Commodities, Stocks Continue to Slide in Deflationary Downturn

It's time to look at some numbers in a broad macro view to get a handle of where the global economy is heading over the next six to twelve months.

In less than six months, Americans will head to the polls to either elect a new president or give Barack Obama the benefit of the doubt and return him for a second term. There are also key Senate races and all members of the House of Representatives are up for re-election. The implications of who becomes president and which party controls congress will have profound implications for the US economy going forward.

However, the presidency is the most important piece of the puzzle. In a nutshell, if Obama wins, we will have a continuation of the descent into a welfare state. If Romney takes it, bet on police state, with brutal, militarized police forces mobilized to quell citizen uprisings throughout the country.

Either way, the USA is in a tough spot, because neither the Republicans or Democrats will do anything remotely positive to improve conditions for millions of Americans.

Let's look at the numbers:

America's current deficit is $1.3 trillion for 2012.

The total US debt is beyond $15 trillion, and, if you add in unfunded liabilities - pensions, Social Security and Medicare - that number grows to somewhere between $125 and $150 trillion. That's a number that cannot be paid out or paid back easily.

In just the past 15 days, reality seems to have struck all the way from Washington to Wall Street. The economy is just barely limping along; in some areas of the country, local economies are dead or nearing a fatal state. More than half the US states face budget shortfalls for fiscal 2013 (starting July 1), the worst being California, Massachusetts (thank you, Mitt!), Illinois and Louisiana. The total gap for the states is estimated at $49 billion and that may be low.

Since the states have to balance their budgets, there will be layoffs and cuts in services. These will be anything but bullish for the general economy.

Retail sales have slowed for four straight months. In related news, JC Penny's (JCP) just today reported second quarter (non) earnings. They lost 0.25 cents per share on estimates of an 11-cent loss. Top-line revenue also missed the projected target of $3.41 billion, coming in at a squeamish $3.15 billion.

CEO Ron Johnson, who took over the reigns of the struggling merchandiser recently and had been widely praised as the master planner of Apple's signature stores, has a difficult road ahead. His Apple experience cannot be rightly compared to what he is dealing with at JC Penny's . Apple's stores were designed to sell only Apple products, which are unique and the envy of the retail world. Penny's deals with thousands of products from a multitude of vendors. It's not the same, and, even though Mr. Johnson is a bright fellow, he's in over his head in an environment that is not favorable to retailers.

Penny's also announced they were discontinuing their dividend of 80 cents per share. The stock was trading down more than 10% in the after-hours.

There are more than 44 million Americans - nearly one in six - receiving food stamps.

New home sales in 2011 had their worst year since 1961.

Stocks on the major averages are down between 4.5 and 5% in just the last 10 trading days. The Dow lost ground on nine of the last ten days; the S&P and NASDAQ have finished in the red eight of the last 10 sessions.

Meanwhile, the dollar index has soared, from 78.71 on April 27, to 81.26 at the close today. Meanwhile the Euro has collapsed to under 1.28 against the US dollar, finishing at 1.2729 at today's close. The move up in the value of the dollar has sent commodities screaming lower, with gold, oil and silver all suffering steep losses in the month of May. That's actually good news for Americans, particularly because lower oil prices eventually will translate into lower gas prices at the pump.

So, what is all of this data telling us? Surprisingly, despite tens of trillions of dollars pumped into the economy since 2008 by the Fed and the federal government, the wailing tone of deflation is unmistakable. Prices are falling rapidly, though incomes are stagnant or declining. There simply are not enough people working and making sufficient money to keep price levels high.

Anecdotally, food prices are coming down. Real estate remains in a moribund, deep slump and home foreclosures are once again rising. Everything will get cheaper as the economy continues down the inescapable path of deflation because the Federal Reserve's money spigot has directed all the flows to the banks, and they are not lending, mainly because they're still repairing their badly damaged balance sheets, and, even when they do cough up some dough, the borrower has to have absolutely pristine credit, a circumstance which is becoming something of a rarity.

Some say the US economy will be destroyed because its unpayable debts will undermine the value of the dollar and cause hyper-inflation. That may be so, though it's difficult to see inflation in anything when 15-20% of Americans are living in what's essentially a day-to-day fight for survival.

If hyper-inflation does one day come about and the dollar is smashed to a fraction of its former value, a deflationary depression will occur first. The government needs low interest rates to continue paying off the massive debt it has created, and will do everything it can to keep rates low.

But, because the Federal reserve has failed so miserably on the second part of its mandate - employment - all the money in the world (and the Fed has most of it now) cannot make people spend when they have no jobs, no prospects, and are worried about having enough food to eat tomorrow. Food prices are likely to stabilize, but, for the most part, the rest of the economy is toast, though it is still marginally better than that of Europe, of which half the countries are already in recession.

The money that was furnished to the banks by the American taxpayer, courtesy of the Fed and Treasury, went straight to financial institutions, and we know that they are profligate gamblers and thieves who will only enrich themselves, leaving Main Street, small business and the American public to fend for themselves in a mostly cash system which is quietly, albeit quickly, turning into a massive black market, underground economy.

Eventually, the government will fail horribly, and many will suffer. Those with wits, skills, cunning and a propensity to see the future and break rules, will prosper. Europe will fall first, but you can bet your bottom dollar (if you still have any) that their problems will come to roost on the shimmering shores of America.

Dow 12,632.00, -63.35 (0.50%)
NASDAQ 2,893.76, -8.82 (0.30%)
S&P 500 1,330.66, -7.69 (0.57%)
NYSE Composite 7,635.81, -69.64 (0.90%)
NASDAQ Volume 1,835,801,375
NYSE Volume 4,114,145,250
Combined NYSE & NASDAQ Advance - Decline: 2214-3408
Combined NYSE & NASDAQ New highs - New lows: 77-236 (gap widening)
WTI crude oil: 93.98, -0.80
Gold: 1,557.10, -3.90
Silver: 28.08, -0.27