Monday, August 3, 2009

Where We Are Today

Here are 3 charts from Calculated Risk today. (For some reason, only the retail sales chart is enlarging on my computer when I click on it. Your browser may handle them differently.)

These charts help demonstrate why I believe:

a) the U. S. has been in a depression;

b) the depression is ending;

c) most financial assets are overvalued.

From the top down:

Retail sales were off about 13% from the peak to the trough. Given population growth, this would likely equate to a 15% drop-off. Nothing since WW II even comes close to the extent and duration of this. This is what was seen in an old-fashioned depression. No one would have believed it even a year ago.
The import-export chart also shows an unprecedented, sustained decline. The powers-that-be are seeing to it that this recovers. But this sort of event in peacetime was supposed to simply be impossible.
Finally, despite all the array of programs that support the housing market, including unthinkable sums simply to prop up Fannie Mae and Freddie Mac, just look at how many new housing units were constructed decades ago vs. now. They can't go below zero.
In addition, other measures of internal trade and inventories within the U.S. accounting for a large percent of GDP has shown unbelievable, 20% year on year declines. This is not within the realm of normal peacetime recessionary behavior, especially when one looks at the duration of this downturn along with its extent.
According to David Rosenberg of Gluskin Sheff in Canada, the Federal Government currently accounts for fully 20% of personal income. So numbers of homes built will increase, numbers of cars sold will increase, and medical and military spending will increase, etc.: the depression will end in that numbers will turn upward.
But that is almost irrelevant. Let's say retail sales went from 100 to 85 in 18 months, and go up an amazing 10% in the next 18 months. They would now be at 93, 3 years after having been at 100. Any mainstream economist looking at a base of 100 would have predicted 110-120 3 years later.
Perhaps 10 years later, retail sales will have had a sustained boom, for reasons unpredicted. Great! Let the prices of retail stocks reflect the booming dividends paid to the owners of the companies. Unfortunately, past history suggests that the managers of the companies will arrogate to themselves a disproportionate share of the profits and the owners (shareholders) will get screwed out of the returns they deserve. And, numerous IPOs of retailers will be rushed to market at overvalued prices. That's the drill- as with tech in the 1990s.
Meanwhile, the only good thing that can be said for prices of bonds of municipalities and corporations is that they are relatively cheap compared to Treasuries. But only the Treasury has essentially infinite borrowing power and can tell the Fed to print more money. And Treasury debt is noncallable, unlike muni debt and some corporate debt. On an absolute basis, non-Treasury debt is no bargain given the Scylla of inflation and Charybdis of debt default.
Gold is gradually rising in price and until India, the world's marginal and price-sensitive consumer of gold, starts buying gold, this rise in gold price is from investors/speculators. But where were these buyers 2-5 years ago?
Cash is safe but yields next to nothing.
In summary, JPMorgan Sachs has investors just where it wants them. There are no sound investment choices beyond cash. Current reality can change and they can get in front of almost any trend, and where they don't, you and I will save them from any errors via our elected and appointed officials. (But their stocks are no safe haven, as they share the wealth internally through huge salaries and bonuses but not through dividends.)
Financially, there simply is no trend and no undervalued asset class based on fundamental, technical and political analysis. This is the opposite of 1981-3, where if an investor simply bet on Volcker sticking to his guns, there were many ways to buy into the disinflation theme and make both a high current return and capital gains with safety. It's a shame, but so it goes. At some point, there will be a trend wherein the fundamentals and technicals, and return to the investor on the investment, will be aligned. Even then, I'm prepared to be more suspicious than in the past given the depradations by Big Finance upon retail investors over the past decade.
Copyright (C) Long Lake LLC 2009

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