Macro Economic Picture Points to Market Plunge

There is a huge disconnect between Wall Street and Main Street. Americans are hurting far worse than government numbers suggest. As John Williams points out, unemployment is rising to levels comparable to the 1930s. Already, if the same 1930s measures were used, unemployment would be 22%! Using Pre-Clinton numbers (which did not stop counting discouraged workers as part of the labor force), unemployment would be over 17%.  Even the official number, the one used by politicians to try to pull the wool over the American peoples’ eyes is at 10.2%.

It’s not hard to understand why things are falling apart in America’s real economy. We have been living beyond our means for decades. We consume not from what we save, but from borrowed money, much of which comes from foreigners. To improve living standards, countries need to work hard and save money, like China and other LDC’s.  The world is getting tired of lending money to America so we can party all day and all night while they work hard and save.

So, the credit orgy is over. As Meredith Whitney has pointed out, $1.5 trillion of credit has been taken away from American consumers this year. She expects that number to grow to $2.7 trillion by next year. No way we will have anything better than a flat year over year Christmas season according to Whitney. 

Wall Street’s sales people are talking up the economy telling us the worst is over. They note the upturn in GDP and suggest it is here to stay. In fact most of the improvement in GDP has come as a result of government spending, not from an improving economy.  Independent economist John Willaims, recently wrote the following:

“General Outlook Unchanged. The most severe economic downturn since the onset of the Great Depression continues, as does the systemic liquidity crisis. At best, activity in key areas such as retail sales, housing and production has flattened out at extremely low levels, as discussed below. Those levels saw recent short-lived support from one-time stimulus gimmicks that have run their courses. There are no quick fixes for the economy, since the downturn is structural, tied to consumer income growth failing to keep up with inflation. The traditional offset to weak income issues in recent years has been encouragement of consumer debt expansion. Such debt expansion, however, is not available at present, at least not in quantities that would support an expanding economy.  

“The Fed has continued in panic mode, spiking the monetary base at annualized pace not seen since the "worst" of the crisis a year ago. Such detail will be updated following the monetary-base reporting Thursday (November 19th). At the same time, broad money supply is contracting at a pace that even in the best of times would promise a recession in the months ahead.

“The broad outlook remains unchanged. I cannot remember stock market prices ever being so far removed from reflecting underlying economic and financial-system reality. Irrespective of near-term market gyrations, the long-term outlook remains extremely bearish for U.S. equities and the U.S. dollar, and extremely bullish for gold and silver. The economy still faces an eventual hyperinflationary great depression, with high risk of that circumstance beginning to unfold in the year ahead.

“Also as a result of the financial markets being removed from reality, surprises in economic reporting should tend to continue on the downside, as seen this week in industrial production and housing (retail sales would have been weaker but for downside revisions to prior-period reporting), while inflation will tend to surprise on the upside, as seen in the CPI reporting.”

Note that while Williams is calling for hyperinflation, as he has been for some time, he is also suggesting that the stock market is hugely overvalued and thus implying we are likely to see a huge decline. As far as the hyper inflation/Deflationary depression debate is concerned, your editor is continuing to hold an open mind. It is difficult for me to see how we don’t get more credit market and asset price deflation if the kind of cataclysmic stock market decline Dr. Robert McHugh, Robert Prechter, Ian Gordon and others are predicting unfolds. I believe Dr. Robert McHugh recently summed up my views about the underlying economic fundamentals that are likely to cause stocks to decline dramatically. Here is what he wrote to his subscribers on Nov. 18th:

“Clearly the Central Planners’ stimulus plan is not working. The reason is simple, they have targeted a small minority to get the trillions of dollars of government spending, and have failed miserably in conducting a strategy that would get cash into the hands of all American Households. If you have a clunker and are willing to buy a tiny car with a certain gas mileage performance, if you are buying a new home for the first time, or if you are one of the largest financial companies on earth, you get the money, and for the rest of you, go borrow money from lenders who won’t lend. This is essentially their plan. This is a formula for catastrophic wave (C) down to come.

“The economy as a whole does not need riskier loans, and the American Household does not need more debt. The Central Planner policy has been to goose the largest financial firms and hope that everything else works out. Nonsense. This is not a policy to create jobs. This is not a policy that gets cash into the hands of Americns so they can live, payoff debts, and restore savings. There needs to be an across the board grassroots massive income tax rebate, and a repeal of the wealth-destroying property tax. That is the only solution that will fix this worsening mess. The latest housing numbers and unemployment numbers tell us things are getting worse on Main Street, not better, and a major policy change is necessary if this economy is to avoid a double dip downturn, the next dip having the potential to be far worse than the 2007 to 2009 decline.

“Both a Democrat, John Kennedy, and a Republican, Ronald Reagan, pulled this economy out of recessions with major tax cuts and rebates. It has worked before and will work again. Consumers need cash from non-debt acquisition sources. It is that simple.”

Of course there is no reason for our “Central Planners” to do what Kennedy and Regan did because our law makers now know who their real bosses are. As John Perkins pointed out in my radio interview with him, corporations not governments are calling the shots these days. Corporations are bigger than governments so forget the needs and desires of “the people.” Of course politicians pay lip service to the needs of the people in an effort to pacify them. But they know which side of their bread is buttered, on so to speak.  And so, with the corporate banking interests now combined in what can only be described as American economic fascism, there is little hope for the kind of tax break required to get the real economy growing again. That is one main reason why I think the deflationary views of folks like Prechter, Gordon and Hoye is still very believable.

Jay Taylor
Gold Investor