Click to go to Six Degrees From Dave Home Page

Dow Repeats Great Depression Pattern Despite $1.25 Trillion Stimulus Boondoggle

Posted on July 5, 2010
Filed Under Economics, News | 1 Comment


After nearly two years This Administration keeps passing the buck on responsibility. It has kept the union workers of GM and Chrysler employed (with taxpayer money). It has made sure that most government employee union members got their annual raises for sleeping on the job (with taxpayer money). We were told that the Auto bail outs would avoid bankruptcy – two months later they declared Chapter 13 despite hundreds of billions of tax payer dollars invested. Shareholders of auto companies were shafted while Union members became owners of the companies they helped destroy with ludicrous pensions and benefits unequaled unless perhaps you count Greece.

It made sure that its voters got handouts mislabeled as “tax cuts” which was actually truly labeled a “tax rebate” just like the Bush administration had tried a year prior. This one was even worse – it became a robin hood switch where tax papers gave their taxes to pay those recipients who never paid taxes; and wasn’t enough to do more than cover one or two utility bills. Major campaign contributors collected billions off government stimulus (with taxpayer money) whereas the promise was this would be an infrastructure investment – only 7 cents on the dollar went to actual road, bridges and other true construction projects.

$1.25 Trillion dollars of opportunity gone from the money stream – forever. And for all the promises to pass the Stimulus, we still went above the 8% unemployment rate it was suggested it would avoid if passed.

The Congressional Budget Office itself a non partisan governmental body declared that at this rate of spending, the national debt will be 100 percent of Gross Domestic Product: National Economic Bankruptcy. Look it up, it’s all true

Credit: CNBCa>

The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation.

The Dow Jones Industrial Average is repeating a pattern that appeared just before markets fell during the Great Depression, Daryl Guppy, CEO at Guppytraders.com, told CNBC Monday.

“Those who don’t remember history are doomed to repeat it…there was a head and shoulders pattern that developed before the Depression in 1929, then with the recovery in 1930 we had another head and shoulders pattern that preceded a fall in the market, and in the current Dow situation we see an exact repeat of that environment,” Guppy said.

The Dow retreated 457.33 points, or 4.5 percent last week, to close at 9,686 Friday. Guppy said a Dow fall below 9,800 confirmed the head and shoulders pattern.

The Shanghai Composite is seeing a very rapid collapse, falling below 2,500, which suggests the major fall in the Dow, he added.

In the European markets, Guppy says Frankfurt’s Dax is witnessing a different pattern to London’s FTSE.

Guppy uses the broad trading band as measurement- giving the Dax a downsize target of 1,500. The same head and shoulders pattern seen in the Dow can also being seen in the FTSE, he added.

“The economy is still in the gravitational pull of the Great Recession,” said Robert Reich, former US labour secretary. “All the booster rockets for getting us beyond it are failing.”

Related Articles: Monetary union has left half of Europe trapped in depression

Ambrose Evans-Pritchard:

“Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing,” he said.

California is tightening faster than Greece. State workers have seen a 14pc fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19bn (£15bn) deficit.

Can Illinois be far behind? The state has a deficit of $12bn and is $5bn in arrears to schools, nursing homes, child care centres, and prisons. “It is getting worse every single day,” said state comptroller Daniel Hynes. “We are not paying bills for absolutely essential services. That is obscene.”

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.

Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weninger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

“Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m.”

Washington’s fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.

The housing market is already crumbling as government props are pulled away. The expiry of homebuyers’ tax credit led to a 30pc fall in the number of buyers signing contracts in May. “It is cataclysmic,” said David Bloom from HSBC.

Federal tax rises are automatically baked into the pie. The Congressional Budget Office said fiscal policy will swing from
a net +2pc of GDP to -2pc by late 2011. The states and counties may have to cut as much as $180bn.

Investors are starting to chew over the awful possibility that America’s recovery will stall just as Asia hits the buffers. China’s manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.

On Friday, Jacques Cailloux from RBS put out a “double-dip alert” for Europe. “The risk is rising fast. Absent an effective policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011,” he said.

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. “It’s appropriate to think about what we would do under a deflationary scenario,” said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to “strict scrutiny”, a comment I took as confirmation that the Fed Board is arguing internally about QE2.

Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

Comments

One Response to “Dow Repeats Great Depression Pattern Despite $1.25 Trillion Stimulus Boondoggle”

  1. Maureen Sharib on July 5th, 2010 1:49 pm

    You need a wider audience than the recruitosphere for this stuff Dave. It’s all interesting and I commend you putting finger to keyboard to express yourself.