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Eduard Fischer
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My perspective comes from somewhat out on the edge in many ways. I live on the fringe of the wilds here on the outskirts of Squamish BC, and my backyard receives quite a bit of bear traffic, real ones, not just the market kind like me. My wife and I spend most of our free time in the mountains,... More
  • The Wisdom of the Crowd?

    A CNN poll late last week revealed that 48% of those surveyed in the general population believe that the US will be in a depression within a year. This is a higher percentage than at any time during the last recession or any other, and will likely only get worse should there be further declines in the real estate and stock markets or rise in unemployment.  The CNN finding contrasts sharply with the news agency’s recent survey of leading economists whose consensus now puts the chance of a recession at 15 percent.


    This is an amazing divergence of opinion between the general populace and the eggheads. Is growth possible against so much negative sentiment, regardless of all the other factors weighing down on the economy? Although I believe strongly in the power of scientific reasoning, it seems doubtful sometimes whether Economics, the dismal whatever it is, really employs any real science at all. Is polling economists really more fruitful than asking a troupe of monkeys? Will they get it completely wrong again? We are about to find out.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jun 13 10:56 AM | Link | Comment!
  • Why a Depression now seems Inevitable


    After 2 years of massive stimulus where is the US economy? The official figures show the equivalent of 2.7% annual growth in GDP for the first quarter. But this is after 2 years of government stimulus and consequent deficit spending of the equivalent of10% of GDP for 2 years. Now even a math dunce like me knows that 2.7 minus (2 x 10) does not equal 2.7. Not even close. I realize that momentum caused by stimulus is hard to measure but in this case there does not seem to be any carry over momentum to the economy after 2 years of massive deficit spending because the economy is slowing again. Any measure of GDP as a measure of economic health that does not take into account, in some way, government deficit spending, is bogus. What has been obvious to most of the public for some time, and yet somehow not to economists, is that the arguments over whether there will be a double dip are irrelevant because we never left the recession in the first place. In this article I will argue why I believe that a worldwide depression is now inevitable. And believe me – I will welcome any cogent arguments that show why I could be wrong.


    Why any slowing of the economy now will lead to further slowing, which will lead to further slowing, which will lead to…..


    The problem is that many small businesses and homeowners are on the edge while waiting for a real economic recovery. But the biggest problem may be that so many state and municipal governments are on the brink of insolvency. They desperately need the increased tax revenues that only a true recovery can bring. The whole US government infrastructure on every level is based on projected revenues from robust continued economic expansion. 1 to 3 percent GDP growth is not enough. There are massive entitlements to fund. Many public employees in California, for instance, can retire at taxpayer expense in their early fifties. The cost of retiring the boomer generation in the US is estimated to be about 60 trillion dollars in completely unfunded entitlements. This is an enormous sum equivalent to several times national GDP and approximately equivalent to the annual GDP of the entire planet.  Fed chairman Bernake himself has warned in testimony several times before congress that this is a looming catastrophe. This is a crisis that is no longer years down the road. State and municipal governments, which cannot run deficits will have to make a choice soon whether to lay off more and more employees, or cut entitlements, or both. Any case there will be a lot less money to spend out there.


    The Real Basic problem


    The real problem that both those advocating restraint in government spending and those for more government stimulus have largely ignored is that real incomes, and therefore potential tax revenues, in the US have not increased in about a decade. This is largely due to corporate outsourcing and competition from overseas. In a number of sectors domestic wages have actually contracted. Many people were given the illusion of increasing wealth through the expansion of credit and the increase in the value of their homes. These have both contracted now.


    There is an inevitable leveling of wages world wide, which is now accelerating. This is not only true in the factory labor market but now also in the high tech market as more and more highly trained young people graduate from Indian and Chinese universities. I just returned form another trip to India and the most common advertisement on billboards in every city seems to be for offers high tech training in the numerous and competitive colleges and universities.


    I have heard the argument that Americans are still the most innovative people in the world.  That may be true but jobs created by high tech innovations originating in the US are even more readily outsourced than factory jobs. Besides do we really believe that Americans are just innately smarter than everyone else? Remember that it was Indians who invented the fundamental concept that revolutionized mathematics and ultimately made computer technology possible – the invention of the zero.


    The Demise of Manufacturing in the US


    China is set to surpass the US as the world’s leading manufacturer in the next year or two. But how is this possible when the US GDP is still 3 times the size of China’s? This is another example of where the use of GDP as a measure of the health of an economy can be totally misleading. So much of the US economy is now based on people just selling goods, many of them imported, to each other – real estate space devoted to retailing in America is vastly greater per capita than any other place in the world. Then there is government spending, which includes the cost of fighting two wars and keeping approximately 1% of the US adult population in prisons, more than any civilization in history that we know of. Then there is the cost of lawyering in the most litigious society in the world. Then there is the cost of healthcare in the most expensive and inefficient medical system in the world, which alone accounts for approximately 1/6 of GDP. In spite of this the US is ranked 42nd in the world in life expectancy and 33rd in infant mortality, in both instances bested by Cuba, one of the poorer nations in the world. Then there is the cost of the largely parasitic financial services sector, which accounts for over 8 % of GDP. This includes the big banking sector, which performs functions like borrowing massive amounts of money from the Fed at 0% interest and lending it back to the US Treasury at a higher rate. They also use this free money for their own prop trading, another socially beneficial function. Meanwhile small businesses are starved for capital.


    Manufacturing in the US, the actual making of stuff, now accounts for only about 12% of GDP compared to China’s 32%. There is an argument that a large amount of profit from overseas manufacturing is still going to US corporations. This is true. But how many workers will be able to buy Apple or IBM shares when they are thrown out of work and then out onto the street?


    The Myth of Decoupling


    Will China and India pick up the slack? Will they develop their own internal economies and keep expanding their middle classes? Before I try to answer this question it is important to understand that the US had a leg up in becoming the world’s economic super power by starting out their industrialization process in a largely unoccupied land with vast mineral, agricultural, and energy resources. India and China have begun their industrialization without these huge advantages. They desperately need to keep exporting so that they can afford to keep importing the raw materials and energy resources they need to improve the lives of their people. But with the economies of both Europe and the US going downhill whom will they export to?


    And both India and China are stretched. We cannot have infinite economic expansion on a finite planet. I know that this sounds like the old Malthusian saw, but now it is really happening. It looks to me that there will be a peak water crisis and a consequent food shortage long before a peak oil crisis. The fossil aquifers needed for irrigation in both India and China are being quickly drained. Satellite imagery shows the land above these aquifers visibly collapsing. Many cities in Northern China have cracking pavements and sidewalks because of this collapsing. Then there is climate change. In the twenty-five years that I have been traveling to India the monsoons have been coming later and later. Two weeks ago my wife and I were enduring the 40 c plus heat in New Delhi; the air conditioning in our hotel was not working because the whole electrical grid in the southern part of the city had collapsed due to overload. The population of the city and the farmers in the country were desperately awaiting the start of the monsoon. Now, two weeks later, with food costs up 10% this year, they are still waiting for the rains.


    The Future


    I was going to try to avoid, in this essay, assigning blame or suggesting solutions to the economic malaise because that would be rather futile, at least on my part, at this point. I will try instead to express what I think will happen so that investors can weigh my opinions and make their financial decisions accordingly. Suffice for me to say I believe that stimulus based primarily on stimulating yet more misplaced consumption was never going to work in the long run.


    The arguments for or against continued government stimulus spending and/or continued printing of money by the Fed are becoming irrelevant in any case; the important factor from an investor’s perspective is that the US congress is losing its appetite for both. The Democrats are almost certain to lose seats in the November elections and that will be the end of stimulus. This administration and the Federal Reserve have thrown every chip they have on the table in a desperate bid to keep the economy from slowing because they both realize the consequences. The US just has too much private and public debt; any slowdown now will set off a collapse of dominos. The simplistic Republican solutions however, that government spending restraint and more tax breaks will heal the economy, at this point, are ludicrous and dangerously delusional.


    The situation now is similar to that in 2007. Then it was obvious to some people, but to few economists, that even a sight pull back in the highly leveraged real estate market in the US would set off further pullbacks and then inevitably a world wide financial crisis. Dider Sornette, an eminent geophysicist, forecast the collapse of the US real estate market and the consequent banking crisis at a time when almost no mainstream economist saw it coming; because as an earth scientist he knew how to recognize unstable systems. I know of at least one other geophysicist who came up with a similar model at the same time. Right after the 2008 meltdown he unexpectently and quietly retired. It has since been rumored by his associates that he had put all his financial assets into shorting stocks.




    I have hardly touched upon the state of the residential and commercial real estate markets in this essay because there are so many other problems to deal with this time. Suffice to say that the amount of private and corporate equity that are bound up with real estate are still as important factors as ever. I remember chairman Bernake saying, when he finally acknowledged the last recession, that it would not end until the real estate market recovered. The Fed and the US government have since done everything they can to try to resurrect real estate prices but nothing has worked.


    To sum up: the US economy is in no shape to weather another downturn. Nor is most of the rest of the world for that matter.  The US job market and real estate market have shown no significant recovery. The recent panic flight to US dollars, although lowering the cost of consumer and US government borrowing, will hinder US exports and exacerbate further US trade deficits. Municipal and state government finances are stretched to their limits and little more help can be expected from the federal government.

    The next economic slowdown will inevitably lead to an abyss.


    Remember when the world financial system came within hours of shutting down in 08? And almost no one saw it coming a few months before. Well just remember how much healthier the world economy was then. How much less unemployment and government debt there was then.  And that crisis was mostly a financial one. This time it could be much more serious.


    I should disclose that I am not a US citizen and that I do not live in the US. However as an investor and resident of the planet I am very concerned with the US economy and politics, as I believe that the US is still the keystone of the world economy.


    Intelligent rebuttals are welcome and encouraged.



    Disclosure: No positions in stocks mentioned
    Jul 03 8:39 PM | Link | 11 Comments
  • Unemployment and the Stock Market
    Thanks to TraderMark’s article and his link to Cramer’s Mad Money yesterday in which Cramer put forth that unemployment was good for the stock market. In this hilarious, but chilling segment, Cramer plays a kind of high priest of Moloch (the god to whom ancient Semites sacrificed their children). He tells us that he is going to ignore what is in his heart, i.e. compassion for small business owners and the unemployed and root for more corporate layoffs and outsourcing because that is what is good for the stock market and his job is to help us make money rather than espouse political opinions. It reminded me a bit of Jonathan Swift’s great satire, “ A Modest Proposal,” in which Swift suggested that Irish babies be served up as a new dish at the tables of absentee English landlords in order the save Irish children from starvation. Some readers actually took Swift seriously and inquired about his offer to provide recipes. I suppose many took Cramer seriously also although I must admit that Cramer’s subtext was somewhat subtler than Swift’s: As an investor you need to play the system or you will be screwed; but then the system may ensure that you and your children will be screwed. “Profits without prosperity,” was the way Cramer summed it up.


    Cramer’s premise is that the stock market is made up of mainly larger corporations whose bottom lines will benefit from continued expansion of outsourcing and domestic layoffs. But is his conjecture that the stock market will continue to boom under these conditions correct? Is unemployment good? Well layoffs may serve the self-interests of certain multinationals for a time. But longer term this may be similar to the belief that invading foreign countries is good for America’s industries; although invasions may benefit certain sectors and boast that absurdly misleading indicator, the GDP (a future article), ultimately wars are a drag on a country’s economy.  I remember stockbrokers becoming activist peaceniks in the early seventies to oppose the Vietnam War during one of the longest periods of economic stagnation in US history.


    Outsourcing in this sense is not much different than fighting foreign wars; sending your country’s treasure overseas will not make your country wealthy. And at what point, we have to ask, does increasing unemployment in the US backfire on the multinational corporations? Eventually they will have laid off so many US workers that they have poured sand into the engine of the world economy that is ­fueled by the US consumer. I can’t buy the popular premise that China and India will take up the slack in US consumption for the following reasons:


    1. Both countries are resource poor in relation their vast populations. Many seem to forget that the US, like Canada, and Russia are blessed with vast resources compared to their relatively smaller populations. India and China, like Japan, on the other hand must maintain constant trade surpluses to keep their people at anywhere above a subsistence level. They simply do not have the natural resources relative to their populations to maintain an internal economy; they must manufacture and trade in order to be able to buy the raw materials they need to continue.
    2. The US has a huge government and consumer debt; China and India on the other hand have a huge environmental debt. I just returned from India and I have traveled in China previously. You have to see it to believe it. Millions of people in those countries die of pollution related causes every year.
    3. China and India are using fossil aquifers to supply much of their irrigation water. Combined with the melting of the Himalayan glaciers (I’ve seen this over the twenty five year period I have been traveling there) the draining of the aquifers will ensure that sometime in the not too distant future neither country will be even self sufficient in agriculture.


    I have been expecting a consumer backlash against outsourcing for quite a while. So far it hasn’t happened. I personally will pay significantly more for a US made product than a made in China one simply because the quality is generally much better. This is not patriotism – I am not even an American citizen nor do I live in the US. Judging by the way big box stores belonging to US corporations are stocked here in Canada though it seems that the vast majority of US consumers do not feel the same way about the quality of their country’s products as I do. I went shopping recently looking for a replacement light bulb that was not made in China because I have noticed that none of these bulbs seem to last the 5000 hours they are guaranteed to. Couldn’t find any; they were all brand names, but all made in China. So I bought a GE, brought it home, didn’t work. Had to take it back to the store. I mentioned this to a Physicist friend of mine and he said that he had just bought 80 light bulbs for his lab. About 10% of them did not work off the bat so he tested the rest with instruments that he has there and found that about half of the remainder would fail in a relatively short time. They were all brand name. Remember when that used to mean something?


    This brings us to the other issue concerning US based multinationals and the government itself – when do they lose credibility? I have to admit that I was shocked that the stock market cheered when the major US banks were blatantly allowed to cook their books last year. Mark to market accounting is a basic, universally accepted principle; without it you have… well….Enron. If your house is really worth what it was three years ago as the banks’ books claim then why can’t you get a loan from them based on that? Why does it work for them and not for you? When does the US government lose its triple A rating after the Chairman of the Fed tells congress, as he did last month, that federal government deficit financing based on projected economic growth is completely unsustainable and there is no solution in sight? And how will corporate welfare for the multinational corporations continue when the huge number of Americans who are unemployed cannot pay taxes? Now it turns out that the Secretary of the Federal Treasury tried to conceal the true beneficiaries of the AIG bailout when he was governor of the NY Fed. These beneficiaries, the banks, continue to be subsidized by the US taxpayer; the banks borrow money from the Fed at 0 % interest and then instead of lending it to small businesses and consumers they buy treasury bonds from the Federal treasury for which the taxpayer pays them interest. It goes on.


    I realize that SA is a site about profiting from investing rather than moralizing but consider this: good business in the long run has always required ethics, accountability, and transparency. There is a reason that companies like United Fruit, Union Carbide, and Enron, are no more.

    Disclosure: Disclosures: Long DXD, SLV, CDN $ Short SPY
    Jan 13 12:39 AM | Link | Comment!
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