Wednesday, February 19, 2014

Are We In A Depression?

I guess if you have to ask, the answer is no, but if you look around, things are quite a bit different than they were 5 years ago. The government now controls the banking industry, the bond market, and the real estate market. And of course, if it’s too big to fail, the government will manage that also. Not to mention that world currencies are a real mess getting worse by the day.

Interest rates are extremely low and there is no line of people waiting in line to borrow for new investments. There are a large number of companies and government agency’s floating new bonds at these low rates. And with low interest rates, savers are not flocking to banks to take advantage of the interest rates. In fact, the real question asked by the consumer, “Why save at these paltry rates when I can buy it now and enjoy it?” The concept consume later and enjoy the interest rate return is gone.

Real estate took off for a while when the money market funds realized that 20 percent down in distressed markets had a very high rate of return as a rental. That hole has pretty much been plugged. Rents can rise, but if the unit is not occupied 12 months of the year, the owner faces a decrease in rental income. Owners don’t set rental rates, available supply does ( i.e. the house could rent for 1,000 a month and be rented only 4 months out of the year, where the house renting for 800 a month might be rented for the full 12 months).

The stock market is truly the last game in town, and a very hard one to regulate from a government perspective. The money the Fed has been pouring into the real estate market and the Treasury market eventually ends up in the stock market. You sell a T-bill to the Fed at face and you get investment dollars that you can plunk into the stock market “for a real gain.” Faites vos jeux.

The real question not being faced is the misallocation of resources. Spending too much money producing or harvesting resources that are not needed, eventually leads to bankruptcy; is what can be considered a bubble. Are we talking about something tangible like real estate which every now knows was a bubble? Or are we referring to other things that show all signs of a bubble, like retirement benefits, and health care.

The government uses economists to project what the economy is doing. And from my opinion, an economist can explain why something happened in the past, but doesn’t have the foggiest idea of what it portends for the future.

The precious metals market displays the two sides of owning something. You either hold it in your hand, or somebody else is holding it in theirs. You can own the gold or the certificate, or you have ETF’s or street name stocks. At some point when everything gets marked to market for accountability, investors will find out that there are 1,000,000 ETF’s and only 100 actual items held in trust. I’m not sure how this will set with the investment community when it is realized. Common sense suggests that it is being abused on a large scale.

So from a government perspective, do you inform the public or misinform the public as to the status of the economy? I think most will agree, that misinformation is the best route, otherwise real information makes consumers more aware and more cautious in their spending. And in the end, being negative about the economy can project itself and make things even worse.

The question you need to examine very carefully is; “Do you believe what the government is telling you about the economy is truthful?” It really doesn’t matter what your answer is, you could have cared less about what government thought when times were good. Let’s face it, we haven’t experienced times like this in our lifetime and our government claims the economy is doing fine. Go figure!


Anonymous said...

How long can a free market system exist if the Goverment misinforms the people? Spending less may do the country some good;most of our available products are from China anyway.

Anonymous said...

I'm always amazed at how some people don't see the u.s.a. as a producer.

People concentrate on 10 cent trinkets from china and not see the $600 iphones being sold to the world. People see 99 cent items and not see the u.s.a selling novel medicines to the world.

get a grip, for every million 99 cent plastic bs we import from china we export 10 million dollar pieces of high tech equipment to them, check ilmn for proof.

by the way, good job on not buying ilmn Joseph Oppenhiemer, just like many readers of this blog, you could not keep up with the times and adapt, and missed out on big gains. I hope when I'm old, I can adapt...

I personally am optimistic about the u.s. economy. I shorted subprime lenders in 2007 but now feel being long is the place and in some time i'm sure being short will be prudent. the economy comes in cycles, those who are perma-bears and perma-bulls, will miss out.

Rob in Nova Scotia said...

Bad example anon. The iphones are manufactured in China. In the long term though I am optimistic about fortunes of North America. We have lots of resources and relativly small population for size of space. Problem is that reset is going to be very painful and politicians everywhere are doing everything possible to avoid the default.

Jim in San Marcos said...

Hi Anon 3:57

Rob in Nova Scotia noticed a glaring error. If we produced the cell phones over here, they would be $2,000 to $3,000 apiece.

I did an article a few years back on the number of shipping containers that are dumped in this country, because there is nothing to put in them for the return trip to Asia. A lot of people in Arizona are using them as prefab basements. They run about $2,000. The base at Camp Pendleton, made a whole village out of them with cameras everywhere for training purposes.

The only thing made in the US in my house is canned goods, soap and cleaning products. Everything else is made in China.

The closest we come to "being made in the USA," is "Assembled in USA."

Most of our production markets are gone. Why pay someone in the US $10 an hour when you can pay someone else in another country four dollars a day?

If you are talking pill production, how many people does it take to hopper feed a pill machine?

The USA makes stuff, but stuff that needs very little labor--- unless you are talking about building homes and running restaurants.

Jim in San Marcos said...

Hi Rob

You touched on something, resources. This is what Asia is buying from us--not finished products.

Not sure where that leads, but as you suggest there will be a reset of what we can expect from government and what we eventually receive. It kind of sucks, but at least we know what to anticipate. The good news, we could be wrong and that's not a bad thing.

Anonymous said...

Since you touched on resources, did you read that China is using billions of gallons of water from California?

Joseph Oppenheim said...

Rising wages in China have made Mexico a manufacturing juggernaut. That with opening Mexican oil to foreign investment, etc has made an economic boom there, and with political changes, a rising middle class. The US, Mexico & Canada, together are an economic giant. Only nonparticipants are underclasses in the US because of Congressional/voter obstructionists. Sure, they could cause a real depression, but also low working class wages could also keep inflation away.