The Deadly Truth About the Great Boom and This “Recovery”

Harry_headshot-150x150A Yahoo Finance headline this morning reads: “Unhappy New Year: The U.S. Economy Is Stalling Out.”

We recently learned that existing home sales in November crashed 10.5% from the month before.

Guess when the last time was when we saw these levels? The housing crisis of the mid- to late-2000s!

I also recently shared a chart showing a cataclysmic 82% drop in the ratio of new home sales to the U.S. population. To put it simply, we won’t need more real estate for decades to come, with baby boomers increasingly dying to offset rising millennial home purchases.

I and a few other experts like David Stockman have continued to argue that this re-bound since 2009 has been all smoke and mirrors – artificial stimulus that has only created greater bubbles in financial assets like stocks, and financial engineering to create rising corporate profits. None of it goes toward real expansion for future jobs, productivity and growth… things like new office space and industrial capacity.

Wall Street analysts and corporate CEOs can argue against this with their “this is not a bubble” logic, but this chart tells the real story.

Below is a chart that shows the office space per worker in square feet. It shows a rise into the height of the financial crisis, after which it’s fallen like a rock!

At first this could seem counterintuitive. Why did the square footage per worker go up into the worst of the recession into mid- to late-2009? That’s because companies were laying off workers going into that recession, meaning there were more workers per square feet.

But the real story comes in the recovery from late 2009 forward.

Demand for Commercial Real Estate Takes a Dive

Square footage per worker has declined very sharply from 371 square feet to 270, down a whopping one-third in just over six years as businesses have rehired a large portion of the laid-off workers – which means largely NOT creating new jobs.

You should not look at this chart and assume that because less square footage per worker means more workers than in the past that everything is hunky dory.

What’s more important is that the sharp decrease in square footage implies a lack of demand in commercial real estate. And that’s because commercial real estate is already way over-expanded! We overbuilt it in the great boom of 1983 to 2007, so even these hires have not filled up the available space. Which means businesses aren’t expanding their office or industrial space!

So while hiring more workers sounds fine out of context… it’s masking much more severe, deeper-set issues in our capacity to build for the future.

This is the hard truth that no one is looking at: businesses are merely re-employing their past capacity, and not creating new plants and offices for future employment. All the 200,000-plus jobs numbers per month, if they are even fully real, are just catching up with the past. And we shouldn’t be investing in such new work space as we already have all we need for decades ahead.

This is the reality of demographics that clueless economists just don’t get.

Meanwhile, more and more people drop out of the workforce either from giving up on finding a job, or retiring earlier once their kids have left the nest.

And more jobs are part-time or in the low-end service sector – like bartenders and waiters, not the higher-paid manufacturing and professional jobs of the past.

To top it off, fewer and fewer people are entering or staying in the workforce. Hence, the workforce participation rates continue to edge down – after falling sharply for years.

And all of that means… we’re not even at capacity for all this overbuilt real estate.

Folks, this “recovery” isn’t working! And no one has expected it to given the over-expansion in the greatest debt bubble in U.S. history from 1983 to 2008.

Inflation hasn’t risen due to excess capacity here and around the world, especially China

Money velocity continues to drop without lending and productive investment to expand it…

Businesses are struggling with stagnant earnings because we already hit the peak of debt capacity and demographic spending growth in the great boom that finally peaked in late 2007, as I forecast two decades before.

A Debt Fueld Boom US Debt versus GDP Growth

Debt was running at 2.54 times GDP for 26 years. It doesn’t take a rocket scientist or nuclear physicist to tell you that pretty much guarantees a massive period of deleveraging and depression – not continued expansion.

So since growth is all but impossible, corporations have resorted to financial engineering to keep the wagon rolling – all courtesy of the Fed, with near-zero short- and long-term interest rates.

They’ve had two options: either increase stock buybacks to leverage their stagnant earnings with rising earnings-per-share on fewer shares, or increase dividends to compete with lower and lower yielding bonds (also courtesy of the Fed). And they’ve been milking both options for all they’re worth!

But financial engineering does not result in real growth.

And speculation does not expand the money supply.

It is only a sign of decreasing money velocity, and a bubble that will only burst – like in 1929, 2000, and now again!

It’s a mirage.

It isn’t real.

And it isn’t sustainable.

Despite such endless financial engineering, sales for the S&P 500 have been declining for the last three quarters. And profits have declined for the first time since the 2009 expansion.

I’d be surprised if both didn’t continue down in the 4th quarter.

This will end badly… which is the only way bubbles end.

My forecast today: the stock market will start to crash by early February, if not sooner, when it gets this clear realization.


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