Wednesday, May 13, 2009

'Cut-throat' Capitalism

Greetings good citizen,

It’s one thing for me to point to the death spiral and quite another to have one of the major news services post a story that could have been penned by yours truly.

I’ve written repeatedly on this topic under various titles so most of the themes presented here should be familiar…

Although I have to admit, they do a better job of presenting this dire scenario than I do.

Is company cost-cutting company throat-slitting?

By James B. Kelleher and Jennifer Ablan - Analysis

CHICAGO/NEW YORK (Reuters) - In recent weeks, a number of investors and economists have declared the recession all but over based on a handful of seemingly positive signs, including a flurry of better-than-expected earnings from U.S. companies.

They may be getting ahead of themselves.

Aggressive cost-cutting through layoffs and capital expenditure reductions has, it's true, helped many companies report profits that surpassed analysts' estimates.

But beneath what can be perceived as "green shoots" of recovery, experts say, lie the germinating seeds of what could be a much deeper, more prolonged recession.

"I think the clear and present danger is the negative feedback loop for the economy," said Greg Peters, head of global-fixed income and economic research at Morgan Stanley in New York.

"If people are getting laid off and if capital expenditures are being pulled back, then that has a cascading effect that is much more long-lasting on the economy."

Analysts and investors argue that while job, capex and R&D cuts may shore up individual profits temporarily, they are bad news in the aggregate. They swell the ranks of the unemployed, reduce the wages of those who keep their jobs, and hurt an already struggling economy by further crimping consumer and corporate spending.

And that will only ricochet back on the companies themselves, reducing demand for their products and services and putting additional pressure on their sales and margins.

"As corporations cut payrolls and deleverage they are acting perfectly rationally," said Robert Reich, the former U.S. Labor Secretary under President Bill Clinton who now teaches at the University of California, Berkeley.

"But if that's what every corporation does, we're going to end up with far more job losses and in a deeper economic hole. Who's going to be left to buy all the goods and services these companies produce?"


The list of U.S. companies able to report better-than-expected results for the most recent quarter because aggressive cost cuts offset falling sales is a long one.

It includes appliance maker Whirlpool Corp, advertising powerhouse Omnicom Group Inc, specialty glass maker Corning Inc, wireless telephone service provider Sprint Nextel Corp, drug maker Pfizer Inc tool maker Black & Decker Corp, and Kraft Foods Inc.

Based on the number of earnings that beat forecasts, one would never guess the United States is in the midst of the worst economic downturn since the Great Depression. According to Thomson Reuters Director's Report of the 365 S&P 500 companies that have reported earnings so far this quarter, 65 percent delivered better-than-expected results.

"In the aggregate, companies are reporting earnings that are 10.4 percent above the estimates, which is above the 1.6 percent long-term average" based on figures since 1994, John Butters, director of U.S. earnings at Thomson Reuters, wrote in his "This Week in Earnings" report last Friday.

But the cuts behind those beats add up, too. U.S. data due out this week is expected to show that employers cut another 620,000 jobs in April, according to a Reuters poll of economists, lifting the unemployment rate to 8.9 percent. That is up from 8.5 percent in March -- double what it was just two years ago and the highest level since 1983.

Over time, those cuts -- and the distress they cause -- become part of a self-reinforcing cycle, hurting consumer spending, which is responsible for the lion's share of U.S. economic activity -- and further pinching corporate results, experts said.


In fact, it is already happening. Although this past quarter was marked by a number of earnings surprises, it was also noteworthy for the number of companies that cut their forecasts, citing a deteriorating sales environment.

"We are still seeing forward earnings estimates being adjusted down," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.

To be sure, some pretty powerful voices are sounding a more upbeat note about the economy.

U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday that the recession should end this year, as long as there is no relapse of the credit squeeze that has strangled the economy. And the Business Council, a private group of top U.S. CEOs, said its members see light at the end of the tunnel and are expecting a rebound, at least in the United States and China, next year.

Still, perhaps too many executives are talking like Harold "Terry" McGraw, the CEO of publisher McGraw-Hill Cos Inc, who stressed last week that "cost containment will be a priority for us all year."

As a result, Wirtz said he expects companies to remain "lean and mean ... slow to add expense early into the recovery phase." [So the question remains, who will buy?]

And in a system where one man's expense is another man's paycheck, that kind of discipline is bad for the economy.

This conundrum, identified early in the 20th century by economist John Maynard Keynes as "the paradox of thrift" or the "paradox of savings" is, of course, one of the major headwinds facing the economy as it struggles to pull out of the downturn.

Simply put, consumers are now saving when the economy really needs them to spend and businesses are now relentlessly firing and cutting costs when the economy really needs them to be hiring.

The result, according to Keynes: declining incomes across the board.

Which is why Reich believes President Barack Obama's stimulus plan, which injects $787 billion into the economy over two years through tax cuts and spending, does not go far enough and may need to be expanded. [Sadly, nothing could be further from the truth. The US was a ‘creditor’ when it ran up massive deficits in the 30’s, now it’s a massive debtor! Does anyone remember why England lost ‘reserve currency status’ after WWII?]

"In this environment, the government has to step in as the spender of last resort," he said.

(Reporting by James B. Kelleher and Jennifer Ablan, Editing by Martin Howell and Matthew Lewis)

We need ‘relief’ all right good citizen…we don’t need more spending that will never ‘trickle down’ on us, we need real ‘debt relief’ and you won’t get that spending what we don’t have!

Putting us further in the hole is not and never has been the ‘road to prosperity’. Sure, the lenders make out okay but the rest of us will never see daylight again!

Our already hollowed out economy doesn’t have the capacity to pay these astronomical debts.

Yet nobody is going there! Not one of these dishonest cretins has admitted the truth and they still call them ‘experts’ when ‘moron’ is much closer to the mark!

Um, across the blogosphere, gloom was heavily in evidence today as we see in this piece from Ilargi at The Automatic Earth.

The Bloody Sack of Rome

Ilargi: American home prices don't just keep falling, they keep falling faster. How it must hurt for super duper cheerleader queen Lawrence Yun to publicize the numbers. Cape Coral-Fort Myers, down 59% IN ONE YEAR!, San Francisco and San Jose down 43% and 42%. Overall, nationwide, prices in first quarter 2009, compared to last quarter 2008, plummeted at an annualized rate of 24.8%. Do you know what your home is worth? Take that number, and prepare for the fact that it might be worth 25% less come Christmas. Don't daydream along with the government and the media, but instead prepare for things turning out as today's numbers forecast. Or worse. This is not a game or a dress rehearsal. What you decide may follow you around for the rest of your life. Mr. Yun tries to make you believe that the prices declines are all the fault of foreclosures and short sales, "...higher levels of distressed sales which are distorting the data...". But they don't, these sales are the market, and they set the price. They will do so for the next few years, time to get used to it.

If not for Fannie and Freddie, not even the Cape Coral shovels at 60% off would sell. Millions of additional Americans will find themselves caught in house traps before the nation wisens up, and Washington is instructed by Wall Street that it doesn't need to buy every single mortgage anymore. Every now and then it’s a good idea to tell people to think about the real meaning of the term "credit crunch". And no, it's not something that can be solved by the government lending your -and your children's- own money back to you at 6% interest. That is, as you will soon find, an extremely temporary policy, and one that doesn't solve anything. One more Lawrence Yun pom-pom line: "While the quarterly drop in prices set a record, the declines slowed in each of the three months." What he should have added is that homes always sell better as spring approaches, so the "slowing decline" is only natural. Thing is, it sounds less attractive when pesky details are provided. Wait for 2nd quarter numbers.

There are countries that see their trade deficit grow, and others that see their trade surplus grow. And still there's no paradox there: it all happens for the same reason. The US is stuck having to buy its oil abuse supplies, though it can't afford the trinkets anymore. With consumption down by a mile and a half, imagine how much exports must have plunged to still have a rising deficit. Canada must contractually sell its fuel to the US, but can't pay for trinkets either, so there's your surplus. It all comes together in China, where exports are down 22.6%, and imports 23%, which leads to some sort of stalemate.

World trade? It once was a nice idea, like homeownership for every man, woman and child. Pity it didn't work. If you have governments that are allowed to spend all of our money at their own discretion, and you depend for your food -and often even water- on faceless corporations, your homes are built and financed by more anonymous drones, and all the clothes you wear come from China, then you have a problem. And if that doesn't make sense to you, just wait a few years.

You have to love that last line good citizen, the public is so incredibly sanguine that they must not appreciate the severity of our situation.

We don’t make what we use…(we, very fortunately, still produce much of what we eat) but we don’t produce even a tiny fraction of things we use everyday.

How serious is this problem? Your underwear won’t last half as long as it will take us to restore our garment industry. This is bad news mostly because many of us will lose a considerable amount of weight during that time…so it will be a while before we have a crack at getting fresh underwear that ‘fits’…but that’s probably the least of our woes.

Sticking with our clothing theme, your washer breaks down, you’re toast! It will be years before we can produce new ones here for pretty much the same reason it will take so long to restore our garment industry. The buildings that housed these facilities were turned into cheap condos and the machinery was sold off and moved to the same third world hell-holes that won the work.

So you’ll have to go to the laundromat…where half of their machines will be out of order because they can’t get parts. When all of the machines at the laundromat are toast, you know what’s next…yep, the bathtub…if you still have running water.

Sadly, that lack of spare parts thing is going to raise hell everywhere. Are you (stupidly) wondering why we won’t be able to buy spare parts? Think, think, think…why would we not be able to buy what we want on the ‘open market’?

The problem will be similar to the problem Zimbabwe is experiencing today, the only place Zimbabwe’s currency is any good is in Zimbabwe. Nobody else wants it because it is worthless.

Understand good citizen, what little industry we have continues to be off-shored at a very brisk pace. If we were to stop off-shoring today, what remains of our economy would fit in one medium sized industrial park.

The nation’s largest employer is Wal-Mart…I’m guessing the number two employer is the US Postal Service…followed rather closely by the Military/Pentagon/Homeland Security apparatus.

Not exactly a ‘robust’ mix is it good citizen?

Anyway, the more employers ‘cut’ the more what remains of our economy collapses. Perhaps more disturbing is the tendency to cut ‘well-compensated’ non-executives, which really shrinks the ‘consumer base’.

And as I stated before, these jobs aren’t coming back.

So, where are these ‘green shoots’ the MSM keeps babbling about?

It’s all in their head good citizen…there isn’t one pundit out there that doesn’t admit it will still ‘feel’ like a recession for most of us even after the so-called ‘recovery’. Worse, they’re all saying this ‘feeling’ will last for years…if not decades.

Thanks for letting me inside your head,


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