You want to buy WHAT? Equities? Are you crazy?
Not to start off Monday morning on a sour note here (I’m in pretty good spirits, really) but I need to inject a little harsh reality into your thinking if you’re not fleeing paper assets as fast as you can. There comes a time when every long wave economic cycle gets into its death throes and while there are headlines that we’re maybe nearing “The end of the Great Recession” you’ll note that even such reports include a note that “Stopping falling means we’re still at Bottom”.
While most on Wall Street are hoping that another major Bull Market is organizing, what they seem to want to bury is that if you had put equal amounts of money into the Dow, the S&P 500, and the NASDAQ Composite at the beginning of 2000, as is shown in my Aggregate Index chart (here), you’d have lost almost one-half of your grub stake, and that’s before cranking in the correction for the declining purchasing power of the dollar. When that’s done, sorry to report, you’ve lost more than half. [I exclude commissions if you exclude dividends.] The Street would just as soon you get memory fogging of events prior to 9/11 and forget that huge losses many portfolios suffered in the Tech Wreck. How soon we forget, eh?
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Since last November I’ve been telling you there will probably be a double-dip recession. While it may seem like the country is turning a corner here, don’t be surprised to see the ‘green shoots’ wither before we get through September for any number of reasons.
Not that I’m a lone tinfoil hat on this stuff: a “Double-Dip Recession Still in the Picture” says Nouriel Roubini, one of the few folks, who like us, saw the mess before it started to wipe out recovering 401(k) plans after October of 2007.
Roubini is not the lone expert sounding a note of caution, either: David Rosenberg, Chief Economist and Strategist with wealth management firm Gluskin/Sheff in Toronto, issued a newsletter last week (“Break Lite with Dave” – see their web site for more) made an incredibly astute observation which seems beyond the understanding of most investors:
“It is amazing that anyone would go long an equity market with a reported P/E multiple of 700x but that is indeed what we have on our hands.”
In the expanded note (not his ‘lite’ column) Rosenberg presents a chart which looks at the S&P’s recent action compared with the first Great Depression:
(Thanks to Gluskin/Sheff’s COO Brian Ginsler for permission to share this…)
As the Kitco pricing at the top of this page suggests, we’re seeing strength in gold and silver this morning, driven by weakening of the US dollar vis-à-vis other currencies, and (again due in part to the falling buck) the price of oil is back over $70 a barrel.
Lining all of this up, I’m seeing what I’d summarize as a classic case of overshoot, as the market tries to digest what are sometimes confusing signals. The way to get over ‘overshoot’ is what? Overshoot on the downside to come…
For example, the fact that the Cash for Clunkers program ran through its money so fast prompted
former Fed Bubblemeister “Greenspan: [to declare] Clunkers Cash an Effect of Economic Rebound, Not Cause.“
Yep. The guy who didn’t get the Tech Wreck right, then pumped up the Housing bubble and almost singlehandedly created the house-flipping environment, is crediting a ‘rebound’ with the the program’s success, when many dealers are telling me looks to them like a deliberate move on the part of the PowersThatBe to take what had been serviceable autos that were paid for and sucker-punch people into taking on debt they can’t really afford.
This isn’t a view that I pulled out of the hat to have something to write about. It’s based on emails like this one from people in the auto industry who see it this way:
I am the manager for ****** ***** leasing in *******, Arizona. This provides a very unique insight into the current economic morass we are in. Facilities are shared with the parent company, the local Chrysler/**** dealership. This too gives me a front row seat for these fascinating times. My anger over this cash for clunkers program coupled with a frustration about how blindly people buy into these programs was the catalyst for (my) impetuous call this morning.
To date an overwhelming percentage of the people taking advantage of this program have traded vehicles that were free of encumbrances. Now they are in bondage, trapped into making payments during a time of great economic uncertainty. A number of the vehicles being traded in are in amazing condition. So, through this program we now eliminate a large segment of the used car market, vehicles that could be sold in the $3,000 to $6,000 range to those on tighter budgets.
The destruction of these vehicles will eliminate a huge resource pool of used parts to keep older vehicles on the road in a cost effective manner. The second reason this really lights my fuse is waste on this magnitude is truly immoral and irresponsible. I will forward photos tomorrow of some of the vehicles we will be destroying and I will also post them on my blog, www.route66chronicles.blogspot.com. The blog generally leans toward the light hearted side of life but as an automotive historian with a lengthy resume of published work and as associate editor with Cars & Parts magazine I feel a responsibility to say something about this insanity.
Next is the simple fact we are merely sopping up some of the excess inventory of automobile manufacturers and doing little or nothing to stimulate responsible production.
Even worse we are placing dealerships in a position where there will be few potential customers in the months ahead. Then there is the environmental charade. Which cause more “pollution”? Driving a well maintained 1973 Olds responsibly (bicycling to work most days, renting a fuel efficient vehicle for long distance trips, and using the Olds for limited transportation) or destroying it to produce a new car?
Two quick vehicle notes you may find of interest. I am notoriously “frugal” when it comes to vehicles. We paid $350 for the Olds seventeen years ago! The second note pertains to the Cherokee mentioned previously. After extensive evaluation we decided the Cherokee of the 1990s was an ideal replacement for our very tired 1988 Ford s/w. Recently our patient search was rewarded with a one owner 1998 model, 103,000 miles, for $3,000. You have noted on several occasions the need for a replacement vehicle and I respectively suggest some research on these highly versatile, extremely durable vehicles.
Last but not least on my list of reason to be angered over this cash for clunker program is the simple fact we are paying for this insanity with our tax monies. With each passing day the feeling increases that I have stumbled into the middle of a French movie with Japanese subtitles. Thank you for letting me vent. On numerous occasions the intention was to drop a note of thanks for your website but rather than intrude on your busy day decided to let the number of hits speak for me. Following your sage advice on relocation and preparation has been hindered by family obligations that keep us rooted in Arizona. Still, we prepare to the best of our abilities and limited resources. The long term plan is to have things in place for a rapid relocation to southern Alaska as soon as these obligations are resolved. Your site is a sanctuary of sanity in this increasingly bizarre world. Keep up the good work.
Oh, and let’s not forget many of those new cars can be turned off remotely by satellite.
Of course, it won’t just be the end of the Cash for Clunkers program that will sneak up on most unaware folks by the end of Fall. There’s a lot going on in economic circles that’s not getting close attention, too. Take as one example, the decision of the FASB (Financial Accounting Standards Board) which has decided to roll out a kind of “Mark-t0-market II” in the near future.
This comes as the Wall Street Journal headlined last week how the Financial Crisis Advisory Group (they overlooked putting me on it) “Panel Assails Meddling into FASB Rules Making.“ And while a Forbes article says none too subtly “Suspend Mark-To-Market — Now“, an AP story out last week that the Crisis Advisory group denied that accounting rules caused the financial crisis.
With all these cards on the table, I wouldn’t be surprised to see a peak in the market perhaps as soon as this week or next. All it would take is the right combination of spin to hit the 38.2% retracement figure between 9,400 and 9,500 on the Dow and then the technical expectations for the bounce from the March 6,626 weekly low would be met.
There may be some moments of skepticism along the way: Since housing foreclosures are going gangbusters, any increase in the Construction Spending report later this morning seems a bit incredible. The NY Post has the latest “AP Analysis: Foreclosures stabilize in Key States” but remember stabilize is not improve just yet. However, the Auto Sales figures which should reflect Cash for Clunkers may add momentarily even more nitrous to the already giddy tone of The Street.
Friday’s numbers will be the biggies: Tuesday’s Personal Income and Wednesday’s factory orders pale in comparison to the Friday Unemployment Rate and the Fed’s Consumer Debt report due out Friday afternoon.
Although only five banks were reorganized Friday (after the close) by the FDIC, they combined accounted for 40 offices changing hands. That 91 ‘banks’ have been reorg’ed, officials might well indicate means this is still only a ‘recession’. However, if you’ve been counting (as I have) it’s now 3,048 offices. Meantime, I’ve yet to find the definitive study comparing the closure rates now with the 1930’s event. Any analysis that excludes online transactions and ATM’s is pretty much pointless whitewashing, in my view.
As reported previously, the per capita cost of the First Depression worked out to about $460 per capita in actual bank losses (constant dollar basis) and the costs here in the Second Depression are on the order of $649 per capita and that was just looking at the $200-billion in bank bailouts. Auto industry bailouts and AIG bailouts add to that.
Still, the futures are up sharply before this morning’s open, so ‘game on’ for the 9,400 level more’n likely. Some of this is attributed to bank earnings, although when you think about it, reporting some earnings on what has essentially been ‘free money’ from the Fed should be a no-brainer. Wall Street continues to practice wrong-way economics, steering by the rearview mirror rather than what’s obviously in our path immediately ahead.
Oh, did I mention that a lot of company earnings may be the result of laying off mi9llions and outsourcing jobs to India? No? Don’t mind skeptical me.
The main difference in the two Depressions (then & now) is that in the first instance, the impact was both immediate and personal. In the Second Depression, we have staved off recognition of the peril at hand by funding FDIC’s bailout work. But, depending on how many more banks fail and have to be shot-gun married off, or directly funded is a big unknown. Meanwhile, the Baltimore Business Journal headlines that “As bank failures rise, the survivors are left to pick up a hefty tab.“
You’ll maybe never guess who that’s going to be?
BOHICA – Tax Hike Coming
A check of the UrbanDictionary web site reveals that BOHICA is the abbreviation for ‘bend over, here it comes again…“
This morning the AP reports “2 Obama officials: No guarantee taxes won’t go up” for the middle class.”
Like the old right-wing email said “Change: It’s all you’ll be left with…” seems to evoke fewer smiles here lately. headlines like “Obama officials eye more jobless aid, weigh taxes” are appearing.
A couple of folks have reported seeing the new tee shirts out too: “A recession is when your neighbor is laid off. A Depression is when you’re laid off. A Recovery is when Obama loses his job.”
That said (and humor is intended), we can’t overlook the fact the the Bush administration’s really to blame for setting this all up. runaway corporate globalism has always resulted in a correction that involves excessive downside action. At least it’s been that way since the South Seas Company collapse circa 1720 and the collapse of the tulip market before that in 1638, or so.
Popularized by British Journalist Charles Mackay in his book Extraordinary Popular Delusions and Madness of Crowds, Mackay’s advice is still sound today:
“”Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
Around here, the idea is not to be in the herd in the first place, since it’s the source of all kinds of aggravation and more often than not, ends at a slaughterhouse. The Memoirs (1852) of the book (e-text here) is also a fine read with more lessons on herd behavior.
BOHICA Redux
The UK Independent reports a “Warning: Oil supplies are running out fast” which then goes on to say that the world is facing a catastrophic shortfall. Again, this is not something to blame the current administration for. Gotta take a look at his predecessor who was an oil man, if’n you’ll recall.
A visit to my friend Matt Savinar’s fine site “Life After the Oil Crash” goes back on the sites to scan list.
Also worth reading (and fast, too, since it’s a PDF of a PPT) is Matthew Simmons’s presentation “How did our Energy Hole Get So Deep?” which was done for a Chevron conference recently. If you haven’t read his book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy
New HIV Strain
The headline that a “New HIV strain leapt to humans from gorillas: study” Say, you don’t think that 800-pound gorilla in those teevee ads was…oh…you know…
Scarred Woman?
An important temporal marker for those who follow the predictive linguistics work out of www.halfpasthuman.com. We’ve been waiting for a ’scarred woman’ to appear in the headlines in a major way and look here: “Sudan trouser woman ‘ready for 40,000 lashes” which oughta qualify.