THE BLOG

Green Shoots turning into Brown Weeds

08/09/2009 05:12 am ET | Updated May 25, 2011

Some Green Shoots supporters have declared that the bottom is in. They point towards various short-term trends, and if you don't look too close, it appears to support their cause.

The Green Shoots supporters accuse the Brown Weeds advocates of using charts that are too long, and thus miss the recent movements.

Therefore I've decided to dig up my own charts, looking at just the last month or two.

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The stock market, supposedly the most "forward-looking" of indexes, has been looking rather sickly during the past month. If you were taking votes, the stock market has given the economic near future a "thumbs down".

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The Baltic Dry Index, the global measure of shipping goods around the world, is also falling. While this is more of an indicator of the global economy, rather than the domestic economy, it nevertheless effects all of us.

On a more domestic indicator, rail freight was down 19.7% from last year. Why does that matter to you?

"Whenever Americans grow something, eat something, mine something, make something, turn on a light, or get dressed, freight railroads are probably involved somewhere along the line," said AAR Senior Vice President John T. Gray. "Unfortunately, right now there's not enough mining , manufacturing and buying going on. So railroads, like most other business sectors, are suffering because of it."

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All of this is a reflection of the dramatic retrenchment of the American consumer.
For instance, let's look at retail sales.

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In fact the consumer is cutting back so fast that businesses are falling behind in their efforts to cut inventory.

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The unemployment initial claims report came out today, and the headline sounded positive.

(Bloomberg) -- The number of Americans filing claims for unemployment benefits fell last week to the lowest since January, as early automotive plant closures altered the timing of layoffs that typically happen at this time of year.

Initial jobless claims fell by 52,000 to 565,000, a lower level than forecast, in the week ended July 4, from a revised 617,000 the prior week, the Labor Department said today in Washington. Meanwhile, the number of people collecting unemployment insurance jumped to a record in the prior week.

Boy, once you get past the headline that sounds absolutely gloomy.

But, wait. What did it say about early automotive plant closures?

It never occurred to me before that the unemployment initial claims numbers would be seasonally adjusted. After all, what does a seasonally adjusted pink slip look like? Can a person only lose their job during months that start with a "J" or an "M"? Obviously the real numbers are unadjusted, while the seasonal numbers are meant to be put "into context".

So what do the non-seasonally adjusted numbers look like?

Initial UI claimsJuly 4June 27June 20June 13
No Seasonal Adjustment577,506559,894568,552558,407
Seasonally Adjusted565,000617,000630,000612,000

Notice how the unadjusted numbers have a rising trend, while the adjusted numbers, the ones the media reports, have a distinct downward trend.
To this point, Green Shooters are likely to point out what happened in previous months, where initial unemployment claims were higher. And that is exactly where I want them to go, because if you start looking at longer trends then the Green Shoots theory falls apart.

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Without good jobs and higher income, The Great American Consumer (TGAC) simply can't step up and live beyond his/her means anymore. Almost every nation in the world is waiting for TGAC to restart buying things they don't need with money they don't have.
The reason that isn't going to happen is because TGAC no longer has an asset to borrow against.

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Of course you can't talk about the economy these days without mentioning the real estate sector.

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Rep. Carolyn Maloney used an alarming phrase yesterday.

"The commercial real estate time bomb is ticking," Joint Economic Committee Chairman Rep. Carolyn Maloney, D-N.Y., said in opening remarks to a hearing before her panel Thursday.

Why would she say something like that? Because $400 Billion in commercial real estate debt is coming due this year, and since prices have fallen about 24% since 2007, the chances of refinancing most of it are slim at best.

This is especially troubling for the banking system, which carries most of this debt on their books. How troubling is it? Take a look.

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Quite simply, these are scary charts. If the taxpayer wasn't backstopping the entire banking system it would have already failed. If it wasn't for the Green Shoots stock market rally from March to June, our banking system simply wouldn't have any capital to cover its losses.
It begs the question: what will happen to the banking system when the commercial real estate market implodes during the 2nd half of the year?

All of this talk of Green Shoots in the economy that we've been hearing is baseless. Before a real Green Shoots recovery can begin two things must happen, neither of which has been seriously addressed so far.

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The banking system must cut down on its overhanging debt. But to do that it must write off its bad debts. The government has allowed the banks to change its accounting in order to hide the bad debts, thus the banks are zombies - sucking up capital while not loaning it out. Those zombie banks live off of the healthy parts of the economy, weakening it.

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In an economy that was an actual capitalist, free market system, those zombie banks would have been allowed to fail. We don't have that.

The other part of the economy that must change is this:

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Notice how no nation on Earth, except maybe the UK, devotes as little to savings and investment as America (and the UK may be in even more trouble than we are).

It's the sign of an unhealthy economic system. We shouldn't be depending on other nations, like China, to do our savings and investing for us.

Both the zombie bank problem, and the lack of savings and investment, are normally cured by a deep recession. However, the bailouts, deficit spending, accounting rules, and government stimulus, are all designed to prevent those those healthy corrections from happening.