stimulus is providing a FAKE bounce in the world's economies

[grapejelly]

http://www.nakedcapitalism.com/2009/...-last-for.html

1. Retailers are in a world of hurt, not just cyclically, but on a secular basis. Listen to the Patty Edwards interview. America has double the amount of retail space per capita that it did a generation ago. This is the definition of over-capacity. When a glut of supply meets a deficit of demand, you have the makings of a very bad outcome for the stocks in that sector. This is the same conclusion that the Barron’s article comes to. The uptick in retail shares like JC Penney (JCP), Ann Taylor (ANN), and Macy’s (M) is all due to beating low earnings estimates. As a result, Abercrombie (ANF) has almost doubled. Nordstrom (JWN) is up 141% and Ann Taylor is up a massive 350%. Investors like George Soros are selling retail (Wal-Mart, Walgreen and Lowe’s).
2. Commercial Real Estate will feel the pain too. The Patty Edwards interview not only shows huge excess capacity in retail, but it shows that retailers are trying to re-negotiate contracts down. They have Commercial REITS over a barrel because they can just threaten to close down outlets if they don’t get the contract price concessions they seek. Back in January, I mentioned the fact that bankrupt anchor tenants like Circuit City destroy the economics of malls for other tenants and create a domino effect. So, if anchor retailers do not get the price concessions they want, they will shut down stores, creating a huge loss in income for all the other stores. Obviously, this will drive down the price of commercial real estate as there will be a huge glut of supply.
3. Export-oriented economies need to foster internal demand growth. Here I am talking about Germany, Japan, and China amongst the major economies. The US consumer is out of gas and these countries are too dependent on exporting to US consumers. It is not clear who can replace her. Certainly, the Chinese government and companies are doing their level best to foster domestic demand in China, even conspicuous consumption. But, the Chinese are unlikely to replace Americans as the new global growth engine anytime soon.
4. The new normal is lower US and global growth. This all suggests that we are likely to see lower growth in the US and globally as a result – at least until the American consumer gets out of a hole or someone else picks up the slack. That will likely mean we will see low-growth, short business cycles punctuated by fits of recession, all complicated by the three D’s (debt deflation, deflation, and depression).
5. One should fear a 1937-style relapse. If you recall, the Great Depression saw a major economic uptick in the years after 1932. No one would call this a boom (see the section called “recovery does not mean recovery” in my post “Economic recovery and the perverse math of GDP reporting.”) This was only a statistical recovery in the midst of a greater downturn. Eventually, stimulus was withdrawn and the economy tanked again. Richard Koo argues that Japan did not go into a 1929-style depression because it maintained much more stimulus than the US did in the Great Depression. If this stimulus is removed before the deleveraging and balance sheet repair is complete, you get a major relapse. So, beware of deficit hawks telling us that fiscal stimulus must end to eliminate deficits. If anything, the government’s long-term deficit outlook should be eliminated via reigning in skyrocketing health care costs.
6. Banks will be in a permanent state of crisis. If we learn anything from Japan, it’s that time does not heal all wounds. The Japanese tried to recapitalise their banking system by propping up zombie institutions. That didn’t work. It didn’t work in Japan in the 1990s and it didn’t work with Savings & Loans in the US in the 1980s. Why should we expect it is going to work now? But, team Obama has decided this is the way forward. If and when an economic relapse occurs, the fragility of the banking system will be made manifest. Much of the so-called toxic assets is still on the balance sheet of American financial institutions. The same is true in countries like Germany, Spain and Ireland, to name a few. When another downturn hits, those assets will go bad and writedowns will drag down the weakest institutions. This is the lesson of Japan.
7. Liquidate zombies while providing counter-cyclical stimulus. The banking example gives a hint to the correct policy response. It is not a return to the bubble days of the asset-based economy. It is not creating deficits as far as the eye can see while perpetuating overcapacity. What policymakers need to do is allow bankrupt organizations to fail and reduce excess capacity, all the while providing enough stimulus to prevent worst-case outcomes.

The whole dealio today is this: "stimulus" is providing an artificial fake bounce. China is affecting Asia, especially Japan. In the US, all the printed money fed to the banks and primarily the huge two trillion dollar deficit are causing an artificial temporary bounce that idjits in the media mistake as a growing economy.

The consumer has to have savings first before she spends money she doesn't have. That will be many years away and the reason is that the US and to some extent the Chinese gubmint is soaking up all the savings in the world and wasting it.