Wednesday, April 1, 2009

When Bad News is Good News

Several bits of economic data came in today, all of it bad. ADP (not the official Labor Department report, which usually follows the ADP report on Friday) estimates that 742,000 jobs were lost in March, which is a very big number, and the ISM's Manufacturing Index came index came in at 36.3, which is positively dreadful. Anything below 50 is indicative of contraction. Yet the DOW rose 152 points on the day. Supposedly, it is because that 36.3 was not as bad as forecast. I'm not buying it. The market has a mind of its own day-to-day, and you can't read too much into things like this. If you get obsessed with every moment to moment movement, you'll lose your mind. A couple of intermediate term trends are bothering me right now, one of which was hinted in this particular article:
Further increases look likely in the months ahead because of TALF and PPIP, and because the American Recovery & Reinvestment Act will inject roughly $100 billion into the U.S. economy in the current quarter.
In other words, various government "stimuli" are temporarily boosting economic "activity," which is certainly not the same thing as economic growth, just in case you were getting hopeful. Better nip that one in the bud. If you did the read-along on America's Great Depression over at Voxiversity, you'll recognize this sort of behavior. Early on in the Great Depression several industries, particularly agriculture, were the beneficiaries of heavy government interventionism attempting to achieve price support. It worked for a little while, at heavy taxpayer expense, but then petered out as the forces of the free market overwhelmed pathetic governmental attempts to defy economic reality. Back when I was reading the book, I remarked that this time around doesn't look all that much like the Great Depression. At this point I would have to take that back; it's just that the beneficiaries have changed slightly. Government is still doing the same things, some at a much greater scale and far earlier in the downturn. Back then, it was simply unconscionable to cut wages. This time, it is unconscionable to let housing prices fall. But the economic contortionism looks very similar. This appearance of price support is the trend that is bothering me. Several key markets are looking as if they have bottomed, commodities in particular as I remarked about on oil a few days ago. Is this real, or a last gasp due to government spending initiatives before the final leg down and we hit true bottom? I'm not sure. This matters (at least to me) because I would like to be in commodities for the long-haul. The government printing presses are at full tilt, and the liquidation of malinvestment caused by the previous inflation has not been allowed to occur. Therefore, neither has the reallocation of capital necessary for sustained growth. This means that when the inflationary rubber hits the road, the money will not flow where our government handlers are expecting it to flow, which is to say that it will not reward America's present capital allocation. It will likely simply drive up commodity prices again. Which is to say, it will flow to Russia and the Middle East, not to Wall Street. And it will flow into the forex markets, where it will find fewer willing buyers than last time around. The G20 is meeting. Their mission, though they'll never say it, is to keep the lie alive, the lie being that the US dollar is worth something. The US dollar is the world's reserve currency. If the US dollar is worth something, then factories in Asia can keep selling to the US in exchange for Treasury debt, and Middle Eastern and Russian oil producers can keep shipping their oil here, and Americans can keep printing dollars to buy more expensive houses and SUV's and everybody can consider himself rich. If the lie is revealed and the dollar isn't worth anything, then we've all been duped, everybody is poor, and we will all have to find a new racket. The truth simply must be supressed awhile longer. The lie is just too good. The conspiracy has more plans for it. A racket that good isn't easy to come by, and can't be given up easily. That's your economics report from me tonight. Scott out.

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