Investors must be pondering the future.

What will the future look like? No one knows. But investors thought they saw things they liked.

For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose “indefinitely.”

Indefinitely is otherwise known as “as long as it takes.”

But as long as it takes for what? Ah…as long as it takes until the economy appears strong again.

How long will that be? Ah…maybe longer than anyone realizes.

Yesterday, we were calculating how long it would take to get the jobless number back down to ’90s levels…that is, around 5%. There are now about 131 million jobs in the United States…and about 15 million people who would like a job but can’t find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction – backwards. It’s losing jobs…maybe 3 million this year…and maybe another 2 million or so before it finally stabilizes (who knows?)…for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let’s suppose, by some miracle, the economy turns around…and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half – 1.5 million – gradually reduce unemployment. Now, let’s get out the calculator…20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!

But what if the economy doesn’t grow at 3% per year? Ooooh…that’s the problem, isn’t it? All the feds – and practically all other economists too – are projecting a return to normal. They expect a ‘recovery.’ But what if there never is a recovery?

Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.

“Canberra says risk of serious retraction over,” The Financial Times reports.

But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.

Or maybe they failed to notice that China’s biggest customer is broke.

Right under The Financial Times’ article about Australia is the following headline:

“No sign of credit revival for US households.”

“The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July – the fastest rate since the crisis began two years ago.”

Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.

Another headline in The Financial Times tells us, “Holiday sales [are] set to fall.”

Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?

Perhaps China is focusing more sales on the domestic market; we don’t doubt it. But you don’t refocus the world’s second or third largest economy in 12 months. It takes years. And you don’t get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls – it makes one helluva mess.

Meanwhile, President Obama is adding more gin to the party punch. He says he’s considering ways to create more jobs without a new stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.

Hey, why not! They had such great success with the Clunker tax credit…and with the first time house buyer tax credit. Of course, when you pay people to do things, you can’t be too surprised that they do them. And then, you can’t be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don’t be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP…or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears…through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That’s savings and capital formation of all types – corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America’s private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well…that’s a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled – by the Congressional Budget Office – to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs – it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy ‘recovers’ quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause…it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

Until tomorrow,

Bill Bonner

Source: The Eternal Depression

As always, the drama’s in the details. “Cash for clunkers” was by far the biggest driver of new spending, almost single-handedly pumping up durable goods orders 5.8%. Interestingly, August’s rise was the biggest since October 2001 — right after Sept. 11, when retailers slashed prices and President Bush urged us to go shopping and “Get down to Disney World.” Heh… looks like only government decree can whip us into such consumption frenzies.

And for our 1.3% leap in spending, American incomes rose just 0.2%. In fact, when adjusted for inflation and taxes, what the government calls “real disposable income” actually fell 0.2%. What’s more, we as the collective “consumer” spent over $129 billion more in August, but chose to save $112 billion less. Savings as a percentage of personal income is now down to 3%, from 4% in July.

This “indicates economic improvement”? Must be reading the wrong release…

Source: Spending Soars, Savings Suffer

Whether the action can be accredited to the greatly debated Cash for Clunkers program or if it is merely the effect of natural economic forces, there is good news out of the auto industry these days… finally.

First, there is word from General Motors (NYSE:GRM) that it plans to expand production at three of its manufacturing facilities. For the nearly 2,400 workers that will be invited to work on the third-shift line, the news is the best they have heard in a while.

It is a similar story at cross-town rival, Ford (NYSE:F), except few American workers will be clocking in for the new shifts. The company is widely expected to announce its plans for a third major production facility in China later this week.

Ford’s news is strong evidence of Asia’s long-term growth potential, especially for American car manufacturers dealing with a weak currency back home.

A bit further down the supply chain, Dana Holding Corp. (NYSE:DAN), a major automotive industry supplier,  is adding to its spectacular six-month run today as its shares surge by nearly 30%.

The stellar gains come as the company kicks off a public offering of 27 million shares. The sale, which is likely to bring in close to $200 million, will be used to repay the company’s massive debt.

While $200 million won’t pull the company out of debt, it will help. The heavy load created by over a billion dollars in debt was one of the driving forces that took share price as low as $0.19 over the last year.

With shares of the company trading for close to $7.30 today, investors who got in at the bottom are sitting on gains of more than 3,700%. Not a bad profit for six months.

Room for more gains?

Over on the retail side of things, the situation is nearly as optimistic.

CarMax (NYSE:KMX) shareholders are smiling today as their company’s value has surged by double-digit proportions on news that the company’s second-quarter sales were better than expected.

Thanks to the crowds awakened by the Cash for Clunkers incentive program, the massive car retailer raked in a record-breaking profit of $103 million over the past three months.

Now the big question on everybody’s mind is will the profitability and growth be sustainable?

Already, there are signs the industry is beginning to slow. Some reports have new-car showrooms even emptier than before the massive incentive program. If that is the case, those recalled workers may be back in the unemployment line all too soon.

If you are a long-term investor, you can afford to keep your shares in the game. Eventually, today’s prices will look cheap.

But if you can’t stand some short-term volatility or are sitting on a hefty pile of profits, now would be a good time to pull some chips from the table.

Detroit has found safety in a calm meadow, but it is not out of the woods yet.
Source: Detroit Update: Finally Some Good News?

This morning’s Commerce Department release of +2.7% places August retail sales well ahead of the 1.9% “expert” consensus.

Great. Now that they’ve “pulled forward” car sales for the next 12 months…what’s next? How about… Appliances!?

Later this fall, Uncle Sam will being doling out up to $200 a pop (in borrowed money) to anyone who wants to replace an old appliance. Yeah, that’ll keep retail and GDP stats humming along.

Wholesales prices rose last month twice as much as forecast…thanks largely to rising gasoline prices. The 1.7% jump in August followed a 0.9% decline in July.

“Core” PPI excluding food and energy rose a more modest 0.2%. But that was also double analysts’ expectations. Turns out a good amount of that was driven by higher prices for cars and trucks, too. Whaddya know… “Cash for Clunkers” gave automakers an excuse to cut back on factory-to-dealer incentives.

Dealers don’t experience a squeeze without passing the costs along to customers. Which should make tomorrow’s release of the consumer price index (CPI), well, interesting too. The consensus says a 0.3% increase. We’ll see what tomorrow brings.

Source: Cash for Clunky Appliances?

Good day… And a Happy Friday to one and all! I’m going to go out on a limb and say it will be a Fantastico Friday! This has been a long week for yours truly, coming off a week of relaxation, and getting right back in the saddle… But… It’s Friday… YAHOO!

OK… There are a few things to discuss this morning, but none so important as the Jobs Jamboree that will happen in a couple of hours from now. I told you yesterday that the economists surveyed believe that the jobs lost number will make a big move downward from 476,000 in June to 325,000 in July… That’s a HUGE jump folks! Ty Keough responded to that note in the Pfennig yesterday by saying, “That’s because there are no more jobs to cut!” Now, that’s one way of looking at it… We have to hope that it’s not that, but instead be a reflection of jobs being added… Come on! We can hope!

Yesterday, the Weekly Initial Jobless Claims printed, what I think is a worse than expected number… The media however, looked at it differently… Here’s the skinny… The Claims filed last week hit 550,000, and were expected to be as bad as 580,000, which is why the media began firing off headlines about Jobless Claims falling… And that’s fine… But the thing that caught my eye was the rot on the Continuing Claims part of the data… This is the number of people who are unemployed and are currently receiving unemployment benefits, and that number jumped to 6,310,000… That’s over 6 million people that are still receiving unemployment benefits, it does not count those that have had their benefits expire… It’s not a pretty picture, folks…

And… This might give you an idea of the total unemployed… The number of Americans receiving food stamps pushed to a new record-high in May… 34.4 million people, or one in nine Americans received food stamps, and this was the 6th consecutive month on increases, so we have June and July to catch up with here… UGH!

OK… Enough of that labor talk! The currencies once again traded in a tight range yesterday, but this time the bias was to buy dollars, for the first time this week. But like I said, the trading range was tight… The euro, for instance, popped up to 1.4425, then down to 1.4335, then back to 1.44, only to spend the rest of the day in the 1.43 handle.

Pound Sterling was knocked off its perch as the star performer currency yesterday when the Bank of England (BOE) decided to EXPAND their bond buying. Recall, I had told you earlier this week that the recent stronger economic data had the market participants thinking the BOE would call off the bond buying / Quantitative Easing (QE)… But the BOE had other plans! And the currency got taken to the woodshed, and rightly so! QE is bad… Say that out loud… QE is bad… And more QE is even worse!

In the overnight market I noticed something that I’m sure most people will not even take the time to read… Here’s the skinny… I’ll give you the headline, and then you try to figure out how this plays well with what I’ve been writing about… “Australia to Resume Sales of Inflation-Indexed Bonds”

OK… If you said… Australian officials must see inflation pressures in the future, which plays well with what Chuck told us earlier this week about how the Reserve Bank of Australia (RBA) raised their bias for interest rates from accommodating to neutral. If you said that, then you get a Gold Star today! You’ve been paying attention in class! To the Head of the Class you go!

Seriously though… This is the first time in 6 years that Australia will issue inflation-indexed bonds… That’s a warning signal we just heard folks…

Did you happen to see the BIG BOSS, Frank Trotter on CNBC yesterday? Our PR people sent out a note last week and asked both Frank and myself if we wanted to do a shot on CNBC… Having been ambushed there twice in the past two years, I pleaded with Frank to do it, and he graciously accepted the mission. And he executed the mission to a “T”! He told people that they needed to diversify with currencies, and talked about Norway and Australia as key components of a diversified portfolio, and then added in Brazil for those with a speculative axe to grind. He even mentioned our new 100% principal protected MarketSafe BRIC CD! Way to go Boss! As it turns out, I should have done the piece, as no ambush took place, but who knew?

Speaking of Brazil… Our newest guy on the desk, Aaron, sent me a note yesterday afternoon, with Martin Weiss’s latest letter… It seems that even Martin Weiss believes that Brazil will be one of the first countries to recover from the global recession, and that it is a good place to invest… At least that’s what I got from the letter… When someone as well read and respected as Martin Weiss talks about Brazil, then we should take notice, eh?

In the Eurozone this morning, German industrial orders increased for the second consecutive month, rising 4.5% in June. The forecasts were for a 1% gain, so this move was unexpected to say the least! The data is old though, and did not give the euro any reason to move higher…

And the Swiss franc continues to move higher despite warning and warning about these moves by the Central Bank… I find this to be funny… Like funny , HA, HA… The Swiss Central Bank began warning the markets to not take the franc higher and for 5 consecutive weeks the franc has moved higher VS the dollar… You see, if the Central Bank doesn’t make the money talk, then their verbal warnings don’t amount to a hill of beans! My dad used to tell me… Money talks… B.S. walks… I think that plays well here in Switzerland!

Hmmm… Did you see the retailers’ sales data yesterday? The ICSC Chain Store Sales for July fell 5%… I guess the real problems for retailers will come this month, for if they are unable to push higher with the back-to-school sales, then I think the pundits and economists that are calling for an end of the recession now, will have to go back to their drawing boards!

And… You knew I would eventually get around to this… But the Cash for Clunkers or CARS program got $2 Billion more yesterday… This is being hailed as a great program to get Americans buying more fuel efficient cars, while euthanizing their old cars, and stimulating the economy… Apparently, dealers are running out of inventory… That sure seems to be strange to me… Here’s what I think is going on… People trade in cars for new cars all the time… According to Edmunds.com, Americans would have traded in about 200,000 clunker-type vehicles in a typical three-month period. So… Have we just taken that 3-month period and crammed it into two weeks to take advantage of the CARS program? For an industry that was expecting to sell about 10 million cars and trucks this year, that’s a 0.5 percent sales boost. I don’t see the euphoria… But then I’m not trading in a car right now!

Hey! Did you know that my friends, Addison Wiggin, and Bill Bonner have new books out? They have done updates to the best sellers, Financial Reckoning Day, and Empire of Debt. Addison sent me a note the other day to let me know that these brand spanking new updates are now available at Barnes & Noble, and Amazon… Financial Reckoning Day was a real eye-opening book, I can’t wait to get my hands on the 2nd edition! And Empire of Debt, is the book that spurred the I.O.U.S.A. movie and book… If you haven’t read the originals yet, here’s your chance to do that and get the 2nd edition at the same time! Everyone knows how to get books at Amazon… So what are you waiting for?

Currencies today 8/7/09: A$ .8360, kiwi .6725, C$ .9225, euro 1.4355, sterling 1.6740, Swiss .9390, rand 8.1420, krone 6.0750, SEK 7.1750, forint 190.10, zloty 2.90, koruna 18.06, yen 95.20, sing 1.4370, HKD 7.75, INR 47.90, China 6.8318, pesos 13.06, BRL 1.8415, dollar index 78.06, Oil $71.35, 10-yr 3.74%, Silver $14.68, and Gold… $961.55

That’s it for today…enjoy your weekend!

Chuck Butler

Source: A Jobs Jamboree Friday!