Leif Peterson

Is a Crash Impending?

It's good to be risk averse, but not good to be so risk averse that your portfolio is totally in asset preservation mode. For every case study on bad news, there is an equal study somewhere that involves strong fundamentals and good earnings on a continual basis. With 6.8 billion people in the world, there always a bull market somewhere.

Four Reasons We're Headed Even Higher

If you plot the daily S&P500 return price over the last 20 years, you will notice that when unemployment spiked up the S&P500 rapidly dropped. In fact, in large measure the S&P500 is the inverse of unemployment. Because many corporations don't really "save" and most US consumers don't save (e.g. the negative US household savings rate of -2 to -3% before the subprime mortgage crisis), the majority of growth in the US economy is due to debt.

Now that debt is harder to come by, their are fewer jobs (corporate loans) and therefore a greater number of household mortgage forclosures. At present there is an interesting dynamic linking together Gov't debt, personal debt, taxation, credit, leverageing, etc., to the extent that the next bull market will likely be skiddish. The economies of the 50 states are wiped out, unemployment remains a large detriment to the economy, commercial real estate may worsen in 2010/2011.

If more debt and taxation are needed to correct things, then the expectation is that there is less certainty about the future. Right now investors should be long the markets but more vigilant about knowing when to leave the party, especially where to go once the party's over (bubble pops). The dollar is the current bubble that's bursting, so enjoy the ride while it lasts. I think a huge paradigm shift will be in store if things go south more than during Q3-Q4 2008.

No Exit for Bernanke

Great article Peter. It would be human nature to think that during a large economic downturn there's dissemination of false information. Ever try to model and understand inflation based on CPI and Gov't dept-to-GDP ratios? Although it is helpful to view the recent debt-to-GDP charts from time to time. [ref: US public debt at en.wikipedia.org/wiki/... ]

What's difficult to fathom is that if US debt was similar to your own family budget, then you'd stop taking on so much debt. However, because we never hear statements like "The US is going to stop doing xxx and yyy simply because the budget can't handle it." The US Gov't got us into the subprime mortgage crisis (definite HUD laws which *required* ~40% of new mortgages in the 90's be given to families whose income is below the area in their area -- and these mortgages had easy initial terms, and were adjustable rate), is now trying to get us out of it through quantitative easing (printing money-->fiscal and monetary policy), but can't ever stop spending and going into more debt.

This is what the military calls "smoke and mirrors," that is, when everything is a haze with no focus and no goals/plan. Personally, I like "dog and pony show." Certainly, it is laudatory to prevent market crashes through Gov't intervention -- so that most of us can safely retire, but the effect of such mismanagement and fiscal irresponsibility on younger generations will be disastrous. There are also strong programs in Gov't called Fraud, Waste, and Abuse. So why doesn't someone start looking at the abuse part of the equation.

Back in the U.S.S.A.

Good article. Actually, I think Ukrainian borscht is a little better.

National Health Insurance, 'Cap and Trade': Two Steps in the Wrong Direction

Peter, this is a very good article. Although right now I am more interested in the Fed/G-20 plans to inflate away the growing debt. A weak dollar can reduce the real value of debt, and help a growing trade deficit. A strong dollar, on the other hand imports deflation.

Countries are losing faith in Treasuries because they know we have to forcefully devalue the dollar. Once the dollar is strongly devalued, securities of well-managed depression-proof US corporations will become interesting from a global buyer's perspective. Issuing billions of dollars worth of securities at this bottom nadir in the dollar's value would allow the creation of millions of jobs..

Since possibility theory is now the focus after 9/11, there could very well be a plan to rapidly knock down the dollar via a gold price spike, US corporations then sell more securities or get "loans-for-equities" in order to bring back employment. This would be tantamount to the "dissolution of the USA," or like a Gordon Gecko move on the dollar: "I did it because it was doable".

The good part of this scenario would be a huge rise in employment. The bad part about this scenario is that it would be the most horrific thing that ever happened to the dollar, since there would be little spending power. The ugly part would be that the average retirement portfolio would be worth close to nothing in short order. Since this is possible, your suggestion to get off at the next train station is becoming more clear.

One question is: During the biggest garage sale of corporate America, who would do the "loans-for-equity" swap?

Current Recession Is Tracking the 1930s Bear Market

That's a nice plot, which shows the advantage of dividend re-investment. For anyone with another 10-15 years of work before retiring, I believe the only way you will ever get back on track is to invest at least 100k in depression-proof companies whose earning have increased over the last 6 months. A general rule of thumb is to invest in big oil, big pharmaceuticals, and consumer staples(tobacco, alcohol, etc). If a depression-like tsunami occurs, then companies like Philip-Morris will be doing fine. DEO and YUM are not bad choices in foreign markets, but I don't think their dividend yield is high enough.

Don't Be Fooled by Inflation

Regarding the uncoupling of foreign economies and the US economy, there are several parallels with the fall of Detroit. In fact, let's call this the "Detroit Syndrome."

The fall of GM, which blew 110b dollars over a twenty-year period and never once flinched, parallels the inability of the Gov't to regulate and prevent bubbles from bursting. Politicians can't solve problems -- but rather promise expensive deals in their election platforms. The high wages, benefits, and pensions for worker unions are a primary reason for outsourcing, which fuels foreign economies. Certainly, the Gov't knows what is happening, but the only solution is monetary policy (money printing).

I truly envision a shift to the East, another fiat currency for the oil standard, which will require hedging with gold, foreign stocks based on foreign currency, and inflation-protected US treasuries. Most of the current and future problems relate to dollar devaluation and inflation.

To summarize, the Detroit Syndrome is defined by a long-term chronicity of exposure to:

1. a long-standing trade deficit
2. unfounded expensive wars
3. unwarranted Gov't-backed sector growth
4. unbalanced Gov't budget
5. monetary policy (printing money)
6. no currency standard (e.g., gold)

When you add corporate and individual debt to the above, the result is failing economy. Hence, the Detroit Syndrome results in a failed economy. Detroit's economy happened to be hinged inextricably to the auto industry.

Gary Shilling: Say Goodbye to the Great Gatsby Era

The stock markets are a mirror image of the inverse of the unemployment rate. Over the long term, you closely predict the markets using the unemployment rate. The key factor to watch now is the change in the unemployment rate. If my calculations are correct, then about ~6 months after the rate stops increasing (i.e., remains constant or steadily declines), the next bull market should begin with gangbusters.

There will be another bubble, and it will likely be Gov't-induced. Some where some place there will be a sector that shouldn't be growing but does (housing). Just watch out for the next burst.

In 3-5 years, gold will be more valuable. Also, get some bonds, and short-term treasuries(for access to cash), with probably little cash. For stocks, I suggest long-term dividend reinvestment -- which is a long slow burn anyhow. Get some tobacco stocks, big oil(BP has a dividend yield > 8%, XOM and CVX are near 4%), and some pharmaceuticals (Lilly, Abbott, Pfizer).

All Eyes on the U.S. Dollar

There is an incredible amount of growing yet unobserved unemployment. The huge losses in equity over the last month has resulted in multi-billion dollar losses in portfolios of many institutions with deep pockets, especially endowments, or gifts. Given this, many have already lost their jobs but don't know it -- jobs tied to existing projects that will come to an end. Without new project starts, the extra staff won't be needed when their projects come to an end. The lack of new projects translates to little employment growth. Little or no growth is *the* problem.

With slowing growth (of employment and revenue-->dividend yield), I wouldn't get too exited about the dollar or the markets right now. You'll need to stay in T-bills for quite while until this is over.

The Great Consumer Crash of 2009

Great article -- it makes doom & gloom sound like the understatement of the year. One sure investment to protect from the onslaught of problems is to hedge with gold; however, gold is dropping like gangbusters now because the groups that originally hedged when the financials starting going south last fall (2007) currently envision a dollar rally. Even as a gold bug myself, it doesn't take more than the 20% correction that occurred last week for me to realize that the party with gold and gold mining equities is over.

A different long-term solution is to invest offshore in global growth stocks. Several international stocks are now growing explosively and are offering good dividends. YUM and DEO are good examples which are linked to food and beverages in EU and Asia. Fundamentally, they are very well-managed companies with strong books, and they are recommended for a "buy & hold" strategy by many groups all over the Internet, that is "buy & forget."

Another angle for approaching the doom & gloom issues is to view everything as a "numbers game." If you think the dollar will undergo something like what happened to the Ruble during the dissolution of the USSR, then consider the price fixing history of gold over the last 50 years. What happened in Japan is also not likely to occur, since the problem there was that the Japanese government didn't do anything. (Our Fed monitors everything very closely). It would be beneficial to start reading up on the history of fiat currencies (paper money) and their demise, why the US got off the gold standard, history of how much gold is in Fort Knox and what happened in the 30's and 70's in the lifetime history of gold. Once the picture becomes clear, you will begin to realize that there is no way that goldville will be the only place to live in the future. There's a lot of manipulated (paper) money out there in the form of electronic digits, and thus, it's an erroneous assumption to expect that significant dollar devaluation will occur and that gold will explode to 2000 overnight. With gold, history has shown that the advantage is related to the long-term chronicity of hedging against dollar devaluation, and not some get-rich-quick scheme based on overnight rallies. Over the long term, you would actually want a lot of gold in your portfolio, so after the price of PM's (precious metals) settles down, then maybe buy again for safety reasons. One thing is certain, if the price of gold got down to say the true value (not overpriced significantly) then you would want to buy say 500K or 1m of it, and then you will have a nice nest egg. Of course, the timeframe here is over the next 10-20 years, when the dollar won't be the fiat currency of the world. Fundamentally, whatever you are doing, you have to invest in growth - companies with rock-solid management and profitable books. Betting (hedging) that your portfolio is going to grow with e.g. a PM is not growth. Last, be careful about groups that focus solely on investment with US stocks, because the US economy makes up only 15-20% of the global economy. In real terms, because we're the greatest debtor nation, the true percentage is probably 5-10%.

Global Market Performance: Nowhere to Hide

This is a good article reflecting the "nowhere to hide principle" in global markets. While I realize this is not a forum, has anyone published a comparison of projected inflation/recession in Europe, Japan, Singapore, Brazil, China? Also, which sectors would be doing better in Europe, Brazil?

6 Reasons U.S. Stocks Will Outperform Foreign Stocks in 2008

Here it is July 08 and most of the conditions mentioned above, while correct, were in better shape than they are now. This week it was announced that ~65,000 jobs were terminated in June, Starbucks is laying off ~12,000 and closing 600 laggard cafes, the Dow and S&P have breached 2003 support levels -- enough for the statistics. ETFs for the Euro(FXE), Yen(FXY), Swiss Franc(FXF) were all rising upward at a fast pace. Also, some of the shorting ETFs such as PSQ, SDS, MYY are doing tremendously well right now, but it is possible that they hit a bottom plateau, where there is not much more that can be shorted.

Basically, debt is a disease and we have seen very few signs over the last decade that would indicate we are curing the illness. With
crude oil now at $145 per barrel, you can buy a pickup truck at 40% off. You can still buy a car for 0-0-0 (zero down, zero interest, no payments for a year). While the final effect of write downs from the housing bubble burst has yet to be seen, it has become more difficult to take out a mortgage loan -- so some fixes have taken place.

For the dollar devaluation, because of national debt and our incurable debt disease, the dollar will probably lose out to the Euro or the Chinese Yuan eventually as the fiat currency makes the West to East transition. If gold becomes part of the equation in the new global fiat currency, then the current bet (over-valuation in commodity prices) that the true value of gold (silver) is realized will become true. Currencies over the long term, however, go up and down reaching an eventual zero sum gain. At this point, it will likely be better to have significant capital offshore in growth equities that are not pegged to the dollar. When retirement approaches, you can exchange your foreign equities for foreign currencies and high paying dividends from, say, US utilities.