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FIRE Economy Explosion Fallout -- Part I: Recession ends, depression begins - Eric Janszen

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  • FIRE Economy Explosion Fallout -- Part I: Recession ends, depression begins - Eric Janszen


    FIRE Economy Explosion Fallout -- Part I: Recession ends, depression begins

    • Surviving economic “recovery”
    • Supply contraction
    • Echo recessions

    In a nationally televised speech last week, referring to the financial crisis President Obama announced that the “fire is out.” Indeed it is—in the ten-mile wide smoldering crater in the middle of the U.S. economy left by the explosion of a $20 trillion securitized nuclear debt bomb that went off in 2007. First the blast flattened the financial markets, then the “real” economy. Who could have known?

    Who do we spy through our periscope poking up from our underground bomb shelter lined with Treasury bonds, CDs, and gold where we hid out from the blast since December 2007? Seven million bewildered formerly employed automobile, finance, and retail trade industry workers wandering the blackened pit, along with millions of mutual fund holders, blinking and stuttering, bombed out 401K statements in hand.

    We see White House economic adviser Larry Summers standing by an abandoned, half finished housing development, or is that an RV town occupied by airline pilots and mechanics on Los Angeles International Airport’s Lot B? He’s yelling to us, and any everyone else who is still in one piece financially, that "the worst is over.”

    There's Warren Buffett telling us if we don't buy stocks or we'll "miss the big gains."

    There's Jim Cramer barking his latest hot stock tips, fully recovered from his ear boxing by Jon Stewart just a few months ago, imploring us to buy, buy, buy.

    And why not? These guys have never led us astray before, right?

    Above us, the sky is dark with vultures. They swoop down in waves to buy up foreclosed McMansions in California and Arizona, bankrupt restaurants in Ohio, and mountains of consumer goods—trucks, cars, furniture, televisions, clothing—thrown onto the market by consumers on eBay and Craig's List desperate for a few bucks.

    Is that Mad Max approaching from afar through the heat ripples, government money in hand, to bottom-pick Microsoft stock and put a bid on a vacant strip mall in Vegas?

    Maybe Buffett is right this time. An economy in such a state can only get better. How can it get worse?

    Yet, tapping the meter on our Financial Risk radiation detector, we notice that after dipping near the Safe range the needle is again pegged in the red Unsafe zone.

    This time the risk is not in the private markets but the public ones.

    Through trillions in bank bailouts and fiscal stimulus our leaders are shifting bad private debts to public account. In the process they substitute one kind of credit risk for another, public for private.

    No wonder a Brazilian credit rating agency recently downgraded U.S. Treasury bonds.

    Q3 2009 on-time arrivals from previous forecasts

    FIRE Economy Depression Quick Review—because if we don’t remind you, you’ll forget

    In 2002, establishment economists tell us that no credit and housing bubble exists. We tell you otherwise and warn the bubble will go on for years.

    In 2007, these same geniuses admit the existence of a credit and housing bubble but claim that the economic impact of collapse will be inconsequential, that no economic recession will result. We warn in 2006 that the crashing housing and securitized debt bubble will lead to a Great Depression class recession starting in Q4 2007.

    Today, the rocket scientists opine that the economic catastrophe, brought on by conditions they previously failed to see, will end like a bad dream and be replaced by a new cycle of borrowing for consumption and financial speculation, if only we click our heels together and collectively chant “There’s no place like 1999.”

    (For an independent analysis of our methods for forecasting the FIRE Economy Depression starting in Q4 2007 and Debt Deflation Bear Market in 2008, see “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models, Dirk J. Bezemer, Groningen University, 16 June 2009.)

    “Buy stocks” broken record is back on the turntable

    Warren Buffett, the world’s best stock picker and worst macro-economic forecaster weighed in Friday with the assessment that the economy is still a mess but, as he said in 2007 and never stops saying, staying out of the stock market until recovery is clearly evident will cause investors to “miss the biggest gains.”

    Such as in his investment in Goldman Sachs, for example, arranged last year by Hank Paulson.

    With the S&P leaping 40% since March 2009 when we noted the First Bounce of the Debt Deflation Bear Market, it appears that everyone agrees with Buffett, especially the poor shorts whose covering turned a garden variety relief rally financed by fund managers into a runaway excess liquidity freight train.

    The latest meme making the rounds: a full bore recovery is six to nine months way, and the stock market is now pricing it in.

    “Recovery” is a big word. To most, it means a return to “normal,” an economy 71% driven by consumer spending, half of it debt financed. The economy bulls like Cramer are not just talking about an end to desperate selling of the family jewels to Cash4Gold to pay mortgage, auto, student loan, medical or other economic rents from the FIRE Economy that consume household income and savings. No, they mean a full-blown regression to the good old days: eating out three days a week, a vacation in Europe, buying a new car and a second home, all on credit. The fantasy life of middle class Americans.

    But the U.S. economy will never revert to its pre-cash past, based as it was 30% on financially engineered credit expansion and 70% real, based on productivity growth. While that does not lead us to a forecast of soup lines and dust bowls, it does not mean happy days are here again, either.

    Recession ends, depression begins

    The Great Depression did not end when the economy stopped shrinking in the first quarter of 1933, after contracting in real terms by 27% over the previous three years. At the time economists heralded the event as the end of the depression. In fact, they were less than a third of the way through the ten-year period between 1930 and 1940 that came to be known as The Great Depression.

    Real GDP grew by 33% in the next six years that followed, but the economy needed 54% growth just to get per-capita GDP back to where it was in 1929, ten years earlier.

    Even after expanding by a third over six years from the official end of the Depression, unemployment in 1939 exceeded 17% and did not decline to pre-Depression levels until 1943, three years into the war. Most historians mark the end of the Depression at the start of WWII.

    Today, with the benefit of hindsight, no one claims that The Great Depression ended in 1933. Likewise the Japanese figured they were out of the woods in 1993, but 16 years later the Japanese economy still has not fully recovered, and recently took a major hit.


    Japan: Industrial production 1998 to 2009


    Debt deflations are like that.

    Several years from now, no one will say that the FIRE Economy depression ended in Q3 2009, either.

    A sharp economic contraction caused by the mass extinction of the purchasing power of private credit that followed the securitized debt bomb explosion of 2007. That acute crisis phase of the FIRE Economy Depression is over.

    By the end of the first half of 2009 reverberations from that detonation died down to a dull, distant rumble. Surveying the scene we see that many areas of the economy, by geography and industry sector, suffered permanent blast damage.

    By the end of the year you will hear an official announcement by the National Bureau of Economic Research that the national recession that started in Q4 2007 ended in Q3 2009. This will signify that GDP stopped declining on a quarterly basis year over year in nominal terms. However, the FIRE Economy Depression will go on for many years in its own unique way. National echo recessions are likely, and ongoing contraction in areas of the country and particular industries is guaranteed.

    Not as bad as The Great Depression, not as good as 1983, like Japan 1992 to 2009 but without the cheap manufactured goods

    There is no question that this time around the U.S. economy did not experience the degree of demand destruction that occurred in the early 1930s. The Fed and Treasury in 2008 were also far more aggressive than the Bank of Japan in 1992.

    Government spending intervention did work to prevent the incredible scale of economic mayhem that occurred in the three years of after the crash of 1929 when nearly 40% of the banks failed and millions of depositors lost their savings. Yet anyone who expects that the end of economic contraction will be quickly followed by a sharp V shaped recovery will be disappointed. Recession attended by debt deflation, or “balance sheet recessions” as they are called by some economists, tend to drag on and on.

    Irrational Recovery Exuberance

    U.S. stock market investors are throwing money at the self-sustained economic recovery story, and a short squeeze is driving up stock indexes sharply.

    As signs of the short term economic recovery are mistaken for organic economic growth, we will see more stories like this one, imploring the Fed to raise interest rates before inflation takes off.
    Raise Rates Now! Fed Risks "Major Bout of Inflation," Economist Warns
    Posted Jul 22, 2009 (Aaron Task – Tech Ticker)

    Ben Bernanke is right to talk about exit strategies but risks a "major bout of inflation" by waiting, says Brian Wesbury, chief economist at First Trust Advisors.

    In fact, were he Fed chairman, Wesbury would be raising rates now - as in today - rather than waiting.

    Contrary to popular belief, Wesbury does not believe a little inflation is a "good thing" and says Bernanke and certain members of Obama's economics team are too worried about the Great Depression.

    Also contrary to popular belief, Wesbury does not believe rate hikes will kill the economy, which he views as being much stronger than the consensus, as we'll discuss in a forthcoming segment.
    The Fed has never raised interest rates following recession until after unemployment has declined for at least six months. The Fed is wired with Non-Accelerating Inflation Rate of Unemployment (NAIRU) neoclassical economic orthodoxy to believe that inflation is impossible if unemployment is rising.

    Unemployment is still rising and will continue to rise before finally leveling off in Q4 2009.

    The Fed will not raise interest rates because the Fed believes in NAIRU. While they wait for high unemployment to magically fight inflation for them, they will stall by hiding inflation for six to nine months the usual way, behind changes in the composition of inflation indexes, substitutions of lower for higher cost versions of goods (e.g., hamburger for steak), and other tricks of the trade. But you will see it, in food prices especially.
    iTulip on Inflation: “Inflation is always and ever a political phenomenon.”
    The primary long term risk that we have discussed here at length is that fiscal stimulus will not produce a self-sustained recovery, that additional stimulus will be demanded by politicians, and that the U.S. may run out of foreign credit before it gets even two years down the path of moving debts from private to public account that Japan has followed for nearly 20 years. The risk is heightened by the fact that America's IMF, China, is itself a bubble economy (see Does USA 2009 = Argentina 2001? Part I: Falling economy reaches terminal velocity).

    No Next Bubble

    Now it appears that re-inflation policy will not create a Next Bubble in Alternative Energy and Infrastructure to bail us out of the crash caused by the Housing Bubble (see The Next Bubble); the U.S. will have to recover the old fashioned way, via saving and investment.

    Do we have time?

    In January we estimated a 25% decrease in income tax receipts nationally for FY 2008. The actual decline: 26% nationally.




    Where will the federal government get the money to cover states' unemployment insurance costs?

    Where will the federal government get the money to finance a second stimulus program?

    If not from foreign borrowing or taxes, where will the money come from?

    If from taxes on capital, what will drive future productivity gains that will create organic growth?

    If you believe that the economy is neither in the early stages of organic growth nor about to experience a next bubble, a bullish scenario for stocks is hard to conceive. By the same token, the forecast for fiscal deficits and the dollar are equally bleak.




    What is America’s fiscal deficit threshold?
    Where will we get the money? The usual place.

    Lower per-capita real GDP translates into lower living standards, especially for the bottom 50% of the net worth group that went into this with little or no liquid net worth.

    When we started posting our distribution of income, debt, and net worth charts back when we reopened in 2006 many readers thought we were making some kind of socialistic point about how unfair the distribution is.

    In fact, every time we posted these charts we made the point that in the coming economic depression, the majority who have little savings to fall back on and most of the debt will need the government to bail them out at a time when tax receipts from that group evaporate due to rising unemployment and falling incomes.
    Our question: Which economic group will government go after for money to pay unemployment benefits and other economic disaster support?

    Our forecast: Lousy distribution of wealth in boom times means high taxes on capital and wealth redistribution during busts. It has always been so throughout history.

    Our fear: Wealth redistribution becomes structural. Then we’re sunk.

    The lesson: In the future boom aim policy at the wealth distribution problem so it would cause the usual backlash later. That means get rid of the rent seeking FIRE Economy and focus on productive enterprise.
    Now what?
    FIRE Economy Fallout -- Part II: Theme Change

    For those among you who have been following my forecasts over the years, my purpose in warning you about this depression since 2005 was to give you time to prepare, especially those of you who have children. Long, drawn out periods of economic hardship are tough on kids in profound ways.

    But that was then.

    The iTulip theme before the depression: get out of debt, horde savings in Treasury bonds, CDs, and gold, and don’t hold any money in stocks and real estate that you cannot afford to lose for the next ten to twenty years.

    With the end of the FIRE Economy and the start of the Debt Deflation Era in 2008 we entered an economic and financial market forecasting environment only Kafka could love. Our forecasting perspective since we started in 1998 must adapt to this change.

    Five main challenges define our forecasting task going forward, now that the FIRE Economy Depression is here:
    1. FIRE Economy legacy debt taxes the cash flows of struggling business and households
    2. Chronic high unemployment and under-employment as debt finance-based industries shrink or fade away but before labor markets retool to meet new national and global production needs
    3. High energy costs due to Peak Cheap Oil
    4. Dysfunctional political responses to challenges one, two, and three
    5. Dysfunctional financial market response to the dysfunctional political responses to challenges one through four

    The iTulip theme from here on out: pace ourselves and stay attuned to changes that create tactical opportunities. This will not be an environment for buy and hold, nor for placing large bets in any one area. more...($ubscription)

    iTulip Select: The Investment Thesis for the Next Cycle™
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    Copyright © iTulip, Inc. 1998 - 2009 All Rights Reserved

    All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer

    Last edited by FRED; 06-24-10, 03:43 PM.

  • #2
    Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

    I like the bomb analogy.


    Our fear: Wealth redistribution becomes structural. Then we’re sunk.
    In my opinion, this is a foregone conclusion. We have a government bubble. It's too large and makes up too big a percentage of our economy now to turn back. We will see the downside of democracy that some of our forefathers warned us about, as politicians are forced to play to the mob.

    Tough times ahead.
    Last edited by flintlock; 07-27-09, 08:14 PM.

    Comment


    • #3
      Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

      Hello Fred

      Unemployment leveling off in Q42009? I believe that you once predicted U-3 at 25 percent. I always thought that we would max-out at 25 percent U-6, which looks very plausible.

      I would assume that you guys have now changed this number. What do you believe will be the ultimate U-3 and U-6 forecast?

      Comment


      • #4
        Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

        Originally posted by Quincy K View Post
        Hello Fred

        Unemployment leveling off in Q42009? I believe that you once predicted U-3 at 25 percent. I always thought that we would max-out at 25 percent U-6, which looks very plausible.

        I would assume that you guys have now changed this number. What do you believe will be the ultimate U-3 and U-6 forecast?
        where? link. pls.

        confused with...

        Comment


        • #5
          Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

          Originally posted by metalman View Post
          where? link. pls.

          confused with...
          See http://itulip.com/forums/showthread.php?t=9528 - last sentence

          Comment


          • #6
            Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

            Originally posted by snacky View Post




            If we compare that animation of unemployment data to this older one of recessions since the late 1970s we see that even at the worst part of the 1980 t0 1983 recessions unemployment fell in some states even if it was rising in most states.

            Comment


            • #7
              Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

              And right below that last graphic, the closing statement, " We are sticking to our forecast of 20% U3 unemployment in the U.S. by the end of 2010."

              My immediate reaction when that was posted was to comb through some old posts to see if I could find a precedent forecast on the site - no luck. I also don't think that particular forecast has been revisited since.

              Comment


              • #8
                Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                Originally posted by snacky View Post
                And right below that last graphic, the closing statement, " We are sticking to our forecast of 20% U3 unemployment in the U.S. by the end of 2010."

                My immediate reaction when that was posted was to comb through some old posts to see if I could find a precedent forecast on the site - no luck. I also don't think that particular forecast has been revisited since.
                have been on this site for 10 yrs... seen 100s of forecasts.. but i can find 1 or 2 that are not within 10%.

                compare to ???

                Comment


                • #9
                  Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                  I would love to see iTulip have a dedicate Forecasts page that lists each forecast, the date, the link to the post justifying the forecast (or change in forecast if it is an update).

                  Comment


                  • #10
                    Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                    Part I: Recession ends, depression begins

                    Part I : Manipulation continues, Depression begins, Manipulation continues, Recession ends, Depression continues, Manipulation continues

                    Forget the fundamentals and logical comparisons. Stay tuned to the manipulations and sieze on opportunities. Be careful not to get burned by the logical and illogical.

                    Comment


                    • #11
                      Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                      Originally posted by snacky View Post
                      And right below that last graphic, the closing statement, " We are sticking to our forecast of 20% U3 unemployment in the U.S. by the end of 2010."

                      My immediate reaction when that was posted was to comb through some old posts to see if I could find a precedent forecast on the site - no luck. I also don't think that particular forecast has been revisited since.
                      I had the same question. 9.5% is a far cry from 20%. I'm not sure why the major change in unemployment, but I disagree. I don't see the fall off in weekly claims that will level out unemployment. I'm still betting on low teens by the end of 2010.

                      Comment


                      • #12
                        Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                        Originally posted by Quincy K View Post
                        Hello Fred

                        Unemployment leveling off in Q42009? I believe that you once predicted U-3 at 25 percent. I always thought that we would max-out at 25 percent U-6, which looks very plausible.

                        I would assume that you guys have now changed this number. What do you believe will be the ultimate U-3 and U-6 forecast?

                        He didn't say at what rate it leveled off did he?
                        Last edited by flintlock; 07-28-09, 08:28 AM. Reason: misread quote

                        Comment


                        • #13
                          Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                          Originally posted by flintlock View Post
                          I like the bomb analogy.


                          In my opinion, this is a foregone conclusion. We have a government bubble. It's too large and makes up too big a percentage of our economy now to turn back. We will see the downside of democracy that some of our forefathers warned us about, as politicians are forced to play to the mob.

                          Tough times ahead.
                          Yep. I saw it coming [politically] thirty-five years ago.

                          Human nature doesn't change. The rich only get greedier and the "kept" class (tax eaters) always grows larger. The Left set it in motion with FDR and supercharged it under LBJ. Then along came the friggin' NeoCons to apply hubris and stupidity so as to detonate the delayed charge.

                          The explosion comes next.

                          Comment


                          • #14
                            Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                            Originally posted by flintlock View Post
                            He didn't say at what rate it leveled off did he?
                            No. But it would take a miracle for U-3 to go from 10 to 20 in just nine months. For whatever it's worth, I believe that the FED is going to continue to extend benefits which will close the gap between U-3 and U-6. They have no other choice or we will encounter civil unrest episodes(Rodney King). To a certain extent, I agree with Gerald Celente("When people have nothing to lose, they lose it"). You cannot give ordinary average citizens 150k+ instant equity in a house in just two short years and then take it away from them leaving behind only debt that they can never pay back, especially in a severe and prolonged recession. The housing bubble is the worse thing that the FED could have blown. It would not surprise me right now if over 30 percent of the adult population is technically bankrupt.

                            Thanks for the link Snacky and the clarification of 20 percent as opposed to 25. I was just too lazy to look it up myself.

                            Comment


                            • #15
                              Re: FIRE Economy Fallout -- Part I: Recession ends, depression begins

                              Originally posted by Raz View Post
                              Yep. I saw it coming [politically] thirty-five years ago.

                              Human nature doesn't change. The rich only get greedier and the "kept" class (tax eaters) always grows larger. The Left set it in motion with FDR and supercharged it under LBJ. Then along came the friggin' NeoCons to apply hubris and stupidity so as to detonate the delayed charge.

                              The explosion comes next.
                              Truthfully, Raz, I'm not sure how to resolve the uneven distribution of wealth "problem", but I don't think it's fair to characterize it as a liberal vs conservative issue, although it is a popular characterization.

                              More accurately, it is a "more capable" vs "less capable" issue. And by "capable" I mean it can take many forms, most obvious of which are intelligence, discipline, street-smarts, drive/ambition, opportunity and the like. If viewed from this perspective, the wealth will obviously flow to the "more capable" much like NBA championships flowed to Michael Jordan.

                              Additionally, your argument may be (hypocritically) fueling the flames of a class warfare debate when such debate is unfounded. The "rich" are not the stereotypical crooks of banking and Wall Street that are the poster boys of the "rich-bashing". In reality, the "rich", those of us that are causing and creating this uneven distribution of wealth, are you and me and our fellow iTulipers that are smarter than the average individual, or have better than average opportunity than some (I was born into a family business), or are more disciplined than most (conservative investing, not highly leveraged/in debt over our heads), more driven (investing hours and hours on iTulip and elsewhere). It is only natural that more wealth (which also includes less self-inflicted wealth destruction) flows our way. We don't do it to spite our less fortunate brethren, we don't do it out of shear greed, we don't try to hurt anyone else along the way (most of us do more direct good the more successful we become personally). No, the uneven wealth distribution just happens as a natural result of our capabilities and chosen actions versus those that are less capable and make bad decisions and possibly don't try as hard.

                              All that being said, I don't totally disagree that a severe uneven distribution of wealth may not be optimal for society, but I'm not sure.

                              I do strongly beleive that a rising tide does raise all boats. So from that perspective, what's good for us "rich" is also good for the "other half". With that in mind, I would have a great fear that any form of forced/excessive wealth redistrubution would directly harm the motivations of the more capable, more productive of us that are the wealth producers in this great Nation, which in turn, would be bad for all members of our society. You know, "Road to Serfdom" thinking. As an anology, we'd all have a more equal portion of the pie, but of a much smaller pie. I further feel that any forced wealth redistribution would only be a temporary unnatural state. As such, and with all due respect to EJ, I can't agree with his call for doing a better job of wealth equalization during boom times simply because that wealth will (eventually) find its way right back into the hands of the same wealthier (more capable) people from whence it came.

                              In summation, it is my opinion that uneven wealth distribution is a natural state that results from a free-market society, and that a free-market society is still the best structure/philosophy for maximizing the size of the pie (strength of an economy), even if it means some inequalities OF RESULT (of wealth) are a natural side affect. The greater pie size will offset the smaller portion of said pie for most citizens in my opinion.

                              All of this is easy for me to say because I am confident in my abilities and successful in my life thus far. On the other hand, I can understand why an individual who is less capable, less successful, and therefore has less wealth than average would scream for government assistance or any type of "break" or freebie or hand-out or "stick-it-to-the-rich" redistribution. Just because I can understand the thinking, however, doesn't make it right. Let's not try to fix what can't be fixed. Let's also not create class warfare where none should exist. We should idolize and emulate the typical entreprenuers, titans of industry, and all around capable, productive members of society that drive our economy, not chastize, belittle, and take from them.
                              "...the western financial system has already failed. The failure has just not yet been realized, while the system remains confident that it is still alive." Jesse

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