Notes on the Economy – February 2012

Another month has gone by as the financial meltdown continues.  As we move past the halfway point of the first fiscal quarter, the cancer that’s growing under skin of our economy is getting more difficult to hide, no matter how much pretty makeup we apply.

OWS – Terrorists?

With the passage of the Defense Authorization Act of 2012, the government is doing all it can to nip this little Revolution in the bud by threatening to jail protestors indefinitely for exercising their First Amendment Rights in the name of National Security.  Apparently, calling every politician in Washington a traitor to the Constitution is the same sort of thing as flying a fully loaded airplane into a New York City skyscraper or shouting “fire” in a crowded movie theater.

Added to that list of potential “terrorists” is anyone who criticizes the government, its monetary policy or the banking industry.  I guess that includes all of us who write in this forum!

The kicker of it, is that now that the President and Congress have basically declared themselves the Dictators of the Republic, they don’t have to actually arrest a single activist in order to frighten most of us into submission.  I’m working under the assumption that they can’t arrest everybody, so I’m going to keep on doing what I’m doing.  

Honestly folks, how much internment can a bankrupt government actually pull off?  Somebody’s got to build the jails, pay the guards, and deal with all the negative publicity that would result from such a blatant violation of individual Rights!   

If I’m wrong, I guess I’ll see ya’ll on the inside!

The Stock Market

The Dow Jones Industrial Average is now over the 13,000 mark as the market continues to rally on ANY crumb of so-called “good news” in the financial markets.  A sign of economic recovery, you ask?  Not really.  If you look closely at how increases in prices have kept pace with the rise of the equities market, it becomes obviously clear that the current “rally” is actually the much-predicted acceleration of hyperinflation due to the actions of the government and the Fed four years ago. 

Jake Towne, of Nolan Chart fame, correctly points out in his weekly radio show along with Walt Thiessen and Gene DeNardo, that significant changes in money-creation tend to take 3-5 years to actually trickle down to everyday economic transactions.  In 2008, the government injected over a trillion dollars into the economy out of whole cloth, and that error in judgment has been compounded by zero interest rates promoted by the Fed and a budget deficit that continues to run over a trillion dollars.

The initial beneficiaries of all that money were the banks, as evidenced by their unbelievable profits despite the fact that they stopped lending money to average Americans.  As these extremely wealthy people started to spend their money like a bunch of bachelors at a Vegas stag party, eventually the money started to trickle down to you and me.

But here’s the rub.  Wages are STILL stagnant, and the higher number of workers in the labor pool has lowered the average labor rate for those still looking for work.  The result is that the  influx of devalued currency is only cutting into your bottom line, making it even harder to make ends meet.  Yes, the employment outlook appears a little better under this scenario, but productivity and housing, which are the truest measures of economic recovery, have not seen any change since 2008 except highly affluent neighborhoods.  Most poor neighborhoods like Las Vegas, has gotten measurably worse.

In the retail market, GAP and Target are reporting that same-store sales are up 4% and 7% respectively for February, despite a prediction of a 1.5% drop by retail analyists.  Up from what you ask?  Why, up from last year’s numbers, of course!  Does that count the number of actual sales, or just the dollar amounts paid?  The measurement is just measuring dollars spent, nothing more.  So what the report is actually saying is that in the retail sector, people are spending more dollars than they did a year ago for purchasing essentially the same things?  Exactly.  Warmer weather may allow people to actually get out to the stores, but it doesn’t necessarily inspire them to spend money they don’t have for things they don’t need.

Europe and Asia

That economic cancer that we call Greece is not only malignant, it is now fully metastasized into the lymphatic system of the Euro.  At this point, even a full amputation of the Greek State is unlikely to cure the patient.  German banks continue to demand more and more austerity from the Greeks while its people are suffering to the point of an all-out Revolt.  The European Central Bank is now in a lose/lose position where if they cut Greece out of the Euro, hyperinflation and Revolution is sure to follow and if they keep Greece in the Euro, a complete collapse of the currency is sure to follow.

In a shocking move, the International Swaps and Derivatives Association (ISDA) has announced that Sovereign Credit Default Swaps (CDSs) associated with Greek debt will not have to pay – at least for now.  Apparently, a “stuctured default” of Greek bonds is not enough of a trigger to compensate all of the hapless investors who happen to still own Greek debt.  If you recall, in a column I wrote exactly one year ago, I predicted that these types of derivative securities would never pay out because to do so would spell certain disaster for the Euro.  It appears the ISDA has proven my point.

A study released earlier today revealed how dangerously close to an apocalyptic disaster Japan had come in the wake of last year’s epic earthquake and tsunami.  Economically, Japan is described as being on the “razor’s edge” of total collapse in the event of another major disaster striking the island nation before it has had the chance to divest itself of its dependency on nuclear power.  It harkens back to the simple wisdom that as it is unwise to build skyscraper on a swamp, it is unwise to build so many nuclear power plants on one of the most seismically active nations on the planet!

US Treasury Bonds

James Paulsen of Wells Capital Management today declared that 2012 will be a “lousy” year for US Treasury bonds.  I have to admit, I did a double-take when I read this one!  As we know, 10-Year Treasury bonds have been trading for less than a 2% yield since last September as investors have been fleeing equities markets and European sovereign debt for the perceived safety of the United States.  Paulsen predicts that as the stock market continues to climb to pre-crisis levels, the yield on US Treasuries will climb as well as investors decide to cash in on stocks instead.  In fact, he predicts that by the end of 2012, the yield on the 10-year Treasury bond may be as high as 3.5%, which would be a disaster for everyone who purchased bonds since last September.  Most analyists are predicting that the 10-year bond yield won’t go over 2.9% by the end of December.

While I strongly disagree with Paulsen’s assessment that the stock market recovery is the result of any sort of “recovery” besides inflation, he may be onto something with regard to the bond yields.  If he is correct, then there will be two very dangerous results.

1)     The market value of bonds sold between September 2011 and now would plummet as investors seeking greater yields will attempt to dump their low-yielding bonds for bonds that will promise a yield that is closer to inflationary rates.  This will greatly reduce the investment balance sheet values of companies that depend on these bonds for their capital needs such as insurance companies and pension funds, which will then result in reduced economic security for everyone.

2)     The deficit will grow even faster as the government will be forced to sell bonds at unsustainable yields, which may force them to declare the much-feared, “bank holiday” in which the currency will be artificially devalued overnight, effectively cutting in half the savings of everyone in the country.

Manufacturing Outlook

Surprise, surprise!  Durable goods orders fell to a three-year low in January despite all of the ra-ra-ra in the media that manufacturing in this country was on the mend.  Opps!  It turns out that all that positive manufacturing data was due to retailers selling their wares at below-cost during the Holiday shopping season and producers misinterpreting those results as an actual economic recovery.  It also didn’t help that so many of the tax incentives to manufacturers disappeared at the close of 2011.

Sorry guys, sounds like we messed up.  Again.  Again, sorry.

Things Going As Predicted

As predicted, the February economic indicators performed exactly to my expectations with absolutely no surprises, although I continue to underestimate the people’s capacity for self-delusion when it’s supported by the media’s full-court-press to convince us that things are better than they actually are. 

When your cancer is so bad that you’re pissing blood and you look as though you’re four months pregnant in your armpit, all the denial in the world isn’t going to make you feel any better.

Latest posts by Bill Gee (see all)

The views expressed in this article belong to the author/contributor and do not necessarily reflect the views of the Nolan Chart or its ownership


  1. Gatspy says

    Perhaps someone can reply. The federal government and the federal reserve has monetized trillions of dollars. It is a swap between the United States Treasury and the Federal Reserve where no money is created except electronically. The Federal Reserve gets another trillion dollars and buys a trillion dollars in United States Treasury Bonds. Hence, the United States owns seventy percent of its own debt. So what happens to this funny money when the interest rates on Treasury bonds changes and how does it affect the American people? That is a very informative article I enjoy it when the writers have hyperlinks so that I can read and get a better understanding of what is being discussed. 

Leave a Reply

Your email address will not be published. Required fields are marked *