January 17, 2016

As AP Blames World for Stocks’ Dive, CNBC Columnist Warns: ‘Worse Than 2008′

The Associated Press’s coverage of Friday’s deep U.S. stock market dive in two Friday afternoon reports engaged in the reality avoidance longtime readers here have come to expect.

An item by Stan Choe (“Get used to it: Big drops for stocks are back again”) spent most of its verbiage on “volatility,” and only cited “China’s sharp economic slowdown … Tensions in the Middle East … the plunge in prices of oil and other commodities” as reasons why the “volatility” will continue. (AP seems to believe that “volatility” is a synonymn for “decline”; it isn’t.) Separately, Alex Veiga’s more detailed coverage, after an analyst’s insistence that “Oil is the root cause of today,” didn’t get to Friday’s awful economic data until his ninth paragraph, and then only vaguely descrbed “some discouraging economic news.” Meanwhile, a CNBC columnist, using a word amazingly not found in either AP writeup, warned that “A recession worse than 2008 is coming.”

As I noted in a Friday afternoon postabout the Obama economy’s latest results:

  • December retail sales dropped a seasonally adjusted -0.1 percent, and came in only 2.2 percent higher than December 2014, a result which in the past has been a recessionary red flag.
  • Industrial production fell by 0.4 percent in December, after a downwardly revised drop of 0.9 percent in November. Industrial production has fallen by 1.8 percent in the past 12 months — the worst such result in eight years, and another historical warning of a recession.
  • November manufacturing and trade sales fell by 0.2 percent from October, and came in a stunning 2.8 percent below November 2014. Inventories-to-sales ratios are also at historically recessionary levels.
  • The Empire State Manufacturing Index came in at -19.5 (a negative number means contraction) — the lowest reading for New York activity since 2009 and the largest miss compared to expectations (which averaged -4.3) on record.
  • Oh, and Wal-Mart’s closing 154 U.S. stores and letting 10,000 people U.S. workers go.

In the wake of this miserable news, analysts and economists raced to lower their fourth-quarter economic growth estimates. The Atlanta Branch of the Federal Reservce is now down to an annualized 0.6 percent; JP Morgan (describing retail sales as “shockingly weak”): +0.1 percent; Goldman Sachs is hanging on to +1.1 percent; Barclay’s: +0.7 percent. A round or two of similarly bad data could easily move those predictions, and ultimately the government’s actual figure, into negative territory — if not in the initial Bureau of Economic Analysis release in late January, then in the later revisions.

Defying the “stay calm” mantra seen in the most of the establishment press — here’s another such example at CNN, which insists that “The American economy is still in good shape” — CNBC columnist Michael Pento says that very rough conditions are on the horizon, and that the government’s ability to do something about them is quite limited by its past actions (bolds are mine):

A recession worse than 2008 is coming

The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008.

… A major contributor for this imminent recession is the fallout from a faltering Chinese economy. The megalomaniac communist government has increased debt 28 times since the year 2000. Taking that total north of 300 percent of GDP in a very short period of time for the primary purpose of building a massive unproductive fixed asset bubble that adds little to GDP.

the debt debacle in China is not the primary catalyst for the next recession in the United States. It is the fact that equity prices and real estate values can no longer be supported by incomes and GDP. And now that the Federal Reserve’s quantitative easing and zero interest-rate policy have ended, these asset prices are succumbing to the gravitational forces of deflation. The median home price to income ratio is currently 4.1; whereas the average ratio is just 2.6.

Likewise, the total value of stocks has now become dangerously detached from the anemic state of the underlying economy. The long-term average of the market cap-to-GDP ratio is around 75, but it is currently 110. The rebound in GDP coming out of the Great Recession was artificially engendered by the Fed’s wealth effect. Now, the re-engineered bubble in stocks and real estate is reversing and should cause a severe contraction in consumer spending.

… Banks may be better off today than they were leading up to the Great Recession but the government and Fed’s balance sheets have become insolvent in the wake of their inane effort to borrow and print the economy back to health.

… two unprecedented and extremely dangerous conditions that should make the next downturn worse than 2008.

First, the Fed will not be able to lower interest rates and provide any debt-service relief for the economy.

Second, the federal government increased the amount of publicly-traded debt by $8.5 trillion (an increase of 170 percent), and ran $1.5 trillion deficits to try to boost consumption through transfer payments. Another such ramp up in deficits and debt, which are a normal function of recessions after revenue collapses, would cause an interest-rate spike that would turn this next recession into a devastating depression.

… Therefore, the ability of government to save the markets and the economy this time around will be extremely difficult, if not impossible.

With frank writing like that, Pento, who is a relatively new columnist with just three submissions since he began a month ago, may not last long at CNBC. Thank goodness he at least had this chance to throw cold water on the pretenders.

Cross-posted at NewsBusters.org.


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