Thursday, December 10, 2009

Goldman Says: "The Roots of the Economy Are Dead and Dry"

From James Pethokoukis: 12 reasons the job market is worse than you think . . .

#12 quotes from a column from what looks like a blog by a columnist for the Asia Times (online edition); Mr. Pethokoukis craftily makes you think it is from Goldman, Sachs (as did I in the title to this post):

12. It is tough to top Goldman’s analysis:

The level of un- and underemployment is so huge by historical standards as to make the usual sort of measurement questionable. With nearly 20% of the population unable to find proper work, there is a different sort of workforce. The vast majority of job creation in the US during the past two generations came from small businesses, which display only vaguely on the radar of government agencies as well as the bigger private surveys. The financial crisis killed small entrepreneurs as surely as Joseph Stalin killed the kulaks, and the roots of the economy are dead and dry.

Clicking on "Goldman" gets you to Dave Goldman's column, not GS commentary. Some is quite similar to the Pethokoukis column. But it's concise and worth a read.

Now, the Onion has, I believe, satirized the jobs situation by turning it on its head and pointing out how favorable the labor supply is for employers: lots of relatively cheap labor is available.

Indeed, almost all the financial oxygen has been administered to Big Finance, and today it is looking likely that Big Insurance is going to join Big Pharma in getting big benefits from a big health bill-- with large taxes coming for several years before the subsidies come in.

What are the investment consequences of all this?

1. A Potemkin economy, where IBM can show large profit gains even as sales almost literally collapse;

2. Massive speculation given that cash is perceived as trash;

3. Unpredictable but almost certain major trend changes.

What are these trend changes?

Think back to Volckerism/monetarism. The price of financial assets--claims on the real economy--dropped to very low levels relative to the real assets. Thus, stocks and bonds were set for many years of revaluation upwards as the real economy moved forward. This ended in farce in 1999-2000, where stocks reached historical overvaluation levels and gold provided a hugely negative return from its 1979-1980 peak adjusted for inflation and lack of dividends.

Gold then started up in 2001/2 but even this year traded below its 1980 peak price.

Treasury bonds continued on their bull run into last December and remain in their multi-decade descending channel (rates descending, prices of the bonds ascending). T-bills now yield assentially nothing. But the rest of the bond market, including munis, collapsed last year. This smells like the canary in the coal mine. While Treasuries soared in price, those bonds collapsed.
Treasuries could be next--some day or some decade. (Japan, anyone?)

What is the government doing about the economy?

Well, it's supporting the real estate economy--those troubled giants such as Fannie and Freddie.

But this is pushing on a string.

The Fed is "printing" money and the President is re-stimulating (stimulus #3).

The hiring/not-hiring index remains around zero, a level it first hit about a year ago.

So it would look as though the current economic cycle is similar to the 2001-7 cycle: the tragedy of the housing bubble now turned farce; even lower short-term interest rates reflecting a more severe economic downturn; continued support for Big Finance just as in Japan; continued war in Muslim countries draining our resources.

While stocks are more reasonably valued than in 2000, there are many fewer bargains now than in 2002/3. And the S&P 500 yields 2% or less, which is less than even 5-year T-notes and thus is a historically poor yield.

I suspect that one of these cycles, investors will see a 5-6% handle on dividends. This would imply a long period of stagnation for stock prices at best. Thus the major trend change of poor returns from common stocks may reasonably be expected to continue, though self-financing companies selling necessities may do quite well.

In the meantime, the businessman's risk here is that gold will not pull a Lehman and disappear from the financial world. In theory it could, but with all the money-printing that policy-makers have adopted to "support" the economy (remember, ZIRP exists to bail out Big Finance), and the strong chart, the guess here is that gold remains a very sensible asset class to own a significant amount of, with silver and platinum along with (probably) oil as ways to participate in what may be a False Recovery in a near zero short-term interest-rate world.

Copyright (C) Long Lake LLC 2009

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