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America’s NOD
Courtesy of Karl Denninger at The Market Ticker
"Honey, we got a NOD in the mail today, so we’re not going to pay – make sure you buy everything on our credit card, ok?"
Spending through July of 2009 has increased by $530 billion, which is 21 percent over the same period in 2008. The bailout money for Freddie Mac and Fannie Mae accounted for almost half of the spending increase. Unemployment benefits have more than doubled, Medicaid spending has grown by a quarter and Medicare spending has increased by 11 percent.
Tax revenue for the first three quarters of 2009 has fallen by approximately $350 billion, or 17 percent compared to the same period last year, due mostly to the effects of the recession on payroll, income and corporate taxes. A third of the decline is due to tax breaks in the stimulus, including the middle-class tax cut that President Obama campaigned on during last year’s election.
Got that?
The Stock Market has been on a tear, powered by printed money. Bernanke and his clowns have been monetizing debt – only $400 billion of the more than $2 trillion in market increase came out of money markets – the rest of the "firepower" – more than $1.5 trillion – came from "new bank reserves" used to buy mortgage-backed securities (Fannie and Freddie) and Treasuries – a figure that incidentally is close to the market’s rise in terms of capitalization.
Annualized, the $181 billion deficit increase in July alone is approaching one half of the full year 2008 deficit – in one month – and Treasury has announced it is going to sell almost half that much again this week in new Treasury issuance – that is, yet more deficit (or addition to debt.)
Think about a personal example. You get a NOD in the mail and realize there is no chance you can pay the mortgage in full going forward. Therefore, you don’t – on purpose.
Instead, you spend the mortgage money on consumption. You go out to eat every night, you take a cruise, you live the high life. Why not? You’ve got an extra $3,000 a month now, and by God you’re going to spend it. Even better, since you know full well that eventually your credit card companies will discover you’re not paying the mortgage, you go out and immediately run those up to the rafters, booking that exotic dream vacation you’ve always wanted but could never afford.
Your lifestyle goes from being cash-strapped and eating Mac-N-Cheese trying to pay your mortgage to that of a King! Why this is great – what could possibly go wrong?
This is what America’s government has chosen to do under Barack Obama, Tim Geithner, Ben Bernanke and our Congress.
Let me ask: How does this end for you when you do it?
What makes you think it will be different for our nation?
The truth of this policy is found in the S&P 500’s P/E – it was over 100 for the first quarter (a level never before reached in the index’s history) and is over 140 today. There are those who claim that we must use "operating earnings", disregarding credit losses.
Those are the same folks who claim that their standard of living has greatly increased after they got the NOD and decided to ignore it, instead redirecting what should be a mortgage payment into an exotic vacation.
Yahoo claims that "the consumer must drive growth" for the rally to continue:
Analysts say investors need to see evidence that consumer spending is picking up before they’ll keep the market’s summer rally going. Despite signs the recession is easing, investors are still worried that consumers, whose spending accounts for 70 percent of all U.S. economic activity, could hurt the economy’s chances for a robust recovery if they continue to limit what they buy.
How will that happen, pray tell?
Those NODs are real. So are the job losses. Over 400,000 people disappeared from the workforce last month – they gave up, dropping the participation rate. That’s where the "improvement" in the jobs number came from.
What’s not talked about are the graduates from last spring’s college and high school classes. Monthly our population entering the workforce (less those retiring) requires about 150,000 jobs to be created just to keep even.
The true unemployment rate is closer to 20% than 9%, but you won’t hear that reported on the evening news. You will see and hear it though around the shopping centers and malls of America.
Here’s just one example:
Where are all the people? This is LAST FRIDAY night at the most popular outdoor mall in the Destin area. A very popular place, and as recently as a year ago it would have been mobbed with teens and families enjoying the fantastic summer evening, some from out of town on vacation, some local.
They’re all gone, their money drained, their credit cards declined.
We now have "cash for clunkers" and people are shouting from the rafters about what looks like an 11.5 million annualized sales rate (for July and August) off that program. How quickly we forget that in 2001 "Drive America" and zero percent interest resulted in sales of over twenty million annualized units. Never mind that four of the five top models are foreign – while many are assembled here in the United States, the profits from those sales are going to Japan and Korea rather than staying here.
I stand in awe of media pundits claiming that this program has "saved" the US Auto industry, blithely ignoring what happened when "Drive America" ended – the pulled forward demand became immediately evident, the automakers responded with one last desperate measure (125% negative balance and above financing for rolled over loans) and when that wall was finally hit the US Automakers entered the decline that led to their bankruptcy.
How is this going to be different, other than the fact that now the government owns them? How will the automakers sustain demand once "Cash for Clunkers" ends? And what of the lower-income Americans who depended on those cars – the clunkers – to be able to afford any transportation at all? Are they supposed to walk – or starve? When I was younger I was one of those individuals; today, this program would have left me unable to afford a car so I could get to work. I’m sure all the college students and recent grads, struggling to find a job, are saying "Thanks Mr. President for destroying all the cars we could afford to buy."
You’re welcome to believe "green shoots" if you wish. You’re welcome to pile into the market with a P/E on actual reported earnings well over 100, more than twice the highest level ever before recorded. You’re welcome to buy into or remain in a market that is pricing in a 5% GDP growth rate for the next four sequential quarters – every quarter.
I find such prognostications and beliefs to be the mark of magical thinking, not analysis, and that’s when I’m being particularly polite. During my impolite moments I will suggest something more sinister – a coordinated effort by Congress, The President, The Fed and some of our nation’s largest financial institutions to manipulate the market higher in a desperate attempt to raise capital from you, the sheeple, so they do not have to declare what any honest examination of their books would show: their state of being bankrupt.
The hope was that by doing so you’d be left holding the bag, and debt-accumulation might re-ignite with you "feeling better."
The error in this thought process was that they forgot that you really did get that NOD last month, and worse, your credit card was declined at The Destin Commons Starbucks when you tried to buy a Latte Friday night.
I will go on record here and now and say that I don’t believe for a minute that the strategy of the banks and government will work, because I don’t believe it can work. There are too many NODs, too many jobs lost, too much debt and too much excess capacity in the economy. The pushers at The Fed and Government will keep supplying heroin until the victim (that’s the economy for you and I) has a heart attack, and that event will come later this year or sometime in 2010, probably sooner rather than later.
Neither I or anyone else can predict the precise trigger for it all coming unraveled, but I can do the math, and I know that it is utterly impossible for the economy to see +5% GDP growth for the next four quarters sequentially.
That’s not going to happen, yet that’s what’s priced in at today’s S&P 500 level – not allowing for any further appreciation in stock prices at all.
Head’s up!
