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Surveying the financial and economic landscape looks increasingly like an exercise in watching the perfect storm unfold. Today's updates on durable goods orders and weekly jobless claims only strengthen the sentiment.

Durable goods first: They're down. Big time. The government reports that seasonally adjusted new orders for durable goods slumped 4.5% in August, the biggest percentage drop since January. As the chart below reminds, the trend looks equally troubling in actual dollar value as well.

It doesn't help that on a rolling 12-month basis, new orders for durable goods have fallen for six months running. Ditto for the fact that the back-to-back losses of nearly 5% in July and August for the 12-month change in new orders is the deepest loss for two consecutive months in six years. Let's not mince words: the trend is definitely not our friend here.

It's arguably even worse in this morning's weekly update on new filings for jobless claims. As our second chart below painfully shows, the labor market continues to suffer. For the week through September 20, fresh claims for unemployment benefits jumped sharply to 493,000, the Labor Department reports. The last time initial claims were reaching so close to the 500,000 mark was September 2001.

The message here is one we've been warning of for some time: The economic signals are weak, and they're getting weaker. Initial jobless claims are particularly troubling because they're a forward-looking metric. Joe Six-Pack asks for unemployment benefits today, which invariably means he'll be cutting back on spending tomorrow. And since 70% or so of U.S. GDP comes from consumer spending, it doesn't take an I.Q. of 200 to figure out where we're headed.

On top of all this is, of course, the implosion on Wall Street. Our duly elected representatives in Congress are working diligently on crafting legislative salvation as we write, a.k.a., putting together the mother of all bailout packages. We, for one, expect more government money is coming soon, and one could imagine some degree of relief will follow.

But let's not forget the trend on this front: Washington, through its various institutions, steps in with liquidity in one form or another. The initial reaction in the markets is positive, but investors quickly get cold feet and return to selling. Maybe it's different this time, but that's not yet clear. Nor is it obvious that the economy is set to recover, or even tread water.

The final capitulation in the investment realm may still be ahead of us, at which point even greater bargains in asset classes will arise. For what it's worth, we believe that to reach that point of maximum opportunity will require a broader, deeper and more comprehensive sentiment adjustment from even currently low levels. We're more than halfway there, or so we guess. Save for a catastrophic collapse, next year will be loaded with bargains. But we've not quite arrived at the station.

But remember that calling bottoms and tops in markets or economic cycles is inherently risky. So, yes, we could be wrong, which is why holding 100% cash is probably a bad idea--ditto for fully loading up on risk, for that matter. In fact, absolute extremes are almost never a good idea, unless the valuation levels are so extreme as to warrant taking a jump. More generally, as Tobin long ago advised, one needs to separate the risk portfolio from the cash portfolio and think intelligently about blending the two halves.

When it comes to designing and managing a risk portfolio, our strategic beliefs remain unchanged. As for cash, well, that needs no explanation.

The great question, as always: What is the appropriate ratio for weighting risk to cash? The answer depends on the individual (or institution), of course, although as a general observation we're not yet convinced that the cash weight should be minimal. But that's just a guess — an enlightened one, we'd like to believe. Or, if you prefer, a strategic outlook. But let's emphasize the word "guess" for now, since that's ultimately at the bottom line of every forecast, be it economic or financial. In the interest of full disclosure, it's refreshing to admit it every now and again.

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  •  
    Remember, politicians get money from these corporations to vote right. Republicans have always wanted to remove any controls, like Paul Volker insisted on. Greenspan, wide open. Now we see what they do with no controls, and no one watching. Obama got the second largest chunk of money from Fannie Mae, amazing for a junior Senator, and Mccain hired the now unemployed Fannie Mae lobbists for his campaign. Guess he knows them.
    Thay take us for fools! Don't give them the bail out, no matter what happens to us. Wrong is still wrong! This is the only way to get at them, throught their wallets!
    2008 Sep 25 01:41 PM | Link | Reply
  •  
    dad: If you don't give them the bailout money, you won't have to worry about how much it will cost you in taxes. You won't have a job with which to pay the taxes.
    2008 Sep 25 03:25 PM | Link | Reply
  •  
    There is NO quick fix for our economic ailments. Our economy is on life support, the transfusion will improve our symptoms for a while, but we are a long way from being cured.
    2008 Sep 25 03:34 PM | Link | Reply
  •  
    This is a good counterargument to the market assumption that the latest gov't bailout will magically make jobless claims decline, housing prices increase, and consumers to start spending again.
    2008 Sep 25 05:25 PM | Link | Reply
  •  
    Larry H I agree with you ! The US economy is on life support . This bailout will only get it thru the elections , which was the goal . In the temp runup in the market , the insiders at the big banks are unloading their positions . The very rich have been leaving the country for some time now. The loose lending , housing boom is not coming back . Remember the consumer is 70% of the GDP . Mass unemployment will soon commence . Folks will go hungry in the US . The central bankers don't give a hoot about the " average Joe "
    2008 Sep 25 07:31 PM | Link | Reply
  •  
    Gypsies, Tramps, Thieves and Politicians. Doctors, Lawyers and Used Car Salesmen. All no damn good.

    All after the same thing, OUR POCKET BOOK.
    2008 Sep 25 07:33 PM | Link | Reply
  •  
    To David White, who cares if you don't have a job to " pay the taxes " If all yoy do is work damn hard your entire life to merely pay your taxes , enegry bills , with nothing left , sounds like slavery to me . This is precisely what they have in China , Russia , the working stiffs work long hard hours for next to nothing , while the corporation owners very rich get richer + richer . If I were a young person in the US today , I'd get the HELL out of this country now !Banana Republic soon , with slavery of the masses to pay for mass " infrastructure repair" no they can't pay you much , as the US government , states , counties are broke !
    2008 Sep 25 07:57 PM | Link | Reply
  •  
    Lin, you don't have to be young to leave the US of A. I retired at 62 and moved to Mexico. It's not as cheap as I had hoped but I get by on Social Security. I have two kids 11 and 13, they go to private schools here and are doing fine. The beach is close, the beer is cold, I control my stocks (lots of SBS and QID to balance my dividend portfolio) through the internet-come on down.
    2008 Sep 25 09:53 PM | Link | Reply
  •  
    It is impossible to calculate the effects of actions that are small in comparison to a big problem, because you can't anticipate the responses of all of the major players. It is MUCH better/easier to tentatively make various presumptions of success or disaster, and predict how each would likely unfold. Soon, it becomes obvious that some just can't happen, while others must happen. To illustrate just one example:

    Suppose that the economy fails, the government runs into problems paying its bonds on time, then you still have your FDIC insured savings - right? Well, if you were the Secretary of the Treasury, which would YOU pay first - bonds so you could continue selling them to keep things afloat, or FDIC and let the U.S. Treasury collapse? You (presuming sanity) would pay the bonds first and put FDIC payments on hold until things improved, and pay FDIC later, probably with hyperinflated dollars. While FDIC is theoretically guaranteed by both their own fund AND the U.S. Treasury, in a collapse, T Bills would probably be better than FDIC-insured savings.

    Unfortunately, no one (that I know of) is working this multi-scenario approach to figure out just how things might recover, slip, or "hit bottom" in a way that we can all live with.

    Any thoughts?

    Lucifer
    2008 Sep 25 11:02 PM | Link | Reply
  •  
    I have an idea... everyone on Wall Street and the Banking industry vote for the incumbents next term, and the rest of us will vote for new blood in congress... What ya think?
    2008 Sep 25 11:03 PM | Link | Reply
  •  
    Recent job growth has been government, health care paid for by government, defense contractors, and services catering to government. Strip out the public sector (teachers, bureaucrats, military, computer sales to government, etc) and we have 50% unemployment. Not clear to me how the private sector can create jobs again.
    2008 Sep 25 11:09 PM | Link | Reply
  •  
    Tell me who pays the most income tax ? Certainly not the bottom 69%, who pay no tax at all. So, don't use the term "Taxpayers" to blame the gov. The economy is bad now because the money is mostly going to the gas-pump.
    Why not blame yourself for driving around too much with you Big Truck !!
    2008 Sep 26 05:45 AM | Link | Reply
  •  
    This is actually excellent news. The economic data indicates that the contraction has been on-going for the last several months. It also shows that GDP growth has been lower than inflation for at least a couple of quarters and thus the economic contraction is well in progress. In fact, I believe that we are on the verge of entering the late contraction stage of the economic cycle. If this is true, we will enter the new up-cycle as soon as the financial services sector's health is restored. If the bail out plan succeeds, I believe we are at the start of the process of healing and near a cyclical upswing. Since the market is forward looking this could be close to the bottom (though I think it may still be a quarter away).

    If the bail-out plan fails, this could be a very long painful and drawn out late cycle contraction; with a bottom lying far below & several months away. While $700 billion is a small amount in the context of GDP of over $13 trillion, a credit default market of $62 billion and a derivative market of $1,300 trillion; with the multiplier effect it will over time generate several trillion worth of economic activity.

    Once the financial services sector stabilizes, we can look forward to investment in productivity; this phase is typically led by technology. As employment rises as do incomes, consumer confidence improves; this phase is led by consumer discretionary. As the economy improves, in anticipation of strong demand from industrials, the basic materials sector prospers. As the economy goes from strength to strength, the next sector to prosper is industrials. As the engines of industry roar, the demand for energy rises; and yes, it is energy that outperforms. By now, the exuberance of the cycle has caused inflation; commodity prices are up, interest rates are rising to tame inflation and slow growth. Now caution prevails; the rotation into the security of health-care commences; when you get sick you need medical assistance, it is a safe-haven and the yield is nice; at the same time growth potential exists. As time passes, the caution spreads, the flight to safety continues as the economy contracts; now investors turn to the security of investing in necessities and essentials; the consumer staples sector prospers. The economy contracts further; unemployment is climbing, valuations in staples have risen reducing yield, valuations are stretched considering the sectors low growth potential. Value becomes fashionable, dividends are important considering rising unemployment; investors shift to utilities. Now risks to growth are elevated, inflation is past its peak, stimulative rate cuts are anticipated in the late contraction stage. In anticipation of better spreads and credit expansion, financials outperform. We have gone a full cycle; but each cycle remains unique - the lead sectors are beneficiaries of a strong secular trend.

    Have a look at maxkapital.wordpress.c.../

    maxkapital.wordpress.c.../

    2008 Sep 26 10:01 AM | Link | Reply
  •  
    Lucifer,
    Exellent point related to one that I've made in my posts. The govt. depends on both foreign debt and taxes for its continued existence. The foreign creditors could flee at any moment. Taxpayers, on the other hand, can be coerced to pay. Which one controls the government then?

    Might the answer to this question explain why the govt. is propping up the value of mortgage backed securities, owned by the same investors who support the govt. by buying treasuries, at the expense of taxpayers. You certainly didn't see tech stock investors (mostly taxpayers) being bailed out by the govt. when their investments lost money in 2000.

    Assets = Liabilities + Owner's Equity

    so...

    Government = Foreign Creditors + Taxpayers' Equity

    Like a bankrupt company, the government's decisions are no longer made for the benefit of the equity owners, they are made to make the liability owners whole. We let things get this bad when we let the national debt (liabilities) become so big that we lost control, just like bankrupt companies do. Now that we don't control or even own a majority stake in the government any more, we can expect more creditor-enriching decisions like this bailout, supported by both political parties.

    Alan,
    Agreed. The US produces far less than it consumes, and the service sector (public or private) does not make up for a loss of manufacturing dominance or utter energy dependence. Investment from foreigners has propped things up for a long time, but with the stable Euro, undervalued Chinese currency, and high-yielding Indian and Brazilian currencies out there, it won't last much longer. The US is basically GM.
    2008 Sep 26 11:27 AM | Link | Reply
  •  
    You got it Chris B. The two choices for America net out to this:

    1) Reinvest the billions into the American economy, forced restructuring of soverign debt, forgive a portion of all debt for all Americans or at least allow massive debt restructuring (household has multiple debt payments say totalling $3,000 a month debt payment for 15 years, consolidated into one payment for 30 years at $2,000 a month). In this scenerio, the USA accepts the large geopolitical fallout from forced retructuring of debt payments with soveign nations including repegging of oil to the Euro and $250 a barrel oil (which of course forces more domestic solutions but immense short term pain, SPR would need to be released).

    2) Liquify the financial market, force taxpayers on an ever lifting and accelerating treadmill to pay off sovereign debt. Government confiscates properties from the middle class as they begin to fail en masse over a few short years and further sells real estate off as securities, US citizens revolt either physically or at the polls.

    Neither option is good at this point. But I favor option 1 as does 99% of the US citizen while it appears the US citizen will receive option 2. Nations are opportunists.The US government in it's hubris and narcassistic practices will face economic collapse either way and restructuring of our nation can ensue. My personal philosophy is that of the Founding Fathers "give me Liberty or give me death". No, I don't want pain, chaos etc but this is preferrable to serving Russia and China the rest of my life. Hey, we pumped $4 B into the Russian economy in 1998 and forgave a further $100 B. Where is the Russian help now? Idiots in Washington, this crop of self-servers must go before the country has a prayer to recovery.
    2008 Sep 26 01:29 PM | Link | Reply
  •  
    Why invest in the US when Canada, Australia, Brazil, India,China and so many small countries(Norway,Swede... Israel) around the world have companies with great growth, low multiples, and solid currency? Great USA companies have profits pegged in U.S currency -do you expect a turnaround in the dollar? I don't.
    2008 Sep 26 11:58 PM | Link | Reply
  •  
    X-15, the US$ is the world's favorite currency, look, through out south America people don't want their own money, they change it to US$ and deposit with banks outside their own countries. Why, stability. Even in China, Some people prefer to keep US$ instead. For the last 60 years since WW2, the US$ is the most trusted currency in this world.
    2008 Sep 27 12:21 AM | Link | Reply
  •  
    All this money on the"sidelines&quo.... that is in either cash or commodities or coal and ag names will EVENTUALLY be deployed into HIGH QUALITY common stocks. Real estate Bubble of 2001-2006 has still not"recovered&quo.... 1982 I locked in a 5 year CD at 17 % ,todaythat same CD will yield less than 4%. FUND managers DO NOT GET PAID to be in CASH ALL YEAR. Find companies like PM XOM and others with a Reasonably priced PE ,have a ROE average of at least 18% annually over the last 5 years and are worth over 100 billion dollars in market cap and can"absorb" large investments by the"big boys"
    2008 Sep 27 09:50 AM | Link | Reply
  •  
    X-15,
    Agreed. Which would you rather own, companies that earn worthless currencies or companies that earn stable currencies of stable economies?

    Jeff J.J,
    Although inertia is a force to be considered, your points are backwards-looking. I'm wondering what the most trusted currency of the NEXT 60 years is going to be. The way things are going I'm suspecting it won't be dollars.
    2008 Sep 29 01:48 PM | Link | Reply
  •  
    The best aspect of the "bailout" is the transparency with which the average citizen can now view his government. It is the biggest in a long line of government giveaways to the megacorporations. Social risk and private gain. The worst aspect is facing the fact that no matter what ideal or motto our leaders throw at you, they are lies. The economy, in our nation and otherwise, exists for the benefit of the priviledged. This has always been true, what was unique in our little empire, was the ability of those in control to convince the working class average folks that the decisions they made and make are for the benefit of all. Of course, they used the same rationale with the "bailout". The economy of the ruling class is the economy that was in danger and that is why the 700 billion was directed right into their laps. The beauty of the free market is it's unwavering attempt to level the playing field for every player, and this is a blatant and clear attempt to keep it tilted in the direction that Paulson, Bush and all his buddies want. Really the same rationale as the Iraq war, send the common person in to die[or work], possibly lose his life, falsely under some lofty ideal, but in reality to bring more wealth and power to those who already have too much. The fact that our only hope for any change in direction, Obama, also supported it, shows how far along this road we are.
    2008 Oct 05 01:51 PM | Link | Reply
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