Wednesday, September 30, 2009

Trends and Friends

There is much discussion in the blogosphere about the course of the U. S. dollar vs. other currencies. Sentiment is said to be wildly in favor of dollar weakness, which is then said to be bullish. It would appear that there are many such contrarians, however!

Regular readers may know that EBR pays little attention to the value of one fiat currency against another, though in a less correlated world it might be interested in that topic. If one lives in America, one buys food in dollars. The global non-fiat currency is gold. Regardless of one's interest in the dollar vs. other fiat currencies and/or vs. gold, one might be interested in "on the margin" news that might buoy the dollar.

EBR is not a political site, but all financial sites must be aware of what's going on in politics. Fundamentally dollar bearish is the increased drift re U. S. policy in and toward Afghanistan, as discussed in a disheartening WSJ piece tonight titled Gates Doubts U.S.'s Afghan Strategy:

President Barack Obama met with senior counselors for three hours Wednesday to launch his review of Afghan war strategy, amid indications that his defense secretary -- the key link between the White House and the military -- is among those undecided about the right approach.

As Yogi Berra advised, when you come to a fork in the road, take it. Think of a deer blinded by headlights. Think of a tennis player at the net who can't decide whether to go left or right and ends up going nowhere. Commodity and currency traders see indecisiveness and invest/trade accordingly.

This pervasive indecision is dollar bearish. No ifs, ands, or buts. It's not determinative, but it is amazing how in a bull or bear market, an accumulation of news and data can paint a picture that can extend and prolong a trend.

For now, dollar bearish (weak dollar) trends are said to be good for the American stock market, at least as priced in weakening U. S. dollars. The stock market averages have risen 7 months straight. Looking Ahead After 7 Consecutive Positive Months is worth a read. A quick summary of it is that historically, optimism has been the generally correct strategy after such strength.

I would add to those who read it that the current period reminds me of 1975, and per the linked article, the one horrible month following 7 consecutive up months was indeed 1975.

Finally, it is not breaking news that Ken Lewis is leaving BofA as CEO at yearend. He may be facing criminal charges. Such a legal situation, which has not happened yet, would not be dollar bullish, either. Readers who want a hard-edged take on the Lewis situation may want to check on Mish at tomorrow; with no knowledge I suspect he will have a hard-hitting post. In the past, he has been all over this story. His point of view in the past has stood in contrast to that of the MSM and may once again be worth considering.

Finally, for people who think that an individual company's stock price means anything, consider CIT. Simply by following through on its pre-bankruptcy actions of a month or two ago, the stock fell 45% Wednesday and may be worthless. 16 months ago the stock was "worth" $60/share and now is trading slightly above $1/share.

Anyone who looked at the longer-term chart of CIT would have been warned that the major trend was down.

The dollar may be at its all-time bottom and gold may be at its all-time top, but there is no evidence of that; au contraire. Gold may have problems over the next 4-6 weeks as it laps the decline it suffered into November 10 2008, when it finally sold off during the massive liquidation in all asset classes except Treasuries and other such issues. But the current ease at the Fed and the Afghan disarray first at the Obama White House and now the Gates Defense Department are gold-friendly. The potential for a melt-up in gold must be considered. The same is true for stocks, but gold is in a clear structural bull market and stocks are in at best a structural neutral market despite having outperformed gold the past half year.

Gold remains the friendliest trend EBR can see.

Copyright (C) Long Lake LLC 2009

What Employment Surveys Have to Do with Toothpaste and the Debt Culture

Rasmussen and Gallup each have current data on whether workers are seeing job growth or losses at their firms.

The findings remain miserable. The Rasmussen data is shown here. Please read the post just below on Nike if you have any doubt that large corporations are "beating expectations" due to their immense gross profit margins and employee headcount restrictions.

Perhaps this helps explain the strength in government bond prices.
Please think of why a tube of toothpaste costs whatever it costs. It just might be that the container and packaging cost more than the paste itself. Not counting costs of transit through the supply chain, gross profit margins on most mass-produced products are vastly higher than one would think. If you are a Nike and want to scrimp on advertising to beat your numbers (perhaps so the insiders can sell stock), or a P&G and go to "value" pricing, you can temporarily get people to buy at the "bargain" price.
Thus deflation can actually set hold, because these lower prices could go far lower and still be produced profitably. Thus, there is no way to know what the "right" yield for government debt is, should be, and will be.
Of course, the single most profitable "commodity" to produce is debt. At least toothpaste is tangible and at least lubricates the movement of an overpriced toothbrush across the teeth. Debt is "Promises, promises" = air. That is why this misguided financial system keeps cracking up. Debt is just too profitable. Since nothing is changing in that regard, expect lots of fireworks but remember that much of the stock market and indeed much of the modern financial markets comprise a shell game run by Big Finance for its benefit and those of its enablers in Washington and various shills and hangers-on.
Copyright Long Lake LLC 2009

Tuesday, September 29, 2009

Nike A-Go-Go Though Results Not Even So-So

All the money-printing has produced a sameness to the financial news that is likely deceptive. The news continues to be almost relentlessly upbeat. I liked it much better in the winter and spring of 2003 when the obvious recovery from the recession of 2001 was loudly doubted on CNBC, with everyone waiting for another terrorist attack or some imminent disaster in Iraq. For example, Nike came out with news after the closing bell today that does not sound "so hot":

Revenue fell 12 percent to $4.8 billion -- narrowly missing analyst expectations of $4.9 billion.

OK; in a "normal" market, a miss on revenues is considered at least as important as a hit on earnings, as it is harder to game sales than earnings. How were earnings:

Nike Inc. on Tuesday reported its profit was practically unchanged in its fiscal first quarter while revenue fell sharply as consumers around the globe limited their spending.

Well, perhaps guidance was really good?

The company's future orders, a key measure for the company that indicates what retailers and other customers are planning to have delivered for the coming season -- fell 6 percent compared to last year.

OK then. Perhaps their Chinese operations are going great guns. Well, maybe not:

Nike's sales fell around the globe, with particular struggles in Europe and China.

Perhaps Nike has a truly new and exciting repositioning? This is what the company says about its revitalization:

Nike executives said while consumers remain cautious, the company is focused on long-term growth and it will push harder than ever for innovative products to help it grow.

"Nike is not a wait-and-see company," its CEO Mark Parker said.

Whatever that means.

Given the above, the ending of the article might be a bit surprising:

Investors were cheered by the company's ability to perform in the tough economy and sent Nike's shares up $2.70, or 4.5 percent, to $62.79 in after-hours trading Tuesday.

It's perhaps churlish to report that before this marvelous corporate report, Nike's stock traded at 20X trailing earnings with a dividend yield of 1.7% with a market value of 1.5X sales and 3.5X book value. The stock was already near all-time highs, only 10% off its 12-month high and over 50% up from its 12-month low.

While of course individuals are responsible for their actions, it is the Fed that is responsible for this manic speculative behavior. Just as most dieters cannot resist that piece of cake on the table, how can a trader resist the chance to "make" 4.5% overnight when that 4.5% equals 4.5 years of the 1% interest rate his/her bank is paying to borrow that speculator's money?

Nike's stock looks as if it is being moved by momentum players. Any remaining shorts are afraid, and the bulls are feeling their oats. Anyone who believes stocks are trading as if Armageddon were in the recent past or might be in the near future is mistaken. For many stocks, the go-go days are here.

Meanwhile, approximate 12-month total returns for gold, the S&P 500 and the long T-bond as judged by the 'TLT" ETF are:

Gold: 14%
S&P: -6%
TLT: 9%.

Remember this is after having lapped the Lehman Bros. collapse.

Copyright (C) Long Lake LLC 2009

Sunday, September 27, 2009

Big Finance: It Shrinks?

As the Great Financial Crisis recedes in memory and mainstream organizations such as the Conference Board (Leading Economic Indicators) and the Economic Cycle Research Institute (Weekly Leading Index) continue to predict growth for months ahead, where are the indicators for those with longer horizons than one year or so? The zigs and zags of these indicators ultimately cannot drive a successful longer-term strategy for owners of long-term assets such as bonds, stocks, and durable physical assets.

Such a strategy is individual-specific and should take into account longer-term trends and projected changing perceptions. Short-term economic cycles are as irrelevant to investors as the retrospective knowledge that Japan, in its 20 years since the peak of its economic supercycle, has been out of recession perhaps 75-80% of the time. In another example, what would an investor in December 1944 have thought was the prognosis for stocks with the foreknowledge that the next 16 years would contain 5 distinct recessions, only 2 of which were to be mild? The stock market soared in price while providing substantial dividends as an important kicker. And the 16 years beginning in December 1963 contained only 2 recessions, only one of which was severe, but the stock market was a poor investment adjusted for inflation.

After all, a bond is just a promise to pay and a share of publicly traded common stock is simply a tiny share of a company controlled in general by strangers who care about themselves more than they care about the outside shareholders. How the proper prices of these assets can be determined by knowing the level of economic activity merely one year in advance is unclear.

It is felt at EBR that what matters more than the gross amount of debt is the quality of the loans. In this regard, the best one can say is that recent experience with high-volume lenders inspires little confidence in prospective lenders of new money.

I personally do not know anyone who wants to take on (more) debt. Certainly there are people buying a home who are jumping at the chance to take on a non-recourse loan called a mortgage, but that's largely because of the subsidies underlying the rate on the mortgage and the fall in nominal house prices. Yet the truth is that given the transaction costs involved in buying and selling homes, probably many younger home buyers would be better off renting. Outside of that special, government-favored case, the public has finally figured out that revolving credit is a loser and should be reserved for truly special cases, such as overseas travel and certain business situations.

(For a downbeat, fact-rich "take" on the ongoing debt situation from an international perspective, please consider reading Money figures show there's trouble ahead.)

While it appears that the surviving Large Complex Financial Institutions have emerged stronger than ever from the crisis, in the broader historical context, the suspicion at EBR is that finance is currently an over-large part of the developed world's economy, that too much financial activity is wasteful of society's resources, and that therefore the odds favor its shrinkage relative to the economy as a whole.

As we have seen with the "roll-ups" that such giant tech companies as Oracle and Cisco have become, such a business model bespeaks a lack of vitality within the industry.

Gold, as the monetary asset with no offsetting liability, had a bit more good news recently, per Mark Hulbert's Deja vu all over again?:

Gold's drop in recent days, after rising to the $1,020-an-ounce level just one week ago, certainly appears to be déjà vu all over again.

On four previous occasions over the last two years, gold has approached, or slightly exceeded, the $1,000 level. On each of those earlier occasions, gold promptly retreated.

But there is one big difference: Gold timers are a lot more discouraged now than on any of those four previous occasions.

Contrarian analysts, who believe that the consensus is rarely right, therefore give gold better odds this time around of mounting a rally that rises to markedly higher levels. If so, then this week's correction in the gold market would be a mere pause -- and not the beginning of a major bear market.

A measured and supporting view is found in a piece by the inimitable Bill Fleckenstein in A golden opportunity for investors?

The best-run countries that stayed away from toxic U. S.-generated debt, and in general stayed away from the whole derivatives scam, have the strongest economies. They are in fact decoupling. These countries include Brazil and India. In the next rung are countries with a greater connection to the U. S., including China, Australia and Canada. The U. S. and the U. K., as the originators of the mortgage- and derivatives-based allied scams, are the two countries the central banks of which continue to literally print (electronic) money by purchasing the bonds issued by the Treasuries of the governments of those countries, bonds which are going to bail out shareholders and bondholders of the Large Complex Financial Institutions that were complicit in creating this mess.

Capital that can be created merely by an electronic command has no durable value. On the other hand, precious metals must be torn from the earth and refined, and thus cannot be created out of government fiat.
Such metals, especially ones such as gold that do not even tarnish, can outlast the life span of governments and thus can never fail, and their owners can always wait for better times if they want to trade that ownership for that of a house, a share of a company, or a debt instrument.

Thus the recommendation at EBR is that those interested in precious metals as a hedge, speculation or long-term store of value not bother with stocks of companies involved in producing the metals. Owning the commodity is very different from owning a small part of a company that produces the commodity. As one example, I like physical gold better than IBM from a risk-reward standpoint, but I like IBM stock (and the stocks of several other low P/E free cash flow-generating companies) better than the stock of any gold miner I know.

Big Finance "should" shrink, from the moral and practical standpoints. Durable commodities may come into
increased demand relative to the "average" financial asset as the memory of the scams of the past decade that are gently called bubbles created by Big Finance with the assent of governments and their central banks lasts through the emerging post-crash economic cycle.

Copyright (C) Long Lake LLC 2009

Saturday, September 26, 2009

Long T-Bond Yield Breaking Down as Lips Flap at the G20

Friday was an upside day for Treasury bond prices, as the 30-year equalled or minimally breached its low of the prior cycle of 4.10 in 2003. A technician opined to me that a standard charting technique had "confirmed" a bull move was underway in this issue, with a yield target of 3.50%. A different technique that I use, called "eyeballing" the chart, suggests 3.7% is a first target. The 'TLT' proxy for the long Treasury continues to move up strongly and will continue to rise if the 30-year issue goes well below 4%.

This occurred as the ECRI's Weekly Leading Index Growth Rate went to yet another all-time high, and the yield curve tightened, with the yield on the 2-year Treasury rising while the yield on the 10-year falling. Perhaps in sympathy with a sense that the best of times has ended for financials, JPM and BAC were among the participants in a broad drop in price for financial stocks. There is tremendous risk in these names for at least a few months.

Silver dropped 1 1/2% today, triple gold's drop. Gold continues to act like a store of value. The feeling at EBR is that having been burned by the unreal tech names a decade ago and the more amazingly unreal financial names such as Fannie and Freddie last year, investors will continue to want physical ownership of real things such as metals, but with enough faith in the underlying financial system to trust exchange-traded funds to hold the metals for them. This blogger prefers for core holdings to own ETFs that actually claim to own nothing but metal, meaning essentially no "derivatives" (e.g., futures contracts on the metal). However, for trading purposes, an "impure" ETF such as GLD is more liquid than a "pure" one such as GTU.

After quadrupling in the past 8 years, physical gold is probably at fair value relative to many ways to value it.
It may however be analagous to the NASDAQ in 1995 or 1996, with much more upside to go (even if unjustified). The NASDAQ tripled in the 8 years beginning in January 1988, then went up 5 times in the next five years.

Among stocks, the more internationally-oriented McDonald's rose on a down day, while the largely domestic name Wal-Mart took a serious tumble (for it). These were the only 2 Dow 30 stocks to rise in 2008, but their prices have diverged this year. MCD raised its dividend 10% and now yields close to 4%, with steady rises in the dividend appearing likely in years to come. Growth and income. The problem with the general stock market and the NAZ in particular is that growth without current income to stockholders is problematic, especially when the earnings somehow never to simply show up as unencumbered cash on the balance sheet.

Quarter-end window dressing aside next week, the growing technical strength in the long Treasury bond is adding to the headwinds that stocks face; what if the Japan scenario is truly in the cards?

(Those who watch the headlines will notice that the G20 meeting and the wasted breath on the Iran nuke situation are being ignored here for now. The first is toothless and the second is old news to the governments involved. Markets are for now moving to a different rhythm.)

Copyright (C) Long Lake LLC 2009

Friday, September 25, 2009

The VIX Stabilizes: Implications

The nearby 2-year chart of the stock market's "volatility index" (VIX), also imprecisely called a fear index, shows the fabled second derivative of the trend turning bearish (i.e., less bullish as the decline is in abeyance for now). The VIX peaked in the fall as the worst part of the advance-decline number of stocks occurred, and had a secondary peak into the current bear market bottom in March, then declined steadily as the stock market marched upward with few pauses.

Mais voila! The VIX has more or less flattened the past 2 months and is well within its trading range of the past 2 years. From the beginning of 1997 till the end of 2003, the VIX probably averaged about 25--exactly where it closed Thursday. Stocks traditionally fall when the VIX rises, though the mathematics of calculating VIX do not necessarily imply that relationship.

Even if a new bull market is underway, a simple view of the chart suggests that a spike in the VIX to 40 would be an ordinary test of "resistance". Patient and brave bulls might find that a convenient entry point.

Of course, there is nothing in the chart to suggest an actual trend change, but we are now for the first time since the major bear market took hold a year or more ago both at longer-term "support" for the VIX with as much chart suggestion of a move up as a move down.

Copyright (C) Long Lake LLC 2009

Wednesday, September 23, 2009

Evolving Relationships Between Major Asset Classes

EBR's take is that the long Treasury bond story is getting more interesting. The 3-month chart of the long Treasury ETF 'TLT' shows that the 50-day moving average has now risen above the declining 100 day ma. When this happens but the pierced, declining ma is the 200 day ma, this event is called a "golden cross". Is this lesser event a "silver cross"? (Upper chart; click on charts for more clarity.)
The intraday chart shows a lot of volatility, with volume peaks coming in at 1 PM before the FOMC announcement, and after the Fed announcement. In other words, support for TLT, which is identical to buying interest in the long bond at the mildly higher yield.
So far as stocks went today, they reversed hard. Gold had a weak day, but . . .
Gold both intraday, over the past year, and over the past 3 years has been both a stronger performer than stocks while being less volatile.
Per, at least as of yesterday's close, 93% of stocks were above their 50 day ma and 95% of stocks were above their 200 day ma. No wonder a reader said recently that he was sucking his thumb in amazement at the relentless advance of stocks.
Let's put the stock market in an intermediate-term perspective, however. The "real", playable low for the DJIA in the 2002-3 bottoming process was about 7500. If we arbitrarily add 25% to that number to reflect 7 years of inflation, we get about 9300. That is roughly equal to the 50 day moving average of the Dow today.
A buyer and holder of the Dow ETF = 'DIA' from that point would have, after the ETF's expenses but including dividends, likely have done just as well buying and holding a 7-year Treasury, and would have underperformed buying and holding a 30-year Treasury.
As they say, "nobody knows anything". Strictly on a chart basis, gold and Treasuries look better to yours truly than do stocks. Personally I only like stocks of companies that are far away from the Fed shenanigans, that have had rising earnings throughout the past few years, that have rising and "interesting"dividends, and where the chart suggests an acceptable level of underlying support and appreciation potential.
Throughout the first several months of this blog, which began in December 2008, the consistent opinion re stocks was that they were for gamblers. And amazingly, it has been the gambling stocks such as Ford and BofA that paid off, though of course Citi is off about 1/3 since yearend 2008 despite more than quadrupling off its low, and GM fared worse. This blog has been kinder to gold than stocks, and gold has slightly outperformed the Dow with less volatility.

Past may be prologue. In the anxious times, all the headlines about 3 government actions or investigations re BofA would have sent the stock plummeting; lately it's ignored them. Yet the 200 day ma for BofA is not much above $11. BofA is almost 7X its low of the past 7 months and about 50% above its average price for the past 200 trading days. Gold is less than 7X its low for the past 30+ years. To present that data is to strongly suggest an answer to the question of which asset has more short-intermediate term downside risk.
My heart is with low commodity prices and prosperity. At least for the next weeks to months, my head tells me that stocks are not just for gamblers, but that the market as a whole is at least ready for a change of leadership. Did the markets begin to ring a bell today with the Fed announcement that it is planning to exit its direct interference with the mortgage market? And will the established, structural bull markets in gold and Treasury bonds resume, while the stock averages go back to meandering unpredictably?
Copyright (C) Long Lake LLC 2009

Treasury Long Bond Refuses to Die

Every time I get ready to toss in my optimism for the chart on the Treasury long bond's price, using the ETF 'TLT' as the proxy, it hands in there despite an allegedly booming recovery. The latest chart pattern is shown here. The green line represents the short-term, 10-day moving average. Coming off a low price/high yield 90 days ago at the left of the chart, what one sees is a strong move up in price , with a peak in the 10-day ma around 95. After a dip in price, the 10-day ma now peaked at 96, had a mild dip, and has begun to point upward.
It's early, but this is how bull moves can begin.
Fundamentally, such non-standard indicators as Gallup's daily polling continue to show miserable reports from real people of hiring/non-hiring at their employers. The Baltic Dry Index hit yet another reaction low, and the Chinese stock market has hit a small air pocket the past few days.
I'm no economist; but . . . If Gallup has it right, a 10% unemployment rate is imminent (barring the technicality of a major shrinkage of the labor force).
Copyright (C) Long Lake LLC 2009

Out, Out, Damned Debt

There are many "must read" articles referenced in the blogosphere. Courtesy of Ed Harrison's Credit Writedowns, here is a "must view" chart in John Lounsbury's The Hidden Depression of the 2000s.
The article is a great read, but this one chart makes the point. Mr. Lounsbury's point is that it was debt, debt and more debt that produced all the growth in the economy this decade. Clearly that fits with the theme of EBR: "In equity, veritas".
I don't know if blood, sweat and tears is quite the correct phrase to invoke, but America needs to produce more than it consumes for some time to come.

Underconsuming from an economic standpoint is sort of like a successful diet: fun when you get the hang of it, because you know you're helping yourself. First, though, you have to truly want to break the habit. There has been NO leadership from Team Obama in this regard, though. Perhaps they will do better on the obesity and overweight epidemic than on the debt habit.

Hope springs eternal.
Copyright (C) Long Lake LLC 2009

Tuesday, September 22, 2009

A Military Man Argues for Ramping Down in Afghanistan, Though Not to Zero

This blog has mentioned the potential inflationary implications of a serious ramp-up in the U. S. military effort in Afghanistan. I have pointed out how all important inflationary periods since 1900 have coincided with U. S. wars or their aftermath. (Perhaps the end of the Carter era was an exception, though I would say that the inflation of the late 1970s can be traced to the Vietnam War and a guns and butter policy, with pro-inflationary Fed policies and strange U. S. support for the oil price increases of the mid-1970s adding fuel to the flame.

In any case, the President's hand-picked commander in Afghanistan, General McChrystal, wants more troops.
A powerful rebuttal to this strategy from Ralph Peters, appears in today's New York Post; click HERE to read it. Here's a part of this brief piece:

Meanwhile, we've forgotten why we went to Afghanistan in the first place. (Hint: It wasn't to make nice with toothless tribesmen.) Here's a simple way to conceptualize our problem: A pack of murderous gangsters holes up in a fleabag motel. The feds raid the joint, killing or busting most of them. But some of the deadly ringleaders get away.

Should the G-men pursue the kingpins, or hang around to renovate the motel? Common sense says: Go after the gangsters. They're the problem, not the run-down bunkhouse.

It's especially interesting to find an anti-war point of view from someone who is often associated with the opposite.

The President, having stressed the great importance of some form of success in Afghanistan in August, is reportedly unsure of whether to authorize more troops there. From an economic and financial standpoint, at least for the immediate future, matters will be stabler in the U. S. if he reverses course and listens to Colonel Peters. And if the decision is to ramp up the military effort further, the economy needs it to please be funded properly-- meaning not with debt--as the Democrats used to complain about the Iraq War just a few years ago.

(This post is not spefically agreeing with Col. Peters, as EBR tries not to make sweeping comments about large geopolitical issues involved in this issue, as its focus is on economic and financial issues, with occasional exceptions for DoctoRx to comment on health care.)

Copyright (C) Long Lake LLC 2009

Why Lyle Gramley Is Indirectly Recommending You Buy Gold

More and more bloggers are "sort of" calling the top in the U. S. stock market. I say "sort of" because the momentum upwards scares off rationalists. One could not predict the top in 1999 either, and in fact it went into March the next year.

Certainly there is blow-off-type activity in speculative names, yet other stronger names could move up a lot and still have reasonable P/E's; sometimes the averages conceal more than they mean. Warning signs abound, most powerfully the failure of lenders to take advantage of the immense spread between Fed funds and market interest rates; or perhaps more truthfully, the lack of interest of credit-worthy businesses or individuals to do a lot of borrowing. In that vein, reports in Fed Effort to Stoke Growth May Be Undermined by ‘Tight’ Credit that:

Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day meeting, will probably maintain its assessment that “tight” bank credit is impeding growth. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflects Fed orders to banks to raise more capital and toughen lending standards, analysts say.
. .

Here's the "money" part:

“They would be absolutely delighted if banks went out and raised a lot more private capital and then began to lend more,” said former Fed Governor Lyle Gramley, now senior economic adviser with New York-based Soleil Securities Corp. “Until that happens, the Fed has to continue to try to encourage economic growth through easy money.”

Econblog Review differs. The Fed does NOT have to continue to try to encourage economic growth through easy money. The Fed needs to ensure that the banking system is safe and sound. Congress and the White House are doing more than plenty to encourage economic . . . GOSH-- I'm not sure they are encouraging that much growth, but they certainly are encouraging activity. (Think cash for clunkers or encouraging buying and selling of houses, all of which are being "encouraged" with money from the public at large, meaning that almost zero percentage of the population is benefitting from these activities.)

There is simply too much debt at all levels. The more the U. S. puts banking back where it was in the 1950s, which is to enable sensible investments but as a modest part of a dynamic economy in which saving rather than borrowing is applauded, the better we will all be.

The more the Fed heads past and present present this sophistry that easy money is good for the economy, the more those who allocate capital will increase their holdings of gold. The public at large is wildly underinvested in gold relative to governments and the IMF. One might consider platinum and even that very speculative metal, silver after a dip and only for a trade.

All precious metals have had quite a run recently and "deserve" a rest. Of the three mentioned above, gold has the best long-term chart, but platinum is currently historically undervalued relative to gold and if some real growth is returning for a while to global economies, platinum could outperform gold in view of its much greater sensitivity to economic conditions.

Strangely, as the Japanese experience demonstrates, excess credit creation by the sovereign is consistent with low interest rates. The lower the interest rate, the lower the cost to borrow and thus there need be no end to the borrowing, so who is to say where rates go from here? (Forget free market theory in this world of manipulated financial instruments.) In the meantime, the Baltic Dry Index went to another low yesterday at 2318, and thus its downtrend that began June 3 at over 4000 continues, now having definitively broken the August 25 low of 2388; click HERE (and scroll up) to see the chart. So there remain important deflationary parts of the national and global economies which are being met by unprecedented money-printing. Thus, weirdly, gold and bonds/money exist as prudent asset classes in which to invest. But we know which of those opposite types of commodities can and if necessary will have its supply increased substantially in short order if the authorities so desire.

That in a nutshell is the fundamental case for gold.

Copyright (C) Long Lake LLC 2009

Sunday, September 20, 2009

Let Them Eat Kale?

In How To Shop At Farmer's Markets, Mish picked up on a WaPo report that Michelle Obama was recently in the following predicament:

Let's say you're preparing dinner and you realize with dismay that you don't have any certified organic Tuscan kale. What to do?

Her solution involved what was described thusly, as she visited a local farmer's market that she helped to bring to near the White House:

The Secret Service and the D.C. police brought in three dozen vehicles and shut down H Street, Vermont Avenue, two lanes of I Street and an entrance to the McPherson Square Metro station. They swept the area, in front of the Department of Veterans Affairs, with bomb-sniffing dogs and installed magnetometers in the middle of the street, put up barricades to keep pedestrians out, and took positions with binoculars atop trucks. Though the produce stand was only a block or so from the White House, the first lady hopped into her armored limousine and pulled into the market amid the wail of sirens.

I had seen the report but elected not to comment. Now that a prominent blogger has picked up on it and I came up with a clever title for my own post, I felt that it shouldn't hurt to comment here.

Mish's take is that Mrs. Obama's actions were "arrogant silliness" and that this sort of behavior was out of touch and would tend to hurt the President's popularity.

My take is somewhat different from Mish's. Consider this quote from the article:

The first lady had encouraged Freshfarm Markets, the group that runs popular farmers markets in Dupont Circle and elsewhere, to set up near the White House, and she helped get the approvals to shut down Vermont Avenue during rush hour on Thursdays. But the result was quite the opposite of a quaint farmers market. Considering all the logistics, each tomato she purchased had a carbon footprint of several tons. . .

And now consider the article's conclusion, in which the first lady was described speaking to a crowd at said farmer's market to observe her shopping:

She spoke of the fuel fed to the world's most powerful man: "I've learned that when my family eats fresh food, healthy food, that it really affects how we feel, how we get through the day . . . whether there's a Cabinet meeting or whether we're just walking the dog."

And she spoke of her own culinary efforts: "There are times when putting together a healthy meal is harder than you might imagine."

Particularly when it involves a soundstage, an interpreter for the deaf, three TV satellite trucks and the closing of part of downtown Washington.

This is not of course substantive hard-hitting investigative journalism, but it does have an anti-(Michelle) Obama flavor. The Post, a reliably liberal paper, easily could have covered this event in a much more pro-Obama manner. Whether or not the physical newspaper is or is not acid-free, certainly this article was acidic and acerbic.

From a policy standpoint, the DoctoRx opinion is that I would rather that Mrs. Obama quietly had someone walk to the farmer's market to purchase whatever was needed, and the President:

A) emulate Bill Clinton and present his preferred healthcare reform plan to Congress;
B) put specific provisions in said plan that would favor affordable healthy foods over sugar-added/salt-added etc. ones in a non-coercive way (recall what the Government has done to act against cigarette smoking);
C) mentions (B) in his speeches or TV appearances.

Not only let them eat kale, but reasonable tax and regulatory governmental action can encourage it.

Copyright (C) Long Lake LLC 2009

It's Not Easy Being Steve Keen

A must read for a non-MSM view of the economy is Steve Keen's latest in a series. This one is titled It's Hard Being a Bear (Part Five): Rescued?

Here's the conclusion, but please consider reading the entire piece, as it is written for intelligent non-economists:

. . . the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.

The Keen analysis is not inconsistent either with ECRI's bullishness or with the longer-term bearishness of many who believe the U. S. stock market is in a "secular" bear market no matter what their guess for stock prices is for the next year.

Copyright (C) Long Lake LLC 2009

Double Bubble Does Not Double the Fun

I never expected to see this anytime soon, if ever (from a local real estate ad):

Let us open the door to your dreams with an FHA Mortgage Loan. . .

As little as 3.5% down
Up to $729,750 loans
96.5% loan-to-value
Entire down payment can be a gift
Up to 6% seller paid closing costs

To misquote Shakespeare,

Double bubble
Toil and trouble . . .

This is worse than the first time round, because the FHA is the Federal Government. For an inscrutable reason, the Federal Government is not saving its pennies for healthcare reform or simply to meet its trillions of dollars of obligations to current and future retirees, and certainly not to support industries that would export goods and services to foreigners, but instead is putting the taxpayer on the hook to support a particular level of home prices.

Trying to invest sanely in an insane world is not easy.

Think gold.

Copyright (C) Long Lake LLC 2009

The Baltic Dry Index and Cross-Currents

Even as the Economic Cycle Research Institute's Weekly Leading Index Growth Rate hits an all-time high (, a measure of price trends to move non-liquid goods internationally called the Baltic Dry Index on Friday hit a low level not seen since May 13. the BDI was at 4100 exactly 5 years ago and now is at 2356, having peaked in May 2008 at over 11,000.

It just may be that there is so much slack in the economy that substantial growth can occur in the setting of an overall sluggish, underperforming U. S. and global economy.

In the past, downtrends in the BDI that broke to new lows often presaged declines in long Treasury bond yields. Now that everyone "knows" that the economic downturn has ended, a growing economy can be viewed as at least temporarily bullish for T-bond prices, both as demand from banks for T-bonds grows and as counter-cyclical spending by the Government declines.

Copyright (C) Long Lake LLC 2009

Friday, September 18, 2009

Is Wells Unwell?

One of these days, banks will begin making an increased number of bad loans again (and some good ones). Presumably the non-change agents in Washington will be continuing the game of socializing the losses when they are large enough while privatizing all gains (save taxes and campaign contributions). For the nonce, as the damage from the last crop of bad loans and fraudulent practices continues to be counted, it's not clear how severe the damage from the infections has been or will prove to be. Courtesy of Credit Writedowns, here are excerpts from a post titled Wells Fargo's Commercial Portfolio is a ticking time bomb:

In order to sort through the disaster that is Wells Fargo’s (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books… and they are shocked with what they are seeing. Not only do the bank’s outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank.

Wachovia, which Wells purchased last fall as it teetered on the brink of collapse, was so desperate to increase revenue in the last few years of its existence that it underwrote loans with extremely shoddy standards and paid traders to take them off their books.

According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large. . .

Both Whitney and Paul Miller of FBR Capital Markets both have gone on-air and written in notes to clients that Wells’ loan loss reserves are not enough to handle coming impairments to residential loans. Miller has a recommended stock price of $15 while WFC is currently trading around $29.

When as good an analyst as Mr. Miller project a stock price that is half the current one, fuggedabout owning the stock. I recall that when Citi was, say, a $20 stock and Meredith Whitney projected (say) a $9 stock price, gasps were heard (at least mentally). Citi of course was headed really toward zero and even after its monster rally this year remains at about half that $9 target.

Where would the stock indices be if Wells became a $7.50 stock?

Copyright (C) Long Lake LLC 2009

Why Should the Public Buy When Insiders Will Not?

Courtesy of a "Tyler Durden" at Zero Hedge:

Bob Toll Once Again Joins Insiders In Unprecedented Stock Selling Spree

Submitted by Tyler Durden on 09/17/2009 12:08 -0500

At least the Bloomberg auto headline generator demonstrates humor:

( DJ ) 09/17 12:39PM *WSJ: Toll Brothers Chmn Robert Toll Continuing To Sell Stk In Co
( DJ ) 09/17 12:40PM *WSJ: Toll Brothers Chmn Sold 1.58M Shrs In Co Sept. 16

In other news, insider selling ($182 million) outpaces insider buying ($2 million) by 80-to-1 in the last week (data courtesy of FinViz).

DoctoRx here.

Coming out of a recession (or, depression), it is common to see substantial insider selling; the amount is not unusual. Essentially zero insider buying with the S&P 500 over 1000 is disconcerting, however. Really, all the stock market is doing is offering you yesterday's fashions. Today's shoppers buy during sales. Why should that apply to clothes or food but not to stocks?

Copyright (C) Long Lake LLC 2009

China Poisons More Children and Other People; the Reward: T-Bonds?

In 80 kids suffer lead poisoning in E China, China Daily reports that a battery factory has created what is now the 4th lead poisoning cluster in China.

Please also see Mish's current post, Pollution Creates "Cancer Villages" in China for another writeup and a link to a worthwhile Reuters article.

I avoid purchasing any goods made in China, both because I doubt their safety and on moral grounds.

The West has outsourced its pollution to the Chinese Communists, who pretend to be capitalists but for whom workers' rights are much of an afterthought than one would expect in a workers' paradise.

Copyright (C) Long Lake LLC 2009

Thursday, September 17, 2009

Bonds Versus Silver

Please see the chart of the ETF 'TLT', a proxy for the long T-bond, versus the ETF 'SLV', which tracks the price of silver. SLV began trading early in 2006. Bonds were in a bear market into Q3 the next year, and have been in a bear market the past 9 months; commodities were in a long-run bull market well into 2008 and again for almost a year.
Surprise! Bonds outperformed SLV simply on price. Add in a starting yield on TLT of (say) 4.5%, multiply by 3.5 years, and voila, you have massive bond outperformance of the bond over the commodity. This of course was achieved as well with less volatility.
It is GLD that clobbered the long bond, I would say because gold is a true monetary metal, whereas silver is at best a quasi-monetary metal.
Technically, SLV is about 30% above its 200-day moving average. It went higher than that in 2008, but this is a warning sign. TLT is "trying" to break through its downsloping 150-day moving average on the "strength" of a rising 50-day ma.
Fundamentally, employment continues to lag production; to the extent that transfer payments have been supporting the unemployed, so will a turn in the employment cycle not induce as much additional spending as would have occurred absent these transfer payments.
As the data show a clearly strengthening economy, with David Rosenberg admitting he has been too bearish on the economy this year, the yield gap between the 2-year and the 10-year Treasury issues has been narrowing. This is a negative for economic growth. The markets giveth, and one day they will taketh away.
Copyright (C) Long Lake LLC 2009

Sometimes Being a Contrarian on Bonds Means Agreeing with Goldman Sachs

From Mortgage Insider, with the quote within the post in bold:

Goldman sees 10-year yields falling to 3%
September 17th, 2009, 7:02 am · 1 Comment · posted by Mathew Padilla
In my last post, I noted the possibility mortgage rates could rise in January, if the Federal Reserve stops buying mortgage-backed securities as planned. But 30-year fixed mortgage rates are indirectly linked to 10-year Treasury notes, and Goldman Sachs sees their yield at “risk” of falling toward 3% amid low inflation. Here’s more from Bloomberg:

The U.S., the U.K. and Australia will be the “main beneficiaries” of a rally in longer-maturity government bonds, Francesco Garzarelli, chief interest-rate strategist in London at Goldman Sachs, wrote in a research report. Australian 10-year securities are the “cheapest” among markets tracked by Goldman and should trade at yields below 5 percent, he wrote.
“We see risk skewed in the direction of 10-year yields breaking towards their 200-day moving average of 3 percent, from their current 3.4 percent level,” Garzarelli and Michael Vaknin wrote in a separate note to clients. “The global bond premium remains elevated, although off the June highs, and there is plenty of excess liquidity in banks balance sheets which needs to be put to work.”

Inflation risks are subdued by high unemployment and under utilization of industrial capacity. But with a weak dollar, big government deficits, and the Fed spreading money around the inflation threat should not be ruled out. So 3% Treasury yield is probably less likely than Goldman suggests.

(End of Mortgage Insider's post)

DoctoRx here again. I present the above this way because no matter how bright Mr. Padilla, the blogger is, I submit that Goldman is well aware of all his points. Goldman is also well aware that yields have always bottomed after recessions end, often in conjunction with a stock market relapse. The contrarian in me would be alarmed if Mr. Padilla had argued that Goldman was not bullish enough on yields fall and instead had argued with David Rosenberg for a challenge of the December 2008 low around 2.1%. Now, the contrarian in me says that Padilla is with the majority that sees blue skies for the economy and lots of inflation pressure.

A 10-year yield bottom in the 3-3.1% range smells very reasonable to me.

Copyright (C) Long Lake LLC 2009

Wednesday, September 16, 2009

Legal Coke as the Bad Stuff reports that:

Soft-Drink Tax Could Pare Waistlines, Cover Health-Care Costs--

A penny-per-ounce tax on soda and other sugary drinks would raise about $150 billion over a decade while slimming Americans’ waistlines, according to a report from public health and economic researchers.

If sugar-sweetened beverages from makers including Coca- Cola Co. and PepsiCo Inc. were taxed at that rate, the U.S. could raise $14.9 billion in the first year, according to the article in the New England Journal of Medicine. The tax would also encourage people to cut back on soft drinks, cutting their daily calorie intake by at least 10 percent, the authors said.

The rate of obesity, a major cause of diabetes, stroke, and heart attacks, has more than doubled in the last 30 years, according to the U.S. Centers for Disease Control and Prevention. Soda and other sugary drinks have been linked to more calories eaten, leading to more pounds, according to background information in the report.

“If you take diseases related to diet, with obesity as the most visible, where do you start?” said Kelly Brownell, the report’s lead author and director of Yale University’s Rudd Center for Food Policy and Obesity. “We thought we’d start where the science is strongest. Liquid calories are a target because the body has trouble understanding those calories in a way that allows you to regulate body weight.”

This "target" is a no-brainer. The antediluvians at Coca-Cola somehow believe that taxing something equates to coercion:

Coca-Cola Chairman and Chief Executive Officer Muhtar Kent called the idea of a federal tax on soft drinks “outrageous” on Sept. 14 in response to proposals in Congress. “I have never seen it work where a government tells people what to eat and what to drink,” Kent said.

Sorry, Mr. Kent. You are mistaken. You "have seen it work". Taxing cigarettes reduces the rate of teenagers initiating smoking. Taxing gasoline reduces its usage. Something has to get taxed for the government to spend anything. Better it's the bad stuff such as supplemental sugar than the good stuff such as lawful, productive work effort.

Copyright (C) Long Lake LLC 2009


Per Rasmussen, some surprising polling data:

One week after President Obama’s speech to Congress, opposition to his health care reform plan has reached a new high of 55%. The latest Rasmussen Reports daily tracking poll shows that just 42% now support the plan, matching the low first reached in August.

A week ago, 44% supported the proposal and 53% were opposed.

Also surprising, Treasury bonds reversed intraday to move upwards in price, down in yield; the % moves in TLT (proxy for the long bond), TNX (the 10-year's yield), gold and the S&P 500 are essentially identical as I write, all moving about 1%.

Now that virtually all bears are hibernating, some remain uncowed. Information about a proprietary sentiment service passed on to me by one of the remaining bears, Paul Lamont of Lamont Trading Advisors, suggests that investors/speculators have digested the green shoots of recovery and then some.

It takes courage to be a full-fledged out-of-the-stock market bear when so many have at least partly capitulated, some saying not to fight the tape.

The take here remains in sympathy with Mr. Lamont's views. It would appear that this recent cycle is being driven as the last one was, with liberal doses of credit and unremitting financial speculation. The stock indices are only now perhaps surpassing their 2001-2 lows when adjusted for inflation. In this context, it is no surprise that gold continues to trudge along, up as much as the S&P 500 on the year (counting dividends) but with less volatility, but outperforming it on 1-year and longer time frames.

Given that the Government and the Fed are transferring unbelievable amounts of either borrowed or newly-printed money into the financial markets (and some directly into the real economy), it is no surprise that matters look better in the markets.

A credible skeptic of the big financial companies with an impressive track record of predicting many blow-ups over the past two years is Reggie Middleton at Suffice it to say that he feels that prices for the stocks of the largest complex financial companies and many smaller banking companies are in looney-tunes territory, and that the financial crisis is far from over.

One thing about the markets: even Yogi Berra's famous saying isn't quite correct. The markets are never over.

Copyright (C) Long Lake LLC 2009

Tuesday, September 15, 2009

Statistics and Theory Regarding the Economic Depression

The Commerce Dept. has released July's Manufacturing and Trade Inventories and Sales.

Seasonally adjusted, total business sales were down 17.8%; manufacturers sales were down 22.2%, retailers' sales were down9.5%; and merchant wholesalers' sales were down 19.8%.

The ratio of total business inventories to sales remained higher in 2009 than in 2008, at 1.36 vs. 1.27.

These numbers are unadjusted for price changes, so given that core inflation was up year on year by over 1%, perhaps the real numbers are slightly worse than the above.

This comparison is of course to a month that occurred in the 3rd quarter of recession.

On this anniversary day of the fall of Lehman Brothers, there remains a school of thought that the above depressionary (or "Great Recession"-ary) numbers are not the worst of matters. A minority of economists believe that the public has been fooled into thinking that things are better than they are and will not get as good as they have been led to believe, because of the hair of the dog strategy to bail out leveraged debtors and encourage more debt. Here
is a current post from the Australian economist Steve Keen, one of the dozen named economists (including Nouriel Roubini) to have "called" the Great (or Global) Financial Crisis in advance. Herewith, Dr. Keen's It's Hard Being a Bear (Part Four): Good Economic Theory:

Steve Keen’s Debtwatch

Published in September 15th, 2009

I delayed publishing this on the blog because I thought it was worth submitting it to a newspaper for first publication on the anniversary of the Lehman Brothers collapse. That has occurred: a slightly edited version of this post (for reasons only of length, I hasten to add!) is in today’s Sydney Morning Herald (page 4 of the print version), WA Today, and probably several other newspapers in the Fairfax chain.
You have just come from your annual medical checkup, where your doctor assures you that you are in robust health.
Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares “You have a serious tumour! It must be removed or you will die”.
You ignore him as you always have, and continue your merry way down the street. One day later, a stabbing pain suddenly cripples you, and you collapse to the pavement.
In agony, your call your doctor, who initially refuses to send an ambulance because he knows you are well.
When you lapse into a coma and stop talking mid-sentence, your doctor concludes that perhaps something is wrong, and sends an ambulance to take you to hospital.
Initially the doctor waits for you to revive spontaneously, because he still knows there’s nothing really wrong with you. But as your pulse starts to weaken, he reluctantly calls a retired doctor who had experience of a similar inexplicable malady in the distant past.
She prescribes massive doses of tranquilisers, painkillers, vitamins, and oxygen—all substances that had been removed from the medical panoply due to recent advances in medical theory. Reluctantly, your doctor follows his retired colleague’s advice—and miraculously, you start to revive.
After a year of expensive medical treatment, you return to the same robust health you displayed before your inexplicable illness. Triumphant, if somewhat puzzled, your doctor declares you well once more, and releases you from intensive care.
As you stride confidently away from the hospital, you have the misfortune to once again bump into the practitioner of alternative medicine.
“But they haven’t removed the tumour!”, he declares.

One shouldn’t have to spell out the details of such an analogy, but in times of widespread denial, one has to:
You are the economy;
The tumour is a massive accumulation of private debt;
Your doctor is Neoclassical Economics, and the retired colleague is a so-called “Keynesian” Economist — who doesn’t know it, since her medical textbooks were poorly written, but he’s actually following another economist called Paul Samuelson, not Keynes (and your doctor’s textbooks are so bad they don’t warrant discussion);
The alternative medicine practitioner follows Hyman Minsky’s “Financial Instability Hypothesis” (which is based on what Keynes actually did say—as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx);
The moment you hit the pavement is the beginning of the Subprime Crisis; The collapse of Lehman Brothers is the moment when you slip into a coma; and
The day the doctor takes you off life support and declares all is well … is next month.
The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky’s “Financial Instability Hypothesis” has been ignored by conventional economists for reasons that are both ideological and delusional. A small band of “Post-Keynesian” economists, of whom I am one, have kept this theory alive.
According to Minsky’s theory:
Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality—in the form of the Global Financial Crisis—slapped them in the face last year);
These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;
These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;
When they burst, asset prices collapse but the debt remains;
The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;
If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.
That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.
In 2008, they did it again—only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all—yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards can’t happen—because there’s almost no-one left who will willingly take on any more debt.
This time, there’s no re-leveraging way out. The tumour of debt has to be removed.

Obviously, there are people who are taking on debt in America, and governmental debt addition is exceeding the aggregate of private and business debt reduction. So, I'm much less sure than Dr. Keen of his conclusion, though obviously I agree with his final recommendation; I believe that we are in fact releveraging and that this could well lead to another "recovery". But in that case, it strikes me that recent trends of outperformance of gold and, over a cycle, outperformance of safe debt such as Treasuries is likely to continue until and unless stocks or cash provide greater current income.

Copyright (C) Long Lake LLC 2009

Monday, September 14, 2009

Statism Update

Despite having done little asserting of state power to reform the behavior of bank holding companies in a way that would make the "system" stabler, the Administration moves more deeply to involve the state in the economy in other ways. From the New York Times in U.S. Is Finding Its Role in Business Hard to Unwind :

When President Obama travels to Wall Street on Monday to speak from Federal Hall, where the founders once argued bitterly over how much the government should control the national economy, he is likely to cast himself as a “reluctant shareholder” in America’s biggest industries and financial institutions.

But one year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.

Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.

If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.

Government at all levels already controls a very large share of medical expenditures, even before Washington acts on health care. Add in military spending, education, transfer payments, and it becomes harder to see what is left of private enterprise. Restaurants, computers and television, toothpaste?

The U. S. has joined much of Europe in practicing a large and growing mix of corporatism and socialism: statism.

All financed with an ever-growing ratio of debt to real economic output.

Regardless of what one thinks of the prior points, I think that most people agree that the debt aspect is troublesome.

The Governmental solutions in the U. S. and the U. K. are not encouraging in that regard.

Copyright (C) Long Lake LLC 2009

Thoughts on Financial System Reform and American Leadership

Economic Donkeys, by former IMF chief economist Simon Johnson ("The Quiet Coup") and Peter Boone, head of the Effective Intervention charity, lays out a persuasive case for what should be done with Big Finance. Please read the entire piece. Here are excerpts:

Today, a year after global financial collapse and the ensuing tragedy for millions, our economic leaders are lining us up to suffer again (and again) through the same horrible experiences.

Today Lehman’s senior debt trades at a mere 10 cents on the dollar, suggesting its $600 billion in assets were a mirage. This outcome is even more startling when compared to senior debt at Kazakhstan’s defaulting large banks, where management is now accused of serious malfeasance, yet that debt trades at 20 cents on the dollar – twice the price of Lehman’s debt.

At the G20 meeting of finance ministers last week, political leaders united behind two key steps which they claim will “prevent another Lehman”: tighter controls on the pay of executives and more capital for banks. France and Germany blame the crisis on lax regulation in Anglo-Saxon markets and excessive pay packets that encourage irresponsible risk taking. The British and Americans counter that European banks have too much debt (i.e., in the jargon, are “overly leveraged”), and need to raise more capital. The final communiqué proposes to do both, and we will hear more of the same at the upcoming G20 heads of government summit in Pittsburgh. But, in reality, both sides want only minor adjustments that cannot solve the real problems posed by our financial system.

Tim Geithner, now US Treasury Secretary, is pushing for higher capital requirements for banks, i.e., they need to have more shareholder funds to protect against future losses. But he surely knows that two weeks prior to its bankruptcy, Lehman’s management reported they were well-capitalized, with a tier one capital ratio of 11% — roughly twice what the United States currently considers is needed for a well-capitalized bank, and much higher than the American side is proposing in private conversations.

The pre-crisis activities and portfolios of Barclays, Goldman Sachs, and other “survivors” of this crisis were only slightly different from Lehman Brothers or Bear Stearns, which failed. The “good” banks also securitized subprime assets, helped build the intricate web of IOUs between banks and insurance companies, and leveraged their balance sheets to enormous levels. The winners were not better, they were just smart enough to make sure someone else held the bad assets when the music stopped, and they were powerful enough to win generous bailout packages from their governments.

The danger we face is that, by bailing out these institutions and rewarding failed managers with new powerful positions, we have now created a much more dangerous financial system. The politically well-connected, knowing they will most likely do fine in the next crisis, is now highly incentivized to take even greater risk.

Once we admit this profound problem in our system, we can begin to think of the radical measures needed to solve it. There is no doubt these solutions will include much greater capital requirements, so that bank shareholders know that they face substantial losses if their ventures fail.

But, we also need to ensure that our regulators are not captured by the banks that they are meant to oversee. This means we need to put checks on financial donations to political parties, and we need to buttress our regulators with more intellectual firepower and financial resources, along with rules that ensure independence, in order to be sure they can act in the interests of the broader population.

We also need to close the revolving door, through which politicians and regulators leave office to earn their nest eggs in finance, and “financial experts” move directly from failing banks to designing bailout packages. The conflicts of interest are abundant and most dangerous.

Last week the UK’s chief financial regulator, Adair Turner, faced heavy criticism from the City, Chancellor Darling, Boris Johnson, and editorials in the Financial Times and Wall Street Journal. His main offense was daring to raise the issue of whether parts of our financial system have become socially dysfunctional, in an interview with Prospect Magazine. He called for greater capital requirements at banks, and he pondered how it would be possible for regulators to preserve the valuable parts of our financial system, while ensuring that regulation limited the harmful parts. These are eminently sensible questions which anyone with a public spirit should understand are critical policy issues today.

Sadly, these public rebukes to Lord Turner are a further indication that very few of our leaders are prepared to even discuss the real problem, let alone seek a sufficient solution.

DoctoRx here.

I believe that the United States and the world need personal leadership from President Obama on this issue.

While 30+ million U. S. citizens lack health insurance (millions of whom are eligible for programs such as Medicaid but have not joined) but by law do have access to emergency treatment is an important issue, the current (receding?) economic depression and financial crisis affects us all. Why the overwhelming emphasis on health insurance but not on a risky financial system that has been estimated to have cost $23.7 trillion in direct governmental expenditures and guarantees? (Estimate by Special Inspector General for TARP Barofsky)

Sadly, the President may be "distracted" from financial reform efforts by the effort to aid less than 10% of all Americans in obtaining health insurance. The job is indeed demanding, but he asked for it!

As the Johnson/Boone essay argues, the entire world needs enlightened American leadership to help build a stronger financial and banking system. It needed it from Barack Obama beginning the day he won the election. Nearly one year later, this leadership remains to too great a degree missing in action.

Copyright (C) Long Lake LLC 2009

Liking Gold Long-Term Better Than Stocks

Peter Brimelow of MarketWatch has a nice review of the technicals and some fundamentals for gold in Gold through $1000, but not in the clear? A quick summary: India's buying, certain chart patterns are very strong, but:

. . . UBS's U.K.-based Reade published Saturday a very negative assessment of the Commodity Futures Trading Commission's Commitments of Traders report, which came out late Friday evening his time.

Reade warned that the net speculative long position in gold had shot up to a record high as of Tuesday. He argued that previously such jumps have been followed by sharp (5% average) declines.

His conclusion: "We recommend that nimble investors take profits."

From a longer-term perspective, yours truly has spent time evaluating a variety of proprietary and public charts and data on gold.

One of several observations: The average price per ounce of gold rose 5.57% per year between 1939 and 1979. Simply to keep that same 40-year compounded price growth from 1979 to 2019 would cause gold to reach $2657 per ounce, about a 10% per year compounded growth from now.

Other comparisons also lead to a $2000++ price target a number of years out, including very simply a gold:DJIA ratio of 1:5 or so even around today's Dow level, and of course much more if the Dow merely rises 3% a year for several years. (This ratio was 1:1 briefly in 1980 and was close to that in 1932-3.)

No guarantees!

Re stocks, more and more it appears that people are happy again. A savvy friend from the New York metro area described the mood as too complacent for his taste. Not only has not much truly improved in the economy, but Nobel-winning economist Joseph Stiglitz is on the warpath again, as covered in Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman. (The banks are now even bigger and reform efforts have not occurred, among other points he makes.) I have criticized Dr. Stiglitz before, but generally agree with these comments of his.

More market seers who have made a number of correct calls do not like what they see. An accessible website that issues monthly reports is Lamont Trading Advisors; here is a link to his last public report (more detailed information is provided to subscribers). The report begins as follows:

Speculative Disaster
By Paul Lamont
August 31, 2009

On February 28th in Panic Selling Will Lead to a Sharp Bounce we stated, "investors should be positioning themselves for a countertrend rally…We do not expect that this is the ultimate low, merely a level that will support a multi-month bounce. This reflationary bounce will be much stronger (and possibly last longer) than any other rally we have seen since October 2007. Its purpose is to put to rest the widespread fear currently in the market . . . This temporary bottom will support a sharp bounce into the fall."

Mr. Lamont, a market historian, was one of those who called the top at the correct early time and for the correct reason, and also made a beautifully-timed call to short Treasuries at their low in yield about 9 months ago and then covered the shorts near the top in yields.

Regular readers of EBR know that one analogy made here is to the end of the 2001 recession but a final market bottom not occurring much later, yet with a number of stocks breaking out to new highs in 2002; all in the context of a reflationary effort bullish for gold but (for some reason) a continuation of the long-term drop in Treasury yields.

We are now half a year from the March stock market bottom. In the half-year leading from early September to that March bottom, far more damage was done to stocks than accrued to their benefit from March 2009 till now. In other words, the down-move had more force than the up-move. Compare that to the 1981-2 recession and the 1982-3 stock market advance. Anyone could see that blast-off had been achieved.

Currently, the average S&P 500 stock is selling for close to 50X dividends. In 1930, many stocks were selling for 11X dividends (9% yields). People should have a return both of capital and on capital. The modern pricing of stocks asks investors/speculators to ignore this. The reason is to benefit insiders within the companies and in the financial community.

Caution continues to be advised in all investments; speculative trades are especially out of favor at EBR given the opacity of markets nowadays in the setting of the greatest financial abuses perhaps in history.

Copyright (C) Long Lake LLC 2009

Sunday, September 13, 2009

EBR Reviews "The Fed" at Naked Capitalism

Anyone interested in my take on Martin Mayer's prescient 2001 book, "The Fed", may click HERE to link to a review of it I wrote for Naked Capitalism, or on the title: Guest Post: "The Fed has never believed in sunshine as a disinfectant".

Saturday, September 12, 2009

Remembering the Recent Real Crisis As Well As Imaginary Ones That Also Hold Lessons for Us

In Wall Street's New Gilded Age, the historian Niall Ferguson has written a review and critique of the events of the past year in finance. On first read, I find little with which to disagree. One of the things I like about Dr Ferguson is that I can't make out his politics other than that he appears to be for truth and justice (I can't say "and the American way" both because he's from the British Isles and because it's not clear anymore-if it ever way- what the "American way" is).

Near the end of the article, Ferguson lists health care reform as a reason that financial reform likely will not occur.

The DoctoRx critique is that the insistence on health care "reform" as a "distraction" from financial system reform is part and parcel of the essential nature of what this blog has called the Bushbama Continuity. The whole point of health care reform is insurance-an essential part of the FIRE economy.

The concept of the "FIRE" economy - - "Finance, Insurance, and Real Estate" - - was propounded years before the current Great Financial Crisis. All of these products involve manipulation of money and "promises, promises". The fire insurer promises to pay you if your house is devoured by a fire that you do not deliberately set. In the meantime, the company and its employees live off of your money. What if the insurer goes bust? You have neither the money you paid the insurer nor your house. Much better not to engage in risky behaviors such as smoking in bed or not tending to electrical problems than to have a burned house.

(Thus the emphasis as EBR upon healthy life-styles and appropriate, non-coercive government actions to encourage those as has been done to discourage cigarette smoking and drunk driving. The real reforms involve eating better, exercising more, not smoking, avoiding unnecessary stress, keeping the environment free of toxins, etc. Much more of medicine is damage control than politicians want to tell you.)

The essence of the FIRE economy is that it produces nothing, with the exception that the acronym takes liberties by having real estate included; the point was that modern real estate is an extension of finance given how little equity "owners" are (were until very recently) expected to have. It merely takes and redistributes, giving society back a cut of society's own action. It's like the Mob. It "protects" you, whether or not you want the protection.

For example, until a year ago, no Australian bank or depositor was burdened with the costs of deposit insurance. The banks were that prudent. (This changed due to risk of capital flight in the post-Lehman collapse panic.) Why has there been so little official debate about socializing the losses from the GFC and recharging the credit cards of Big Finance to do it again? The public basically "gets it" but is powerless.

In other words, the FIRE economy is getting a twofer from the Bushbama Continuity. First, the gamblers in Big Finance roll on, sucking massive real resources into their pockets (and sending some of their winnings to Swiss gold vaults), while pretending that things are good in the land because they have manipulated the "market" back to S&P 1000. Then the insurance companies get tens of millions of new customers. Forget the rhetoric that these companies are "villains". A President who loves Big Finance and Big Pharma does not hate Big Insurance.

All this support of the FIRE economy is being done on the backs of savers suffering near-zero interest rates on their deposits and borrowers who in effect are borrowing their own money back from the banksters who obtained it at little or no cost in a shell game from them through their governmental and financial institutions. All with the support from a President who in his initial speech to Congress asserted that this country was all about "credit".

No, Mr. President: it's all about productive work and saving, then using those savings to generate a virtuous cycle of improved productivity, higher living standards, and more savings that finance more real growth in the real economy, not the current parasitic FIRE economy. If one reads Dr. Ferguson's book, The Ascent of Money, one will learn that usury laws had as one justification the point that if, for example, a venture required a 10% interest rate to pencil in from a risk-reward standpoint, then it was simply too risky and should not receive financing. Something about a bird in the hand: real capital is valuable; it takes risks to obtain and preserve it. In the modern way, the powerful get infinite numbers of mulligans.

Nancy Pelosi mumbled some stuff about holding a new "Pecora Commission" several months ago. Ms. Pelosi is a rich woman whose private affairs include investing with the wildcatter, financier and loudmouth Boone Pickens in a "clean energy" venture.Are you holding your breath for explosive Congressional hearings? (I'm not.)

What next?

Perhaps the scriptwriters of Casablanca can provide context:

Strasser: Captain Renault, are you entirely certain which side you're on?

Renault: . . . I blow with the wind, and the prevailing wind happens to be from Vichy.

Strasser: And if it should change?

Renault: Surely the Reich doesn't admit that possibility?

Right now the prevailing wind is aiding the gamblers. Might it change?

From an investment standpoint, I can emulate Captain Renault and blow with the wind, but unfortunately the breeze is too selective for my taste. Stocks of plain-vanilla financial companies such as Northern Trust (NTRS) and UMB financial have miserable charts. They also carry high P/E's, relatively low dividend yields, and relatively high price-book ratios. They also can be somewhat analyzed as companies, unlike Citigroup or Wells Fargo. If "investors" (how many true investors remain?) are uninterested in these companies' stocks, then I say that it's only gamblers who are in Citigroup and Wells Fargo stock.

What next? Will the Victor Laszlos of the current situation somehow win out? And will it take the financial equivalent of the horrors of World War II for that to occur?

One more quote, from Star Trek II: The Wrath of Khan--

IN foreground; chillingly, Khan rises INTO SHOT by the main console. He is horribly burned, and it is clear that he is clinging to life.

KHAN No... Kirk. The game's not over.

Khan then sets the doomsday machine ("Genesis") to detonate and destroy the Enterprise. Khan dies of his wounds.

DoctoRx back on Earth. Just one year ago, Big Finance appeared to be a dying Khan that like him threatened us with mutual assured destruction if it were not saved. But unlike Kirk and Spock, who got the Enterprise "out of danger" while Khan's ship exploded harmlessly, the authorities rushed to Khan's aid and partnered with him. The elite got their Hollywood ending; the rest of us got the shaft.

We need a modern Pecora Commission; and we need to channel Kirk, Spock, and Victor Laszlo.

Remember who caused zero job growth in the last 10 years in America while China and India began to boom; remember whose gambling caused the Great Financial Crisis; and remember who's profiting from it.

(As Spock said to Dr. McCoy in The Wrath of Khan:)

"Remember . . ."

Copyright (C) Long Lake LLC 2009

More on the Obama Tire Tariff has a thorough discussion of some of the facts involved in the 35% tariff that Team O imposed upon tires made in China (see EBR post immediately below). Per the article:

"Four U.S. companies have operations in tire production in China and they account for two-thirds of exports to the U.S."

Let us hope that the U. S. has not shot itself in the foot with this action.

Copyright (C) Long Lake LLC 2009

Friday, September 11, 2009

Protectionism on the March?

The NYT is reporting that President Obama is making a change from the policies of his predecessor and imposing a significant tariff upon imported Chinese tires even though there has been no finding of "dumping". Click on U.S. Adds Punitive Tariffs on Chinese Tires for details.

Has the Administration "cleared" this with China?

There could be real, or faux, anger out of the Chinese.

Worth following.

Copyright (C) Long Lake LLC 2009

Multiple Views of the Economic Situation Continue to Lead to Gold and Treasuries

Courtesy of Zero Hedge:

Interview with Zhu Min, Bank of China Vice President:
Q. Is overconfidence the biggest risk to the recovery?
A. It's not only overconfidence, it's overmyopic: Wall Street feels the crisis never happened. It seems to me the financial crisis is not over yet, but it has stabilized from a cliff drop. That's one thing. The real economic crisis is just starting.

Contrast that comment with ECRI's news release (Reuters) today:

A weekly gauge of future U.S. economic growth hit a year-high in the latest week, sending its yearly growth rate to an all-time high that points to a more vigorous recovery than consensus has shown.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 125.4 in the week to Sept. 4 from a revised 124.6 the prior week, which was originally reported at 124.7.

It was the highest WLI reading since Sept. 5, 2008, when it stood at 126.0.

The "growth rate" of the index is probably less important over the long run than the actual level of the index (and the "coincident index", which measures how matters actually are rather than trying to predict the future), and those readings are well off their all-time highs.

And compare the above two with Ed Harrison's measured comments on Credit Writedowns today:

The problem I have with the recent history of growth in the United States, the United Kingdom, Spain and Ireland in particular is that the growth was underpinned by high debt accumulation and low savings. As debt is a mechanism through which we pull demand forward, the debt and consumption has meant we have been growing today at the expense of future growth.

Low quality growth can go on for a long time.

And here are some market-oriented comments from Jesse; others such as Art Cashin and market timers such as Bob Prechter and Paul J. Lamont tend to concur:

There is a strong correlation between this US equity rally and the Fed monetization of debt, which indicates a 'hot money' flow into US stocks but with thin volumes from a significant market bottom. This points to 'technical price trading' by the financial sector, also known was price manipulation, or trading stocks like commodities.

Continued heavy insider selling from those with the best forward view of the real economy is a clear sign of a top.

As regular EBR readers know, this blog has emphasized bottom-fishing in Treasuries, which had a strong week, with both trading and maintaining a core holding in Treasuries and Ginnie Maes suggested for many people; and gold. Gold as tracked by the GLD exchange-traded fund has now gone to an all-time high in its 50-day moving average.

Physical gold had a morning price fix on March 17, 2008 slightly above $1020/ounce. By this measure, it has not hit a new high. However, so far as I'm concerned, it's broken out. As with the Internet boom, every bull needs its new, higher bar to justify bringing (sucking?) in people who didn't buy in earlier. Right now, China is the story: it banned gold ownership until recently, and now is promoting physical gold ownership to its populace. The China gold story is reminiscent of the old, old saw promoted by U. S. shoe manufacturers: just think if every Chinese bought one pair of American shoes . . .

Gold and Treasury bonds: those are the 2 major structural bull markets that can be found. Perhaps oil. (I prefer gold.) An odd couple; but these are odd times.

Copyright (C) Long Lake LLC 2009

The Washington Post's Downbeat Day-After Assessment of the Status of Health Care Reform

In Details Still Lacking on Obama Proposal, the WaPo reporter Ceci Connolly, a non-member of any right-wing conspiracy, provides a downbeat assessment of The Day After the Speech:

One day after President Obama pitched his plan for comprehensive health-care reform to a joint session of Congress, administration officials struggled Thursday to detail how he would achieve his goal of extending coverage to tens of millions of uninsured Americans without increasing the deficit.

After declining for months to identify himself with the details of emerging legislation, the president for the first time Wednesday embraced a set of ideas as "my plan." But the White House released scant specifics on legislation advertised as including new taxes, changes in malpractice law, a new national high-risk insurance pool, a commission on eliminating Medicare fraud, and tax credits for individual consumers and small businesses that cannot afford insurance. . .

More troubling (Ed.: than the cool reception from Republicans, that is) for Obama were the mixed signals from Democrats who, absent any signs of significant Republican support, have increasingly become the focus of the president's lobbying effort. After a White House meeting with Obama, Sen. Herb Kohl (D-Wis.) voiced concerns that the most prominent health-care proposals fall short.

"We all understand that we want to move toward universal coverage, but I don't think we're focusing enough on costs," he said.

(Sen. Kohl is indeed of the Kohl's (NYSE "KSS") discount retail chain; the Kohl's know how to count.)

EBR has suggested that the taxpayer money wasted on bailouts of Big Finance is likely to mess up comprehensive reform. This article would appear to be consistent with that. Yet meaningful insurance reform could pass with strong bipartisan support; the President could claim victory and fight again in 2 years, one would hope with a stronger economy to allow a properly-funded program to be proposed that could achieve his goals.

A tragedy in all this is that Bob Woodward reported in "The Agenda" that Bill Clinton's first year as President ended with him rejecting the idea of proposing universal catastrophic health insurance coverage to be funded by simple "sin taxes" on cigarettes, alcohol and the like. This would have likely passed Congress overwhelmingly. Woodward reported that the President rejected the proposal as not grand enough; apparently Pres. Clinton wanted to be another FDR or LBJ; thus "Hillarycare" was born (or should I say "stillborn"). Where would we be now if that modest and needed catastrophic program had been enacted? Would Congress even have fallen to the Republicans in 1994?

An irony in all this is that the much-reviled G W Bush pushed through the first major expansion of Medicare in years, with a pharmacy benefit that actually worked operationally and came in under budget, with centrist support and both conservative and liberal opposition. At least on that specific campaign pledge, he was a promise-keeper and a uniter not a divider.

The current President, with complete control of Congress and with only talk radio and Fox News as significant sources of media opposition, likely feels the heavy burden of trying to do all he wants to do domestically while unemployment is poised to exceed 10%.

Money is only money; but health care is life and death for people, and to some degree life and death politically at least for the midterms a la Clinton 1994. Mr. Obama knows this; but will the money problems indeed be force majeure for comprehensive health care reform in 2009?

Copyright (C) Long Lake LLC 2009