The Boomers are Out of Time - and Out of Money

Clowns to the left of us...jokers to the right...

The Simpleton's Analysis:

Consumers cut back. The economy sank.

Now, government must take action. It must help people out and take up the slack.

The downturn took $12 trillion off Americans' net worth. The feds have pledged about $12 trillion to fix the problem.

But wait, where does government get any money?

Hey, they borrow it, just like consumers did. And besides, it's ultimately the same money - taxpayers' money. So what's the big diff?

The first big diff is that the feds don't spend your money the way you would. Private citizens spend money they don't have on things they want but don't need. The feds spend money that doesn't belong to them on things that the rightful owners don't even want.

Wait a minute. Markets were closed yesterday. With no figures to report, we should talk about something important. What's important about macroeconomics? Nothing. It's 95% claptrap. The other 5% is pure fraud.

At least as practiced by the leading macroeconomists of our time - such as Ben Bernanke, Tim Geithner and Larry Summers. It's just a show-off sport...the idea is to impress the world with some fancy data-heavy formula...win the Nobel Prize and save the world. That way, you get what all men crave...money and power. Why do men (and women) want money and power? Aww, c'mon...we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success or what?

The great Khans of today are no longer the steppe warriors on horseback. They're basketball players, rock 'n' roll stars, actors, and hedge fund managers...and, oh yes, occasionally - economists.

The link between economic theory and procreation is probably very weak; but that doesn't stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President's Council of Economic Advisors...or to the central bank...or get a professorial post at Princeton...etc. etc. This you do by producing tomes, formulae and hypotheses. And, don't forget to write a piece for The Wall Street Journal from time to time.

Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want.

If you are a Daily Reckoning-type economist, you can forget fame and fortune completely. Who wants to hear from a macroeconomist who tells people to leave well enough alone...and to let the forces of natural economics sort out their own problems? No one...at least no one who is running for public office. Instead, they want someone who will promise to "Save the World."

Save the world from what? Why...from the damage done by other economists!

Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists...and Daily Reckoning commentators...laugh at the idea. You don't really get rich by consuming; you get rich by saving and investing.

But they had their charts and graphs...their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds' ears too - since every politician wants to promise more consumption. The feds favored home ownership, for example...even by people who were bad credit risks. They set up Fannie and Freddie to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren't likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed.

And now...wouldn't you know it...Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion...about $124,000 per household. Total debt/GDP tripled since 1980.

And now, it's payback time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)...

And so what do the simpletons do? Private citizens are unwilling to consume...so they push the government to consume their money for them!

"The story Friday was gold, on the verge of $1,000 an ounce," writes Ian Mathias . "Now well rested thanks to our holiday weekend, we focus on the larger issue - in part, the cause of $1,000 gold: The dollar.

"Ironically, we're not as enthused about the dollar's decline this time around. As the Bloomberg explained , 'The dollar declined to the lowest level this year against the euro as equity markets rose on speculation the global recession is easing, sapping demand for the currency as a haven.'

That's the best reason to sell the ol' greenback? We could think of better...like voracious money printing at the Federal Reserve, a national debt like no nation has ever suffered in history, or this:

"'An initiative equivalent to Bretton Woods or the European Monetary System is needed,' said Heiner Flassback over the weekend, director of the United Nations Conference on Trade and Development. Essentially, the UN has called for a new global reserve currency. The global group wants for a reserve note that's composed of many worldly monies - a complicated array of currencies with adjustable pegs and variable exchange rates. It isn't clear exactly what they would want, but it’s quite clear what they don't...dollar watchers take note."


Gold futures tapped the $1,000-an-ounce mark in early morning trading; a level the precious metal hadn't reached since February.

"As long as the Federal Reserve and the US government take actions that debase the dollar, the dollar price of gold will rise," says GoldMoney.com's James Turk. "Similarly, as long as the Bank of England and the UK government take actions that debase the pound, the Sterling price of silver will rise. It is a certainty, just like night follows day.

"Years from now we will look back at today's action with amazement at how low the price of gold and silver were, just like I can today look back to my college years when gold was only $35 and an ounce of silver could be had for 46 pence. It is a distant memory - and those prices will never again be seen. Eventually a three-digit dollar gold price and single-digit Sterling silver will never again be seen, as long as those currencies continue to be mismanaged and continue on the path to the fiat currency graveyard.

"...the dollar and pound are being debased, and in the absence of any policy advocating sound money in the US and the UK, inevitably gold will hurdle $1,000 and silver will clear £10."


"Frugality is the new normal," says an Associated Press report. One study suggests that consumer will spend 14% less - even AFTER the recession is over.

Boomers are out of time. Out of money. And they'll be out of luck unless they trim expenses and begin saving.

They've figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn't done that since 1947 - when they first began tracking it.

Consumers' net worth has taken a big hit - down $13 trillion, from $62 trillion to $50 trillion.

And so, the simpletons think the government has to rush in where fools foundered...that is, they rush in with more money.

But where do the feds get any money? They have to borrow it...or print it. There's a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won't be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they're right. Sometimes - such as when economists mislead them with a lot of gibberish numbers - they're wrong. And when they're wrong, borrowers default...and lenders lose money.

The feds, on the other hand, can't default. At least, not when their debts are calibrated in money they control. But there's the risk right there. And it is a different kind of risk. It's the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency.

Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so...perhaps his sense of honor would prevent him. Or maybe he would fear that he wouldn't be allowed to borrow again. But if his back were to the wall, there is little doubt that he'd soon be in the print shop.

The feds are in the print shop already. They're printing up more dollars intentionally - to try to get inflation rates up...and to finance federal borrowing. It will be a miraculous thing if their new dollars don't eventually cause inflation. But the macroeconomists who run the print shop tell us not to worry. They've got it all under control. They're already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period.

The simpletons - who had no idea that the crisis would come...and then thought it could be easily contained...and then mistook it for a monetary, banking crisis...and then judged it over before it had really started...

...these same simpletons still do not understand that the problem is not a lack of money, it's a surplus of debt...

..they now reassure us that they know just how much money to put into the system...and just when to take it out.

If you believe them...you might want to stay in stocks and US bonds. If not, you should head for cover.

The country is being run "by a gang of clueless bozos," says Lee Iacocca, in his new book.

4 Ways to Protect Against a Falling Dollar

The US dollar is in bad shape. Over the past several years, the federal budget deficit has shot up like money is going out of style - and maybe it is.

This caused the federal debt clock to add a 14th digit (by breaking the $10 trillion dollar mark).

We've also got an out-of-control trade deficit. For having a 40% share of the world's economy, we certainly don't produce that many goods.

Finally, we have a credit crisis that is causing many to worry that our lenders, like China and Japan, will turn off the tap.

With this nightmarish scenario we find ourselves in, it wouldn't surprise us if the US' credit rating fell. That would cause an immediate panic in the currency markets and send the buying power of the dollar into a tailspin.

I guess what we're saying is get out of the dollar as fast as possible!

There are a couple of ways to go about this:

Currency Protection Strategy No. 1: Sell the Dollar

The easiest way to get out of the dollar is to trade in the cash you don't need to live on for another currency. You might even be able to hold other currencies in your brokerage account.

Here at Lifetime Income Report, we don't recommend currencies directly. We're here to help you find income, not to pick currencies.

Exchanging currencies is one way to protect your wealth from a potential dollar disaster. But it's not the only way...

Currency Protection Strategy No. 2: Buy Precious Metals

There's probably no safer way to protect your wealth in the world than to own gold and silver. There are many Web sites and exchanges where you can do this, as well as coin dealers that can help you make this move.

While we personally think precious metals are going to continue increasing in value, you probably shouldn't just spend all your money on gold nuggets. There's a big difference between the spot prices and what you would pay. Gold coins, for instance, are trading at a hefty premium over spot.

Currency Protection Strategy No. 3: Buy US Companies With International Exposure

Again, this shouldn't be a surprise. We have many US companies in our portfolio. After all, we are here for income, not to be global traders. But you'll probably notice that most of our US companies have plenty of international exposure.

Currency Protection Strategy No. 4: Buy American Depositary Receipts

We saved the best for last. This is the theme we have been hitting the hardest in recent months. ADRs have been a cornerstone of this newsletter. From the very first issue, we had at least two ADRs in our portfolio. This month, we are adding another.

There's a huge reason why we buy ADRs instead of the currencies themselves. Instead of just the upside of foreign currency to US dollars, we also get the benefit of fast-growing emerging markets and mega income from international players.

You see, foreign markets, especially now, have huge dividend yields.

The US is near the bottom of the list of places for income investors to look. The smart money is in companies staying out of the dollar.

Regards,

Jim Nelson
for The Daily Reckoning


Editor's Note: Headed by Jim Nelson, Lifetime Income Report exclusively recommends companies that are cash-rich, well-established, well- positioned, safe and fundamentally solid. These companies have to be in the right industries at the right time. They must have a long history of doing good business, taking care of customers, and looking out for their shareholders.

Otherwise, they won't make the cut.

To find investments like these, Jim uses a special seven-point filtering strategy to find his readers the best income streams possible.

This recovery is wonderful in every way, except the important ones. It is like a shiny new airplane. It has glossy aluminum wings. It has plush seats in the first class section. Trim stewardesses serve drinks. Movies are available on demand in all sections.

A majority of those polled by Bloomberg think things are great; 61% said they thought they economy had taken off and was flying high. Stocks are up. Commodities are up. And here's another Bloomberg headline: "Global investors give Federal Reserve Chairman Ben S. Bernanke top marks..."

The recovery has won the approval of economists and the public. It has almost everything going for it. It just won't fly!

Comes news this morning that the US economy is still on the runway. This report from the AP explains why:

"Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery prompted Americans to rein in their debt.

"Economists expect consumers will continue to spend less, save more and trim debt to get household finances decimated by the recession into better shape. Such behavior, though, is a recipe for a lethargic revival, because consumer spending accounts for 70 percent of economic activity.

"The Federal Reserve reported Tuesday that consumers in July ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. Economists had expected credit to drop by $4 billion."

Hey, not bad...economists were only off by 430%. Consumers are paying down debt more than four times faster than they thought. Partly because they want to. And partly because they have to. They don't want to borrow...and banks don't want to lend to them anyway. Consumer credit is falling at a 10% annual rate, based on July figures. Credit card debt is going down at an 8% rate.

When they pay down a dollar's worth of debt that is one dollar less in the consumer economy. But it's also a dollar that is not borrowed. Where the consumer spent all his income two years ago...and borrowed more so that he could increase his consumption even further...now, he doesn't borrow...and he doesn't spend all his income either. Now, the money that used to pour into consumer spending leaks out.

As we reported yesterday, personal spending is dropping...the figures were down in four of the last six quarters - something that has never happened before, since they began keeping records in 1947. And the level of consumer spending is down 33% from a year ago - with discretionary spending now down to a level it hasn't seen in 50 years.

Of course, that's just what we've been saying. The great credit expansion began in 1945. It ended in 2007. Credit will contract for many years. One study, also reported here, suggested that consumers would spend 14% less - even after the economy was back on its feet. We estimate that the total level of debt must go down below 200% of GDP. If that's correct, we need to pay down about $25 trillion of debt. That won't be easy and it won't be quick.

And it will mean high levels of joblessness for a long time. Already, two out of five working-age Californians are unemployed. The other three are working the shortest workweeks in history. No wonder; with spending dropping, sales are falling. So businesses don't need so many people to make, ship, sell and service their products. Then, of course, when they lay off workers to cut expenses, the unemployed workers have to cut spending!

How is it possible for a consumer economy to grow when consumers are spending less money? Of course, it's not. This is not a genuine recovery...it's an imposter. A fraud. A recovery impersonator.

More news from The 5 Min. Forecast:

"The great deleveraging has entered a new chapter. We Americans shed $21.6 billion worth of personal debt in July, excluding mortgages, the Fed quietly announced yesterday. That's the largest monthly deleveraging (measured in dollars) in American history.

"Factor in the last 12 months or so, and the trend is clear: Not only are Americans getting rid of debt, but they are doing so at an accelerating rate.

"In other terms, July's decline marked a 10.3% annualized rate of debt dumping, the biggest since 1975.

"We're proud of the Average Joe... Like any addiction, weaning off easy money isn't easy. We've had to do it ourselves, personally and professionally, and it's not exactly fun.

"But we suspect this is lousy news for banks and retailers. As we've forecasted numerous times in these pages, most creditors are currently drumming up plans for the recovery - not bracing for a long slog of continued credit deleveraging and default. Here's one example: Wall Street expected a consumer credit contraction of $4 billion in July. Off by more than a factor of five, it's safe to say the men behind the curtain are just a bit out of touch.

"And we hasten to add, July's record deleveraging included a healthy chunk of the cash for clunkers program. You know... That 'stimulus' where the government gave you $4,500 to get rid of your working car in exchange for a new car and $15,000 of debt.

"How much further could this credit contraction go?

While the private sector is paying down debt, the public sector is adding debt at a ferocious pace - about $150 billion per month. Public spending isn't the same as private spending. It is usually spending for things that people wouldn't buy if they had a choice.

And it comes with a whole new risk attached - the risk that the feds will inflate their way out of debt rather than pay it off.

Government spending does not bring a durable, real prosperity. (If it did...think how easy it would be to make people rich; governments love to spend money!) It may look like a recovery. It may have shiny wings and spiffy-looking stewardesses. But it won't fly.


The World Economic Forum has taken the United States down from the number one position. America is no longer the world's 'most competitive' economy. That title goes to Switzerland.

Meanwhile, the US banking system is rated #109 in the world - just below Tanzania.

"More than one in four US banks announced an unprofitable quarter," Strategic Short Report's Dan Amoss tells us.

US banks became leveraged casinos during the bubble years. They've still got a lot of leverage...and are still trying to relive those glory days when players lined up to spin the wheel...and free drinks flowed by Niagara Falls.

"Keeping up with children is a full-time job," said Elizabeth last night. "There is always at least one of them who need help. Sometimes more than one.

"Sometimes I wonder if we shouldn't devote ourselves more fully to helping them. That's our main project, isn't it? It's the thing that is most important, isn't it?

"So...shouldn't we go to where they are...and give them advice...help them get their careers and families established? I mean, we're in Europe. Our children are mostly in the US. Shouldn't we go back so we would be available to help them? Maybe we should rent a house in Los Angeles and stay there until Maria's acting career is on a more solid footing, for example. At least she'd have somewhere to go for Thanksgiving...

"The prevailing view in America is that children leave the nest when they are 18 or 21...and then, they're on their own. But that's not the view here in Europe. In Paris, I know lots of parents who stick with their children all their lives. They spend their vacations together. The parents buy an apartment for the children. They direct their careers...and pass judgment on marriage prospects. Not that the children always listen, but one generation is not left to its own devices. That's why inheritance is such a touchy issue in France. People aren't expected to make it on their own...they're expected to get as much support from the family as possible...

"Sometimes I think we should take the same attitude. And we do to some extent. Still, I'm not sure the children would appreciate our help. I'm not even sure our help would really be much use. Sometimes they just need to make their own mistakes...

"Besides, we have our own projects...our own lives. I just don't know what is best..."

Until tomorrow,

Bill Bonner
The Daily Reckoning



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Unlabor Day
by Rob Parenteau
San Francisco, California


As the summer draws to a close, the unemployment rate has stepped up 0.3%, to 9.7%, a level last seen coming out of the horrendous double- dip recession of 1980-2. Yes, private payrolls shed less than 200,000 jobs in August, which is a vast improvement over the nearly 750,000 jobs shed in the opening month of the year. But as summer draws to a close, look around and realize nearly one in 10 of your neighbors is chewing on their fingernails and trying to hustle up a new gig. Perhaps we should rename the recent holiday Unlabor Day, in honor of those sweating out one of the toughest job markets of the post-World War II period.

From a mainstream economic perspective, it should be renamed Leisure Day, as unemployment is interpreted as an individual choice of leisure over paid labor effort. Of course, only a tenured professor could be expected to come up with such a conclusion. As it stands, it is currently estimated there is one job opening for every six people looking for work.

Since employment is a lagging indicator of economic activity, we learned over the years to dig deeper than the headline figure to get a read on where labor market conditions may be going. One of the more useful, but often ignored, parts of the employment report tells us about the percent of private industries that are net offering jobs. Even when payrolls are shrinking in total, some industries are still net hiring - and, indeed, this is part of how markets facilitate the reallocation of productive resources during a recession, which, as the Austrian approach reminds us, is crucial to long term-growth prospects.

This measure is called a diffusion index, and we prefer to look at the average in this series over the past three months to avoid too many miscues. As it stands, the breadth of private industries net hiring, though still at a lower level than the last recession, has consistently climbed from the March lows. The pace of broadening is even a bit stronger than what we observed in the last exit from a recession, which, as you may recall, was followed by a jobless recovery. If the slower pace of layoffs is all a sugar high from extreme policy measures, or if a double dip is about to open up before investor eyes, this is one of the places it should show up first. So far, this diffusion index is more consistent with an unemployment rate that peaks near year-end around 10% and begins to show some improvement in Q1 2010. We would also note while survey results still report perceptions of a very difficult job market, these measures have stabilized in recent months.

When firms start shedding labor more aggressively than their production activity is contracting, labor productivity (output produced per hour of work) tends to reaccelerate as the pressure on the remaining work force intensifies. In fact, productivity growth has begun to rebound, and we believe it has a good shot at pushing through 4% year-over-year growth by year-end, from the current 2% pace in the nonfarm sector. At the same time, businesses struggling to stay alive have pressured labor compensation growth. Hourly compensation (wages and benefits) growth has been on a disinflation (that is, decelerating inflation) path through the entire recession. We suspect it will be flirting with deflation near year-end, which is something we have not seen since Q4 in 1949.

If we put these two developments together - labor compensation growth approaching deflation, while labor productivity growth reaccelerates - we get deflation in unit labor costs. Companies that can hold the line on pricing while unit labor costs are falling will tend to experience rising profit margins, and rising profit margins are generally a signal to expand production. Improving cost conditions are one benefit of recessions, and if final demand can stabilize or improve from sources other than the household sector - say, fiscal policy or an improvement in the trade balance or the onset of some replacement capital spending - then this can be a route back to economic recovery. We will have more to say about this in the next monthly letter, but for the moment, it does look like firms are successfully compressing cost conditions.

This matters because with the release of Q3 S&P 500 earnings in October, we suspect strong operating leverage will become apparent to equity investors. Earnings improvement through Q2 has been all cost cutting related in a flat or falling revenue environment for most companies. If Q3 begins to show top-line revenue improvement, as we suspect it will, then earnings will be fed by both revenue and profit margin gains. After the seasonal September jitters, the exposure of the operating leverage available to firms that have cut to the bone could very well capture the imagination of investors, leading to the next leg in the advance of US equity indexes since early March.

According to supply managers in the manufacturing sector, goods sector production has been on the rise since June, and new orders are through the roof. By way of reference, the new orders index was scraping a new historical low back in December, rivaled only by the 1980 lows following Fed credit controls. Never before in the six decades of Institute for Supply Management (ISM) records have new orders surged so dramatically in any eight-month span. Never before has the ISM new order and production indexes recorded these levels without marking an escape from recession. No doubt the "cash for clunkers" sugar high has something to do with this, but we doubt it explains away all of the dramatic reversal in supply manager perceptions, as the export indicator in this report has also improved remarkably since the December 2008 lows.

These ISM results are usually good for a three-four month lead time on government reports for industrial production, shipments and new orders. We can anticipate the rebound depicted above will now reverberate in the monthly reports from here to year-end, at a minimum. In particular, the ISM production index has provided a reasonably good guide to year- over-year momentum in manufacturing production.

The sharpest monthly contractions in industrial production began in September of last year as the credit markets went into cardiac arrest, and all parts of the economy went into a cash grab/cash conservation mode so that prior cash commitments could be met. This included dramatically reducing production and liquidating existing inventory stocks. In other words, the comparisons against year ago are about to get ridiculously easy, and a healthy 5% year-over-year manufacturing production growth rate is certainly within reach by year-end 2009.

As summer slips away into the flaming leaf show of fall, we conclude the labor market is still a mess, but we can find some broadening of hiring activity even though total payrolls are still contracting. That means the necessary reallocation of productive resources, which is part of the function of recessions, is under way. More importantly, unit labor costs are falling as the pace of layoffs has overshot the contraction in output, and labor productivity is improving as a consequence, which is a second growth encouraging outcome of recessions.

The question remains what lies ahead after the massive quantitative easing operations of the Federal Reserve have lapsed and the bulk of the fiscal stimulus is behind us. In the very near term, we can surely expect auto sales to wilt following the end of the cash for clunkers program, but we remain impressed by what supply managers in the most cyclical part of the economy, namely manufacturing, have to say about new orders, production and export conditions. Policymakers panicked and adopted a "whatever it takes" stance, one that has proven to be the most radical outside of major wartime conditions. Looks like something took - and not surprisingly, gold is taking out the $1,000 per ounce mark at the same time.

Regards,

Rob Parenteau