It's Déjà Vu Disappointment All Over Again

Baseball great Yogi Berra had a saying “It's déjà vu all over again”, and every year around this time, I am reminded of those words.  As we have once again, happened upon that magical time of year I call, recovery summer déjà vu. It’s the time of year when Wall Street and Washington apologists trot out their dog and pony narrative, in an attempt to spin the actual data, proving we have finally embarked on the summer that will launch sustainable economic growth.    

And this year is no exception, as those same people appear to be downright giddy by the prospect that we finally have something to feel optimistic about.  For instance, they are euphoric about the most recent jobs report, some suggesting that there is absolutely nothing to find fault with.  Of course, they fail to mention anemic wage growth, the lower quality and part-time jobs created; or the discouraged workers who have left the work force. 

Yes, they will admit that they were stunned when GDP contracted in the first quarter, but that was a mere weather-related incident.  It was the blizzard of Q1 2014 that left GDP buried under 2.9% inches of negative growth.  In truth, a more accurate reason for the economic slump was the move in the 10 year note from 2.48% on October 23rd, to 3.03% on December 31st of 2013.  And the move over 3% was the peak of the cyclical advance from the low of 1.63% on May 2nd. The doubling of interest rates, although still to a historically low level, was enough to send this debt-laden asset-bubble driven economy into the freezer. But why allow facts get in the way of a good weather story.  So once again we hear cheers for another summer recovery. 

The truth is, since 2010 every second half recovery has disappointed and this one will be no exception.  The first quarter of 2014 gave us 2.9% negative growth.  I am in agreement with most economists that the 2nd quarter will come in somewhere around 3%, resulting in an economic flat line for the first half of 2014.  This puts enormous pressure on the second half of year to bring us out of stagnation that has led to the most anemic recovery since WW II.  Let’s review; after GDP shrank in both 2008 & 2009, growth returned in 2010 by 2.5%, in 2011 it fell back to 1.8%, it then went up slightly in 2012 to 2.8%, but then down again in 2013 to 1.9%. The inability to obtain growth above 3% in each year since the economy collapsed during 2008-2009 underscores this tremendous economic failure to bounce back after the Great Recession.

So why do they think this year will be different?  After all, if you subscribe to the Keynesian fairytale of money printing and deficit spending, it was easy to see why they were excited back in the summer of 2010.  The economic spigots were over flowing with a treasure trove of demand stimulus and monetary elixirs.      

In the summer of 2010 sanguinity was in the air…Time magazine’s 2009 man of the year Ben Bernanke was poised to save the day, ready to do whatever it took to get this economy growing again.  Today, despite lack luster growth, the Fed is retreating.  Essentially conceding—at least for now--printing money didn’t solve the problem; QE is set to wind down in just 90 days.

But for a Keynesian it gets worse.  Instead of an Obama phone, we have the roll-out of the job-killing Obama-care plan this year and next. In addition, profligate tax-payer subsidized loans that funded the likes of Solyndra, have been supplanted by a capital goods strike.   “Shovel ready” has been replaced with anemic real income growth and record debt levels.  

Putting the Keynesian fantasy aside, the truth is there isn’t much ahead that will stimulate real growth.  The middle class, which was already saturated in debt, has not been the beneficiaries of the Federal Reserve’s money printing.  Instead, those dollars have been funneled into the creation of new asset bubbles and have led to an increase in food and energy prices—like it always has in the past.  Stagnant wages are being stretched further to pay for the necessities of living.  We still don’t have the regulation and tax reform that catapulted the Regan revolution. Companies that have cash flow would rather make stock purchases to increase their Earnings per Share than invest in property, people, plant and equipment.  And, unless the economy is headed back into a severe recession, the economic boost from a lower cost of money will be absent.

The truth is there is not much at all on the economic horizon to warrant optimism. Yes, the cheerleaders are hoping if they yell loud enough, a recovery-summer will finally manifest.  Unfortunately, until free-market forces are finally allowed to deleverage the system, it will be a disappointing second half recovery--all over again. 

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Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

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Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”