Mish's Global Economic Trend Analysis

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• Long-Wave, Fixed Investment, Inventory, and Demographic Cycles all Downwardly Converging
• Sunday Funnies 2010-10-03 World's First Bureaucrat; Cobb County Georgia Spends $78,000 on Mules Jack and Jill, has Second Thoughts, Finds No Buyers
• California Legislature and Schwarzenegger Agree to Kick the Can; Corporations Vote with their Feet
• Government Share of Personal Income Tops 30%

Long-Wave, Fixed Investment, Inventory, and Demographic Cycles all Downwardly Converging Posted: 03 Oct 2010 11:06 PM PDT Inquiring minds are reviewing a chart of Total Loans and Leases and also a chart of Quarterly Real Final Sales of Domestic Product for clues about the strength of the alleged recovery. After a review of the charts, my friend "BC" shares some of his thoughts regarding the converging Long-Wave, Fixed Investment, Inventory, and Demographic Cycles. The possibilities are not pretty. Real Final Sales of Domestic Product Year Annualized QoQ Annualized YoY Q2 '08 +1.10% +1.80% Q3 '08 -3.90% +0.15% Q4 '08 -4.60% -1.93% Q1 '09 -3.90% -2.86% Q2 '09 +0.22% -3.07% Q3 '09 +0.41% -2.00% Q4 '09 +2.07% -0.33% Q1 '10 +1.06% +0.94% Q1 '10 +0.90% +1.11% Avg. -0.74% -0.69% Avg Since Q1 '09 +0.13% -1.04% Total Loans and Leases at Commercial Banks My friend "BC" writes .... US GDP Poised to Contract The trend rate of bank lending and money supply ex incremental annualized government spending implies that the private sector probably decelerated to around 0% or slightly negative early in Q3 and is poised to contract again hereafter. Consider what real final sales/demand would have been had the government not borrowed and spent 30% of private GDP over two years. The average trend rate of real final sales since the secular '00 peak is 1.6% vs. the average long-term trend rate of 3.4%. This means that the US economy has experienced a 14-15% decline (24-25% per capita) in real final sales/demand below what would have otherwise occurred had the long-term trend rate continued from the secular peak. Were the trend to persist through the rest of the decade, as the secular LW (Long-Wave) debt-deflationary precedent implies, the loss of US real final sales/demand from the long-term trend rate will be 30% (~40% per capita), which is likely to be the level at which the US labor market underutilization rate eventually reaches. Downwardly Converging Cycles Moreover, we are likely completing a weak Kitchin Cycle (inventory rebuilding) as a part of the simultaneously downwardly converging Kondratiev Cycle (Long-Wave), the Juglar Cycle (fixed investment), and the Kuznets Cycle (demographic swings). If so, the post-'00 trend rate will likely decelerate well below the 1.6% rate to around the 1% rate or lower, implying the risk that real final sales/demand will be 35-40% (as much as 45-50% per capita) below the long-term pre-'00 trend rate by the late '10s or early '20s. Note that bank loans grew 9%/yr. (5-6% in GDP deflator terms) from after WW II to the absolute peak in '08 and 7% from '74 and '82 (4-5% deflated), whereas real final sales grew 3.2% from after WW II to the peak in '08 and 2.9% from '74 and '82. A deceleration of real final sales/demand of 35-40% or so below the long-term trend implies a similar scale of decline in bank loans of 35-40% (-4%/yr.) from the secular '08 peak to converge by '20 with the longer-term trend growth of final sales from the onset of the secular reflationary phase in the early '80s. As mentioned earlier, the loss of growth of final sales/demand per capita from the secular peak will be closer to 50%, which is approximately the scale of decline per capita likely to have occurred from the '85 secondary peak for US oil production by '20. The loss of bank loans and final sales/demand, with total government /GDP of 36-37% (and 56-57% of private GDP), implies a combined loss of GDP and resulting government receipts totaling no less than 8% of GDP or $1.1T/yr. avg. in federal deficits for the decade just to keep nominal GDP from contracting. Loan Growth and PE Contraction Growth of bank loans, final sales, and thus GDP and corporate earnings will have decelerated from the 6-7% secular bull and long-term trend to 4% by 2020. The implication for stock prices given the tendency for the P/E to contract and earnings to track GDP is for the SPX to fall to the 300s-400s at some point. Unfortunately, by the late '10s to early '20s, the doubling or more of the US debt held by the public will have a net interest burden reaching and then surpassing 25% of government receipts (absent large tax increases and/or cuts in spending). The larger the deficits in the meantime, the sooner the US government will reach the fiscal day of reckoning. Please note that the above analysis is not a prediction that the S&P 500 will fall to 300. Many things can happen along the way. However, it is important to keep an open mind on these things. The S&P 500 certainly could fall that low. Moreover, were it to do so, it would be consistent with the convergence of the various cycles as described above, and it would also be consistent with Japan's Two Lost Decades. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Sunday Funnies 2010-10-03 World's First Bureaucrat; Cobb County Georgia Spends $78,000 on Mules Jack and Jill, has Second Thoughts, Finds No Buyers Posted: 03 Oct 2010 08:12 PM PDT In a belated edition of "Sunday Funnies" please consider Mules Jack and Jill run up $78,000 bill Cobb County taxpayers became the proud owners of two mules in August 2009. County officials bought the animals to put them to work on a proposed historic farm, a living museum where schoolchildren would learn how farmers tilled the land a century ago. But Cobb put the cart before the horse. Or rather, the mules before the farm. Several key steps in the development of historic Hyde Farm had not been completed by the time the county bought the mules. More than a year later, some are still not resolved. In the meantime, Cobb taxpayers have footed the bill for $78,000 on the mules in the past year — including purchase price, a caretaker, food and other expenses. With the cost rising, the county has been trying to sell the mules since June but has not found a buyer. The problems don't surprise the Alabama farmer who sold the animals to Cobb officials. "Most of that bunch, you know, they didn't know a mule from a donkey," said Terry LeDuke of Vincent, Ala. While $78,000 is a tiny fraction of the county budget, that amount could have covered the price of building a medium-size playground or a pavilion restroom structure at a county park. And the episode demonstrates how poor planning can lead a government to get in over its head. Once purchased, the mules quickly started racking up other expenses that now stand at $63,490, the largest of which was $25,488 to pay a caretaker to feed, groom and exercise the animals. The caretaker, Cindy Cason, is the wife of a county transportation department employee, Randy Cason. County workers also spent 701 man hours — an estimated cost of $15,000 in taxpayer money — to work on four different mule-related projects. For three months, county staffers have been trying to find a new home for Jack and Jill. They are advertising them on eBay, Craigslist and several specialty mule websites but are not getting good offers for them, Canon said. LeDuke, the Alabama man who sold Cobb the animals, said it's a bad time to sell mules. "Ain't no market for them. Right now, it's winter coming on and somebody's got to feed them all winter." LeDuke told the county he'd be willing to buy the mules back for $3,000 — less than half of what he sold them for. When LeDuke learned how much Cobb had spent on his former animals in the past year, he said, "Good God almighty ... That's a bunch of [expletive]." Archeologists Unearth Bureaucrat It's very difficult to top that story but in honor of government bureaucrats as well as government mules and jackasses, here is this week's cartoon feature. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

California Legislature and Schwarzenegger Agree to Kick the Can; Corporations Vote with their Feet Posted: 03 Oct 2010 06:11 PM PDT The budget impasse in California is over. The governor and the legislature agreed to a "compromise" that does essentially nothing and solves no long-term problems. Please consider California Budget Deal Ends Impasse With Vote Expected in Days California Governor Arnold Schwarzenegger and top lawmakers came up with a compromise to close a $19.1 billion deficit and give the state a budget, ending a record three-month impasse with a vote expected next week on the spending plan. The accord doesn't raise taxes, as sought by Democrats, nor does it dismantle the state's welfare system, proposed by Republicans, the leaders said yesterday. Passage of the plan would clear the way for Treasurer Bill Lockyer to borrow about $10 billion on Wall Street by issuing short-term notes needed to pay bills until tax revenue comes in later in the year. Legislative aides briefed on the details said last week's framework cuts spending by around $8 billion, less than the $12 billion the governor had proposed, and holds education spending about the same as last year's level, around $49 billion. The framework also would suspend for two years a tax break that let companies deduct part of net operating losses in a previous year from current-year taxes, said the two people briefed on it. Nothing was solved by this "compromise". The state's massive welfare system is still intact, the massive pension problem was shoved aside, and the bloated state prison system was not even discussed. Instead, the state will borrow $10 billion of the $19 billion it needs, hoping the revenue comes in later. It won't. California will be back at this next year with a different legislature and governor in place. Perhaps democrats can win the Governor's office and enough seats in the legislature to raise everyone's taxes enough to support more free give aways to unions, illegal aliens, and other groups with their hands in taxpayer pockets. Corporations Vote With Their Feet Wealthy taxpayers and corporations are not bothering to wait for the vote. They have had enough. Nevada News and Views reports Companies Fleeing California For Utah Over Confiscatory Tax Rate Computer software giant Adobe, computer game monster EA Games, and Internet auction king ebay are abandoning California to set up shop in Utah. Why? California's horrid business climate and high taxes. Adobe Systems, maker of a suite of graphics programs such as Adobe PDF, Illustrator, Photoshop, and InDesign, have announced that they are building a $100 million facility in either Salt Lake City or in nearby Utah County, Utah. The facility will bring thousands of jobs to Utah over the next few decades. In May the Internet auction company ebay also announced a major new facility to be built in Salt Lake City. The $287 million data center will also bring hundreds of new jobs to the Bee Hive State. Not to be forgotten, games maker Electronic Arts opened its new facility in July in Salt Lake City where around 100 employees are already at work. These companies fleeing California's horrid business climate are not alone. There has been a steady flow of businesses out of California for the better part of a decade. As California's political morass worsens, as its budget woes increase, and as her politicians are proven incapable of making the hard budgetary decisions to take power from unions and chop unnecessarily lavish social programs, the state's jobs are bleeding out. California is an a freefall the end of which is still unseen. It should be noted that Utah is a right-to-work state. The article mentions by name, about 70 companies that have left California. Many of the names are highly recognizable. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Government Share of Personal Income Tops 30% Posted: 03 Oct 2010 09:29 AM PDT On Friday, the Wall Street Journal reported US Stocks Rise, Boosted By Upbeat Income, Spending Data The U.S. Commerce Department said consumer spending rose 0.4% in August after rising the same amount in July. Incomes, meantime, increased by 0.5% in August after a 0.2% rise in July. The numbers were slightly better than expected. Economists surveyed by Dow Jones Newswires had forecast spending and income would both climb by 0.3% in August. Not only is the data from August, but raw numbers without an explanation as to what really happened paints a very misleading picture. Jed Graham at the Capital Hill Blog explains how Government Propped Up Personal Incomes In August News accounts are highlighting the fact that the 0.5% increase in personal income in August was the biggest of the year. But the data weren't evidence of a healthy and sustainable private-sector expansion. Government transfer payments accounted for 60% of the increase, and the government share of personal income crept further into record territory at just over 30%. That's up from just above 25% before the recession. Transfer payments include Temporary Assistance for Needy Families (TANF), Supplemental Security Income (SSI), Food Stamps - now called Supplemental Nutrition Assistance Program (SNAP) , medical insurance (Medicaid and Medicare), and housing assistance. Transfer payments are social schemes to redistribute the wealth. However, given the US is running an enormous deficit, one can argue these schemes are funded by the government printing money and giving it away. Regardless of how you look at it, government share of personal income at 30% is outrageous. Moreover, more than half of that 30% is transfer payments, an equally outrageous happening. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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