The 4th Place Finisher in This Year's Dodo Derby

Stocks are up. Stocks are down. The same goes, naturally, for the broader indexes that house them. Yesterday, for example, the Dow fell about 80 points. Today, last we checked, it was up almost as much. Over the past five days, it’s firmer by 95 points. But on the month, it’s lower by 80. And, by the time the bell rings this afternoon, all those numbers will have changed.

What to make of it? As a general rule, we don’t pay much attention to the minute-by-minute, hour-by-hour market moves that saturate the mainstream media. Why would we? We’re not trying to identify the specific cause of a single-day, fraction-of-a-percent move in a multi- trillion dollar market. For one, it’s a fool’s errand. The market is driven by hundreds of millions of individual human actions and emotions – some rational, others irrational. There’s no way of knowing with certainty what the next hour, day or maybe even month will bring. If we could know – if anyone could know – for sure, we’d be on a tropical island somewhere, minding our own business and keeping our secret to ourselves.

But if we had to guess, we’d say, on the whole – that is, over the long run – that the bull market we’ve seen run since the crash of 2008 is closer to its end than its beginning. A quick look back…

Remember, we had the crack-up boom of the late ’90s, which spilled plentifully into the early naughties. After a brief, mini-recession of 2001-02, it was full steam (and full credit) ahead…to the bust-up of 2008. Stocks – following houses and the banks that stood behind them – fell deeper and harder than all but a few fringe-dwelling contrarians had anticipated. Wall Street institutions – stalwarts that had weathered the First Great Depression, a couple of World Wars, the stagflation of the ’70s and the crash of ’87 – fell to their knees, were broken up or forced to marry equally distressed partners. Millions of employees fell out of work. Many of their jobs are gone…for good.

That, in a nutshell, was the first phase in what we see as a bigger, ongoing correction, one that could last for decades and reshape the world. Bill Bonner calls it the “Great Correction.” Doug Casey, perennial Vancouver favorite from whom we’ll hear more below, refers to it as the beginning of the “Greater Depression.”

Even the rosiest outlook calls for a fundamental paradigm shift in the way the world economy operates. China is due to overtake the US as the world’s largest market sometime in the 2030s. Then, barely two decades later, India will overtake China. We don’t know that these things will happen, of course. They’re just guesses, based mostly on inklings, feelings and hunches. (And some rather compelling demographic data. But that’s a story for another day…)

Were the bust of ’08 allowed to keep on busting, as it seemed determined to do, we might now have bottomed out and, with any luck, found ourselves ready to begin along a real road to a feasible recovery. In other words, we might have begun the long, hard slog back to sustainable economic expansion. But instead of exercising even a single degree of restraint, the Feds did what the Feds do best; that is, they made things worse.

It is almost impossible to know exactly how much money has been poured into the fight against the forces of economic nature. We’ve seen figures of 10…12…even 14 trillion dollars in total. Between the Fed’s many and varied programs – from its Term Asset-Backed Loan Facility to currency swaps, GSE debt purchases and various bank bailouts – to the Treasury’s own shenanigans – $700 billion for TARP, stimulus I and II, endless support for Fannie and Freddie – it’s easy to get lost in the paperwork. And that’s to say nothing of the FDICs ongoing obligations and other assorted boondoggles, like President Obama’s $300 billion “Hope for Homeowners” sinkhole.

The national debt, which stood at “only” $5.7 trillion dollars around the turn of the century, or $55,000 per taxpayer, is now on track to surpass $22 trillion, $186,000 per taxpayer, by 2015. State debt has risen from $750 billion to $1.16 trillion since 2000. And, it’s worth mentioning, those numbers do not include unfunded liabilities which, although brushed aside in the past, become ever more important with every retiring worker.

This year, 44 states are expected to register budget shortfalls. The total budget “gap” for fiscal year 2012 comes in around $125 billion. California owns the lion’s share, with $25.4 billion to fill, more than seven times Wisconsin’s shortfall. Illinois comes in next with a $15 billion shortfall, followed by Texas with $13.4 billion, New Jersey at $10.5 billion and New York at $9 billion.

But these numbers mean nothing. Not to the average man on the street, anyway. You could beat him over the head with 1s, 7s and 5s all day long and he’d scarcely feel a thing. He doesn’t understand that, no matter how much he wants healthcare for everyone, turkeys in every oven and American-made muscle cars in every garage, there simply isn’t any money left to pay for them.

The states are broke. Broke as in “B-R-O-K-E” broke.

Which brings us to our second Daily Reckoning Dodo Derby Award announcement for the week. Over the weekend we narrowed the field to ten finalists (in alphabetical order) – California, Connecticut, Illinois, Louisiana, Massachusetts, Mississippi, New Jersey, New York, Ohio and Wisconsin.

Yesterday, we awarded 5th place to Connecticut.

Today we have fourth place honors for a state whose unions, perhaps the most renowned in the country, work tirelessly to retard the economic progress of its otherwise hard working citizens. Although this state has a slightly lower debt to GDP ratio than 5th place, its projected 2012 budget shortfall, at $10.8 billion, is more than three times as large, making it a much larger problem for the nation if or when it goes down. It’s also managed to stack up some $54.4 billion in unfunded pension liabilities not to mention billions more in healthcare and “other” unfunded obligations.

In fact, it was concerns over these very liabilities that Standard & Poor’s cited when they downgraded this state’s credit rating earlier this year. And, as Fellow Reckoners well know, if the ratings agencies are on to you…it’s probably already too late.

How did they get to this point?

Writes one reader, with a clue, “I asked a turnpike toll collector what he makes after hearing the waste of money in this state and was told very proudly that he makes $76,000! That [job] is no better than a cashier and that’s not including benefits he receives. No wonder that the Christi administration is looking to privatize it.”

Congratulations…New Jersey! You receive 4th place honors in this year’s Daily Reckoning Dodo Derby Awards: The State Edition.

In tomorrow’s issue, we’ll have the first of our two runners- up…followed by the big winner, to be announced Friday. Stay tuned.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning