2013 Economic Outlook: Grim

Anyone still wondering why they call economics the dismal science need only take a look at the latest budget forecast from the Congressional Budget Office. It lays out a grim fiscal future no matter what voters and Congress do between now and Jan. 1. 

The current path leads straight to the fiscal cliff — nearly $500 billion in tax increases in 2013, combined with sharp cuts in federal spending. Without changing course, CBO warns, economic conditions in 2013 “will probably be considered a recession,” with unemployment around 9 percent late in the year. 

The CBO’s “alternative” scenario assumes that Congress will head off steep tax hikes and deep budget cuts. If that happens, the agency projects that unemployment and growth will remain at about the same levels as in 2012, with another $1 trillion budget deficit likely in 2013. 

If that sounds like a terrible choice, it’s because it is grounded in a stubborn belief that government spending is the main driver of the nation’s economy. Cut spending, the CBO economists figure, and you necessarily stall the economy. 

The dismal record of stimulus spending and quantitative easing over the last few years should by now have persuaded Capitol Hill, Wall Street and Main Street alike of the need for a different approach. 

That approach would combine restrained government spending, lower tax rates, entitlement reform, and the repeal of unwelcome government mandates that increase uncertainty. Letting American businesses, workers and consumers keep, save and invest more of the money they earn is the way to economic health. 

Whoever voters put at the helm of the ship of state on Nov. 6, they must insist on the plotting of a new economic course. 

However, I'm afraid it' too little too late. We're in for a tough road ahead no matter who wins this election.

US Economy At Risk For 2013 Recession

The latest data of durable goods orders, released Friday by the Commerce Department showed an increase of 4.2% for July but excluding transportation goods the order declined by 04%. 

In addition orders for capital goods fell 3.4% over the same month while the June figure was revised down to 2.7%. 

The latest data are not only very weak but are a sign of the weakest economic recovery since WWII according to several US economists and analysts. The decline in capital goods orders is a sign that US companies are hesitant to invest and expand their production capacity in light of global uncertainty. 

China, Europe and Brazil, once thought as the economic drivers to set the tone of recovery after the end of the economic recession in the summer of 2009, are now struggling themselves to keep their growth at a steady pace. 

We have seen large dips in economic growth in China to an annual rate of 8%, down from 11% during 2011, and continued fiscal and debt struggles in Europe which largely affect the US economic growth overall since both regions are crucial to the US production output and exports. 

US exports to both regions have been stagnating since 2007 due to a slowing demand from Europe and China. 

China in particular struggles with high inflationary pressures which lead the government to intervene through quantitative easing to ensure their economy does not overheat. That results in a net decline of production materials which in large part are imported from the US. 

Europe on the other hand is still not out of the woodworks when it comes to curbing the budget shortfalls and the debt/GDP ratios of some members which puts extra pressure on Germany, France and The Netherlands to control their inflation for the benefit of euro stabilization. 

The US economy continues to grow albeit at a very slow rate but should the durable goods orders continue to falter then the risk of a double-dip recession in 2013 is not unimaginable. 

This scenario would result in the unemployment rate rising again to 9%, currently at 8.3%, when the expected budget cuts and tax increases take effect early 2013. 

The Federal Reserve has yet to give a sign that it is willing to implement QE3 but given the latest data it is expected that the next FOMC (Federal Open Market Committee) may hint at a higher possibility of bond buy-back programs to curb long-term interest rates even further and to encourage business borrowing and spending to keep the US economy for retracting any further. 

Written by Nick Doms © 2012, all rights reserved.

False Unemployment Numbers

The US Labor Department declared that the unemployment rate has dropped to 8.2 percent. While economists applaud the latest news, the reality is improvement comes only after 3 million jobless Americans are unaccounted for. 

While job creation exceeded expectations for January, those experiencing long-term unemployment — those jobless for longer than six months, that is — remains at a record high. 

In a new report from the Pew Charitable Trusts, it’s revealed that those suffering the longest from the unemployment epidemic exceed any monthly statistic dating back to the World War II. The Labor Department figures that 5.5 million would-be workers have been without employment for 27 weeks or longer, accounting for around 42.9 percent of the total tally of unemployed Americans.

The consulting firm Hamilton Place Strategies based out of Washington estimates that as many as 3 million additional unemployed workers have been without jobs for just as long but are not taken into consideration by the US government. For those, the Department of Labor simply stops counting them. 

The government has also identified around 2.8 million Americans “marginally attached” to the job market in January. Per their own definition, that accounts for those who want to work and have looked for working during the last year but have not concentrated their efforts on the job hunt during the last month. 

They are also not accounted for in the Labor Department’s unemployment figure.

Speaking before the US House of Representatives Committee on the Budget, Federal Reserve Chairman Ben Bernanke addressed the issue. He admitted that the US economy “has been gradually recovering from the recent deep recession,” but called long-term unemployment figures still “particularly troubling.”

“More than 40 percent of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade,” explained Bernanke. “We still have a long way to go before the labor market can be said to be operating normally.”

Easy for Mr. Bernake to say - he has a job.

Hedge Funds Betting On Collapse

Hedge funds are betting on a disaster hitting the financial markets within the next several quarters, with managers holding onto historic levels of cash.

That so-called dry powder gives them the cash they need to quickly jump in if markets sell off, according to numerous hedge fund managers and industry consultants.

”Most hedge funds I see are carrying lower market exposure than I’ve seen in some time,” said Brad Balter, founder of investment advisory firm Balter Capital Management. “This is not to say they are net short. They simply want to conserve their buying power and be ready for major opportunity sets that may arise.”Many are anticipating that Europe’s debt crisis, the U.S. fiscal cliff, or the slowdown in China will cause a 2008-like reaction around the globe, when stocks swiftly sold off in the wake of the financial crisis.

But betting on a downturn in this environment is a risky play.

The latest Fed minutes showed central bankers leaning toward more stimulus. Should Fed chairman Ben Bernanke suggest another round of bond buying next week in Jackson Hole, Wyo., stocks could swiftly move higher. On top of that, Greece is still in limbo and talk of the European Central Bank intervening in the bond market makes predictions about an end-game for Europe nearly impossible.

"I have not seen the level of uncertainty this high for a long long time," said Komal Sri-Kumar, chief global strategist at TCW . "If you were a hedge fund and you didn't know when the correction would come but were concerned, it would makes sense to keep cash available."
Because of this defensive posture, hedge funds have missed out on the 2012 stock rally. The S&P 500 (SPX) has gained 11% through July 31, while Morningstar's hedge fund index of nearly 1,000 funds gained just 3.7%.

"They could've picked stocks poorly, but with these returns, it looks more like they're not even close to being fully invested in the market," said Nadia Papagiannis, Morningstar's director of alternate fund research.

The SEC only requires hedge funds to disclose stocks they own, and not how much cash they're holding or what stocks they're betting against.
Holding onto cash is actually one of the boldest moves a hedge fund can make. Hedge fund managers get a 2% fee for all the money they manage, so investors quickly grow irritated with managers who sit and wait. "It's a natural reaction to say why am I paying you to hold cash," said Daniel Celeghin, partner at hedge fund consulting firm Casey, Quirk & Associates.

Some funds have outperformed the S&P. Among them: Tiger Global Management, which focused on technology stocks and counts Apple as its top holding, is up more than 20% as of July 31, according to a source with knowledge of the fund's returns. And the flagship hedge fund at Citadel run by billionaire Ken Griffin is up 11.5% through July 31, according to sources familiar with its returns.

Hedge funds betting on the mortgage market and those focused on financials have also scored big in 2012. Bay Pond Partners, owned by asset manager Wellington Partners, is up 11%, largely through its investments in bank stocks, said two sources. Two key funds at SPM, a $3.4 billion fund focused on residential mortgages, are up 13.4% and 11.3% respectively. Another mortgage focused hedge fund, Metacapital, is up 25% through July.

Despite the industry's overall recent poor performance, investors haven't shied away. In the first quarter of 2012, the hedge fund industry held a record $2.13 trillion of assets, according to Hedge Fund Research. During the second quarter, investors pulled back slightly, leaving them with $2.10 trillion.

Since the financial crisis, investors have been drawn to hedge funds because they have the ability to bet on all types of markets and don't simply expect stocks to move up. "The thought now is that I need to have at least some of my capital with managers who have the flexibility and skill set to take advantage of unpredictable sideways markets," said Casey, Quirk & Associates' Celeghin.

Mississippi River Traffic Moving Again

Barge traffic resumed along an 11-mile (17.7 kilometer) stretch of the drought-ravaged Mississippi River near Greenville, Mississippi, but dozens of vessels waited their turn on Thursday to pass in the shrunken waterway.

The Mississippi River, the country's primary highway for barge traffic, has dropped as much as 14 feet in the drought that has also withered crops in the Midwest and triggered wildfires in the West.

The latest incident occurred around dawn on Wednesday, just hours after the Coast Guard opened the channel near Greenville. Seventeen of the roughly 100 ships stuck since Monday made it through before one became lodged in the sand, forcing authorities to close the channel again for roughly 12 hours.

Traffic resumed late Wednesday afternoon with southbound vessels going through first, then northbound. After all those boats get through, the Coast Guard will continue directing river traffic on a staggered schedule, Gomez said.

As of Thursday morning, some 50 vessels remained backed up in the channel, waiting for their turn to pass.

Barge operators typically haul some $180 billion in goods annually, and the Mississippi River is their main artery with some 566 million tons (513.5 million tonnes) of freight going up and down the inland waterway each year, according to the American Waterways Operators, a national trade association representing tugboats, tow boats and barges.

The drought's effect on the river has caused logistical and financial woes for the barge industry.

Barges must unload 17 tons (15 tonnes) of cargo for every one-inch loss of water and 204 tons (185 tonnes) for every one-foot (30.5 centimeter) loss of draft, said Tom Allegretti, president of the trade association.

Draft is the vertical distance between the ship's waterline and the lowest point of its keel.

Allegretti said it would take 130 semi trucks or 570 rail cars to haul the freight unloaded by one large barge on the Mississippi River under those conditions.

OPERATORS LOSING MONEY

Barge operators are losing an estimated $10,000 per day for every one of their boats that sits idle near Greenville, said Ann McCulloch, spokeswoman for the American Waterways Operators said.

With 97 vessels idle on Monday and Tuesday, and 105 vessels idle on Wednesday, according to Gomez, that's nearly $3 million in lost revenues in three days.

"It's a day-to-day situation now to manage the stoppage," McCulloch said.

If water levels drop further, prices could rise on the raw commodities commonly shipped by boat, including coal, grain, petroleum and steel.

Taxpayers also share some of the drought's financial burden. The U.S. Army Corps of Engineers has dredged the river almost nonstop since the start of the drought with equipment costing as much as $85,000 per day, Corps spokesman Kavanaugh Breazeale said.

Dredging removes the silt that falls to the bottom of the river - a problem that accelerates as water levels drop. The Corps must keep the channels at least nine feet deep and 300 feet wide for safe passage of vessels.

Conditions were expected to improve in the short-term near Greenville, where the Coast Guard projects the river will rise about one foot by Monday.

But it forecasts a one foot decrease by Monday in Memphis, which has had its own headaches this summer. On August 9, the American Queen steamboat - a multilevel passenger vessel carrying some 300 pleasure passengers - got stuck near Memphis.

The river there could hit 10 feet below baseline by Wednesday, the Coast Guard said. That is nearing the historic low set in 1988 when river traffic came to a halt and an estimated $1 billion in revenue was lost.

Reuters - Colleen Jenkins, Greg McCune and Vicki Allen

Governments And Big Banks Preparing For Financial Collapse

All over the world, governments and big banks are preparing for imminent financial collapse. Hushed conversations are taking place in corporate boardrooms and in the halls of power in places such as Washington D.C. and London. The clues are all around us. 


It is now known that the U.S. government has been secretly directing five of the biggest banks in America "to develop plans for staving off collapse" since 2010.  

U.S. regulators directed five of the country's biggest banks, including Bank of America Corp and Goldman Sachs Group Inc, to develop plans for staving off collapse if they faced serious problems, emphasizing that the banks could not count on government help.

The two-year-old program, which has been largely secret until now, is in addition to the "living wills" the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

When combined with the dozens of other clues of imminent collapse, a very troubling picture begins to emerge.  Over the past 12 months, hundreds of banking executives have been resigning, corporate insiders have been selling off enormous amounts of stock, and a significant number of Wall Street bankers have been shopping for properties in rural areas this summer to escape urban war zones.


The U.S. government has been stockpiling food and ammunition. President Obama has signed executive orders that would potentially be implemented in the event of a major meltdown of society.  

So what does all of this mean?  That a financial collapse is coming. Over the past 40 years, the total amount of all debt in the United States has grown from about 2 trillion dollars to nearly 55 trillion dollars.  That is a recipe for financial armageddon, and it is inevitable that this gigantic bubble of debt is going to burst at some point.


The situation in Europe continues to get worse and worse.  The authorities in Europe have come out with "solution" after "solution", and yet unemployment continues to skyrocket and economic conditions in the EU have deteriorated very steadily over the past 12 months.

Of course the historic drought that is ravaging food production in the United States this summer is not helping matters either.  Another summer or two like this one and we could be looking at a return of Dust Bowl conditions.

Our resources are dwindling, war in the Middle East could erupt at any moment and our planet is becoming increasingly unstable.  The following is from a recent article by Paul B. Farrell on Marketwatch.com....

Fasten your seat belts, soon we’ll all be shocked out of denial. Some unpredictable black swan. A global wake-up call will trigger the Pentagon’s prediction in Fortune a decade ago at the launch of the Iraq War: “By 2020 ... an ancient pattern of desperate, all-out wars over food, water, and energy supplies is emerging ... warfare defining human life.”

A "perfect storm" is brewing. Prepare yourself.

Drought 2012: Stokes the Food As Fuel Debate

The U.S. government requires about 13 billion gallons of ethanol to be used in the nation's gasoline. To achieve this, nearly half of the nation's corn crops go to not feeding people but to powering motor vehicles.

Since 2005, the U.S. government has mandated that gasoline contain ethanol, mostly derived from corn. The policy intent was to reduce dependency on foreign oil imports and improve air quality. It has also been a boon for corn farmers.

But in the midst of the worst drought since 1934, the faults of this policy that forces nearly half the U.S. corn harvest into fuel production. And with corn prices at record highs, the ethanol requirements are fueling increased food costs and spreading it to the price of gasoline, which is up almost 40 cents a gallon since early July.

Beef and pork ranchers are slaughtering their herds at a record rate to cut their corn feed costs which have gone up more than 30% in three months. As a result, U.S. cattle herds next year are projected to be the smallest since 1952, a guarantee of more expensive food in years to come.

Th drought exposes the notion of trying to expand an industry where the economics of it don't make sense. Based on its energy content, ethanol is approximately 50% more expensive than gasoline and the acreage required to produce it distorts land prices.

Tractors run on diesel fuel that plow the fields, plant seed, harvest the crop and haul it to refining plants. Ethanol is also highly corrosive and can’t be transported by pipeline, unlike oil. Trucks or trains must carry the finished product to gasoline blenders. In short, ethanol requires more energy to produce than it actually yields, negating the environmental benefits.

Earlier this month the United Nations Food and Agriculture Organization issued a statement urging "an immediate, temporary suspension" of America's use of corn to produce ethanol, in order to "allow more of the crop to be channelled toward food and feed uses."

Natural disasters can't be controlled, but ethanol is a man-made disaster that needs to be stopped.

Drought 2012: Global Impact of Wilting U.S. Crops - Video

 

At least 32 states are feeling the effects of the drought as the unrelenting heat has pushed grain prices to record levels.

Corn is the major U.S. crop and a bad year drives the price up on everything from beef to cereal to fuel. As crops continue to wilt, farmers and consumers around the world are looking towards the sky, hoping for rain.

Drought 2012: Mississippi River On The Verge Of Shut Down

The record-breaking drought of 2012 is drying up the Mississippi River, which is critical for commercial travel. If the shrinkage continues at the current rate, all river traffic could be shut down costing the U.S. $300 million a day in commerce.

The Mississippi River is the highway accounts for 60% percent of grain, 22% of oil and natural gas and 20% of coal transportation.

But its narrowing and shallow waters are forcing barges to stop running or to reduce the weight of the goods they carry which is now showing up at the grocery store – leading to shortages. Areas of the river have dropped 20 feet below normal – and the decline is expected to continue.

If the Mississippi River is closed to all water traffic, goods like grain, oil, natural gas and coal will need to be transported by truck or train – costing the US an additional $300 million a day.

The American Queen Steamboat, which needs eight and a half feet (2.6 meters) of water to float, can no longer navigate the river after getting stuck in a town near Memphis, Tennessee. Its 300 passengers were forced to abandon their river voyage and reach their destination by bus instead.

In some parts of the Mississippi River, the salt water is moving upriver, threatening drinking water extracted from other areas. All river traffic was shut down for 12 hours to give the US Army Corps of Engineers time to try to keep the salt water contained.

In other areas, millions of fish are dying as the bottom of the river transforms into an exposed desert. The river flows into lakes and streams across the US, carrying the devastation to all corners of the Midwest. About 40,000 shovel-nose sturgeon fish were killed in Iowa in one week as water temperatures reached 97 degrees. In Illinois, fish carcasses clogged an intake screen near a power plant, causing it to shut down one of its generators.

But in some areas, dead fish can be found shrivelled up on barren land that used to be underwater.

If the Mississippi River continues to dry out, food shortages will only be part of the concern, as the economy could be slapped by rising cargo transportation prices.

Drought 2012: Nearly 1,600 Counties Declared Disaster Areas

218 Counties Added in 32 States

As one of the worst droughts in U.S. history continues, an additional 218 counties have been added to the US government’s list of natural disaster areas bring the total to 1,584 counties in 32 states that have been designated primary disaster areas, according to the USDA.

The USDA utilizes a weekly drought monitor to form its list and this week they found that nearly half of the nation’s corn crop and 37% of its soybean crop was rated “poor” or “very poor.”

Farmers and ranchers in counties considered natural disaster areas are eligible for federal aid, including low-interest emergency loans, in addition to access to 3.8 million acres of conservation land to feed their animals. Three quarters of the country’s cattle are in areas affected by the drought.

Farmers are being paid to take land out of production to prevent erosion and create wildlife habitat and are also receiving a penalty-free, 30-day grace period on their crop insurance premiums this year.

With confidence in the economy at its lowest level since the recession combined with US export orders at there lowest level in three years, food shortages and rising food prices could drive the country into another recession with impact felt worldwide.