ddtuttle

ECRI: Economy Showing Signs of Future Stability

I have been following the WLI for many years. It is stabilizing at a very low level. In other words growth will still be very negative but not accelerating. The simplest interpretation is that GDP growth will be many percentage points in the red for the foreseeable future.

Fed Intervention, Market Response Confirm: We're on the Path to Hyperinflation

We are currently experiencing deflation on a global level. World net worth has dropped something like 50%, an amount that dwarfs the amounts actually "created" by central banks. We are in a deflationary spiral that show no signs of stopping.
When prices finally stop going down we'll have assets worth a fraction of their former value and many times the corresponding money supply. That will be a recipe for inflation, but from massively deflated values and prices.
Until then cash (and gold) are king. Once the inflation starts, then you'll want to switch to commodities (and gold).

The Shedlock-Schiff Affair: A Chronicle

Schiff is a money manager. It doesn't matter that he was right on TV about the US economy going down. He lost a lot of money for his clients. He bought the "decoupling theory" hook line and sinker. Peter believed (and still does) that the US is going to go down and everybody else is going to be much much better off. Don't believe it. The whole world is going down all at once because the global economy is MORE coupled than before, not less.
If you're looking for a metric to figure out what might happen, consider demographics. Chinia, Japan, UK, Europe all have older populations than the USA. India has a very young population. You will see relative strength wherever there is a group of young people who can work and consume for many years. This means after the US dollar corrects against the major currencies, they'll all go down together, staying more-or-less even in exchange rate. Peter Schiff bet the exact opposite way, and lost a ton of money.
BTW: Shedlock's company, Sitka, has performance charts on their web site, and they're pretty good. They pride themselves on extreme transparency.

The Shallowest Generation

It simply doesn't make sense to blame a generation for anything. Our current predicament is due to the infantile idealist philosophy of the conservative "revolution" led by Ronald Regan. Phil Graham and Newt Gingrich had much more to do with our current financial crisis than any spoiled boomer theory.

Americans have always been spoiled rotten, and we worked our asses off getting that way. The so-called "great generation" was also a bunch of sheep who let a depression and a world war go by without even asking why or wondering if there was a better way. They came home and created the most shallow materialistic society ever seen: the 1950's became the achetype of what you're complaining about. If the boomers are spoiled, its the great generation that spoiled them.

Certainly Americans might do better if they didn't consume so much, but that's true of every generation. The depression is actually due to a series of bubbles not unlike the ones we just went through. Shame on all of us for learning a damn thing in all those years.

You want to blame a generation for something, how about the people of the 1920's who nearly destroyed the world; first with hyper-inflation in some countries, then a bone crushing depression and finally with a monstrous war. That was a real low point.

I don't see any difference between the boomers and any of the peace-time generations that follow us. We are all spoiled, and we all borrow too much, and everybody including the great generation get blame for creating the incredible mess that Social Security and Medicare shortfalls will create.

FDR didn't set it up right, it got compounded in 1960's and we all have ignored the problem for the last 40 years.

The Crash of 2008

1. PE ratios are meaningless. We are in a declining global economy, which means the E part of PE is going to decline dramatically over coming quarters. Stats other than Shiller's PE show 400 S&P and 6000 DOW are not out of line with long term trends in historical lows.

2. Oversold indicators only make sense when the market is in relative equilibrium. It presumes a population of buyers hungrily waiting for their entry point. No such thing right now.

3. Just about everything in this crisis is 'the worst since the great depression'. Well, we just put in the worst day EVER on the Dow. In other words, we now have one metric whereby this things is WORSE than the great depression. Your 50% down is still in play, which is more than 1000 pts below where we are now.

4. Investors are bearish because real estate prices are still in free fall, we still have to unwind trillions upon trillions of toxic deriviatives, the US banks have $8T of level II & III debt that is may be worth $0.10 on the dollar, the US government is printing money so fast the presses will catch fire, the entire global financial system has collapsed and we are HOPING the world governments can resuscitate it, and we are still in a steep economic decline. Yeah, everybody's way too bearish.

5, Expecting government to cooperate is naive. If this gets worse or lasts too long it will rapidly devolve into everybody for themselves.

Now having said all that, a fast large snap back rally has to happen in here somewhere. It would flush out all the shorts, sending it even higher. But that is only a trade, not an investment. The whole world in hanging by a thread, and the risk profile for equities depends on the immediate context, and that sucks right now. I would quantify it as a couple of percent upside against 10-20% downside.

In virtually all the episodes like this one, it has taken 10 years or more for equities to recover. So investors beware.

Think of These as Short-Term Troubles

We are only half way through with the housing crisis.
The number of resets & recasts coming down the pike.
The amount bad debt on banks books still marked at $0.80.
The fact banks aren't modifying mortgages at affordable levels (and they want 1/2 the equity!)

This is the engine of decline in this debacle, and until the brakes are applied hard, or it just runs its course, we aren't near a bottom. It will take the market, the world economy and all the big banks with it.

Some banks have withstood the first half, but can you imagine any of them surviving a second onslaught of equal size? If they're going out of business anyway, why bail them out now? Let 'em go and start fixing things sooner rather than $5T later.

This bill has NOTHING to slow the root cause. It will do nothing but delay the inevitable and waste an absolute ocean of money.

Investing now would doom your money to more losses, and subject it to the serious inflation that will follow this printing party. We are only down 30%, which is an average bear market. There is nothing average or normal about this one.

I'm all for dollar cost averaging in as we approach a real bottom, but I'm in cash and waiting. Don't try to catch a falling hydrogen bomb.