Hard-landing Scenario Should Not Be Underestimated

In the middle of 2015, an article that appeared on this site touted the idea that a hard landing scenario was not out of the question and the possibility of such an occurrence should not be underestimated. It was based on the idea that QE and low-interest rates had run their course and played themselves out. Since that time central banks and countries around the world have added more fuel to the fire which has postponed the day of reckoning. This has made all of us thinking the market was about to turn south looking rather silly and underlines the fact that trying to time events is both confusing and complex, this is especially true when it comes to the financial part of our lives. Those who watch closely will notice that even small changes in the laws and rules can have a big impact on how things unfold. A lot of strange almost bizarre theories are floating around concerning our economic future. This means that on occasion it is wise to step back, take a deep breath, then try to sort out what is really happening in the economy.

Will You Be Able To Walk Away?

While history is a great reference point it does not define the future. The current economy is a conundrum, the global economy is like a Rube Goldberg machine, contraptions built in a ridiculously complicated way to perform task that should be reasonably simple. The problem is that nothing is simple when it comes to economics, this means it is best not to have a great deal of faith in our economic system which is severely flawed. Central banks can stack the deck but when it gets too high and begins to fall they may not be able to control the direction or who it will crush. Many of the investments people make are predicated on the idea that if the economy fails we will have a soft-landing, or if it does crash the result will not be fatal.

The idea the economy will simply be able to adjust and grow its way out of many problems we have tried so hard to ignore is asking a lot. The idea it will thrive deifies what history has taught. The idea we can just muddle along is very simplistic. It is based on a view of history that often overlooks the many who have "lost it all" in prior periods of economic chaos. As we focus on the fact the system always moves forward we tend to forget how it has a way of sacrificing many investors for the "better good", this is fine if you are not one of those being sacrificed. This means we should not be blind as to other less optimistic scenarios concerning our economic future. A key assumption of the current "escape velocity" mantra is that we have all the time in the world to deal with our problems, it discounts the notion that forward progress may at any time be fouled by events often beyond our control. This feeling all is well is strengthened by the government's optimistic projections and numbers that fail to recognize how another recession could skew future tax revenue and cause spending to soar.

Computer Screen Of Inaccessible Sites!

To the left is an image posted on a website on the morning of Monday, June 29th, this was at a time concern over a default by Greece ran high. In many ways, it might be considered a warning or a cautionary tale that investors should heed.It shows dozens of servers as being "inaccessible" and is an indication of how fast things can lock-down when things turn ugly. Take this as a warning and solid reminder that we must not allow ourselves to become complacent and think we have plenty of time to take action. In our modern world of instant communication, it is becoming increasingly common that options can vanish in a blink of an eye. If we wait too long we may find all doors closed and there is no place to hide.

At the time anyone watching closely as the deadline approached for Greece renegotiating its debt with the Euro-zone noted that many people reading about money coming out of the Greek banks were wondering why any money was still even left in these accounts. He went on to say "It is simply another Greek tragedy that so many of the local depositors were merely waiting until just after the last minute to withdraw their funds before joining those already busy hoarding fuel and food." The financial default of Greece could be the thing that fuels the fire that finally brings down the house. If it does not, the light from the flames will surely illuminate and expose the fact that similar flaws and massive debts exist in many other countries across the world.

The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. The irony is how little of this money has reached Main Street in a constructive way while the damage to savers has been massive. While the Fed has essentially abolished the most basic rules of macroeconomics do not be surprised if the natural laws of economics show their dominance over FED policy. It appears complex and strong crosscurrents may be about to converge and knock the implicit assumption of the escape velocity off its axis. 

The theory that we have plenty of time and that another recession does not loom anytime in the future is rooted and based on the momentum model of economic growth.  It rests on the idea we will experience a trend of ever-growing year over year increased production. The problem we face today is much of this recovery has been constructed on the unstable base of false demand coupled with new debt and government spending. The easy money policies and artificially low-interest rates of the last decade have simply moved demand forward and created a slew of economic activity that is unsustainable in what would be considered a normal economic environment. This tends to distort prices and lead to overbuilding that often abruptly comes to a painful end.

Much Of The Current Job Growth has Been In Services 

Just how far off course we have moved becomes clear when we look at how much of our economic growth has been in the service trades. These jobs often cater to the top 10% of consumers and the people also account for 40% of total spending and 85% of financial assets. The fact is service jobs can rapidly vanish. This highlights that the jobs reports should be viewed as a lagging indicator, but in the present US business world that is dominated by stock market obsession, it has been elevated much as it was in the run-up to 2008. Many people are "over-inventorying" labor by believing that the stock averages are forecasting higher sales and demand around the corner. We should also consider the high ratio of business inventories to final sales which is partly due to low-interest rates which make it easy to stock more goods with little carrying cost. When the markets finally break, we may again witness a hard landing driven by the dual liquidation of excess labor and stockpiled goods.

Apple And Amazon Share An Ugly Truth - They Exploit Us

Apple and Amazon share an ugly truth and that is their strong ties to America's government has in many ways allowed them to create a persona or facade that far outshines reality. This allows each company in its own way to exploit us while masking the huge amount of income they pluck from our government on all levels. Years ago I penned an article titled, "The Poison Apple" where I questioned how Apple remains the darling of so many Americans while stories continue to surface on how those they have contracted to make their products abuse their workers? This coupled with the widespread criticism for its environmental practices and tax avoidance schemes would have caused major damage to the corporate image of most companies resulting in large protest outside their offices and massive boycotts of their products. We should remember, Apple is a company that Fortune magazine has called the most admired company in the United States and in the world, this is a company that the Economist called a "phenomena" and questioned if "it was a bubble" even years before its stock price soared.

A More truthful Apple Logo

A week ago I had decided to again post about "tax dodging" Apple because the corporate tax rate is a topic currently very much in the news. The crux of that post was focused on the Paradise Papers that revealed the murky dealings by the world's largest corporation, helping it pay a mere 3.7% in corporate taxes in 2017. This is a fraction of the worldwide average and well below the 20% slated in our new tax bill. In the leaked documents, it detailed how Apple attempted to find different avenues at securing its worldwide profits, which accounted for roughly 55% of its total income in 2017. In August of 2016, Apple was ordered by the European Commission to pay €13 billion in taxes, which Tim Cook called 'total political crap' at the time.

It is as if people are totally blind to the less tasty side of Apple that appeared in a 2006 report written on working conditions at factories in China where the contract manufacturers Foxconn and Inventec produced the iPod. The article stated that one complex of factories that assembles the iPod and other items had over 200,000 workers, that lived and worked in the factory. Employees regularly worked more than 60 hours per week making around $100 per month and were required to pay for rent and food from the company.  This generally amounted to a little over half of the workers' earnings. Add to the history of worker exploitation the fact that since Apple manufactures in China it creates few jobs in American. Is the typical Apple user so self-centered that they just don't care, or do they lust for the product so much that they bury and ignore their social conscience?  These consumers are even willing to pay higher prices to lock themselves into a closed system tightly controlled by Apple.

For a moment let us put aside Apple and explore some of Amazon's corporate tactics as well as some of the recent stories and the evergrowing political tilt of the Washington Post which is owned by Amazon's CEO Jeff Bezos. Lurking in the back of my mind is that it was the Washington Post and not a newspaper located in Alabama that broke the Roy Moore story which has turned many women against the Republican party. Because of Amazon's strong ties with the government and what is often referred to as the "deep state," we should be concerned about whether certain forces are making a concerted effort to shape public opinion. It must be noted many of these parties appear to be at war with our current President. This brings up the question of just how much of the Roy Moore story that has had huge ramifications across society is a coincidence or if a strong hidden agenda is at play.

Bezos Has Moved Into Shaping Public Opinion

Jeff Bezos, the founder of Amazon has indeed had a good 2017 and in the last few weeks, he has claimed the title of the worlds richest man. Among the goals of this online retail mogul is replacing workers with robots which his company will both build and market plus controlling one of the most influential news media giants in America, the Washington Post. This high-flier is also the head of Blue Origin, a company with big plans to pioneer the frontier of space. Last but far from least as Amazon's CEO Bezos ties this all together with Amazon Web Service or AWS. This is a cloud service which also collects data and has strong ties to the government. This means they know when you are sleeping, they know when you're awake, they know when you are bad or good. This all constitutes a great deal of power in the hands of one man.

As to the common link these companies share, both receive and feed at the tit of our government and receive a great deal of American tax dollars. We should never forget that in America the government and schools use taxpayer money to buy countless numbers of Apple products produced in China adding to Apple's credibility and helping to carry tax evading Apple to the next level. While this is happening the United States Postal Service bends over backward to deliver Amazon products at a loss and the American government pays out billions to AWS for its services in collecting and storing data on American citizens. This money adds to Amazon's war chest and feeds its ability to continue exploiting the brick and mortar stores that line the streets of our communities. These are the real businesses that provide jobs to millions of Americans. All in all, it is a bit ironic that so many people are infatuated with these two companies that seem hell-bent on taking far more from us than they are willing to return. To us not so enamored with these two companies the fact is, we just don't get it.

China A State Driven Business Model Geared To Expand

It could be said that people are naive if they do not recognize the distinct advantage a state-driven economy has over free enterprise, at least initially. A bit predatory in nature, such a system can quickly exploit the weaknesses of its competitors, however, a major flaw is that over time a state-controlled system pays dearly in that they are not responsive to consumers real needs or trends. Such systems also fail to react accordingly to market change thus squandering their resources. The crux of this article is that it is important we recognize China is a state-run economy based on a business model that is geared to expand by crushing the competition. Subsidizing those companies working within its system in a multitude of ways helps it achieve this goal.

For years China has been a place were corruption has flourished, partly fueled because any appearance of growth has been rewarded. Also, the rules protect the politically connected.  Donald Trump recognized this and rallied those Americans that have been harmed and most affected by globalization and the "China effect" to put him in office. Trump's so-called base is made up of supporters many of which have lost their jobs or seen wages stagnate over the years. This sometimes referred to as the hollowing out of America is something that has occurred across a broad swath of the country as greedy companies have exploited the concept of "free trade" by having the products they sell in America manufactured in China using cheap Chinese labor.

Now Airborn The C919 Will Be A Major Player

Three articles that appeared on this site over the last year support my argument that China is not our friend and that we had better be on our toes. The first explored how China was ramping up its fledgling aviation industry and how when it hits its stride we can expect cutthroat competition. The article warns that as China's aviation industry takes flight over the next decade America may be saying say goodbye to a big chunk of its exports in this field. The Chinese manufacturer claims the twin-engine, narrow-body design of the C919 is superior to its competition the Boeing 737, the best-selling jetliner in the world, and its competitor, the Airbus A320. COMAC (Commercial Aircraft Corp. of China) also says it can bring the C919 in at a price lower than the $50 million range that Boeing and Airbus charge for each of their planes.

On Chinese President Xi Jinping's first state visit to the USA, he made a couple deals said to help foster relations between the two countries. One was to order 300 Boeing aircraft for $38 billion, this was tied to Boeing building the first "aircraft completion plant" in China, it was to be Boeing's first non-U.S. plant. Considering China's knack, or shall we say, history, of taking advantage of sucking production ideas from manufacturers this move was a watershed event to many industry watchers. As noted above China is now in a far better position to realize its dreams to develop this industry because part suppliers such as GE, Pratt & Whitney, and other firms are eager to supply the engines and other key components. The politics of globalization a few years ago have paved the way forward and makes China's effort to produce planes far more likely to succeed. With China's experience of building cities from scratch, why build just one factory when you can build twenty? This means we should not expect this industry to grow organically but it is logical it will be engineered by an aggressive government with a mission.

Chinese-Bullet-Trains On Display

The second deals with the company formed in a recent merger of China’s two largest train makers this means the production of railway locomotives, bullet trains, passenger trains and metro vehicles.   It points out that no effort is being made to deny that the impetus for the merger of China CNR Corp and CSR Corp in 2015 was the quest for a deeper push into overseas markets. Proof of its ability to compete is that it has been able to win by a wide margin nine-figure contracts, such as the supply of metro cars to Boston and LA. It should also be noted that CRRC recently formed a consortium with Bombardier that allows it to compete for the renewal of the New York subways where it appears they are currently in the lead to win the contract that should amount to around $1.5 billion dollars.

The third article warns that when you closely examine America's trade deficit with Mexico it becomes even more disturbing.  When following the money the United States huge trade deficits you begin to understand the money eventually ends up in China.  When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash, however, a bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route and each year the numbers are huge. The US trade deficit widened to a shocking 48.7 billion dollars in October of 2017.

It does not take a great deal of foresight to realize that America is on verge of giving up its role as an economic leader if it continues on its current path. Those who surrender to the idea America is too small to lead based on population numbers do not understand that quality beats quantity hands down. Sadly the spirit of, "I will gladly pay you Tuesday for a hamburger today" is alive and well in many of those advocating free trade and the expansion of globalism. Whether driven by greed or suffering from being short-sighted, buyers of the many products we import each year should resist giving up their futures so that we can buy the latest fancy flat screen television or set of patio furniture made in China for far less than one made in America. Countries that export goods at slightly below cost in exchange for manufacturing jobs are not stupid they are predatory and we in America are their prey.

Is Growing National Debt No Longer A Major Issue?

It appears Washington is again prepared to ignore the deficit and growing national debt and press forward on more "important" matters. Consider how small an issue this was for most Republicans when they passed their tax bill. America is already over twenty trillion dollars in debt and it was projected that debt would grow another ten trillion dollars over the next decade, so is adding another one and a half trillion more during the next ten years such a big deal? Apparently, Congress has decided that it is not and so has the president which is confirmed by his recent tweet.

  Donald J. Trump ✔ @realDonaldTrump

We are one step closer to delivering MASSIVE tax cuts for working families across America. Special thanks to @SenateMajLdr Mitch McConnell and Chairman @SenOrrinHatch for shepherding our bill through the Senate. Look forward to signing a final bill before Christmas!

2:49 AM - Dec 2, 2017

Sadly, for most Americans this so-called "Massive tax cut" will be mostly an illusion and so will the idea that Washington has truly reformed our hellish tax system which is in need of major simplification.

Click Here To View The National Debt Clock

Several years ago America negotiated or shall we say, was able to survive the financial cliff (a combination of expiring tax cuts and across-the-board government spending cuts that were scheduled to become effective Dec. 31, 2012) and muddle through what was described as a draconian sequestration. This has emboldened many Americans and left them feeling immune to economic reality which has put us on the part towards financial disaster. A rising deficit that has yet to yield dire consequences has given the American people a false sense of security. It is also clear that running up debt is far easier than paying it off. We should also be aware that figures released by the U.S. Treasury are for public consumption and it relies on accounting tricks which massively understate how much debt is really being accumulated. The myth that a scenario of growth coupled with a falling deficit will allow us to outgrow many of the problems we face brings with it a false optimism and hope.

Estimates Have Been Very Very Wrong

It is important to remember predictions of future spending and revenue often turn out to be wrong. The chart to the right predicted that by 2019 the national debt would top 12 trillion dollars. Projections made by the government or any group predicting budgets based on events that may or may not happen at some future date are simply that, projections or predictions and not fact. This means that such numbers are totally unreliable. Sadly, when President-elect Trump taking office in early 2017  the National Debt Clock was ready to breach the 20 trillion dollar mark. This means the deficit during the Obama years ran at over twice the nosebleed levels that had been projected. Yet, this appears to have raised no red flags as we continue to hear from the media how robust economic growth has helped push the U.S. budget deficit down. These claims bantered about by Washington and the media have helped push the stock market into new territory and reassured America that all is well.

We often confuse and muddy the waters when we talk about the debt, one way we do this is to emotionally charge the issue by seeking which administration or President is to blame. While Bush left office with the economy in the sewer most the resulting deficit occurred on Obama's watch.  Over the last few years, the Obama administration has touted how the deficit is dropping and the economy is on the mend. Don't expect a chart put out by somebody with an agenda to clarify this issue, long ago I learned that looking at a chart to see how we are fairing can be very deceiving, little things like the scale or how they are colored often blur how we interpret their message. This has led some Americans into thinking the worst of our problems are now in the rearview mirror. One thing is clear and that is only by looking back decades do we see just how large this problem has grown.

As things stand America continues to rack up a deficit each year of nearly $2,500 for every man woman and child in the country, such deficits were unheard of in the past unless it was during a major war. Deficit spending has been accomplished by borrowing money that will become a long-term drag on the economy going forward. To make matters worse the government has fiddled away the time in deadlock rather than pursuing the structural reforms we so desperately need. This means much of this money has been poorly spent in ways that do little to address the deep problems that plague our economic future. Even the tailwind of lower energy cost through the massive expansion of oil and natural gas supplies has not been enough to move the economy forward. Much of what we have seen should be considered a "one-off" that is behind us. Bottom-line all this trickles down to job growth which has been nothing to brag about when you consider many of the positions being created are not "quality" or even full-time jobs.

Even though we have seen deficits reach unprecedented levels the deficits in our future will be dramatically worse. Any claim that Washington has the budget deficit back under control is a total lie. We are currently mired in the midst of the greatest government debt bubble in the history of the world. By our actions or lack of action, we are destroying the future of this nation. Only when we use the massive 2009 deficit as a baseline are we given the impression the budget is back under control, it is clear that 2009 was an unplanned budget disaster and should never be used as our reference point. The ugly truth many people choose to ignore is that starting in 2017 entitlements will become the driving force that carries the deficit higher and higher into nosebleed territory.

The fact is with the artificially low-interest rates of today many people seem to have little desire to cut spending. We are literally gorging on debt, and most Americans seem to think that it is just fine and dandy to wildly run up debt as if there is no tomorrow. Way back in 2011, the "Gang of Six" committee’s bipartisan plan proposed three dollars of budget cuts for every one dollar in tax increases, after much tough talk this has all been forgotten. The irony is that today lawmakers are again looking at boosting spending on both defense and infrastructure programs at the same time they cut taxes.

If you want to know what the real budget deficit is, all you have to do is go to a U.S. Treasury website which calculates the U.S. national debt. Below you will find the amount of debt outstanding on an annual basis from 2000 through 2015. This includes legal tender notes, gold and silver certificates, etc. The first fiscal year for the U.S. Government started Jan. 1, 1789. Congress changed the beginning of the fiscal year from Jan. 1 to Jul. 1 in 1842, and finally from Jul. 1 to Oct. 1 in 1977 where it remains today.

Date	Dollar Amount
09/30/2015	18,150,617,666,484.33
09/30/2014	17,824,071,380,733.82
09/30/2013	16,738,183,526,697.32
09/30/2012	16,066,241,407,385.89
09/30/2011	14,790,340,328,557.15
09/30/2010	13,561,623,030,891.79
09/30/2009	11,909,829,003,511.75
09/30/2008	10,024,724,896,912.49
09/30/2007	9,007,653,372,262.48
09/30/2006	8,506,973,899,215.23
09/30/2005	7,932,709,661,723.50
09/30/2004	7,379,052,696,330.32
09/30/2003	6,783,231,062,743.62
09/30/2002	6,228,235,965,597.16
09/30/2001	5,807,463,412,200.06
09/30/2000	5,674,178,209,886.86

To find more historical information, visit The Public Debt Historical Information archives.

Economic Evolution Makes Many Comparisons Obsolete

With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. Over the decades we have moved from an agricultural based society to an industrial centered manufacturing way of making a living. Now, without a doubt, we are moving solidly in the direction of technology becoming the main driver of cultural change and with it, the economy is again undergoing a metamorphosis. With the passage of time, we tend to forget or minimize in our minds what is too painful to remember and the way we were during times where growing pains battered us at every point. While we are undergoing this latest transformation and all the noise that accompanying it I ask you to consider the possibility the important adjustments the economy must make are lagging far behind our current "financial culture" or that the economy has evolved in a way that simply no longer works.

The Titanic Was Herald As "Unsinkable"

Much of this has yet to become apparent to the masses and is masked by institutions papering over problems and a tradition of optimism that has served mankind well, however, something seems to be broken or out of kilter. When we look behind the curtain it is difficult to ignore the numbers simply do not work going forward. Ignoring the warning signs on the horizon does not make them go away and kicking the can down the road can only delay the inevitable for so long. Many of the comments I read concerning the current stock market and companies such as Tesla and Amazon remind me of the following statement, "Not even God himself could sink this ship." that an employee of the White Star Line made during the launch of the Titanic on May 31, 1911.  The truth is as we move forward we are in uncharted waters at any time a surprise might shock us into the reality.

Much of the economic distortions we are experiencing today harken back to President Richard Nixon's decision on August 15, 1971, to close the gold window. It is a factor that changed everything. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Nixon's decision untethering the dollar from gold and releasing it from the promise dollars could be redeemed in gold, this resulted in opening the floodgates and allowed credit to explode from $1.7 trillion to $65.5 trillion at the end of 2015.

Exploding Credit Has Massive Ramifications

A question we must ask is just how relevant today's comparisons are with prior economic cycles? The situation today is in many ways "historically unique" due to the rampant expansion of credit in recent decades. Much of this has flowed from Nixon's decision to close the gold window and may be greatly responsible for the rising income inequality that has occurred in recent decades. After inflation soared in the late 70s America found the cost inflation in goods could be reduced by buying these things from low-cost producers located in other countries. This means imports soared.

A de facto policy of placing no restraints on trade deficits due to the removal of the gold window has encouraged the outsourcing of jobs. This policy dovetailed with America's decision decades ago to make China into a formidable ally that would act as a  counterbalance against Russia and the Kremlin. We did this by offering economic incentives and help to China's economy, looking back this was a watershed event which changed the way American companies conducted business. It has resulted in American companies outsourcing production and the mass exodus of manufacturing jobs from America to distant lands where labor was both cheap and abundant. This policy was sold to America's middle-class as a "win-win situation" and we were told the American worker would move up the economic food chain towards better-paying jobs that would be more fulfilling and require less toil. This did not happen.

Many Comparisons With The Past Now Obsolete

Returning to the main theme of this article this massive expansion has rendered many comparisons with the past obsolete. It has also resulted in the economy embarking on a rollercoaster-like experience where it encountered a series of events such as the dot-com bubble, which burst in 2001. In reaction, the Greenspan Fed stepped on the gas blowing the biggest housing bubble on record. In response to that asset bubble popping, we saw the Fed bail out the banks, the asset holders and the wealthy. The bottom-line is that in the end, this chain of events left the average American worse off than before. During all this time debt has grown, and to service that growing pile of debt the Fed had to keep slashing interest rates. This means that instead of allowing consumers to benefit from technological advances that tend to be inherently deflationary, the Fed sought to increase inflation by declaring inflation in the range of  2% to be in our best interest. This has benefited the banks and those already wealthy while at the same time increased inequality.

I came back to finish this article that I started some time ago because I found myself pondering the line, "outwit and outlast" that is often used during the popular hit television show Survivor. It occurred to me the winners in both life and investing often reflect these qualities and that this game is far from over. While investors are often urged to be cautious the excesses of today are in many ways not as "sector" oriented as those experienced during certain periods we have seen in the past and this makes it more difficult. It seems everything is encouraging and causing both savers and investors to take far more risk than they should in the quest for higher returns and yields. The "fear of missing" out is again running rampant and with the strategy of buying the dip having proven successful over almost a decade investors have become complacent to the risk they face.