Recession 2008: GE’s Warnings Show how the Crisis is Spreading
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Last week, General Electric — one of the finest companies in the world and an American icon — announced a major fall in earnings. Amazingly, the bad news surprised Wall Street. GE shares fell 13 percent in a single day. Some surprise!
GE is one of the best-diversified and well managed companies on earth, and is seen as a barometer of both the U.S. and the world economies. Its latest earnings report was affected by the expected fall in financial services and a continued strength in overseas earnings. But it also showed a largely unexpected fall in the sales of U.S. medical devises as public and not-for-profit hospitals, suffering massive increases in their borrowing costs, cut back on spending.
The fall in GE’s earnings suggests that recession in America is taking hold across a wider spectrum and is not restricted to sub-prime real estate. As this idea reality finally began to dawn on Wall Street, the Dow Jones Industrials and other broad market indices lost some 2 percent on the day.
As investors lick their wounds, they should also realize that nominal losses in U.S. stocks are really just half the story. So far this year, the American dollar has lost some 7 percent against the Euro and some 10 percent against the Japanese Yen. As more GE-like earnings reports loom on the horizon, and as the dollar continues to slip, holding even blue chip American stocks will remain a risky proposition.
False rally
Not long ago, before the sub-prime debacle (of which Peter Schiff and I had warned of repeatedly) really began to take its toll, the majority of economists foresaw little widespread difficulties in the American economy. However, when Bear Stearns became completely unraveled almost overnight, most of these formerly optimistic observers now belatedly recognized real problems. Their fears have been largely assuaged by the magnitude of the Government’s response.
Using methods that the legendary former Fed Chairman, Paul Volcker, said, “stretched the very limits of its legal powers,” the Fed dramatically rescued Bear Stearns on March 17th. Such was the sanguine sense of relief that investors felt our national economic problem had been largely cured, at a single stroke, by the Fed.
In the four weeks since March 17th, stock markets appeared to rally, on the back of what can best be described as the ‘euphoria of blindness’ to the realty of the systemic economic problem we face in the ‘real’ world.
Credit contamination
Renowned Yale Professor Robert Shiller has shown that from 1995 to 2006 the value of U.S. real estate rose some 30 percent above its century-long value line. Today, the U.S. residential housing stock is valued at some $20.145 trillion, of which more than half is debt! Admittedly, not all this debt is sub-prime. But the sub-prime problem is, as we have long forecast, spreading both upwards and across the real estate field and the credit markets.
As the average consumers’ single most important asset is their homes, the fall in house values is now adversely affecting American consumer confidence. This bodes ill for both the American and the world economy, in general.
The Fed Chairmen, Ben Bernanke, now has an historic opportunity staring him in the face. Should he continue to back the government in disguising the natural economic recession, by debasing the U.S. dollar and so continue to rob every single American citizen of his or her hard-earned wealth? Or should he, at long last, stand up for American citizens and their money by using his ‘independence’ to force our government to adopt sound economic and financial policies?
Cosmetic patches versus radical cures
Recent pronouncements indicate that he has decided to ignore his legal ‘independence’, and instead submit to political pressures and allow the government to silently tax current and future citizens in order to bail out financial and real property. Characteristically, Wall Street appears to applaud the decision, accepting both more inflation and further debasement of our dollar to save themselves, for a time, at least.
The Fed balance sheet amounts to some $800 billion. This sounds like a lot of money and it is. But it is dwarfed by the county’s debt exposure, which includes not just the $10 trillion of residential property debt, but also trillions more in commercial property, auto loans, and credit cards and increasingly vulnerable business loans!
The key question is: Does the government have enough money to finance a bailout of several trillion dollars? The answer, of course, is no. But, although national savings are at an all time low, both the American taxpayer and many ordinary citizens still have some net worth that can be both taxed and eroded by inflation and currency debasement!
Recent pronouncements to extend the regulatory powers (read: funding ability) of the Fed to the really big gamblers, namely investment banks, derivative traders, insurance companies and even to hedge funds (the speculative vehicles of the super rich) and the increasing political talk of ‘help’, indicate that both the government and Congress are now set on a path of higher taxation, inflation and dollar erosion.
For alert Americans, investment attitudes must undergo a sea change. Instead of thinking in terms of return ‘on’ capital, investors will be well advised to think about return ‘of’ capital! Greed should give way to extreme prudence.
It is becoming increasingly clear that any investors, who wish to protect their wealth, should invest in non-dollar denominated financial assets and, where possible, hold them (legally, including paying tax) offshore, in order to avoid any risk of the future imposition of American exchange controls.
As the old song goes, ‘the times, they are a changing’. Soon unfortunately, that refrain will bring smiles only to those who have taken wise protective action with their investments.
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Tags: American Economy, American Stocks, Bear Stearns, Bernanke, Dow Jones Industrials, fed, GE, inflation, Japanese Yen, real estate, taxation, US dollar, World MarketAbout the Author
John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. He is a contributor to Money Morning and Today's Financial News.
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Comment by david hill on 2 September 2008:
Britain in recession 2008! Europe, part of the western hemisphere and part of SE Asia in recession 2009! Fully blown world in recession 2010! This seems a fairly confident and predictable outcome considering that our banks, who have caused the worst economic crisis in modern times, now have no real money of their own in reserve. The reason why they cannot lend anymore at the level they could and why the world is heading for the socio-economic turmoil that is clearly upon the horizon now. Many of our banks will undoubtedly go to the wall according to the edicts of capitalism and the market forces dictum. With share losses of western banks, insurance groups and investment institutions of US$2.7 TRILLION over just the last 18 months and bank losses in excess of well over US$1 TRILLION predicted when this is all over, the forecast becomes more-or-less a certainty. Indeed, who would have thought that Europe’s once largest bank UBS (and one of the largest in the world) would have been worth a mere 25% of what it was only a mere 15 months ago. But adding to this many are now worth less than 60% of what they were. Unfortunately the unseen suffering around the world that these great bank losses will cause to all people should be the main point of our anxiety. For in this respect millions will die through a global recession that had nothing at all to do with them. Let us hope that when we are all over this terrible malaise in a decade from now, that governments around the world will make perfectly sure that our banks can never crucify us ever again. Do we really learn is the question?
Dr David Hill
World Innovation Foundation Charity (WIFC)
Bern, Switzerland