Published on The Smirking Chimp (http://www.smirkingchimp.com
Is a Gaggle of Brandy-drooling Loafers Capable of Building a Prosperous Economy? Don't bet on it.
By Mike Whitney Created Sep 3 2009 - 3:08pm
Company insiders are now dumping their own stocks at a sell-to-buy ratio of 61.8x.
That's according to Charles Biderman, CEO of TrimTabs Investment Research. Biderman thinks that Wall Street's "Green shoots" bear market rally has run out of gas and insiders are hitting the exits as fast as they can. In a Bloomberg interview Biderman said:
"Insider selling is 30 (now 61.8x) times insider buying, while corporate stock buybacks are non-existent. Companies are saying they don't want to touch their own stocks."..."When companies are heavy sellers (of their own stocks) and retail customers are borrowing to buy stocks; that's always been a sign of a market top." (More on this on zero hedge.com)
Indeed, the rats are leaving the ship. The best-informed market players believe that the 6-month sucker's rally is about to fizzle big-time, so they're taking their winnings and checking out. Who can blame them? Stocks are grossly overpriced and the fundamentals are weak. In fact, the equities surge has been an utter fraud from the get-go. The ocean of liquidity from the Fed's so-called "lending facilities" and quantitative easing (QE) programs have spilled over into the stock market buoying underwater financial institutions and building consumer confidence. It's all worked out exactly as Fed chief Ben Bernanke planned. Bernanke had no intention of groveling back to Congress for another TARP bailout; it's easier just to goose the market and make it look like retail investors just can't get enough of dogsh** stocks like Citi and Fannie Mae. Mmmmmm Good!
But the economy hasn't changed just because Captain Bernanke decided to shower Wall Street with another $1 trillion of Fed-confetti. Oh, no. The banking system is still insolvent--(Not one "toxic asset" has ever been purchased through the TARP program!) and the rate at which banks are failing is accelerating. Christopher Whalen does an great job of summarizing the condition of the banking system in a recent post at The Institutional Risk Analyst:
"The results of our Q2 2009 stress test of the US banking industry are pretty grim. Despite all of the talk and expenditure in Washington, the US banking industry is still sinking steadily and neither the Obama Administration nor the Federal Reserve seem to have any more bullets to fire at the deflation monster. With the dollar seemingly set for a rebound and the equity and debt markets looking exhausted, one veteran manager told The IRA that the finish of 2009 seems more problematic than is usual and customary for the end of year.
Plain fact is that the Fed and Treasury spent all the available liquidity propping up Wall Streetís toxic asset waste pile and the banks that created it, so now Main Street employers and private investors, and the relatively smaller banks that support them both, must go begging for capital and liquidity in a market where government is the only player left. The notion that the Fed can even contemplate reversing the massive bailout for the OTC markets, this to restore normalcy to the monetary models that supposedly inform the central bankís deliberations, is ridiculous in view of the capital shortfall in the banking sector and the private sector economy more generally." (2ndQ 2009 Bank Stress Test Results: The Zombie Dance Party Rocks On" Christopher Whalen, The Institutional Risk Analyst)
So, how many local and regional banks will go belly-up in the next year or so? 500? 750? 1,000? More?
And how many of the large banks are still concealing the extent of their losses through accounting sleight-of-hand? (Hint: All of them)
And for those people who still think that deregulation "did not cause this problem"; keep in mind, that if banks were still limited to taking deposits and issuing full-term loans--rather than operating as casinos peddling fraudulent securities created in off-balance sheet operations---the financial catastrophe which has effectively bankrupted the country never would have transpired. And, it is only because the bank-vermin and their army of lobbyists have a stranglehold on the political process that this problem has yet to be fixed. Instead, the nation is sliding inexorably towards an even bigger disaster in the form of a funding crisis brought on by a collapse of the dollar. We are governed by fools.
It is true, however, that Obama's stimulus helped soften the effects of the recession and given a boost to GDP. If the deficit-wary Republicans had prevailed consumer spending would have fallen more sharply, which would forced businesses to lay off more workers pushing down wages and asset prices. This is the downward spiral that Bernanke was hoping to avoid. And, to some extent, he succeeded. Here's a clip from the Wall Street Journal:
WASHINGTON -- Government efforts to funnel hundreds of billions of dollars into the U.S. economy appear to be helping the U.S. climb out of the worst recession in decades....The U.S. economy is beginning to show signs of improvement, with many economists asserting the worst is past and data pointing to stronger-than-expected growth...Much of the stimulus spending is just beginning to trickle through the economy, with spending expected to peak sometime later this year or in early 2010. The government has funneled about $60 billion of the $288 billion in promised tax cuts to U.S. households, while about $84 billion of the $499 billion in spending has been paid. About $200 billion has been promised to certain projects, such as infrastructure and energy projects...
Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate. The impact in the second quarter, calculated by analyzing how the extra funds flowing into the economy boost consumption, investment and spending, helped slow the rate of decline and will lay the groundwork for positive growth in the third quarter -- something that seemed almost implausible just a few months ago. Some economists say the 1% contraction in the second quarter would have been far worse, possibly as much as 3.2%, if not for the stimulus." ("U.S. Economy Gets Lift From Stimulus", Deborah Solomon, Wall Street Journal)
Fact 1: The stimulus DID help to avoid a downward spiral.
Fact 2: The Republicans were wrong.
It's true, Keynesian stimulus cannot fix the economy's deeper problems. But that is not what it is designed to do. It is designed to keep the economy on life-support during a period of retrenchment when consumers and businesses have cut back on spending and investment. Stimulus keeps more people employed, keeps asset prices from falling too sharply, and keeps perfectly good businesses (which may not be able to roll over their debt) from defaulting. Government has a role to play in the economy, and part of that role is to fill the demand-chasm that widens during a recession.
Stimulus is not the problem; the real problem is that neither the Fed nor the Obama administration are using this grace-period to address the main issues: Taking insolvent banking and financial institutions into conservatorship and auctioning their assets, rebuilding a regulatory regime that will increase capital requirements, eliminating off-balance sheet operations, and forcing all derivatives-trading through a regulated clearinghouse.
Most people have no idea of what the Fed and Treasury are up to. Their intentionally-opaque programs; The Public Private Investment Program (PPIP) and the Troubled Asset-backed security Lending Facility (TALF) are designed to shift a trillion dollars of dodgy mortgage-backed assets onto the public balance sheet, while restoring a deeply-flawed "wholesale" credit system ("securitization") which allows financial institutions to generate as much credit as they can (without any government oversight) through the sale of under-capitalized garbage paper; the very same paper which just blew up the global financial system and pushed the economy to the brink. Obama's economic policy can be summarized in one sentence: "Every effort will be made to defend the right of a handful of cutthroat speculators to make as much money as humanly possible regardless of its effects on the American people." That's it, in a nutshell.
If the banking system is not fixed, then credit expansion will be permanently impaired making any long-term recovery unsustainable. But even if the banks are cleaned-up and underwater institutions are resolved; there's still the problem of maintaining aggregate demand. That requires personal consumption. For the last decade consumer spending has accounted for roughly 70 percent of GDP, but that growth came at a high price. US households doubled their debt in the last seven years to nearly $14 trillion. The massive borrowing binge fueled economic growth and pushed assets higher, but the spending-spree was only possible because of low interest rates, lax lending standards and deep-pocketed trading partners who were only-too-eager to purchase boatloads of US securities, bonds (Fannie and Freddie) and Treasuries. Now conditions have changed; funding has dried up and central banks and foreign investors have limited their purchases to Treasuries.
Household budgets have never stretched as far as they are today. and consumers are left to fend for themselves in a hostile environment where both jobs and credit are scarce. Housing prices have dropped 33 percent from their peak in 2007, but household deleveraging has only just begun. There's a lot of belt-tightening ahead if families plan to reduce their debt-to-equity ratios to their normal trend-line. At least, $2.5 trillion will have to be paid-down. That means more asset firesales, more foreclosures and more defaults. Policymakers need to focus on debt-relief and mortgage-principle writedowns to ease the transition and get people back on their feet again.
The economy cannot recover without a strong consumer. But consumers and households have suffered massive losses, credit lines have been reduced and, for many, the only source of revenue is the weekly paycheck. That means everything must fall within the family budget. The rebuilding of balance sheets will be an ongoing struggle and if wages continue to stagnate (or go down as they have recently) the economy will slip into a semi-permanent state of recession. If Team Obama sees this unfolding trainwreck, they haven't let on. Washington policymakers have done absolutely nothing to help middle class workers from falling off the edge.
Supply side ideologues see the drop in consumption as a temporary blip that can be fixed with low interest rates and fiscal stimulus. They think the economy has just hit a "rough patch" between periods of expansion. But they're wrong; at least that's what the data says. Recent surveys indicate that working folks have hit-the-wall. Consumers will not be able to lead the way out of the current downturn.
According to a recent Gallup Poll:
"Baby boomers' self-reported average daily spending of $64 in 2009 is down sharply from an average of $98 in 2008. But baby boomers -- the largest generational group of Americans -- are not alone in pulling back on their consumption, as all generations show significant declines from last year. Generation X has reported the greatest spending on average in both years, and is averaging $71 per day so far in 2009, down from $110 in 2008....
Gallup finds significant declines among all generations in average reported daily spending in 2009 compared to 2008. Given that consumer spending is the primary engine of the U.S. economy, it's not clear how much the economy can grow unless spending increases from its current low levels. But spending may not necessarily be the best course of action for baby boomers as they approach retirement age and prepare to rely on Social Security and their retirement savings as primary sources of income. Indeed, the two generations consisting largely of retirement-age Americans consistently show the lowest levels of reported spending. ("Boomers' Spending, like other Generations, Down Sharply", Jeffrey M. Jones, Gallup)
The US consumer is maxed-out. He's fighting just to keep the wolves away from the door. It no longer makes any sense to spend more than he can afford. It's "paycheck-to-paycheck" and hope that "the kid doesn't break a leg on the playground" or the wife gets a fever. This is how the Fed sympathetically sums up the hand-to-mouth existence that most people are now living:
"Consumer spending had been on the soft side lately. The new estimates of real disposable income that were reported in the comprehensive revision to the national income and product accounts showed a noticeably slower increase in 2008 and the first half of 2009 than previously thought. By themselves, the revised income estimates would imply a lower forecast of consumer spending in coming quarters." (excerpt from this week's FOMC meeting)
That's right; even Bernanke and Co. know that the consumer is toast. What more evidence do you need?
Neither the economy nor the consumer will miraculously "bounce back" without big changes in public policy. The middle class didn't simply burst on the scene because Americans are such wonderful, evenhanded people. Whatever gains were made were the result of a bitter struggle with self-righteous oligarchs who would not hesitate to pick the gold tooth out of a dead man's mouth. Welcome to Wall Street. Without a strong labor party and progressive taxation to reverse the prevailing trend, conditions for ordinary Americans will only get worse.
It's hard to believe in "post racial" "post class" America that arrogant plutocrats still have their boot firmly resting on our collective backs. But that's how it is. Neither party represents working people. Both the Democrats and the Republicans are supportive of "social engineering for the rich"; regressive taxation and economic policies which shift a greater portion of the wealth to the richest Americans. Obama is a well-spoken pitchman for medieval policies and endless war. Is there someone who still doesn't know that?
Berkeley economics professor Emmanuel Saez, notes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression. His report shows that:
"The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007" ... The top 1% of households received 23.5% of income, while the top 10% received 49.7% of income (the highest on record.)"
They own it all; the congress, the courts, the media, the military, Wall Street, property, assets, gold etc--You name it, they own it. Apart from the moral question of whether a handful of people deserve to live like kings while others live in squalor; there is the practical question of whether a gaggle of brandy-drooling loafers are really capable of building a prosperous economy based on strong consumer demand.
Because, if they are, that means they must support wage growth (to maintain aggregate demand) and other benefits that will keep worker's salaries in pace with increases in production.
Of course, this is all nonsense. The anti-labor "trickle down" ideology is stronger now than ever. The only difference now is that Voodoo economics is literally pushing the country into another Great Depression. The US consumer does not have the ability to generate sufficient demand to produce positive growth. According to McKinsey Global Institute, Homeowners withdrew "$2.3 trillion in home equity loans and cash-out refinancings between 2003 and 2008." Most of the money was spent on personal consumption. Where will the money come from now that home equity has gone negative? The Obama administration will need a second, third and fourth stimulus just to fill the gaping hole left by the collapse of the housing market.
The Fed and its allies in the corporate/financial establishment, have killed the Golden Goose. After Obama's stimulus runs out, consumer spending will again sputter and the economy will slide back into recession. As personal consumption declines, U.S. markets will become less attractive to foreign exporters. There will be no need to continue trading in dollars.