Rebel Traders – Analysis Without The Hype

On Wednesday evening, President Obama will hold his State of the Union address. Advance talk is circulating that President Obama will emphasize a new push to create jobs in America. Short of creating a Works Projects Administration (WPA) type program (established during the Great Depression and was the nations biggest employer before World War II, providing nearly eight million jobs) there is simply not much the President can do.

He can spent more stimulus funds that create a slew of temporary projects which give the illusion that the jobs market is improving, but creating real jobs that last is something that is nearly impossible for the Government to create.

It is often said that unemployment lags the real economy. But, it is different this time. Yes, it really is different this time. How do we know it is different?

The chart below depicts how many weeks people are unemployed. At no time has the duration of unemployment been as high as it is now. The chart says it all…

The President will probably try to convince the people that his administration has already created or saved nearly 1 million or more jobs from the stimulus package last year. But if it is based on the calculations discussed in my previous post on the subject (President Changes Definition), then I would be worried about any promises of new jobs.

All through the late 70’s and the 80’s American’s were told how great it would be in a ‘new global economy’. And many others warned that America’s strength in manufacturing would suffer. And suffer it did, today the United States makes very little. Everything from steel processing, electronics, and even customer support for your American bank is in another nation.

For America, the ‘new global economy’ has been a bust. As consumers we want everything to be cheap, and in that demand for lower and lower priced products they are being manufactured in countries where their employees can be paid just a fraction of what it would cost to be made here in America. Some companies even resort to manufacturing products in third world countries where child labor is used and unsafe working conditions prevail. This is what we get when the Wal-Marts of the world take over and push family run business out, and push cheap products made in China and other countries on the consumer while paying their employees here next to nothing.

Cheap products are one thing, but what are we really sacrificing just so we can get that toy for $5.00 cheaper, or the cheap products (with some even being unsafe) from the million dollar stores across America?

As Americans, are we guilty of creating the demand for cheaper and cheaper products? Are we responsible for the decline of America’s once great dominance in the world as a manufacturer? Or has all of this been a result of a global economy that seized the United States consumer with the enticement of cheap products? All good questions and no easy answer. But I would like to see some large American corporations actually make their products here for a change.

Take Apple (AAPL) for example. Not one product they sell is made here in America that I am aware of. Because everything revolves around ‘more profits’ they have to keep finding ways to make the products cheaper so they employ cheap labor in other nations. We can’t force American companies to manufacturer their products here because they would just move the company to another nation. Perhaps the only way to restore America to a goods producing powerhouse is to boycott any company that does not make their products here at home. But even that would be nearly impossible, because not much is made here anymore so we have little choice.

American’s are held hostage by every company that sells us our televisions, sneakers, clothes, and even the toys for our children. 

Where does it end?

In just one more week Ben Bernanke’s term will expire. The confirmation of Ben to another term will reach fever pitch this week as the voting process gets underway. This morning one more Senator (John McCain) has indicated he will vote against Ben Bernanke’s re-confirmation.

Over the past few days the talk has turned to what would happen if Ben should lose his bid for a second term as the Federal Reserve chairman. Unfortunately, much of this talk is about what would happen in the short term, not long term impact. Some in Washington have stated that failing to appoint Bernanke to a second term would send the wrong message to Wall Street and the markets would react very negatively, and they could not allow that to happen.

Washington, and the Senate specifically, appear to only be concerned with what happens tomorrow, and not what happens months and years from now. I agree, if Ben Bernanke fails to win a second term the stock market most likely will react negatively in the short term. But, this would not be a reaction by the market thinking the economy could get much worse if Ben walks. No, the stock market reaction would be in response to the very real possibility that the transfusion tubes that are now connected between the tax payers and the financial firms would be severed.

As has been written by me, and many others, the rally in the markets witnessed over the past many months has, in part, been nothing more than easy money for Wall Street provided by the tax payers to the tune of nearly $1 Trillion dollars, and a safety net of trillions more again on the backs of the tax payers. Wall Street loves Ben Bernanke, he has enabled them to obtain money, much of it very cheaply through the numerous lending programs and bailouts. But none of this would have ever been necessary had the Federal Reserve been on the ball in the first place. Had the Federal Reserve been doing its job it would have maintained a stable financial system, albeit not as robust as some may have liked. Instead the Federal Reserve ignored the warning signs, contributed greatly to making the problems worse, and after the financial collapse responded in a manner which only puts the financial system at even greater peril instead of dealing with the root issues. But dealing with the root issues would not be popular in Washington because it would mean allowing the financial system to ‘reset’.

I don’t care about the near term impact on Wall Street, I care about what is going to happen 6 months from now, or 2 years from now, and even longer. Sure the markets won’t like it if Ben leaves, But that will only be because Wall Streets free lunch card will be in jeopardy of being torn up and wall street will be forced to earn money by actually earning it, not handed to them.

Ben Bernanke, through his massive and unprecedented quantitative easing has laid the groundwork for the an even larger financial disaster as the programs are merely an extension of what got us in this mess in the first place.

Ben Bernanke has failed to recognize, act upon, or even acknowledge that the Federal Reserve was instrumental in destroying the financial system which led to the stock market crash of 2008 and 2009. When housing prices were skyrocketing he claimed it was fine, even when others were screaming that it would lead to a financial meltdown.

A man who proclaims to be a student of the Great Depression, Ben Bernanke has only enacted policies that, if left intact, places the United States on a road to financial ruin. The United States can not keep borrowing to address the here and now without it having grave consequences down the road.

To claim that Bernanke rescued the financial system from collapse is akin to a firefighter who sets fires and then responds to help put them out. In the real world a person who does something like that goes to jail. But in the Government they are put up for another term. And was Ben really putting out the fires? No, he may have responded to the fire, but his actions only subdued the fire temporarily. And as we say in the fire service, the chances of a re-kindle are very high.

The long term health of our financial system is at stake. One should not be focused on what would happen the day after. Ben should not be re-confirmed no matter what the short term implications are. There would be some who say ‘oh no, the market nose dived because they failed to reappoint Bernanke, are they nuts?” The only nuts would be those who think that continuing the same failed policy of Ben Bernanke is the right thing to do. For me, I’m thinking about the financial health of the United States in the years ahead, and that is reason enough for me to urge the Senate to vote against re-confirming Ben Bernanke.

NO on Ben Bernanke for a second term

Again with thanks to the nice work over at ‘News From 1930‘ I am able to match the statements from the Wall Street Journal on September 15, 1930 to the actual chart from the Great Depression.

Interesting how it is that these very statements sound like they are from today. Little has changed over the span of 80 years… everyone will keep trying to sell you a bag of worthless paper (stocks)… and ‘hope’.

(click image for full size)

Great Depression - WSJ Articles From The 15th of September 1930

With thanks to the author of News From the 30’s for their research into archives from the Wall Street Journal of the Great Depression era.

News related to the market superimposed on the Dow Industrial Average of the time.

(Click image to see full size)

Market News From the Great Depression

This article appeared in my local newspaper…

By Dr. Mark W. Hendrickson, For The Philadelphia Bulletin

“There is nothing inevitable about another depression. We have a simple choice: We can repeat the errors of the past or we can avoid them.”

Those were my words, Feb. 8, 2008. It’s time for a “depression watch” update.

Unfortunately, it’s mostly bad news. While another 12-year depression still isn’t inevitable, the post-financial-crisis policy blunders of Presidents Hoover and Roosevelt are being re-enacted with eerie similitude by the current president.

Hoover devastated America’s exporters by signing the Smoot-Hawley Tariff Act, triggering a devastating trade war. President Obama triggered retaliatory tariffs from Mexico when he appeased his Teamster supporters by blocking Mexican trucks from entering the United States, unilaterally repudiating NAFTA. He also elicited retaliatory tariffs from Canada (other countries will follow) by inserting a “buy American” clause in his “stimulus” bill. As in the 1930s, international trade is collapsing today. Foreigners suddenly find themselves earning fewer dollars to buy American products. Nor can they buy as much American government debt as before.

Hoover’s Reconstruction Finance Corp., which interfered with needed economic adjustments by channeling federal dollars to various money-losing businesses, was reincarnated as the Bush/Paulson TARP program, which continues under Team Obama.

Both Hoover and Roosevelt crippled economic activity by raising income tax rates. In addition to the massive tax hike already scheduled for next year when Bush’s tax cuts expire, Obama seeks additional tax hikes on higher-income taxpayers.

FDR burdened poor and middle-class Americans with higher excise taxes on everyday purchases—milk, gasoline, check-writing, stamps, beer, etc. Today, Obama wants to saddle Americans with the mother of all excise taxes—the cap and trade tax on coal, oil, and natural gas. This will raise the price of driving cars, heating and cooling homes, and powering businesses. Most other prices will rise, too, since energy is used to produce almost everything we consume, including food, clothing, and shelter.

During the Great Depression, runaway federal spending and ballooning deficits diverted capital from private investment into government programs. Today, private credit is again contracting as the U.S. Treasury absorbs capital (an astounding $1,442.8 billion in recent months). In the name of “stimulus,” Obama is asphyxiating the private sector by hogging all the economic oxygen—capital.

Obama shares FDR’s overt hostility to private, profit-making firms. FDR forced businesses into government-regulated cartels. Obama simply nationalizes them. FDR plundered corporate treasuries with his “undistributed profits” tax; Obama is targeting corporations’ offshore earnings. FDR persecuted successful businesses by threatening them with criminal prosecution for alleged antitrust violations. Obama’s Assistant Attorney General for Antitrust, Christine Varney, is making similar noises today. FDR crippled economic expansion and job creation by creating a climate of fear and uncertainty among the business community. Obama’s unfortunate diatribes against profits are having the same chilling effect today.

Like FDR, Obama doesn’t trust or doesn’t want the private sector to create jobs. The only “good” jobs are government jobs, such as low-paying, taxpayer-funded, weather-stripping jobs instead of high-paying, private-sector, oil-extraction jobs. Obama is replicating FDR’s strategy of adding workers to the federal payroll (Civilian Conservation Corps, Works Progress Administration, etc.) through such measures as tripling the size of AmeriCorps and adding the Serve America Act. Just as FDR’s New Deal programs failed to reduce employment below 14 percent throughout the 1930s, Obama’s federal jobs will siphon resources from the private sector, thereby exacerbating overall unemployment. Team Obama even wants to regulate, control, and stifle those great incubators of private jobs—venture capitalists—even though the VC firms did nothing to cause our country’s financial mess.

FDR discouraged business activity by ignoring contract law when he unilaterally voided the gold clause in private contracts. Recently, Obama made corporate bonds—an important source of business financing—less attractive by abrogating bankruptcy law when he expropriated the property of secured creditors and gave it to his UAW allies.

Like FDR, who championed the 1935 Wagner Act (which led to massive work stoppages, lost profits, and fewer jobs), Obama seeks special privileges for labor unions. In addition to the UAW handout and the Teamsters favor, Obama supports the Employee Free Choice Act that would scrap secret ballots and make it easier for union-organizing intimidators to “persuade” workers to unionize. He even threatened California Gov. Schwarzenegger with withholding $7 billion in federal stimulus money unless legislated wage cuts for unionized health-care workers were restored. To the degree that Obama strengthens unions, the result will look like the ‘30s—higher unemployment.

President Obama seems determined to be the second coming of FDR. This is economically irrational. Government couldn’t spend us out of economic depression in the 1930s, nor can it today. But runaway government spending and intervention do have the potential to create the worst depression that money can buy.

For the Obama/Pelosi/Reid axis to ignore history, and instead repeat the policy errors of the ‘30s, brings to mind Einstein’s remark about the insanity of doing the same thing over and over and expecting different results. If Team Obama persists in defying the inexorable laws of economics, it will inflict great hardship on Americans. This unnecessary tragedy is still avoidable, but only if we wake up in time and alter our course.

Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with The Center for Vision & Values at Grove City College.

Do you remember the Household Finance Corporation?

The company that is credited with being the first to offer unsecured loans in 1878 and invented the ‘installment plan’ in 1895…

Here, an advertisement for the Household Finance Corporation from 1935

And do you know where Household Finance Corporation is now?

All 800 Household Finance Corporation offices nationwide have been closed down and they no longer take any applications. They are in ‘run off’, simply retiring existing accounts where possible.

Ironic how the company that started the unsecured loan business would actually fail due to the blow up of debt from the very same lending practice…

From the UK Telegraph:

The International Monetary Fund has warned of “worrisome parallels” between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.

April 16, 2009 – This recession is likely to be “unusually long and severe, and the recovery sluggish,” said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop “feedback effects” gathering force.

Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. “The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping,” he said.

“The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today.”

Mr Strauss-Kahn called for a urgent action to “cleanse banks” of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.

“The impact becomes negative for debt levels that exceed 60pc of GDP,” said the Fund.

While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.

The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. “While the credit boom in the 1920s was largely spec­ific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact,” it said.[...]