Monday, July 5, 2010

Small Business and Consumers Static Economically at Best; Policy and Investment Implications

Two small business June surveys are out. The Discover(R)(Rasmussen) report on small business shows some worsening vs. May; click HERE for the latest report. Here's a brief excerpt:

Small business owners' economic confidence leveled off in June to halt a two-month rise. The index dipped to 86.1 this month from 87.4 in May as rising concerns over temporary cash flow issues offset some improvement in the way small business owners see the climate for their own operations. . .

The Watch recorded a slight increase in confidence about how individual business owners were faring: 30 percent say economic conditions for their businesses are improving, up from 28 percent in May; 43 percent said conditions are getting worse in June, down from 44 percent in May; and 34 percent said things are staying the same, up from 24 percent in May.


NFIB has pre-reported its June survey; click HERE for its press release. Here's the summary:

"Overall, the job creation picture is still bleak. Weak sales and uncertainty about the future continue to hold back any commitments to growth, hiring or capital spending. Job creation plans have been running far below comparable quarters in the recovery periods following two other major recessions."

Similarly, Gallup.com's tracking of consumer spending and hiring/not hiring have shown an aborted recovery, just as has Consumer Metrics.

How will the governmental/monetary powers respond? The well-connected British journalist "AE-P" comments in With the US trapped in depression, this really is starting to feel like 1932

From the ending of his article:

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2. . .

Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

More and more, it is looking as though the authorities are readying new "stimulus". ZIRP 4EVA (zero interest-rate policy forever)?

The longer an honest accounting of the books of the banks, and the Fed, is delayed (or hidden from the public), the more confusing things get, and the more ordinary investors have no idea what's real and what's fake. If for example BofA is insolvent properly valuing its second-lien mortgages that it may be carrying at full value but that may be worthless, then shareholders can be wiped out and its bondholders can be forced, a la GM, to take a debt-for-equity switch. None of this would impinge on FDIC's guarantee. An honest resolution of these sorts of matters in a way that simplifies the entire financial structure, and shrinks finance to the fraction of the economy that it had in (say) 1955, would allow much more efficient allocation of resources than can be done now in our opaque world of financial secrecy and complexity.

More ZIRP, "stimulus" and the like, and the mislabeling of smaller but large governmental deficits as "austerity", argues in my opinion for gold as a means to attempt to preserve real purchasing power. If continued fiscal and monetary fuel is poured into the economy and the normal course of economic cyclicality occurs, at some point price inflation is likely, and in that case silver (and copper) may well have more upside than gold.

Stay tuned.

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