WHAT CAN WE LEARN FROM U.S. ECONOMIC TURMOIL?

As 2007 came to a close, the estimated national debt of the United States was about US$9.2 trillion. With a population of 304 million, that averages out to each citizen's share of debt at US$30,000 plus.

ChangeWave’s latest corporate quarterly survey shows the U.S. economy caught in the clutches of a recession far deeper and more painful than that of 2001 – with alarmingly low 4th Quarter sales projections, abysmal visibility, a deteriorating job market and a severe pullback in capital spending. Refer to graphs.


Other negative indicators include a rapid deterioration of the labor market, coupled with a huge increase in cancelled orders and a pullback in customer willingness to spend.

*The Death of an Empire: A problem of Psychology

*Beginning of the End for U.S. Auto Manufacturing

*4Q 2008/1Q 2009 Corporate Quarterly Report
Grim Snapshot – The U.S. Economy in Rapidly Accelerating Freefall

The Death of an Empire: A problem of Psychology
Comments by Bob Bauman JD, former U.S. Congressman and long-time Legal Counsel and Senior Writer for The Sovereign Society.

"Those who cannot remember the past are condemned to repeat it." Of course, as with many memorable aphorisms, William Shakespeare got there first with: "What is past is prologue."

The parallels of the British Empire with present day America are there to see, and enough to make a thoughtful reader more than uneasy.

It wasn't just the loss of colonies in India and Africa that killed the British Empire. The British Empire rapidly disintegrated after World War II because the U.K.'s financial and material resources were depleted by its war against Germany. The country was worn out by massive borrowing and expenditures the U.K. couldn't afford.

It was this financial and economic overextension that drained the imperial lifeblood and caused a rapid global demise.

As 2007 came to a close, the estimated national debt of the United States was about US$9.2 trillion. With a population of 304 million, that averages out to each citizen's share of debt at US$30,000 plus.

"Then there is the continuing massive trade deficit. Since 2001, the trade deficit has doubled to more than US$700 billion. At best, these deficits will gradually harm all Americans' future incomes. At worst, they could trigger a national fiscal crisis, which could accelerate and increase the economic damage.

Five years ago I noted in this column: "My checkbook balance tells me I can't spend what I don't have. In fact, writing bad checks is a crime in every state. And if a collective national confidence in the economy is a key to prosperity, what happens when Americans finally wake up and discover the financial cupboard is bare?"

How can a government that is bankrupt possibly act as lender and guarantor of last resort?

The answer is that it cannot - and so we will all be paying, for years to come, in taxes, in inflation, in lost freedom, the horrible price for our government's and our leaders' all too obvious failures.

"Those who cannot remember the past are condemned to repeat it."

The Death of an Empire: A problem of Psychology

As one who loves history and has read hundreds of histories and biographies, I must agree with the late George Santayana's sentiment carved into the wall of the National Archives in Washington, D.C. - "Those who cannot remember the past are condemned to repeat it." Of course, as with many memorable aphorisms, William Shakespeare got there first with: "What is past is prologue."

Some time ago I recommended for your reading Professor Niall Ferguson's impressive book, Empire (2002 Basic Books), which details the rise and fall of the British colonial empire. The parallels with present day America are there to see, and enough to make a thoughtful reader more than uneasy.


But aside from the moral objections to abusing military power to achieve laudable colonial ends, Professor Ferguson points to the real reason the British Empire fell.

It wasn't just the loss of colonies in India and Africa that killed the Empire. The British Empire rapidly disintegrated after World War II because the U.K.'s financial and material resources were depleted by its war against Germany. The country was worn out by massive borrowing and expenditures the U.K. couldn't afford.

It was this financial and economic overextension that drained the imperial lifeblood and caused a rapid global demise.

Does that description suggest perhaps the current situation of these United States of America?

Advice From Beyond the Grave

This is not the first time that America's economy has collapsed into recession or even a major depression. (Read "Rainbow's End: the Crash of 1929" by Maury Klein (Oxford Univ. Press, 2001). And in many respects, the causes now and then have too many frightening parallels.

Benjamin Strong, Jr. (Dec 22, 1872 - Oct. 16, 1928) was an American economist and vice president of Banker's Trust of New York. He was one of the founders of the Federal Reserve System and served as the first Governor of the Federal Reserve Bank of New York for 14 years until his death. Strong exerted great influence over the policy and actions of the entire Federal Reserve System.


Strong was J.P. Morgan's emissary to the secret Jekyll Island, Georgia, gathering in November 1910 - one of the selected members who stayed at the luxurious Jekyll Island Hunt Club retreat for a private ten-day conference that included some of America's wealthiest men, many of them bankers, led by Senator Nelson Aldrich (R-RI), maternal grandfather of the late New York governor and U.S. vice president, Nelson Rockefeller.

Out of this meeting eventually came the Federal Reserve system created by the Glass-Owens Act and signed into law by President Woodrow Wilson in 1913, after a conference between the president and the New York financier, Bernard Baruch, one of Wilson's largest campaign donors and a leader of the Democratic Party.

A Matter of Psychology

Benjamin Strong was one of the strongest leaders of the Federal Reserve System at a critical time. His policy of maintaining price levels during the 1920s through the open market purchase of securities, and his willingness to maintain the liquidity of banks during panics gained many supporters, as well as critics.

Such critics as President Herbert Hoover, elected in 1928, blamed Strong for the easy money policy that he said fueled the stock market rise, leading to the Crash of 1929. But Strong had a clearer sense than most of what was happening. In one of his last letters he summarized the dilemma:

"I do not think the problem is necessarily one of security prices or of available volume of credit, or even of discount rates. It is really a problem of psychology. The country's state of mind has been highly speculative, advancing prices have been based upon a realization of wealth and prosperity ... consequently speculative tendencies are all the more difficult to deal with ... The problem now is so to shape our policy as to avoid a calamitous break in the stock market, a panicky feeling about money, a setback to business because of the change in psychology."

House of Cards May Come Crashing Down

Last January, (under the above heading), I asked my readers to "consider the current depressing economic statistics in the United States. As 2007 came to a close, the estimated national debt of the United States was about US$9.2 trillion. With a population of 304 million, that averages out to each citizen's share of debt at US$30,000 plus.

"Then there is the continuing massive trade deficit. Since 2001, the trade deficit has doubled to more than US$700 billion. At best, these deficits will gradually harm all Americans' future incomes. At worst, they could trigger a national fiscal crisis, which could accelerate and increase the economic damage.

"Since President Bush's first presidential term began in January 2001, the dollar has also dropped over 36%. Meanwhile the housing market is in the doldrums, mortgage foreclosures are in the millions and rampant federal deficit spending continues unabated."


We Warned You

Of course you've read similar warnings from me and my colleagues at the Sovereign Society for a good part of the last decade. It wasn't that we were mystic soothsayers endowed with great powers of divination. It was because we know history - and because we can count. And to this day we continue to give you good advice, even in a time of great economic suffering.

Five years ago I noted in this column: "My checkbook balance tells me I can't spend what I don't have. In fact, writing bad checks is a crime in every state. And if a collective national confidence in the economy is a key to prosperity, what happens when Americans finally wake up and discover the financial cupboard is bare?"

The Last Resort

The stark contradiction in all these extant and proposed U.S. government bailout and stimulus billions, (nay trillions if President-elect Obama has his way), is that the American people and the world have finally reached the point that a dying Benjamin Strong spoke of in 1928 - a change in mass psychology has occurred.

People now are asking the pertinent question: How can a government that is bankrupt possibly act as lender and guarantor of last resort?

The answer is that it cannot - and so we will all be paying, for years to come, in taxes, in inflation, in lost freedom, the horrible price for our government's and our leaders' all too obvious failures.

"Those who cannot remember the past are condemned to repeat it."

BOB BAUMAN, Legal Counsel

P.S. We here at the Sovereign Society are dedicated to steering a clear path between the propaganda of government and the irrational exuberance of businessmen.


Beginning of the End for U.S. Auto Manufacturing

Wednesday, November 12, 2008 - Vol. 10, No. 270

Today's comment is by Eric Roseman, Editor of Commodity Trend Alert and Investment Director at The Sovereign Society

In 1955, U.S. manufacturing was approximately 55% of the nation's GDP. Today, manufacturing is barely 15% of GDP as the United States and other industrialized countries continue to transition to service-based economies. Unfortunately, the backbone of American industry is now coming apart at the seams and desperately hungry for a government bailout.

In 2004, I predicted that one of the Big Three auto companies would fail in a few years. Though not a bold forecast by any measure - the autos were long bleeding before 2004. My target back then was Ford. At the time, I plugged put options on Ford Motor and made a profit on that trade; now I wish I had purchased long-term LEAP put options. Ford in July 2004 traded north of $13; today, Ford Motor (NYSE:F) fetches just $1.76.

Ford's stock price chart starts to resemble everything else...

Detroit is home to America's Big Three auto companies. It's also home to one of the worst contractions in manufacturing activity accompanied by seemingly never-ending losses.

General Motors (NYSE:GM), Ford and Chrysler are bleeding profusely and need emergency cash funding right away. Of the three, General Motors is headed into bankruptcy first unless the government comes to the rescue.

The world's second largest car company (Toyota is now #1), GM has just enough cash to last until January at the latest. Chrysler and Ford probably have enough funding for another 6-12 months. Beyond that period, it's Game Over.

Bailout Bonanza

The scope of Washington's bailout reach is now extending: mortgages, banking, investment banking, insurance and now auto manufacturing. Pretty soon it might extend to the airlines, real estate companies and who knows, maybe even every industry that comprises the S&P 500 Index. This whole bailout thing is totally out of control.

Should the government let the Big Three fail? Combined, these three goliaths employ more than 300,000 people worldwide with most of that total in the United States. The pressure is on the government to bailout the autos. Paulson isn't too keen on extending TARP to the auto companies but Obama certainly is. I reckon Detroit's odds of obtaining a bailout are pretty good.

With the economy showing no signs of bottoming as we shortly conclude a miserable 2008 for investors it would only seem prudent to remain underweighted stocks. The market shows no convincing ability to bottom; every major rally is met by big selling as investors eagerly grab short-term gains to raise cash.

This recession will be a long, drawn out affair, probably lasting throughout 2009, possibly 2010. Housing is at the core of this secular bear market. I don't see housing bottoming or at least stabilizing until at least mid-2009 with inventories still rising in Q3. Mortgage rates, which declined following the initial Paulson Fannie Mae and Freddie Mac government guarantee in September, have since risen again. Mortgage rates must come down.

It's now time for America to become thrifty again. The correlation between a rise in the savings rate and corporate earnings growth is negative. Earnings expectations remain too bullish for 2009 and must still be revised lower. Earlier this fall I had expected a rally following the post-October 9 crash; thus far, the Dow is up just 7% off its low for the year or 42% off its October 2007 high. Now I'm beginning to think we might test fresh lows and soon.
Equity Markets in line for another Beating.

The Dow will test its October 2002 low of 7,286. In my mind, there's no way this bear market is not as severe as the 2002 debacle. It's much worse.

Should stocks decline another 15% from current levels the Dow would sit 57% off its best level in October 2007 but still about 30% above the trough of the 1932 lows. From October 1929 until late 1932, the Dow collapsed a cumulative 86%. I doubt we'll see that sort of spectacular decline; yet it's pretty likely that a 42% peak-to-trough loss thus far won't kill this bear.

If one of the Big Three is allowed to fail, watch out. That would trigger another crash. The market is drunk, expecting another industry bailout. Let's not disappoint Mr. Market.

ERIC ROSEMAN, Investment Director


4Q 2008/1Q 2009 Corporate Quarterly Report
Grim Snapshot – The U.S. Economy in Rapidly Accelerating Freefall

Overview: Most everyone knows it’s a jungle out there for the U.S. economy, but how does this recession measure up to the last one we went through in 2001?

ChangeWave’s latest corporate quarterly survey shows the U.S. economy caught in the clutches of a recession far deeper and more painful than that of 2001 – with alarmingly low 4th Quarter sales projections, abysmal visibility, a deteriorating job market and a severe pullback in capital spending.

The survey was conducted November 20-December 1, 2008 and a total of 3,029 U.S. respondents participated.

Highlights:

4th Quarter 2008 Performance: A whopping one-in-two respondents (51%) project that their company sales will come in Below Plan for 4th Quarter 2008 – 16-pts worse than the previous quarter. Only 11% say their company sales will come in Above Plan – a 7-pt decrease.




As the following chart shows, these 4th Quarter (Dec ’08) corporate sales projections are the worst ever recorded in a ChangeWave survey dating back to the depths of the 2001 recession.

1st Quarter 2009 Sales Pipeline: There is also a huge plunge in visibility going forward. Sales pipeline projections for 1st Quarter 2009 show just 9% of respondents say their company will come in Above Plan – 12-pts less than the previous survey. At the same time, 39% report they’ll come in Below Plan – 18-pts worse than previously

Once again, these are by far the lowest sales pipeline numbers ever recorded in a ChangeWave quarterly survey.

Massive Pullback in Cap Spending: In perhaps the most ominous sign of rapidly deteriorating U.S. business conditions, survey respondents project a massive cutback in capital spending going forward.

Only 6% project an increase in their company’s 1st Quarter capital budget, while nearly half (45%) project a decrease. Note that these are the worst cap spending numbers ever recorded in a ChangeWave survey since we began asking this question back in December 2002.

Most disturbingly, capital spending is plunging at a time of year when we normally experience seasonal increases. This becomes immediately apparent when you look at the change for each December - beginning with December 2003 - in the Overall Capital Budgets chart above.

Ever since 2003, December has always been the peak point of the yearly cycle in this survey – up until December of 2007. That was when we had the critical early warning that cap spending was very seriously breaking down. Continued deterioration for the next 4 quarters led us to this December’s historic collapse.

Labor Market Woes. The survey also shows an unprecedented deterioration in the labor market. One-third (31%) of respondents say there are Less new hires in their company at this point in the 4th Quarter vs. last quarter – a 9-pt increase since the previous survey. Only 8% say there are More new hires.

Credit Crisis Tightens its Chokehold.

Over the past year we’ve been measuring the impact of the credit crisis on U.S. businesses – generally thought to be one of the key causes of the recession. Yet despite the U.S. government’s numerous attempts to open the credit spigot, the credit crunch continues to worsen.

Three-in-ten respondents (30%) now say that it is harder for their company to borrow money than it was just 90 days ago – a 5-pt jump from previously. Less than 1% say it is easier to borrow money.

Biggest Drop in the Price of Products. The slowing economy continues to drive down the prices companies are charging for their products.

Simply put, the current results show a major acceleration of the downward price pressures we first picked up in our September survey – capping a dramatic turnaround from the upward price spikes we saw during the first half of 2008.

Only 7% now report prices are rising for their company's products –15-pts less than the previous quarter. At the same time, the percentage reporting falling prices (24%) has nearly doubled.

We also note that there has been an improvement in the ability to purchase commodities. One-in-four (26%) say it is easier for their company to purchase commodities than it was 90 days ago – a five-fold increase from previously. At the same time, just 8% say it’s become harder – 16-pts less.

Bottom Line: The current survey results provide clear evidence that the U.S. recession has now entered a far more virulent period – characterized by an unprecedented and rapidly accelerating freefall.

Moreover there is no relief yet in sight. Rather, 1st Quarter sales pipeline projections are by far the most dismal of any ChangeWave survey of the past eight years, and massive cutbacks are occurring in capital spending going forward.

To top it off, the U.S. credit crunch is now weighing even more heavily on U.S. businesses than at any previous point of the past year.

Further negative indicators include a rapid deterioration of the labor market, coupled with a huge increase in cancelled orders and a pullback in customer willingness to spend.