Paul B. Farrell: Romney, Obama both stock-market killers. Both lack vision and courage, Pimco CEO says
The economy is going to be a disappointment whether President Barack Obama or challenger Mitt Romney is elected in November.
SAN LUIS OBISPO, Calif. — “Like an earthquake rocking a house, the 2008 global financial crisis exposed a shaky new foundation underpinning Western economies,” warns Pimco’s CEO Mohamed El-Erian, in the latest Foreign Policy journal.
Unemployment and inequality has “heaped social unrest atop financial turmoil,” spreading uncertainty, volatility and lower market returns that Pimco labeled the New Normal a few years ago.
Flash forward: “Something has changed” as this economic crisis has gone on far too long without a political solution: Instability has morphed into “vicious feedback loops that turned bad economics into bad politics” that’s now recycling, converting “bad politics into even worse economics, further threatening an already tenuous economic future … welcome to the New New Normal.”
The core problem? Washington’s “inability to deal with the aftermath of a huge wave of excessive debt creation and credit entitlement gone crazy … But where politicians … act ponderously, markets don’t. They move at much faster speeds … so as the New Normal morphs into the New New Normal, the economic and financial system risks breakages that the political system will be increasingly incapable of mending rapidly enough.”
Yes, America is sinking into this toxic New, New Normal hell with more and “more political dysfunction and greater sluggishness in economic growth, unacceptably high youth unemployment and long-term joblessness, redoubled debt and deficit concerns, and worsening inequalities between rich and poor.” Normal? No, Abnormal.
New New Abnormal: Neither politician has a real solution
Solution? Can we stop the hemorrhaging before another Great Depression? El-Erian says that the solution depends on what happens after the elections.
But that seems unlikely because, “sadly, neither Obama nor Romney has yet offered a meaningful, forward-looking economic reform program to address problems such as a malfunctioning labor market, unsustainable public finances, a broken credit system, inadequate infrastructure, and a lagging education system.”
Why? Because both Obama and Romney “lack vision and political courage.” And no matter who’s elected their failure of leadership will result in “even greater economic disappointment and financial instability.”
Worse, the longer America’s “economic and political challenges persist, the greater the number of companies and long-term investors that begin to worry, and … act on those fears … hire fewer people … invest less in factories and equipment … sit on the sidelines” leaving America’s fate more and more “in the hands of tactical position players and short-term traders, further ramping up volatility and reducing future growth and job opportunities. And when day traders and company flippers start running a country’s economy, watch out.”
History lesson: New New Normal started back with 2000 dot-com crash
Solution? Pimco’s CEO isn’t hopeful: “Warning bells are ringing, and they are ringing loudly. We’ve already allowed bad economics to lead to bad politics. Now, it’s high time to put a stop to the cycle where bad politics undermines an already fragile economy.”
Unfortunately, the warning bells have been loud since the 2000 dot-com crash that triggered a 30-month recession, $8 trillion in stock market losses, a decade of inflation-adjusted negative returns, and set up to the 2008 bank meltdown.
In short, from 2000 to 2008 we had the Old Normal … then a few years of the New Normal … then we morphed into a deadly dysfunctional New New Abnormal, where bad politics and bad economics are spiraling deeper, driving America into a hell with no exit strategy.
We saw this coming, summarized it a few months before the 2008 Wall Street meltdown when we republished our list of 22 early warning signs: One SEC chairman, two Fed governors, four billionaires, five big-name economists, five big money managers, two financial historians, and many more.
But all the warnings were ignored by conservative ideologues ruling America the past generation, and it’s happening in what we should call the New New New Abnormal.
Here’s our list: Note especially the Bloomberg News report about the new Treasury Secretary Henry Paulson who warned President Bush and his staff in August 2006 — two years before the meltdown — that derivatives could “blow up in Wall Street’s face and affect the whole economy.”
Here’s the list of crash warnings from 2000 to 2008.
2000. Fed Governor Ed Gramlich warns Greenspan
Gramlich later wrote the book, “Subprime Mortgages: America’s Latest Boom & Bust.”
2002. St. Louis Fed President William Poole warns Greenspan
Poole warned low rates would backfire. And Fannie Mae-Freddie Mac lacked capital.
2004. Billionaire Pete Peterson, Nixon’s Secretary of Commerce
Warned that Bush’s reckless finances worst in history, creating a “bankrupt nation.”
2004. Hedge fund portfolio managers start going short
Robert Rodriguez predicts meltdown, began shorting. Soros, others follow.
June 2005. The Economist cover story: “Biggest bubble in history”
Property prices inflate 75% in 5 years after the stock bubble pops in 2000.
June 2005. Economist Nouriel Roubini warns of recession
Economist called housing a speculative sport, will trigger a new recession.
August 2005. IMF Chief Economist to Greenspan and Summers
At Fed’s annual meeting IMF economist Raghuram Rajan warns of disaster.
January 2006. Fortune: Billionaire Richard Rainwater
“First scenario I’ve seen where I question the survivability of mankind.”
February 2006. Marc Faber’s Doom Boom Gloom newsletter
Correction Time: overbought, high optimism, low cash, foreign buying, correction.
March 2006. Forbes Columnist: economist Gary Shilling
“Housing weakness, full-scale rout, painful recession, stocks in tailspin, worldwide.”
March 2006. New book: “Sell Now: The End of the Housing Bubble”
Former Goldman banker predicts an average 47.2% decline in 40 metro areas.
March 2006. Bill Gross in Pimco investment outlook
Bush “failed to tell the truth” about borrowing “from the future for today’s party.”
March 2006. Fortune: Buffett Warns America of deficit dangers
America’s a rich farmer consuming 4% more than they produce, selling, mortgaging.
May 2006. Harper’s: “Guide to coming real estate collapse”
“20 factors will drive down wages, increase debt, push economy into stagflation.”
August 2006. Bloomberg: New Treasury Secretary warns President Bush
Yes Two years before crash Paulson tells Bush derivatives could blow up economy.
August 2006. Wall Street Journal: Countrywide CEO Angelo Mozilo
“Never seen a soft-landing in 53 years, preparing for the worst.”
November 2006. Harvard historian Niall Ferguson in Vanity Fair
“Rome in 331 and America/Europe in 2006 have many problems in common.”
November 2006. Fortune: “Can the economy survive the housing bust?”
NAHB index is leading indicator, plummeted 54%, stocks inevitably fall in year.
January 2007. Los Angeles Times on Schwab’s trading
Averaged 242,300 trades daily in 2006, back at 2000 peak in last collapse.
April 2007. Jeremy Grantham in GMO’s quarterly newsletter
First truly global bubble. Bursting impact all countries, all assets in world
June 2007. Economist Gary Shilling’s Insight newsletter
As bubble is bursting, speculation end, derivatives trigger a meltdown.
2007. Raghuram Rajan, chief economist IMF
Again warns world’s bankers, “headed for doom,” markets not learn lessons.
June 2007 New book: “Pop! Why bubbles are great for the economy”
Bubbles work miracles for economy. Welcome them, let them pop, Pop, POP!
July 2007 Paulson in Fortune: “Strongest economy in my lifetime”
Yes, as the meltdown spread, Paulson failed to warn the public of hard facts he knew.
August 2007. Wall Street Journal: Former SEC Chairman Arthur Levitt
Subprime mortgage crisis rivals crises like 1980s S&L, Enron, mutual fund frauds.
August 2007. Former Fed Chairman Alan Greenspan on “60 Minutes”
Hustling “The Age of Turbulence,” he admits, “I really didn’t get it until very late.”
Politicians ignore economics, will destroy the economy to win elections. For over a decade America’s been morphing into a series of rapid “vicious feedback loops” that are turning “bad economics into bad politics” then recycling “bad politics into even worse economics, further threatening an already tenuous economic future.”
They want a recession. And most likely the third major Wall Street stock market crash of the century. Welcome to the New New New Abnormal, a repeat of the Old Normal.