A Case of Scurvy and Financial Vitamin C

One of the benefits of being a certain age is having had several different experiences while still being young enough to remember them. With that intro, I'd like to recount a diagnostic coup I observed and relate it to the financial matters mentioned in the title.

When I was an intern rotating through the Bronx Veterans Administration Hospital, I performed a history and physical exam on a newly admitted patient. He was clearly unwell, but the nature of his diagnosis was obscure in the extreme. I discussed the case with my senior resident, still a doctor in training but a year or two above me. I was puzzled; he was quite interested.

The next morning, the resident had quite the self-satisfied look. He announced that the patient had scurvy (a disease due to severe deficiency of vitamin C). Had the resident ever seen anyone with scurvy before? No. How did he know? He had correlated the symptoms with the patient's dietary habits. The patient basically lived on sardines. There was no vitamin C in sardines.
The patient was discharged on vitamin C and we all learned that there is no substitute for careful, case-by-case evaluations along with encyclopedic knowledge and an open mind.

That said, I wanted to correlated the above example with a post from Mish today titled Hyperinflation Nonsense in Multiple Places. This lengthy post is of special interest because not only is Mish one of my very favorite bloggers, but he approvingly quotes Jeff Harding of The Daily Capitalist from last fall on the prospects for hyperinflation in the U. S. As regular readers may know, I have agreed with Jeff about stagflation being the likely outcome for the foreseeable future.

I also agree with Mish that hyperinflation is not imminent, but I am mindful of the case of scurvy. Does the U. S. have the financial habits that can lead to hyperinflation, just as my patient had the dietary habits that led to the rare case of scurvy in New York City?

In a word, yes. Central bank monetization of large amounts of Federal spending is the key.
The politics of the day are in favor of this policy. The Democrats refused to raise taxes when, for two years, they controlled both Congress and the White House. Then they were all too happy to keep taxes as they were after the midterms, at least till the next election. Now they are happy to complain about the Republicans' position on Medicare while not saying how they will fund it. Presumably money will arrive from the tooth fairy AKA the Federal Reserve or a coalition of the unwilling and coerced. Net-net, my take is that the irresponsible fiscal and monetary policies that were followed when Bush the second was president have simply gotten worse in the Age of Obama.

So if the prediction of a significant global industrial downturn starting no later than summer is correct, there will be a cyclical factor working to restrain prices. But the trend in consumer prices is up, and with returns on bank deposits yielding much less than the rate of consumer price inflation, the hoarding mentality that can quickly lead to high and accelerating rates of inflation may take hold rapidly. Most Americans have never experienced anything approaching hyperinflation and are not as savvy as the brilliant doctor who sniffed out scurvy. In practice, all this continues to argue for possession of a significant and permanent holding of gold. Had the patient simply eaten some fruit or taken a vitamin pill, he would have had better health status. Similarly, gold and only gold is the classic way to hold long-term purchasing power when a government goes out of fiscal control, as the government of the United States may do sooner rather than later. There is no financial VA Hospital you can go to should the rate of loss of purchasing power vs. money rates paid by banks get worse. There may only be the Internet, depending on the point of view of any financial advisor(s) you may have.

I don't know anything about future choices that the authorities will make. Whether the U. S. goes in and out of deflation, as Mish predicts, is above my pay grade. All I can do is ask whether the U. S. is as deficient in financial prudence as my scurrilous patient was before he got sick enough to come to medical attention. Thus, my equivalent of financial vitamin C is gold.

BTW, in follow-up of my recent posts, I reversed trading course this AM and covered most of my shorts and also added more longs. The reason was that too many headlines were gloomy, and bearishness does not love company.

Copyright (C) Long Lake LLC 2011

Commodities: Too Popular? Sometimes One Can Take Contrarian Thinking too Far

Mish raises a familiar objection to commodities and by extension, contrarian investments, and raises a question of high importance at EBR is his post, Commodities Kiss of Death? Is the Reflation Trade Over?

He points to the interest of the California State Teachers' Retirement System in putting a very small part of its funds into commodities and points to that as contrarian evidence that a further fall is underway:

Pension plans are looking to hop on the commodity bandwagon now after copper prices have quadrupled in the past eight years, and crude oil has more than doubled. . .

China is on the verge of imploding (or blowing up attempting to prevent a implosion) yet pension plans and other misguided souls are plowing into China and commodities. These are contrarian indicators.

Another take is that IF there were a cost-effective way to own commodities (not so easy to achieve), the cost of creating refined metals and raw foods (etc.) is actually a reasonable way to tie into the real world. In contrast, the true bubble is in the stock market. The idea that ownership of the industrial company Deere & Co. is in any way a good way to obtain a correlation to the inflation/deflation possibilities of raw materials pricing is just plain silly.

In the same column, Mish admits to being a bull, after all, on commodities:

Yet, I am a also believer in peak oil and commodities for the long haul. However, for the short-to-intermediate term I am sticking with my target for the price of crude to fall back to $55.

Since pension funds are only for the long haul, it makes little sense to, on the one hand, criticize their interest in diversifying their exposure to add commodities and on the other hand express bullishness about the investment class on the time frame which pension funds are required to consider.

Over the past century and perhaps through the centuries, the regions of the world that have had advancing prosperity have done so by using physical raw materials to create wealth by adding human ingenuity. Thus, commodities' returns have not kept pace with theoretical stock market returns in the U. S. or most of Western Europe. Whether that relationship continues is, of course, unknown. What is nearly certain, however, is that the concept of exposure to an underlying necessity of life is a reasonable thing for an investor to do, especially a conservative organization such as a pension fund. The real challenge is to find an appropriate investment vehicle, given the ETFs such as USO (oil) and DBA (ag) that have such high operating costs that they are guaranteed to underperform their benchmarks.

Copyright (C) Long Lake LLC 2010

Is ECRI's Optimism Sign of an Impending Market Top?

The top-notch economic forecasters at the Economic Cycle Research Institute are human, as was discussed recently by Mish; to read his extensive and often-incisive comments, click HERE. ECRI's caution about the economy all through 2008, and their increasing concern beginning on or about early September, was useful to my investing. However, how useful is ECRI at extremes?

Here are some comments from ECRI in late February 2009 in WLI Remains Near Cyclical Low, as the bear market was within days of ending (though not at its bottom):

The annualized growth rate inched up to negative 24.0 percent from negative 24.5 percent. "While the WLI rose for the first time in six weeks, it still remains near its cyclical low," said Melinda Hubman, research associate at ECRI. "An economic recovery is not at hand," Hubman added. The weekly index rose due to lower interest rates and stronger housing activity, with the gauge partly offset by a decline in stock prices, Hubman said.

OK. "An economic recovery is not at hand." Implicit message to investors: don't buy. And, of course, said recovery was not "at hand". No criticism from yours truly. But if you bought then and help the SPY, you'd be up about 50% as of today. Similarly, if you bought in mid-late October and November 2008 based on plunging WLI and WLI growth rate and held till today, you would be up. You would have been down a lot temporarily, and all this is with perfect hindsight.

And, ECRI has pounded the table on the economy, and you can actually chart the upmove in its WLI growth rate and correlate it with the stock averages.

Where are we today?

ECRI says: US Recovery Poised to Trounce Any Obstacle
October 16, 2009
(Reuters) - A weekly index of future U.S.economic growth edged down in the latest week, but its yearly growth rate rose to a new record high that further suggests signs of a tapering recession, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 128.1 in the week to Oct. 9 from an upwardly revised 129.1 the previous week, which was originally reported as 128.3.

But the index's yearly growth rate climbed to a fresh all-time high of 27.9 percent from 27.4 percent the prior week, which was revised higher from an original 26.1 percent.

The group's data has posted annualized economic growth at record high rates since September. Earlier this year, the growth rate was struggling to dig itself out of deeply negative territory.

"Such a pronounced, pervasive and persistent upswing in the WLI and its components assures that this economic recovery can overcome any obstacles in the months ahead," said ECRI Managing Director Lakshman Achuthan.

The report's yearly growth gains are in step with U.S. industrial production figures released earlier on Friday that suggest the third quarter closed out with surprisingly strong economic growth.

"IP numbers are very much in line with our April forecast that recession would end over the summer," said Achuthan, who has said chances of a double-dip recession are highly unlikely.

Meanwhile, the VIX collapsed under 21 today briefly, closing down 1.34% while the SPY closed down nearly 1%. As these indices normally move together, this is another negative divergence; another finger on the scale on the bear side.

Given that the certainty that the U. S. economy is mature, then exactly what the economy does for a quarter or two has little meaning in the context of stocks being valued at (say) 20 times their yearly earnings and 50 times their dividends, or 10-30 year bonds.

The public has shown extremes of optimism on standard measures for months, and this is a common phenomenon early in bull markets; and it is also standard for insiders to avoid buying. After all, they get nervous in depressions and bear markets, and they may not be rich with cash after the bear market. These facts are why certain seers have been short the market and wrong for months.

Meanwhile, stores are closing in the wealthy area in which I am renting a cottage, and the mid-range housing market is above the Fannie/Freddie conforming loan limit and remains weak. In the real world, I know almost no one who really cares about the stock market anymore as anything but a game, and the general feeling is "God Bless Bernanke" for saving the financial system.

The collapse in the VIX this month suggests that at the least, matters have moved beyond the successful speculative rally stage into the complacency stage. There are lots of profits to be taken in stocks that have gone up 3-7 times in 7 months.

The good news is that value stocks such as WMT, MCD, GSK and others are seeing rising prices.

The averages may or may not move much, but watch for rotation into the quality names that have seen little or no bull market since March. And

Copyright (C) Long Lake LLC 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);
and
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

Singing the Post-Labor Day Blues

Please click on the image shown for greater detail.

The basic image is one that Calculated Risk creates periodically. One can see that to date, the current/recent "banana" is the single worst unemployment event in the post-WW II era. The discontinuous magenta line was added by Mike (Mish) Shedlock in today's post on whether this is/was a "depression" (a word scrubbed after the Great D).

EBR presents this because Mish has been projecting unemployment rates when the Fed and ECRI were acknowledging the existence of a mild recession. Even after the Lehman collapse, Mish's unemployment rate projections have been more accurate than that of the Fed, such as those the Fed used in its "stress tests" of bank holding companies.

If he's correct again, we have another 2 years to go to get back to where we are now; but of course the labor force is expanding each year, so a true reversion toward a healthy economy would be some ways off. The only way to get "organic" inflation out of this sort of projection is either to literally drop bills from helicopters; command and control stuff such as massive Government spending much greater than from the "stimulus" package; or a boom elsewhere in the world.

In that vein, David Rosenberg cuts to the chase in his last Breakfast with Dave for a week:

M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure — off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend — contracting at an epic 9% annualized pace over the past four weeks.

So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

(Emphasis added)

Dr. Rosenberg continues:

In case you are wondering how it is that the housing market has suddenly sprung back, it’s because the era of free money is back, courtesy of the benevolent U.S. government. The FHA’s share of the mortgage market has ballooned from a residual 3.0% in 2006 to 23.0% currently as the government moves in to replace the private subprime lending industry. So now we are back to the thought process that insuring mortgages with a 3.5% down payment is a good thing for the economy — little surprise that the FHA delinquency rate has soared to nearly 8.0% from 5.4% a year ago, and the taxpayer is on the hook. How is it that there is no public outrage for a government policy of giving another shot of scotch to the drunken sailor is totally beyond our comprehension.

Finally, just in case you're not depressed enough, here is Bruce Krasting from Zero Hedge on the Social Security Trust Fund (SSTF) in SSTF Shocker - $6B August Deficit:

Based on the past twelve months performance I now estimate that the Net Present Value of future committed liabilities is in deficit by $7 trillion. To plug this sized hole would require a significant increase in payroll taxes. That isn’t going to happen. Raising payroll taxes by 4% would kill the economy. No White House economist would advocate that. The alternative of cutting benefits would be very unpopular. There are currently 52 million beneficiaries of the system. A lot of them vote. To shore up the fund would require across the board cuts greater than 20%. While that may not be a hardship for some it most certainly will be for others. The only way to address this inequity will be a means test.

The August deficit reconfirms that the Funds foundations are wobbly. Some observations:

-In August the US Treasury had to borrow an additional $6 billion in the public market to finance the cash shortfall of Social Security. We already have too much paper for sale to fund the budget deficit. SS added to the supply problem last month.

-The 2037 Future Value of the August deficit is -$17b based on a 4% return. What this means is that there will be a very significant revision in the 2037 drop-dead date. Based on current trends the go broke date is closer to 2025.

-This is not just a bad month. The net decline in the Funds assets for June/July/August comes to $7 billion. In 08 that period was in surplus by $5 billion, In 07 it was +$7b and in 06 it was +$13b.

-The decline in payrolls is hurting the Funds’ top line. January-July 2009 payroll tax receipts were down from 2008 by $5 billion or 1%. While the monthly declines in payrolls will fall over the next six months it is unlikely that there will be much net increase either. It will be a very long time before we see monthly gains of 250k. Without that kind of growth the Fund will quickly fall into annual deficits.

-The expense side is exploding. The September monthly benefits cost will be $56.6b up from $51.5 in 2008, a 10% increase.

-In 2007 the SSTF produced a surplus of $191b that it invested in the US economy. This year it will be closer to $100b. Based on the current trends that surplus will be gone by 2012. Six years earlier than the Trustees forecast in June of this year.

SS is the mother of all systemic risks. Even the debate on this topic brings risk. It will expose an additional $7trillion unfunded liability. Another reason for holders of dollars to worry.

There is no fix to this. Raising taxes is a dead end. Age warfare is a possible social consequence. The really bad news is that no one will touch this for another year. By then it might be too late.

Your humble blogger has no interest in predicting the course of the U. S. dollar vs. other fiat currencies. The stock market would be very attractive to one such as me who agrees with John Mauldin about a "muddle-through" outlook, except that it appears that the lower the dividend yield, the better the performance: too much like 1999 to suit me. "Cash is trash" but reasonably secure; 5-10 year Treasuries make sense; well-chosen Ginnie Maes make even more sense (discuss with an expert if you don't understand mortgage-backed securities as investments); nothing has really changed in the comments made here all year regarding gold.

Gold has endured as a store of value for, say, 5000 years. Much as I love democracy, I don't think that government allocates capital as well as private enterprise; and governments have printing presses that private borrowers and lenders lack.

The more the stock and credit markets "normalize" a la 2002-4 on a sea of Fed and Federal credit creation, the more gold has pushed upward in price. Other than price volatility, gold reminds me of the NASDAQ in the 1990s before it got truly crazy: the Force was with it.

There are numerous ways to invest in gold. These include physical ownership of bars or coins; exchange-traded funds (see, GLD and GTU); custodial accounts (see, Bullionvault and Goldmoney). In a crazy bull market for gold, gold stocks should be the best performers, but look at the performance of Newmont Mining the last four years: unchanged in price while gold bullion has doubled.

Here is a quote attributed to Mark Twain, namely that a mine is "a hole in the ground owned by a liar".

In the real world, a gold bar in the hand (or vault) should be worth many in the ground.

Copyright (C) Long Lake LLC 2009

The contents herein do not constitute investment advice. Neither the author nor the site is an investment adviser.

Big Finance to Shrink as Creative Destruction Moves Along?

There happen to be some very good reads today at two widely-read blogs.

At Naked Capitalism, Yves Smith comments on the possibility that there may be some hope for a relative shrinkage of the role of finance in the workings of the advanced economies; click here for the post.

Mish has a complex writeup with a number of links to his and other material with the theme and title of Creative Destruction.

Back at Naked Capitalism, Yves linked to a WSJ article I brought to her attention, click here for NC's links today; eighth link from the top. Because this is a subscription only WSJ article, I'd like to add a link to a more thorough abstraction from this, as published at the Planet Gore blog:

The Looming Biofuel Bust

The biofuels revolution that promised to reduce America's dependence on foreign oil is fizzling out.
Two-thirds of U.S. biodiesel production capacity now sits unused, reports the National Biodiesel Board. Biodiesel, a crucial part of government efforts to develop alternative fuels for trucks and factories, has been hit hard by the recession and falling oil prices.
The global credit crisis, a glut of capacity, lower oil prices and delayed government rules changes on fuel mixes are threatening the viability of two of the three main biofuel sectors — biodiesel and next-generation fuels derived from feedstocks other than food. . .

Producers and investors now are pushing for swift and aggressive government help. Biodiesel makers are lobbying to kick-start the delayed blending mandates immediately and extend biodiesel tax credits, which expire in December.
On Aug. 7 more than two dozen U.S. senators wrote to President Barack Obama to warn that "numerous bankruptcies loom" in the biodiesel sector. "If this situation is not addressed immediately, the domestic biodiesel industry expects to lose 29,000 jobs in 2009 alone," the senators wrote, using estimates by the National Biodiesel Board.
Mr. Obama, who supported biofuels throughout his campaign, is working to roll out grants and loan guarantees for bio-refineries and green fuel projects, said Heather Zichal, a White House energy adviser. The pace of the disbursements should speed up this fall, administration officials say.

I have not followed the biofuels stuff much at all, but with oil around $70 barrel, the idea that oil prices are so far below projections that this stuff is now uneconomic is loony. One wonders if this was just another corporate scam.

It's one thing when one group of people gain an advantage over another in the process of developing useful goods, services, capital investment and the like. From an overall standpoint, spending real resources to build irrelevant things is pure waste. In the Bible, the seven lean years probably came from locusts and weather problems. Nowadays it's more likely government-caused problems or too much in the way of "animal spirits" amongst businesspeople.

Copyright (C) Long Lake LLC

Energy Glut?

Just as I hear from Nashville, TN and Madison, WI that they are having the coolest summer in over a century, the media report evidence of oil over-supply and decreases in energy demand.

1. From the WSJ today: OPEC Braces for Decline in Crude Prices

The Organization of Petroleum Exporting Countries is bracing for a sharp drop in crude prices in coming weeks, as huge reserves of oil-based fuels continue to pile up and the space to store them runs out.

Stockpiles of fuels such as diesel and heating oil are at a 24-year high in the U.S. because of tepid demand from industries and consumers hammered by the global economic downturn. . .

The enormous supplies are pushing available storage capacity to its limit, with some traders reportedly resorting to barges and tankers at sea.

"Inventories are at just ridiculously high levels," said Kevin Rooney, chief executive of the Oil Heat Institute of Long Island, a trade group for heating-oil wholesalers. "I would imagine that just about every available barrel of storage is full."

2. From Bloomberg.com, July 16: Verleger Sees $20 Oil This Year on 'Devastating' Glut

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”

3. Mish had an interesting post yesterday titled Electrical Demand Plunges in Ontario, Canada; US Demand Expected to Drop 2%.

You will likely find it illuminating.

GENERAL COMMENTS:

The 2-year chart of Exxon Mobil Corp. stock is shown. There is no hint of rampant strength. With this price decline and regular dividend increases, the yield is only 2.4%.

Of course, who's to know, but as this blog has documented, economic weakness continues whether or not the "Great Recession" has finally ended.

Forget oil in the twenties: if prices were to merely break
forty on the downside, I would expect XOM's price to fall a good deal more and Treasury prices to move strongly upward (that is, yields would drop in that scenario).

Food for thought.

Copyright (C) Long Lake LLC 2009

Here are several economic-financial related charts and other data presentations. The first shows the current unemployment rate as compared to the (recently-derived) "baseline" case and "more adverse" (low probability event, allegedly, according to the Fed) for the national unemployment rate.

Whoops!

Here's another example of forecasters getting it very wrong, and recently, from the Philadelphia Fed:

First Quarter 2009 Survey of Professional Forecasters
Release Date: February 13, 2009 (click on the hyperlink, then click on "First Quarter 2009):

An upward revision to the forecast for the unemployment rate accompanies the outlook for economic growth. The forecasters predict that unemployment will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Previously, unemployment was forecast to rise from 7.0 percent to 7.7 percent over the same period. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010. On the jobs front, the forecasters project job losses in the current quarter at a rate of 548,400 per month. They also see a reduction in jobs of 311,200 per month in the second quarter and 202,100 in the third quarter of 2009.

Both of the above were found at Mish's post from today.

Let us examine the facts. Also thanks to CR, consider Regulators Eye Pay Czar:

A Bankrate Inc. survey also released today showed 70% of survey respondents said they felt secure in their jobs despite the rising joblessness. Of those remaining at their jobs, 54% responded they’d received some sort of pay reduction: pay cut, reduced hours, reduced work days, suspended raises, bonuses or 401K match, or a combination of these.

So, the unemployment rate and pace of job losses are well above those projected just four months ago. Deflation in job benefits is proceeding. There is no inflation except in commodities, which are speculative.

Those seers such as Nouriel Roubini and Mish who stated in Q1 2009 that the economy would underperform the consensus forecast have been proven correct. The public is now probably more optimistic than the facts support. Others such as Robert Prechter and Paul Lamont who two or more years ago foresaw the recent, ongoing severe "debt deflation" and then a stock market pop upward beginning a few months ago are fearing a major new stock market downturn, perhaps after more optimism pushes stock prices up higher.

Amongst stocks, there are some that do not reflect the horrible bear market. Here are two charts that reflect successful businesses.

That the price of a security has fallen does not tell you that it has fallen too far. On the other hand, a security that has resisted the fall of most others tells you a lot. If its price has risen consistently over the years and has other fundamental characteristics that you like, it is not determinative as to whether one wants to own that security whether the prices of other securities are attractive.

Right now, the stocks of large consolidators such as Teva (generic pharmaceuticals) and deep discounters such as Ross Stores (clothing), the long term price charts of which are shown above, reflect businesses that are thriving and can continue to grow long-term in any economic environment (excluding complete and utter devastation). They pay dividends equal to money in the bank and have low double-digit price-earnings ratios. While their stock prices will certainly fall if the stock market makes new lows, over a full economic cycle, they are likely to be profitable investments and provide a different sort of hedge from inflation than gold.

Finally, regarding gold, I have previously commented on it as unexciting from a chart pattern. If an increasing percentage of the public remains sold on a Goldilocks scenario and continues to pay rising prices for risky assets, then the price of the perceived safe haven of gold is likely to suffer.

Short term, gold is unexciting at best.

Meanwhile, sentiment remains horrible or even beyond horrible for intermediate to long-term U. S. Treasury bonds. Yet a Goldilocks scenario for stocks has to imply diminishing counter-cyclical deficit spending and acceptable inflation, and thus cannot mean a durable bear market for Treasuries soon.

Copyright (C) Long Lake LLC

Yves Smith Says Team Obama Uses "Big Lie" Technique, and Other Unpleasantries of the Day

Today is another busy news day.

The Economic Cycle Research Institute is out with its monthly U. S. Future Inflation Gauge.  ECRI has maintained this measure for over 60 years.  It has fallen massively over the past 18 months and is back near its lowest level in history at 79.3, at about a 51-year low.  Inflation probably averaged 1% in the next 5 years after sinking to that level, only rising after the guns-and-butter Viet Nam era (1964 onward).

ECRI also reports another marginal uptick in its Weekly Leading Indicator, which remains well below its very low level of November 2008 and still at a very severe 22% below year-ago level.  This suggests a continued slowing of the economy through year-end, with stabilization at very low levels of economic activity.  

I intend to do a post on the ECRI and its usefulness, or lack of such, to investors, in the near future.

Consistent with the above, there is truly bad news behind the headlines of the Labor Department's unemployment report.  Not headlined are two data points.  The average supervisory work week has shrunk to a record low since records began in 1964:  33.2 hours.  

And, consistent with the lack of work available and the very low USFIG, January's unemployment number was revised upward substantially, from 655,000 to 741,000.

Labor Department's broadest measure of unemployment is U-6, which can be found on Table A-12 of the basic unemployment report available at www.bls.gov, shows that almost 1 in every 6 members of the labor force is either unemployed, underemployed or too discouraged by labor market conditions to bother actively looking for work.  While comps are difficult to obtain, it would appear that the definition of unemployment used in the 1930s is more like U-6 than the headline U-3 (8.5% in March).  Given that the Obama "stimulus" program has no relation to FDR's emergency work programs, it is virtually certain that U-6 will hit 18% sooner rather than later.

(Note also that ADP's March non-farm job loss count was 742,000, exactly the current Labor Dep't count of Jan. job losses.  The ADP and Labor numbers have tracked each other very well for some months now (www.adpemploymentreport.com); expect further downward revisions in the Labor numbers for Feb. and March, I'm afraid.)

Moving along to the blogosphere, it is interesting to observe how certain passionate critics of the Bush-Paulson approach to the financial crisis have stayed objective after Mr. Obama became President, and others have kind of sort of joined "Team O" while trying at the same time to be interesting and objective.

Amongst the former, I would note Mish at www.globaleconomicanalysis.blogspot.com.  He has a series of posts excoriating the PPIP and has not fallen for Team Obama hype.  Mish is of the Austrian school of economics and has an amazing track record of forecasting the economic downturn and the low-inflation/deflation environment.  He also is a darn good market timer.

Another blogger who was definitely in the Obama hope-change camp is Yves Smith of www.nakedcapitalism.com.  She has definitively changed her tune, and her site is currently displaying a variety of well-informed opinions and reports.  Here is a quote from Yves herself from the conclusion of today's post, Treasury Trying to Defend Bank Gaming of Public-Private Partnership:

The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.

Well!  Obama-phile no more, it would appear.

Finally, also on NC is the overlooked report that Hedge Fund Bridgewater Says No to Public Private Partnership Program:

Now illustrating our (Ed:  Yves'/NC's) latest concern, that the Treasury may turn out to be the Gang That Can't Shoot Straight, our ongoing reservation, that there may be no way to make the program work for banks and investors even with hefty government subsidies, may be coming to pass. . .

The turndown by Bridgewater is particularly significant.  (Ed: They only manage $80 B!)

Is this the beginning of the end for PPIP?

What Nouriel Roubini recently called the "Made-Off" economy, with Ponzi schemes built into the system of much greater scale than the Madoff one, is currently on a glide path to a 1995 level of economic activity, if one takes the numerical ECRI weekly leading indicator as predictive.  Given potent deflationary forces and "crowding out" of private borrowing by the massive projected Federal deficits, the outlook for business remains unexciting, and when brilliant thought leaders such as Yves Smith start describing Team Obama as using a technique associated with Team Hitler, one should watch out for the public to gradually adopt that viewpoint.

Copyright (C) Long Lake LLC 2009 

BARF

Per Calculated Risk today, James Galbraith has dubbed the new Treasury plan BARF: Bad Assets Relief Fund. Or perhaps it could be called Confused Relief of Assets Plan.

Yves Smith at Naked Capitalism and Mish at Global Economic Trend Analysis this morning each skewered the plan mercilessly based on last night's NY Times preview of it.

The stock market is passing its judgment of the day today, down 3-4% at a time when so many people were looking for a rally. Worse, virtually everything is down except for the safe haven plays: gold and Treasuries.

Yuccch!

Copyright (C) Long Lake LLC 2009

Winter of Discontent

Perhaps it's time for Monopoly sets to reappear both on kitchen tables and on expensive dining room tables for twenty in Greenwich mansions.

The classic Depression-era game may start making a comeback. The headlines are grim, as is the commentary from many of the top bloggers:

Mish has two posts today: "Railroad Traffic Plunges"; and, "Exports Plunge in China, Japan, South Korea".

Yves at Naked Capitalism posts, among others: "Veneroso: Japan on the Edge of the Abyss", and "Willem Buiter: Mismanagement by the Officialdom Can Produce a Depression".

Then there's the redoubtable CR at Calculated Risk. A representative post that sums up the recent economic news is January Economic Summary in Graphs. A lot of "cliff diving".

If you have time, you may want to read all the above. However, you get the picture. At a time of increasingly slack labor markets, now-abundant raw materials, and Asian exporters desperate to export at increasingly low prices, their customers have had to pay down debt.

In addition, Bloomberg.com has given up the happy talk at least for today. Perhaps the former Masters of the Universe meeting at Davos convinced them it was out of touch. The Econblog Review proprietary Bloomberg.com Vido Indicator shows bearishness, with talk about a new depression and musing about a further drop in the S&P 500 should it drop below 800.

Also, the Obama Administration is acting like a . . . new Administration. Gone is the hype about a stimulus package ready to be signed on or about Inauguration Day. Delay is the order of the day. Methinks that too many traders and investors were thinking that there would be so much enthusiasm for the new Administration that they could sell their stocks under cover of such enthusiasm. Since one of the functions of markets is to fool the greatest number of people, there are lots of bears who are angry that they either missed their chance to short-sell at Dow 8800 or whatever, or holders of economically sensitive stocks who missed their chance to lighten up. What do they do now at lower prices and worsening headlines?

Cheery.

From a markets perspective, here are some comments.

GENERAL:

Marc Faber looks increasing right in his core assertion from last fall that the U.S. would have less economic stress than Asia, in that our manufacturing is already low as a % of GDP. But people still need services, and mostly can pay for them, for now. However, he looks optimistic, as he was calling for a stock rally into spring. Apparently the horrible headlines out of Asia are coming in worse than he, an Asia-based economics expert, expected.

The headlines will drive weakened holders out of positions they thought were strong ones.

FIXED INCOME: The deflationary implications of the headlines du jour, which assuredly will not end with today's, are too strong to ignore. One might want to take profits in TIPS and consider instituting positions in Treasuries for a trade, or depending on point of view, to add to them as a core holding. Lower quality debt is not worth holding unless you are John Paulson, with an extensive research organization to evaluate individual securities. But in that case, you are not interested in any thoughts expressed on this blog!

STOCKS: It is too soon for a contrarian purchase. The chance of a meltdown to new lows and far below is real, and unfortunately a bear raid makes sense while the new Administration and Congress decide what to do. In this sense, stocks could do the opposite of the 1999 blow-off top in stocks, when everyone experienced knew that 25X P/E on large-cap glamour stocks was a dangerous level and that the NASDAQ at 4000 was lunatic; yet P/E's on the large-caps went to 30 and the NASDAQ went over 5000. On the other hand, valuations on the stock market are not cheap on a variety of criteria, and earnings could be imploding. If Dow stalwarts such as Procter & Gamble, AT&T, IBM, Coca-Cola, and others get priced based on tangible book value, there is not much "there" there. (A Dow half the current level is easily justifiable on a number of metrics.)

When both the economic and market macro trends are both down, the wise trader and the prudent investor stand clear.

GOLD: Fundamentally increasingly overvalued, as the macro economic trends demonstrate that there is no bottom for cash commodities prices. However, the price of gold is driven by psychology. Traders who are long must remember that the major use of gold remains jewelry, not investment. (Offsetting this is that much jewelry use in India and perhaps China is quasi-bullion at minimal mark-up over bullion.) Technically, the trend lines are up over most time frames, though gold has churned to no net effect over the last 12 months. However, the sudden crash of the price of oil may provide grist for the mill of purchasers of (deep?) out of the money puts on GLD.

Returning to the Shakespearean theme of the title, the time is out of joint. Is Mr. Obama thinking the next part of the quote: "O cursed spite that ever I was born to set it right"?

Copyright (C) Long Lake LLC 2009