by Tyler Durden
Whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession. Where is this number now: +0.8%, and declining fast. Feeling lucky?
Of course, in no other previous recession, was the US Fed holding $3.5 trillion in securities and increasing at a pace of $85 billion per month.
Source: Dept of Commerce
We first noticed the first signs that the economy was beginning to soften about three months ago. Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession. We cite the following as evidence.
Retail sales (both total and non-auto) have dropped for three consecutive months. This has happened only five times since 1967—-four times in 2008, and one now. Vehicle sales have tapered off with May and June being the two weakest months of the year. Consumer confidence for both the Conference Board index and the University of Michigan Survey are at their lowest levels of 2012.
On the labor front, June payroll numbers were weak once again and averaged only 75,000 in the second quarter. The latest weekly new claims for unemployment insurance jumped back up to 386,000 and the last two months have been well above the numbers seen earlier in the year.
The ISM manufacturing index for June fell 3.8 points to 49.7, its first sub-50 reading in the economic recovery. The ISM non-manufacturing index for June dropped to its lowest level since January 2010. Most recently the Philadelphia Fed Survey for July was negative (below zero) for the third consecutive month.
The small business confidence index declined in June to its lowest level since October and has now dropped in three of the last four months. Plans for capital spending and new hiring have dropped sharply.
Despite all of the talk about a housing bottom, June existing home sales fell 5.4% to its lowest level since the fall of last year. In addition mortgage applications for home purchases have been range-bound since October.
Core factory orders, while volatile on a month-to-month basis, have declined 2.6% since year-end, and the ISM numbers cited above indicate the weakness is likely to continue.
The Conference Board Index of leading indicators has declined for two of the last three months and is now up only 1.4% over a year earlier, the lowest since November of 2009, when it was climbing from recessionary numbers. The ECRI Weekly Leading Index is indicating a recession is either here now or will begin in the next few months.
The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead. In addition the foreign economies will be a drag as well. A number of European nations are already in recession and others are on the cusp. The debt, deficit and balance sheet problems of the EU’s southern tier are a long way from any solution, and will not remain out of the news for long. China is coming down from a major real estate and credit boom, and is not likely to avoid a hard landing. The Shanghai Composite is in a major downtrend, declining 28% since April 2011. The view that China is immune because of their unique economic system reminds us of what people were saying about Japan in 1989.
The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat. It couldn’t do it in 2000 or 2007 when it had plenty of weapons at its disposal. Now there is little that the Fed can do, although it will try since it will not get any help, as Senator Schumer so aptly pointed out at Bernanke’s Senate testimony. In sum, we believe that the stock market is in store for a huge disappointment.
- Index of U.S. Leading Indicators Falls More Than Forecast – Bloomberg (bloomberg.com)
- Economic data add to signs of slowing recovery (rep-am.com)
- 12 Signs That The Next Recession In The United States Has Already Begun (judgementofamerica.wordpress.com)
- This is what a recession really is (business.financialpost.com)
- 12 Signs Showing The Next Recession In The U.S. Is Underway (GLD, TZA, FAZ, FAS, INDEXSP:.INX) (etfdailynews.com)
- Recession Now More Likely (blogs.wsj.com)
- 12 Signs That The Next Recession In The United States Has Already Begun (investmentwatchblog.com)
Insider trading is illegal — except for members of Congress. A Wall Street executive who buys or sells stock based on insider information would face a Securities and Exchange Commission investigation and quite possibly a federal prosecutor. But senators and congressmen are free to legally trade stock based on nonpublic information they have obtained through their official positions as elected officials — and they do so on a regular basis.
On Sunday night, CBS News’ “60 Minutes” looked into this form of “lawful graft.” The “60 Minutes” story exposed, among others, then-House Speaker Nancy Pelosi for participating in a lucrative initial public offering from Visa in 2008 that was not available to the general public, just as a troublesome piece of legislation that would have hurt credit card companies began making its way through the House (the bill never made it to the floor). And it showed how during the 2008 financial crisis, Rep. Spencer Bachus (R-Ala.) — then-ranking Republican on the House Financial Services Committee — aggressively bought stock options based on apocalyptic briefings he had received the day before from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson.
The report was based on an explosive new book by Peter Schweizer that will hit stores on Tuesday. It’s called “Throw Them All Out: How Politicians and Their Friends Get Rich off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison.” (Full disclosure: Schweizer is a close friend, a former White House colleague and my business partner in a speechwriting firm, Oval Office Writers.
The “60 Minutes” story only scratches the surface of what Schweizer has uncovered. For example, Bachus was not the only member of Congress trading on nonpublic information during the financial crisis. On Sept. 16, 2008, Schweizer writes, Paulson and Bernanke held a “terrifying” closed-door meeting with congressional leaders. “The next day Congressman Jim Moran, Democrat of Virginia, a member of the Appropriations Committee, dumped his shares in ninety different companies . . . [his] most active trading day of the year.”
Rep. Shelley Capito (R-W.Va.) and her husband “dumped between $100,000 and $250,000 in Citigroup stock the day after the briefing,” Schweizer writes, and “at least ten U.S. senators, including John Kerry, Sheldon Whitehouse, and Dick Durbin, traded stock or mutual funds related to the financial industry the following day.” Durbin, Schweizer says, “attended that September 16 briefing with Paulson and Bernanke. He sold off $73,715 in stock funds the next day. Following the next terrifying closed-door briefing, on September 18, he dumped another $42,000 in stock. By doing so, Durbin joined some colleagues in saving themselves from the sizable losses that less-connected investors would experience.” Some members even made gains on their trades, at a time when ordinary Americans without insider knowledge were seeing their life savings evaporate.
Schweizer also documents numerous examples of how members of Congress of both parties — including Pelosi, Senate Majority Leader Harry Reid and former House speaker Dennis Hastert — have used federal earmarks to enhance the value of their own real estate holdings. They have done so, Schweizer shows, by extending a light-rail mass transit line near their property, expanding an airport, cleaning up a nearby shoreline, building roads and bridges, and beautifying land and neighborhoods nearby — in each case “substantially increasing values and the net worth of our elected officials, courtesy of taxpayer money.”
Perhaps the most disturbing revelations come from Schweizer’s investigation into the Obama Energy Department and its infamous “green energy” loan guarantee and grant programs, a program Schweizer calls “the greatest — and most expensive — example of crony capitalism in American history.” The scandal surrounding Solyndra — the now-bankrupt, Obama-connected solar power company that received a federally guaranteed loan of $573 million — is well known. But Solyndra, Schweizer says, is only the tip of the iceberg. According to his research, at least 10 members of President Obama’s campaign finance committee and more than a dozen of his campaign bundlers were big winners in getting tax dollars from these programs. One chart in the book details how the 10 finance committee members collectively raised $457,834, and were in turn approved for grants or loans of nearly $11.4 billion — quite a return on their investment.
In the loan-guarantee program alone, Schweizer writes, “$16.4 billion of the $20.5 billion in loans granted went to companies either run by or primarily owned by Obama financial backers — individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.” That is a staggering 71 percent of the loan money.
Schweizer cites example after example of companies that received grants or loans and documents their financial connections to the Obama campaign and the Democratic Party. And he shows how “the [Energy] department’s loan and grant programs are run by partisans who were responsible for raising money during the Obama campaign from the same people who later came to seek government loans and grants.”
There is much, much more, which means that when Schweizer’s book hits stores Tuesday, heads in Washington are going to explode.
- Huge House majority backs insider trading ban (tarpon.wordpress.com)
- Throw Them All Out: An Interview with Peter Schweizer (fool.com)
- Throw Them All Out: An Interview with Peter Schweizer (dailyfinance.com)
Having finished his “damage control” PR campaign (for now) Ben Bernanke decided to discuss… Europe, urging the Big Banks to help prop up the system over there.
Exclusive: Bernanke breaks bread with top bankers
After completing a series of public lectures in Washington, D.C. last week, Federal Reserve Chairman Ben Bernanke quietly slipped into New York City for a private luncheon on Friday with Wall Street executives.
Fortune has learned that attendees included Jamie Dimon (J.P. Morgan), Bob Diamond (Barclays), Brady Dougan (Credit Suisse), Larry Fink (Blackrock), Gerald Hassell (Bank of New York Mellon), Glenn Hutchins (Silver Lake), Colm Kelleher (Morgan Stanley), Brian Moynihan (Bank of America), Steve Schwarzman (Blackstone Group) and David Vinar (Goldman Sachs).
Sources say Bernanke spoke at length about monetary policy, in an apparent effort to persuade attendees that they needed to take a more active role in helping to deal with the European debt crisis. He spent virtually no time discussing regulation, although that mantle got taken up by both Dimon (domestic regulation) and Schwarzman (global regulation).
The lunch was held at the New York Fed, and hosted by NY Fed president William Dudley. Before leaving New York, Bernanke separately addressed NY Fed staffers.
This is an interesting progression from the last time Fed officials went to New York:
Fed met with major financial firms to discuss Volcker Rule impact
Documents released by the Federal Reserve on Monday show that its officials met with some of Wall Street’s major financial firms earlier this month to discuss Volcker Rule implications.
The Fed met with representatives from Goldman Sachs, JPMorgan Chase and Morgan Stanley on Nov. 8, according to Bloomberg.com. Bank lawyers H. Rodgin Cohen and Michael Wiseman from Sullivan & Cromwell were also present during the meeting.
According to the documents, the meeting entailed a discussion on “possible unintended consequences of the rule.”
Notice that during discussions of regulations, it was “Fed officials” who attended these meetings, NOT Bernanke himself (at least he’s not mentioned anywhere). So why is Bernanke, the head of the Fed wanting to meet with bankers to discuss Europe instead of Regulation?
You guessed it: Bernanke realizes Europe is totally and completely bust… and that the coming fall-out will be disastrous for the global banking system.
After all, the ECB spent over $1 trillion trying to prop up the system over there. And already the effects of LTRO 2 (which was worth $712 billion) have been wiped out. If you don’t think this sent a chill up Bernanke’s spine, you’re not thinking clearly.
Consider the following facts which I guarantee you Bernanke is well aware of:
- 1) According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans… the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
- 2) The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
- 3) The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the ENTIRE EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
- 4) Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
So we’re talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank (the ECB) that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.
I guarantee you Bernanke knows about all of the above. He also knows the ECB’s used up all of its ammunition fighting the Crisis over there. And lastly, he knows that the Fed cannot move to help Europe without risking his job. After all, even the Dollar swap move the Fed made in November 2011 saw severe public outrage and that didn’t even include actual money printing or more QE!
Moreover, Bernanke knows that the IMF can’t step up to help Europe. The IMF is, after all, a US-backed entity. How many times has it requested more money to help Europe? Maybe a dozen? And the answer from the US has always been the same: “No.”
Finally, the G20 countries have made it clear they don’t want to spend more money on Europe either. They keep dangling a bailout carrot in front of the EU claiming they’ll cough up more dough if the EU can get its monetary house in order… knowing full well that they actually cannot provide more funds (otherwise they’d have already done it).
This leaves the private banks as Bernanke’s last resort for a “backdoor” prop for Europe. If private meeting with the TBTFs that focuses on Europe doesn’t scream of desperation, I don’t know what does.
And do you think the big banks, which have all depleted their capital to make their earnings look better, actually have the money to help Europe? No chance.
Which means that Europe is going to collapse. Literally no one has the firepower or the political support to stop it.
Remember, we’re talking about banking system that’s a $46 trillion sewer of toxic PIIGS debt that is leveraged at more than 26 to 1 (Lehman was leveraged at 30 to 1 when it went under).
Again, NO ONE has the capital to prop the EU up much longer. And the collapse is coming.
If you’re not already taking steps to prepare for the coming collapse, you need to do so now.
- Bernanke Just Admitted the Fed Failed… Not That More QE Is Coming (zerohedge.com)
- Exclusive: Bernanke breaks bread with top bankers (finance.fortune.cnn.com)
- Revisited: Three Data Points That Prove Europe Cannot Be Saved (zerohedge.com)
- We Are Nearing the End Game For Central Bank Intervention (zerohedge.com)
Now at first blush, this statement might sound highly critical and moralistic, like saying that Bernanke is feeding the worst habits of the economy, when in reality the economy needs to be cut off from cheap leverage and go cold turkey.
And since elsewhere in his interview, McCulley slammed moralistic interpretations of macro-economics, this seems odd.
But here’s the full line from McCulley: “Suddenly the Federal Reserve is the bartender at an AA Meeting: You Keep cutting the price, but nobody’s drinking!”
So he actually wasn’t making a judgment, but rather just describing the reality of an economy that’s in deleveraging (or as put it, in a liquidity trap). When people want to have less debt, no amount of rate cutting will want them to take on more. When people are quitting alcohol, lowering the price doesn’t matter (or at least, it’s not the price that will make them change their mind.).
Unlike in past recessions, where households were sensitive to changes in the price of credit, in this economy they’re not, and Bernanke’s actions do very little.
So according to McCulley (who sounds very Richard Koo-like, when talking about all this) the answer is: Fiscal, fiscal, and more fiscal stimulus. Let the government lever up, so that the private sector can finishing levering down without an economic collapse.
- Two Investing Geniuses Share Their Take On The Economy, Markets, And What Government Needs To Do Now (businessinsider.com)
- Guest Post: There Will Never Be A Failed US Treasury Auction… Until There Is (zerohedge.com)
- McCulley: We Are In a ‘Liquidity Trap!’ (ritholtz.com)
- Paul McCulley on Fed policy and “liquidity trap” (investmentpostcards.com)
- This Is Paul McCulley’s #1 Fear For The US Economy (businessinsider.com)