Gloomy Picture Perhaps Worse Than It Seems

Gloomy forecasts have generally held sway at the Committee for Monetary Research and Education’s annual spring dinner, but this is the only time we can recall when there were no optimists on the dais bold enough to challenge a consensus now gloomier, probably, than at any time since the 1930s. Jim Grant’s off-the-cuff talk was about as sunny as the evening’s presentations got, and even he was unwilling to allow much more than a ray of hope that everything would somehow turn out all right. Bob Hoye, on the other hand, was unequivocally bearish:  “The chances of anyone fixing this mess,” he told the crowd, “are literally zero.” But the scariest talk of the night came from Bill Beach, director of the Heritage Foundation’s Center for Data Analysis.  If you find today’s economic news too depressing to imbibe, he said, “things are even darker than they seem.”

nyc-small

A self-described data junkie who loves to delve into the statistical facts behind the headlines, Beach says today’s economic numbers are so appalling that he’s “scared to death” to look at them.  What is most extraordinary about these times, he said, is that government at all levels has never been so willing to take on more debt. As a result, said Beach, our children will be paying back interest and principal for many, many years to come. How much do we owe?  Beach asked one person in the room to stand up.  That one person — one among a hundred in the banquet room of New York City’s Union League Club that night – could be said to represent the $182 billion required to bail out just one insurer, AIG. But if you add in the expenses the federal government will incur maintaining Social Security, Medicare and Medicaid over the next 20 years, you’d have to stack the entire room’s dinner guests up to the ceiling to equal the final tally. Nor will we likely be able to grow our way out of debt, said Beach, since, in order to succeed, today’s five-year-old would need to be three times as productive as we are now while getting his pocket picked clean by the tax collector.

Teapot Dome ‘Delay”

So when will the system finally unravel?  Barron’s editor Jack Willoughby reminded the audience that it took seven years for the Teapot Dome scandal of 1921 to have a measurable impact on the economy. Pressures are building this time as well, many of them attributable to corruption and scandal, and sooner or later something will have to give, said Willoughby. “Risk always hits at the weakest point.”

Hoye concluded the evening with a sobering look back on history. He noted that the economic contraction following the Panic of 1873 lasted for more than two decades, until 1895. Although the Federal Reserve came into existence two decades later and was holding the discount window wide open at the time of the 1929 crash, that didn’t prevent the economy from slipping into the Great Depression, noted Hoye, founder of the Vancouver-based Institutional Advisors. Quoting from a 1932 Barron’s editorial, the speaker reminded the audience that all of the Fed’s anti-deflationary remedies had failed, and that bonds had gotten sucked into “the vortex of deflation.”  As much could be said of the federal government’s current, recklessly extravagant bailout – a so-far failed effort that Bloomberg news has estimated at $12.8 trillion.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)  

  • Rich May 28, 2009, 8:58 pm

    Read the fine print on ETFs.
    They do not track their markets long term.
    Also, JP Morgan and Barclay gold and silver ETFs are not backed 100% by physicals, but derivatives, and can make gold and silver loans, sales and shorts. JPM and BCS currently quite short both. Nuff said…

  • richard dudley May 23, 2009, 11:45 am

    with a weekly key reversal in silver, and validation of bull flag on slv etf, I am all in. Next stop $25.00 silver. Maybe not until 2014. 34 years after Hunt Bros. (fib)

    If silver ever closes under $14.00 I will lick the cowboys feet in Times Square.

    &&&&

    Be nice to have some company out there, Richard, if Goldman doesn’t trade for $29. RA

  • Occdude May 19, 2009, 4:46 am

    Rick just wondering if you were writing this from your cabin on Eric Janzens ship the “USS deflation?” http://www.itulip.com/forums/showthread.php?p=97954#post97954

    He boldly predicts rising ppi by Q3 2009 and cpi by q4 2009 to no later than q1 2010. Sounds like he’s throwing down the gauntlet Rick, no ambiguity here. The five factors to bring along this surge in prices are credit crisis, currency crisis with energy push inflation from imports, money growth inflation, institutional inflation bias and something called “bankruptcy induced industrial concentration”?huh? I don’t see people flocking to equities in the aforementioned scenarios. Nor do I see them engaging in self destructive consumption in the fiery armegeddon described. I do see these things playing out in the long run, but we’re still “awalkin”.

    So what say you of that, Oh mighty purveyor of deflation? I know you and “EJ” go way back. Personally I think that fall will be more than a season after this brief period of brainsickness. We need one more period of capitulation buying by scared money sitting on the sidelines (3 trillion in the bull pen ). The market is headed to 1000 on the S and P which is definitely gut check time. If it lacerates 1000 with conviction look out bears, but the zenith is definitely nigh shortly after.

    &&&&&&&&

    Life’s too short to waste even a minute arguing with the likes of Janszen. Let him boldly predict whatever he wants. RA

  • Aenar May 18, 2009, 10:34 pm

    Hoye knew about this years in advance. Before Bear Stearns, he called what was happening “the Greatest Train Wreck in History.” As a historian, he has a great insight into the errors of man that repeat, repeat and repeat.

    Hoye in May 2008 said:

    -All equities would collapse
    -Senior currencies get excessively strong during the deleveraging
    -Gold gets sold for margin calls
    -At the Nadir, gold gets excessively strong as well as miners as banks rush to recapitalize with hard currencies without obligations.

  • tom paine May 18, 2009, 9:57 pm

    I can’t fathom today’s more than 200 point rally. What with Chrysler bankrupt and GM as good as, with a slew of mortgage resets about to deal a new blow to the nascient “green sprouts” in the housing sector, with a huge tax on energy being contemplated and interest rates spiking on any sign of market strength, etc., etc., how on earth can people think this situation is analogous to 1983 or whatever?

  • Ross May 18, 2009, 2:16 pm

    I can’t say much with respect to timing the next down leg-my best guess is it starts by mid summer- but until the PTB (and all others) stop resorting to debt creation as a means to cope with our current predicament we will not even be at the start of a recovery. The marginal productive capacity of debt went to zero in 2003, and from that point on taking on debt became akin to trying to dig oneself out of a deep pit with a shovel. Until debt is allowed to clear the system there will be no green shoots let alone a recovery. There will be no quarter for Keynesianism.

    &&&&

    Yours is a metaphorical summation of Fekete’s thesis: Every dollar the U.S. borrows at this point forward will produce NEGATIVE growth. If true, Fekete is about to drive a well deserved stake through Keynesianism’s heart. RA

  • Jeff Kahn May 18, 2009, 1:19 pm

    I’ve noticed that there is nobody in the entire financial world that doesn’t consider themselves to be a contrarian. All the bulls constantly cite the “unparalleled pessimism out there.” And all the bears cite the constant “we’ve seen the worst” mantra. I think it best to follow the analysis of those who have been unequivocally right about everything so far like Nouriel Roubini, and George Soros (no matter what you think of their politics). Which is why I love this site too.

  • johno May 18, 2009, 5:42 am

    “…but this is the only time we can recall when there were no optimists on the dais bold enough to challenge a consensus now gloomier, probably, than at any time since the 1930s.”

    I would say that the above could be construed as moderately bullish, at least for the intermediate term (months).

    &&&&&

    Better that we should play contrary to the simple idiots who see recovery in 2009, don’t you think? RA

    &&&&

    Yes. But when the time is right.

    I don’t see the bears getting away with a mere 2 month rally to correct a 17 month fall from Oct ’07. johno