'Green Shoots' Are a Mirage: Economy Will Deteriorate Further 59 comments
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If there's one thing you can bank on, it's that the public will be controlled by emotional whims rather than rational judgment. I do my best to lay out the facts, and whenever possible, support my claims with hard data. When the characteristics of the the data change, my outlook will as well.
Until then, I will report things as they are, not as I want them to be. That being said, I see foreboding storm clouds in the horizon not unlike the storm clouds I perceived in 2007. I will lay out briefly why I feel the economy will deteriorate further. P/Es in the Stratosphere In a sign of the crazy times we live in, P/E ratios at historically high levels are shrugged off by investors. Speculation is rife, and like in all bubbles, ridiculous P/E ratios are justified by unrealistic growth scenarios that will never materialize. Trailing 12 month P/E ratios are at 67, which implies fair value in the S&P is closer to 250 than 1000. The truth hurts, but 401ks are about to turn into 101ks.
GDP Minus Government Spending Collapsing
The brouhaha resulting from improving GDP figures masks the inconvenient fact that without a 10% increase in government spending, GDP figures would have been disastrous. Although big government cheerleaders led by Paul Krugman will celebrate this development, the fact remains that you can't get something for nothing.
Debt-financed spending is not without cost; the costs are merely transferred to future generations. While the model of instant gratification has served us well, we are rapidly approaching the breaking point.
Below is a chart of GDP minus government spending. Note the growing role of government spending in GDP.
Unemployment Rising
The way the media report unemployment, most people probably think we have achieved an upturn in unemployment. However, only the rate of decline in job losses is improving. We are still shedding jobs at an unprecedented rate, which makes it hard for me to see how we will get out of this downturn after just 20 months.
The following charts of initial claims, continuing claims, and average weeks unemployed help bear out the extent of the unemployment crisis.
Consumer Spending Weak
No other indicator will give you a better idea of where we are headed than consumer spending, since consumption accounts for 70% of our economy. Even with stimulus checks from the government, consumers are retrenching at a rapid clip.
As long as the unemployment situation isn't addressed, consumer spending will continue to remain weak. Note that stimulus in May and June skewed numbers to the upside.
Any objective economic analysis will show that "green shoots" are just a mirage. We are approaching a major inflection point in the economy that will catch most people by surprise. Investors should exercise caution in the months and years ahead as sell-offs are likely to be brutal.
Don't be swayed by media hype; stay focused on the facts.
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my point here was just that the market will move well in advance of economic fundamentals, and that any market recovery will appear overly-optimistic in its initial stages. and yes, in the context of a global economic collapse, less bad is considered good- less bad implies inflection.
70% consumer spending is unsustainable and was indicative of highly unbalanced growth. a 'new normal' with higher personal savings, a reduced trade deficit, lower home prices, and a weaker dollar are all positives in my opinion, and i wouldn't expect consumer spending to reach its 2006-2007 levels any time in the near future. the banking system is still weak, but is largely strong enough to absorb the shock from any singular direction- for the author's view to hold, there would need to be a number of simultaneous shocks, which is something i don't see as being possible with government's current level of market involvement.
i'm not making a bullish argument per se, but that rather things aren't as bad as they seem, nor are they as good as they seem. for now, i will stick to
On Aug 13 10:41 AM Carlos Lam wrote:
> "Debt-financed spending is not without cost; the costs are merely
> transferred to future generations. While the model of instant gratification
> has served us well, we are rapidly approaching the breaking point.
> "
>
> True. As John Lounsbury has written on this very site, "[S]ince 1966,
> each dollar of additional debt has given the economy less of a boost.
> In 1966, $1 dollar of debt boosted GDP by $.93. But by 2007, $1 dollar
> of debt lifted GDP by less than $.20." Simply put, we are borrowing
> more, encumbering our future, and getting less out if it in the bargain.
>
>
>
> "As long as the unemployment situation isn't addressed, consumer
> spending will continue to remain weak."
>
> True and false. It is true that unemployment--particul... at the
> magnitude and duration plus the amount of household debt that we
> have--becomes more than just a "lagging indicator." Thus, consumer
> spending will continue to weaken; consumers need to pay down household
> debt, which is just under 100% of GDP.
>
> Where I disagree with the author's analysis is that he implies that
> "something must be done" about the unemployment situation. Simply
> put, government is powerless to do anything; malinvestments have
> to be wrung out of the system and assets must be re-deployed to better
> firms. Indeed, this is already occurring at some banks, as employees
> at bad banks seek work at more healthy ones. While painful, the healthiest
> thing that can be done is to allow the bust to take its course. If
> we bailout, subsidize and reward the failed, we merely set ourselves
> up for long-term enervation.
As the SP500 goes to these new base lows, not only will our confidence be shot about the market, our confidence in these national leaders will be totally gone as well.
www.usdebtclock.org/
Based on the numbers at this website, the interest paid on the debt is about 2.5%, or approximately $291B so far this year. Each additional dollar borrowed creates an additional 2.5 cent debt service fee which must be paid starting next year. This year's deficit of $1.27T creates an additional debt payment of $31.8B. And, to fully pay off the national debt over the next 30 years requires an annual payment of (gasp) $570B!
Instead of prudently paying off the debt, our government representatives are spending like drunken sailors in hopes of averting calamity. Since when is more of a bad thing good?
That said, solution by Hussein (Emperor Obama's REAL middle name) and his cronies Tax Cheat Timmy and loud mouth Summers are prescribing, GASP, MORE DEBT!
More debt for failing banks (those who created the debt debacle), Government Motor (appease union), porkulus galore in the name of stimulus and soon finance health insurance for army of uninsured (more than half are illegal aliens).
It's like giving a case of beer to drunk with a very bad hangover.
On Aug 13 05:21 PM Russ Wetherill wrote:
> Rising deficits don't just affect future generations, they have an
> immediate impact on present generations too. Take a look at the national
> debt clock at:
>
> www.usdebtclock.org/
>
> Based on the numbers at this website, the interest paid on the debt
> is about 2.5%, or approximately $291B so far this year. Each additional
> dollar borrowed creates an additional 2.5 cent debt service fee which
> must be paid starting next year. This year's deficit of $1.27T creates
> an additional debt payment of $31.8B. And, to fully pay off the
> national debt over the next 30 years requires an annual payment of
> (gasp) $570B!
>
> Instead of prudently paying off the debt, our government representatives
> are spending like drunken sailors in hopes of averting calamity.
> Since when is more of a bad thing good?
On Aug 13 04:39 PM doubleshortetf wrote:
> On Aug 13 04:16 PM Robert0713 wrote:
The valuations are too high - S&P trades at 23x '010 earnings (top down operating), just 3% projected growth from '09 forecasts. These multiples are phenomenal even for a bull market. We are in a deep recession, bear market PEs in the past have ranged from 6 -10 only. So go figure.
Markets can stay irrational longer than you remain solvent, and fools never learn.
Current: Bull 51% Bear 33%
9/25/00 (top) Bull 62% Bear 25%
9/23/02(bot) Bull 24% Bear 47%
10/8/07(top) Bull 54% Bear 25%
3/2/09(bot) Bull 19% Bear 70%
These figures seem to indicate that the mkt is close to a top and/or due for a good correction. YMMV!
Previous to Every market crash in US history , the RSI was OVER 70 .
IT is now 75 .
seekingalpha.com/insta...
On Aug 13 09:55 PM 437339 wrote:
> Re
>
> Previous to Every market crash in US history , the RSI was OVER 70
> .
> IT is now 75 .
A 3,000 point advance is a fact no mirage.
But after the "Facts" you conclude with "We are approaching a major inflection point in the economy that will catch most people by surprise. Investors should exercise caution in the months and years ahead as sell-offs are likely to be brutal. Don't be swayed by media hype; stay focused on the facts" Seems like an odd conclusion? When should an investor not exercise caution? I was expecting you to say "Sell now before people realize the real reality"
Yes, after a 3,000 point advance it's a no-brainer to expect a pull-back. I suggest you study the 1982 and 2003 economies and market advance for extra credit. And if people used trailing P/E's the commodities sector and oil service stocks would never have tumbled so fast (as just one example). Wall Street is forward-looking.
Nobody wants to get front run. The SEC rules mandate when positions in a security reach a given point, there's a formal public notification made...but its usually a couple of months after the fact (normally a quarter back).
The same is true trying to tag along with Buffet/BRK...once the position is made public, that stock is 15/20/25% higher.
On Aug 13 03:25 PM Joanito wrote:
> Why didn't Paulson highlight his BAC aquisition in June when he topped
> it off? How much was BAC trading for in June vs right now? Hedgies
> can be very deceptive. Paulson could eat a huge loss on his distressed
> bank portfolio and use it as a tax write off against other gains
> without losing a night's sleep. I would be surprised if he's still
> adding shares at these prices or if he decided to hold once banks
> resume their nosedive. Additionally, by which mechanism would you
> have MBS and CMBS reinflate so that fair value is in the same stratospshere
> with the value that these instruments are being carried at on the
> banks books? When do you expect these instruments to appreciate back
> to non-distressed levels? At maturity?
>
> "The institutional values are supported by actual cash flows being
> received every month, plus default histories, and are in every respect
> supported by real, tangible data."
> Is this not what these entities did to arrive at fair value as opposed
> to the value at which these assets are carried?
>
> Any asset is worth only what the market is willing to pay. Not surprisingly,
> the market is fairly illiquid for securities collaterallized by pools
> of loans originated during the very height of credit lunacy and insured
> by CDS contracts created by institutions that are obscenely undereserved.
> If even a few percentage points worth of CDS contracts outstanding
> were to have to pay out, the underwriting institutions would instantly
> evaporate whatever remains of TARP and any other bailout facilities
> barring a situation in which the insuring parties were equally hedged
> for each loss. How probable is it that any underwriter is going to
> be equally hedged for each CDS contract that they have to pay out
> on?
There is a lot that is worthy in your comment and some stuff I agree with at its core. But name calling, demonization, and oversimplification tend to dismiss your audience before they hear what you're saying. To begin with, the current power structure is no more "right wing" than it is "socialist." It is a very wealthy, fairly monolithic oligarchy comprised of both conservatives and liberals, democrats and republicans. The only true tie that binds in the power structure is a great deal of accumulated wealth. There is some in-fighting on how to manage this wealth and which sinking billionaire's ship to save, but by and large they are all pulling on the same side of the rope. On the other hand, we the victims (or pawns or peasants or masses or whatever other label you'd like to use) are also from a wide spectrum of political backgrounds. The only thing that binds us is our relative lack of wealth and lack of power to change how the game is played. (And oh yeah, we're the ones being fleeced.)
And therein lies the most important part of why the name calling bothers me. It is because if we are ever to actually come together and excercise some democratic (as in democracy) power and gain control of our taxes and care for the least among us instead of the wealthiest among us, it will have to be as a group brought together by a shared desire to improve society. Dismissing whole groups of potential allies with one shocking word is simply not good social strategy. If your goal was to offend others, then mission accomplished. But if your goal was discourse, you mostly missed your mark.
On Aug 13 04:16 PM Robert0713 wrote:
> Almost got it right, but you can't see the forest for the trees:
>
>
> It's the distribution, stupid.
>
> Right Wingnuts have a penchant for asserting that whatever happens...
><snip>
> 3. Unemployment - How many times do people have to be told that
> unemployment is a lagging indicator - look at your own chart! Average
> weeks unemployed peaked out in 2004 after the last recession! That
> was 2 years into a bull market and 3 year after the recession ended!
><snip>
Pimco's Al-Erian(sp?) has stated that he considers unemployment to be a leading indicator in the current scenario. But I'm biased - I had stated the same awhile prior to his statement.
I've not heard him change his mind. Niether have I.
At the same time, I don't believe the numbers. I don't know if he does or not. It says something when to me when I even mention an indicator that I believe is a manipulated self-serving lie from the dispicable organization we call call our government.
And to think we let them have guns and tanks and such.
HardToLove.
All you have to do is read the comments attached to this article, and note the recent market upside moves due to short squeezes to note there is significant bearish sentiment still out there.
However I also think we have come a long way perhaps a bit quickly so my stops are pretty tight at the moment.
On Aug 13 08:51 PM Old Rick wrote:
> I posted this earlier on the 2008 like 2009 story, but it is appropriate
> here also. One of my favorite sentiment indicators is the AAII Bull/Bear
> survey. Here are some numbers that might give some clue to the current
> state of the market:
>
> Current: Bull 51% Bear 33%
> 9/25/00 (top) Bull 62% Bear 25%
> 9/23/02(bot) Bull 24% Bear 47%
> 10/8/07(top) Bull 54% Bear 25%
> 3/2/09(bot) Bull 19% Bear 70%
>
> These figures seem to indicate that the mkt is close to a top and/or
> due for a good correction. YMMV!
Another way of saying it would be 'post ergo propter hoc' is a logical fallacy.
en.wikipedia.org/wiki/...
On Aug 13 09:55 PM 437339 wrote:
> Re
>
> Previous to Every market crash in US history , the RSI was OVER 70
> .
> IT is now 75 .
What really is needed is probably a time and resource consuming tracking down of the perpetrator through their ISP(s).
To my mind they should be prosecuted.
On Aug 13 02:33 PM snowdenRoad wrote:
> first we get "iamned" spamming comments, now its "trade4rich". How
> about a little IP banning SA?
>
> Perhaps I should not complain, given the price of admission, and
> the great insights of most SA commenters.
the important thing to remember is at market turning points the central bank is running a policy counter to the market move and the economy. concerning the rsi numbers look up the previous 12months money supply growth at those tops..then look at the +18% growth currently..guess whos going to win..
On Aug 13 02:32 PM doubleshortetf wrote:
> Check out this great article and shocker graphs from 2001 vs, now.
>
>
> Key takeaways are ratio of money market fund asset and employment
> payroll, personal income, industrial production and mfg retail sales
> in 2001 recovery vs. now.
>
> Granted animal spirit and irrational behaviors like today's higher
> unemployment and lower retail sales result in market going up. <br/>
>
> To me sign of blow off indeed...
>
> www.financialsense.com...
On Aug 13 11:01 AM upgrayed wrote:
> Here's an anectodal piece of data. My company laid off ~20% , the
> remaining workforce picked up all the slack and the organization
> reconfigured itself to operate more efficiently. Meanwhile we all
> took a 10% 'temporary' pay cut and bonuses, previously at around
> 15% are mostly gone. And I haven't seen anyone quit as a result of
> this. I don't like it but how can this not bode well for future competitiveness?