May 09 2008

Eye of the Economic Storm Showing Signs of What’s Looming

Published by Johannes Ernharth at 12:28 pm

You have to love Alan Greenspan.  Today he’s quoted as having declared the worst over for the credit crisis during a speech in New York.  Yet, at the same time he still thinks housing has a long way to go down, and will not be hitting bottom by year end.  Well, which one is it going to be, Sir Alan?   Given the implications of the latter, it certainly can’t be both!  Perhaps that’s why Mr. Greenspan is requesting the press not cover his speech comments?

Longtime readers of VI know where we stand on the issue, but as of late your writers have been busy in our full time consulting business — the economy unfolding much as we predicted to many people we’ve talked to over the years has brought much interest as you can imagine.  That aside, though, updates like this one will continue as our schedules allow.

Currently we’re taking the approach that we’re now amid a sort of eye of the hurricane situation, with one glaring exception.   The eye of the storm is welcome to those enduring the prior chaos, but even though it might appear that the worst is past, there are still plenty of signs that all is not normal.   Usually the eye represents the half-way point for a hurricane, but in our economic case, our estimation is that we are fortunate to be about 1/3 of the way through.  Just consider the signs:

Does this sound like a real “all clear” signal to you?  We’ve been hearing the calls of “the bottom” since the implosion hit last summer with Bear Stearns at the epicenter.  These calls keep coming from the people who failed to see any of this mess arriving, and are the same ones who’ve continually misdiagnosed problems since then.

Don’t count on these same rascals to correctly call anything, especially Honest Al Greenspan who is doing whatever he can to salvage his eroding reputation as the man who tamed inflation and the business cycle.  In reality, he merely compounded the distortions on both ends.

Recessions are like earthquakes — better to have the pressure relieved in many smaller releases.  In the real world, you rarely feel earthquakes since most are so mild.   Consider that the natural business cycle, where you have normal ups and downs. Only problem is the meddling policy maker find those not politically tenable while the banker finds their restraint terribly inconvenient, so in cahoots they inflate and create boom / bust cycles. Everyone loves the highs these injections give the economic addict, but nobody likes the abyss of withdrawal. And the abyss is deep.

Instead, Fed policy under Greenspan and now Bernanke is all about holding off any release of tension as long as possible.  In an attempt to sustain the unsustainable (overly inflated asset prices backing the entire Wall Street system) they’ll go back to the old inflationary tricks and rewrite the rules for the Fed without any Congressional authority.   The tension only compounds, and eventually the release will be much uglier thanks to their meddling.

We expect serious consumer pull back as more jobs are hacked in the face of tight credit. We also expect stagflation — the Fed, its Wall Street backers, and the Dependent politicians in D.C. will do what they can to punt this problem into some future administration’s lap. Problem is, they appear to have finally run out of rope.

Hence, as the eye of the storm passes, get ready for the worst 2/3′rds of it.

Stay Vigilant!

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