Scary Charts---We're In a Free Fall

Most people get turned off as soon as a chart pops up but I think if you take the time to look at these from the 3/12/2010 Online Version of The Casey Report it will make you pause and think.


A4Driver

Free Fall

Dear Reader,

Our own Bud Conrad has a standard retort when presented with a testable economic hypothesis, “Let’s see what the data says!”

Along those lines, for no particular reason, this morning I found myself on the website of the St. Louis Fed, which is always good trolling ground for data – albeit data that first goes through a government filter.

The first chart that caught my eye was this, showing the history of surpluses and deficits in these United States. A couple of things are noteworthy, starting with how, until about 1970, the deficit picture remained largely unchanged. But then, in the 1970s, things started to go wobbly.

Could it have been Nixon’s closing of the gold window and the advent of a pure fiat system in 1971 that is the culprit? Sure seems that way to me. Regardless, if today’s free fall in government finances, especially in the historical context, doesn’t set off loud alarm bells in the back of your cranium, then you are not paying attention. Or you need to get off your meds.

Another chart from the Fed that I find notable is this, of the CPI. The airwaves and nettrons are still full of deflationary expectations and prognostications that gold, among other tangible assets, is in a bubble. Further, there is a loud cheering section for bonds. But looking at the CPI figure, other than a blip during the worst of the crisis, it sure looks like prices are remaining stubbornly high.

And if you think the price of stuff is high now, just wait until the monetary inflation begins to work its way back into the system!

Next up, and to the point about bonds, I would refer to the following chart showing the latest data on 30-year conventional mortgage rates. What does this tell you? To me, it says a lot. For instance, given that the mortgage industry has been nationalized – and it has – today’s low, low rates are reflective of nothing more than a massive meddling by our keepers.

With almost 10% of the nation’s mortgages now in arrears, and almost 5% in actual foreclosure, how does the government exit this industry without rates soaring to cover the inherent risk?
Answer: I have no idea.

Speaking of housing, here’s a somewhat less-than-cheery picture of recovery. As I have said before, and I say again now, if you are in a business that depends on a recovery in housing, give serious thought to building skills valued for a different career.

Recently, the press has made much of the fact that consumer debt has fallen. Including this reference out of the Financial Times today…

Americans reduced their household debt for the first year on record last year as they aggressively cut back on spending to cope with the recession, Federal Reserve figures showed on Thursday.
US household debt contracted by 1.75 per cent in 2009, according to the closely watched “flow of funds” data. It was the first annual decline since the Fed began tracking household borrowing in 1946 and marks a sharp shift from the euphoric borrowing that led to the recession.

Good news, right? No question, they have aggressively cut back on spending because, as you can see here, part and parcel with high unemployment, incomes nationally have taken a hard punch in the gut and remain doubled over.

But cutting back on spending is not the complete explanation for even the slight reduction in consumer debt trumpeted by the Financial Times.  This from MarketWatch earlier this week…

CHICAGO (MarketWatch) -- Credit-card debt has been falling for 16 straight months but consumers aren't paying off their financial obligations as much you might think. Instead, they're walking away from the debt, forcing credit-card issuers to write off as much as 90% of that reported drop, according to a new report by CardHub.com.
U.S. banks charged off a record $83.3 billion in credit-card losses last year. That makes up the bulk of the $93.2 billion drop in outstanding credit-card debt that was reported by the Federal Reserve for 2009.
Full story here.

In any event, while there have certainly been some small improvements in the economy from the depths of last year, it would be a mistake to assume those blips signal the sort of robust economic recovery that one hopes for following a “normal” business cycle downturn.

Simply, there is nothing remotely normal about what is going on just now. So, be careful in all the important ways. And with the S&P once again trading at about 23 times earnings, right at the top of the historic range, be especially careful in buying and holding stocks.