In America, Labor Is Friendless

 by Roger Martin

I imagine that labor is feeling quite wistful about Labor Day 2014. It has been a while since labor, especially organized labor, has had much to celebrate. And the prospects going forward aren’t particularly bright.

Real wages for production and non-supervisory workers have declined since the mid-1970s.  The share of jobs that are unionized has plummeted back almost to the level it was before 1935 when the National Labor Relations Act (NLRA) facilitated a huge increase in unionization.  High unemployment has persisted in the jobless recovery. For those fortunate enough to have full time employment, job security is down, and pension and health benefits are shrinking. No trend for labor is positive.

Worse still, it is arguable that its longtime friend in Washington has abandoned traditional labor. 

Throughout most of the 20^th century, labor could count on having the Democratic party squarely in its corner. President Roosevelt rode to the rescue of labor in 1935 with the NLRA to fight back against the corporations who were subjecting labor to hostile, dangerous, insecure and low-paying workplaces. Throughout most of the rest of the 20^th century, a Democratic presidential hopeful could not dream of winning the party’s nomination without gaining the endorsement of the President of the AFL-CIO – who always had a key speaking role at the Democratic Convention.

Meanwhile, the Republican Party battled on behalf of capital, supporting right-to-work states, deregulating industries, and lowering tax rates.  That was the 20^th century alignment.

It began to change at the end of the 20^th century. A key marker occurred in 1992 when President Bill Clinton signed into law a tax change that allowed only the first $1 million in CEO compensation to be deducted for corporate income tax purposes. It was supposed to discourage corporations from paying their CEOs more than what was then thought to be an excessive $1 million (imagine that!) – and failed spectacularly as they were given stock options instead, which made them wealthier than ever before.

But in whose favor was this measure intended? Labor?  Hardly. There was no obvious benefit to them.  Capital? Yes indeed. Shareholders were complaining about CEOs demanding ever-higher compensation – and the Democrats responded to help capital reign in CEO talent. Arguably the attention to the needs of capital has continued in the Obama administration. This administration featured enthusiastic embrace of the TARP bailouts of banks that protected their shareholders first and foremost and the continued low interest policies that favor capital owners.  Of course, the argument can be made that these policies help labor too, by avoiding a recession/depression. But the careful attention to capital first is a relatively new behavior for the Democrats.

Meanwhile, the Republican Party has increasingly shifted its allegiance to high-end talent, a tiny offshoot of labor that began to emerge around 1960.   During the Reagan era, for instance, they cut the top marginal income tax rate from 70% in 1980 to 50% just two years later. By 1988 it was 28%. In seven years, an executive earning a million-dollar salary went from keeping $340,000 after federal taxes to keeping $725,000. That’s quite a raise. (The marginal rate for labor — median-income families — fell only about 10% over the same time-span.)

Republicans have also defended private equity investment managers in maintaining the favorable capital gains treatment that their carried interest fees are accorded by the tax system.  While hedge fund managers and the like are often seen as representatives of capital, in fact they ought to be considered high-end talent: their investor-customers are in fact the representatives of capital. The GOP even went as far as putting forward a card-carrying member of the high-end talent class, ex-strategy consultant and private equity manager Mitt Romney, as its Presidential candidate in 2012.

So in the modern economy, capital has the Democratic Party as its friend and high-end talent has the Republican Party as its new BFF.  But who wakes up in the morning thinking first of labor, even Monday morning on Labor Day? Arguably it is no one. Labor is on its own politically in America in the 21^st century – and that can’t feel too comforting.

More blog posts by Roger Martin

QE III: Pushing On A String

Initially, the stock market interprets inflation as a positive, as price increases on goods sold fall to the bottom line. Subsequently, rising costs wipes out all benefits of inflation to companies.

It has now been two weeks since Ben Bernanke announced that he would join European Central Bank President Mario Draghi in unleashing unlimited printing at a monthly rate of $85 billion dollars to save the economy [read asset prices] from further deterioration. Unfortunately, the cure does not match the true disease.

The S&P 500 Index closed September 27, at 1,447.15, up 13.83 points, but, lower than the September 13 close of 1,459.99, when the Federal Reserve Board Chairman held his news conference. Thursday's price action was achieved with the market positively and enthusiastically embracing a spotty economic report, the announcement of a new budget by Spain, and the news item that China had injected more stimulus money into its softening economy.

The nominal effect is tantamount to pouring a third cup of Starbucks coffee down a drunk to sober him. Actually, evidence of diminishing returns from various stimuli programs had been seen in earlier macroeconomic data.

The Commerce Department reported Thursday orders for goods meant to last at least three years, excluding demand for airplanes and automobiles, fell 1.6% last month after a 1.3% decrease in July. Total bookings plunged 13%, the most since January 2009, attributed to a decline in demand for civilian aircraft.

Also reported by the Commerce Department, the U.S. economy expanded at a 1.3% annual rate, the slowest pace since the third quarter of 2011 and down from last month's 1.7% estimate.

The Labor Department said new claims for unemployment benefits fell to 359,000 last week from an upwardly revised 385,000 the week prior. Claims were expected to fall to 378,000 from an initially reported 382,000.

Helping the upbeat mood of the market on Thursday, according to CNBC, China's central bank injected a net 365 billion Yuan ($57.92 billion) into money markets this week, reportedly, the largest weekly injection in history.

Mr. Bernanke promised to keep interest rates down for institutions and mortgage seekers by purchasing mortgage-backed securities at the expense of savers. This program ignores altogether other forms of outstanding debt weighing down consumers such as revolving and non-revolving lines of credit and student loans, which now stand at over one trillion dollars.

According to a Pew Research Center analysis of newly available government data published today, 19% of the nation's households owed student debt in 2010, more than double the number in 1989, and more than 15% that owed student debt in 2007. The Pew Research analysis also reported that 40% of all households headed by someone younger than age 35 owe such debt.

Some of the more salient statistics from the Pew research analysis include; the average outstanding student loan balance increased from $23,349 in 2007 to $26,682 in 2010. Most debtor households had less than $50,000 in outstanding student debt in 2010, but the share of households owing elevated amounts has increased.

In 2007, 10% of student debtors owed more than $54,238. By 2010, that number had risen to more than $61,894. Interestingly, average household indebtedness fell from $105,297 in 2007, to $100,720 in 2010.

Every remedy seriously discussed and/or enacted since 2008 by the federal government or the Federal Reserve Bank in the wake of the Great Recession has been a top-down solution. Most of the problems Congress, the White House, and the Feds addressed required a bottom's up approach to succeed long-term in helping Main Street. Avoiding this reality, addressing total household debt servicing requirements and a sharp drop in disposable income, was at the core of their failure in rescuing the economy.

Case in point, real estate; Washington DC, pushing trillions of taxpayers' dollars through the banks over the last four years, hoping that the dollars would find their way to individual mortgage borrowers and rehabilitate the national economy, has proven to be a squander of time, effort, and resources, given the skimpy results.

A simpler and more effective approach would've been for the government to utilize the treasury auction one time to issue $50 billion in 30-year bonds, with a 3% coupon, and refinance 250,000 mortgages at $200,000 each month. Over the last four years millions of home owners would have been better served with this approach and at a fraction of the cost to taxpayers, versus the many cumbersome and failed homeowner relief programs Washington tried.

Instead we are being tortured with an L-shaped recovery, consisting of lethargic growth, flat tax revenue receipts, and stubbornly high unemployment figures, unknowingly, for as far as the eye can see.

What about those underwater mortgages? Any difference between the original mortgage amount and the newly appraised value of the home could be split from the new mortgage (as in a second) and would become a tax obligation to the borrower over 30 years.

With this approach, many of the tens of thousands of entrepreneurs that went out of business in 2009 and 2010 would have found their shops located in neighborhoods with homeowners struggling less, or not at all, making their mortgage obligation and finding a few hundred dollars extra each month in their pockets to spend.

Lastly, making these new mortgages assumable, as in days gone by, and GNMAs, would have given the real estate market natural buoyancy during a period of free fall. Backed by the full faith and credit of the U.S. government, institutions could then legally purchase this new debt.

This bottom-up rescue would have lowered borrowers' monthly mortgage payments, paid off the original mortgage, saved bankers (they got the money, anyway) holding dubious collateral, and preserved contract law, while stimulating the economy.

The dollars' velocity would be rising instead of falling at this point in time in this recovery. More importantly, by quickly reducing the amount of debt per household and increasing household disposable income in the darkest days of 2009 and 2010, the true disease afflicting consumer spending then and today - lack of demand from truncated disposable income - would have significantly reversed that deficit.

Besides, the government had already guaranteed some 3 trillion dollars in money market funds in the dark days of 2008, so, did it matter if this money was guaranteed before or after it entered the bloodstream of our financial system?

But I digress.

Applying traditional economic stimuli to a changed economic system we are now learning is unproductive. The superstructure of the western financial system, forged during the depths of the Great Depression, has mutated over the past 30 years by a shift in political and social culture, financial product innovation, and retirement planning choices.

Since 2008, the post-World War II economic and financial ecosystem has been completely modified by both governments and their central banks and corporations, during crises after crises, to the benefit of industry and corporations, and at the expense of national economies and individual households, worldwide.

The 70% consumer driven U.S. economy, the world's largest single economy, is a product of the 20th century. The economy has not responded robustly to QE I, QE II, Operation Twist, and now, so far, to QE III, as policymakers apply outdated remedies for an economy that no longer exists.

The economy has, however, drifted listlessly, from misdiagnosing and mismanaging treatment. Archaic monetary policy tragically is, ultimately, unproductive in guiding outcomes desperately being sought by politicians and economists. We are traveling down a new economy road without a road map.

For long-term investors, there is no mystery to the disease afflicting the U.S. economy; we are living in a complex world plagued with 21st century globalization. The extreme ends of inputs for the marketplace to create opportunities, produce output, and generate wealth, are in fundamental conflict with each other and our expectations and sensibilities imported from the 20th century.

Whether the conflict is over wealth accumulation, labor and productivity, return on capital, education, natural resources, innovation and technology, or geopolitical rights of ownership, this clash between the past and the future economic systems will establish along the way new winners and losers.

Once upon a time, there was a financial theory called a business cycle. It quantified economic activity, measuring and marking its circumference from trough to peak to trough as one complete revolution. And, from this business cycle winners and losers were recognized by the marketplace. Somewhere along the way, we discarded the notion of recession as a natural and healthy part of this business cycle.

Historically, whenever central banks began pushing on a string with monetary policy, attempting to stimulate demand where none naturally exists, first stagflation, then inflation, occurs. This develops whenever the marketplace is prevented from deciding winners and losers.

Initially, the stock market interprets inflation as a positive, as price increases on goods sold fall to the bottom line. Subsequently, rising costs wipes out all benefits of inflation to companies.

The 32 year-old bull market in bonds is in its final weeks. The policies that set it in motion three decades ago, compelling interest rates to fall - no tolerance and complete vigilance to fighting inflation, are no longer recognized as prudent policies. The consequences of loose monetary policy can be seen appearing on the horizon.

Around the world, governments are struggling, in varying degrees, with escalating inflation from drought, scarcity of supply, debased currencies, and local conflict and violence inhibiting the free flow of goods.

How long can the U.S. bond market avoid these realities going forward is anyone's guess. At some point, however, bond investors will stare into the abyss recalculating risk and the time value of their money.

The unprecedented amount of funds that have flowed into fixed income investments since 2008 will reverse and regrettably, take many, sophisticated and unsophisticated investors alike, out to sea as the tide rolls away.

This summer's rally began June 4, at 1,278.18, which was induced by horrible May economic data, thus, anticipating QE III. Now that unlimited quantitative easing has arrived, central banks around the world are all in, where will the economy and fundamental global change take the market and investors' capital next?

To seek higher investment ground, investors should reduce exposure to fixed rate income investments and begin looking for variable rate fixed income products for long-term income. Also, the stocks to consider, if you must buy stocks, are essential companies such as: AT&T (T), Verizon (VZ), Google (GOOG), IBM, Exxon Mobil (XOM), Chevron (CVX), Disney (DIS) and Microsoft (MSFT), core companies that will only go out of business if society ceases to function as we know it today.

As inflation rises, it will be hard assets including gold, up 6.4% for the month and for the quarter 14.6%, and silver, up a sparkling 12.2% for the month, and for the quarter over 31.5%, farmland, natural resources, energy, companies that manage the new digital world and essential basic services, that cannot be re-produced on two-dimensional printers, which will retain their value.

Discerning Trends and Fluctuations From Direction and Volatility

There is a cornucopia of objective and subjective data flowing into the marketplace 24/7. Once out there, it’s twisted and molded into supporting or rejecting whatever narrative is being presented. It’s this world that we must employ all our analytical skills and investment experience to discern trends and fluctuations from direction and volatility.

On April 6th, it was reported in the New York Times from a story entitled “Upbeat Signs Revive Consumers’ Mood for Spending” the following statement:

The mood has gone from panicked to cautious, and now, as Mark Zandi, chief economist for Moody’s Economy.com put it, some consumers are “almost a bit giddy.”

On April 7th, The Federal Reserve Statistical Release G.19, Consumer Credit reported the following:

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Econoday published this analysis to explain the report:

Highlights

Well the rebound for consumer credit lasted only one month. Consumer credit fell a steep $11.5 billion in February, sinking hopes that January's increase would mark the end of the steepest consumer credit contraction on record. A $5.6 billion upward revision to January, to plus $10.6 billion, does take some of the sting out of February's contraction as do preliminary indications for strong retail sales in March. But February's data are bleak, showing a $9.5 billion contraction for revolving credit and a $2.0 billion contraction for nonrevolving credit. Tight credit standards together with the consumer's mood to save are not helping the economic recovery. Stocks showed little initial reaction to the report.

Market Consensus Before Announcement

Consumer credit outstanding in January rose $5.0 billion, breaking a record of 11 consecutive months of decline. The gain was led by a $6.6 billion rise in non-revolving credit (car loans, mobile homes, education, boats, trailers, vacations). But revolving credit (credit cards) still declined by $1.7 billion.

Finally, add into the mix, auto sales that were reported on April 1st, and again Econoday explains:

Highlights

Vehicle sales in March proved much stronger than February, the first solid indication of what looks to be a strong month for retail sales. Sales of domestic-made cars and light trucks rose to an annual unit rate of 8.8 million, up more than 15 percent vs. February's 7.6 million rate. Improvement was broad based among manufacturers but was centered at Toyota (TM) where aggressive incentives led to a major jump for the troubled manufacturer. New car sales make up about 12 percent of total retail sales. Gasoline sales, which make up about 10 percent, also look to be strong in March given gains for demand, seen in the weekly EIA petroleum inventory data, and gains in price, also posted weekly by the EIA. Chain stores will round out the retail picture for March when they post results next Thursday.

Market Consensus Before Announcement

Sales of domestic-made light motor vehicles in February dipped 2.2 percent to a 7.7 million unit annualized pace, largely on severe snow storms cutting into showroom traffic. Imports, however, fared worse, dropping 7.9 percent to 2.7 million units. The import share was hurt by Toyota's recall-related stoppage of sales on certain models. Combined domestics and imports were down 3.7 percent to 10.4 million units from 10.8 million in January. Deal making by competitors going after Toyota market share could boost overall sales in March.

Question: Why did the market tank at the close Wednesday, after the release of the G.19 report, when it was already known February was a poor month for consumer credit? Between 3:00 pm and 4:00 pm Wednesday, this was the most significant news to come out?

Also, how do you square Ben Bernanke’s testimony before congress explaining the to keep U.S. interest rates low because of a fragile economy when the day before Australia’s central bank increased their benchmark interest rate, by a quarter percent to 4.25%, the fifth time in six months, over fears of inflation, following China’s changing position on inflation and rising commodity prices?

Are the Feds conflating a residential real estate inventory problem with GDP growth? Can we see a further drop in home prices, an expansion in the economy, and miss the beginnings of a cyclical turn in inflation? Will policy and politics interfere with sound but tough economic choices in Washington DC? What warning signal is the debacle in Greece sending to the U.S.? Will Paul Volcker be heard by the administration on banking reform and will Larry Summers be leaving the circus through the revolving door to Wall Street?

Man, and you thought the Duke/Butler NCAA basketball final was a cliffhanger.

U.S. Markets: A Week of Inexplicable Events

You can excuse the average investor if, this week, he found himself and his thoughts drifting, perplexed and panicky. The inexplicable was found lurking everywhere starting with the normally spineless Democrats handing President Obama a historic legislative victory on healthcare reform, Sunday. Opponents feared that the $1 trillion price tag, and the disputable commandeering of 17% of the annual national budget was too ambitious, and that the increase in taxes necessary to cover an additional 32 million Americans health insurance would impede economic growth.

The stock market continued rising into the close; on Tuesday, up 102 points, on below average volume. The respective 17 month highs were 10,752.41 on the Dow Jones Industrial Average; 1,174.17 for the Standard & Poor’s 500 Index, and 2,415.24 on NASDAQ. Some call this a melt-up rally, a term describing a short squeeze in search of a pullback, which never comes, especially during end of the quarter window-dressing buying. If you don’t take any profits now at least buy SPY or QQQQ puts for portfolio protection in April.

But another inexplicable event occurred. Bloomberg reported that the 10-year US treasury swap spread closed negative for the first time ever. Ft.com/Alphaville provides a concise definition:

“A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps.”

The negative spread widen on Wednesday accompanied by a below average 5-year treasury auction priced at a 2.605%. The 10’s and 30’s sold off by the close at 3.83% and 4.72%, respectively. The treasury auction calendar is stuffed with offerings as far as they can see. At some point, the market will lose its appetite for governments. It may be happening now, if so, buy puts on TLT.

Another head-scratcher Wednesday was Pimco’s bond maestro Bill Gross comments on CNBC professing his affection for equities: “Let's suggest the economy looks good, that risk assets— whether it's high-yield bonds or whether it's stocks—have a decent return relative to the potential of declining bond prices," he said in an interview. "I'll go with the stock market."

We also learned what we already knew when S & P lowered Portugal’s credit rating, that the western world is broke. Before I forget, this day also included Google (GOOG) and Go Daddy quitting China, the US accusing China of currency manipulation, and financial regulation reform disappearing into a Washington DC black hole.

But enough about inexplicably strange; let us return to good old-fashion butt-ugly economic data. Negative housing data again filled the landscape pointing towards a funky economy in 2010 for the average citizen. The Mortgage Broker’s Association purchasing index, ending March 19, rose 2.75% while its refinancing index fell 7.01%. The average 30-year mortgage increased 10 basis points to 5.01%.

February new home sales fell 2.2%, to an annual rate of 308,000. Two years ago, the annual rate was above 600,000 homes. Supply swelled to 9.2 months while the median price of a home rose 6.1% to $220,500 and the average price up 5.1% to $282,600. The first-time home buyer tax credit ends in five weeks.

Finally, the US Census Bureau, 2009 State Government Tax Collection Data was released. State revenue was down in 2009 versus 2008 some $66.9 Billion dollars. Fourteen states saw their tax revenue fall 10% or greater. The fourth quarter figures are available at the end of March.

This snapshot of the market and the economy shows that things are far from normal, or what we once considered normal. The calculus that propelled investing over the last 30 years has dissolved. The new formula is being being created and tested in real time. The stock market and investing is currently unreal - it’s devolved awhile ago into, or, if you prefer, transformed itself into a momentum investing affair in an unraveling world.

This great casino awash with taxpayers’ cash can only speculate on when the world will end and where shall the end begin; Greece, Portugal, Spain, Italy, the UK? Who shall be savaged first and who shall be saved? Where can I hide and make a profit? It wasn’t in gold Wednesday; the yellow metal lost $15 an oz. due to a rising dollar. However, currently, the dollar is the dog with the least fleas – and it will not rise indefinitely.

If this report reads unfocused and schizophrenic, it’s the market, it isn’t me.

The Lazarus Rally in 2010

This week marks the one-year anniversary of the market bottom for stocks following the 2008 collapse of the supply-side themed western financial system. A deceased stock market, the second week in March 2009; the major averages resurrected themselves, like Lazarus, on a holy-water flood of liquidity, more than any other cyclical bull market bounce in history.

The Dow Jones Industrial Average advanced March 9, 2009 to March 9, 2010, from a gut-wrenching 6,547.05 to 10,564.38. Likewise, the Standard & Poor’s 500 Index moved from 676.53 to 1140.45. The NASDAQ 100 climbed from 1043.87 to 1,901.38, over the same 365 days. These returns equal a decade’s worth of historical gains.

To those investors, who grew feathers, and ran to the sidelines, take heart; in investing, there are lies, damn lies, statistics, and market returns. At the beginning of 2009, the DJIA started at 8,801.72, the S&P 500 Index at 902.99, and NASDAQ at 1,212.24. Only the luckiest of people and your typical liar coolly strolled into the market that second week in March last year, aggressively bought stocks, and are still holding those positions.

Closer to the truth, an experienced bull investor last March probably started taking profits off the table in early summer. Or, they screwed up their courage in April or May and bailed in September, or year end. Anyone capturing these once in a lifetime returns should be running full page ads of their trade confirms announcing the opening of their new hedge fund. And why not, they could afford the advertising rates. Unfortunately, 2009’s trend will be swapped for market fluctuation in 2010.

So, where do we go from here? The answer for the stock market is quite different from the answer about the economy. Let’s first look at the stock market.

Stocks will not repeat the performance of the last 12 months. The last 12 months was fueled on liquidity and promised future growth. The future is here but the growth is not. Wall Street Cardinals assigned to Washington DC, Ben Bernanke and Timothy Geithner, will be less helpful to stocks over the next 12 months.

U.S. Quantitative Easing has an expiration date on its existence. Some central banks have already begun raising rates because their economies are moving forward, unlike ours. The retail customer has yet to return to the market, either through their company’s retirement account (which is hard to do when you no longer work for a company), or taxable investment accounts; when your 1%-2% bearing CDs and T-Bills, and falling home values no longer contributes to your positive cash flow.

Also, investors are going through Post Traumatic Stress Syndrome (PTSD). The dot.com bubble, the Enron era of scandals, the real estate depression, and 2008, has left baby boomers dazed and confused. They are reluctant to hop into the barrel one more time before retirement.

Despite paraphilic dispatches by CNBC anchors, reporters, and guests of an aroused recovery, to the contrary, the U.S. economy is impotent based on low tax receipts, high unemployment, and contracting housing prices and available credit. This is what occurs during a period of deleveraging.

Disposable income from the safest fixed income investments has all but disappeared. That retired couple that spent their 5%-6% interest from their fixed income portfolio to shop, to travel, and to dine has temporality lost over 70% of their purchasing power. Fewer transactions equals fewer sales taxes, in turn, equals less state and federal revenue. Becoming smaller becomes a vicious cycle.

In October and November of 2008, when extraordinary unilateral decisions were made to save the economy, two additional smaller adjustments would have made a huge difference; temporarily change the tax laws for five years, permitting individuals to write off all interest payments for credit cards, automobiles, etc. on their taxes, and to suspend for five years the provision in the Monetary Control Act of 1980 eliminating usury laws. Individuals would have extra cash inside their annual tax return and smaller monthly finance payments. How could banks complain since the Federal Funds target Rate was set December 16, 2008, at 0.00% -0.25%? Their return on borrowed capital is infinity.

Cities and states across the nation will become the biggest drag on the economy in 2010. Dramatic budget cuts to reduce a currently projected $180 billion shortfall are being debated for the 2010-2011 budgets, at this moment, thereby, violently truncating personnel and services.

Banks are still failing. The FEDS feel that they dare not raise interest rates without a very good reason. But, with banks not lending, or reducing credit lines to businesses, and credit cards rates were hiked before new banking credit cards laws were changed, I’m unsure who might be hurt by an increase. Top-down stimulus programs are inefficient and growing more unpopular. Both commercial and residential real estate are not improving And, the November elections will drive sagacity from public conversation.

Internationally, what we can see are sovereign debt problems and a suspect economy in Europe. Tensions growing in the Far East over; military bases, and now Toyota, with Japan; trade disputes and sanctions and political disagreements over Taiwan, Tibet, and Iran, with China. Plus, we have an amorphous exit strategy in Iraq and Afghanistan.

Adding up tapped out consumers, the continuation of deleveraging, near insolvent municipalities, and a gradual reduction of liquidity, what you have is a somber national economy with too few pockets of strength.

Traders relying on volatility and stock pickers that can hunt for appreciation will have several opportunities to feast, however, investors hoping for an expanding economy will soon wish for 2010 to be over with nothing but apples (AAPL) and chips (PEP) and cokes (KO) to snack on in the interim.

Where Is Gold Headed?

Gold continued to fall on Friday as the rising U.S. dollar reduced its hedge appeal. December gold fell to $1,115.30 per ounce, down $10.40 on the session. Prices fell as low as $1,110.80 earlier in the day. The metal lost $46.50 on the week, falling in four of five sessions. Gold is more than $100 off the record $1,218 reached last week. Yesterday, gold was flat.

Nothing has changed.

The strategy to buy and hold gold now is predicated on the following rational:

Gold should be held for at least three to five years.
We are at the beginning of a new cycle for gold accumulation.
Economic indicators still favors commodities and hard assets.
The long-term trend is still up for the price of gold.
The secular bull market in equities that began in 1982 exhausted itself in 2007. The current bull market in gold started in 2002. The economic data pouring out in November and December has a tremendous amount of “white noise” in it. The fourth quarter of 2008 had such a dramatic collapse that year-over-year comparisons and seasonal adjustments distorts the true economic picture. This will continue another two or three months.

April 15th, the deadline to pay taxes, is 120 days away. This will be the day of reckoning for municipal budgets when shortfalls in tax receipts around the country become apparent. The federal government will be shocked in the drop in taxes collected, also.

People invest for one of two reasons: greed or fear. Over the next two years, investors will buy gold primarily out of fear. There are insufficient funds to service the obscene amounts of outstanding debt that was issued this decade. As more and more defaults occur from real estate, corporations, and governments, trust in domestic and international financial systems alike will diminish. The price of gold will rise.

Historically, it is documented that after periods of hyper-credit, the swift and troublesome reversal of credit causes an economic depression. Unemployment swells, lifestyles and life choices are interrupted, altered, or sometimes ruined. Public anger begins to rise; politics becomes more bitter and partisan, and true solutions are prevented from reaching the surface and being enacted.

When economic systems are broken, to protect their jobs, politicians rely too heavily on monetary and fiscal policies, which have limited impact on the aftermath of busted bubbles. Political discontent ensues, the propensity for violence by all sides’ increases, and a pattern for chaos emerges. This current edition of growing anarchy isn’t my paranoia; I’m borrowing it from several senior Goldman Sachs bankers who applied for gun permits (soon after receiving first dibs on the H1N1 vaccine before city hospitals) in November before their lavish Christmas bonuses were paid. Their CEO, Lloyd Blankfein, also upgraded the security system on his two New York homes.

These types of events occur pushing up the price of gold absent real inflation.

Then inflation begins.

We are leaving the first decade of the 21st century. The second decade will be quite different from the previous one. Ten years ago, the federal government was running huge budget surpluses and paying down the debt. Then Federal Reserve Board Chairman, Alan Greenspan, speculated aloud about the distant problem of the debt market running out of treasury obligations if the US borrowing needs continued to fall. Congress became concerned and decided to study the problem. So, the future can be changed.

As the price of gold continues to rise, fear is replaced by greed as the primary reason to hold gold bullion. This is a recurring theme throughout history which is never discussed in the mainstream media. I don’t work in the mainstream media; I provide economic commentary to preserve wealth and to manage risk for clients. What investment strategies did work this decade is ill-equipped for tomorrow.

Make no mistake about it: near term, wealth is under assault and risk is growing- from all sides.

10 Reasons to Believe That We're in a Depression

As the economy drifts listlessly going into this holiday season, thoughts of sugar-plumbed call options and zombie companies (Fannie Mae (FNM), Freddie Mac (FRE), and Citibank (C)) are dancing in the heads of day traders, fund managers and CNBC.

Hooray, hooray, everything is OK! Well, not quite. While Wall Street is feasting on the greatest secular bear market bounce in history, Main Street is experiencing persistent and formidable economic famine, the likes of which, have not been seen the Great Depression – which recorded the second greatest secular bear market bounce in history.

10. Look at the macroeconomic data.

Tuesday’s retail sales number, up 1.37 %; excluding autos, were up .2%. The year-over-year number was -1.74%! The world ended September 15, 2008, with the demise of Lehman. Financially, October 2008 was the dark side of the moon, yet, October 2009 still lags? The GPD is in a funk.

9. Look at the market’s technical data

On CNBC’s Fast Money last week, a dazed and beaten Louise Yamada pointed out there are “green shoots” of stock distribution appearing in the market; rising volume on falling days and falling volume on rally days. Additionally, the market’s chart pattern still roughly traces 1932-1941 period. We are near the 1938 bounce during the Great Depression. Money was and can be made in a depression.

8. Look at the market’s fundamentals

On November 6, the Wall Street Journal reported that, with 88% of companies reporting earnings, year-over-year was down 15%. However, earnings estimates by analysts were beaten by 80% of the reporting stocks. Sales are down but layoffs and cost cutting are allowing the market to believe in this Immaculate Conception rally. At some point, currency exchange manipulation by international corporations and lower wages, or fewer workers employed, invariably leads to the destination of painful contraction and negative growth.

7. Consumers

Consumers are toast and retailers are beginning to blink for the holidays. The housing index is rolling over; flat in November at 17, revised downward in October from 18 and September recorded its high of 19 since falling down into single digits. Wednesday morning, housing starts showed a drop of 10.6%, on a seasonally adjusted annual rate, to 529,000 units. In 2006, housing starts were closer to 2,000,000 units. Unemployment is 10.2% ( for U-3; for U-6, the unemployment figure is 17.5%), the housing ATM machine is gone, wages are weak (except on Wall Street) and the market rally has helped institutions more than retail. Credit card lines of credit are truncating, loans are for those who don’t need them and many consumers are too gun-shy to use credit if they could.

6. Municipal Governments

John Maudlin latest piece did a brilliant job dissecting the bleak future of state income shortfalls. A jobless recovery with missing sales taxes will create at minimum 10 more California fiscal basket cases in 2010. The first round of stimulus money actually bailed out states – that’s why new job creation was so muted. Municipal defaults will emerge next year to terrorize investors.

5. Federal Government

Washington doesn’t have the stomach to break up banks that are too big to fail and to seriously reregulate the financial industry. The reverse merger of Washington DC by Wall Street in 2008 makes this so. Much of the financial products that the feds have guaranteed, to the tune of $24 trillion, are so complex that they are only understood by their creators - the borrowers. This ensures that we can sweep our current problems under the rug today to inflict more pain tomorrow. Even if we do not bring back mark-to-market anytime soon, at some point the battered dollar will force interest rates to rise and drive the economy down. Also, certain people in high places need to be replaced. Sadly, they will keep their jobs.

4. The global economy

Countries are diversifying away from the dollar and into gold and other hard assets. So should we (SGOL, SIVR, GDX, GDXJ, IAU, and GLD). They recognize that our fiscal and monetary policies are out of whack and no one in the US, either businessmen or politicians, is putting country before profits or reelection. This is the mindset that formed the greatest generation. South America, circa 1980s, here we come. Also, many countries are recovering faster than the US because their actions in the crisis aimed at repairing their economies, not individual companies.

3. Baby Boomers and retirement

Baby boomers who’ve lost jobs in this period realize their chances of finding one last job before retirement, at their last income level, are extremely low. The “severance package” class of unemployed, and the employed but leery worker, will not return to their previous spending habits. Years ago, they were told to save long-term in the stock market through index funds and to dollar-cost average, to buy more real estate than you could afford because both stocks and real estate rise over time, to fund their retirement accounts and buy company stock, to trust municipal bonds, and they would be alright. Unfortunately, as they near retirement, too few baby boomers are alright.

2. Income and wages

Either global competition, or inevitable draconian changes in fiscal policy to address our growing federal debt, or both, will reduce US wages for many years to come. To increase productivity, wages have been flat for the past 10 years. It was masked by the irrational stock and real estate markets. Without America discovering the “next new thing” our previous standard of living will accelerate downward. State and federal governments will desperately tax income sooner rather than later. These factors enhance the chances of the next leg of our depression.

1. The 21st Century

Every champion, eventually, must retire from the ring. The US is no different. And that is the primary reason most professionals have gotten some portion of the last three years wrong. Any data set from the 20th century is obsolete without significant adjustments. Linear extrapolation of historical patterns of growth, revenue, and consumption, without correctly modifying credit, demand and demographics, plus the impact of technology, domestic tariffs and regulations, and Realpolitik, is like placing a compass inside a magnetic field. Good luck.

No one can take away the fact that America owned the 20th century. However, in the 21st century, cheap land, cheap labor and a younger demographic profile, suggests that in 20 years, the reins of power will be in the adolescent hands of a rapidly growing Asia. So, we invest in their currency (CYB, ICN, and BZF), finance their growth (DRF), and sell them the raw materials (DBN) that they will need to build tomorrow.

For now, besides military weaponry, our number one export is entertainment (DIS).

Fourth Quarter Outlook: Become a gold bug, now

The horrible jobs report, which overshadowed the stock market at the end of last week, portends a 4^th quarter reality that will disturb the financial markets as we continue to escape 2009. John Williams’ www.shadowstats.com forensics analysis of government data, namely U-2, U-6, and his SGS Alternative Data describes the brutality of the current recession/mild depression, in which, we find ourselves.

The unemployment report U-3 increased from 9.6 to 9.8 percent. Its broader counterpart, including those looking for full-time work while working part-time or, short-term unemployed for less than one year, reached 17 percent, climbing from 16.8. The SGS AD uses the 1980 BLS formula, adding back those unemployed for longer than one year, that changed in 1990, shows a whopping 21.4 percent unemployment, up from 21.2 percent, the previous month.

Job losses were reported at 263,000 in the September, payroll survey, while the household survey published an astonishing 785,000 jobs loss.

How will this affect the markets? Let me count the ways. Before I do, let us quickly review the landscape on the one-year anniversary of the 777 point drop in the DJIA. The immaculate rally from March, on less-bad economic data, advanced 62 percent, including a 15 percent 3^rd quarter performance, before experiencing a gentle case of vertigo. The market is still below the September 30, 2008 DJIA closing level of 10,850.60 or the S&P 500 Index’s 1,164.36. Obviously, a two trillion dollar hot shot by all the President’s men can only do so much.

Look for the last three months of 2009 to resemble a junkie coming down from her high. The TALF programs face truncation to the chagrin of conditional omnipotent financial firms; Cash for Clunkers, is a bittersweet memory for green shoot data sets. The $8,000 tax credit for first-time homebuyers ends soon – the S&P/Case-Shiller index, reflected July home price increases in 20 cities, the most robust in four years – even as existing sells unexpectedly fell.

The good news is we are only losing a few hundred thousands of jobs each month versus 700,000 each month. However, the bad news is that 40 percent of managers surveyed stated they will layoff additional workers going into the holiday season. If I were betting on the unemployment rate reaching 10 percent this year, Alan Greenspan is, I’d take the over.

Bill Gross recently suggested that the personal savings rate might be up to eight percent, with a fundamental shift in consumer spending habits. This will create a conundrum for V-shaped recovery cheerleaders and administration spokespersons. There are two germane reasons the consumer will sit-out this round of re-inflating the economy: the trickle-down stimulus plan crafted in Washington never found Main Street and until jobs begin growing again, caution over self-gratification will prevail around kitchen tables.

Additionally, Baby Boomers – the greatest spending generation – have lost its former gluttonous appetite to acquire things just for bragging rights. The “New Normal’ braggadocio is whining about how little interest your various cash positions are earning in CDs, Municipal Bonds, and Treasuries – not what you have acquired in deprecating goods.

So, why become a gold bug, now, (GLD, GDX) you ask. The simple answer is the respite from Armageddon we purchased with poorly planned deficit spending during 2008’s financial implosion has an expiration date. Vigorish charged by the world for our initial greed and incompetent rescue will soon come due.

For starters, the US dollar is an abused orphan. An obscene and growing federal budget deficit notched a 6.7 percent increase in spending for the second quarter to offset the severity of the first quarter contraction of an annualized 6.4 percent. The consumer benefited little from this expenditure while financial institutions, and now private equity firms, benefited mightily. Germany and Japan are issuing dollar denominated debt to arbitrage our currency’s weaken future. Expect other countries and multi-national corporations to follow.

Last week, the IOC rebuffed President’s Obama schnorring for the 2016 Olympic Games for Chicago on the world’s stage in Copenhagen. The irrational right-wing schadenfreude response failed to ask the only germane question to his rejection; why? Is it because Barack has lost his mojo? On the other hand, might it be because the world is still sore that America sold trillions of dollars of worthless toxic assets, stamped AAA by US rating agencies, to every country and continent that could rub two nickels together, over the last five years? If so, what other nasty surprises can we expect in the future.

Eventually, the Feds must allow interest rates to rise. They will be hesitant to do so, peering into the rear view mirror, watching the horror of 2008 and rising unemployment claims, and not keeping an eye on the road ahead. The deleveraging that began at the end of 2008 will continue for many years with chronic European-style high unemployment, near 10 percent, plaguing the US. Our ability to repay ever-increasing amounts of debt, from a stagnant economy, eventually will cause reexamination by our creditors, to our detriment.

The 1980s to 2006 real estate phenomenon, that transformed 2,000 sq. ft. personal residents into 4,000 to 6,000 sq. ft. ATM machines, and altered average Joes and Janes into Donald Trump, has vanished like D B Cooper in mid-air. Notwithstanding, stagnant incomes, reluctant borrowers, and tight credit combine, will home values offers a stunted growth period over the next five to ten years – without robust inflation?

Stock markets in the US will devolved further into a volatile trader’s paradise, mimicking emerging markets. However, the stock index to gold ratio going forward will clearly show the lost of the dollar’s purchasing power.

That brings us back to gold.

This bleak future of less USA prestige and girth in the world is due to expanding deficits, inadequate tax revenue, rising interest rates, and a day of reckoning with the global financial system. A diluted dollar - and the usual third act of political instability, which follows, the first two acts of financial calamity and economic collapse – is why I believe gold in the next three to five years will raise prices $2,000 to $4,000 per ounce. Avoid the US Treasury markets, as well.

Tuesday Markets: after you, my dear Alphonse

The next five per cent move in the market is as clear as the smoke-filled skies above Los Angeles. The deadly and massive Station fire, which doubled in a day to 105,000 acres, from 52,000, mirrored the brutally singled-minded cyclical bull market beginning in March. Both U.S. Fire Service and the Los Angeles County Fire Department concur that the fire’s growth had slowed and that its ferocity is declining. The same might be true for the magical, mystical Wall Street rally we witnessed over the last six months.

Pre-market jitters point to another down opening as disappointing economic manufacturing data of contraction from Europe, and unexpectedly, likewise from England, reminded investors that the all clear from last year’s global meltdown is not entirely clear. The overly rich valuations built into current share prices could be premature.

Bloomberg is reporting Paul Tudor Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are among funds betting the green shoot economic recovery announced weeks ago by Goldman Sachs (GS) and Morgan Stanley (MS) are off base this time as economic growth will be overtaken by a continuation of fundamental deleveraging.

On Monday, the DJIA closed down 47.92 or .50 per cent at 9,496.28. The S & P 500 Index also fell 8.31 or .81 per cent to 1,020.62. NASDAQ fell, down 19.17 or .91 per cent to 2,009.06.

Total volume today on the NYSE was 1,377,655,473; advancing shares were 273,143,033 and declining shares were 1,094,260,290 with 10,252,150 unchanged. NASDAQ volume was 2,256,216,789; 847,105,496 shares were up, 1,385,908,101 were down, and 13,912,894 were unchanged.

The Five-Year Note closing yield was 2.387 percent; the Ten Year Note also was lower to 3.402 per cent; and the Thirty Year Bond fell to 4.18 per cent.

Today, economic data hitting the market includes Motor Vehicle Sales, Redbook, ISM Mfg Index, Construction Spending, and Pending Homes Sales Index. The inflated Motor Vehicle Sales figure with embedded Cash-for-Clunkers one-off buying borrowed from future purchases. That program ended August 24^th.

This year’s menace to society, unemployment residential foreclosures will pick up again in the fall, as explained by bankers yesterday. Because the government’s mortgage modification program is fully up and running, the foreclosure process ending in eviction can resume running in real time. This could add up to five million additional homes on the market by next spring.

Personal bankruptcies are rising again. Calculated Risk reported non-business filings are up 34.3 per cent from July 2008. Additionally, personal bankruptcies filed in July, are at their highest levels, 126, 434, since the 2005 reform of bankruptcy laws.

Mike Shedlock at Minyanville wrote about a recent Gallop Poll showing that the recent slowdown in consumer spans the entire spectrum of shoppers; from the Greatest Generation, Silent generation, Baby Boomers, Generation X, to Millennials. The study reports that all generations’ daily spending is down about $30. Truncated spending habits are a further macroeconomic drag on the economy.

However, the big enchilada this fall, for blowing a hole in any economic recovery or continued bull market, is commercial real estate. Disappearing prospective tenets, grossly over-valued properties, absent refinancing, and upside-down mortgages, should do to CRE what occurred to residential single-family homes in 2008.

If this does not bother you, then, neither will the fact that the FDIC is running low on cash. It should be pointed out that the FDIC is handing out 80 percent loss guarantees to supposedly intrepid private equity guys willing to save capitalism, if the deal is not too risky for them; but for taxpayers...