Obubblomics: Prepare for Markets to Get Worse

Includes: DIA, SPY
by: Craig Brown

Okay, I admit that it is hard to pronounce but I view the current "recovery" as Obubblomics, i.e. Obama stimulus causes improved numbers in the economy and builds a new bigger bubble destined to pop in incredible fashion. Even though it is a bit hard to pronounce at first, you have to admit that the word looks pretty cool. The truth is, however, that if you kick a dead dog it will move and if you kick harder it will move more, but that does not change the fact that the dog is dead. And so far I have seen nothing to suggest this dog ain't dead.

Debt, public and private, still a big issue. Unemployment, while perhaps reaching a bottom, is still a problem, especially when you consider the hundreds of thousands of jobs we need to create each year to simply support the growing job force. Housing may be at the bottom but there is plenty of phantom inventory that will keep it down for long to come. And retail sales, though rebounding a bit this holiday season, are undoubtedly simply leading to more debt as the incomes are not there to support a climb. More debt, folks, is the last thing we need. I saw a post blaming it on "frugal fatigue." I like the term and think it may be right but guess what, get used to frugal as with our debt levels it will be with us a very, very long time. I am expecting it to be part of our national economy dynamic the rest of my lifetime, and that is not necessarily a bad thing.

Still, frugal is fighting fiscal stimulus and its attempts to get everyone spending again. Frugal is fighting the new bubble the government is foolishly trying to build. Frugal will win out in time as this bubble will pop, but I am more concerned with the long term consequences of building a new bubble. This is not Lawrence Welk and we cannot keep pumping out bubble after bubble. This one could be our biggest and last.

Now I have to back track on some former doom-and-gloom predictions. I do not at this point think the bubble will necessarily pop in the next few months or, for that matter, the next few years. The ability of government dollars thrown at the situation to mask the issues is greater than I had ever imagined. So I am simply saying we need to hunker down for when it happens and I have given up for when that will be. I know this seems cheap as whenever the economy dumps in the future I can say I told you so, but call me to task on the reason for the future slump. If it is based on the underlying fundamentals I continually note here, I get to say I told you so. If it is based on Obubblomics, I get to say I told you so. So hold on to your seats, the next decade, in my view, will have even more economic problems than the last and the last had the most since the Great Depression.

From their lips to your ears.

A couple of people I respect have some words of advice. First, Paul Volcker. If you have followed me you will see that his involvement in Obama's economic team was one of the reasons I supported Obama. Little did I know that Obama and company would pay no attention to anything Paul had to say. Well, he is still speaking despite the Administration not listening and he still has plenty to say. Bottom line, he says the financial industry has added nothing (and has nothing to add) to the economy other that ATM machines. The elaborate financial products they have developed over the last decade or so add absolutely nothing to a productive economy. I agree!!!

Another person deserving of some attention is Meredith Whitney. Now I have to say she turned somewhat bullish a few months ago with Nouriel Roubini and I think they were looking more to protect their reputations than to tell the painful truth, but it is good to see Meredith beginning to grow some bear hair again. She says in this link she was bearish all the past year but I know just a few months ago she was not quite as bearish as she is now, and she is definitely bearish now. Her linked video is well worth the listen and very telling. Some highlights:

  • Consumer spending is 70% of GDP and it is still under pressure;
  • State and local government spending is 12% of the GDP and it is under pressure;
  • Small and medium sized businesses simply are getting no credit to run their businesses and consumers have had credit card debt availability shrink by over a trillion dollars.

She sees 2010 as the year when the "sand", as she says, hits the fan. Now Meredith thinks this turd will come home to roost in the first or second quarter 2010. I think that is certainly possible but I have learned not to underestimate the staying power of government stimulus, which Obama continues to promise is in the pipeline. We will see. Either way, be prepared for things to get worse. If you have equity positions, perhaps it is time to put some hedges in place.

Disclosures: None.