Thursday, January 21, 2010

Bad Things Happening; Better Things Coming?

Barack Obama has been punched in the face several times lately. His poll numbers are following the labor force participation rate downward, as everyone living in the real world knows that the real national economy is poor, whether or not inventory restocking and other pro-cyclical forces mean that the depression aka Great Recession is technically over. He has overpromised and underdelivered. If he were a stock, he might be a contrarian "buy", at least for a bounce. The truth is that his poll numbers are tracking the economy and are their path is roughly superimposable over the track that Ronald Reagan's poll numbers took during his first year, when the economy also truly stank. It's the economy, stupid and all that.

The good news is that the president is signaling flexibility given the national mood. Even better is the following, as reported by in Obama to Propose New Rules on Banks’ Size, Trading:

President Barack Obama will offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking, an administration official said.

Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House. The proposals will be part of an overhaul of regulations and will specifically address firms’ proprietary trading, the official said yesterday on the condition of anonymity.

It would be great news if (it would appear) that Mr. Volcker has growing influence within the White House.

Up Volcker means down Summers/Geithner.

We shall see whether the Bushbama Continuity on favoring Big Finance over the people is, at least at the margins, evolving away from the extreme pro-Big Finance stand that the Establishment imposed on the country and that has strangled the real economy for about the past 2 years.

A return to more centrist politics and toward sensible regulation of the financial parasites--which will free them to get back to where they once belonged (facilitators of the real economy rather than pretenders)--will have short-term benefits to the national mood and the economy.

In that context, yesterday's sell-off in stocks means little. The downside action in precious metals relates to a more fundamental problem, which is the possible cooling off of the wild economic action in China, and thus a possible correction in commodities such as platinum and copper. This correction would, however, be good for many companies that EBR has commented favorably on. Two-way markets can be fun in normal or quasi-normal times.

The pubic is depressed over the economy and is spending minimally per numerous polls; there are numerous fundamental negatives in the economy. Ten years ago the public was ebullient; there were no obvious negatives in the economy. No one can time it, and I think we remain in a secular bear market for stocks and the economy, but if this secular bear (if that is indeed what it is) is similar to the inflationary bear of the 1970s, then we must remember that there were huge investment opportunities for those who went with the trend for periods of time but did not buy and hold. The classic time to truly beware of owning risky assets is when times are too good for too long and the Fed is making money tighter. Times are dangerous now and there is lots of downside risk all over the place. But one precondition of good investment returns is present: the fundamentals appear to stink. What is lacking is low prices. Whether these low prices occur in nominal terms or in real terms (adjusted for price inflation that may or may not be coming soon) is one of the key questions of the day.

This remains one of the few times in my 30 years in the investment field when my best idea is diversification across many asset classes. Quality is the watchword.

Copyright (C) Long Lake LLC 2010

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