I was going to write a post about one data point or another that came out today, but Calculated Risk plus Bloomberg cover them all. The bottom line is that in past years, when one economic datum after another comes out weak--ranging from ECRI's WLI growth rate dropping below 10% (a level not even reached in the severe 1981-2 recession) or the various weak reports out of new home sales (record low sales), the Dallas Fed Manufacturing Index and the like, and the widespread skepticism that the European bank stress tests are useful, the stock market usually drops and Treasuries rally in price.
Not now. Perhaps the prospect of zero interest rates forever has gladdened the hearts of valuation algorithms amongst owners of capital.
The VIX has dropped to around 23. In turbulent economic times I have noticed that it averages roughly 25. In good, stable times it is in the teens. Thus the VIX hit a record low late in the last decade's bubble period.
It appears to me that when record low governmental interest rates are widespread and are dropping, this could only fail to be a bubble in government debt if price deflation were present--and this would be "good" deflation, associated with greater supply of goods and lower real costs of production.
This is how living standards improve rapidly.
The last time the U. S. had this sort of "good" price deflation was in the latter part of the 1800s.
But guess what: there was virtually no Federal debt then. There was no central bank. There was no involuntary unemployment. Gold was not an investment; it was money. Financial paper took the place of money but was recognized as not being money. Living standards soared and immigrants flowed without restriction into this country, the only requirement being passing a medical test for public health reasons.
Now, any deflation we have is the "bad" kind: price-cutting, such as of homes, due to overproduction. But we have "underproduction" of iPads due to component shortages (presumed temporary).
An example of "good" deflation that theoretically might occur would be the simultaneous discovery near New York City and Los Angeles of massive amounts of easily accessible fields of natural gas, sufficient to displace huge amounts of imported oil.
I'm not holding my breath for any such game-changing event, however.
What I do see is rampant overpricing of financial assets all over the place, this being a sign that too much "money" has been "printed". Yet the real economy is far less buoyant. Not only is this disconnect unhealthy, but since the money is circulating in New York and its printing supports the establishment in Washington, the result is that people look around themselves in their localities and see a distorted view of the real economy.
It's sort of like trying to see what the temperature is out on the farm by putting your thermometer inside a hothouse.
But the Federal Government is locked into a Japanese-style model in that its fiscal health waxes and wanes with the economy. When the economy is weak, Federal finances weaken. Normally, the "market" would make the increasingly leveraged borrower--the Feds-- pay an increasingly higher price to borrow. Inexplicably, as default chances rise, prices have been falling on said debt. Is this due to "crowding out", manipulation, or no other good investments being perceived available to typical bond investors?
If, for one reason or another, the U. S. is going Japanese (before perhaps defaulting), then the pattern in Japan provides a good template. That template includes huge undervaluation in stocks; and, gold has moved to a record high in yen terms over the years. If one lives in Japan and thus has had roughly stable consumer prices for years, then gold has quadrupled in yen terms.
Anyone who thinks that money printing/massive deficit spending associated with a zero interest rate policy exempts the pricing of tiny minority fractional ownership of corporations (aka stocks) from traditional valuation measures may want to study the Japanese financial experience.
Of course, the U. S. is not Japan, past need not be prologue, etc. Nonetheless, isn't there a saying or two about learning from history?
Copyright (C) Long Lake LLC 2010
Showing posts with label Federal debt. Show all posts
Showing posts with label Federal debt. Show all posts
Monday, July 26, 2010
Friday, June 11, 2010
ECRI Allies With Barron's and Issues Its Latest, Downbeat, Report
The Economic Cycle Research Institute, which has been getting more mention these days, is now tighter with its data release and has left Reuters to join Rupert Murdoch's media empire by releasing its updates through Barron's. And today's report stinks, as summed up by the title "WLI Drops, But No Double-Dip Yet".
Recently, Brazil has had a failed gov't bond auction; Germany has had a failed auction or two (I forget the duration of the securities); and China announced its third failure of bills auctioned.
In May, the United States government spent approximately twice as much as its revenues. Boy, all those investors who are passing on higher-yielding securities of other countries must really espy hidden value in U. S. bills yielding approximately nothing.
All the predictions of big increases in U. S. Federal debt are predicated on good economic growth. Even a growth slowdown is going to further challenge Federal finances. And as consumer spending is more and more dependent on Federal money, it is getting harder and harder to see a happy next few years. When the Japanese bubble began to burst, interest rates collapsed. The opposite has been happening in Greece. Will the U. S. have a reverse Japanese, or Grecian moment? Tentative times, and investors in Federal debt must ask themselves why they want low yields locked in for many years in the future.
If the government would suddenly shrink, we might well see some economic dynamism following the withdrawal process. Breaking addictions is difficult, but the method that works best is cold turkey. Unfortunately what we are seeing is much more like the frog that got boiled so slowly it didn't notice till it was too late.
Copyright (C) Long Lake LLC 2010
Recently, Brazil has had a failed gov't bond auction; Germany has had a failed auction or two (I forget the duration of the securities); and China announced its third failure of bills auctioned.
In May, the United States government spent approximately twice as much as its revenues. Boy, all those investors who are passing on higher-yielding securities of other countries must really espy hidden value in U. S. bills yielding approximately nothing.
All the predictions of big increases in U. S. Federal debt are predicated on good economic growth. Even a growth slowdown is going to further challenge Federal finances. And as consumer spending is more and more dependent on Federal money, it is getting harder and harder to see a happy next few years. When the Japanese bubble began to burst, interest rates collapsed. The opposite has been happening in Greece. Will the U. S. have a reverse Japanese, or Grecian moment? Tentative times, and investors in Federal debt must ask themselves why they want low yields locked in for many years in the future.
If the government would suddenly shrink, we might well see some economic dynamism following the withdrawal process. Breaking addictions is difficult, but the method that works best is cold turkey. Unfortunately what we are seeing is much more like the frog that got boiled so slowly it didn't notice till it was too late.
Copyright (C) Long Lake LLC 2010
Wednesday, June 9, 2010
Mr. Geithner's Report on Federal Debt and the Golden Rule
Click HERE to link to the current Treasury report on the public debt. (This link was ultimately obtained using an intervening link beginning on Zero Hedge.)
During the last two fiscal years, Federal receipts have falled over 18%, and outlays have risen over 27% (pp. 2-3 of the report).
Click HERE for TreasuryDirect's listing of total Federal debt for each completed fiscal year, totaling almost $12 T as of the end of the last fiscal year.
Because of asset purchases such as those via TARP, the first document linked to above mentions that while debt is up, so are assets.
That introductory section was not matched by a parallel statement that the Fannie/Freddie liabilities are not included. And forget about the true present value of Social Security liabilities, which are clearly owed, as opposed to Medicare unfunded liabilities, which are changeable.
An interesting fact(oid) I came across over the weekend is that the total value of all physical gold outstanding is 6% of the value of all financial assets, but was 20% in the mid-1930's and 22% in 1980 (see "The Golden Mean-Interview with John Hathaway"/Barrons.com).
And Gallup's hiring/not hiring metric is becalmed in the +8 range. At the end of September 2008, this number was twice as high, and unemployment was rising. After the orgy of firing that followed the financial collapse, we should have seen very high hiring/not hiring numbers under any reasonably healthy economic recovery, but this has not happened.
Gold has been rising in price against all important fiat currencies because governments and their central banks have chosen a financial, debt-based solution to a problem involving too much underlying financial complexity. It's not subtle, unexpected or bubbly.
It's the debt (, stupid).
If and when government stops enriching the financial interests by issuing more and more debt and a simpler system emerges that focuses on real needs of real people, the financial interests will want to make you believe that the world is ending and will mark down the value of financial assets. At such a time of rationality, fiat money may cease depreciating against gold. Till then, the golden rule is in force. Don't borrow money collectively that you wouldn't borrow individually.
Copyright (C) Long Lake LLC 2010
During the last two fiscal years, Federal receipts have falled over 18%, and outlays have risen over 27% (pp. 2-3 of the report).
Click HERE for TreasuryDirect's listing of total Federal debt for each completed fiscal year, totaling almost $12 T as of the end of the last fiscal year.
Because of asset purchases such as those via TARP, the first document linked to above mentions that while debt is up, so are assets.
That introductory section was not matched by a parallel statement that the Fannie/Freddie liabilities are not included. And forget about the true present value of Social Security liabilities, which are clearly owed, as opposed to Medicare unfunded liabilities, which are changeable.
An interesting fact(oid) I came across over the weekend is that the total value of all physical gold outstanding is 6% of the value of all financial assets, but was 20% in the mid-1930's and 22% in 1980 (see "The Golden Mean-Interview with John Hathaway"/Barrons.com).
And Gallup's hiring/not hiring metric is becalmed in the +8 range. At the end of September 2008, this number was twice as high, and unemployment was rising. After the orgy of firing that followed the financial collapse, we should have seen very high hiring/not hiring numbers under any reasonably healthy economic recovery, but this has not happened.
Gold has been rising in price against all important fiat currencies because governments and their central banks have chosen a financial, debt-based solution to a problem involving too much underlying financial complexity. It's not subtle, unexpected or bubbly.
It's the debt (, stupid).
If and when government stops enriching the financial interests by issuing more and more debt and a simpler system emerges that focuses on real needs of real people, the financial interests will want to make you believe that the world is ending and will mark down the value of financial assets. At such a time of rationality, fiat money may cease depreciating against gold. Till then, the golden rule is in force. Don't borrow money collectively that you wouldn't borrow individually.
Copyright (C) Long Lake LLC 2010
Friday, January 29, 2010
Paul Krugman and Tired Old Thinking
In today's NYT column March of the Peacocks, Paul Krugman lays out the progressive/liberal view that government is the ultimate actor in the economy:
The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.
This view is open to dispute. The 1929 downturn became a "great" depression during the unprecedented activism of President Hoover, and involved post-WW I debt repayments imposed on Germany as a unique complicating factor. In another sense, the Great D involved a series of events that comprised a perfect storm.
Think of it as a Hurricane Katrina which before the levees gave way, first made a direct hit on New Orleans and devastated it; and then the levees broke. A truly "perfect" storm.
And re the Great D, also remember that candidate FDR harshly criticized Hoover's Federal deficits, and pledged to bring the budget back into balance.
There is no replaying history. No one can disprove the concept that had FDR kept his pledge, the economy would not have recovered just as it recovered from the severe depression of 1920-21 or the Panic of 1873.
All we know is that in the 1930s, the government had a balance sheet that was a fortress founded both on gold and on untapped taxing and borrowing power.
This situation is quite different today, thanks to generations of Krugman-praised policies. The consolidated balance sheet of the Federal Government shows, let us say, $60 T of debt against $2 T of income. That's a 30 to one leverage ratio, and only includes the present value of Social Security and Medicare obligations. It excludes other obligations such as the financial backstops for FDIC and the like, and other implicit obligations.
Why a solution that was tried in the 1930s is the same solution that should be tried after decades of increasing debt and chronic price inflation is unclear. Something about Einstein's definition of insanity being doing the same thing and expecting a different result.
Moving to the recent past, there is no evidence that the disorderly bankruptcy of Lehman Brothers was going to lead to anything worse than we got.
Going farther, remember that one year ago, Mr. Obama's advisers were forecasting 8.5% peak unemployment in the absence of a massive deficit-spending "stimulus" bill.
Were these top-tier economists off by, say, an additional 15-20% unemployment points (these numbers are all U-3 for consistency)?
Could it be that all the activist government--cap and trade and then healthcare reform, for example--inhibited animal spirits amongst small business owners?
Yours truly has an only-partially tongue-in-cheek solution. Let us say that there is, net, 20% unemployment/underemployment (U-6 and then some). The average American with a job works 2000 hours per year. All one has to do is shorten the work week to 4 days, and poof, everyone has a job.
This solution is as obvious as simply taxing fossil fuel use directly rather than going to the sham of cap and trade.
In other words, go more European in work effort. Now, this can be spun in various ways: shorter work days, earlier retirement, etc.
In fact, the more leisure time people have, the more time they can spend consuming (not that consumption is the goal of life in richer countries). For sure, less work means more play.
Now, this is partly satirical, but only partly. America produces about 3000 calories of food a day for a population that needs, on average, only 2000. Our current solution is to stuff people with this overproduction, and the result is an obesity epidemic.
Less food production (less GDP) would be a good thing for our health, economy and environment. One can go down the list. Driving to work 4 days a week would save lots of gas, wear and tear on autos and roadways, and thus have positive aspects. In fact, working 4 ten-hour days a week would create savings over 5 eight-hour days.
In the real world where resources are finite, we need to think creatively and humanistically about practical approaches, not reflexively take Dr. Krugman's approach and turn to Leviathan for fixes.
Dr. Krugman is oriented toward government. In Europe, he would likely be a member of a Social Democrat-type party. Fine, legitimate point of view. But the key is to avoid imbalances such as massive deficits other than in wartime. A Great Recession caused by hot money, mortgage fraud and imprudent borrowing/lending simply does not get "solved" by repaving roads.
Two macro economic solutions are: Win a world war and thus dominate the global economy (the way out of the Great D); or deleverage at all levels (the post-WW II solution until leverage got excessive in the past decade).
Since a world war is not desired, the solution is to simplify our accounts, and as the world turns, commit ourselves to replacing debt with equity.
I would suggest starting with Citigroup.
The disagreement between Dr. Krugman and President Obama is one between similar thinkers. Both advocate government increasing its leverage to a greater extent than the rest of the economy is simultaneous decreasing its own.
There is no current cleared, trodden path away from this roadway, and until there is, I believe that the fundamental case for gold is strong and that new gold buyers can and will easily be found.
Remember: 30 to 1 leverage is a conservative measure of current Federal leverage. Sounds like Bear and Lehman to me. Paul Krugman thinks that raising this to 31 to 1 is the solution for 2010. Barack Obama perhaps prefers 30.8 to 1. I favor bringing it down an order of magnitude to, say, 3 to 1, and then going below that, and rethinking all current economic dogma built on the alleged virtues of an ever-expanding gross domestic product.
Copyright (C) Long Lake LLC 2010
The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.
This view is open to dispute. The 1929 downturn became a "great" depression during the unprecedented activism of President Hoover, and involved post-WW I debt repayments imposed on Germany as a unique complicating factor. In another sense, the Great D involved a series of events that comprised a perfect storm.
Think of it as a Hurricane Katrina which before the levees gave way, first made a direct hit on New Orleans and devastated it; and then the levees broke. A truly "perfect" storm.
And re the Great D, also remember that candidate FDR harshly criticized Hoover's Federal deficits, and pledged to bring the budget back into balance.
There is no replaying history. No one can disprove the concept that had FDR kept his pledge, the economy would not have recovered just as it recovered from the severe depression of 1920-21 or the Panic of 1873.
All we know is that in the 1930s, the government had a balance sheet that was a fortress founded both on gold and on untapped taxing and borrowing power.
This situation is quite different today, thanks to generations of Krugman-praised policies. The consolidated balance sheet of the Federal Government shows, let us say, $60 T of debt against $2 T of income. That's a 30 to one leverage ratio, and only includes the present value of Social Security and Medicare obligations. It excludes other obligations such as the financial backstops for FDIC and the like, and other implicit obligations.
Why a solution that was tried in the 1930s is the same solution that should be tried after decades of increasing debt and chronic price inflation is unclear. Something about Einstein's definition of insanity being doing the same thing and expecting a different result.
Moving to the recent past, there is no evidence that the disorderly bankruptcy of Lehman Brothers was going to lead to anything worse than we got.
Going farther, remember that one year ago, Mr. Obama's advisers were forecasting 8.5% peak unemployment in the absence of a massive deficit-spending "stimulus" bill.
Were these top-tier economists off by, say, an additional 15-20% unemployment points (these numbers are all U-3 for consistency)?
Could it be that all the activist government--cap and trade and then healthcare reform, for example--inhibited animal spirits amongst small business owners?
Yours truly has an only-partially tongue-in-cheek solution. Let us say that there is, net, 20% unemployment/underemployment (U-6 and then some). The average American with a job works 2000 hours per year. All one has to do is shorten the work week to 4 days, and poof, everyone has a job.
This solution is as obvious as simply taxing fossil fuel use directly rather than going to the sham of cap and trade.
In other words, go more European in work effort. Now, this can be spun in various ways: shorter work days, earlier retirement, etc.
In fact, the more leisure time people have, the more time they can spend consuming (not that consumption is the goal of life in richer countries). For sure, less work means more play.
Now, this is partly satirical, but only partly. America produces about 3000 calories of food a day for a population that needs, on average, only 2000. Our current solution is to stuff people with this overproduction, and the result is an obesity epidemic.
Less food production (less GDP) would be a good thing for our health, economy and environment. One can go down the list. Driving to work 4 days a week would save lots of gas, wear and tear on autos and roadways, and thus have positive aspects. In fact, working 4 ten-hour days a week would create savings over 5 eight-hour days.
In the real world where resources are finite, we need to think creatively and humanistically about practical approaches, not reflexively take Dr. Krugman's approach and turn to Leviathan for fixes.
Dr. Krugman is oriented toward government. In Europe, he would likely be a member of a Social Democrat-type party. Fine, legitimate point of view. But the key is to avoid imbalances such as massive deficits other than in wartime. A Great Recession caused by hot money, mortgage fraud and imprudent borrowing/lending simply does not get "solved" by repaving roads.
Two macro economic solutions are: Win a world war and thus dominate the global economy (the way out of the Great D); or deleverage at all levels (the post-WW II solution until leverage got excessive in the past decade).
Since a world war is not desired, the solution is to simplify our accounts, and as the world turns, commit ourselves to replacing debt with equity.
I would suggest starting with Citigroup.
The disagreement between Dr. Krugman and President Obama is one between similar thinkers. Both advocate government increasing its leverage to a greater extent than the rest of the economy is simultaneous decreasing its own.
There is no current cleared, trodden path away from this roadway, and until there is, I believe that the fundamental case for gold is strong and that new gold buyers can and will easily be found.
Remember: 30 to 1 leverage is a conservative measure of current Federal leverage. Sounds like Bear and Lehman to me. Paul Krugman thinks that raising this to 31 to 1 is the solution for 2010. Barack Obama perhaps prefers 30.8 to 1. I favor bringing it down an order of magnitude to, say, 3 to 1, and then going below that, and rethinking all current economic dogma built on the alleged virtues of an ever-expanding gross domestic product.
Copyright (C) Long Lake LLC 2010
Sunday, January 24, 2010
Political Markets
On the one hand, the drop in stocks and commodities- with platinum off 6% in 3 days--associated with a rise in the VIX volatility index to above 25 (and therefore contrarianly somewhat bullish) appears to be a buying opportunity. After all, the various pronouncements and "sort of" plans by the administration coincided with the upcoming (bank tax proposal) and actual (Volcker Plan) Senate loss in Massachusetts and were therefore political more than serious proposals for which the President would fight.
On the other hand, the President's defenders are saying silly things, witness the first paragraph of Frank Rich's column in today's NYT, After the Massachusetts Massacre:
It was not a referendum on Barack Obama, who in every poll remains one of the most popular politicians in America. It was not a rejection of universal health care, which Massachusetts mandated (with Scott Brown’s State Senate vote) in 2006. It was not a harbinger of a resurgent G.O.P., whose numbers remain in the toilet.
Wrong on all 3 counts. Clearly, polls and focus groups show that voters were consciously treating the election as a nationalized vote. Second, and a more subtle issue, polls show that healthcare "reform" was front and center in the vote, and that Mass. voters are similar to the rest of the country's in opposing "Obamacare". Of course, their opposition includes double-payment because Mass. gets the stick but no carrot unlike Neb. or La.; and Mass. has a huge biotech and medical tech industry that stand to suffer from Obamacare. Third, only a few people can deny that the GOP has surged more than the economy. If a devastating win in Virginia despite real efforts from the President in that race, and then decisive wins in the deep blue states of NJ and Mass. are not persuasive, then the finding from Rasmussen Reports might be a shocker: Republicans Post Eight-Point Lead in Generic Ballot (from Jan. 19).
On the other side of the political spectrum, the points are more fact-based and the point of view of the writer has clearly gained ground since one-party rule began one year ago. You may consider Rich Lowry's The New Catechism.
In other words, the administration is on defense and the quarterback is scrambling. Meanwhile bulls such as David Kotok of Cumberland Advisors point to zero interest rates as cause for a further rise in the stock averages (but Dr. Kotok believes we are in a secular bear market and his bullish call is tactical); but the obvious paradox is that zero interest rates only can be sustained at a time of gigantic Federal deficits and horrible state and local finances by a combination of a weak underlying economy and gigantic unrealized bank losses. The mortgage market is a phony, caused by Fed money-printing.
To paraphrase Yeats, the center is not holding. A resurgence of an unreformed Republican party is unappealing. A liberal majority that can hold Frank Rich's view is insane, expects us to be idiots, or is otherwise playing some strange PR game.
Given the unprecedented times, fundamental come into play. Please consider two more resources, one a simply chart and one an analysis of Treasury's funding needs. The first demonstrates on 2 measures that the stock market is fundamentally overvalued; see: http://www.smithers.co.uk/page.php?id=34. For the Zero Hedge article, see:
http://www.zerohedge.com/article/700-billion-us-funding-hole-desperately-seeking-very-indiscriminate-treasury-buyer
Meanwhile, Citi's Tobias Lefkovich points out that bond buying by the public is in a bubble.
And Gallup.com continues to show no hiring going on, consistent with the Govt's JOLTS survey and the recent stagnation of new unemployment claims at an unsatisfactory level.
If the best argument for stocks is gridlock due to an administration that is debating a mid-course adjustment and aggressive money-printing by the Fed, it's a weak argument. Please remember that as late as Oct. 1, 2008 Bank of America traded at $38 per share. By early March, it was at $3. This occurred with the Fed already in easing mode for quite some time. Why had it been at $38? In large part, the SEC had eliminated short selling in the stock.
When the Government can borrow for one year at 0.27% and at 3 months for essentially nothing, something is very wrong. One cannot look at a stock with a 1% dividend and say it's a bargain. If you buy the S&P 500 for a 5-year planned period, you can expect to receive at most $15 in dividends, about as much as for a 5-year Treasury. If you agree with the current bull Dr. Kotok that this is a secular bear market in stocks, then you do not want to own stocks: not enough return.
This is the opposite of the early 1980s and much more like Japan, which coddled its banks until it finally let some fail. And re Japan, Mr. Smithers' site points out that it turned bearish on fundamental grounds on Japan at Nikkei about 12,000 about 2years ago, well before the Great Financial Crisis drove it back into recession. This was almost 20 years after the peak of the Japanese bubble and Nikkei 39,000. So anyone who thinks that the S&P 500 being about where it was a decade ago means that it is cheap or undervalued has another think coming.
The screenwriter William Goldman famously said about Hollywood that no one knows anything. This is now true about Wall Street, given the politicization of markets. What you think you know may be what you do not know (think of the geniuses at LTCM circa summer 1998). Since everybody who knows anything knows the above, buying surges and selling surges of any security can occur based on fear that the unknown trend is changing.
Direct ownership of a diversified portfolio of high-quality securities for those who can afford such a thing thus makes sense. Those with fewer financial assets may be best off simply keeping money in the bank or a bank-like equivalent and focus on job, friend and family.
Copyright (C) Long Lake LLC 2010
On the other hand, the President's defenders are saying silly things, witness the first paragraph of Frank Rich's column in today's NYT, After the Massachusetts Massacre:
It was not a referendum on Barack Obama, who in every poll remains one of the most popular politicians in America. It was not a rejection of universal health care, which Massachusetts mandated (with Scott Brown’s State Senate vote) in 2006. It was not a harbinger of a resurgent G.O.P., whose numbers remain in the toilet.
Wrong on all 3 counts. Clearly, polls and focus groups show that voters were consciously treating the election as a nationalized vote. Second, and a more subtle issue, polls show that healthcare "reform" was front and center in the vote, and that Mass. voters are similar to the rest of the country's in opposing "Obamacare". Of course, their opposition includes double-payment because Mass. gets the stick but no carrot unlike Neb. or La.; and Mass. has a huge biotech and medical tech industry that stand to suffer from Obamacare. Third, only a few people can deny that the GOP has surged more than the economy. If a devastating win in Virginia despite real efforts from the President in that race, and then decisive wins in the deep blue states of NJ and Mass. are not persuasive, then the finding from Rasmussen Reports might be a shocker: Republicans Post Eight-Point Lead in Generic Ballot (from Jan. 19).
On the other side of the political spectrum, the points are more fact-based and the point of view of the writer has clearly gained ground since one-party rule began one year ago. You may consider Rich Lowry's The New Catechism.
In other words, the administration is on defense and the quarterback is scrambling. Meanwhile bulls such as David Kotok of Cumberland Advisors point to zero interest rates as cause for a further rise in the stock averages (but Dr. Kotok believes we are in a secular bear market and his bullish call is tactical); but the obvious paradox is that zero interest rates only can be sustained at a time of gigantic Federal deficits and horrible state and local finances by a combination of a weak underlying economy and gigantic unrealized bank losses. The mortgage market is a phony, caused by Fed money-printing.
To paraphrase Yeats, the center is not holding. A resurgence of an unreformed Republican party is unappealing. A liberal majority that can hold Frank Rich's view is insane, expects us to be idiots, or is otherwise playing some strange PR game.
Given the unprecedented times, fundamental come into play. Please consider two more resources, one a simply chart and one an analysis of Treasury's funding needs. The first demonstrates on 2 measures that the stock market is fundamentally overvalued; see: http://www.smithers.co.uk/page.php?id=34. For the Zero Hedge article, see:
http://www.zerohedge.com/article/700-billion-us-funding-hole-desperately-seeking-very-indiscriminate-treasury-buyer
Meanwhile, Citi's Tobias Lefkovich points out that bond buying by the public is in a bubble.
And Gallup.com continues to show no hiring going on, consistent with the Govt's JOLTS survey and the recent stagnation of new unemployment claims at an unsatisfactory level.
If the best argument for stocks is gridlock due to an administration that is debating a mid-course adjustment and aggressive money-printing by the Fed, it's a weak argument. Please remember that as late as Oct. 1, 2008 Bank of America traded at $38 per share. By early March, it was at $3. This occurred with the Fed already in easing mode for quite some time. Why had it been at $38? In large part, the SEC had eliminated short selling in the stock.
When the Government can borrow for one year at 0.27% and at 3 months for essentially nothing, something is very wrong. One cannot look at a stock with a 1% dividend and say it's a bargain. If you buy the S&P 500 for a 5-year planned period, you can expect to receive at most $15 in dividends, about as much as for a 5-year Treasury. If you agree with the current bull Dr. Kotok that this is a secular bear market in stocks, then you do not want to own stocks: not enough return.
This is the opposite of the early 1980s and much more like Japan, which coddled its banks until it finally let some fail. And re Japan, Mr. Smithers' site points out that it turned bearish on fundamental grounds on Japan at Nikkei about 12,000 about 2years ago, well before the Great Financial Crisis drove it back into recession. This was almost 20 years after the peak of the Japanese bubble and Nikkei 39,000. So anyone who thinks that the S&P 500 being about where it was a decade ago means that it is cheap or undervalued has another think coming.
The screenwriter William Goldman famously said about Hollywood that no one knows anything. This is now true about Wall Street, given the politicization of markets. What you think you know may be what you do not know (think of the geniuses at LTCM circa summer 1998). Since everybody who knows anything knows the above, buying surges and selling surges of any security can occur based on fear that the unknown trend is changing.
Direct ownership of a diversified portfolio of high-quality securities for those who can afford such a thing thus makes sense. Those with fewer financial assets may be best off simply keeping money in the bank or a bank-like equivalent and focus on job, friend and family.
Copyright (C) Long Lake LLC 2010
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