Thursday, August 26, 2010

Statism on the March Gives Bears the Fundamental Upper Hand

Let's start with an ominous longer-term signal that is occurring in the stock market. The simple moving averages (sma) are the main topic. These have the advantage of smoothing out very short term moves. This discussion relates to the Standard & Poor's 500 index; the DJIA is similar.

The 50 day and 150 day sma have been downsloping with the current average below both, the the 50 day in the "proper" bear market configuration of being below the 150 and 200 day sma.

Reflecting prior strength, the 150 day sma has been above (higher than) the 200 day. This is about to change, absent an amazing move upward in the spot index. Assuming that this happens, the S&P 500 will be in the same configuration is was in throughout the big bear market of 2008-9. The 50, 150 and 200 day sma will then all be downsloping, the spot average will be below all of them (any bounces during the bear were contained by the 200 day sma until spring 2009 (green shoots rally), and the shorter-term the average, the lower it is. In other words, 50 below 150 below 200.

The last time this began: around or about Jan. 14, 2008. That was also a time of great uncertainty about the economy. Mainstream economists had not called even a mild recession, Bear Stearns stock was healthy, and so on.

Meanwhile, the Consumer Metrics Institute is showing some measures of growth as being in the bottom 2nd percentile of all quarters in the last 63 years.

From a stock market standpoint, it may not matter much if there is a new recession, assuming the recent one actually ended. The mild 2001 recession was followed by a new bear market low in 2002, though the economy was growing. The strong recovery after the 1973-5 recession was followed by a bear market in 1977, though the economy had no recession till 1980.

On the other hand, the major 1958 global recession was followed by a double dip recession in 1960 (which undoubtedly elected John Kennedy), but the stock market hardly noticed. The DJIA hit a record in 1955 and yearly through 1959, and by winter 1961 was setting new records again.

From a sentiment standpoint, the media has been confusing people. The White House began with the pre-election spin just a couple of months ago, touting the summer of recovery. The Veep allowed as to how the economy might just show 250-500,000 monthly job gains. What happened? A near-record rally in Treasuries and a surfeit of gloom.

Sentiment measures suggest that even if lower lows await, a stock market bounce would be no surprise even to the bears.

But Washington, meaning the Fed and the Feds, continue to assert their power in statist, unimaginative ways. They are like the 1962 Mets, of whom Casey Stengel said, "Can't anybody here play this game?". The only obvious reason the dollar hasn't collapsed again is that hardly any other major country is doing better. The money-printing is widespread globally, and the foolish borrowing and lending paradigm as a way to create a wealthier society is becoming more easy for the public to see has been little but a way to transfer wealth to financial types. These financial types now own a record amount of real estate in the U. S., having offered too-good-to-be-true deals to too many borrowers.

Regardless of the arguments of the redoubtable David Rosenberg and Gary Shilling, the history of the U. S. with the conditions of sub-3% 10-year T-notes and Fed debt monetization suggests that price increases lie ahead and may well exceed the paltry coupon of the bonds. The modern example of Japan as to why U. S. bonds are still on the bargain counter must take note that the average Japanese female is only producing a little over 1 child on average, whereas demographers say that 2.1 children per woman is needed just to keep the population stable. Plus, Japan is not spending a ton of money fighting "terrorists" all over the world.

I don't know the future of interest rates especially given the interest of the authorities to keep them artificially low for an extended period, but by definition the U. S. is not Japan. Yes, if our population is slated to decline massively and the U. S. stops chasing Afghans around their own country, I can certainly see price stability ahead despite a massive money-printing program by the Fed, but I am thoroughly unpersuaded that the Japan analogy is valid here.

With the U. S. in an all war, all the time (now it's Yemen!) posture draining lots and lots of money; with the Fed printing excessively; with a President who one poll showed was viewed by a majority of the public as being a socialist (he's certainly a statist); and with an economy that lacks a new New Thing to bring new efficiencies and new excitement to the plate; we now have a trifecta. Stocks as a whole remain seriously overvalued on both an asset and a smoothed earnings basis, cash is hugely undercompensated; and Treasuries have marvelous momentum but no one seriously expects them ever to be paid back rather than rolled over ad infinitum.

Maybe munis, certain high quality stock, gold, and perhaps oil given loose monetary and fiscal policies in the U. S., are not overvalued. The same goes for the currencies of the few true AAA-rated sovereigns, which according to independent experts do not include the U. S. but do include some Scandinavian countries, Switzerland, Australia and New Zealand, and perhaps Canada. (None of these are fighting any wars, though I forget if Australia or Canada still has any troops in Afghanistan.)

I am sticking with a very conservative strategy, owning only the highest quality assets and avoiding "bargains" such as any stock with a failing chart.

This blog has always called the stimulus bill a "stimulus" bill. Even Christina Romer's own research showed that tax cuts provide a positive return on foregone governmental income, whereas government spending has a multiplier effect of at most one and probably less than one.

We are simply seeing the typical results of a credit collapse. Central banks pump money into the financial system, leading stock markets to rise and now we are seeing the bond market rise as well (meaning rates are falling). The real economy can't use much of this credit money, though, which is why I said above that it is not all that important exactly when the next recession occurs (again, assuming the prior one actually ended).

Business has government's and the central bank's boot on its throat due to misguided policies that have never worked. Meanwhile the GAO has this to say about the U. S. Government last month:

During its audit of the fiscal year 2009 CFS, GAO identified continuing and new control deficiencies in the federal government’s processes used to prepare the CFS. The control deficiencies GAO identified involved

enhancing policies and procedures for identifying and analyzing federal entities’ reported restatements and changes in accounting principles;

establishing and documenting policies and procedures for disclosing significant accounting policies and related party transactions;

establishing and documenting procedures to assure the accuracy of Treasury staff’s work in three areas: (1) social insurance, (2) legal contingencies, and (3) analytical procedures; and

various other control deficiencies identified in previous years’ audits (see
app. I for related recommendations).

These control deficiencies contribute to material weaknesses in internal control over the federal government’s ability to (1) adequately account for and reconcile intragovernmental activity and balances between federal entities; (2) ensure that the accrual-based consolidated financial statements were consistent with the underlying audited entities’ financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles; and (3) identify and either resolve or explain material differences between components of the budget deficit reported in Treasury’s records, which are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal entities’ financial statements and underlying financial information and records. As a result of these and other material weaknesses, the federal government did not have effective internal control over financial reporting.

Of the 44 open recommendations GAO reported in April 2009, 2 were closed and 42 remained open as of February 19, 2010, the date of GAO’s report on its audit of the fiscal year 2009 CFS. GAO will continue to monitor the status of corrective actions taken to address the 10 new recommendations as well as the 42 open recommendations from prior years (see app. I).

A government that can't get its own financial house in order has no moral right or practical ability to try to control anything as complicated as the American economy.

Meanwhile an unreformed Republican party is likely to share the mismanagement of Washington in January.

For investors and increasingly for small businesspeople and much of the general working population, this is a nowhere to run, nowhere to hide economy. Caveat everyone and everything right now.

Copyright (C) Long Lake LLC 2010

No comments:

Post a Comment