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    Daily Digest – June 13

    by Davos

    Saturday, June 13, 2009, 3:00 PM

  • Financial Sense News hour 3, June 6 (Repost, Audio)
  • * * * * ABBY NORMAL
  • A Nation of Ditch Diggers
  • A New World Order (H/T JerryLee, Chart Jerry Noted China then and now!)
  • Just Short of a Sign in Times Square: China airs fears on US debt, dollar: lawmaker
  • The Still Over-Leveraged Consumer
  • Changing Times, Different Choices
  • California to lead us into Abyss
  • Sales – Still More Economic Cliff Diving (Charts on Page)
  • Weak Hiring and the Jobless Recovery
  • Five stock market experts share their views
  • By the Numbers?
  • US cities may have to be bulldozed in order to survive


Financial Sense News hour 3, June 6 (Repost, Audio)

  • ****6:04 Minsky, Bubbles, 5 Steps of: 1.) A Displacing Event 2.) Credit Creation/Fuel/Expanding Money Supply 3.) Captivates Investors Euphoric State 4.)  Critical Stage, Financial Distress 5.) Revulsion
  • 9:00 copper and oil, India and China
  • 11:30 Insolvency, 100 trillion
  • 15:00 60% tax or 10% per year inflation needed to balance budget
  • 23:00 School kids laugh at Geithner
  • 30:00 (Can’t read notes)
  • 31:00 USD falling
  • 33:00 Geithner Image
  • 34:00 Kid for an auto Czar
  • 37:00 Unfunded liabilities
  • 41:00 Oil
  • 48:00 Electricity
  • 52:00 Demand
  • 56:00 A or B, EV’s or War for oil
  • 1:01 Reverse Globalization
  • Part 2 of 3rd Hour: 2:00 How Ben How?
  • 4:30 Inflation6:30 (Can’t read notes)
  • 14:00 Second wave up

This was a good listen, I’d make it a point to catch it.


The pundits on CNBC who appear every morning proclaim that things are returning to normal. It amazes me that such supposedly intelligent people have no idea what normal means. Since 80% of the people interviewed on CNBC manage other people’s money, I’m guessing they are just trying to stay in business by lying to the average investor. If they were honest, they would say they have no idea what the future holds. If they were outspokenly honest, they would say that a Frankenstein’s Monster is loose in the countryside and will wreak havoc on the American economy for years.

 A Nation of Ditch Diggers

“Mom, dad, do I really have to lay asphalt as a career? Why did I even go to school?”

Relax college graduate. The suits in DC have it all figured out. Your future? You have Social Security for that. For now? Asphalt work is just a temporary as we “fix” the economy. It’s amazing to me that solutions and “fixes” that would otherwise be labeled as moronic actually gain traction when fear is in the air.

A New World Order (H/T JerryLee, Chart Jerry Noted China then and now!)

Just Short of a Sign in Times Square: China airs fears on US debt, dollar: lawmaker

"It’s clear that China would like to diversify from its dollar investments," the lawmaker said at the Center for Strategic and International Studies, a Washington think-tank.

The Still Over-Leveraged Consumer

One of the primary reasons I am not a big believer in the green shoots thesis is due to the fragile financial condition of the Consumer.

Despite spending less time at the mall, throttling back consumption, and increasing their savings rate, the US consumer still finds themselves with too much debt and too little savings. Even worse (at least for the economy), they lack the income or the equity to fund their previous lifestyles.

In my opinion, consumer spending remains an unhealthy ~68% of the economy. While this is down from a peak of ~71%, it is way up from the 63% of the 1950s. The difference over that period has been the massive increase in revolving credit and accessible secure lending (2nd mortgages, HELOCs, etc.).

“Despite recent frugality, consumers have barely dented their debt load. The Federal Reserve will offer a fresh peek at that mountain on Thursday, when it releases its “flow of funds” data for the first quarter.

By the end of 2008, households were on the hook for $13.8 trillion in debt — nearly matching the $14.3 trillion output of the entire U.S. economy, not adjusted for inflation, that year.

Households are shedding debt; they’re just not doing it very quickly. They owed roughly 130% of disposable income at the end of 2008, down only slightly from a record 133% in the first quarter of 2008.”

I am not sure that really puts this into the proper context of indebtedness.

Changing Times, Different Choices

Most people do not commit crimes because they have controls in their lives which mean that the costs of crime far outweigh the benefits of crime. Such controls include attachment to family (e.g., marriage and children), commitment to a career, active involvement in a community and reputation, and belief in rules and discipline. Certain groups, i.e., the young, the working class, the underclass, etc. are less likely to have such controls in their lives and the benefits of crime clearly outweigh the risks of being caught and punished.
— Sociology, Steve Chapman (Letts and Lonsdale, 2004)

With more and more of people being forced into a lower economic strata or worrying about thier family’s survival rather than "career commitment" or personal reputation, is it any wonder that we are seeing developments like those described in the following Los Angeles Times report, "Vehicle Fraud Cases Heat Up Amid Economic Downturn"?

Suspicious car fires or arson rise 27% in the first quarter compared with a year earlier as owners seek a payoff.

Reporting from Sacramento — Motorists unable to afford payments on pricey cars and gas-guzzling sport utility vehicles in this recession are turning to a time-tested financing solution: matches.

Insurance cheats are torching their vehicles in remote deserts. They’re pushing them off cliffs. They’re sinking them in lakes or ditching them in Mexico in the hopes of getting their policies to pay off, fraud investigators say.

Nationwide, suspicious vehicle fires or arson increased 27% in the first quarter of this year compared with a year earlier, according to the National Insurance Crime Bureau, an industry-supported agency that investigates all types of insurance fraud. So-called owner give-ups — cars intentionally destroyed or abandoned — jumped 24%.

Barbecuing a Beamer is one of the more dramatic types of suspected insurance fraud that’s increasing in this economic downturn, the deepest in more than half a century. But it’s not the only one. Suspicious personal injury slip-and-fall claims increased 60% in the first quarter; staged car accident cases were up 34% and commercial property fire/arson cases jumped 76%.


California to lead us into Abyss


June 1 (Bloomberg) — There is an old joke that a borrower dies if everyone stops believing in him. A look at the history of financial crises suggests there is a kernel of truth in this.


That’s why the California budget crisis may well lead to a second financial calamity that would be far worse than anything experienced over the past 18 months.

California is, of course, facing a debacle. Voters rejected a series of ballot initiatives designed to restore some sense of sanity to the state’s budget. As a result, California is more than $21 billion in the hole.

Governor Arnold Schwarzenegger is struggling to find enough spending reductions to close the gap, but investors are skeptical. According to Fitch Ratings, which in March downgraded California’s general obligation bond rating, California has the worst rating of any state.

Even amid economic calamity, the people of California are relatively wealthy, and the state’s economy is an impressive engine.


Sales – Still More Economic Cliff Diving (Charts on Page)

This morning’s Redbook and ICSC data got my curiosity up so off I went to the Fed to look for some sales data. There you can find all types of data, except of course, whatever it is that would make the most sense for them to chart, like the Redbook and ICSC data! They chart all types of other data though, like tobacco tax collections for every state, fuel taxes, gaming taxes, entertainment taxes, etc. And I did find a few interesting charts in regards to sales… let’s take a look.

We’ll start with the big picture Total Retail Sales presented in Year-Over-Year (yoy) percent change.

Weak Hiring and the Jobless Recovery

First a report from Bloomberg: U.S. Third-Quarter Hiring Plans at Record Low, Manpower Says

U.S. employers’ hiring plans for the third quarter held at a record low, signaling fired workers will have to wait many more months to find a job, a survey showed.

Companies are “treading slowly and watching with guarded optimism, hoping a few quarters of stability will be the precursor to the recovery,” Jonas Prising, president of the Americas for Milwaukee-based Manpower, said in a statement.

That fits with the Fed Economic Paper I posted yesterday: Jobless Recovery Redux? that argued a jobless recovery is likely.

Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market.

This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.

And Frankels (on the NBER recession Business Cycle Dating Committee) notes: The labor market has NOT yet signaled a turning point (ht Mark Thoma, Paul Krugman)
The members of the NBER Business Cycle Dating Committee (of which I am one) will be responsible for calling the trough when the time is right.

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy. Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers. (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.) The phenomenon is called “labor hoarding” and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.
Note that Frankels is making similar arguments as the San Francisco Fed paper – except he is discussing the end of the recession as opposed to a jobless recovery.

And the following graph shows the aggregate hours index from the BLS over several recessions

Five stock market experts share their views

Michael Covel is the author of two best selling books, Trend Following and The Complete Turtle Trader. While educating his followers on his blog, Michael just finished his first film, Broke: The New American Dream. This documentary not only details the causes of our economic problems, but also features eye-opening revelations from today’s top financiers and traders.

I have no idea what stock, bond, currency, and commodity markets will do over the next six months. How many of the great fundamental analysts had calls that made their clients money over 2008? Not many as trillions of dollars were lost through buy and hold prediction nonsense. Sure, some very smart analysts will get the next six month’s of predictions right, but then again when you flip a coin you have a 50% chance of being right too. Does that mean there is no hope for profit? No. If you can put aside the need to try and predict the future and if you can instead trade as a technical trader, like trend followers who made fortunes in 2008, you will have a chance to make money going forward. Bottom line, if we can’t know the future and if we can’t know what direction any market will trend it is far better to have a plan to systematically profit by reacting to market moves versus a reliance on the false hope of predictions. Trading for profits speech aside, how do I feel personally about the economy? Broke is definitely the new American dream.

By the Numbers?

Although I believe that our government has every incentive to make the economy look better, employment appear stronger, and inflation seem weaker than they really are, I’m not a statistician or an economist (for what it’s worth, some might view that as a good thing).

Hence, while I can’t sit here and say for certain that our government manipulates the data in such a way that it has become meaningless, common sense tells me, for instance, that the Bureau of Labor Statistics’ assumption that start-up businesses accounted for 43,000 new construction jobs in May is reason enough to doubt whatever Washington is telling us (for a bit more color on this particular statistic, check out "May Employment Report Not Believable" at ChrisMartenson.com)

With that in mind, it’s not hard to side with the views of the statistical gadfly cited in the following SmartMoney report, "True or False: U.S. Economic Stats Lie."

How’s the economy treating you? Chances are, your answer is colored largely by three things: whether you’re working (if you want to), how much you’re making and how quickly your expenses are rising. Economists rely heavily on the same factors to judge the nation’s health. At last count, 9.4% of the workforce is jobless. Compared with a year ago, the goods and services we produce are worth 5.7% less while the ones we buy are 0.7% cheaper.

 US cities may have to be bulldozed in order to survive

Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.
The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area. The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr. Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the "rust belt" of America’s Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.

"The real question is not whether these cities shrink – we’re all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."

Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.

"Places like Flint have hit rock bottom. They’re at the point where it’s better to start knocking a lot of buildings down," she said.

Flint, sixty miles north of Detroit, was the original home of General Motors. The car giant once employed 79,000 local people but that figure has shrunk to around 8,000.

Unemployment is now approaching 20 per cent and the total population has almost halved to 110,000.



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