The Adventures of Charlie Champion

Last week, The Wall Street Journal had a headline ” recovery likely in 2nd half”.

Goldman Sachs has reported obscene profits for the 2nd quarter, and has declared for a major stock market rally similar in intensity to the ” Jimmy Carter is gone” rally of the early 1980’s.

Is it really that easy? Is the worst over?

Should we all get out our cut up credit cards and glue them back together, so we can ” shop till we drop”?

I don’t think so, unless you have a hidden money tree growing in your basement. If you do, don’t forget your friend Charlie.

The recession is officially 19 months long as of July 09. This represents the longest recession since the early 1930’s, which evolved into the Great Depression.

Are the Journal and Goldman right ? Has the government porkbarrell stimulus fiasco really saved the day?

Is Joe Bidenright ” we have to spend money to keep from going broke?” What ever that means!!!

No! No! and Double No!

What I have been telling you for almost 2 years now, is “we broke the machine”. This is not a simple case of throwing money at the problem to create a new bubble, The system has derailed and you can only fix  a broken system by letting it die, and creating a new and stronger one.

The fabric and structure of our society is realigning. Society’s priorities are changing, and fundamental change takes a long time.

This protracted change is what they call a Depression, and clearing a depression takes time.

Time to heal and recover, Time to use up inventory and develop new demand where it no longer exists. A basic change in the format and the foundation that society builds upon.

Debt reduction.

New industry.

New demands.

The death of old habits and a return to basics.

Something major has occurred, and stimulating it won’t work. Over stimulation is what caused it  to break.

The shakeout is just beginning, The cure is a bitter pill to swallow, and includes, bankruptcies, business liquidations, deflation, defaults, and eventually a possible hyper inflation.

Stimulating a depressed economy is having the effect of delaying the inevitable.  A new auto industry based upon reduced labor costs and new innovative designs would have been the best of free enterprise born out of a G M  chapter 11. It would have allowed for the elimination of oppressive union contracts and make American ingenuity competitive with the World once again.

Instead a government bailout will result in a micro managed mis managed auto company kept alive by government funding to save the unions.

In a 12 month whirlwind of corporate and  social extremism, we have witnessed  a cacophony echo of partisan changes and bailouts unprecedented in the history of the United States.

Insidiously, many of the moves have been motivated by an agenda of punishment and reward for political affiliations rather than for the good of our beautiful America as a nation and unified people.

At a watershed time in history, the near collapse of our economic system has seen bailouts in the $ hundreds of billions, to pay off the labor unions (see UAW, Teachers, et al) , the cronies at Wall Street Banking firms (namely Goldman Sacks) where most of our treasury and finance leaders have  apprenticed, and various insurance and banking entities.

The $Trillions that have been spent to prop up and stimulate appeared to be very focused towards  ideologically friendly companies.

Fannie and Freddie got into trouble by lending to subprime minority borrowers. The have been bailed.

The Car dealerships forced out of business while the Auto manufacturers were being nationalized, were predominantly Republican contributors.

The money has flowed and continues to flow as quickly as the printing presses can churn out the paper, but the recipients have been suspiciously partisan.

This is why it is so troubling that the Obama administration has taken such a tough stance directed towards CIT Group.

The White House has chosen this struggling lending Institution as the focus test “line in the sand”. Cutting off the lifeline offered to so many others.

This primary lender to small and medium sized businesses, is being left to fend for itself as it struggles to stay afloat, while the Administration has continued to catered to the banks that service major corporations and investors have been bailed out.

Letting them fail is a major blow to small businesses that depend upon CIT to fund their inventory and weekly payrolls.

The administration has also squashed a bipartisan effort to rescue come of the car dealerships set adrift by the GM and Chrysler bailouts. 

Partisan politics is understandable, but not at the expense of the innocent American public.

Despite our government intelligentsia insisting that we are in a recession, they are wrong. We are at the beginning of one whopper of a Depression.

In a recession, the economy gets a nose bleed, and possibly a mild fever.

Traditionally Dr Fed will tell us to take a few aspirins, get a good night’s sleep, and get back to business as usual , in the morning.

In a Depression, the economy is in the process of dropping dead, with a cure beyond the miracles of modern economic medicine.

Businesses have failed, with hundreds of thousands still in a death throe.

People have lost their savings, their jobs, and their homes.

New waves of loan defaults are on the way:

1. Prime Adjustable Rate Mortgages(PARM’s) Credit worth people who bought bigger and more expensive than necessary, by using the leverage of clever mortgages, which ballooned in 5 or 6 years(2010-2012) so they could refinance their much move valuable homes, or sell them at a profit prior to the adjusting.

2.Commercial Real Estate mortgages. A. The flood of retail store closings and mall bankrupcies has just begun as consumer spending continues to shrink.

                                                                            B. There are hundreds of thousands of small and medium commercial companies in construction supply, or commercial maintenance or manufacturing or any other commercial industry, who are literally holding on by their finger nails. I see it every day, and I hear it in the frightened voices of my customers and suppliers.Many of them are failing, and will take the commercial/ industrial real estate market down with them.

3. Home equity loans- Their time is due. Too many people pulled equity out of their homes and now there is less and less collateral in their homes to cover their loans.

4. Credit Card defaults.The banks are squeezing the card holders with shrinking limits and rising interest and penalties. To many who lost their jobs and their savings, credit cards represented a very expensive way to keep afloat. But not for long.

The final death of our economy is being delayed by the misguided attemps by the government to prop up  the “old economy” by pumping $ trillions into the dying economy to keep business functioning at artificial OLD levels.

All of this money is not creating anything new except for a massive government funded bubble. And we sadly know what inevitably  happens to bubbles. Coupled with the oncoming depression, the bubble burst is appalling to imagine. 

Prop up the banks, even though their mismanagement and duplicity helped cause this final mess(We should have let the weak ones fail)

Bail out the auto industry. They are too important and their labor unions deliver a lot of votes.(The unions were the yolk that made US auto makers non competitive. Let them go chapter 11, reorganize, and get rid of the grandfathered union benefits)

Now its insurance companies, then health care companies and widget manufacturers and energy producers. The government will run everything, and bankrupt us all, meanwhile new resources are diverted from new entrepreneurs to prop up the old dinosaurs.

Have I bummed you out yet?

I need a break.

Much more later.

The U S gross domestic production contracted by 5.7% in the first quarter of 09

The World economy is forecast to contract by 3% for all of 09.

In a world of steady population increases, and a standard of living which has been improving worldwide for the better part of 20 years, a contracting economy is dramatic and dangerous.

In the U S , real estate values have been the savings account, which gave people the freedom to borrow and spend. Home equity was alway an easy loan in a market that increased steadily .

Retirement funds have been traditionally  augmented by the cushion that our home equity provided.

The crashing real estate market has been a severe blow to our psyche.When the steep decline in Wall Street wiped out our retirement savings, we could no longer look to our home equity as an alternative  hidden cushion.

Defaulting loans and home foreclosures has left many parts of the country looking like ghost towns, and the ripple effect has affected all aspects of our economy.

Every reported slight increase in pending home sales is examined  with wishful optimism, but the sad truth is , any glimmer of optimism is fueled by short sales and foreclosures sold by the mortgage companies; most  at a loss.

The economic recovery can not begin until home prices stabilize and begin to recover.

With the inventory glut of available homes equal to almost a full years supply, values are still falling.

Property values can’t begin to recover with the economy stuck in a cycle of higher savings and lower spending.

The stagflation which we have talked about many times, is getting a stranglehold on any recovery.

World wide, factories have a glut of excess capacity, built for the bubble economy, which is now deceased.

With the Democrats agenda of big spending and massive stimulation, the Treasury Department is running the printing presses on a 24/7 basis.

This excessive growth in the money supply has only just begun to trickle into the general economy.

This trickle will soon become a torrent, as the Fed hopes to pay back the   $ trillions  in borrowed funds with inflated dollars. The potential for this unprecedented money expansion to trigger a hyper inflation recalls visions of modern day Zimbabwe, and post WW I Germany. Both resulted in scenarios of wheel barrow loads of paper currency to purchase a loaf of bread.

If you depend upon a fixed income to survive, be very cautious.

More later

I happen to be CEO of a small import export business, in the construction supply industry.

My business is down almost 40 % year to year. Several of my largest credit worthy customers have filed Chapter 11. My bad debt is growing, and the phones barely ring during the height of the construction season.

I have been forced to lay off 5 workers, and reduce the hours of my other 10 employees.

If this is economic stimulation I must be missing something. With state and federal taxes increasing in a dozen direct and indirect ways, I feel squeezed,

People have become mean spirited and very antagonistic.

Every day I speak to customers and suppliers  around the country, Almost every one of them tells me that they are laying people off, cutting back hours, and cutting expenses at every turn.

Small business is struggling to survive.

Despite the Stock Markets being 40 % above their March lows, I don’t believe this recovery is real. This economy is still dropping, The glimmers of rebound that “they” keep telling us about, represent the optimism born of Spring and warm weather.

The Federal Stimulus spending bill has made a bad situation worse because:

1. Investors and the public are mislead into thinking that all the money being thrown at the problem economy will make the problem go away.

The spending psychology has seen the markets go up almost 35% off their March lows. The public sees this performance, and accepts that things must be getting better. They are tempted to put money back into stocks. They chase the market after the bounce has almost run its course, in a vain attempt to recoup their losses and replenish their retirement savings.

Chasing a running market bouncing off a deep dive is a futile strategy destined to fail.We are not at the beginning of the next boom, and the bottom of our depression has not been seen yet.

2. The stimulus money delays a real recovery by keeping bad businesses afloat. Instead of letting the incompetents die off they are keeping alive dead wood for political agenda.

If General Motors and Chrysler had been allowed to fail on their own without bail outs, new American entrepreneurs would rush in to fill the void with viable new lean companies, and the American spirit of investment.

What should have been a 2-3 year shakeout and restructuring in a free market is destined to become a prolonged 10 year, slow recovery,(If it ever recovers from all of the interventions)

3 Basic laws of economics have been ignored. When a corporation goes broke due to a  faulty business plan, stock holders, bond holders, and labor unions should all suffer a proportionate loss.

In the case of the auto bailouts and subsequent bankruptcy, the labor unions have come out as the big winners, while the bond holders have been left holding a bag of pain. Rewarding the unions as political allies at the expense of the rule of law and free enterprise , sends a very stilted message of  distrust and legal disregard.

Politicians should not decide the outcome of free market movements for partisan reasons.

4 The current upward trend in stock prices is ultimately a fools gold fake out. The recession is a depression, and we appear to be doing everything possible to duplicate the errors of our predecessors in the early 1930’s.

Those who do not study history are doomed to repeat it.

The era of bubble economics is over. We have broken the engine which drove our economy. The banking system has been bailed out and regulated but not fixed.

The final bubble, which the government is attempting to inflate, to pull us out of this disaster is the US Treasury.

When this bubble pops from too much hot air too fast, who will bail out the treasury?