Here is a very bearish case for the economy being made by Martin Hutchinson at prudentbear. You can read the whole piece here.

Here is the part where he lowers the boom…

At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the U.S. economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing. Once again, the banking system will be in deep trouble. The industrial sector, beyond the largest and most liquid companies and the extractive industries, will in any case have remained in recession – it is notable that, in spite of the Fed’s frenzy of activity, bank lending has fallen $600 billion in the last year. Unemployment, which will probably enter the second downturn at around current levels, will spike further upwards. The dollar will probably not collapse, but only because it will have been declining inexorably in the intervening year, to give a euro value of $2 and a yen value of 60 to 65 yen to the dollar.

In the next downturn, the Fed will not be able to cut interest rates, because inflation will be spiraling, as in 1980. Instead it will need to raise them while dealing with a profound crisis in the bond markets. Capital in the U.S. will become still more difficult to come by, and unemployment will approach 15%. The U.S.’s only saving graces will be that the inflation will have prevented much further decline in the nominal prices of houses, while the decline in the dollar will have finally swung the payments deficit towards balance. U.S. real wages will be forced downwards by high unemployment, while banks’ relief on the home mortgage front will be balanced by a tsunami of collapsed credit card debt and other consumer debt.

2011 and 2012 will be very unpleasant years, as the Obama administration struggles to get closer to budget balance without pushing up taxes so far as to cause yet a third recession. Stock prices will be at or below their March 2009 lows, and will stay there even as earnings of export-oriented companies will be robust. (Conversely, retailers dealing in cheap imported goods, such as Wal-Mart, will be devastated.)  Wages will be generally declining relative to prices, although may show some growth in nominal terms as inflation will be considerable. Foreign goods and services will be inordinately expensive in dollar terms.

If he is right, and he certainly could be, then this is bad, real bad. Even if he is close, it is still incredibly bad. If true, it will also mean that Obama will be in deep trouble come 2012. Even the media might not be able to save him if this scenario plays out.

If you believe the health care bill being pushed by Max Baucus will not add to deficit and will keep costs under control then you need to run, not walk to the nearest psychiatry facility and commit yourself. Please stay there until you are better, and get well soon.

When asked whether she was worried about how her resignation as Governor of Alaska might effect her political career, Sarah Palin responded, “Politically speaking, if I die, I die. So be it.”

She is not afraid, which is one of the reasons I like her. She knows everyone in the media is literally out to destroy her both personally and professionally and she is now ready for the onslaught.

Do what is right and if it does not go the right way, at least you can sleep well knowing you did it right. I am willing to go down guns blazing with someone like that.

Remember when the “expert” pundits on TV said a few months ago when she resigned that she is finished and how she has no future? Well, a weird thing happened on the way to obscurity. Within 48 hours of the date announcement, and before there was even a cover, Sarah Palin’s book “Going Rogue” rocketed to number one at both Amazon and Barnes and Noble.

It comes out in a little over 6 weeks and is already number one!

This reminds me of the time when Larry King asked Jerry Seinfeld if “Seinfeld” got cancelled. Jerry humorously reminded Larry that there is a big difference between being cancelled and being number one.

Take it from me, Sarah Palin is far from being cancelled.

Here is a quick chart I got from CNBC. It is the last 6 months and shows how the DOW has risen while the US Dollar has fallen. So, your stocks have gone up but your purchasing power with the dollars you hopefully earned has gone down.

Last week the White House claimed their stimulus package has already “saved or created 1 million jobs.”

If you believe that statement, then you are too dumb to read this blog and you should not waste your time here. Saved or created is the new term used since net new jobs are not being created. In fact, we are losing jobs every month. The media should challenge this laughable assertion, but sadly they barely challenge anything coming from the White House these days.

The White House says their plan will “save or create” 3.5 million jobs. Well, even if we believe this saved or created nonsense (which I don’t) then $787 billion divided by 1 million jobs created so far equals $787,000 per job! If we take their big number of 3.5 million jobs then it equals $224,857 per job! Only an imbecile or a liar would think this is a good return on investment.

As you can see, I have no ads or anything on this blog. I do not write here to make money. I do not need money from this blog. I do it because many people ask me what I think about the economy and how to invest and believe it or not, I like to help people. People have emailed me and thanked me for my writing as they have made good money the past few months as well as avoided big losses. So, if people don’t want to read what I have to say, that is fine with me. I couldn’t care less.

Now, back in March I was a mere few days off calling the market bottom when I told you I was getting back in. I also predicted the snap back rally and gave you the range amount of DOW points it would be. I also told you then that unemployment would reach 10% plus when the White House said it would be 8%. I also told you to make some easy money by shorting the long treasury bond until the 10 year hit 4% where it would rally again sending the yield lower. Finally, I told you the White House debt forecast would be way off as they underestimated the debt they are causing.

So, if you do believe the White House and their 1 million jobs saved or created nonsense over me then I must ask why you would believe them when they have been wrong, and I have been right? They said if they passed their $787 billion stimulus (1 trillion with interest) we would peak at 8% unemployment. Now it is 9.7% and rising. They said their debt forecast would be one thing, and then had to admit it was off by $2 trillion.

Why in the world would you believe this “saved or created” jobs nonsense? If you don’t want to believe me that it is nonsense, fine. I don’t care. However, what have they done to make you believe them?

Since January 20, 2009 the dollar has lost approximately 10% and gold has gained approximately 10%. I could be more precise, but you get the picture. We are spending money like lunatics, and the politicized economic hackery coming out of the White House OMB (office of management and budget) is breathtaking given their latest mea culpa on their debt forecast being off by a mere $2 trillion.

The debt is rising and it has to be paid for. The administration has to get money from somewhere, and even if they raise taxes big time, it still will not be enough. This means money printing, monetizing the debt, and more borrowing from foreign countries.

The dollar looks very weak right now and could break down. However, if there is another dramatic sell off in the market, or a double dip recession, the dollar will ironically rally as people look for safety. You might remember the dollar doing quite well as we were in the worst parts of the economic crisis. After a quick fall, it recovered quickly as the safety trade was on. Currently, the trend is still down though. We will see if it changes.

Keep an eye on it.

On Friday the Obama economic team fessed up to their incompetence when they delivered the news that they were a bit off in their debt forecasts. A bit, in this case, was a mere $2 trillion. They underestimated the debt their budgets will cause by $2 trillion.

My $20 trillion minimum debt prediction is looking just about guaranteed now. What a shame.

If you have been reading this blog since early this year, you would have known this was coming as I predicted it many times. I hope the current economic team gets their sea legs soon (they won’t), or this nation will be in for a world of hurt (we are).

This is page 114 of President Obama’s budget, and an annotation I made about debt created from 2009-2019.

Current USA debt = $11.686 Trillion

New debt to be added over next 10 years (Obama numbers) = $7.550 Trillion 

Total USA debt in 2019 (using Obama numbers) = $19.236 Trillion

These debt levels are based on optimistic growth for the economy, therefore when these numbers are revised they will be much higher. I am feeling charitable though, so I will round it off to the grand total of $20 Trillion.

So, 10 years from now if President Obama’s budget is followed we will be living in a country that is $20 Trillion in debt. Let that sink in for a moment. You should also know that these are not my numbers. These are Obama’s numbers. They are found right in his own budget, so I am not making anything up here or estimating anything. If anything, I am being too easy on him by not factoring in his growth assumptions. These numbers also do not take into account the cost of the national health care bill or the cap & trade energy tax bill. If these things happen, then the numbers will be even worse.

Where will you be in 10 years? Will you be putting a child through college? Will you be running a business? Will you be looking to retire? Will you be finishing school and looking to get out on your own? 

Well, regardless you will be looking at higher taxes, lower economic growth, and inflation that saps your buying power. The interest payments alone on this debt will eat up a huge part of the annual federal budget which means less money for everything else. Lets face it, the government for decades has not been very good at managing money, but this budget reaches a new low as these numbers show.

We can get out of this, but it will be very difficult. We need strong economic growth and budget cuts. This problem cannot be addressed without doing both of these things. I have mentioned Sarah Palin twice before on this blog. Once in a post about being unorthodox and one other time in passing about higher taxes. From the time she took office in Alaska, she cut the overall budget by approximately 9%. We need someone to kick ass and do the same thing in Washington DC. We need this federal budget to be taken out back, and shot!

She can do it, if given the chance, but regardless of who is in the White House we need the budget slimmed down in a big way unless you want to be staring down the barrel of $20 Trillion in debt 10 years from now.

On March 25, 2009 I authored the post “Red Ink Rising.” It was short and sweet with a graphic showing our future deficits. The picture wasn’t just worth a thousand words, it was worth trillions and trillions of dollars. It is worth it to note that even these horrible CBO numbers have been revised to the worse since this graphic was made.

SOURCE: CBO, White House Office of Management and Budget | The Washington Post – March 21, 2009

Reuters reports today:

 

“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

But later in the day, Chinese Vice Premier Wang Qishan said it was important for the two nations to show the world they are working together through their joint economic dialogue.

“We must through our dialogue send a clear signal that China and the U.S. are engaged in practical cooperation to address the crisis,” Wang told Geithner, according to the Chinese Foreign Ministry’s website (www.mfa.gov.cn).

“This is important for boosting confidence and encouraging global financial stability and economic revival,” said Wang.

In his speech, Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised “very disciplined” future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing.

So this is  how we restore our standing in the world that was damaged the last eight years? Our treasury secretary is literally being laughed at when he talks about fiscal responsibility and safe investing. He is being laughed at because President Obama’s own budget makes a mockery of Geithner’s remarks on pay-as-you-go budgets and disciplined spending.

OK OK, I know what matters in life is the love of our friends and family, but for the country’s sake we need to think that money is everything.

If we do not get our economic footing back we will suffer incredibly for decades. Even if the government can somehow scale back some of its spending, their will still be massive obligations on the government budget. The only way this can be handled is by a vibrant growing economy that spends and invests wisely.

Without money, we can’t do anything. We can’t build roads, schools, solar farms, fighter jets, libraries, or outhouses. OK, maybe I threw outhouses in there, but you get the idea.

The fact is we cannot borrow trillions to pay for new things like national health care, when we cant even afford our current level of government programs. If we are to have a chance in hell of ever affording our current programs let alone new ones, we have to have a strong economy that grows at a good clip while providing stable well paying jobs.

Money is everything. Without it, we can’t protect ourselves, heal ourselves, or feed ourselves.

Treasury bond yields will have to go up alot given the reckless spending our government is engaged in. The Obama budget is insane and will lead to higher yields as we finance our deficits with more treasuries then ever before. This will continue for several years to come. Be alert for this and do not get burned as treasuries fall and yields skyrocket. I would short the long treasuries by buying (TBT) which is a short ETF that goes up when treasuries fall and yields go up as I am predicting will happen. You can hold this long if you would like, but I would get out when the yield on the 10 year gets around 4%. This is because the economy will still be very weak and people will demand bonds. Then as it comes off the 4% level you can get back in, after you made some easy money.

Northrop Grumman (NOC) closed Friday, March 13th 2009 at $36.57, almost 60% below its intraday high of 85.21 on November 7th 2007. Is this the result of something ominous on the horizon for the defense giant, or is it just one of many victims of the broad market sell off that has occurred over the last 12 months? I lean heavily toward the latter. I can find no massive loss of revenue or scandal that warrants such a price correction. It is true that Northrop has been involved in the circus that is United States politics in regards to the Air Force tanker refueling contract. In fact, Northrop and EADS winning the original contract was seen a huge surprise and was a bonus. Had Boeing won the contract as was widely predicted, Northrop would not have seen a major long term sell off. Now that is still in limbo, but I do not see significant downside no matter how it turns out.

While boasting a 3.40% dividend yield and trading 60% below its high, Northrop seems quite attractive to me. There is some risk of a new administration scaling back weapons purchases, but no president is getting rid of nuclear powered aircraft carriers anytime soon and when it comes to that, Northrop Grumman is the only game in town. To be clear, I fully expect the Obama administration to make big defense cuts but I believe they have already been factored into the price. They will also replace some cuts with purchases in other areas. Simply put, the world is a dangerous place and investors need to protect themselves. Looking back at some historical prices from years ago, I discovered that one of the greatest days this stock ever had came on one of the worst days for the market and our great country.

On September 10th 2001 the DOW closed at 9,605.51. After the horrific events of September 11th the market reopened on September 17th and closed at 8,920.70. This drop of 684.81 was enough to scare the most seasoned investors. About a year later the market fell to well below 8,000. As we always do though, America and the stock market roared back from 2003 to 2007. The question remains though, how do we protect our portfolios from such a jarring terrorist attack in the future?

While the DOW was diving almost 700 points on the day the market reopened after the attack, one stock soared over 15% and went even higher in the coming weeks. That stock was Northrop Grumman. They build aircraft carriers and other things that go boom and have been a good long term performer. With hindsight it is easy to see why this huge pop happened on a day when almost everything else tanked. Looking for a safe haven, investors concluded that the USA was going to make someone pay for killing our citizens no matter what the cost and Northrop Grumman was as likely a candidate as any to benefit. While it will almost always be a decent long term performer, any type of national terrorist attack or global instability in the future will benefit companies like Northrop Grumman in a big way.

This might seem a bit unethical to some people by essentially profiting off tragedy. I do not follow that logic as I must point out that this is the harsh reality with which investors are faced, and there is nothing wrong with protecting yourself. If I had to trade a 15% increase in a day for the World Trade Center and 3000 American lives, I would forfeit my capital gains in a heartbeat, but since none of us can predict the future or control events we should be prepared for any and all eventualities. If you want to sleep well at night knowing your portfolio is safe, do what I do. Get some defense stocks like Northrop Grumman, and pray that nothing bad happens.

I am heavily invested in the defense sector and it will remain a stalwart in my portfolio.
I own shares in…

Northrop Grumman (NOC)
General Dynamics (GD)
Boeing (BA)
Lockheed Martin (LMT)
Raytheon (RTN)

We are in a depression.

To be clear, this is not the “Great Depression” we have heard so much about from the 1930′s. We will not see 25% unemployment and we will not see massive bread lines. But that should not be the standard we hope to avoid. Our bar should be set much higher. Some might call this forecast more of a “Great Recession,” but I am going one step further due to the lack of growth that will come after this “Mini Depression” or whatever you prefer to call it technically ends.

While the definition of a depression may be elusive, we are looking at coming unemployment above 10% and an economy that will contract by around 3%-5% from peak-to-trough, maybe worse. 2009 will be negative in terms of growth by 2%-3%, maybe worse. Both the peak-to-trough number and the 2009 number would be worse if it weren’t for the government sectors ridiculous expansion. So these numbers could turn out to be worse, but this is what the data currently available tells me. We could deal with that, but what comes next is the real problem. Anemic growth caused by government policy will make a bad situation worse and we will stagnate. So even when it is technically over, it wont feel over. We will grow again in 2010, perhaps 2%, but the growth will be so weak that jobs will not follow and many will still feel recessionary pain. This depression most likely will not be an “L” shape, but it will resemble a square root thats been flipped horizontally like this “  .” The first line down represents the sudden drop our economy suffered. The small “V” shape that emerges next is the natural snap back rally that the stock market and economy will have. This could be worth 2500-3500 points on the DOW. What comes next is the flat line and economic stagnation.

I was hoping we would avoid it and merely suffer through a “U” shaped recession, but I am afraid to say the government has sealed our fate. In a shocking display of incompetence they have literally done everything wrong. President Obama and his team did not cause the recession, but they are causing the depression each and every day by their stunning stupidity. The hope that the Obama economic team would ease us to recovery with wonder boy tax cheat Tim Geithner steering the ship has totally evaporated.

Sure he did not pay his taxes, but since he was supposed to be brilliant, we were supposed to overlook his tax problems since he was supposed to help us. Yet, here we are and Geithner is on capital hill bashing energy companies and saying we need to tax them, saying we need to tax home mortage interest, saying we need to tax chairitable contributions, and saying we need to pay for national healthcare even though the government will spend around 2 trillion dollars more this year then they will take in.

We were told repeatedly by the media that this treasury secretary was brilliant and ready to step in on day one and hit the ground running. They said it was no big deal that he couldn’t figure out his own tax form. It was a simple mistake they said. This guy knew his stuff.

Uh oh! Here we are, no bank plan, nothing, nada, zero. The media lied to us or made a big mistake in their analysis. I don’t care which one, because the results are the same. If you would like an example of why there is no confidence in the leadership coming out of Washington DC, here it is.

The other day we had tax cheat Charlie Rangel questioning tax cheat Tim Geithner about, you guessed it, going after TAX CHEATS! I thought it was an Abbot and Costello routine when I watched it. Sadly, no one was laughing.

Unlike these two idiots, I actually pay my taxes so lets talk about it. I hear on a daily basis from supporters of Obama’s tax policy that “all he is doing is going back to the tax rates under Bill Clinton, and we had a great economy then.”

If anyone says this to you, you need to realize something about them. One possibility is they are idiots who have no idea what they are talking about. If they are in the financial world, never put money with them, never invest with them, and tell everyone you know to stay away from their financial advice. The other possibility is they are misleading you on purpose by not mentioning other factors due to their own ideological agenda. Why are they so wrong you ask?

First of all, in the 90′s we were blessed with the explosion of technology. This led to the tech bubble which sent the NASDAQ to 5000. Today it is around 1300. There is no tech bubble to bail us out this time. That bubble was so fierce that it overwhelmed the negative effects of higher taxes, but it was doomed to failure as we all know now. It burst and led us to the recession that George W. Bush inherited.

Second, we did not have the brutal international competition that we have today. Countries around the world are cutting taxes and enticing businesses to go there. This was unthinkable in the 90′s. The tax rates then in the USA were far better then most of the world. Today, it is the opposite. Today, communist China has lower taxes on capital and investments then the USA! I never thought I would envy the capital gains tax rates of a communist country, but here I am.

Third, in the 90′s we weren’t engaged in 2 brutal long wars and an over arching war on terror which has necessitated a rise in defense spending. Clinton did not have to worry about funding this so the budget never had to take massive military engagements into account. While Obama is not proposing massive increases to the current defense budget, he is not making massive cuts either because even he understands how high the stakes are and that our warriors need to be funded with the best equipment available.

Fourth, Mr. Obama and Mr. Geithner are not just talking about raising the top income rate from 35% to 39.6% we had under Clinton. The people who just wish to go back to the 90′s ignore the issues of social security taxes, medicare taxes, state taxes, property taxes, etc. I could go on and on. So rest assured, the high income earners who employ most everyone else will see their taxes rise to a total rate of far more then 39.6%.

So why would anyone compare the period during a tech bubble, peace time, and high tax rates around the world to today when we have a recession, massive deflation, low taxes around the world, higher taxes in the USA, and a staggering level of deficits that will add over 4 trillion dollars to the debt over Mr. Obama’s first term?

If you think your $500-$1000 check (Obama’s so called tax cut) from the government will help you, which is around $10-$20 a week, God bless you. However, you should know that this money will be devoured by inflation, higher energy prices, higher food prices, and higher local taxes. The great lie that 95% of Americans will get a tax cut is quite deceptive. If you think you fall into that 95% ask yourself a simple question. Do you use electricity? Do you drive a car? Do you eat? Do you buy anything? Do you save and invest for your retirement? If the answer is yes to any of these, then you will have your taxes raised whether you realize it or not.

Here is an example. The energy company that powers your house gets a huge carbon tax imposed on it. They still need to make a profit so they can maintain their service and pay their workers so they are forced to raise the electricity rates they charge you and your monthly bill goes up. Bang! You just got charged for Mr. Obama’s tax plan. But, you were in the 95%. You arent rich. So what happened?

Economic slight of hand happened and it is all too common in Washington DC.

Hopefully, you will hold onto your job, but then again the people that employ you will be getting hit with massive tax hikes that will be far more extensive then going from 35% to 39.6% as discussed earlier. When businesses and business owners make less profit, they have no choice but to limit costs and that means laying off workers.

Bottom line, we have a contracting economy that has imploded under a mountain of too much bad debt. Here is the solution the government has proposed.

*Endless bailouts of incompetant companies leading to nationalization in many cases

*Endless bailouts of people who bought homes they could not afford

*Higher taxes on the people who we want buying those very homes

*Higher taxes on businesses that we are asking to keep people employed

*Higher taxes on capital gains and dividends which by definition reduces the value of the stock market

*Higher taxes on home mortage interest

*Higher taxes on chairitable contributions

*Higher taxes on energy companies that every American relies on

*Trillions of dollars added to the national debt in the name of big government programs

We have a crisis of confidence where the professional investor and the average citizen both see Washington DC as totally out of touch. While we pull back and save money during the tough times, congress passes a bill with a $1.8 million earmark for “swine odor and manure management research.”

The DOW has fallen around 53% from its high, and it has fallen 31% since Mr. Obama was elected.

He did not cause the recession, but he is causing the depression. It makes me sick to say this. It hurts me deeply. I believe in the resilience of the American economy and the strength of our system, but even we cannot fight every battle all at once. If we do not change course, we will not be able to overcome this for a very long time. We are a rudderless ship in very stormy waters and unless the captain sets the right course we will be pummeled mercilessly by economic tidal waves for years.

I pray that I am wrong. Nothing would make me happier then to see a robust second half 2009 recovery, but I have no faith in that since I have no faith in the people who have the power to bring it about.

Here is a quick prediction for you.

Obama’s radical spending/deficits will lead to a  legacy of trillions in new debt that will result in the USA bond rating being reduced from AAA by the end of 2011.

Think I’m crazy? Wanna bet me?

Below is a screenshot of the deficit and GDP forecasts found on page 114 in President Obama’s newly released budget.

The budget deficits listed for his first term are based on expected GDP growth that is higher then private forecasts, and in my opinion much higher. Therefore, it is my belief that these deficit figures will be far worse then what his budget projects.

However, lets put that aside for a moment and with a dash of hope, take his numbers at face value. This means that after President Obama’s first term we will add $4.416 trillion to the national debt. The title of this budget is “A New Era of Responsibility.” Yes, you read that right.

In just 4 years, the debt will increase by 4,416,000,000,000 dollars. This is the President’s BEST CASE SCENARIO! This is economic insanity. I could write all day and night about the problems our President and Congress are thrusting upon our economy, but if I did I would have no time to do actual work that makes money. So, I will just give you one of the more egregious examples of what I am talking about.

We all know that one of the root causes of our current economic mess is the issue of housing. It was a bubble and now it has burst. Currently it is a depreciating asset that millions can no longer afford to live in. This has flooded the markets with homes for sale amid low demand from new home buyers. Combine that with the fact that credit has contracted, and we have a classic supply and demand problem. Housing will not turn around until prices hit a level where people can afford these homes and then start buying them and taking them off the market. Since the financial institutions securitized the mortgages that go along with these homes they suffer massive write downs as these housing assets continue to fall and it becomes a vicious cycle.

So obviously the faster we can get people in these homes at prices they can afford, the better. Eventually, this will happen in the marketplace as the natural healing process occurs but no one knows exactly how long that will be.

Here is where the problem comes. The President’s budget I discussed above actually makes it MORE EXPENSIVE to buy and own a home by reducing the amount of mortgage interest you are allowed to write off on your taxes. We want people to buy these homes, thus reducing the supply, which will help to form a bottom in the housing market. This budget plan guarantees that housing has more room to fall since it makes it more expensive to buy and own a house. In addition, the administration will raise taxes on the very people that can afford these homes and take them off the market.

There is a chance that this provision will be stripped out as the budget is debated in congress, but other provisions like this will no doubt survive. The fact that we even need to strip out such an insane proposal shows you just what kind of people we have running things right now since it should have never existed in the first place.

This is the tip of the iceberg and I will discuss this further as time goes on. Apparently, I am not the only one who thinks something is wrong with the economic policy that President Obama and his team are putting forth, as the Wall Street Journal points out in this chart.