If the unemployment claims figure was not bad enough, the Philly Fed survey was even worse... I thought it was a misprint! – Legendary trader Dennis Gartman in the August 20 issue of The Gartman Letter.
The much-touted, government-led recovery seems to be stalling. The Philly Fed index measures manufacturing conditions in the Mid-Atlantic states. The index is set between +100 and -100. It has been as low as -40 at the depths of the recession and should be registering positive numbers based on the consensus view that the economy is recovering.
Instead, the print on the report read -7.7. Meanwhile, unemployment claims rose to 500,000, a level not seen since the fall of 2009. In short, the economy seems to be weakening again, despite all the stimulus... or perhaps because of it...
One more obvious sign of a weakening U.S. economy: the energy complex. Take a look at the chart (below) of the Dynamic Energy PowerShares ETF. This fund invests in a broad range of leading U.S. energy companies – everything from natural gas pipelines to Schlumberger.
Demand for energy is perfectly correlated with economic activity. Thus, watching these stocks gives us a window into the market's expectations of future demand. After rallying steadily off its lows in early 2009, this ETF fell off a cliff in early May. Interestingly, that's the exact point in time most of the government's tax credits for new homebuyers expired. I know from sources in the industry that foot traffic at new home sales centers came to a complete halt at the same time.
The cockroaches in Washington now face an interesting dilemma. The economy seems unwilling to move forward on the basis of private business. Corporations are hoarding cash. They're not hiring. And wealthy individuals are leaving the United States in record numbers – more than 700 people renounced their citizenship last year, up from 235 in 2008.
However, all of the government's efforts to spend its way out of this downturn have failed. We would have pointed out to them that bailing out the banks that got us into trouble and giving tax credits to build still more houses might not have been the best idea. We have yet to find a credit bubble in history that was repaired by borrowing more money or planting more tulips...
What will the government do? We're pretty sure it won't do the right things. Nobody seems to be in favor of vastly cutting taxes, government spending, or regulations. In fact, nobody seems to care that taxes are set to soar next year for the very people whom we need most if we're going to grow our way out of this serious economic crisis: small-business owners. Nobody seems to care that allowing capital gains and dividend taxes to soar next year will drive up the cost of capital needed to expand businesses. And nobody seems to have even noticed that adding a 55% estate tax onto the average entrepreneur's list of taxes makes it nearly impossible for most successful small businesses to be left in control of the founder's family.
Ask yourself the obvious question: Why would anyone take the risk of starting (or growing) a business when the government is going to take a total of 70% of the upside and leave you holding the bag if it doesn't work out? Why would anyone be surprised more businesses than ever are moving jobs overseas and taking the best and brightest of this country with them? If you want the rest of America to look like Detroit, just keep on trying to tax and spend our way out of this recession.
I'm concerned about these problems for one reason: There's almost no chance any of the proper policies can be passed by Congress. No one is going to vote for sensible policies because more than half of all Americans no longer pay any federal taxes on a net basis. The mob is now living at the expense of the Treasury.
That's a big problem in a democracy. America is becoming a new type of fascist state, where government employees, unions, and everyone else on the dole constitutes the largest voting block. It's not communism because the government doesn't directly control the means of production. But true private property doesn't exist in America anymore. If you don't pay taxes on it, you don't own it. And if the government decides you're not using your property the right way, it'll take it away from you. I don't know what to call this kind of regime... but I know damn well where it will lead.
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