It's the economy, stupid

http://www.businessweek.com/news/2012-06-01/slowdown-magnifies-jobs-number-for-obama-race-with-romney

On the first Moddy presidential poll, I said that Obama would beat Romney. ... unless we saw bad economic news between now and November, and I saw the possibility of that with all of the consequence of miserable fiscal and monetary policy coming to a head. The question was how long Europe, the U.S. and China could hold off a collapse.

The new employment report today was miserable. Job growth missed targets by a lot. And confidence in the economy is pretty bad right now.

This is what all presidential races come down to. An incumbent wins if things are pretty steady. Unless the economic news is bleak, in which case he goes the way of Jimmy Carter.

The whole world is in an economic slowdown right now, we are having mini-runs on banks in Europe, Spain is not going to hold up much longer, and the Euro is not going to survive more than another 6 months. China's economy has slowed down (making the communists in power vulnerable, actually). And the U.S. is in more debt than people realize and has monetized that debt with loose monetary policy in a way that is going to anchor our economy for years.

The worldwide fallout from the accumulated mess and bad decisions is going to be worse than it was 2008-2009. The question is if things are very close to falling apart right now, or if there if there is just a continual decline through November, and we see a worldwide economic mess in 2013. If things deteriorate further over the summer, President Obama is very vulnerable. It doesn't matter who his opponent is. He had to be cussing up a storm when he saw those numbers.

 

Agree with this. We're five months from Election Day -- and there are five more jobs reports to come. Things don't heat up until after the conventions -- Labor Day. It doesn't look good today. But today isn't Election Day.

 

I can't say what is going to happen to the worldwide economy. I have known there was going to be an economic collapse for at least the last two years, but I couldn't have told you when. That is the problem. I started shorting the Euro when it was at 1.43. And held on through some irrational rallies because they didn't make any sense.

Politicians and central banks have a lot of tools at their disposal to whitewash things, and this hasn't played out quickly as a result. They can run up a lot of debt before it drowns them, and they have a unique ability to just print money to buy time. But that has been the playbook for way too long -- not just in Europe, but in the U.S., as well.

Europe is in really bad shape. Structurally they have not done anything to address the mess and it is only worsening. Spain is in really bad shape. They are just billions of Euros away from a massive banking system collapse. It's a large economy in its own right, but the bigger effect is what I have said all along -- the runs on banks that are already percolating throughout Europe is going to create chaos. The whole continent is overleveraged.

The fallout from the collapse of the Euro is going to hurt the U.S. worse than our own fiscal and monetary policy has. But we haven't made things better by sticking our own heads in the sand.

This could drag on for a while, though. For the presidential election, it really is a matter of whether they can stave off a crisis past November, or whether a lot of things that are going to cause panic play out over the summer and into the fall. I can't predict it, though. Europe should have collapsed under its own weight at least two years ago, but a combination of BS bandaids and people deluding themselves with false hope has been enough to buy more than two years worth of time. Who is to say that they can't buy another half year?

I wouldn't be surprised if our Federal Reserve is finding some covert way to funnel money to the ECB to bolster European banks -- at our expense. It has already done that, even though it is of questionable legality. I also wouldn't be completely surprised if we get a Eurobond scheme of some sort, which could put off the total collapse for months or even a year or more longer. I put the odds of that at less than 50/50, because I don't think Germany and Finland and even France (even with Hollande in charge now) are going to fund the last voyage of the Titanic without getting first dibs on the lifeboats.

So really anything can still happen. But to my larger point always, this is all buying time. It isn't solving what are unsolvable (they passed that bridge long ago) problems that were caused by reckless governments and central banks.

 

I put it at less than 25 percent chance there is a Euro currency a year and a half from now. Even down to 1.23 right now, I still see plenty of room left to be shorting it. I wish I could say with certainty it is going to fail, because I'd bet you a couple of pints of Guinness -- paid for in dollars. There is still a chance there will be some Eurobond scheme that changes the nature of the currency but keeps something called a Euro around -- even if there are alternative currencies added to the mix. So I don't want that bet.

Even more insane that the way the Euro has traded, though, is the dollar index. The dollar has weakened considerably the last few years overall, as it should have, but every time there is European news, almost on cue the dollar index trades up as people flee to this mistaken haven of "safety" -- ignoring the fact that the U.S. is in massive debt and has been crapping all over its currency, too. With the dollar index sitting right now at 83 +, if I had enough patience, and I didn't have better ideas for my money, I'd go way short on that dollar index and wait. You will have to sit through some rallies, but ultimately people will wake up to the fact that the dollar has to trade on its own strength -- which it has none of. It can't keep trading too high because it is a bit less ugly than the Euro. It may take some time for that story to play out, but on the course we are on -- more than a trillion dollars of new debt each year and a Federal Reserve tripping all over itself to print more worthless money to monetize that debt -- I don't see how we don't get well below the 72/73 levels we were at when people freaked about S&P downgrading U.S. debt last year. That is another one that is going to happen. I just can't say exactly how long, because as I said, politicians and central bankers have a lot of snake oil to play with to delay the consequences of what has been building up for a long time.