We Are the Mushrooms of This Economy 16 comments
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Mushrooms grow in the dark and are fed crap.
Most have been reading the 2009 financial predictions – market up, market down, economy up, economy down, inflation up, inflation down. Have you heard any predictions from the Captains of our economy?
We are analyzing what the Captain of a ship is doing without access to a route plan or timetable. The passengers interview each other and come up with conflicting routes and itineraries. Meanwhile the ship keeps glancing off of icebergs, while fires break out from time-to-time. The Captain keeps assuring the passengers that the ship is strong, and that tomorrow things will be fine. Meanwhile, enjoy yourself at the ship’s casino – drinks for first class passengers are on the house.
We are in the dark on what the economic Captains are predicting. They are not talking except to give little sound bites – little morsels of crap. The plans our government wants to impose on us should be open to public debate. It will affect your life, your children’s, and if we survive this – the lives of our ancestors.
- How do you think we got here? [This exposes to us what they think the problem is.]
- The current situation as they see it? [Do they see all the problems? Do they see inter-relationships?]
- What shoes are left to fall in this crisis and what actions are you taking to prevent their occurrence? [I do not see them positioning themselves for other economic weaknesses.]
- The time frame for economic recovery. [This answer would expose how fast they think the economy will respond. The wider the range of recovery, the less sure they are of what they are doing. We would also have a scorecard on the economic Captains so we would all know at the same time that things are or are not working.]
- Our options / courses of actions at this point? What are the potential side effects? [What are our choices? Will they disclose how much their economic medicine will make us sick?]
I know any responses to the above will be worthless double-talk. I have watched them dance in front of the clueless Congress – truth is illusive. But it will give a reference point to start the second group of follow-up questions:
- Why was the housing crisis considered such a low threat to our economy when there were reputable economic studies prior to 2008 showing it was a grave recessionary threat to our economy?
- When will inflation begin? What effect will it have on all of the low interest financial instruments are being created under ZIRP?
- What is stimulating about the proposed stimulus plan? Most items are simple GDP filling projects. Do you need a dictionary to look up the meaning of “stimulus”?
- Why follow a ZIRP (zero interest) model when it did not work in Japan? [There are inherent dangers in an exit strategy for zero interest rates which may trap us. The longer we are at zero, the harder it will be to extract ourselves.]
- Do you consider the size of government debt to be a constraint on economic recovery? Does assuming this additional stimulus debt worry you? Are you planning to transfer the US debt to Puerto Rico, and then cutting loose Puerto Rico from the USA? [Yes, I am joking but what they are doing is a joke also.]
- Do you think the consumer will start to credit spend again? Does the size of consumer debt bother you or should we just ignore it? Has the US government considered issuing their own credit card to all citizens so that stimulus can be disbursed throughout the economy instantaneously? [Balances on the card will be carried at zero rate – and the principal does not have to be repaid until you die. If that does not stimulate the economy – nothing will. Yes, this is a joke too but should warm the hearts of all Keynesians.]
- Are you a freemason? [I saw the Da Vinci Code. This is sarcasm, but it may not be a joke.]
It is unlikely these questions could be answered because I expect the truth to be so terrifying it would create a crisis of confidence. Okay, I would settle for answers over a two double martini lunch at a fine restaurant. At least I would get a good meal with entertainment included.
The few interviews of the Captains in this economic crisis reveal that events crept up on them and just exploded. They claim they were blind-sided. Whatever economic forecasting tools they are using are suspect. So it logically follows:
- They are not seeing all of the other perils to our economy;
- The perils they are seeing are not properly quantified;
- The solutions are miss-targeted as the problems are improperly defined.
I have begun to realize what is troubling me in this economic crisis is the logic jumps – or gaps in logic. An old professor once told me when you do not understand something; there is something you do not know.
All explanations now are non-scientific (non-quantitative) opinion, economic dogma or spin. No longer can we point to past events (except the Great Depression) to extrapolate an expected recovery path or methodology. This economic crisis is now larger than any modern day crisis – and if that was not bad enough, it is now dwarfed by the proposed solutions.
We will all be fine if the economic medicine does not kill us.
No stimulus bill should be legislated until the overall economic recovery plan is exposed including options, outcomes, and time tables. This ad hoc tinker toy approach to economic recovery smells of desperation and deception – and predictably pork once Congress finishes with it.
I have little hope that any meaningful economic debate will happen. Maybe there is a Fed or Treasury “Deep Throat” out there? I mean a Mark Felt type, not Linda Lovelace. On second thought…..
The New York Fed began purchasing fixed-rate mortgage-backed securities guaranteed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. Selected private investment managers are acting as agents of the New York Fed in these purchases. They have already purchased over $10 billion.
Joining Bankruptcy: Waterford Wedgwood (WATFF.PK), LyondellBasell, Goody's Family Clothing Inc (GDYS).
There is trouble in Gaza. This carries political and economic risk for America as the rest of the world sees this crisis almost 180 degrees differently than portrayed in the American media. We should hope for a quick and long term resolution.
India has their own Madoff scandal which drove markets lower this week. Satyam (SAY), the fourth largest software firm, cooked the books. Fears are how pervasive this problem is in the economy.
Natural gas to Europe has been cut off this week with a dispute between Russia and Ukraine. Hundreds of thousands of homes are without heating.
click to enlarge
Economic and Investing Outlook January 2009
My investing style based on economic conditions continues to be based on capital conservation (spelled “cash” with a few very small bets here and there). My opinion is that we are not yet through the worst of this economic crisis. I will wait for fundamentals to begin to align with market trends. If you do what I do - you will not join any advance at the ground floor. I will not gain as much as others. This works for me as I do not want to come out of retirement, and I must be careful with risk. The markets remain volatile. You need to take risks to make money - however I consider most markets more like gambling than investing.
Inflation remains off of the table for the next two quarters. At the same time as I submitted this article for publication, ECRI’s USA and Canadian were also submitted. Both showed negative inflationary pressures (deflation). On Friday, the Future Inflation Gauges for Europe, UK, Japan and Korea were published all showing negative inflationary pressures.
I look at economic trends and correlate them to market trends for direction in investing. In this regard, no market is investable. In most areas, I can give as many economic reasons why a particular market will advance as decline. In these situations, markets usually are volatile – and market trends are short lived. My investing outlook is only for 30 days due to the volatile economy.
The problem in using an economic fundamental is timing. I know commodities will strengthen. But there is no emerging fundamental which says it will happen in the next 30 days. If you buy into something too early, your investment may languish or take a ride to the dark side.
To date, the Fed’s monetary policy is not working. Credit markets are still slow. I understand the Fed’s concern over access to credit, but why would anyone borrow except to refinance? Where will the economic demand originate?
- Cash – Generally, cash is your friend during deflation, and your enemy in inflation. We have a Fed policy to create inflation which has not yet taken hold. Inflationary pressure is not forecast through mid-2009. Most non-liquid assets are deflating – and probably will continue at least through 2009 (more likely 2010). If you have cash, you can buy these deflated assets at reduced prices later with any cash you build up today.
The problem is that you cannot get a return on cash right now with low interest rates. There is downside risk to capital in treasuries during inflationary events (except in TIPS). There are relatively high returns on CD’s or Money Market Funds of 3% to 4% but what happens if inflation triggers while your money is locked up? The lowest risk option is the normal interest bearing bank account which is paying literally nothing. You should validate that your bank or financial institution is sound (once every 30 days is good). Spreading your money between several institutions is prudent. Bottom line – there is no good way to make cash work for you in January 2008.
- Gold / Silver – There are opposing fundamentals today for investing in mining stock or Gold ETF’s. Any major economic event may send gold / silver rapidly up in value, and this kind of event is not foreseeable. For those that want gold as a hedge against a black swan event, it should be in your possession where you can use it when required.
- Commodities – Long term, the current low commodity prices will trigger a commodity crunch as supply evaporates due to production shutdowns caused from negative returns for producers. Short term fundamentals are mixed to negative.
- Currencies – The short term fundamental is for the dollar to be strong as deleveraging is still occurring. ZIRP is mitigating dollar demand. There is continuing pressure on other major currencies to lower interest rates to devalue their currency to support export markets which also supports a strong dollar. Six months from now this may be an entirely different ballgame.
- Equities – The pumpers are out in full force. Here is part of a little junk email I received (I think most of you know who sent this):
You know what scares us? Really scares us? The answer might surprise you...
It's not when a good stock gets cut in half. And a $10,000 investment say, goes to $5,000 for a period. Or even when an entire market swoons, and a $500,000 portfolio drops by some gut wrenching amount...
No. What scares us is MISSING OUT on historic stock market gains.
Missing out on months like January 1975, when the market broke out of the 1973-74 bear market freeze for more than a 10% gain...
Economic fundamentals do not support a stock market rise. Stocks are overpriced. Nobel Economist Nouriel Roubini believes the market will fall another 25%. Economists do not make good market predictors, and I suggest he is saying the fundamentals support a lower market. Equities do not belong inside of a 401(k) until there is a bull market as your ability to jump in and out of investments is limited.
- Bonds – There are fundamentals which point to bonds outperforming equities in 2009. The risk of higher interest rates destroying a bonds value should not be a problem for the next six months. But there is a chance of bankruptcies (for non-Treasury bonds) destroying your invested capital. 2009 will be a record year for bankruptcies which will affect the bond market. There is a growing concern over the accuracy of the current bond rating system. As more and more of this outrageous government debt must be financed, it will be interesting what happens to Treasury rates later this year - and this will affect the entire bond market. If I decided to buy into this asset class I would do it inside of an ETF where you can exit quickly if necessary.
- Real Estate – If this asset class was only liquid the value crisis would be over. It would have fallen like the stock market – and we would just be cleaning up the mess right now. Industrial and commercial properties have now joined residential real estate in their descent. There are two more years to go for residential to reach the bottom, and four more years for industrial and commercial if this crisis follows the path of past crises. My guess is that it will be worse due to demographics and the shear magnitude of the entire economic event. So if you are planning to sell within the next few years, this is the time as the market is being flooded with low rate mortgages for the unsuspecting buyers to get sucked up. If you are a potential buyer, please buy now as I have a few duplexes in Nevada I am trying to sell. For the few buyers which would not be interested in my duplexes – you have got to be crazy to buy property AS AN INVESTMENT now. There was a good analysis published this week by John Lounsbury on housing which you should read. This is the time to refinance existing loans with some 30 year rates under 5%.
The trailing indicators continue to show a economic contraction. Below is a list of news which happened this week which either reinforces or contradicts any investment strategy.
Interesting but Not Indicating Anything
- None this period
- The price per barrel of oil has finally started to move upward towards $50 / barrel. Although this might seem like bad news for the consumer, it really is good long term news. The price of oil had fallen below marginal lifting costs, destroyed exploration and expansion of oil fields and refining capacity, and priced oil below alternatives. We need new energy growth to be focused on non-petrochemical alternatives – higher oil prices will help this process along.
- ECRI’s Weekly Leading Index continues to demonstrate deteriorating market conditions six months from now. As I contribute ECRI’s index result at the same time as this weekly summary, I cannot give you a link – but if you click on “more articles” under my picture above you can find this weeks submission.
- None
Negative Coincident indicators
- The Department of Labor released their December 2008 Employment Report and it was as bad as expected. The preliminary numbers put official unemployment at 7.2%. Unemployment is the highest in 16 years. The broad reaching U-6 shows unemployment at 13.5% in the same report. “In December, job losses were large and widespread across most major industry sectors.” Although the higher educated people are less effected than the lower educated, the rate of increase in unemployment is highest for those who have a college diploma.
- None
Negative Trailing Indicators
- The National Association of Realtors published their preliminary November 2008 data showing a continuing decline in existing home sales prices and a growing backlog of existing homes for sale. This is a long term trend, and is indicating the problem is growing.
- The Census Bureau published their preliminary November 2008 report on Manufacturers’ Shipments, Inventories and Orders.
- New orders have been down for the last four months, and decreased almost 5% in November.
- New orders decreased over 4%
- Shipments fell over 5%
This is in line with my expectations but higher than analysts’ expectations.
- Home loan applications were slightly lower than last week. This number was seasonally adjusted but data over a holiday period is suspect. Approximately 80% of all loan applications were for refinancing existing loans. The Mortgage bankers also released their third quarter of 2008 quarterly commercial property report. In summary:
- Sales down 67%
- Prices are down 2% to 12%
- The amount of loans outstanding for commercial market contracted slightly 0.1%.
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This article has 16 comments:
You ask too many questions! I say his if you are assuming you will get answers from politicians or bureaucrats.
But you are asking the right questions and the number maybe even too few to get around to everything that should be understood.
Great article. It coud be the charter for a an economics institute.
Good on ya Steven!
"Economic fundamentals do not support a stock market rise. Stocks are overpriced. Nobel Economist Nouriel Roubini believes the market will fall another 25%. Economists do not make good market predictors, and I suggest he is saying the fundamentals support a lower market. Equities do not belong inside of a 401(k) until there is a bull market as your ability to jump in and out of investments is limited."
True as all of this may be, equities are a good inflation hedge, and are a leading indicator. Nobody knows how bad it is going to get, but on the same token, nobody knows when it's going to get better too. By the time that bull market arrives, you'll already be too late in regards to equities.
The reason why I say so is because, let's say someone takes your advice and goes into equities during a bull. Well, when would they sell? When the bear arrives? Someone operating on that kind of logic would have held in Dec 2007 even after the BS hedge funds collapsed and earnings began to dip (tipping off your fundamentals argument), and if they were astute, would have sold either then or sometime before October 2008, when the bear market officially arrived (20% dip). However, most people are not that astute, and ended up selling when the majority of analysts out there said there was a big problem - mid-October onward. These people lost a LOT of money.
For 401k style investors, dollar cost averaging remains king, along with an asset allocation that matches how close you are to retirement. If most of these folks rebalanced their portfolios during the New Year, you'd find that they would have averaged up on equities, due to the steep losses suffered last year. That, more than buying during a bull, would have positioned them to participate in the market's recovery, which neither me, you, nor Ben Bernanke can accurately time.
As always, you build this article around extensive data. However, the opinions you express are of real value and should prompt many to think, discuss and evaluate. I have listed a few below that readers should pay attention to and go back to read in context.
1. "I have begun to realize what is troubling me in this economic crisis is the logic jumps – or gaps in logic."
2. "All explanations now are non-scientific (non-quantitative) opinion, economic dogma or spin."
3. "I look at economic trends and correlate them to market trends for direction in investing. In this regard, no market is investable. In most areas, I can give as many economic reasons why a particular market will advance as decline. In these situations, markets usually are volatile – and market trends are short lived. My investing outlook is only for 30 days due to the volatile economy."
4. "The problem in using an economic fundamental is timing. I know commodities will strengthen. But there is no emerging fundamental which says it will happen in the next 30 days."
5. "Economic fundamentals do not support a stock market rise. Stocks are overpriced. Nobel Economist Nouriel Roubini believes the market will fall another 25%. Economists do not make good market predictors, and I suggest he is saying the fundamentals support a lower market."
Thanks for this great article.
"An old professor once told me when you do not understand something, there is something you do not know."
"It is unlikely these questions could be answered because I expect the truth to be so terrifying it would create a crisis of confidence."
It is best to strike while the iron is still hot. After v. 1.0 fizzles in strength and as conditions deteriorate, the populace will become more cynical and stingy.
So far there is no answers or solutions to these endemic problems.
It is sad that there is still no transparency or regulatory improvements. Please re-institute Glass Stegal. Conglomerate banks are a miserable failure and the old institutional brokerages are gambling fools.
If Dr. Roubini believes the market is due for a 25% drop then he's changed his tune, because as recently as last November he believed fair value for the Dow was 1000. Maybe now he's considered the "overshoot" possibility.
Overshooting I think is what the credit industry and banking bedfellows did when they took themselves to run off the leash.Profit is good and seeking a well-fed well makes for good drinking but when you start so many wild fires there's never enough water to keep the well from going dry.
On Jan 11 10:22 PM constructe wrote:
> Thanks for the facts. U-2 at 13.5% is rather astoundingly bad. When
> you talk about shoes dropping I think we should be talking about
> our pants dropping. No longer should we be talking about housing
> prices dropping but should be talking about how to prevent 20-30%
> unemployment.
>
> So far there is no answers or solutions to these endemic problems.
>
>
> It is sad that there is still no transparency or regulatory improvements.
> Please re-institute Glass Stegal. Conglomerate banks are a miserable
> failure and the old institutional brokerages are gambling fools.
On the one hand I will observe that the most intelligent analysis of recent events does not come from 'the Captains' but from SA writers like you and others who comment. Here there are people who combine academic, market and business backgrounds, who both understand theory and have longtime on the ground experience. Increasingly I am becoming convinced that the people who really see and understand what is happening are not running the Fed and Treasury but sharing their insights in this forum.
You have to admit, it certainly doesn't SEEM like they understand what they're doing, whereas SA writers seem to see it very clearly--even if all there is to see is fog and uncertainty and conflicting evidence. Just because they're in charge does not mean they're smarter or more knowledgeable than you, or have any clearer view of the way forward.
On the other hand if 'the Captains' who are supposed to be guiding the US economy are in fact looking at the US only as a cog in the global system, their agenda may not be pro-American. Maybe they see some American pain as 'necessary' for the benefit of the global system. Before I started doubting their competence I was pretty sure there was a 'freemason' type agenda toward one world government being advanced. Now I'm more inclined to think that even if such an agenda was underway, its Captains have lost control of it. It's hard to get good help nowadays, and maybe the aging freemasons' idiot nephews are now in charge of the conspiracy.
There are so many possible factors in play and so many permutations and combinations of the factors that it's impossible to predict anything. Many if not most of the possible scenarios are 'terrifying'. Even if anybody knew one of these was coming, it might be irresponsible to start a panic by publicizing it. The general public knows even less about money and economics than does Congress, so I don't think it would be helpful to try to explain complexities to people who just want to be able to go to their job every day and pay off their mortgage.
To tell the truth, I think a lot of people are more satisfied living as mushrooms under the warm pile of comforting crap Washington shovels, than actually hearing about what's going on.
While we're on human nature: there's a ton of money in cash and nowhere to place it to make a safe return. There's another ton of money stashed in Treasuries. I don't think it's going to take an economic turnaround or a shift in fundamentals to get some of this money coming back into the market and raising stock prices.
Fear of inflation, and not knowing when it might start, could send some money into the security of at least owning physical companies. If people begin doubting money they will doubt Treasuries, which would see more money looking for physical security. Gold might benefit from this psychology too, but if people doubt money per se they might doubt gold as much as fiat money. Hard assets might seem the last best haven to preserve at least some of your capital.
People get impatient with uncertainty and eventually cannot hold it any longer and just place their bet on one side or the other. As Steven says, yes, this is not investing but gambling. But this is what people do, and the market is the sum total of what all the people do, so I think it's useful to be aware that the market could see renewed interest even as earnings shrink and the economy contracts.
Timing is uncertain, but I really do think we're going to see a fairly substantial 'impatience rally' within the next 6 months, especially if the MSM starts talking hyperinflation after Obama's and Ben's trillions begin obviously flowing. 'Buy the rumor, sell the reality'. Though, like Steven, I certainly wouldn't bet my retirement on it.
www.mcclatchydc.com/ho...
we can only hope the fed is as straight talkin as the hand.