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What I See Ahead for the Economy

31 | By Shah Gilani

Let’s try and be insightful today, shall we?

Equities have been rallying; we’ll call it the summer rally.

Major benchmarks are only a few percentage points off their highs. It’s all good, right?

I don’t think so.

We could use the old “can’t see the forest for the trees” adage, which means, sure, you can look at all the trees around you and see they’re still standing, because you’re in the middle of the woods. But you can’t see the whole forest, because you’re too flat on the ground and too deep under the canopy.

Let’s rise above the treetops and market highs and look down, to get the big picture.

Here’s what I see. There are too many trees to measure the health and height of each one. But I see something much simpler on a path through the woods that we’re going to look at and draw our insights from.

Yes, I see a team of horses, yoked together, pulling a huge wagon up a steep, meandering slope.

One of the horses embodies central banks, banks, bankers and market players. The other horse embodies the markets: stocks, bonds, commodities, and real (estate) assets. The large and heavy wagon they’re pulling is the economy. It doesn’t matter which one. Think of the U.S. economy, or the European economy, or the global economy.

Some of the stuff in the economy wagon includes horse parts, things like equity, fixed income and real assets, stuff like real commodities, too, not just the paper stuff.

Did I mention that the horses are yoked together? Did you notice that the horses are pulling the economy wagon?

“Don’t put the cart before the horse” is another adage.

Well, here’s what happened, at least as far as I can see from up here.

The wagon got too heavy. Mostly from real estate and paper instruments that ended up getting soaked when the leverage bubble, which got blown up by overuse of the low-interest rate pump, popped and rained on everybody’s parade.

So the guys who own one of the horses in the team (did I say they were yoked together?) decided they were struggling mightily and could end up being dog food (they were already horse-whipped to near total collapse and death) decided to unhitch them from the wagon.

Who owns that horse? There are a bunch of owners, breeders, really. They run the Central Bank Stables and breed race horses as well as draft horses.

The other horse in the team, yoked to the CB Stables stallion, isn’t a horse they own. She’s a filly that they train, on account of the fact that they’re trainers and jockeys too.

Either way, that other horse, because she can be bred for huge fees on account of her foals being worth a lot in the future, has to be taken care of too. Kind of like breeding “futures” you might imagine. Futures of wealth for the silent partners who actually control the goings-on at the CB Stables; yeah, those guys.

As it turns out, the wagon is stuck, and the team of horses has gotten ahead of themselves.

No one would ever advocate cruelty to animals, so they were cheered on by most people, even though most people were cheering grudgingly.

But here’s the rub. They’re a team, you know. And you can’t hope the breeder’s horse drops dead and the filly gets to run wild. They’re yoked together. (Did I say that?) So if you want the filly to have a life, you have to go along with keeping the other horse alive.

At some point, the wagon is going to have to get hitched back up to the pulling horses, or it ain’t going nowhere.

From above the trees, I see that wagon, which was holding its ground on the slope it was abandoned on, starting to slip. Did I say it was one big, heavy wagon?

Oh, I forgot one thing. That’s because I almost couldn’t see clear to the ground because of all those trees. But there’s a long, very long, set of reins that still connects the wagon and the horses.

As that wagon starts to slip backwards, it won’t matter how healthy those horses look and how far they’ve gone ahead of their heavy load. They’re going to get yanked back, reined-in, and maybe broken.

You don’t think so?

Have you seen what’s weighing down the wagon? Haven’t you seen it starting to slip?

The economy here in the U.S. looks like an old nag is pulling our giant rickety wagon.
Unemployment is at 8.3%. Real estate prices have been up in some areas. Up? Up is relative. Like The Doors sang, “I’ve been down so goddamned long, it looks like up to me.” Foreclosures this month are up 6%, according to RealtyTrac. Consumers aren’t spending, and what they’re buying, they’re back to buying on credit. Savings rates are back to non-existent levels. And we’re facing that fiscal cliff thing.

How bad is the fiscal cliff?

First of all, people, it is real and it is not going to be addressed on any long-term basis. We will go to the edge of the cliff, look over, lose our national footing, and be saved (hopefully) by a last-minute, temporary “fix,” which will be too little too late.

Want to know what’s going to happen to our wagon then? Just look across the pond at Europe. That’s where we’re heading.

The U.K.’s (great Olympics, you lads and lassies!) industrial production numbers are now the worst in 20 years. At 97.3, they are down 2.5% from May to June. Their economy continued to contract through July. That makes three consecutive quarterly declines. Two quarterly declines in a row constitute a recession.

Italian GDP was down 0.7% in the second quarter after falling 0.8% in the first quarter. Year over year growth is down 2.5%. Italy is experiencing its fourth consecutive quarter of negative GDP growth. And about those bond yields… they’re going to sink the country.

Germany, you know, the biggest economy in Europe, saw industrial production dip 0.9% in June, erasing some of the 1.7% upside they saw in May. Year over year IP is down 0.3%, and German government officials are saying they’re seeing “growing signs of decline.”

Spain? Oh, things there are just peachy. Spain, the Continent’s fourth-biggest economy (Germany is 1, France is 2, Italy is 3, Spain is 4, and the Netherlands is 5) just notched its tenth month in a row of declining industrial production.

The Netherlands just announced IP fell 0.6% in June, from a lackluster May.

Greece? We won’t even go there.

China? Slipping into darkness.

So, how did those horses get so far ahead? Oh yeah, that would be by manipulation. The same kind of manipulation that China, the ECB, and the Fed are ratcheting up again.

Can those horses break free of the reins that bind them to reality (it’s the economy, stupid) and run wild?

Sure.

Just don’t lose sight of the reality that it’s the economy, stupid.

… Did I already say that?

Shah

31 Responses to What I See Ahead for the Economy

    • Tom O'Leary says:

      Thank you for the graphic report.It causes me to ask- will heavy load on the WAGON defy inflation and resort to deflation for the
      ECONOMY/FINANCIAL SYSTEM?
      About Un/Emplotment-the classic model is defunct,ref-Lester THorow’s observations of decades ago.Regard,TomO’

  1. JohnD says:

    “Been Down So Long It Looks Like Up To Me” is the name of a book by Richard Farina, published in 1966–before The Doors plagiarized the phrase in the 1970s.

    • tom says:

      Well done.. You saved me an email I planned on sending with the same info. Its ok Shah didn’t know but it bothered me the Doors didn’t give credit to Farina.

    • Robert in Canada says:

      I agree Roger – Shah’s article is metaphorical to the point of being un-readable.

      Regarding Shah’s comment “China? Slipping into darkness”, the fact is that China is forcing their economy to slow down a little.

      China has put the brakes on to make growth go down from 9% to 7.5% – that is not slipping into darkness Shah.

      And China can ease off the brakes anytime they want their economy to ramp up again.

  2. Dr Ralph Krutulis says:

    Great analogy! It does appear the next drop may crash the whole global system. We are clearly headed that way.

  3. Philip Evan Hope says:

    Funny how we are using the term ‘economics’ these days. There is no ‘economy’ about any of the moves our leaders and bankers have made in response to this ‘fecal mire'(I am being polite) of their own creation. Perhaps it is really ‘macro-economics’ they are talking about….that is..saving their own crooked asses and that of all of their crooked cronies..rather than effect real lasting repairs to the very system that created the massive wealth to begin with. Shah your next analogy should be about the “Hole-the-Wall Street Gang” and how they stole so much gold that there is no gold left to steal, and how now they are reduced to pick-pocketing, because they have to have at least have something dishonest and unethical to keep themselves busy.

  4. H. Craig Bradley says:

    MEANDERING MARKETS OR CRUSHING DECLINES?

    Everything you just said points to either a very severe global contraction (depression), extended over a long period of years (if we are lucky), or if unlucky, a 1929 style market-economic collapse. The long term drawn-out scenario is probably what we are in right now, as it began in 2001. A severe market crash a la October 1929 would require some sort of “trigger”, yet unknown.

    If we really knew the future, or even the odds of the latter scenario- acute contraction, then we might be able to better protect ourselves (assets). It does little good at all to find out we are in a depression after we hit bottom. Personally, I don’t think we are at a market bottom at this time, but we may find out sometime in 2013 after the presidential election is over. When the U.S. BANKERS want us to find out, then we will all find out together and suffer together. However, “they”** sure won’t.

    * Political class, U.S. BANKERS, ultra high net worth individuals.

    • tom says:

      Spot on comment. The upside to the future is there are more resources available to avoid a complete meltdown. Even those who are manipulating don’t want the golden goose to die or be completely incapacitated.

  5. ASHLEY GOODMAN says:

    I like the image of the overiloaded wagon drapping the four horseman down the mountain and over the cliff. Ron Paul said it very simply, i.e. the United States is Bankrupt. He might of included the enire western economies in that observation but he didn’t. I believe that what has happened is fault of the centeral banks and is treasonous.and if I were Stalin, I’d have they all burned at the stake. after a painful trial. Jefferson said something to the effect that no generation should be able to indebt future generations. I agree in principle. I suggest that the each indebted nation and its citizens should declare uniiveral bankruptcy here and now. Thereafter each of us is granted an equal financial stake in the new economy from which we proceed to build our respective fortunes witha new clean currency. . I can hear the screams now but what other alternative is there. Ask yourselves what can your money be worth if its purchasing power is totay destroyed by more and more Quantiative Easing. I”ll answer that ; Less than nothing.

    • nonasumpsit-sansrecourse says:

      All according to “their” plan,Im shure these inbreds(the British crown)have a “new” currancy to “save” the(their)world,LET THE PEAPLE AT LAGE REJECT IT!,Let us find the “bolt hole”(should be easy,it will be the fortress whith the moat)that these inbred international banker are hiding,drag them and their brood out into the streets,whipe the cocain(as their decisions bear out,they are obviously on drugs)off their noses,and let the “mob” deal whith them,because you have to know,that physically,they cant fight their way out of a wet paper bag.

    • Ed the Grocer says:

      It won’t be that pretty. Once upon a time there would be somewhere to run to. Now, the hideaway is already overrun and the one percent have just realized that. The poor people aren’t dieing fast enough. We will all take a hit so it would be wise to find a small isolated town with good weather and good fishing. Throw in a gold mine or two for luck and cross your fingers. Oh, right, I’m already there! Yesss.

  6. Dom says:

    Not a big fan of the analogy, but I think I get your point. All the horses of Europe, China, US, etc are pulling the same wagon, aka global economy. If one horse falls, dies, wtvr, then the whole cart stops and thus the whole economy collapses / retracts significantly.

    I generally agree, but allow me to play devil’s advocate. If we are so connected, why haven’t the US markets been struggling as much as Europe? Despite all its woes, such as the one’s you’ve listed above, the US has been rallying well over the last few weeks and since the March 09 lows, up over 100% since then. Sure we have our problems too, but so far equity markets seem to have shrugged off Europe…

    Again, me playing more Devil’s Advocate. Not sure if I consider myself a bear or bull right now. Would love to hear your insightful thoughts.

    Dom

  7. Doris Kelsey says:

    Agriculture is our largest economic engine. It doesn’t look good from here (out my window). What does it look like when you scrunch the numbers globally?

  8. Kevin Donnelly says:

    We cant see the wood for the trees
    We can’t get the honey without bees
    We live in a land of resources and splendor
    We must open our minds to it’s greatness and grandeur
    We must share in it’s bounty with effort and honor
    We must live a good life for those who come after.

  9. Brad Morgan says:

    The Central Banks run the world, but, unfortunately, care little about it. European economies are growing weaker and the United States is following. The only question is just when and how fast it will happen and how bad it will be. Will it lead to wars as well?…. Or perhaps some new global currency and economic system.

  10. Ed the Grocer says:

    It is reasonable to create images to in order to dramatize the debt problem. There are other pictures to view. China? They have destroyed about one quarter of their cropland and they didn’t have much to start with. They are riding a wave of international buying but what happens when the money and the supply runs out. And don’t worry, they are not coming here, their navy sucks. 1,400,000 people and not much food. Now that is an image that needs a paragraph or two.
    How about North America? 500,000 people eating corn, soy and chemicals. Essentially the worst shit on the planet. Throw in vaccines and fluorides and you have the potential for a generally stupid and sick population. What a sight!
    Oh the Mediterranean. The NWO destroying one country after another!
    It brings me back to money. When you use only money as a meter ( masked by inflation ) it appears as if we are all in it together and gently slipping down hill. Not in real life. In real life many, many people have already gone over the edge. And by my calculations, they won’t be back. It would do us all good to have long conversations with people from the second and third worlds. You will find that the word ‘hope’ never comes up. Therefore it is up to us and the time is now.

  11. Amit Ruparelia says:

    Shah, as with almost all of your articles you need to learn sons serious editing lessons, if you want to be taken as a serious economic commentator. Your articles are way too long. Some of us who run businesses regularly get thru 300 or more emails a day. When trading I want to get to the meat of the commentary and then make a judgement as to whether I consider it merits action or inaction. Very often your articles appear loaded with lots of personal views overloaded with cliched metaphors and similes; one often gets the impression that you are just trying to fill space. Cut out lots of the flowery language and adjectives. Use of more bullet points to make your point would also help. There endeth the fifth lesson. Happy to provide you with some quality editing for a very reasonable fee!! Amit R

  12. eric taylor says:

    “In the long term we are all dead”; yet, Asia is still growing,
    even China, with some of the lowest price stocks in the Third
    World, even though they seem in between the First and the Third.
    Perhaps there is hope for long term investors if the stock they
    take has good and plenty of Asian revenues, and the options
    that are bound to follow the momentum winners.

  13. alex gogan says:

    I have been saying for years that once real value left the market and goods them it was only a matter of time. Most of what people are buying now are ‘ giffen goods’ because of notional value. This lead to hyped prices and feeding frenzies.

    one of the only ways the global economy can survive now is the debt reset button been pushed, and forcing prices down to real value rather than a notional one.

    But as this is not going to v happen then I guess it’s the cabin in the hills >:~}

  14. Rick says:

    I can’t see any any other scenario. It’s right in front of us. It doesn’t matter who gets elected in Nov. We have passed the line in the sand. Get ready. Also, if you have ever had the unforturnate experience of been down so long it looks up to me it doesn’t matter who wrote it. Again metaphor.

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