goodtimes

STAFF NEWS & ANALYSIS
Did the Good Times Even Exist?
By Daily Bell Staff - January 18, 2016

Why This Market Meltdown Isn't a Repeat of 2008 … The end isn't nigh … The U.S. economy and financial system are in a very different place. Notably, debt ratios within the U.S. aren't nearly as high outside the government. – Wall Street Journal

Dominant Social Theme: 2008 is ancient history. Let's focus on what's good about the present.

Free-Market Analysis: There's a difference between being optimistic and unrealistic. This article, above, seems a tad unrealistic. However, we have to consider the source. The Wall Street Journal is not apt to be overly negative about Wall Street or its main business of stock trading … not even if it is warranted.

This is one reason why the Journal often seems mildly surprised when market disasters occur. The meme that the Journal and other mainstream media ascribes to is that the financial system is basically healthy. When things go wrong there are reasons and these reasons can be rectified.

After things have gone wrong, the Journal is apt to compose and post articles suggesting the appropriate palliatives. Once they are applied in some form, the Journal and other influential publications tend to lapse into silence, reporting the financial news as it happens until another disastrous interlude occurs.

These occur regularly, as does the Journal's damage control.

More:

The Dow Jones Industrial Average tumbled Friday, falling more than 500 points at one point, as steep declines in oil prices and a bear market in China heightened anxieties that have pushed global stocks lower this year.

But there are crucial differences between now and those dark days, at least for the U.S. While losses could continue, the U.S. appears, at the moment, to be in a better position to weather them. That could keep a market downturn from morphing into a full-blown financial crisis that then leads to an economic one.

… After 2008, many investors have come to fear that every episode in financial markets is another black swan. They should remember there are white ones, too.

One individual who believes that current economic conditions ARE leading toward a "full blown crisis" is Michael Pento, president and founder of Pento Portfolio Strategies. Pento recently wrote a column for CNBC entitled "A Recession Worse Than 2008 Is Coming."

In simplest terms, Pento understands, as most do, that recessions – as generated by the current global economy – occur on average about once every five years. Thus, the West, especially the US, is overdue.

Here's how the article begins:

A recession worse than 2008 is coming … The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008.

Nor do they want investors to believe this environment is commensurate with the dot-com bubble bursting. They claim the current turmoil in China is not even comparable to the 1997 Asian debt crisis.

Indeed, the unscrupulous individuals that dominate financial institutions and governments seldom predict a down-tick on Wall Street, so don't expect them to warn of the impending global recession and market mayhem. But a recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one – we are overdue.

Pento is focused in particular on the US economy, and in this article he cites a number of reasons why the US's situation is fragile. These include both domestic and overseas influences. He also believes, as we can see above, that the upcoming recession will not be an average "garden variety" one.

"This one will be worse," he predicts. "The market will drop 20% in 2016."

For Pento, China's unraveling is a big part of the reason why 2016 will be a difficult one and why the upcoming recession will, in his view, be more severe than usual.

The megalomaniac communist government has increased debt 28 times since the year 2000. Taking that total north of 300 percent of GDP in a very short period of time for the primary purpose of building a massive unproductive fixed asset bubble that adds little to GDP. Now that this debt bubble is unwinding, growth in China is going offline.

If China were a small problem, the country's difficulties would be relatively insignificant from a global perspective. But according to Pento, "China is not growing at the promulgated 7 percent, but rather isn't growing at all."

Even worse: "China accounts for 34 percent of global growth, and the nation's multiplier effect on emerging markets takes that number to over 50 percent."

Pento believes the US economy is dangerously overextended. Equity valuations and real estate are overpriced. Additionally, higher rates and the cessation of quantitative easing have removed the nation's monetary safety net.

He doesn't believe, contrary to the Journal's stated position, that banks are much healthier now than in 2008. His reasoning here is that regulators are overstating bank capitalization because bank assets are composed of Treasuries – and when the next recession hits hard, even Treasury prices will be subject to a good deal of additional stress.

Pento points out that interest rates remain low despite the Fed hike and thus the Fed goes into the next recession with very limited ability to reduce rates and add liquidity. This probably explains some of the talk about negative interest rates.

Another point Pento makes is that the US federal government has upped publicly traded debt by $8.5 trillion. As with interest rates, this number leaves the Fed with little room to do another such "ramp up" because of the danger of an interest rate spike. Between low rates and high public debt, the Fed faces the possibility of recession with little in the way of solutions.

Pento's grim conclusion: "Look for chaos in currency, bond and equity markets on an international scale throughout 2016. Indeed, it already has begun." For us, Pento wins the argument based on timing alone. The US is overdue for a recession and the modern economy is predictably cyclical.

There is another reason as well that we have often pointed out on these pages and that is that is that predictions of a recession may be unnecessary because the US never actually left recession. What Pento calls a recession is just a continuation of the 2008 slump that was cosmetically ameliorated by central bank money printing.

Within the context of this argument, the financial system in the US and indeed around the world never purged itself of subprime excesses. Large businesses still can't tell if their counterparties are solvent or not. In other words, the current recovery is an entirely monetary one, boosted literally by hundreds of trillions in central bank currency printing and disgorgement.

Predictably money has circulated and found its way into various kinds of asset classes causing troublesome bubbles. But the underlying economy for the most part has NOT improved because the market itself is not engaged by the Fed's top level stimulus.

After Thoughts

No matter how you want to interpret economic events, what's going on these days calls for renewed diligence and preparedness. The affliction of bad times is not a hypothetical matter and neither are the solutions that investors and savers should be implementing.

Posted in STAFF NEWS & ANALYSIS
  • LawrenceNeal

    “recessions – as generated by the current global economy – ” I tend to think that recessions are not caused by the global economy, but, by “the unscrupulous individuals that dominate financial institutions and governments”: Central Bankers, that profit from the boom-bust cycle.

  • Bruce C.

    I think it’s becoming pretty clear to everyone that the reflationary efforts by the world’s central banks haven’t worked because “liquidity” (i.e., more “money”) alone is not enough to create sustainable demand. All it fostered were “mal-investments”. Even “debt jubilees” in one form or another – which may happen – won’t create SUSTAINABLE demand either, only the extinguishing of existing debt – maybe, if that’s allowed.

    The fact that Pento thinks a 20% drop in the stock market is a big deal shows how spoiled “everyone” has become. That’s “nothing” by historical standards.

  • Praetor

    Did good times ever exist! No! What’s good about the present! Nothing! Look for chaos! Yes! The Great Chaos is beginning! So, Prepare accordingly, my and your survival is at stake. The PTB are losers and you don’t want to go down with them!!!

  • chrisyew

    As long as Fed can supply free money to banks after a recession, the boom/bust economic cycle is rigged against the people. The banks get the free money and also keep the collateral used to borrow the money by the people. Bail ins are even worse. They are daylight robberies. Negative interest rates are also daylight, in your face, robberies. A system that treats people like fools will surely fail.

  • Lou Brolic

    I’m having a hard time understanding what is the purpose of this article. Are we trolling The Wall Street Journal for their never ending exuberance and optimism surrounding financial markets? Are we slamming Pento for being cautiously pessimistic regarding our future global growth in 2016? Are you providing solid financial advice to your readers by saying that we should be prepared for the rapture of financial markets in the days and years to come? How exactly is one supposed to heed your advice?

    • http://www.thedailybell.com/ The Daily Bell

      We believe the mainstream media gives a distorted picture of economic progress and that people ought to prepare for worse times to come.

      • Lou Brolic

        How are we supposed to prepare for the rapture? I am of the contrarian opinion to your piece and largely agree with the Journal’s assertion that our financial situation is not a crisis or even a recession, but rather a bear market that, pardon the pun, must be beared.

        Hamish McRae published a piece that paints a more accurate picture of the global economy, which he coined as the fourth industrial revolution. Specifically, McRae wrote that the most prudent advice he would give to emerging players in today’s global economy that “What I suggest we can be sure about is that a combination of general skills, especially mathematics, plus a sense of resilience and adaptability, will be the best way to prosper in an uncertain world.” http://www.independent.co.uk/voices/look-out-here-comes-the-fourth-industrial-revolution-a6821801.html

        The fact remains that all of our economic indicators point to a global restructuring of economic specialization that has the USA leading the charge in the diversity of our GDP. I would suggest that China’s economic engine and the glut of cheap oil on the market has led to a devaluation of currencies, which in turn has led to a market correction.

        As of even less than eight weeks ago, many analysts argued that the DJIA, NASDAQ, and S&P 500 were all over valued historically when comparing P/E ratios and GDP growth. If we were to have this same discussion now, we’d be saying that the markets are fairly valued based on expected growth and production.

        Although I am not expressing optimism for US and global financial markets, to be pessimistic and reclusive would not be wise. It is at this time that those who continue to be financially prudent and continue to invest will be rewarded again in the near future (late 2016-early 2017). It would be even more prudent if we remain flexible and adapt our skills and education with today’s economy.

        • alaska3636

          What the DB means, and what you seem to be missing, is that the media (in this case the WSJ) portrays a predictable paradigm and seeks for solutions consistent with it. The paradigm is central banking, macroeconomic indicators (such as GDP) and effective regulation. In light of the failures of most pundits to accurately explain historical downturns or to accurately predict future ones, and due to the frequent failings of the regulators, it never seems to occur to mainstream sources to question whether “public” solutions are good solutions.

          The DB seeks to lend an alternate paradigm for understanding the economy so that readers will be able to perceive inconsistencies in analysis that are pervasive in mainstream outlets. One of the problems, for instance, with GDP as a macro-indicator, is that it aggregates a very broad range of activ.ities and outputs; it fails to account for the stability and efficacy of various outputs and can not predict with any certainty that a “strong” GDP will remain strong at any future point in time.

          I agree that when you look under the hood of the car and see the mess of duct tape holding the engine together, you would be forgiven for coming away pessimistic about the prospects of the car going very far in the future. What is predictable is that it will breakdown if not when and people should be prepared

          • Lou Brolic

            I don’t think the daily bell in this article has said anything that you said alaska3636, which is my point. How is one supposed to gain such context from such a poorly written and poorly chosen topic? The article is a book report that draws its own conclusion to be cautious and prepared but neither you or the article, establishes how one can do just that.

            This is what I mean by giving you this analogy. The daily bell says you need to be cautious and prepared for risks in financial markets. I say that you need to be cautious in any risky situation.

            It would behoove the author(s), to actually tell you how to prepare yourself for the pending calamities that they did not ever so clearly illustrate.

          • http://www.thedailybell.com/ The Daily Bell

            We write regularly about solutions, just not in every article. Otherwise we would sound like a clock ringing midnight every day of the week. Your solution is to visit us regularly. Then you will see.

          • Lou Brolic

            Even the doomsayers in Times Square tells you to read John 3:16 to find your salvation. I am subscribed to the bell and have never been impressed when one criticizes the work and intellectual thinking of others to only to offer the “This is bullshit!” argument that is all too easy to say and induce a panic amongst your readership that is unwarranted.

            If I must be the voice of reason, limited to the comments section, then so I will. Continue to invest if you are able to in financial markets and be as diversified as your investments will allow. If you are unable to invest because you are focused on survival, focus on learning new skills that will make you more valuable to our global economy. A great friend of mine learned how to read, write, and speak proper American English from Google alone. Now he is an editor without a journalism degree. Furthermore, the United States economic engine will not tank and a wise investor would continue to invest in American companies. The global slowdown is being driven by China’s slowing growth and cheap oil flooding international markets and devaluing oil trading nations currencies (ourselves minimally included).

  • Danny B

    I never have found a pair of rose colored glasses that I trusted. I go for reality; http://www.theautomaticearth.com/2016/01/why-this-slump-has-legs/
    There are endless fundamentals that scream recession. This is just one;
    http://www.zerohedge.com/news/2016-01-17/what-crisis-goldoil-ratio-predicting-time

    There are a LOT of people who believe that they are going to be off to the sides of the collapse. Good luck. 5.1 million people quietly starved to death in Great Depression I. They aren’t going to go quietly this time. Neither gold nor guns will save anybody by themselves.
    Cooperation, diesel fuel and a long growing season might do it.

  • Pater Tenebrarum

    Wall Street is continually downplaying the severe debt crisis that has begun to rage underneath the relative tranquility of the stock market. The argument is that it is “only” hitting the energy sector – but energy alone represents 13.5% of the US corporate bond market, and most of it is junk. They forget to mention that while the bust has clearly begun in energy and other commodities and has been most severe there so far, it has begun to spread – globally. As an example, the amount of distressed emerging market corporate bonds has tripled over just the past six months. Already 15% of all outstanding US oil company bonds are considered distressed. Venezuela is close to becoming the next sovereign bankruptcy. China’s situation is opaque, but there are a number of private estimates as to the true extent of the bad loan problem of China’s banks that are truly mind-boggling. Even if they are only half-right, a major debt implosion seems imminent. The closer one looks at the problem, the more it appears to be an intractable one – this is to say, the train has left the station. No amount of intervention can stop the bust from unfolding anymore. Here are a few charts illustrating the situation: http://www.acting-man.com/?p=42868

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