As we close on the end of the year, it is time to look back at the big picture 2012 painted.
With 2012 culminating 32 years of rising bond prices, following decades during which U.S. investors had taken to calling bonds “certificates of confiscation,” many asked if the U.S. is turning Japanese. We at WealthCycles, of course, really think so…
WealthCycles wrote on Valentine’s Day 2012 that the U.S. was experiencing economic contraction—that is to say, the U.S. is producing less and less as time progresses, what we labeled then as a “double dip.”
Early in the year, Business Insider wrote a few hit pieces on the Baltic Dry Index (BDIY), saying “it’s one of those measures that people love to hype up when it is going down.” BDIY is an index of the cost to ship bulk goods in oceangoing freighters that was closing in on 5,000 in 2008. Today it is over 5-times cheaper to bulk ship as global trade has collapsed. Our comments came about a month before the Business Insider articles, as we showed that economic activity as measured by BDIY has flat-lined for years. At the time of that writing, BDIY was 784; today it stands at 766.
The Economic Cycle Research Institute called December 2011 as the beginning of the new recession, notwithstanding the fact that, less than six months earlier, the San Francisco Federal Reserve Bank reported:
Who invented GDP, or Gross Domestic Product? Simon Kuznets, whom we profiled over the summer, excoriated the 1934 Congress, warning it not to use GDP as a measure of economic welfare, as “distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run.”
We can see from Kuznets’ quote alone how economic thinking at that time had yet to be throttled by the “new economics,” invented by Mr. Keynes and embraced by his acolytes beginning in 1936. Even if we do not consider the quality of growth, even if we do not distinguish the seemingly invisible costs of spending from the widely purported benefits, nor short-term benefits from long-term, we can at least discount dollar-denominated GDP by the devaluation in the dollar to obtain Real GDP, as opposed to nominal.
To obtain the real rate of GDP growth, subtract CPI, or Consumer Price Index, from GDP. The CPI, by reporting the percentage prices on certain consumer goods have risen, measures the rate at which dollar purchasing power declines. Classical economist and fund manager, Marc Faber estimates CPI in a range from 5% to 8% for an American family, and as we reported, the American Institute for Economic Research’s Everyday Price Index puts the price inflation rate at ~8%, as reported by CBS.
Over the years, the U.S. Bureau of Labor Statistics has changed the items included in the basket of goods used to calculate the CPI to account for, it says, changes in consumer buying behaviors. For example, a few years ago, steak was swapped for chicken—use your own judgment about whether that substitution was valid or merely served to lower the price inflation rate. But even when we undo the changes in the CPI basket of goods to duplicate 1980 government standards, the real inflation rate shows 9%.
The U.S. economy achieved 1.8% GDP growth for the year. Now subtract, let's say, 8% for the contraction in dollar value from the 1.8% GDP growth, and what you get is a 6.2% contraction in economic activity—or negative growth in Real GDP.
The National Federation of Independent Business (NFIB) survey for November was entirely consistent with an economy already firmly back in outright recession. The number of firms who believe economic conditions will improve over the next six months plunged 37%. The drop is twice the previous record 18% decline, which occurred in the immediate aftermath of the 2008 Lehman Brothers’ collapse that kicked off the global crash.
Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), who agrees that the economy is already in recession, wrote on December 7:
Sounding a similar tone last week, he warned that if the fiscal cliff wasn’t avoided, it “would send the economy toppling back into recession.” Once again, he seems unaware that a recession is underway.
The rhetoric sourced from “mainstream” media producers is slowly moving from the Japanese financial comedy-media westward. Here is a common, funny comment referring to the “hope” for the benefit further printing, after more than two lost decades for the Japanese economy:
This idea that stagflation, or a stagnant economy caused by the addition of monetary inflation, is somehow not a recession in real terms, or is not marked by a contraction in real economic activity, is simply laughable.
Ask the Japanese how their finances are doing with debt in the quadrillions… With QE [Quantitative Easing] 10 approaching, recovery may be only three days away, as the Bank of Japan begins a two-day meeting tomorrow with newly elected, pro-printing Prime Minister Shinzo Abe.
The U.S. is Japan. We all know how precious metals are doing in terms of return over the long haul, as they are in their WealthCycle. Now let us compare this to the performance of bonds and stocks over the long haul, with Japan as our template. Check out how markets in post-bubble Japan reacted to QE1 through QE9 of the monetary easing morphine:
Bonds dead to any price discovery, stocks excited about new printing, only to eventually come back to lower and lower realities, eventually giving up altogether, losing ground all-the-while in real terms over the years.
Compare charts, courtesy of Zerohedge, of Japan above, with the U.S. (shorter-period):
Despite all uplifting reports to the contrary, the U.S. economy, in real terms, continues its decline. The U.S. government and central planners, like those of Japan, continue to prop up zombie banks and artificial-life-support pain corporations, fed by an ever-growing stream of paper, desperate to avoid at any cost the of a correction that ultimately would allow healthy new innovation to take root and grow. Don’t make the mistake of drinking from that polluted paper stream; find your footing on the solid bank of real money and stand your ground.