THE VW ECONOMY by Rich Karlgaard
Foreshadowed by the spring-summer stock market recovery, the American and global economies have turned the bend and are in recovery. So declares every economist. Believe it.
Now the hard question. Will the recovery be V-, U- or W-shaped?
Answer: VW-shaped. I’ll explain in a few minutes.
Tuesday’s news that President Obama will reappoint Ben Bernanke as Fed chair should reassure us that a flat-out W disaster–a 1937-38 scenario–will be avoided. During the Great Depression, 1932 marked the absolute bottom. Auto sales were off 60%, stocks were pancaked 89% from their August 1929 peaks and unemployment was 25%. From 1933 to early 1937, the economy healed … slowly. Unemployment improved to 14%.
Bernanke believes the 1937-38 “depression within a depression” was caused by a lack of liquidity. He’s partly right about that. But the 1937-38 pothole was also caused by FDR’s growing arrogance and overreach. Flush with the relative success of his first administration, FDR felt emboldened to micromanage the U.S. economy in ways that flouted the rule of law. He tinkered with price controls, tried retroactive taxation and Supreme Court packing, and endlessly fiddled with gold prices. These actions drove business owners and the wealthy underground. Capital went “on strike,” as Amity Shlaes wrote in The Forgotten Man. Hiring and investment ground to a halt.
I’ve no doubt that Bernanke, a student of the Great Depression, knows all about the policy disasters of Roosevelt’s second term and sees new mistakes being made right and left (well, mostly left) in Obama’s administration today. Best to keep the emperor happy and avoid mentioning them right now. So expect that Bernanke’s public pitches will skip past policy and focus on liquidity conundrum; i.e., how to tread a fine line between 1937-38 deflationary relapse and inflation.
But what about the Chinese bubble? I think we’re in for a crash of spectacular proportions – unless, that is, we want to believe that China is just hunky dory swell peachy keen.
Can NOT agree less! We are in for a major crash in the market (I think) and thank goodness, only the major players that are trying to make money on a losing market are participating. Small investors are out and watching with skepticism. That means at least the little guy won’t go down on the next crash.
Actually, can’t believe that so many of the major players are looking at this market with blinders on (or maybe just trying to get rich quickly before the crash). Anyway, I expect a major drop within the next three months and it will take down all the players that are currently attempting to crop up the market.
Major problems exists worldwide – The US is suffering a drop in the dollar confidence (and rightly so). Major inflation is on the way. Not a lot of good signs that I can see…
No, there is no recovery, and no, there will not be one anytime soon. You left out the most obvious problem coming: massive inflation.
M2 has increased over $1 trillion, the monetary base has doubled, banks are sitting on $600+ trillion in reserves, and the fed (Ben) has promised to monetarize all the debt.
The trillions borrowed and “helicoptered” in, will not only crowd out and destroy private investment, but will destroy savings and wealth.
We are, and will ever more so, awash in debt – nothing impoverishes more forcefully and quickly. The dollar will take a beating on the world markets (as it already is) and we’ll be paying far more for energy due to that. And, that will also deter foreign investment here.
So, what letter represents plummeting off a cliff?
And just for the record, the economists predicting the recovery are the same ones who failed to ring the warning bells about this recession.
Not being an economist, my opinion isn’t worth much. But I read a lot of different money guys and I’ve noticed a definite trend. The people whose livelihoods depend on things getting better say things are getting better. People whose livelihoods depend on being right are still predicting disaster.
“There is probably no better indicator of market volatility than the current price to earnings ratio of the S&P 500. The market volatility is spectacular and we are seeing more gyrations in this recession than we did during the Great Depression.
Since March when the S&P 500 touched the 666 mark, the rally has boosted the index by 54 percent. Was this caused by stunning second quarter earnings? Absolutely not. With nearly 97 percent of all companies now reporting earnings for the second quarter, the S&P 500 PE ratio sits at 129. This is by far the most over hyped rally in the world.
So what is causing this massive rally if not earnings? This recent rally is being driven by the “getting less worse” mentality. Sure, we lost 247,000 official jobs last month but sure beats 700,000! Okay, earnings are way low but it beats actually losing money! This kind of thinking is leading many sheep to the slaughter again.
And keep in mind, a big jump of earnings in these last few quarters involved massive infusions of free money into the banking sector. Do they not realize that there are still some $3 trillion in toxic commercial real estate debt left? Of course on the estimates, you can see that the financial sector is having the best expectations. The industry that brought us the credit and housing bubble is now going to lead us out of this massive recession. We are in good hands.
Many now agree that this is the worst recession since the Great Depression. Yet many think things will turn around in a few months. These kind of market dislocations last years and impact generational thinking.
There is a new austerity out in the market. In fact, this new spending habit is taking hold so deeply that the government had to entice people to trash their working vehicle for a new car. People are surprised that the cash for clunkers program worked. How are they shocked? Free money for your bucket and a new car? Who could have ever seen that coming!”
VW economy? You mean like Volkswagen – the “people’s car” designed by government think-tanks and built by state-dominated industries? OK, I get it.
This piece is way too easy on Bernanke. He is a magician, er, illusionist. The NYT recently praised him to the skies for ‘making trillions of dollars out of thin air’. Sorry folks, but this is a bug, not a feature, and this bug will continue to plague us until the Fed is audited and/or ended. I’m no Ron Paul fan, but he does have a point on this one.
There is no recovery, and there won’t be for a long time. Hang on to your ‘nads folks, this is going to get a lot worse before it gets better. I’m just 45 y/o so I can ride this out, but most of the Boomers will be screwed.
If you have kids: drill into them every day that this crisis is the direct result of a Federal government which is too big, does too much, and spends too much. Tell them about the 75%+ marginal tax rates they will be paying to defray the costs of the “hope and change” social programs for which their older siblings and cousins voted. As vivo said, this will impact generational thinking. We need to make sure it has the right (pun intended) impact.
Ironic, isn’t it – the very groups of people who put this statist charlatan Obama in the White House will be the ones who lose everything because of his governance.
As for what he’s doing to the country my kids will inherit, I’m just mad as hell.
Ag, Au, Pt
There is a huge bubble in credit markets, 30% of China’s GDP are made up of bank loans. Nobody knows what USA numbers are because the Fed refuses to release them, we just don’t know how much of US economy is made up of banking loans at this time.
There is a terrific crash approaching, and it will shake the foundations of the world economies
#4 The letter you are looking for is either “L” or “\”
Does this article say anything other than that those who will succeed will succeed, while those who falter and fail will falter and fail? “Gross averages” do indeed tell a story. The destiny of nations is in their gross averages. My own portfolio is important, no doubt. But I’m sort of fond of America as a whole. If the Vs don’t overshadow the Ws, then both U and I are in trouble.
#8 vivo – Who are you, and what have you done with our buddy, vivo? Good analysis, except that it is the worst recession since the Great Depression.
I lived through the Carter years. You had to see it to believe it. Double-digit unemployment. Double digit inflation. 18% home loan rates. No job creation. There was no work for graduates when I left H.S.
This doesn’t even take into account our foreign policy, military morale, etc…. It was a very bleak time. We are not even close, yet, but we are working on it.
No, I think the market’s up, because there is free government money to be had, but it is temporary and (as the article states) haphazard. The market is also up, because businesses are getting more efficient, thus profitable. Also, the market surged as O’s poll numbers fell. It seems like all the monkeying with the rules will be over, and the market is responding, as businesses can now make plans.
It is, however, over-optimism. A second crash is coming, becuase they never fixed all the underlying problems of the first one. I agree. Gird your gonads.
The real US unemployment rate is 16 percent if persons who have dropped out of the labor pool and those working less than they would like are counted, a Federal Reserve official said Wednesday.
Obama said it would only be 8%-
at least he has doubled those numbers.
blockquote>The Federal Reserve argued yesterday that identifying the financial institutions that benefited from its emergency loans would harm the companies and..
“The immediate release of these documents will destroy the board’s claims of exemption and right of appellate review,” the motion said.
So there you have it-
You do not have a need to know!
Just shut up and continue to invest in those large loaned reserve banks.
Everything will be peachy until the Chinese get up from the table and cash in their trillion dollars worth of chips.
America will then have two choices-
Ether declare war on the Chinese and cancel our debts,
Or give them several large cities.
Maybe they would settle for California?
13. Marc Malone:
“#8 vivo – Who are you, and what have you done with our buddy, vivo?”
Yes, I have two personalities. Crazy answers for crazy people, but people like you are true conservatives with a decent outlook.
“No, I think the market’s up, because there is free government money to be had, but it is temporary and . . . haphazard. The market is also up, because businesses are getting more efficient, thus profitable. Also, the market surged as O’s poll numbers fell. It seems like all the monkeying with the rules will be over, and the market is responding, as businesses can now make plans.
It is, however, over-optimism. A second crash is coming, becuase they never fixed all the underlying problems of the first one. I agree. Gird your gonads.”
Pretty much what I said, I guess.
14. Nobama 2012:
“Everything will be peachy until the Chinese get up from the table and cash in their trillion dollars worth of chips . . .
Maybe they would settle for California?”
No, they would settle for ‘Red’ states, pun intended . . .
We could end up with a Toyota Prius recovery, overhyped, underpowered and going nowhere slowly
16. Ed Butt:
Maybe your degree in Automotive Engineering Design could help.
I retired early two years ago with expectation of living off my dividend income until my retirement benefits start in a decade. Needless to say, most of my dividends have been suspended, and my portfolio is down 30%.
Nevertheless, it is easy to get by if everything is paid off, and you live modestly, but my biggest concern remains the devaluation of the dollar which is certain to happen in the next two to five years. And one can no longer count on retirement, or social security benefits to be there in full when you need them.
Our unfunded liabilities are going to cripple this country like nothing else before, and most twenty somethings do not know what is about to hit them. If they were smart, they would all become fiscal conservatives, and demand restraint from Washington.
McCain had it right. It is generational theft.