I started this post weeks ago and originally I was going to update my posts about the similarities between the 1920s economy and the economy we’re seeing today. Those two posts alone account for a significant amount of search traffic to this site for some reason.

Unfortunately, the update I have been writing got huge. In fact, it got so large I decided not to bother posting it and will instead put together a research paper that will take quite some time to compile, simply due to free time constraints and my health.

What I did want to discuss was an article I found on the Bloomberg website for Friday. Something that, combined with a whole heap of other factors, supports my previous statements that the current increase in the stock market values are just a correction to make up for the precipitous drop back in February.

Before I get into that, I just want to say that I think those in the US that are going on about Tea Parties and tea bagging the President are idiots. Those folks are worried increased taxes after 8 years of a President who did nothing but decrease overt taxes while spending money that didn’t exist. While I don’t agree that increasing taxes right now is necessarily a good thing (I’ll explain shortly,) I think those of you in the US that are complaining about it really need to stop and take a hard look at just how little tax you actually pay compared to the rest of the world. And how much your Government is spending. You have been running up debt for the past 8 years that you had to start paying for sometime… Its just unfortunate that it coincides with the rest of the economy collapsing. But then again, the level of tax is partly to blame for the US economy slumping anyway. So get over yourselves and start concentrating on what really matters.

Kevin Rudd (the Prime Minister of Australia) has announced that the amount of tax collected in February will be so far reduced from the projected expectations, that they are forced to cancel so called “stimulus” projects that have been successful to this point, simply because they cannot afford to continue them.

“More than two-thirds of the deficit is a result of a collapse in taxation revenues,” Rudd, 51, told Melbourne Radio 3AW. “We have said there has been a A$115 billion collapse in taxation revenues and with these new growth figures from around the world, there will be a greater reduction in taxation revenues.”

The government in February forecast a A$22.5 billion budget deficit in the year ending June 30 and A$35.5 billion the following year. It is the first shortfall in seven years as global demand wanes for exports from the world’s biggest shipper of coal and iron ore.
Rudd Says Australia Tax Losses Exceed A$115 Billion - Bloomberg

Collapse in taxation revenue is another way of saying the amount of people gainfully employed has drastically declined, and the number of business currently open and providing tax revenue has drastically declined. People just aren’t buying enough things to make up for the shortfall, even after the Government foolishly dumped a piece of several billion dollars in free money in every citizens bank account.

This proves that just throwing money at the economy does not work. Kevin Rudd’s government gave out so much free money (nearly AU$1000 per citizen) and hoped people would spend it to try and prop up the economy. It back fired. Badly.

In March I said that the rally we’re seeing in the markets at the moment would be swinging back to a downward trend by May. I may have been off by that. I’m willing to say that it will happen sometime during May, maybe early June. It will definitely happen.

I think we’re starting to see the first economic declines coming in Australia. On the back of this news from the Government there, people will start to shore up their spending and we’ll definitely see profit taking. Of course, all of that will adversely affect NZ due to the nature of NZ’s banking infrastructure.

With the recent tax announcements in England, we’ll also see the FTSE start to take a hit shortly as well. For much the same reason. By raising taxes as much as they have, the UK Government has effectively admitted there is reduced currency in the Treasury. The increase in tax will reduce spending which will reduce tax revenues and we’ll hit a nasty cycle there. Once that happens, the FTSE will start to suffer as people start to take profits and liquidate currency.

Then it will spread to the DAX followed by the rest of Europe. From Europe it will start to affect Asia (Europe is a huge trading economy for both China and Japan) before finally hitting the US. Of course, I could be completely wrong about the progression, but that is my current prediction. I won’t give a time frame estimate, but I think we’re about to see it start happening very soon.

Newsweek published an interview with Nouriel Roubini on Friday, 24 April. For those that are not familiar with the name, this is Dr Doom. This is the man that predicted the state of the economy back in September 2006. Back then, everyone laughed and didn’t believe him. They gave him the moniker “Dr Doom” for his dire predictions… Unfortunately for us all, he was right.

In this interview he makes some very interesting statements, but two of them really stand out for me.

Weymouth: What do you believe is happening to the economy today?
Roubini: The rate of economic contraction you have seen in the last two quarters—6 percent annualized—is going to slow down. The optimists are already talking about the “green shoots” of spring, about economic activity becoming positive. [They say] we will have positive growth in the third quarter, and in the fourth quarter we will grow 2 percent over the previous quarter. They expect that next year, growth will go back to above 2 percent.

Compared with this optimistic consensus, I believe that the rate of economic contraction is going to slow from minus 6 percent in the last two quarters to minus 2 percent by the fourth quarter. Next year, I believe that the growth rate is going to be 0.5 percent for the U.S. average. Even if we are technically out of a recession, we are going to feel like we are in a recession. The bottom of the economy is not going to be in three months, but rather toward the beginning or middle of next year.

[...]

Do you believe this is a bear-market rally or do you think it is the market anticipating an economic recovery?
As we reach newer lows, we may be closer to a level of the market that is fundamentally right. A year ago we were not as close to a true bottom. Today we are closer to it. As we become closer to the bottom of the economy, the stock market looks ahead and sees the light at the end of the tunnel and rallies. In spite of these caveats, I would argue that even the latest market rally is a bear-market rally.
I Am Dr. Realist - Newsweek

By his estimate, Governments have managed to avert a depression similar to what we saw in the 1920s and 1930s. This is good news. However, he does not expect to see positive economic growth until 2010.

What scares me the most in all of this is the blatant money printing that has been going on. Not to mention the toxic debt itself.

Some people are still not familiar with how we got into the situation we’re in. While not encompassing the whole situation that currently exists, there is a great video that explains the problem caused by the sub-prime mortgages in the US and how they have contributed to the problem. I’ve been slack with this video, as its been in another draft for nearly 2 months now. But to make amends I have embedded it below and strongly recommend it to those of you not familiar with that aspect of the current economic situation and why the banks are in the situation they’re in. Definitely share this video around so others may learn from it.

Till next time folks.