Wednesday, May 6, 2009

Better than Expected Hurricanes

Getting back to normal life after traveling involves reading snail mail and E-mail.
In the E-mail box from a scheduled travel day was a missive from our government. Because the stock market rose the day it was released, this data was likely "better than expected". It was, however, ugly. A Category 4 hurricane that was expected to be a Cat 5 one is still a bad one.

On May 1, the Commerce Department reported that manufacturers' shipments in March 2009 were $360 B. This was an astounding 18% below the level of one year earlier.

Worse, orders were down an even worse 22.5% year on year.

These numbers are not preliminary or advance numbers. Pending some final revisions, these are the numbers. These are Depression-type numbers. Every industry group and subgroup except defense and some medical and food sectors were down.

If you read the report, the text completely ignores the year on year declines, focusing only on the almost irrelevant sequential month to month declines (or advances). This innovation in economic reporting is of a piece with the fraudulent Big Finance "earnings" and with the Street focus on "operating" earnings rather than earnings provided under Generally Accepted Accounting Principles.

Personal income is being kept up by all sorts of government stratagems such as tax cuts, large cost of living increases and a $25o giveaway to Social Security recipients, and immense subsidies on mortgage rates to encourage refis.

In the meantime, John Mauldin published a newsletter from Jim Welsh of "The Financial Commentator". Mr. Welsh made the interesting point that between 2000 and 2008, credit card companies increased the number of cards issued to small businesses from 5 million to 29 million, and credit card debt of small businesses increased from $70 B to $290 B. Further astounding numbers. For those of us who have felt bad that some small businesses have been suddenly cut off from credit though they have been sound, this is sobering news. It would seem that if you are running a business and need money periodically, it would be safer to pay a bank for an irrevocable line of credit rather than rely on the kindness of a credit card company.

In other bearish news, TrimTabs continues to pound the table that any green shoots are largely withering based on its analysis of income tax receipts and employment trends, and it also passes on very high ratios of insider stock sales to buys, with very little insider buying.

EBR continues to believe that, understanding that the U. S. is the military hyperpower of the world that prints the world's reserve currency, the approach taken to the depredations of Big Finance is exactly that of Japan, and so it takes seriously the deflationary, long-term stock market decline possibility that Japan has gone through for 20 years. EBR mused on this in an early post, "Land of the Setting Sun", and events since then have largely been consistent with the views expressed therein.

Long term, because the creditor countries of Asia trust gold, and economic power flows over time to creditor countries (previously Britain and then the U. S.!), EBR likes the gold story. Short term, this blog has been consistently cautious on gold as a trade, and remains so. Gold likely won't make anyone rich, but if Government does not confiscate it, it probably deserves a significant place in many portfolios. At some point, so may investment quality tangibles such as art, given the place of money-printing going on in the developed countries, but objectively, prices are in a downtrend; catching falling knives is risky.

And so it goes . . . how hard to believe it is 10 years plus 2 months since the NASDAQ peaked over 5000. Adjusted for inflation and essentially no dividends, the 10-year negative return on the NASDAQ vastly exceeds any 10-year return on the general stock market any time in the 20th Century. In other words, the long-term magnitude of that bubble far exceeded that of the stock market bubble in 1929, especially when one recalls the cataclysm of 1931-33.

We are living in completely unprecedented financial times. Humility regarding any particular future outcome would appear to be a virtue now more than ever.

Copyright (C) Long Lake LLC 2009

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