growth.

As far as I can tell, the complexity serves one main purpose, and that is to baffle enough of the populace for long enough to allow a significant transfer of public wealth to occur in broad daylight into private pockets. In this regard, Europe and the United States seem to be identical.

A Bad Reaction

On September 21, 2011, the Fed disappointed the world equity and commodity markets by announcing Operation Twist, which is nothing more than monetary Jell-O being moved from one side of the plate to another, instead of more QE stimulus (representing additional Jell-O in this metaphor).

The reaction was swift and negative. 

Beginning with stocks, we see that a couple of severe down days (the red bars in the green circle) ensued, following the Operation Twist announcement. 

We also note that the S&P 500 is down year to date (YTD, blue dotted line) and that it is bouncing between the 1120 and 1220 marks (purple lines) with a lot of volatility but not much direction. The simplest explanation for this is that tensions exist between what the fundamental data is telling us about the state of the global economy (not good; more below) and the hope that more central bank money will soon be flooding the world.

As always, this is not a good sign. Any time you read the word "investors" being used in an article about who is driving these price movements, I invite you to replace that word with "speculators," as that's what we all are now. We are left speculating wildly about when and how much thin-air money will next be injected by one central bank or another.

Gold had particularly tough going after the Twist announcement, getting clobbered for ~$100 on the following couple of days (green circle):

These price drops had nothing to do with an improved outlook on the viability of the world's fiat money systems or a reduction in overall systemic risk. Neither were appreciably altered by the Fed decision, although systemic risk was probably elevated. Without the Fed absorbing additional existing debt, the entire system is at greater risk of slipping into a deflationary spiral that could get out of control.

If that happens, you want to be sure to have gold -- in hand.

Silver was especially slammed and was the undisputed loser of the entire commodity complex, losing as much as 25% in a single session (before recovering):

I have always held that the risk for silver in this current rout would be for it to behave more like an industrial metal than a monetary asset, and therefore slip in price regardless of systemic stress. For a while there, throughout July and August, I began to think that silver was displaying some money-like qualities, but the recent slam dispelled those thoughts.

I continue to think that this rout is not yet over and am waiting on better prices for silver before I remove some of my dry powder and accumulate some more.

The 'off note' in this story is the price of oil: 

Until and unless oil, the main lubricant of commerce and a feed-in to the price of everything, slips and plummets a long way from here, I remain bullish on commodities in general. The macro story for oil is simply that a marginal new barrel of oil costs at least $70 in today's world, and quite a bit more in some cases. 

If oil falls below that $70-$80 level, then you can forget about new supply coming on line. In many respects, we are living in an 'oil shadow' created by the plunge in oil to $38 in 2009, which delayed a large number of oil development projects that would otherwise be yielding supply today.

Should oil fall below the marginal cost again here in 2011 or 2012, then we'll have another oil shadow to contend with a few years down the line.

Of course, I should point out here that the above chart is for US oil only (WTIC) and that the world price for oil is roughly $20 higher, as indicated by the price of Brent crude at $104/bbl.

Slip-Sliding Away

Presently, the global economy is not doing all that well. There are troubling signs from Japan, the US, Europe and now China that the economy is stalling out and in serious danger of slipping back into recession. If that happens, all of the debt-rescue plans will have both additional headwinds with which to contend and new debt implosions to rescue. 

Any analysis of the global economy has to begin with Dr. Copper, the most trusted source for an accurate economic diagnosis. Used in an enormous variety of commercial applications, from houses to cars to electronics to electricity cables, copper prices usually provide a useful early read on the direction of the economy.

That tale is one of weakness:

Copper prices are now back to where they were in 2008, although still considerably up off the lows of late 2008 and early 2009, and are in negative territory YTD by more than 20%.

Consistent with the weakness in copper prices are recent reports of Chinese manufacturing activity slipping into contraction:

China manufacturing data paint weak picture

(Sept 22, 2011)

HONG KONG (MarketWatch) — HSBC’s preliminary China Manufacturing Purchasing Managers’ Index, or “flash” PMI, fell to a two-month low in September, indicating a broadening slowdown in the Chinese economy, with industrial output swinging from a modest expansion to a deterioration.

The weak data were a factor in the broad equities sell-off in Hong Kong Thursday.

The headline preliminary PMI for the month was 49.4, down from 49.9 in August, HSBC said in a statement Thursday.

The PMI’s output index fell to 49.2 in September, down from 50.2 in August and below the 50 level dividing expansion from contraction.

China is addicted to rapid rates of growth, and its banking system is heavily exposed to a wildly over-priced real estate market, especially in their major urban centers. If the Chinese property bubble busts, then expect major banking stress to follow suit.

Perhaps one nearby indicator is the health of the Hong Kong real estate market, which is now entering a dangerous phase:

Hong Kong’s Tsang Sees Property ‘Soft Landing,’ Backs Peg

(September 27, 2011)

(Bloomberg) -- Hong Kong Financial Secretary John Tsang predicted a “soft landing” for the real estate market and said the city will keep its currency peg to the U.S. dollar, blamed for helping drive home prices up about 70 percent.

The residential market has basically frozen as a result of the curbs and the global downturn,” said Alva To, head of consulting for North Asia at DTZ, a property broker. “Our surveyors are seeing almost a 60 percent drop in the number of valuation queries from banks compared with normal times.”

Hong Kong’s used home sales have slowed, with prices falling for the first time in seven months in July. That’s not a “very violent reaction,” Tsang said. Prices have jumped about 70 percent since the start of 2009. New loans approved fell 10.3 percent in August from a month ago.

A 70% jump in prices in two years is not a healthy sign; it is an indication of a bubble. The basic trajectory is simple enough; falling sales then lead to falling prices. Once the dynamic is underway, it will not stop until prices again reach affordability for the median household (at best) and may even badly overshoot to the downside (at worst).

More directly, Chinese real estate developers are encountering a slump in both sales and prices:

China Developers Face More ‘Severe’ Credit Outlook, S&P Says

Sept. 27 (Bloomberg) -- Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said.

A 30 percent decline in sales may leave many developers facing a liquidity squeeze, S&P said after conducting stress tests of the nation’s real estate companies. Most developers would be able to “absorb” a 10 percent sales drop next year, the credit rating company said.

“The worst isn’t over for China’s real estate developers,” S&P analysts led by Frank Lu wrote in a report today. “Developers are bracing themselves for slower sales and lower property prices ahead.”

Fewer than half of the 70 cities monitored by the government in August posted month-on-month gains in home prices for the first time, according to Samsung Securities Co.

What will happen to Chinese lending to the US and Europe if global trade slumps and the Chinese banking system begins to experience severe stress as a consequence of their own real estate bubble popping? Probably nothing good. That's why we have concerns that the enormous bubble in US Treasuries may be exposed as early as next year (2012).

Consistent with the rumblings from Dr. Copper are the reported slumps in global trade recently hitting the wires:

German Exports Unexpectedly Fell in July

(Sep 8, 2011)

German exports unexpectedly declined for a second month in July, underscoring signs Europe’s largest economy is losing momentum as the global recovery falters.

Exports, adjusted for work days and seasonal changes, fell 1.8 percent from June, when they dropped 1.2 percent, the Federal Statistics Office in Wiesbaden said today. 

German growth is slowing as Europe’s debt crisis prompts governments from Spain to Ireland to cut spending, sapping export demand. Factory orders from abroad dropped in July and executives and investors grew more pessimistic last month. Bayerische Motoren Werke AG (BMW), the world’s biggest maker of luxury cars, said on Sept. 1 that U.S. sales dropped in August.

Japan exports disappoint, could weaken further

(Sept 20, 2011)

TOKYO, Sep. 20, 2011 (Reuters) — Japan's exports rose in the year to August at less than half the pace expected as a global economic slowdown, a strong currency and Europe's sovereign debt crisis put Japan's own recovery increasingly in doubt.

"The impact of a slowing in the global economy is starting to become visible in Japan's export figures," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"In the coming months exports may go back to posting year-on-year declines, meaning the economy will have no sufficient support factor unless the government quickly implements reconstruction spending."

[US] Economic indicators predict continued weak growth

(Sept 22, 2011)

[F]actory orders, unemployment benefit applications and hours worked were among six measures that weakened in August.

Existing home sales up but price outlook grim

(Sept 21, 2011)

WASHINGTON (Reuters) - Existing home sales rose in August to their highest in five months as lower prices and rock-bottom interest rates drew more buyers into a still moribund market.

Sales climbed more than expected, up 7.7 percent from the previous month to an annual rate of 5.03 million units, the National Association of Realtors said on Wednesday. The median price was 5.1 percent lower than a year earlier.

Existing home sales have trended lower in 2011 and prices are still weakening. One factor keeping prices low is the high rate of "distressed sales" which include those forced by foreclosures.

Distressed sales accounted for 31 percent of August transactions, up from 29 percent a month earlier.

Comment: Note that falling prices are not a good sign here. Also the 7.7% bump in sales, assuming we believe the NAR data (always worth taking it with a grain of salt), still leaves us well off the peak of several years back and is being driven in large measure by distressed sales.

Let's contrast the distressed bargain activity with new home sales, also for August, to see if a different picture emerges:

New home sales fell in August for 4th month

(Sept 26, 2011)

Sales of new U.S. homes fell to a six-month low in August.

The fourth straight monthly decline during the peak buying season suggests the housing market is years away from a recovery.



The Commerce Department said Monday that new-home sales fell 2.3 percent to a seasonally adjusted annual rate of 295,000. That's less than half the roughly 700,000 that economists say must be sold to sustain a healthy housing market.



New-homes sales are on pace for the worst year since the government began keeping records a half century ago.

New home sales are on a pace for the worst year since records began fifty years ago? That statistic alone should tell you exactly where we are in this so-called recovery. Absolutely nowhere. The decline in new home sales wipes out the warm glow from the increase in existing home sales.

Summary: Part I

The world that Europe, the US and Japan are desperately trying to sustain is no longer possible in a world of too much debt and too expensive energy. The plethora of sliding data noted above represents classic warning signs taht one would expect to see from a global economy in systemic decline.

We are now down to the wire. Over the next few months and years, our story of credit growth - four decades in the making - will continue to unwind. Those who place their faith in the authorities to first, understand the true nature of the predicament, and second, implement restorative policies, are at tremendous risk of personal and/or financial losses.

In Part II of this report: Understanding What Happens Next, we discuss important decoupling trends, what steps global leaders will be forced to take later this year to deal with them, why these steps won't work, and what prudent individuals should be doing now to protect themselves and their wealth.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

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14 Comments

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 269
Chris Martenson wrote: The

Chris Martenson wrote:

The macro trends of worsening public and private debt loads, a looming and unaddressed Peak Oil threat, exponentially increasing global population, resource depletion, and an all-too-human tendency to use the money printing machine to deal with tough economic problems all remain pointed firmly towards an uncomfortable conclusion: There's a future of less in store for most people.

To continue with the gloomy outlook, I finally did a hard numbers analysis to determine how much additional food the world will need to produce in order to bring the entire global population up to a western diet. This works out to be more than double the current food production. And then add on top of this 2 billion more people whom I presume will also be expecting such a diet, which works out to more than triple the current global food production!

That was part one of the analysis, which was easy. Considering that very rough estimates put the amount of global ecological productivity currently gobbled up by humanity at about 25% (not all of this goes to food production, however), then increasing this by over three fold to 77% is not a trivial matter. The second part of the analysis will be more involved and I will try to answer the question of whether the planet can actually provide this much food. Given the current difficulties we seem to face in simply maintaining current food production, this seems unlikely absent some imminent miraculous new breakthough in nuclear fusion technology or equivalent.

http://markbc.wordpress.com/how-much-more-food-must-the-world-produce/

Mark

tictac1's picture
tictac1
Status: Silver Member (Offline)
Joined: Sep 25 2009
Posts: 174
Something you might

Something you might consider-

A "western diet" is neither healthy nor sustainable, for a wide variety of reasons.  Even our caloric intake is way higher than it needs to be.

Conventional farms are extremely inefficient and destructive of land, they too are not sustainable.  This will work itself out over time.

According to most of the intensive and organic farming information I've read, a family can support itself on as little as 1.5 acres.  The French in the 1800's were growing so much produce IN Paris, year-round, they were feeding Paris and exporting to other parts of Europe.

So our current model should not be used to judge what is possible or impossible.  It is based on what profits corporations and banks, not what works best.

ikursat's picture
ikursat
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Joined: Feb 5 2010
Posts: 11
Self-sufficient Homestead on 1 Acre

A recent article in Mother Earth News by a British permaculture expert gave detailed plans for a self-sufficient homestead / mini-farm on 1 acre of land. Whether the next chapter is the best of times or the worst times, returning to primary wealth creation feels like the right step to me. As I take even baby steps towars a homestead,  I am physically stronger (without paying $600+ a year to pump iron in a health club), emotionally much less prone to panic over the unfolding global scenario, my mind is clearer and my connection to spirit is growing vital again. Consider checking out the article.

earthwise's picture
earthwise
Status: Platinum Member (Offline)
Joined: Aug 10 2009
Posts: 832
Self-sufficient Homestead on 1 Acre

ikursat wrote:

A recent article in Mother Earth News by a British permaculture expert gave detailed plans for a self-sufficient homestead / mini-farm on 1 acre of land. Whether the next chapter is the best of times or the worst times, returning to primary wealth creation feels like the right step to me. As I take even baby steps towars a homestead,  I am physically stronger (without paying $600+ a year to pump iron in a health club), emotionally much less prone to panic over the unfolding global scenario, my mind is clearer and my connection to spirit is growing vital again. Consider checking out the article.


 

I'd like to see this but couldn't find it at that site. Got a link?

KugsCheese's picture
KugsCheese
Status: Platinum Member (Offline)
Joined: Jan 2 2010
Posts: 729
Let's hope so

"Our best hope is for a negotiated decline to lower levels of economic activity that allow us to gracefully adjust our expectations to a new and lower level consumption that offers an even more enjoyable and purpose-filled existence."

Let's hope so as I hated the last 10-12 years of mindless malinvestment greed.

dps's picture
dps
Status: Martenson Brigade Member (Offline)
Joined: Jun 27 2008
Posts: 442
earthwise wrote:   I'd like

earthwise wrote:

I'd like to see this but couldn't find it at that site. Got a link?

You may have to buy it hard copy because it's so recent.  I get it too.  It's a bit optimistic ... one acre may not be enough really.  However, there are permaculture techniques that can significantly help in that direction.   Here's a link you may find helpful ...

http://www.organiclandscapedesign.org/

A lot of rich material there.  Hugs ... dons

sofistek's picture
sofistek
Status: Platinum Member (Offline)
Joined: Oct 2 2008
Posts: 651
Is that the best?

"Our best hope is for a negotiated decline to lower levels of economic activity that allow us to gracefully adjust our expectations to a new and lower level consumption that offers an even more enjoyable and purpose-filled existence."

Well, maybe for some people, this best hope might lead to a more enjoyable and purposeful life, but it certainly wouldn't lead to that for future generations unless that lower level consumption is sustainable. I don't think there is any hope for a negotiated move to sustainable living. If it isn't sustainable, it will end and leave an even worse environment for future generations. If we can get close to sustainability then maybe that day of reckoning can be put off for decades or centuries but that's about it.

frobn's picture
frobn
Status: Silver Member (Offline)
Joined: Nov 28 2010
Posts: 184
sofistek wrote: "Our best

sofistek wrote:

"Our best hope is for a negotiated decline to lower levels of economic activity that allow us to gracefully adjust our expectations to a new and lower level consumption that offers an even more enjoyable and purpose-filled existence."

Well, maybe for some people, this best hope might lead to a more enjoyable and purposeful life, but it certainly wouldn't lead to that for future generations unless that lower level consumption is sustainable. I don't think there is any hope for a negotiated move to sustainable living. If it isn't sustainable, it will end and leave an even worse environment for future generations. If we can get close to sustainability then maybe that day of reckoning can be put off for decades or centuries but that's about it.

Sustainablity will come about with or without us. There is an old Roman saying, "The gods lead the willing, the other they drag." Politicians and elites are fighting for the status quo, expect them to be forcibly dragged. Unless we, the consumers, learn quickly to put people and nature ahead of goods we will be dragged along with the politians and elites.

I see seeds of hope in books like Share or Die, a collection of writing from Generation Y about post-college work and life in the 21st Century and about how young people are finding ways to produce and share resources differently.

bob980's picture
bob980
Status: Bronze Member (Offline)
Joined: May 27 2010
Posts: 25
Decline

It took many decades to arrive at our present standard of living supported by abundant, cheap energy and then we screwed it up with all the personal and soverign debt.  Decline of systems as complex as ours today happens much faster than advance.  I just hope that we can get ready but I fear that many, many ignorant people will be caught with nothing and then will turn on those of us that have tried to responsibly manage our personal predicament.  Part of my preparation involves firearms and knowing how to use them well.  But, even more important, we must also build a community of friends and family that we can rely on too.

Stay safe my friends. 

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2490
Copper Bear Market = Stock Bear Market?

cmartenson wrote:

Any analysis of the global economy has to begin with Dr. Copper, the most trusted source for an accurate economic diagnosis. Used in an enormous variety of commercial applications, from houses to cars to electronics to electricity cables, copper prices usually provide a useful early read on the direction of the economy.

That tale is one of weakness:

Copper prices are now back to where they were in 2008, although still considerably up off the lows of late 2008 and early 2009, and are in negative territory YTD by more than 20%.

I wanted to share a surprising (for me, anyway) analysis of copper and the stock market from Jason Goepfert of Sentimentrader.com.

We've discussed "Dr. Copper" several times in the past, and the correlation between extremes in copper prices and future returns in stock prices is poor.  It's just not usually a very good predictor.

But let's go back over the past 25 years for which futures prices are available and look at how the S&P 500 fared after other times copper fell rapidly into a bear market.  By this, we're looking for a decline of 20% or more within a two-month period, when its highest point was very near a 52-week high.

Out of the 6 instances, only 1 led to an imminent and dramatic fall in stock prices.  The occurrence in November 2007 did ultimately lead to a bear market in stocks, though the S&P rallied fairly strongly for a month or so beforehand.

The other occurrences were not so bearish.  In fact, they were outright bullish for the S&P.  By six months later, the index was up by more than +12% each time.  For whatever reason, perhaps this latest bear market in copper will be more predictive of a future failure in stocks...but its history has not been consistent.

(emphasis mine)

So based on his historical analysis, the current weakness in copper prices means that their is a significantly higher probability for a rally in the stock market (versus a decline) over the next 6 months. Though, the one outlier in this study preceeded the crash in 08. 

Amazing.

Common sense has no business trading in the markets.

horizonstar's picture
horizonstar
Status: Member (Offline)
Joined: Oct 1 2011
Posts: 1
Sustainability

Actually an area of only 4,500 sq. ft. is sufficient to provide the entire protien and vegtable needs for a family of three in temperate to southern US climatic conditions.  The secret is biosystem aquaponics, the process of co-cultivation of fish and vegetables along with  duckweed as the fish food input to the system.  Combined with passive solar greenhouses, such a system becomes a biological solar collector requiring only minimual imports from outside the system in the form of organic waste products like dairy waste to fertilize the duckweed production.

Perhaps the surbaban wasteland is sustainable after all!  Just tear out the lawn, fill in the swiming pool, and ignore the outdated zoning restrictions.

techperson's picture
techperson
Status: Member (Offline)
Joined: Aug 28 2008
Posts: 1
earthwise - here's a link

http://bit.ly/p0yzvv

lynford's picture
lynford
Status: Member (Offline)
Joined: Jun 29 2010
Posts: 3
John Steinsvold's picture
John Steinsvold
Status: Member (Offline)
Joined: Jan 26 2009
Posts: 16
LET'S HAVE A FUTURE FREE OF ECONOMIC FEAR!
An Alternative to Capitalism (if the people knew about it, they would demand it)
 
Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.
 
I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:
 
http://evans-experientialism.freewebspace.com/steinsvold.htm
 
John Steinsvold

 
--Georg C. Lichtenberg

Perhaps in time the so-called dark ages will be thought of as including our own.

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