The L. A. Times purports to make a virtue out of a bad thing, repeating the big lie that "deflation" will cause people to starve themselves to death, fail to buy diapers for their babies, not send their children to college, because they expect that, perhaps, the prices of these goods and services will fall at the rate of perhaps 1% a year as in Japan. Here is a representative sample of the article titled Trashing the dollar to save the economy from today:
If prices of many imports at your local Wal-Mart or Target rise even slightly, or at least don't fall, it could be that much harder for a deflationary spiral to take hold.
We all like paying less, but the Fed is afraid that, amid tepid demand, many consumers will begin to believe that prices can only go down if they wait to buy. That could push the economy back into recession, or worse.
So the theme that the public is supposed to buy is that we all need to buy, buy, buy before prices rise.
And presumably the tooth fairy (aka the Fed) will recharge our credit cards when we buy, buy, buy what we can't collectively afford.
The mainstream generally ignores that it takes productive work and then productively-utilized savings to create true economic growth.
Nassim Taleb gets it right, as usual. Bloomberg reports in Obama Stimulus Made Economic Crisis Worse, 'Black Swan' Author Taleb Says:
U.S. President Barack Obama and his administration weakened the country’s economy by seeking to foster growth instead of paying down the federal debt, said Nassim Nicholas Taleb, author of “The Black Swan.”
“Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.”
Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse.”
That last sentence is quite the understatement.
Taleb, no right-winger, "gets it". A free people will produce growth as their available resources and inclinations allow. If people don't want to "grow" and instead want to consolidate their situations, there's nothing wrong with that. Instead we have central planning run amok, and without the Bush/Paulson excuse of a crisis.
The surge in the stock market this month must be related both to easy money and to optimism in some quarters that Obama-ism will be officially neutered after the elections. One gets the impression that just as the Republican Congress devolved into a parody of itself in 2006, a similar thing has been happening in Washington recently. Stephen Colbert? Puh-lease!
From a markets standpoint, the low expectations that people have for either political party admits for upside surprises should one party or the other outperform these low expectations. Or perhaps the economy will turn up of its own accord.
In the meanwhile, what we know is that the President, the Fed and Congress are united in desiring a weak dollar. Unfortunately, more than half the world also wants their own currencies to be weak.
While gold looks technically extended, only now is it getting mention from within the business press that it, and only it, is the one "currency" that can only be diluted ("printed") at the rate of mine production as a % of accumulated supplies that have taken centuries to be mined and saved. It remains the view here that stocks remain in a meandering phase within a structural bear market and only appear cheap in relation to zero interest rates, and that gold remains at least a good ways from the end of its structural bull. It is Treasuries that continue to go Japanese, until one day they may quickly go Grecian and destroy wealthy as rapidly as the NASDAQ did after its implosion. Of course, it is Japan that may in one way or another go Grecian with rapidly rising rates, but since it does not have debt to foreigners, it is plausible that it will find an intra-Japanese solution to its own debt bubble.
America needs to suck it up and cope, as Charles Munger might say. Unfortunately statism has been on the march, with promises that if we just print more money and keep bailing out the banks that lent not wisely but too well, benefits will trickle out to the real economy. If the Taleb view of facing reality and dealing with it actually gains significant traction, the world will get very turbulent for a while and end up a much better place.
Copyright (C) Long Lake LLC 2010
Sunday, September 26, 2010
Saturday, September 25, 2010
Stocks Increasingly Frothy
Gallup's continuous polling is showing a continuing stagnation with a downward trend in discretionary consumer spending.
In this context, the buoyancy of many consumer stocks makes little sense. There's a difference between optimism and investing based on hope against the facts. When even a semi-free market has essentially no value placed on money for as long as two years, with Treasuries paying less than one dollar in total interest per $100 invested for two full years, then the profit outlook for reinvested profits, which is what helps drive the stock market, is poor.
Ultimately what matters in investing is value. Two standard ways to decide on the value of companies ties to their earnings and to the value of their assets. The accountant and investments expert Andrew Smithers, who loudly and contemporaneously called the stock market a bubble in 2000, has just provided another quarterly update of his estimate of the fair value of the S&P 500.
Please look carefully at the linked chart he provides on his website. His earnings-based (CAPE) estimate of fair value and his asset-based estimate (q) are in close agreement that the stock market is massively overvalued. Averaging fair value provided by CAPE with that provided by q gives a fair value of about 725. This in turn means that based on Friday's closing prices, the stock market can be estimated to be about 57% overvalued.
People point to ultra-low interest rates to justify high valuations. Unfortunately, that's circular reasoning. A dead economy is required to justify near-zero short-to-intermediate interest rates. If one carefully studies the Smithers chart, one can look at the 1930s and 1940s, as well as the early 1920s, to find times when there were low to very low interest rates and very low stock prices in relation both to earnings power and assets.
Not only are American common stocks very risky, their prices are increasingly disconnected from the experience of everyone I know and every poll or survey I see. No one I know sees business doing especially well or about to do well. The idea that stock traders know better is a dubious one. It's far more likely that ultra-cheap money is fueling the bull moves in all sorts of assets. The investor's task is to separate wheat from chaff, AIG from Chubb, Honda from GM, stocks vs. Treasuries circa 2000 and circa 2007.
The situation re stocks is reminiscent of the old punch line, "Who are you going to believe, me or your lying eyes?"
Another analogy is Wile E. Coyote suspended in midair.
Yet another analogy is a chart of the Japanese stock market since 1989. It looks like ours, about a decade out of phase. It shows several massive bull moves in a 21 year structural bear market.
This blog has argued for a long time that the best places for investment money were the trend-following ones of being long Treasuries (and implicitly other high quality bonds) and gold. Both of their structural bull markets remain intact. The gold bull is mildly extended short-term and is up about 30% year over year, which is a red flag. The 30 year Treasury is also extended, but the longer duration bonds represent the only part of the Treasury curve which I believe is not yet in bubble valuation.
The chronic weakness of consumer spending continues to support the Treasury bull, and the Fed's response is to print money, which then supports the gold bull. In that context, stocks (other than precious metals stocks) are an afterthought.
Someday the trends will change. Are they changing here and now?
I doubt it.
Copyright (C) Long Lake LLC 2010
In this context, the buoyancy of many consumer stocks makes little sense. There's a difference between optimism and investing based on hope against the facts. When even a semi-free market has essentially no value placed on money for as long as two years, with Treasuries paying less than one dollar in total interest per $100 invested for two full years, then the profit outlook for reinvested profits, which is what helps drive the stock market, is poor.
Ultimately what matters in investing is value. Two standard ways to decide on the value of companies ties to their earnings and to the value of their assets. The accountant and investments expert Andrew Smithers, who loudly and contemporaneously called the stock market a bubble in 2000, has just provided another quarterly update of his estimate of the fair value of the S&P 500.
Please look carefully at the linked chart he provides on his website. His earnings-based (CAPE) estimate of fair value and his asset-based estimate (q) are in close agreement that the stock market is massively overvalued. Averaging fair value provided by CAPE with that provided by q gives a fair value of about 725. This in turn means that based on Friday's closing prices, the stock market can be estimated to be about 57% overvalued.
People point to ultra-low interest rates to justify high valuations. Unfortunately, that's circular reasoning. A dead economy is required to justify near-zero short-to-intermediate interest rates. If one carefully studies the Smithers chart, one can look at the 1930s and 1940s, as well as the early 1920s, to find times when there were low to very low interest rates and very low stock prices in relation both to earnings power and assets.
Not only are American common stocks very risky, their prices are increasingly disconnected from the experience of everyone I know and every poll or survey I see. No one I know sees business doing especially well or about to do well. The idea that stock traders know better is a dubious one. It's far more likely that ultra-cheap money is fueling the bull moves in all sorts of assets. The investor's task is to separate wheat from chaff, AIG from Chubb, Honda from GM, stocks vs. Treasuries circa 2000 and circa 2007.
The situation re stocks is reminiscent of the old punch line, "Who are you going to believe, me or your lying eyes?"
Another analogy is Wile E. Coyote suspended in midair.
Yet another analogy is a chart of the Japanese stock market since 1989. It looks like ours, about a decade out of phase. It shows several massive bull moves in a 21 year structural bear market.
This blog has argued for a long time that the best places for investment money were the trend-following ones of being long Treasuries (and implicitly other high quality bonds) and gold. Both of their structural bull markets remain intact. The gold bull is mildly extended short-term and is up about 30% year over year, which is a red flag. The 30 year Treasury is also extended, but the longer duration bonds represent the only part of the Treasury curve which I believe is not yet in bubble valuation.
The chronic weakness of consumer spending continues to support the Treasury bull, and the Fed's response is to print money, which then supports the gold bull. In that context, stocks (other than precious metals stocks) are an afterthought.
Someday the trends will change. Are they changing here and now?
I doubt it.
Copyright (C) Long Lake LLC 2010
Thursday, September 23, 2010
Relating French Strikes to America
USA Today reports France paralyzed by strikes over raising retirement to 62:
Tens of thousands of French workers took to the streets Thursday for the second day of nationwide strikes this month to protest President Nicolas Sarkozy's plan to raise the retirement age to 62. Union walkouts crippled planes, trains and schools across the country. . .
Sarkozy has indicated he is willing to make marginal concessions but remains firm on the central pillar: increasing the retirement age from 60 to 62 and pushing back the age from 65 to 67 for those who want full retirement benefits. . .
This blog has in fact argued that one way to look at the U. S. un-/under-employment problem is that perhaps we work too hard and think and play too little. Just think that if the average American worker put in the same number of annual work hours as a typical French worker, and retired at the same age, there would probably be a hue and cry about a shortage of labor here. It's all relative. Neither you nor I, nor the government, nor business leaders have any idea what the "right" level of work effort or production is for the abstraction called "the economy". Only a free people operating in free markets can properly, and should, determine those things.
America's problem is tied into debt piled upon debt, which is to say promise piled upon promise. But we have lost a great deal of faith in promises, promises the past few years.
Part of the solution, as per the motto of this blog, is equity - specifically the lack of such. Equity, both as in ownership (a true ownership society, not a faux version), and as in fairness. Has all the government intervention in society created a fairer, more equal society? No. When government was tiny and on the gold standard, as in the 1880s, America was a much more equal and fast-growing country.
In France, many think it's unfair to have to work all the way to the ages America peacefully settled on for Social Security benefits years ago. And so it may be if one hates one's job and is viciously oppressed by one's boss. I doubt that's a typical situation in France. Maybe they just like to sit around cafes and sip hot and cold beverages, and people-watch. But I digress down memory lane; the first piece of art I ever bought was of a French street scene.
Back to the U. S.: There's plenty of production to sustain every American in decent conditions. The problem stems in large measure from over-financialization, which has divorced much of production from meeting the needs of real people and real markets. A simpler, more honest and more transparent financial system, with government much less involved, would be an important first step in allowing Americans to meet their own needs and serve the needs of foreign countries via exports in a more balanced manner.
In this regard we should become less like the French, no matter how good their food and drink are.
Copyright (C) Long Lake LLC 2010
Tens of thousands of French workers took to the streets Thursday for the second day of nationwide strikes this month to protest President Nicolas Sarkozy's plan to raise the retirement age to 62. Union walkouts crippled planes, trains and schools across the country. . .
Sarkozy has indicated he is willing to make marginal concessions but remains firm on the central pillar: increasing the retirement age from 60 to 62 and pushing back the age from 65 to 67 for those who want full retirement benefits. . .
This blog has in fact argued that one way to look at the U. S. un-/under-employment problem is that perhaps we work too hard and think and play too little. Just think that if the average American worker put in the same number of annual work hours as a typical French worker, and retired at the same age, there would probably be a hue and cry about a shortage of labor here. It's all relative. Neither you nor I, nor the government, nor business leaders have any idea what the "right" level of work effort or production is for the abstraction called "the economy". Only a free people operating in free markets can properly, and should, determine those things.
America's problem is tied into debt piled upon debt, which is to say promise piled upon promise. But we have lost a great deal of faith in promises, promises the past few years.
Part of the solution, as per the motto of this blog, is equity - specifically the lack of such. Equity, both as in ownership (a true ownership society, not a faux version), and as in fairness. Has all the government intervention in society created a fairer, more equal society? No. When government was tiny and on the gold standard, as in the 1880s, America was a much more equal and fast-growing country.
In France, many think it's unfair to have to work all the way to the ages America peacefully settled on for Social Security benefits years ago. And so it may be if one hates one's job and is viciously oppressed by one's boss. I doubt that's a typical situation in France. Maybe they just like to sit around cafes and sip hot and cold beverages, and people-watch. But I digress down memory lane; the first piece of art I ever bought was of a French street scene.
Back to the U. S.: There's plenty of production to sustain every American in decent conditions. The problem stems in large measure from over-financialization, which has divorced much of production from meeting the needs of real people and real markets. A simpler, more honest and more transparent financial system, with government much less involved, would be an important first step in allowing Americans to meet their own needs and serve the needs of foreign countries via exports in a more balanced manner.
In this regard we should become less like the French, no matter how good their food and drink are.
Copyright (C) Long Lake LLC 2010
Wednesday, September 22, 2010
On the Bull Markets in Precious Metals and Bonds
Gold continues to pick up mainstream believers. That this is news is testament to the non-bubbly nature of the gold bull. When contrarians break from the consensus that everyone's got to be in gold, and that break from (possible) future orthodoxy gets reported as news, then it will much closer to the time to bail out. The latest bull is Allen Sinai, the noted Fed-watcher, as reported by Bloomberg in Sinai Says Fed's Sept. 21 Statement Means `Gotta Buy Gold'. I haven't listened to the interview from which this quote is taken and do not know precisely when he turned positive on gold. I will get into my deeper point after quoting from the article:
The Federal Reserve’s statement yesterday that inflation is below levels consistent with the central bank’s mandate for price stability means it’s time to buy gold, said Allen Sinai, chief global economist at Decision Economics Inc. in New York.
“That’s code for we don’t want to go the way of Japan so we’re going to print money,” Sinai said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “You gotta buy gold when those two central banks are doing what they’re doing.”
There is a contradiction in Dr. Sinai's second paragraph. I can't tell if he is saying the Fed is being contradictory or if he is. The contradiction comes from the fact that in saying the Fed doesn't want to go Japanese, it is printing money. However, that's just what the Japanese did. Japan's adjustment, in this humble blogger's view, to a post-boom environment, was inadequate in that what mild chronic price declines have occurred should have occurred rapidly. Boom, bust. Japan may in fact have taken this route when, I believe in 1965, every bank in Japan failed. (I am writing this from memory and some details may be a bit off; please forgive me.) In the next quarter-century, Japan nearly took over the world.
I recently read a book about China's economy from a Brit who spent years there. He pointed out that the Japanese multi-nationals have a business model in which they make most of their profits from charging high prices in the home market and accepting thin margins in their export markets. Seen in this context, the modest price declines in Japan may simply be concealed price increases, with the Bank of Japan printing enough money to prevent more significant price declines to fairer price levels.
If the same thing were to happen in the U. S., where almost all consumer nondurables such as toothpaste (which is mostly water) have gross profit margins well over 90%, why would that be bad?
In any case, Dr. Sinai is positive on gold, which is really to say that he is bearish on the U. S. dollar. Is he a contrary indicator?
I am currently differentiating gold and silver in the short term. One of the fund families I invest in has a gold fund (GTU), a silver fund (SBT_U or SVRZF.PK), and a gold-silver fund (CEF). Half a year ago, the silver fund regularly sold at or below net asset value per share (NAV). The gold fund sold perhaps 4% above NAV and the gold-silver fund sold at perhaps 8% over NAV (CEF is far better known than the others and much more tradeable). Currently, there has been a sudden shift. The silver fund has soared to 8% above NAV. This is simultaneous with a soaring silver price. Thus the market is surprisingly "saying" that this fund has much better prospects after a big, quick run in the price of its only asset than when the price was much more restrained. Meanwhile, even though gold has gone from one high to another, premia for the ETFs GTU and PHYS have shrunk markedly to the 2-3% range.
Thus I conclude that the gold ETFs GTU and PHYS have a better risk-reward ratio than Silver Bullion Trust.
This further suggests to me that this is the quietest raging bull market in a major asset (gold) that I can remember. Hardly bubble behavior.
Meanwhile, the Treasury market continues in its bubble. The only segment that is merely in a bull market is the long end. The 2-year Treasury note yields less than a total of 90 cents on the hundred dollar investment total over 2 years-- under 1/2% yearly. This is "going Japanese" without the consumer price decreases.
As with Japan, the big banks remain arguably insolvent--no one is allowed to know outside of the banks themselves and the authorities based in Washington. And the spending out of Washington financed in part by new money created on the spot by the Fed as well as by the accumulated savings of the U. S. and much of the world does not appear to be having much of a multiplier effect, if any. In other words, it's not stimulating.
Just as the NASDAQ bull run that began in 1975 or 1982 (take your pick or pick another start date) kept running until massive overvaluation stopped it, the gold bull market actually has a logical story. My base case is that it also keeps running until it dies of frank overvaluation or the authorities pull a Volcker and kill it.
Treasuries, on the other hand, are into bubble phase. Where they go, when, and why, I can't even guess.
Copyright (C) Long Lake LLC 2010
The Federal Reserve’s statement yesterday that inflation is below levels consistent with the central bank’s mandate for price stability means it’s time to buy gold, said Allen Sinai, chief global economist at Decision Economics Inc. in New York.
“That’s code for we don’t want to go the way of Japan so we’re going to print money,” Sinai said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “You gotta buy gold when those two central banks are doing what they’re doing.”
There is a contradiction in Dr. Sinai's second paragraph. I can't tell if he is saying the Fed is being contradictory or if he is. The contradiction comes from the fact that in saying the Fed doesn't want to go Japanese, it is printing money. However, that's just what the Japanese did. Japan's adjustment, in this humble blogger's view, to a post-boom environment, was inadequate in that what mild chronic price declines have occurred should have occurred rapidly. Boom, bust. Japan may in fact have taken this route when, I believe in 1965, every bank in Japan failed. (I am writing this from memory and some details may be a bit off; please forgive me.) In the next quarter-century, Japan nearly took over the world.
I recently read a book about China's economy from a Brit who spent years there. He pointed out that the Japanese multi-nationals have a business model in which they make most of their profits from charging high prices in the home market and accepting thin margins in their export markets. Seen in this context, the modest price declines in Japan may simply be concealed price increases, with the Bank of Japan printing enough money to prevent more significant price declines to fairer price levels.
If the same thing were to happen in the U. S., where almost all consumer nondurables such as toothpaste (which is mostly water) have gross profit margins well over 90%, why would that be bad?
In any case, Dr. Sinai is positive on gold, which is really to say that he is bearish on the U. S. dollar. Is he a contrary indicator?
I am currently differentiating gold and silver in the short term. One of the fund families I invest in has a gold fund (GTU), a silver fund (SBT_U or SVRZF.PK), and a gold-silver fund (CEF). Half a year ago, the silver fund regularly sold at or below net asset value per share (NAV). The gold fund sold perhaps 4% above NAV and the gold-silver fund sold at perhaps 8% over NAV (CEF is far better known than the others and much more tradeable). Currently, there has been a sudden shift. The silver fund has soared to 8% above NAV. This is simultaneous with a soaring silver price. Thus the market is surprisingly "saying" that this fund has much better prospects after a big, quick run in the price of its only asset than when the price was much more restrained. Meanwhile, even though gold has gone from one high to another, premia for the ETFs GTU and PHYS have shrunk markedly to the 2-3% range.
Thus I conclude that the gold ETFs GTU and PHYS have a better risk-reward ratio than Silver Bullion Trust.
This further suggests to me that this is the quietest raging bull market in a major asset (gold) that I can remember. Hardly bubble behavior.
Meanwhile, the Treasury market continues in its bubble. The only segment that is merely in a bull market is the long end. The 2-year Treasury note yields less than a total of 90 cents on the hundred dollar investment total over 2 years-- under 1/2% yearly. This is "going Japanese" without the consumer price decreases.
As with Japan, the big banks remain arguably insolvent--no one is allowed to know outside of the banks themselves and the authorities based in Washington. And the spending out of Washington financed in part by new money created on the spot by the Fed as well as by the accumulated savings of the U. S. and much of the world does not appear to be having much of a multiplier effect, if any. In other words, it's not stimulating.
Just as the NASDAQ bull run that began in 1975 or 1982 (take your pick or pick another start date) kept running until massive overvaluation stopped it, the gold bull market actually has a logical story. My base case is that it also keeps running until it dies of frank overvaluation or the authorities pull a Volcker and kill it.
Treasuries, on the other hand, are into bubble phase. Where they go, when, and why, I can't even guess.
Copyright (C) Long Lake LLC 2010
Tuesday, September 21, 2010
CNBC Doesn't "Dig" Gold
An anonymous writer for CNBC shows once again today that the media don't grok gold, in The Shocking Lack Of Gold Volatility:
Orderly commodity markets are an oxymoron - watch for a catalyst to move this market much higher or, much lower.
However, gold trades more as a currency. It has almost no industrial uses, it never gets consumer, etc. So there are no supply squeezes, since current production is not needed for consumption. (This comment ignores for the nonce the potential that "gold banks" have promised much more gold than they have in the vaults and thus there could be a run on said banks.)
As a currency or more properly a money-equivalent/alternative, is gold any more volatile against the dollar than currencies issued by other sovereign nations? I think that's the correct way to look at this matter, rather than comparing gold to consumable commodities with vastly lower stock-usage ratios. It is this fact of having massive stocks relative to actual consumption that differentiates gold from perhaps every other "commodity".
(Of course, everything that one can buy with money is a commodity, such as T-bills, which have almost no volatility to the SPY fund to natural gas futures. That's not the CNBC writer's point, though.)
Given gold's structural bull market, and the current very low premia to net asset value of Canadian gold ETFs that when gold hit important intermediate highs, this CNBC article continues to discourage me as an American who truly wants to see a strong dollar that deserves its strength. It just may be that until the dollar hitches its wagon once again to gold, at which time gold would cease to be either a "commodity" or an investment and would revert to its historic role as actual money, this trend of devaluation of the dollar against gold is, from an investment standpoint, your friend.
Copyright (C) Long Lake LLC 2010
Orderly commodity markets are an oxymoron - watch for a catalyst to move this market much higher or, much lower.
However, gold trades more as a currency. It has almost no industrial uses, it never gets consumer, etc. So there are no supply squeezes, since current production is not needed for consumption. (This comment ignores for the nonce the potential that "gold banks" have promised much more gold than they have in the vaults and thus there could be a run on said banks.)
As a currency or more properly a money-equivalent/alternative, is gold any more volatile against the dollar than currencies issued by other sovereign nations? I think that's the correct way to look at this matter, rather than comparing gold to consumable commodities with vastly lower stock-usage ratios. It is this fact of having massive stocks relative to actual consumption that differentiates gold from perhaps every other "commodity".
(Of course, everything that one can buy with money is a commodity, such as T-bills, which have almost no volatility to the SPY fund to natural gas futures. That's not the CNBC writer's point, though.)
Given gold's structural bull market, and the current very low premia to net asset value of Canadian gold ETFs that when gold hit important intermediate highs, this CNBC article continues to discourage me as an American who truly wants to see a strong dollar that deserves its strength. It just may be that until the dollar hitches its wagon once again to gold, at which time gold would cease to be either a "commodity" or an investment and would revert to its historic role as actual money, this trend of devaluation of the dollar against gold is, from an investment standpoint, your friend.
Copyright (C) Long Lake LLC 2010
Apple of the Public's Eye
I have more than once praised AAPL and gold as investments, such as on a Sept. 1 post. An article appeared today that indicates that Apple is playing in a different league than any of its corporate competitors, tech or otherwise. Per Secrets of Apple's customer success:
For the seventh straight year, Apple has topped its competitors in the PC industry in the University of Michigan's American Customer Satisfaction Index (ACSI), achieving a score of 86 out of 100. Its Apple's highest ranking since the annual survey began in 1995. . .
The Mac maker's nine-point lead is now the largest lead any company has over its competition in any of the 45 categories that the ACSI study surveys--including home appliances, gas stations, autos, e-commerce, airlines, and more.
AAPL is one of the few high quality large cap companies selling at a clear price-earnings ratio discount to its recent and prospective growth rate. Its growth comes with no debt, no leverage. And need anyone mention that its leadership role is in an intrinsically high-growth area, that of mobile information/communications? And that increasingly its growth is ex-U. S., and therefore it is itself an anti-dollar hedge?
If you think I like the stock, with appreciation for the substantial risks it and the overall stock market have, you are correct. Apple is sui generis. For a long time, that was a bad thing. Now it's the paragon- at a "GARP" discount to the market.
Caveat non-emptor?
Copyright (C) Long Lake LLC 2010
For the seventh straight year, Apple has topped its competitors in the PC industry in the University of Michigan's American Customer Satisfaction Index (ACSI), achieving a score of 86 out of 100. Its Apple's highest ranking since the annual survey began in 1995. . .
The Mac maker's nine-point lead is now the largest lead any company has over its competition in any of the 45 categories that the ACSI study surveys--including home appliances, gas stations, autos, e-commerce, airlines, and more.
AAPL is one of the few high quality large cap companies selling at a clear price-earnings ratio discount to its recent and prospective growth rate. Its growth comes with no debt, no leverage. And need anyone mention that its leadership role is in an intrinsically high-growth area, that of mobile information/communications? And that increasingly its growth is ex-U. S., and therefore it is itself an anti-dollar hedge?
If you think I like the stock, with appreciation for the substantial risks it and the overall stock market have, you are correct. Apple is sui generis. For a long time, that was a bad thing. Now it's the paragon- at a "GARP" discount to the market.
Caveat non-emptor?
Copyright (C) Long Lake LLC 2010
Stock Buybacks Getting Boring
Stock Buybacks Surge as Companies Borrow for Share Repurchases (per Bloomberg.com):
“It’s so cheap to do it now in the bond market: issue debt, fix their cost of capital, then shrink the number of shares outstanding,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $197 billion. “The markets are almost calling for them to do it.” . . .
“Levering a balance sheet is a good idea if you want to expand your company,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management, which manages about $44 billion. “You don’t do that unless you feel secure about 2011. It may just be the corporate outlook for 2011 is better than you would gather from economic news.”
Sorry, Mr. Miller. The right way to expand your company is to abjure financial engineering. It is NOT to borrow money with which to speculate in your company's own stock. The way to expand your company is to . . . well . . . (channel John Houseman in the old ad) . . . make money the old fashioned way: earn it. Reinvest it into other profitable enterprises with return on invested capital that well exceeds what cash will earn.
Not to be tendentious, but here's the set-up. The Fed prints lots and lots of money (which I prefer to call "money"), said money exceeds what the real economy can use and thus the money-printing drives up the prices of securities, including bonds (thus lowering interest rates); companies then try to prop their stock prices (and value of their corporate options) up, leading to the above report.
What is missing is old-fashioned American dynamism.
What's present is more of the games of the past decade. Same-old, same-old.
Somehow I don't want to think that such entrepreneurs as Mr. Goodyear, Mr. Deere, Mr. Carnegie etc. who actually contributed inventions and products that helped this country become an industrial export powerhouse focused on this sort of stuff.
We need new and better products for the real world, not more and more uncreative financial products.
Copyright (C) Long Lake LLC 2010
“It’s so cheap to do it now in the bond market: issue debt, fix their cost of capital, then shrink the number of shares outstanding,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $197 billion. “The markets are almost calling for them to do it.” . . .
“Levering a balance sheet is a good idea if you want to expand your company,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management, which manages about $44 billion. “You don’t do that unless you feel secure about 2011. It may just be the corporate outlook for 2011 is better than you would gather from economic news.”
Sorry, Mr. Miller. The right way to expand your company is to abjure financial engineering. It is NOT to borrow money with which to speculate in your company's own stock. The way to expand your company is to . . . well . . . (channel John Houseman in the old ad) . . . make money the old fashioned way: earn it. Reinvest it into other profitable enterprises with return on invested capital that well exceeds what cash will earn.
Not to be tendentious, but here's the set-up. The Fed prints lots and lots of money (which I prefer to call "money"), said money exceeds what the real economy can use and thus the money-printing drives up the prices of securities, including bonds (thus lowering interest rates); companies then try to prop their stock prices (and value of their corporate options) up, leading to the above report.
What is missing is old-fashioned American dynamism.
What's present is more of the games of the past decade. Same-old, same-old.
Somehow I don't want to think that such entrepreneurs as Mr. Goodyear, Mr. Deere, Mr. Carnegie etc. who actually contributed inventions and products that helped this country become an industrial export powerhouse focused on this sort of stuff.
We need new and better products for the real world, not more and more uncreative financial products.
Copyright (C) Long Lake LLC 2010
Monday, September 20, 2010
We Are All Speculators Now
The Federal government refuses to face the fact that its accrued liabilities, including explicit and nearly-explicit promises to current future retirees and users of governmentally-sponsored medical programs. This refusal leads everyone throughout the financial spectrum to be unable to make realistic plans.
If one is poor, and is aware of the situation, one wonders how government can continue to provide whatever aid is being provided, and one is concerned about one's future income and that of one's family.
If one is in the broad middle financially, and retired, one is being hit with no increase in Social Security payment but with large percentage increases in medical costs; and one may own one's home and have suffered loss of equity (the only real "deflation" in the economy the last few years except for typical tech pricing declines).
If one is a retiree who would have expected to be comfortable at current wealth levels as recently as 3 years ago, one now has no idea how to plan for the future. How much damage inflation will do to one's assets? What will public policy be regarding Social Security and Medicare?
If one is a young-to-middle aged employed adult, one is probably confused about what to do with income. Should it be saved? Why bother saving if government is going to tax heavily the income that the savings throw off, and in any case may inflate much of it away?
If one is truly rich (whatever that threshold is), one may be worried about the peasant-pitchfork scenario, and may be moving (more, perhaps, than one has already done) assets out of the country.
The certainty that the Federal government and many important state governments have their heads in the sand about their abilities to meet their obligations is causing sufficient uncertainty amongst the populace to be providing a negative feedback into the economy.
The blogger Calculated Risk had a (now-deceased) co-blogger who focused on the about-to-pop housing bubble known as Tanta who used to joke (not such a joke): "We are all sub-prime now!"
In 1992, tired of what then seemed like large Federal deficits and what appeared to be a once-every-50-year financial disaster (the S&L fiasco), taxpayers supported a balanced budget hawk as a 3rd party candidate for President. This Perot movement ended up being reflected in an apparently virtuous financial gridlock between the parties. The Republicans wouldn't allow President Clinton his spending priorities and he in turn would not let them cut taxes.
The public "got it" in 1992 and later in the '90s when it supported and took pride in balanced Federal budgets.
People know there is no free lunch, except perhaps in the Garden of Eden where there may have been low-hanging fruit to pick. What they need is for the President, as the official elected by all the people, to level with the American people and propose a realistic plan for government to meet all its obligations. He could propose a plan that takes Federal spending to 70% of GDP, as in Norway. Or, unlikely for this President, he could propose a plan that takes said spending to 10% of GDP, such as in Hong Kong.
The public would vigorously support the goal of a plan toward financial stability based on unaggressive projections. The political process would be charged by the President with working things out, subject of course to his veto. Then the horse-trading would begin. There is a reason why Congress has an 18% approval rating, and it comes from the public's knowledge that Washington has failed for several years to rise to Job 1:
chart a course for the future of the United States. Other countries have done so. Why can't we?
The current policy is no policy at all. It involves fighting unfunded wars; promising greater unfunded medical programs even as doctors retire young due to declining reimbursements and higher costs; "stimulating" the economy with giveaways to retirees, small and large businesses, and asphalt companies; and keeping a nominally Republican Fed chairman in place with the understanding that he will accommodate all the government's funding needs that the marketplace cannot provide at a price that the government will accept.
It is literally impossible to make logical choices one can believe in when political decisions or lack of decisions are such critical factors. Even more basic decisions such as whether to buy or sell a house are now made almost regardless of fundamental supply-demand considerations. Consider that even as unemployment came in worse than predicted in last year's "stress tests" on banks, house prices came in much higher. Who could have predicted the vast array of Fed and Federal programs to keep prices higher than expected given the relatively sluggish pace of economic growth? And will such prices and governmental support continue? Gentle Ben and governmental leaders may or may not even know. Maybe some other fiscal or military crisis will supervene.
The advent of stagflation in the 1970s threw a lot of people off balance, but the economic and financial imbalances did not become bubble-like until the energy crisis of the late 1970s sent oil prices skyrocketing for the second time in the decade. This was superimposed upon the chaos of the loss of the Viet Nam War. So the public sent Mr. Nixon packing; his plan to end the war was no plan, it turned out. Mr. Carter similarly got the boot after the "misery index" he used against Gerald Ford turned out to be much worse in 1979-80 than during Ford's tenure.
Matters turned when Messrs. Volcker (a Democrat) and Reagan laid out a coherent plan. It just may be that the fact that there was a plan that each man stuck with as long as he could was as important as the specifics of the plans. The political process put each man in place with his plans, thus the public explicitly and/or implicitly bought in, and individuals and businesses could make plans under this new set of policies.
Sorry, but health insurance reform to start after the next Presidential election, and another deficit commission due to report after the midterm elections is not a plan.
Mr. Obama started his term with a reservoir of very good will and fervent hopes, just as Jimmy Carter did. Neither one delivered what the public hoped when they elected them. Mr. Obama has time. He's wasted a year and a half from an economic perspective. Until he and Congress agree on a realistic plan that shows that Leviathan has developed strong self-assessment skills, we all all be fumbling around in the dark in America.
Exploration of new frontiers has its benefits. But nothing beats travel plans based on a good map. The country needs a good map. Blaming the prior guy does not provide that map.
Meanwhile the financial markets continue with two trends intact: falling Treasury yields and rising precious metals (and other commodity) prices. As with NASDAQ 1990s and housing 2000s, financial bodies in motion can stay in motion longer than reality-based bears can stay solvent. The third and most recent trend is truly easy money. Forget 1%- that is so last decade. Money should be free in the land of the free, right?
Well, sort of. If you're a member of Big Finance, yes, not only should it be free, but you should get to make money on the very money you put in reserve against losses. Huh?
The leaders of the United States of America are deliberately turning the country into a land where everybody has to guess as to what plan, or non-plan, they will come up with next. Thus we cannot plan our own futures.
We are all speculators now.
For the perma-bulls amongst us: precisely why will this end well before it gets worse?
Copyright (C) Long Lake LLC 2010
If one is poor, and is aware of the situation, one wonders how government can continue to provide whatever aid is being provided, and one is concerned about one's future income and that of one's family.
If one is in the broad middle financially, and retired, one is being hit with no increase in Social Security payment but with large percentage increases in medical costs; and one may own one's home and have suffered loss of equity (the only real "deflation" in the economy the last few years except for typical tech pricing declines).
If one is a retiree who would have expected to be comfortable at current wealth levels as recently as 3 years ago, one now has no idea how to plan for the future. How much damage inflation will do to one's assets? What will public policy be regarding Social Security and Medicare?
If one is a young-to-middle aged employed adult, one is probably confused about what to do with income. Should it be saved? Why bother saving if government is going to tax heavily the income that the savings throw off, and in any case may inflate much of it away?
If one is truly rich (whatever that threshold is), one may be worried about the peasant-pitchfork scenario, and may be moving (more, perhaps, than one has already done) assets out of the country.
The certainty that the Federal government and many important state governments have their heads in the sand about their abilities to meet their obligations is causing sufficient uncertainty amongst the populace to be providing a negative feedback into the economy.
The blogger Calculated Risk had a (now-deceased) co-blogger who focused on the about-to-pop housing bubble known as Tanta who used to joke (not such a joke): "We are all sub-prime now!"
In 1992, tired of what then seemed like large Federal deficits and what appeared to be a once-every-50-year financial disaster (the S&L fiasco), taxpayers supported a balanced budget hawk as a 3rd party candidate for President. This Perot movement ended up being reflected in an apparently virtuous financial gridlock between the parties. The Republicans wouldn't allow President Clinton his spending priorities and he in turn would not let them cut taxes.
The public "got it" in 1992 and later in the '90s when it supported and took pride in balanced Federal budgets.
People know there is no free lunch, except perhaps in the Garden of Eden where there may have been low-hanging fruit to pick. What they need is for the President, as the official elected by all the people, to level with the American people and propose a realistic plan for government to meet all its obligations. He could propose a plan that takes Federal spending to 70% of GDP, as in Norway. Or, unlikely for this President, he could propose a plan that takes said spending to 10% of GDP, such as in Hong Kong.
The public would vigorously support the goal of a plan toward financial stability based on unaggressive projections. The political process would be charged by the President with working things out, subject of course to his veto. Then the horse-trading would begin. There is a reason why Congress has an 18% approval rating, and it comes from the public's knowledge that Washington has failed for several years to rise to Job 1:
chart a course for the future of the United States. Other countries have done so. Why can't we?
The current policy is no policy at all. It involves fighting unfunded wars; promising greater unfunded medical programs even as doctors retire young due to declining reimbursements and higher costs; "stimulating" the economy with giveaways to retirees, small and large businesses, and asphalt companies; and keeping a nominally Republican Fed chairman in place with the understanding that he will accommodate all the government's funding needs that the marketplace cannot provide at a price that the government will accept.
It is literally impossible to make logical choices one can believe in when political decisions or lack of decisions are such critical factors. Even more basic decisions such as whether to buy or sell a house are now made almost regardless of fundamental supply-demand considerations. Consider that even as unemployment came in worse than predicted in last year's "stress tests" on banks, house prices came in much higher. Who could have predicted the vast array of Fed and Federal programs to keep prices higher than expected given the relatively sluggish pace of economic growth? And will such prices and governmental support continue? Gentle Ben and governmental leaders may or may not even know. Maybe some other fiscal or military crisis will supervene.
The advent of stagflation in the 1970s threw a lot of people off balance, but the economic and financial imbalances did not become bubble-like until the energy crisis of the late 1970s sent oil prices skyrocketing for the second time in the decade. This was superimposed upon the chaos of the loss of the Viet Nam War. So the public sent Mr. Nixon packing; his plan to end the war was no plan, it turned out. Mr. Carter similarly got the boot after the "misery index" he used against Gerald Ford turned out to be much worse in 1979-80 than during Ford's tenure.
Matters turned when Messrs. Volcker (a Democrat) and Reagan laid out a coherent plan. It just may be that the fact that there was a plan that each man stuck with as long as he could was as important as the specifics of the plans. The political process put each man in place with his plans, thus the public explicitly and/or implicitly bought in, and individuals and businesses could make plans under this new set of policies.
Sorry, but health insurance reform to start after the next Presidential election, and another deficit commission due to report after the midterm elections is not a plan.
Mr. Obama started his term with a reservoir of very good will and fervent hopes, just as Jimmy Carter did. Neither one delivered what the public hoped when they elected them. Mr. Obama has time. He's wasted a year and a half from an economic perspective. Until he and Congress agree on a realistic plan that shows that Leviathan has developed strong self-assessment skills, we all all be fumbling around in the dark in America.
Exploration of new frontiers has its benefits. But nothing beats travel plans based on a good map. The country needs a good map. Blaming the prior guy does not provide that map.
Meanwhile the financial markets continue with two trends intact: falling Treasury yields and rising precious metals (and other commodity) prices. As with NASDAQ 1990s and housing 2000s, financial bodies in motion can stay in motion longer than reality-based bears can stay solvent. The third and most recent trend is truly easy money. Forget 1%- that is so last decade. Money should be free in the land of the free, right?
Well, sort of. If you're a member of Big Finance, yes, not only should it be free, but you should get to make money on the very money you put in reserve against losses. Huh?
The leaders of the United States of America are deliberately turning the country into a land where everybody has to guess as to what plan, or non-plan, they will come up with next. Thus we cannot plan our own futures.
We are all speculators now.
For the perma-bulls amongst us: precisely why will this end well before it gets worse?
Copyright (C) Long Lake LLC 2010
Is Berkshire's Charles Munger Still Making Sense?
Bloomberg.com is reporting some surprising statements from Berkshire Hathaway's long-time vice chairman, Charlie Munger, in Munger Says `Thank God' U.S. Opted for Bailouts Over Handouts.
From the article:
“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”
Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.” . . .
“There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be,’” Munger said at the event, which was moderated by CNBC’s Becky Quick. “At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”
From the article:
“You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”
Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.” . . .
“There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be,’” Munger said at the event, which was moderated by CNBC’s Becky Quick. “At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”
There is much with which to disagree in Mr. Munger's sentiments. For one, it would seem that the U. S. in fact had an "awful" downturn despite the bailouts. For another, it is difficult to see how a managed bankruptcy of Citigroup or Bank of America (or both) would have destroyed civilization as we know it. For a third counterexample, shouldn't the corporations have adapted, such as by wiping out the common shareholders as appropriate and having the bondholders convert their bonds into equity?
Come to think of it, didn't GM do just that? And somehow civilization survived?
A miracle!
Once again, let us review matters. The bailouts were bailouts of bank holding company bondholders, as well as of senior bondholders of Fannie and Freddie (as well as of mortgage-related securities). They were bailouts of counterparties of AIG. They were in many cases bailouts of common shareholders of numerous companies large and small. The bailouts have sustained all sorts of companies and individuals associated with them. The companies that took the lead in the fraud and the bubble, and their bondholders, received aid. Mr. Munger approves of such aid. Who paid for this aid? Why, it was we the people. What does he think of we the people?
In contrast, he appears to take a hardhearted viewpoint to individuals who may have believed in the media's touting of housing as a great, no-lose investment. But it's individuals and not corporations that have hunger, feel the sting of adverse weather when sleeping outdoors rather than in a home, and that ultimately built this country.
Munger applauds the bailouts of owners of stocks, bonds and mortgages who invested unwisely or unluckily. The fate of the little guy who was simply caught up in a bubble of historic proportions and that had at its root extensive mortgage fraud that the FBI stopped investigating after the 9/11 attacks changed priorities troubles him little if at all. Even though all the little guys collectively paid for the bailouts.
It's one thing to cultivate an image as a curmudgeon. That's Munger. It's another to equate the bailouts that so infuriated a nation with saving civilization. Charles Munger is 86 years old. It is certain that a brain scan would reveal that his brain is shrunken. He's "talked his book" one time too many and in an unduly offensive manner, in my humble opinion.
Time for him to suck it in and step down.
Copyright (C) Long Lake LLC 2010
Thursday, September 16, 2010
The Peso of the North
Look who's got the strong currencies, as reported by Reuters:
BOGOTA, Sept 15 (Reuters) - Colombia's central bank on Wednesday started purchasing what it said would be at least $20 million daily for the next four months to help ease the rise of its currency, becoming the latest Latin American economy to intervene in its market.
The move left the door open for more measures to curb the peso's COP=RR appreciation and followed intervention by Brazil to ease the real's climb and Peru's buying dollars to curb the sol.
The article is worth a read in its brief entirety.
Yours truly continues to be at least as comfortable with Brazilian real-denominated interest bearings debt instruments as with any multinational stock. The vehicle has the NYSE symbol of BZF, which ties to the short-term money market rate. Not nearly as easy to purchase are real-denominated Brazilian government bonds. These have a different risk-reward calculus from BZF. You may wish to consult a financial adviser and/or do some independent research to see if either of these vehicles makes sense for you.
In any case, the worm has turned. The U. S. dollar is the weak currency. Exchange controls may be more likely in the U. S. than in Brazil.
What is the Spanish word for schadenfreude?
And the Portuguese word for it as well . . .
There just may some of that emotion going on in central banks south of the equator in the Western hemisphere.
Copyright (C) Long Lake LLC 2010
BOGOTA, Sept 15 (Reuters) - Colombia's central bank on Wednesday started purchasing what it said would be at least $20 million daily for the next four months to help ease the rise of its currency, becoming the latest Latin American economy to intervene in its market.
The move left the door open for more measures to curb the peso's COP=RR appreciation and followed intervention by Brazil to ease the real's climb and Peru's buying dollars to curb the sol.
The article is worth a read in its brief entirety.
Yours truly continues to be at least as comfortable with Brazilian real-denominated interest bearings debt instruments as with any multinational stock. The vehicle has the NYSE symbol of BZF, which ties to the short-term money market rate. Not nearly as easy to purchase are real-denominated Brazilian government bonds. These have a different risk-reward calculus from BZF. You may wish to consult a financial adviser and/or do some independent research to see if either of these vehicles makes sense for you.
In any case, the worm has turned. The U. S. dollar is the weak currency. Exchange controls may be more likely in the U. S. than in Brazil.
What is the Spanish word for schadenfreude?
And the Portuguese word for it as well . . .
There just may some of that emotion going on in central banks south of the equator in the Western hemisphere.
Copyright (C) Long Lake LLC 2010
Wednesday, September 15, 2010
Irrational Optimism about Housing among Experts; Continued Consumer Pessimism
ABC News reports Economic Pessimism at a Yearlong High:
For the third straight month significantly more Americans say the economy is getting worse, 38 percent, than say it’s getting better, 22 percent. The rest, 37 percent, say it’s staying the same, which for nearly all of them means bad.
The gap between pessimists and optimists has grown from 6 points in July and 11 points in August to 16 points now, its biggest since September 2009. Economic optimism is at its low going even further back, to March 2009.
Stock prices are of course much higher than in March 2009. Contrarians who want to "buy" pessimism should realize that with mutual fund cash at or near a modern record low as a % of assets under management, facts do not support that idea that the stock market is especially either oversold.
There is however some optimism, and some of it may be misplaced.
Some of the optimists who should be realists are real estate experts who should know better. Bloomberg.com reports U.S. Home Prices Face Three-Year Drop as Supply Gains and describes a hold-on-and-wait viewpoint from two interesting players:
Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta’s Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005.
“I’m stuck,” Miner said. “I thought it was a stepping stone to a house.”
Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three- bedroom house in a good Atlanta-area neighborhood at today’s prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated.
“I’m not $200,000 in the hole, thank God,” she said. “But the quarter of the country that’s underwater -- that’s me.”
Ms. Miner would not "cost" her a specific amount if she sold now, other than closing and moving costs. Her home has lost value. Another person who appears to have an optimistic point of view about prices bouncing back is even more surprising:
The slide in values and record-low interest rates may offer some bargains for property hunters. Prices have returned to historically affordable levels, said Karl Case, professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller index. He estimates a bottom for prices in six months. . .
Case is an example of a homeowner waiting to sell because of low demand. He’s seeking to sell the A-frame on 15 acres near Cooperstown, New York, that he bought for $190,000 in 2005.
“I want to keep it if I can’t get what I want,” he said. “It’s a terrific little getaway and I’m not going to give it away.”
In the meantime, all the Fed and Federal programs (including bank forbearance) have kept housing prices above their equilibrium price. Waiting for any specific property to come back to the price you like is quite a gamble. It's like buying Oracle at 30 but it's now 2002, not 1999 and it's and 10, or 20, or whatever. It may never come back.
I am looking for housing to play the role that tech played for years following the tech bust: a deflationary or relatively disinflationary force. I also expect short-term interest rates to stay below the rate of consumer price rises for some time. This could be the 1940s and early 1950s again, with very low interest rates due both to public fear and active purchase of Treasury debt by the Fed coupled with high rate of price rises; let us hope no worse war comes along.
Under this scenario, classic inflation hedges beat general common stocks, and Treasuries are trading vehicles; and cash is trash until and unless the U. S. actually enters a sustained period of generalized price decreases.
Copyright (C) Long Lake LLC 2010
For the third straight month significantly more Americans say the economy is getting worse, 38 percent, than say it’s getting better, 22 percent. The rest, 37 percent, say it’s staying the same, which for nearly all of them means bad.
The gap between pessimists and optimists has grown from 6 points in July and 11 points in August to 16 points now, its biggest since September 2009. Economic optimism is at its low going even further back, to March 2009.
Stock prices are of course much higher than in March 2009. Contrarians who want to "buy" pessimism should realize that with mutual fund cash at or near a modern record low as a % of assets under management, facts do not support that idea that the stock market is especially either oversold.
There is however some optimism, and some of it may be misplaced.
Some of the optimists who should be realists are real estate experts who should know better. Bloomberg.com reports U.S. Home Prices Face Three-Year Drop as Supply Gains and describes a hold-on-and-wait viewpoint from two interesting players:
Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta’s Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005.
“I’m stuck,” Miner said. “I thought it was a stepping stone to a house.”
Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three- bedroom house in a good Atlanta-area neighborhood at today’s prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated.
“I’m not $200,000 in the hole, thank God,” she said. “But the quarter of the country that’s underwater -- that’s me.”
Ms. Miner would not "cost" her a specific amount if she sold now, other than closing and moving costs. Her home has lost value. Another person who appears to have an optimistic point of view about prices bouncing back is even more surprising:
The slide in values and record-low interest rates may offer some bargains for property hunters. Prices have returned to historically affordable levels, said Karl Case, professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller index. He estimates a bottom for prices in six months. . .
Case is an example of a homeowner waiting to sell because of low demand. He’s seeking to sell the A-frame on 15 acres near Cooperstown, New York, that he bought for $190,000 in 2005.
“I want to keep it if I can’t get what I want,” he said. “It’s a terrific little getaway and I’m not going to give it away.”
In the meantime, all the Fed and Federal programs (including bank forbearance) have kept housing prices above their equilibrium price. Waiting for any specific property to come back to the price you like is quite a gamble. It's like buying Oracle at 30 but it's now 2002, not 1999 and it's and 10, or 20, or whatever. It may never come back.
I am looking for housing to play the role that tech played for years following the tech bust: a deflationary or relatively disinflationary force. I also expect short-term interest rates to stay below the rate of consumer price rises for some time. This could be the 1940s and early 1950s again, with very low interest rates due both to public fear and active purchase of Treasury debt by the Fed coupled with high rate of price rises; let us hope no worse war comes along.
Under this scenario, classic inflation hedges beat general common stocks, and Treasuries are trading vehicles; and cash is trash until and unless the U. S. actually enters a sustained period of generalized price decreases.
Copyright (C) Long Lake LLC 2010
Tuesday, September 14, 2010
Mr. Softee Goes for the Big Blue Pill
The beginning of the end of Microsoft as an interesting investment has occurred. Bloomberg.com reports Microsoft Said to Plan Debt Sale, May Boost Dividend.
The opening paragraph tells us you need to know:
Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter.
Mr. Softee (the standard Street moniker for MSFT) is going the route of the federal government and before it IBM, the stock of which has also been range-bound for, let us see-- forever! (Or so it seems.) For no good reason other than to appease constituencies that are non-core, meaning constituencies that are NOT their customers, it has now committed to the route of pumping the stock price since AAPL/GOOG and others have defeated it in the game of corporate "Go" and blocked all its growth paths. It's all over now, baby Big Blue, but the Brownian stock motion.
Copyright (C) Long Lake LLC 2010
The opening paragraph tells us you need to know:
Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter.
Mr. Softee (the standard Street moniker for MSFT) is going the route of the federal government and before it IBM, the stock of which has also been range-bound for, let us see-- forever! (Or so it seems.) For no good reason other than to appease constituencies that are non-core, meaning constituencies that are NOT their customers, it has now committed to the route of pumping the stock price since AAPL/GOOG and others have defeated it in the game of corporate "Go" and blocked all its growth paths. It's all over now, baby Big Blue, but the Brownian stock motion.
Copyright (C) Long Lake LLC 2010
Gold's New High and Monetization of the Debt
Here is a suggestion about why gold is at a new record high today, up about 2% in one day. It has to do with the following two "front page" article summaries from Eurointelligence (link provided, but free subscription may be required):
ECB IS BUYING BONDS AGAIN
So much for phasing out the bond purchasing programme. The latest weekly ECB data suggest that the ECB bought €237m worth sovereign bonds last week, the highest since the middle of August, according to the FT. Still small in absolute size, the paper notes, it is a sign of continuing problems in eurozone bond markets. Irish traders last week reported that the ECB had been in the market to support Irish bonds, whose yield spread to German bunds rose to new record levels. The article suggested that the ECB was also buying Greek and Portuguese bonds.
About that ECB’s exit strategy
Ralph Atkins and David Oakley have an excellent analysis in the FT about the change in the ECB’s exit strategy. While a year ago it was the conventional wisdom inside the ECB that the banking support policy would have to be phased out, and only then could interest rates rise. That is no longer so. As banks have become dependent on generous ECB liquidity support, it is possible that the monetary tightening occurs while the liquidity policies are still in place.
The eurozone, Japan, the U. S.: the three most important currency blocs around, all have central banks busily monetizing government debt and/or central governments engaged in massive deficit spending upon a base of huge accumulated deficits. Gold cannot be printed by a central bank, and I believe that its seemingly inexorable price rise since 9/11/01 relates to the permissive monetary policies that followed in the wake of the twin wars on the post-bubble economy (fighting "deflation") and on "terror".
Unfortunately, there is little evidence that officialdom is changing its pro-money-printing views yet. Witness Dana Milbank's piece today in the WaPo, titled John Maynard Keynes, the GOP's latest whipping boy. I have no time to deconstruct what is in large part a political rather than economic article, but the article tries to make the case that Keynes remains an economic god, or perhaps the God of economists. One brief quote in the article from a Republican economist shows Mr. Milbank's argument:
"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics."
In other words, the point is, we are all Keynesians now. Resistance is futile. If you are not a member of the Keynesian Borg, you are just out of it intellectually.
Hmmm . . .
In my view, the idea that Wise Guys in Washington know better than individuals, businesses, non-profits etc. what level of consumption vs. saving is optimal for the inanimate abstraction called "the economy" is wrong in theory and increasingly is proving wrong in practice.
Increasingly, Keynesianism is the ancien regime, out of touch with today's realities. At the close of Milbank's piece, he talks about the "misery" people of today. Perhaps he thinks he's back in France of the 1780's, with most people living in hovels (at best) and Jean Valjeans stealing bread to support their families. Les Mis and all that. Perhaps he more mildly believes this is America of the 1930s, where a brilliant politician could credibly claim to see one-third of a country ill-fed/housed/clothed. Mr. Milbank may not have noticed that today, in contrast, we see one-third of the country obese and one-third in houses too large and fancy for them to afford.
As Shakespeare might have said, Keynesian has succeeded not wisely but too well.
Governments all over the world are dealing with a modern credit collapse of a scale that rivals that of the 1930s; and as in the 1930s, different countries are dealing with the issue differently.
The new highs in gold are evidence that market participants continue to view these efforts skeptically. The gold rally (dollar collapse) of the 1970s did not end until Paul Volcker took decisive action to make dollar-denominated investments attractive. Why should matters be different this time?
Copyright (C) Long Lake LLC 2010
ECB IS BUYING BONDS AGAIN
So much for phasing out the bond purchasing programme. The latest weekly ECB data suggest that the ECB bought €237m worth sovereign bonds last week, the highest since the middle of August, according to the FT. Still small in absolute size, the paper notes, it is a sign of continuing problems in eurozone bond markets. Irish traders last week reported that the ECB had been in the market to support Irish bonds, whose yield spread to German bunds rose to new record levels. The article suggested that the ECB was also buying Greek and Portuguese bonds.
About that ECB’s exit strategy
Ralph Atkins and David Oakley have an excellent analysis in the FT about the change in the ECB’s exit strategy. While a year ago it was the conventional wisdom inside the ECB that the banking support policy would have to be phased out, and only then could interest rates rise. That is no longer so. As banks have become dependent on generous ECB liquidity support, it is possible that the monetary tightening occurs while the liquidity policies are still in place.
The eurozone, Japan, the U. S.: the three most important currency blocs around, all have central banks busily monetizing government debt and/or central governments engaged in massive deficit spending upon a base of huge accumulated deficits. Gold cannot be printed by a central bank, and I believe that its seemingly inexorable price rise since 9/11/01 relates to the permissive monetary policies that followed in the wake of the twin wars on the post-bubble economy (fighting "deflation") and on "terror".
Unfortunately, there is little evidence that officialdom is changing its pro-money-printing views yet. Witness Dana Milbank's piece today in the WaPo, titled John Maynard Keynes, the GOP's latest whipping boy. I have no time to deconstruct what is in large part a political rather than economic article, but the article tries to make the case that Keynes remains an economic god, or perhaps the God of economists. One brief quote in the article from a Republican economist shows Mr. Milbank's argument:
"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics."
In other words, the point is, we are all Keynesians now. Resistance is futile. If you are not a member of the Keynesian Borg, you are just out of it intellectually.
Hmmm . . .
In my view, the idea that Wise Guys in Washington know better than individuals, businesses, non-profits etc. what level of consumption vs. saving is optimal for the inanimate abstraction called "the economy" is wrong in theory and increasingly is proving wrong in practice.
Increasingly, Keynesianism is the ancien regime, out of touch with today's realities. At the close of Milbank's piece, he talks about the "misery" people of today. Perhaps he thinks he's back in France of the 1780's, with most people living in hovels (at best) and Jean Valjeans stealing bread to support their families. Les Mis and all that. Perhaps he more mildly believes this is America of the 1930s, where a brilliant politician could credibly claim to see one-third of a country ill-fed/housed/clothed. Mr. Milbank may not have noticed that today, in contrast, we see one-third of the country obese and one-third in houses too large and fancy for them to afford.
As Shakespeare might have said, Keynesian has succeeded not wisely but too well.
Governments all over the world are dealing with a modern credit collapse of a scale that rivals that of the 1930s; and as in the 1930s, different countries are dealing with the issue differently.
The new highs in gold are evidence that market participants continue to view these efforts skeptically. The gold rally (dollar collapse) of the 1970s did not end until Paul Volcker took decisive action to make dollar-denominated investments attractive. Why should matters be different this time?
Copyright (C) Long Lake LLC 2010
Monday, September 13, 2010
Economic Reporting Sets New Low; Get Next Year's News Now
U.S. Accelerates in 2011 as Demise of Consumer Is Exaggerated
The above is the title of what is currently the lead article on Bloomberg.com (about midnight Eastern time).
I had to get this post up before the headline changes. This is what passes for news these days in the mainstream media. This article is dated September 13, but the year is 2010. This is "prequel" reporting. The Internet Age has made a further advance, it would appear.
Here is further nonsense from the article's introductory paragraphs:
U.S. Accelerates in 2011 as Demise of Consumer Is Exaggerated
By Rich Miller
Sept. 13 (Bloomberg) -- Reports of the demise of the U.S. consumer have been exaggerated.
Households are reducing their debts and building savings faster than he anticipated, said Richard Berner, co-head of global economics for Morgan Stanley in New York, giving them more room to spend in the future.
In conjunction with the intro paragraphs, the message appears to be that those wily and strong-willed American consumers are restricting their consumption this year so they can go whole hog next year. Sort of like a sine wave.
I don't think so. Does the obesity epidemic suggest that the American consumer can cut back at will unless absolutely forced to do so?
The article gets "better". Robert Doll - a man for whom "perma-bull" is almost too weak a term - makes an entrance early on in the article and is quoted as saying:
“The U.S. consumer is not dead.”
Thanks for that insight, Bob!
Regular readers of this blog need not read the entire article. Clearly the title shows that it is another puff piece, just a more idiotic one than usual. Even Michael Bloomberg has no idea what will happen with the economy next year.
When the Fed feels forced to monetize massive amounts of government debt, and said government is keeping consumer spending going with such measures as having over 40 million Americans receive food stamps and over 50 million Americans receive Medicaid, the economic times are out of joint.
It's hard enough to figure out what happened last year. Reporting this year on hoped-for good news from next year is bad "news".
Copyright (C) Long Lake LLC 2010
The above is the title of what is currently the lead article on Bloomberg.com (about midnight Eastern time).
I had to get this post up before the headline changes. This is what passes for news these days in the mainstream media. This article is dated September 13, but the year is 2010. This is "prequel" reporting. The Internet Age has made a further advance, it would appear.
Here is further nonsense from the article's introductory paragraphs:
U.S. Accelerates in 2011 as Demise of Consumer Is Exaggerated
By Rich Miller
Sept. 13 (Bloomberg) -- Reports of the demise of the U.S. consumer have been exaggerated.
Households are reducing their debts and building savings faster than he anticipated, said Richard Berner, co-head of global economics for Morgan Stanley in New York, giving them more room to spend in the future.
In conjunction with the intro paragraphs, the message appears to be that those wily and strong-willed American consumers are restricting their consumption this year so they can go whole hog next year. Sort of like a sine wave.
I don't think so. Does the obesity epidemic suggest that the American consumer can cut back at will unless absolutely forced to do so?
The article gets "better". Robert Doll - a man for whom "perma-bull" is almost too weak a term - makes an entrance early on in the article and is quoted as saying:
“The U.S. consumer is not dead.”
Thanks for that insight, Bob!
Regular readers of this blog need not read the entire article. Clearly the title shows that it is another puff piece, just a more idiotic one than usual. Even Michael Bloomberg has no idea what will happen with the economy next year.
When the Fed feels forced to monetize massive amounts of government debt, and said government is keeping consumer spending going with such measures as having over 40 million Americans receive food stamps and over 50 million Americans receive Medicaid, the economic times are out of joint.
It's hard enough to figure out what happened last year. Reporting this year on hoped-for good news from next year is bad "news".
Copyright (C) Long Lake LLC 2010
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