Top 10 Reasons this recession will never end: Update 6

I've been doing a regular update on my original 'Top 10 Reasons this recession will never end" post and I think I'm going to make this my last and final entry in the series.

The previous entries can be seen here:


Top 10 Reasons This Recession Will Never End
Update 1
Update 2
Update 3
Update 4
Update 5

The reason I think I'll make this my last post on this topic is that it's beyond clear now that this recession, if it ever does end, will be no time soon.

Let's take a final look at the 10 variables I've been tracking in my assessment of how this recession is progressing. Remember, ratings of worse or better are relative to the status of the variable  in the last update.

1. Crashes hurt for a long time - worse -

We are now almost four years post-2008 crash and the markets still have not returned to their post-crash levels. In fact, they have recently started falling again, with the DOW currently at 12,500.

For the millions of baby boomers whose retirement plans hinged on a  seven per cent annualized return, they are 30+ per cent behind in their investment worth than they should be at this point. To put this in perspective, someone with a million in savings / investments in 2008, should today be at 1.3-1.5 million (with compounding interest), yet in all likelihood they are probably at around 850,000.  

This is also why the Fed has propped up equities because you can imagine what happens if the markets crash another 30-40 per cent (which I personally think they will, if not even more). That 850,000 suddenly becomes 500,000 (while the pre-crash expected returns by 2013 would have been 1.5-1.7 million).

I hope I'm wrong about all this, but I don't think I am. I simply do not see any conceivable scenario where the DOW rises to say 17,000-20,000 and gets all the baby boomers back on track for retirement. It's simply not going to happen no matter how much everyone needs for it to happen. 

Actually, I should make a correction. The one scenario in which it could happen would be massive stimulus spending in conjunction with massive inflation (the latter being the key). If we see hyperinflation then sure, stocks will double or triple in value. It will also cost you 10 dollars to buy a loaf of bread and two million to buy a crappy house. So the rise in equity values won't help anyone. 

Personally though I don't think inflation is a worry if we have a crash. In fact, deflation is what will likely occur. Right now it's hard to know what is going on with inflation because different products are doing different things. Monopolized industries are inflating (because they can milk the consumer) while competitive industries are deflating (because they have to sell cheaper than their competitor and in response to consumer spending capacity). 

But if a crash happens, I think we're looking at a total crash across all investment classes and an associated deflationary period associated with massive unemployment. 

Even if everything I think is going to happen does not, there's no way the markets are going to support the 401k/RRSP plans that boomers were counting on to retire. Not only would the DOW have to climb to 17,000-20,000 but it would then have to continue climbing over the next 15-30 years. 

It ain't going to happen. Instead of suffering a massive crash in 2008 and suffering horribly for one-to-two years, governments chose instead to string this out over 10, 20, or perhaps even 30 years. 

2. Until Debt do us Part - worse -  

Nothing new to report on this front other than the fact that debt-to-GDP ratios continue to climb and it's pretty much a guarantee that the US will have another debt ceiling fight on its hands later this year, which will result in yet another downgrade of the US. 

Four years in and no one has figured out what to do about the compounding debts accumulating in just about every country. 

Elected leaders have started getting booted out of office (as we saw in France) and I suspect that will continue over the next couple of years. Politicians are not solving the problems but rather kicking the can down the road as best they can. People are waking up to this reality and kicking them out of office. 

The problem though is that regardless of who is in office, the problems have grown over the past four years and it's questionable as to whether there's any solution at all any more. Even kicking the can down the road is getting harder and harder to do because countries can't simply print their way out of this mess without causing massive inflation. 

3. Eroded Trust - slightly worse -

Trust among the American people (and now spreading around the world) continues to erode. 

Corzine still has not been charged in the MF Global Scandal and it looks like he's going to walk free after screwing clients out of $1.2 billion.

The secret service got caught with their pants down, literally, partying it up with Columbian hookers prior to the Presidents arrival. 

Obama, who is currently attacking Romney with negative attack ads regarding his time in Bain Capital, is heavily engaged with private capital firms seeking donations for his re-election campaign. Hypocrisy seems not to be an issue when raising campaign funds, although the public shakes their head at this kind of stuff. 

And lastly we've got JP Morgan, the biggest 'too big to fail' bank in America, coming out with the fact that it lost over $2 billion on hedging activities in the quarter. For those not aware, hedging is suppose to protect your investments, not lose you money. In the days after the news the $2B turned into $3B and then speculations of $5B and as of today who knows how much was actually lost (some speculate up to $18B). 

Basically it appears the big banks are still treating the world like a giant casino and making crazy bets every chance they get. Which is not a big deal after all, if they ultimately blow up again they are still too big to fail so they will get another bailout. Welcome to the world of banana republics.

 4. Anxiety - unchanged - 

Anxiety out there seems unchanged. Which is mostly due to the fact that nothing has really hit the fan lately. Unemployment seems steady, gas prices have come down a bit, and that's about all.

5. Growth versus Replacement Cycle - worse -

So last update we had Sony cutting 10,000; the Canadian gov cutting 20,000, best buy closing 50 stores, and IBM cutting 2,500. 

This time around we've topped them all:

HP cuts 27,000

Wall street looking at 21,000 layoffs

As we mentioned in another post, RIM looking at 6,000

And all of this is not even during an official crash of any sort. In fact, it's during what Obama calls a 'recovery'. 

And let's not even get in to the unemployment rate with is supposedly at 8.3 per cent. In truth, it's more like 15.6 per cent. The only reason it keeps going down is simply because the government stops counting people as unemployed after a certain period of time. Not sure what they suddenly consider them... I guess they simply don't consider them at all. 

If you look at the labor participation rates, it's clear that things have been getting consistently worse since 2007.

Let's just state all this very simply: we are NOT growing. We are at best treading water (and even that would be a hard sell). 

And all of this is against a supposed recovery. If we have a crash, things are going to get really ugly.

6. Shareholder model breakdown - worse -

Thanks to Facebook we can officially call this much worse. 

As stated above the stock market has taken everyone to the cleaners. The past four years has destroyed investor confidence. People are no longer investing like they use to because they don't trust the markets. 

Facebook is merely the latest example that this trend is going to continue. It was the first IPO where retail investors actually jumped back in to the market. Where folks who said "I don't trust the markets" actually jumped back in to invest in their favourite social networking company. 

As of today Facebook is trading at 28 bucks off its peak of 42 bucks (which was the price most retail investors bought it at, during it's opening). That's almost a 40 per cent loss in less than a week of trading.  And the only reason its not dropping even further is that it is artificially being propped up by the underwriters. 

The markets are broken. The markets are manipulated. And the markets are NOT the retail investors' friend any more. 

The damage that's been caused to investor confidence will remain with the markets for years to come. If they had fixed all this between 2008-2010 perhaps confidence would have returned, but since it has taken so long and the markets are still a shark-infested place where retail investors go to get their legs and arms bitten off, even if we get a recovery, confidence may be lost for years to come. 

Without new investors it's only a matter of time until the markets crash beyond repair. I personally believe that it is entirely possible that if we have another crash that we could see the markets disappear entirely and the entire notion of buying equities become a nostalgic thing of the past. 

7. Lowest Common Denominator Thinking - no longer measurable -

As nations begin to crumble under their debts, they basically start to look at off-loading that cost on to the citizenry.  They can do that by making the masses take less for their labor or by taxing the rich more (so they are less rich) or by doing both. 

Which options they take will be tied to the awareness of the citizenry. In countries where the citizens are aware of what's happening, the rich will get dinged (as we'll see in France). In countries where the citizens are blind to what is going on, the middle class will get dinged (as we see in the US). In countries where the citizens are partly aware and partly blind, you'll get a mix of both (as we see starting here in Canada). 

In light of this, this particular variable is no longer measurable because too many countries will approach this differently. So you won't get any single trend, you'll get a mix of trends, none of them good mind you. 

8. Globalization - worse - 

Greece is falling apart. Spain and Italy are a total mess. There's talk that even Germany may want to exit the EU. 

The Middle East is still a mess with potential war with Iran or Syria very likely in the near future. 

Not to mention no country is standing strong right now with a healthy economy. Even China is constantly in question now.  

You know things are a total free-for-all when you have Iceland saying it may adopt the Canadian loonie as its national currency. 

9. Baby Boomer Cost - unchanged - 

This remains the straw that will break the camel's back. When baby boomers wake up one day and realize they cannot afford retirement and that their bodies' are breaking down with age, you'll start to see everyone realize that the system is unable to take care of people the way it promised in past years.  

While we aren't seeing the carnage yet of the baby boomers growing older without sufficient funds to support themselves, it's coming in the near future. 

10. Extremism - unchanged - 

Things have been fairly quiet, which is good. Unfortunately though thunder clouds loom on the horizon. You've got the US debt ceiling issue, the presidential election, potential war with Iran, potential war with Syria, the potential of another stock market crash, the potential of another 'official' recession (the UK has already been tagged as now being officially in recession again), etc. 

So the potential for extreme events in the future is there. That said, for the time being things are quiet, which is an improvement when compared to the world two or three years ago. 

11. Bonus: inflation - unchanged -

As stated above, inflation is not running rampant just yet. You've got a mix of inflation for some goods and services and deflation for others. 

The Fed has so far avoided doing another round of stimulus (ie. quantitative easing), which has kept inflation in check. If things get economically worse though, and they do another round of stimulus, inflation will kick in. If things get worse and they don't ease, then deflation will kick in. 

So we'll have to wait and see what happens on this front. 

So there you have it, my last post regarding the recession that will never end. I hate being right, but it looks like I was. 

We'll see what the years ahead bring, but it looks like the world we are living in today is what we can look forward to over the next 5, 10 or 20 years (if we are lucky!)