Make Kitco Your Homepage
Contributed Commentaries
  1. Kitco Metals Inc.
  2. Commentary Archive
  3. Bio

Why It Is Worse This Time -- Fundamental Reasons

Cass Freight Index suggests recession underway
Recently an excellent article in Zero Hedge underlined some very basic fundamental reasons for believing that the real economy is getting so bad that not even the government will be able to lie and deceive the market and the public much longer. 

The Fed has demonstrated that it can pump money into the banking system and make those casino chips available to hedge funds and other wealthy people attached to the banking system. But QE has been an abysmal failure worldwide when it comes to stimulating economic growth.

The Cass Freight Index chart above shows that both in terms of shipments (red line) and dollar value of shipments (black line), the zero growth line has now been penetrated. Indeed this more or less mirrors the pattern of stagnation shown in my IDW below, which coincides with the peaking of gold and commodities in 2011. The financial markets have partied on. But the real world economy has been suffering more and more pain. The shipping index reflects a picture that is out of sync with a stock market that is still not far from its all-time highs, even as basic commodities like oil and copper are in depression territory.

Deflationary Pressures Are on the Rise
Recently, Albert Edwards at Société General was quoted as saying: “We expect the acceleration of EM devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession. As investors realize yet another recession beckons, without any normalization of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008.
That statement absolutely makes sense to your editor. Despite massive QE, my IDW is now indicating massive deflationary forces are underway. In other words, as my IDW is now in the process of breaking below the five-year moving average, I’m expecting a waterfall event, perhaps every bit as daunting as the one you see with an Oct. 2008 bottom of 84.77 on an index that started out at 100.00 on 1/31/05.

The Zero Hedge article also showed an Import Export chart that looks a lot like the Cass Freight Index above, with both imports and exports contracting now. This has been a very accurate indicator of recessions in the past.

Why It’s Worse This Time

The implication of the statement from Albert Edwards that “this time expect a financial market rout every bit as large as 2008” is that this time it might actually be worse. I think there is a very high probability that it will be worse, because this time, it may well be that the Keynesian worldview/belief system on Wall Street may be destroyed beyond repair. I realize I may be voicing wishful thinking because I hate the totalitarian results that Keynesian economics is ushering in.

But as the Zero Hedge article points out, this time it is dramatically different because the Fed has never raised interest rates. It may want to raise rates so it does have some ammunition for “loosening” in the future. But every time it has tried to raise rates, the stock market, which knows there has really been no real recovery, has a hissy fit, to use David Stockman’s terminology. And so the Fed has time and time again backed away. Recently it has used its propaganda machine to con investors into thinking it will raise in September, but then China devalued its currency, which strengthened the dollar and led to prospects for an even weaker U.S. economy.

Hence raising rates in September is again very much in doubt. The problem is, even if the Fed were to raise rates by a miniscule ¼%, it looks like they are likely behind the curve, given that they will have very little ammunition to use. And given the rapidly softening global economy, it doesn’t seem as though it will have much time to raise rates, even one baby step at a time, without upsetting a global economy that is more leveraged than ever before. The Keynesian mindset that is a humanistically-driven model fails to recognize the reality within the four dimensions of time and space within which we all live before passing on to the next world.

So, dear subscriber, let me ask you the following question. What will happen to the Keynesian con game now as the next recession gets underway? What will happen when the Fed is not only unable to raise rates, but in fact will also be forced to engage in a Weimar Republic money-creating hyperinflationary binge, which of course will cause all the more debt that leads to still bigger and bigger problems in the future? At some point, the jig will be up and the con game will be over.

Michael Oliver provides a view from 32,000 ft. in the air with his structural-momentum work. He sees two major tectonic plates—stocks and gold—smashing into each other knowing full well an outcome that will be anything but tranquil lies right around the corner. For me as a fundamental analyst, what Michael is seeing in his agnostic, non-ideological models confirms what I as an Austrian economic proponent believe is inevitable. The only question is timing and for that I look to Michael as well as other technical analysts, my other favorite being Dr. Robert McHugh (you can listen to my interviews with either one of them at http://jaytaylormedia.com/audio/)

Jay Taylor
www.jaytaylormedia.com
www.miningstocks.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news