The Real Economic Forecast

Where is this Going?

It’s possible that I could be wrong, but something about what’s happening in the economy leads me to suspect that despite the rosy prognostications of Government bureaucrats, and the even rosier hopes of some market analysts, I don’t think the improved GDP growth numbers for the third quarter are going to mean much for the long-term health of the economy.  For one thing, the government has had to revise every quarter downward as they adjust their numbers to better fit reality.  These first numbers are raw at best, and propaganda at worst, and may bear little or no resemblance to what is actually going on.  For another thing, I’ve noticed a trend, and I suspect you’re going to notice it too.  Fuel prices fell with the ugly end of summer, and they’ve recently begun to tick up anew.  I suspect this will tell us the direction of the economy in two months or so, if history is a guide.

As I have discussed at length before, our economic prospects are linked to many things, but few are more important to growth than the price of energy.  Through the first half of October, gasoline prices fell at the pump because the economy was doing poorly and producing few new businesses.  By mid October, the price decline suddenly reversed and we watched the cost per gallon begin to tick upward again. As I have explained ad nauseum, once the prices tick back past the $3.50/gallon boundary on gasoline, or the $4.00 threshold on diesel, you can expect the temporary increase in growth we saw in the end of the 3rd quarter begin to be choked off.

There is always a lag to these things, but what should have offered you the tip on the economy’s underlying condition was when fuel prices began to decline well before Labor Day weekend.  That’s a sign of a struggling economy, all else being equal, and it should have been noted with trepidation.  I knew the numbers for August were going to be abysmal long before they eventuated.  The price of fuel continued to slip, but some time in the last part of the third quarter, we saw a turnaround in growth.  The reason is simple:  With the prices of fuel in decline, economic activity increased, consumers had more to spend on other things, and we saw a brief uplift.  I suspect that as this little bubble grows, the prices of fuels will follow.  As they reach higher, they will begin to suck all of the oxygen out of the economic room, once again.  When that happens, well, you know the rest.

At the same time all of this was going on, Texas was seeing record heat and a continuing drought(that persists for most of the state even now.)  In that period, Texas began to experience rolling brown-outs, and threats of them, as our once enviable electrical grid could no longer support the demand.  We’ve had to shut down a number of coal-fired power plants in Texas due to EPA regulations, and with no new plants to replace them, and more plant closures almost certain in the coming year, the prospects are going to worsen.  Barack Obama’s obsession with the elimination of coal-fired plants is going to be the death of Texas, but hey, Texans didn’t elect him anyway, so why should he care?  This political aspect aside, Rick Perry has been somewhat successful in getting some companies to relocate here, but they’ll find it difficult to function when they can’t turn the lights on.

At the end of it all, it was her superior understanding of this particular facet of the economy that had made me most hopeful Sarah Palin would run for president in 2012.  Most politicians are blissfully ignorant of how thoroughly dependent growth is on energy.   They will soon discover it if Obama has his way.

Now comes some very realistic analysis to which you should pay close attention.  Despite all the assurances of impending improvement, and the ostensibly good news of last week’s Euro-deal, you should still prepare for all of that to collapse.  As Liam Halligan reports in the Telegraph,  this deal, this latest round of bail-outs offers not much hope of failure. As he rightly points out, with all of these government bail-outs, the natural signaling in the free-market is short-circuited, which means people take actions based on conditions that are largely ore even entirely artificial.  It’s much like Treasury forcing all banks to take TARP money during the crisis of 2008, because they realized that by giving assistance funds to some banks, but not to others, they would be signaling which banks were in trouble.  Rather than permit depositors to draw their own conclusions, and make rational choices, what they did was to intentionally obscure which banks were healthy and which were not.  This sort of tinkering is part of what got us here from the outset.

Halligan’s basic warning boils down to a suggestion that the prideful Euro-set will not accept, but is nevertheless the best advice he could give them:  Let Greece default, openly, and boot them from the Euro.  Dump Portugal too, says Halligan, because as he points out, it is “absurd” to think of Portugal as having the same monetary stature as Germany.  This is what you get when politicians interfere in the markets: Unbridled chaos and fakery, and this is what we are now experiencing.  When the Euro-deal fails, as it almost certainly must, Wall Street and markets around the globe will lose all the value they’ve gained in recent weeks, and then some.  Mr. Halligan concludes as follows:

“The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So “euroquake” fears, once viewed as outlandish, are gaining pace. Despite Thursday’s deal, and all the reassurances of a “durable solution”, the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy, the eurozone’s third-biggest economy, and the eighth-largest on earth, would make Lehman look like a picnic.”

“The eurozone must be consolidated. World leaders should similarly force European banks to disclose their losses, we all take the hit and then we move on. Instead, we are served-up, in ever more complex variants, the same “extend and pretend” non-solutions. It gives me no pleasure to write this, but I give this deal two weeks.”

Indeed, what Halligan predicts looks bleak, but as he reminds, it needn’t be the case.  Just like in our own domestic policies, this is being done by people who are largely ignorant of the workings of markets and the conditions that drive them.  The problem is, they always do what politicians have done since the first elections on record: They kick the can down the road hoping for one more postponement.  There w ill come a day that such tactics will offer no further hedge, and I suspect it will be sooner rather than later.

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  • http://twitter.com/politiJim PolitiJim (@politiJi

    Very good analysis Mark. The Euro solution will be exposed in about 2 weeks and the BEST case scenario is that it puts an enormous debt weight on Europe for 2 years dampening their economies any more. Yes that is the BEST case scenario.

    EVERYONE needs to read the book AFTERSHOCK. These are the ONLY guys to correctly nail the 2008 meltdown based on underlying economic factors. And the dynamics of the debt buble and inflation bubble have yet to hit. READ IT!

  • SeanStLouis

    PlitiJim – I've read Wiedemer's books. He and his buddies are right when they talk about hedging inflation with bullion. But, surely, they realize that central banks are the source and cause of all inflation. So, why do they advocate an international digital currency and global central banking? I'll tell you why. It's because they, and those like them, see inflation and the bubble/bust cycles as a profit center. Unfortunately for them, the era of fiat currency is coming to an end and their assets will become as worthless as the paper they're printed on.

  • SeanStLouis

    If you want a more realistic and honest view about what's going on (yes, I'm implying that Wiedemer is dishonest) read Ron Paul's "End The Fed".

  • SeanStLouis

    Mark – In my opinion, and simply put, the graphic you used to head this post very well illustrates what is happening. Crash and burn.

    There is still time, however, and we all need to continue spreading the word.

    • http://www.markamerica.com MarkAmerica

      Thanks Sean. I think it's pretty clear that the relationship between the costs of energy and our economic prospects is firmly established.

      • SeanStLouis

        Yes, I think your analysis is good food for thought. However, while energy prices can be a good indicator of the health of our economy it can also be deceptive (keep the word "deceptive" in mind as you read what I say next).

        We significantly tapped our strategic oil reserves last summer, to "alleviate Libyan supply disruptions". The price of gasoline in the U.S. went down shortly thereafter. But get this – at the time of the "tapping", our supply was still quite higher than it was in 2010. I smell a rat.

        Regarding what Halligan had to say:

        "…force European banks to disclose their losses, we all take the hit and then we move on. Instead, we are served-up, in ever more complex variants, the same “extend and pretend” non-solutions. It gives me no pleasure to write this, but I give this deal two weeks.”

        More people need to stop whatever they're doing and wake up. People like Halligan are warning us. Unfortunately, I think many don't WANT to listen to who they may consider to be the 'chicken littles' of the world and prefer to ignore what is happening. Let's just hope it all goes away!

        We are in serious trouble, my friends.

  • http://twitter.com/BDWatcher bdwatcher (@BDWatche

    I have posted this on twitter several times…

    "When Bank of America announced that it was moving its derivatives-laden portfolio at its subsidiary Merrill Lynch over to its bank holding company, it said it was merely responding to pressure from some of its partners to take advantage of the holding company’s higher credit rating. It would also reduce the need for the bank to post an additional $3.3 billion in collateral because of the recent downgrade it suffered at the hands of Moody’s last month.

    But the real reason, according to Bloomberg, is that the FDIC insures the bank but not Merrill Lynch, and in the event of a failure in its derivatives holdings, the FDIC, courtesy of the U.S. taxpayer, would pay off depositors who suffered losses." http://thenewamerican.com/economy/markets-mainmen

    As the economy spirals down due to the failure of the Euro.. the US tax payer will again be left holding the bag. There is still trillions of dollars of derivatives outstanding. With the FDIC holding the bag to insure the banks deposits.. My friends, it will be the end of our financial future to be paying trillions of dollars to failed banks. Where will the government get all this money? Debt, we don't know debt, yet. 85 banks have failed so far this year. If the Euro falls, there will be an epidemic of financial failures. People will go to the banks to withdraw all their money and none will be available. Then what will we do?

    • http://www.markamerica.com MarkAmerica

      I reported on this last weekend BDWatcher. It's astonishing that they get away with this as the world watches the spectacle in Zuccotti Park.

      • SeanStLouis

        Is food and gasoline to become the new currency?

        "Then what will we do?" is a serious question that we must ask ourselves and everyone around us. History has shown us what to expect if something isn't done very soon to change direction.

        I have been sharing what I know with anyone who is willing to listen and have been quite successful in convincing my friends, family, and neighbors about the probable outcome of our current situation. I have also volunteered for local community emergency response initiatives for many years. We all can make a difference in this regard and I encourage everyone to do the same.

        Although I believe that we still have time to avert disaster we can see the shift accelerating and it may soon be time to brace for impact.