Systemic Risk is Higher Than in 2008

Here are a few zingers for the “recovery” crowd.

§  The US economy added no new jobs last month. That’s the first time this has happened in the post-WW II period.

§  Productivity in the US has declined in back to back quarters (despite QE 2). If we get another decline in 3Q11 it will be the first time this has happened since the depths of the 1979 recession.

§  Today, the US employs less people in manufacturing than it did in 1942. By the way, the US population has doubled since then.

§  The mean duration of unemployment is at an 80-year high.

These are not simply “things are bad” numbers. These are “economic disaster” numbers. The fact they’re coming after the Government and US Federal Reserve have spent TRILLIONS in stimulus should give you an idea of just how dire the situation is in the US economy.

I’ve seen countless arguments for why we’re about to see a new bull market. They are:

1)   Cash on the sidelines

2)   Companies announcing buybacks

3)   Banks are better capitalized

#1 is outright wrong. Mutual fund cash levels are at all time lows. Consumers are broke. So where is all that cash that investors are going to pile in?

#2 doesn’t mean anything either. Corporate insiders are dumping their shares by the truckload. If they really believed their stocks were cheap, why are they sell their personal shares while having their companies buy them back?

Two other aspects to the buybacks arguments: a company only buys back its stock when it doesn’t see any point in reinvesting it in the business. So the fact companies are announcing buybacks is actually a bad thing in that it reveals they are neither hiring nor investing in research or new programs.

#3 The banks are insolvent. End of story. They’re sitting on tens of TRILLIONS in crappy derivatives that are marked to fantasy accounting. Look at Bank of “well capitalized” America. If their balance sheet is so solid why do they need emergency injections from Buffett? Why are they selling off ownership in assets to raise capital?

And on and on.

I will be blunt here. Systemic risk is higher today than it was in 2008. Anyone who claims that the financial system is stable can look at either Treasuries or the credit markets. Look at Europe where the entire banking system is collapsing.

In plain terms, we’re on the even of the Great Crisis: the Crisis to which 2008 was just a warm up. We’re going to see bank holidays, civil unrest, food shortages, market crashes, and more.

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Good Investing!

Graham Summers

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