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May 26, 2009
Issue 47  -  No Light in Sight
I was listening to some CNBC talking heads and a common theme is "the worst is over" and "there is a light at the end of the tunnel."  Well, sorry to say, but this couldn't be further from the truth.  I look at numbers, not opinions and things just plain stink.  Some indicators have stopped falling as fast, but that is normal as nothing can go to zero.  There will never be zero housing starts or zero retail sales, so even if the numbers stop crashing, that doesn't mean things are getting better.  If your child's grades dropped from A's all the way down to D's over a three month period, and then stayed at D's in the fourth month would you say things are getting better?  Not likely.
First, let's look at the stock market and what is going on there.  The stock market has been down over the last couple weeks after a monster rally.  Are things going to power back up from here?  I just don't see it.  Let's look at the numbers.  Here is a chart regarding retail sales:
Sure, things have stopped falling, but does that mean we are out of the woods?  Of course not.  We need to see a dramatic rise in sales to just get back to BAD.  Normalcy is a long ways off at this point.  Look, over the last 17 years retail sales have only been negative three times.  The previous two times it was only for a quick spike of time.  Clearly we are in uncharted waters as we have been severely negative for over 6 months.
How has this affected earnings?  Here are two quick charts from


The first chart shows the earnings of the S&P 500 in an INFLATION adjusted manner.  When looked at this way, and I expect inflation to get worse and worse, we have earnings lower than at any time since the 1930's!   That's a long time.  What this shows is that things are worse than is being reported, much worse.  The second chart shows the P/E ration of the market using the inflation adjusted earnings.  This shows that the price to earnings ratio is at a record high.  Higher than even 2000, in fact, much higher.  A P/E of 15 is generally considered "average".  So with earnings of $7, the S&P 500 would be trading at 85!  This will probably never happen, as the government is in hyperdrive money creation mode, but it should give you pause about a "buy and hold" strategy.  That will only lead to tears.
There was "news" of consumer confidence "skyrocketing" and while the number was good, I believe a lot of the bounce was due to all the happy talk coming from the administration and CNBC.  In reality the data is what counts and it continues to get worse in a lot of cases.  Look at this chart:

Housing starts

Year Over Year, Not Seasonally Adjusted: Commerce Department Building Permits Down 50% And Housing Starts Down 54%


As you can see the delinquency rates are in a literal parabolic explosion.  This chart covers residential, commercial and credit cards.  Each of these is now over 6%.  Taking an average here, 1 in 15 loans is behind, and is accelerating higher.  If the trend continues, this could be as high as 1 in 8 by the end of the year!  Unprecedented.  All the bailout money in the world cannot stop this, short of mailing out checks for mortgage payments.  Of course this would lead to the end game of hyperinflation.
One last chart for the week:
This chart tracks a number of things over the last 60 years including household debt and wealth. Notice that although debt has finally started to fall after a near perfrect ascension, wealth is falling MUCH faster.  We are getting poorer quicker.  The red line is an extension of the long term trend line which will probably be retraced.  This indicates that we have just STARTED paying down our debt and it will take years to get back to normal.  I believe the powers that be will not let that happen and that hyperinflation is the only course of action.  Tying into that is the current administrations spending, which even compared to Bush, is unprecedented.  From GATA:

"Stephen Wellman at GATA

What I see from the US TREASURY DAILY STATEMENT for May 20, 2009is that so far Obama and his team have spent $7.613TRIL USD for FY 2009. The FY2009 year started October 2008, so a month or so is on Bush’s watch. I have calculated that Obama has spent $24,939.25 on behalf of every man, woman and child in the USA within the past eight months. There are still four more months left in FY 2009.

Current SPEND RATE = $5.78USD. That means for every $1 of revenue Obama is now spending $5.78USD. Total outlays divided by total tax receipts. According to the US TREASURY DAILY STATEMENT that is $7.631TRIL in outlays and $1.320TRIL USD in receipts(tax revenues).

Lets look and see how that compares to FDR and the 1929 stock market crash, which was the worst on record. First in 1929 the US government had a budget surplus of $745mil USD. That surplus continued on into 1930. During the height of FDR’s jobs work program spending the US TREASURY went into a budget deficit. During 1937 when FDR spending was at its zenith he was spending at a rate of $2.40USD over receipts (revenues). Obama is now spending over two times that amount and he has yet to even begin his "FDR Stimulus" to create jobs. Amazing as it may seem FDR was spending even less per receipts during the height of WW2 in 1945, it dropped to $2.05USD for every $1 of receipts."
So we are spending nearly $6 for every $1 of income.  Obviously, this is unsustainable and will put the United States into a bigger hole.  There just is no possible good outcome here.  What would happen to your family if you spent $6 for every $1 in income?  If you made $50,000 a year, then it is like adding $300,000 in debt, in eight months! 
Absolutely incredible.  We have a long, long workout period that is just getting started.  The stock market is not a buy and hold mechanism, especially now.  We, as investors, must be totally flexible to take advantage of the zigs that occur in a short term manner.  The only sure thing now, and it may not go up much, but WILL maintain its value, is gold and silver.  Position yourself accordingly.
Next week I will be having part two of Forewarned is Forearmed where I will tackle the scenario where you have to bug out.  Have a great week!