There has been alot of talk recently about inflation and even the Fed pulling back some of the liquidity they have added to the market. Hence, the ideas of a V shaped recovery are popular.
I think it is all ridiculous. I don't think the odds of a depression have really dropped off that meaningfully in the last four months and in some ways I think the playbook for a depression is being followed fairly closely.
In my latest quarterly letter I talked about the normal cycle within a non normal cycle. I said:
Modern economic history in the last hundred years has been split into two basic cycles. The “normal cycle” which ends with a Fed induced recession caused by raising interest rates, forcing the economy to slow with the overall goal of keeping a lid on inflation and the “non-normal” cycle which is the result of too much leverage in the system outside of the Fed’s control. This is what occurred during the Great Depression and Japan’s implosion in the 1990s. It is incredible that investors are still trying to apply the economics of normal cycles to the current economic decline. The world is in a “non-normal” mega deleveraging cycle. Of all the premises circulating in the marketplace, this appears the most obvious.
and
As production stabilizes, investor’s optimism rises, but investors are looking for the normal cycle. In reality, it is the normal cycle embedded in a non-normal cycle, the production stabilizing after inventories are worked off, but the underlying demand is still deteriorating. A stabilization in overall production occurred in late 1930 into early 1931. There was great hope that the bottom was in; yet, demand was still deteriorating. This demand stabilization is what matters (not production or inventory levels) and investors are once again failing to recognize the difference between today and normal recessions.....If the deleverging continues, which seems inevitable, demand will continue to decrease. If this decrease continues, once the inventory correction is complete, the production will once again turn lower. It is what occurred in late 1930 and unless the deleverging stops, it will occur again.
What is occurring is what I wrote about. We have had two months in a row of retail sales dropping, both months missing forecast. We are almost assured now a third month in a row (May). That should mean consumer spending was down in Q2 after a bounce in Q1. Today same store sales were reported. Chain store sales were down a record 4.6% in May.
We probably have another month of two for production to catch up to the depletion in inventory but what matters is the demand stabilization. There sill appears to be little of that occurring. This means the normal road of a depression / non normal cycle is being followed very closely.
Thursday, June 4, 2009
U.S. Mortgage Rates
This is becoming a big issue. The 30 year mortgage rates have hit the year high. Like the other big issues that the market is ignoring, the market is continues to ignore this one. For all the efforts of the Fed and the U.S. government to keep mortgage rates low, this is a complete slap in the face.
I tend to think this is all more tied to the inflation trade and what is forcing oil and other commodities higher. I still think it is premature and the rates and the commodities will head lower before really taking off sometime in the next 1 to 3 years. Could be wrong but in the short term, the more the mortgage rates stick north of five percent and the more commodities climb, the more pain the consumer will feel.
From Bloomberg
Fixed U.S. mortgage rates jumped to the highest level this year, signaling the Federal Reserve’s plan to lower borrowing costs has stalled.
The average 30-year rate rose to 5.29 from 4.91 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The last time the rate was higher was Dec. 11, when it was 5.47 percent.
and
Yields on the benchmark 10-year Treasury note and Fannie Mae mortgage bonds are higher than they were before the Federal Reserve said March 18 that it would buy as much as $1.25 trillion in mortgage-backed securities to help drive down borrowing costs.
I tend to think this is all more tied to the inflation trade and what is forcing oil and other commodities higher. I still think it is premature and the rates and the commodities will head lower before really taking off sometime in the next 1 to 3 years. Could be wrong but in the short term, the more the mortgage rates stick north of five percent and the more commodities climb, the more pain the consumer will feel.
From Bloomberg
Fixed U.S. mortgage rates jumped to the highest level this year, signaling the Federal Reserve’s plan to lower borrowing costs has stalled.
The average 30-year rate rose to 5.29 from 4.91 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The last time the rate was higher was Dec. 11, when it was 5.47 percent.
and
Yields on the benchmark 10-year Treasury note and Fannie Mae mortgage bonds are higher than they were before the Federal Reserve said March 18 that it would buy as much as $1.25 trillion in mortgage-backed securities to help drive down borrowing costs.
Wednesday, June 3, 2009
Zeke Ashton Interview
One of my favorite probably lesser known investors is Zeke Ashton from Centaur Capital. I have met him a couple of times and he is a great guy besides being a great investor. I love how he approaches the investing world and believe our views are pretty similar in how we look at things like portfolio construction. He uses options and leaps alot to minimize risk which I am very activity involved with as well. He did an interview with the Manual of Ideas that Seeking Alpha republished. I highly recommend reading it. It covers many of his points from his speech at the Value Investing Congress and discusses some major risk management themes in investing. Risk management in investing is not about formulas but about common sense. Of course when your losing money it sometimes means doing what you don't want to do but have to force yourself psychologically into doing it. Great read.
Another Quirky Day
Another day where there was no volume and a buyer stepped into the close to propel the markets higher in the last fifteen minutes. Most of the time I don't have any opinion on where the market is going in the short term and this is one of those times. We may go higher, we may go lower, who knows, and I don't care all that much. The economic news was dreadful, more dreadful than usual, especially if you consider Europe's news on consumption and exports and then the revisions in previous months for the U.S. data. The market actually did fairly well considering all of that. The lack of volume said there was no sellers, there was just no buyers also which caused the market to head lower.
Outside the short term, the tension continues to build. Eastern Europe problems continue to build and with mortgage rates over 5% another host of problems are being created. In my opinion, it is just a matter of when not if this all finally blows and lower we go.
Outside the short term, the tension continues to build. Eastern Europe problems continue to build and with mortgage rates over 5% another host of problems are being created. In my opinion, it is just a matter of when not if this all finally blows and lower we go.
"We are all going to die" - Jim Rogers
Okay, that is not exactly what Jim Roger said in this interview with The Economic Times but pretty close. Jim is always fairly frank and he holds no punches in this one. Talks about currency collapse and the Dow going to a 1,000,000 in dollar terms because of the collapse.
In a word I think it is nutty (in the time frame he is talking about). His points if you cut the drama from it are very very valid and things I have been talking about over and over again.
Even if he is 100% right, this stuff does not happen overnight. If you study the history of the Wiemar Republic in the 20s into the 30s it took years before things really unraveled. There was high inflation (well at least by our standards) of 5 up to 15% for years before the 100,000% inflation rates hit. The stock market went way down before skyrocketing in local currency terms before basically going to zero.
A major sovereign default will cause deflation, not inflation, in all countries outside of that nation. So if UK defaults or devalues similar to 1931, just like 1931, it will lead to deflation in the United States.
Anyway, read the interview, glean from the themes, understand the inherent meaning behind the themes, and discard the rest keeping a piece of it in the far reaches of your mind.
The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?
In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.
Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again. Thanks goes to several of you.
Are you worried about any particular market or region?
I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.
But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.
and
What kind of a market are you witnessing now?
It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.
In a word I think it is nutty (in the time frame he is talking about). His points if you cut the drama from it are very very valid and things I have been talking about over and over again.
Even if he is 100% right, this stuff does not happen overnight. If you study the history of the Wiemar Republic in the 20s into the 30s it took years before things really unraveled. There was high inflation (well at least by our standards) of 5 up to 15% for years before the 100,000% inflation rates hit. The stock market went way down before skyrocketing in local currency terms before basically going to zero.
A major sovereign default will cause deflation, not inflation, in all countries outside of that nation. So if UK defaults or devalues similar to 1931, just like 1931, it will lead to deflation in the United States.
Anyway, read the interview, glean from the themes, understand the inherent meaning behind the themes, and discard the rest keeping a piece of it in the far reaches of your mind.
The possibility of a sovereign default in the developed world could further depress sentiments. You think it’s possible?
In 1918, the UK was the richest and the most powerful country in the world. Within one generation it was in shambles, within two-and-a-half generations it defaulted. The UK defaulted in 1970s and had to be bailed out by the IMF. Many of the countries in the developed world are in serious trouble right now.
Iceland has already defaulted. I think there could be a currency crisis because of sovereign debt problems later this year, next year or 2011. Developed nations have defaulted before. Remember the Asian crisis. It was a default of one kind or the other. It has happened before and it will happen again. Thanks goes to several of you.
Are you worried about any particular market or region?
I am glad that I have no investments in the UK. Neither long, nor short. I am convinced that it’s in trouble. I am worried about the US. I have sold nearly all of my US dollars. I always had some as I am an American citizen. But I see serious problems developing there. Those two of the big developed countries are the ones that I see with the most likely problems.
But the problem is that it never works that way. Everybody is sitting here watching the UK and US and it may happen in say Portugal or some place we haven’t thought of and it will come suddenly to surprise us all.
and
What kind of a market are you witnessing now?
It's a bear market rally. I was going to say I don't think S&P 500 will see new highs. But I have to quickly temper that by saying against the dollar because the S&P 500 could triple from here if they print enough money and the value of the US dollar collapses, then S&P could go to 50,000, Dow Jones can go to 1,00,000.
Your Tax Dollars at Work at JP Morgan
Goldman has been playing this game and now JP Morgan is jumping in the mix. According to Bloomberg JP Morgan has leased a tanker to store heating oil off shore. Goldman has been doing this with regular oil for months.
So, as I have said numerous times, we are drowning in oil. Inventories are sky high. Yet, oil prices keep going up (until today). This is because of 1) market manipulation - if held offshore they don't go in the official inventory numbers and it makes current supply scarce and 2) China stockpiling probably because they would rather pay for an overpriced asset like oil than pay for an overpriced long term US bond.
Either way, this drives up input prices for companies and hurts the consumers where more of our dollars go to pay for fuel at the pump. JP Morgan of course has TARP money, tax payer money, to play this game. If the bet goes bad, I guess they are to big to fail and you and I will bail them out. Got to love the world we live in.
JPMorgan Chase & Co., the second- largest U.S. bank by deposits, hired a newly built supertanker to store heating oil off Malta, shipbrokers reported, in the company’s first such booking in at least five years.
and
“It’s opportunity-driven,” Sverre Bjorn Svenning, an analyst at Fearnley Consultants AS in Oslo, said by phone. “I doubt it’s going to be a permanent or new sort of trade.”
So, as I have said numerous times, we are drowning in oil. Inventories are sky high. Yet, oil prices keep going up (until today). This is because of 1) market manipulation - if held offshore they don't go in the official inventory numbers and it makes current supply scarce and 2) China stockpiling probably because they would rather pay for an overpriced asset like oil than pay for an overpriced long term US bond.
Either way, this drives up input prices for companies and hurts the consumers where more of our dollars go to pay for fuel at the pump. JP Morgan of course has TARP money, tax payer money, to play this game. If the bet goes bad, I guess they are to big to fail and you and I will bail them out. Got to love the world we live in.
JPMorgan Chase & Co., the second- largest U.S. bank by deposits, hired a newly built supertanker to store heating oil off Malta, shipbrokers reported, in the company’s first such booking in at least five years.
and
“It’s opportunity-driven,” Sverre Bjorn Svenning, an analyst at Fearnley Consultants AS in Oslo, said by phone. “I doubt it’s going to be a permanent or new sort of trade.”
Tuesday, June 2, 2009
From One Type of Debt to Another
A very good write up in the Financial Times by Edward Chancellor of the GMO Asset Allocation Team. It touches on several of my thoughts. The United States is fixing nothing but moving the problem from the consumer to the government. The end result will end in tears. Thanks goes to Charles.
As the stock market revival survives its third month, talk is turning from “green shoots” to a “sustainable recovery”. Yet this economic pick-up, like the one which followed the technology bust, has a potentially fatal weakness – it is fuelled by the rapid expansion of non- productive credit. America has not yet been cured of its addiction to debt. All that has happened is that excessive growth of household credit has been replaced by an even more extravagant expansion of government borrowing.
and
Public policy today serves to delay the day of reckoning rather than promote a return to economic equilibrium. We have been through this process before. During the technology boom of the late 1990s, US corporations were expanding net debt at an annual rate equivalent to 6 per cent of GDP.
and
Yet the US government cannot support both the economy and the financial system indefinitely without ruining its own balance sheet. The alternative is for Washington to retrench. Only when that happens will we discover whether the current recovery is any more soundly based than the one which preceded it.
As the stock market revival survives its third month, talk is turning from “green shoots” to a “sustainable recovery”. Yet this economic pick-up, like the one which followed the technology bust, has a potentially fatal weakness – it is fuelled by the rapid expansion of non- productive credit. America has not yet been cured of its addiction to debt. All that has happened is that excessive growth of household credit has been replaced by an even more extravagant expansion of government borrowing.
and
Public policy today serves to delay the day of reckoning rather than promote a return to economic equilibrium. We have been through this process before. During the technology boom of the late 1990s, US corporations were expanding net debt at an annual rate equivalent to 6 per cent of GDP.
and
Yet the US government cannot support both the economy and the financial system indefinitely without ruining its own balance sheet. The alternative is for Washington to retrench. Only when that happens will we discover whether the current recovery is any more soundly based than the one which preceded it.
Monday, June 1, 2009
Screaming Market
My thought that if we didn't gap down at the open we would be at 950 before you knew it didn't take long to play out. High was like 947.77 in the S&P 500 which is close enough for government work. Didn't think it would happen all in one day but that is what it is. We have been screaming for a day and 15 minutes so I wouldn't be surprised to see a pullback potentially back to the 200 day moving average but assuming nothing major hits I think the market is heading higher. The idea or hope for any 10% pullback has probably been pushed off for awhile. It is really amazing when you think about it. In the last two weeks you have had North Korea test nuclear missiles, threaten South Korea, economic news that is still only less bad (PMI on Friday was just bad), the first DOW component in the history of the index declare bankruptcy, the 10 yield go parabolic, the dollar plummet etc. etc. and the market is able to launch a major breakout to the upside.
The fact that the treasury market is becoming just as volatile if not more volatile than the equity markets should be concerning. Today was also weird with the huge spike in volume early on and nothing else going on all day with volume drying up until once again in the last two minutes. Also the internals were strong but not what you would have expected on a major break out like this. Financials also really didn't participate.
Either way, I think the market has decided which way it is breaking and we may get some pauses and moves lower but the market seems like it will want to move higher in the next few weeks.
The fact that the treasury market is becoming just as volatile if not more volatile than the equity markets should be concerning. Today was also weird with the huge spike in volume early on and nothing else going on all day with volume drying up until once again in the last two minutes. Also the internals were strong but not what you would have expected on a major break out like this. Financials also really didn't participate.
Either way, I think the market has decided which way it is breaking and we may get some pauses and moves lower but the market seems like it will want to move higher in the next few weeks.
David Rosenberg CNBC Visit
David Rosenberg was on CNBC this evening. He has been a big bear and right. He thinks the economy will not show a great Q3 or Q4 recovery but thinks you won't know this until August or September and the stock market could likely keeping running on technicals alone. I read many of his economic pieces. There good stuff and been right on regardless of what the market decides to do in the interim.
Speech by Bob Rodriguez of FPA Capital
A very very good speech by Bob Rodriguez. He spoke at the Morningstar conference last week. He has been selected Morningstar Manager of the Year three times and after this speech received a standing ovation. He was one of the early bears and still thinks we are in a bear market rally. He believes the U.S. government is walking down the wrong road. I couldn't agree more. The speech is worth the time to read. Thanks goes to Pete.
On the government's bailout policies.
At FPA, we fundamentally disagree with these “rescue” programs since we believe our impaired financial system is being distorted by protecting inefficient and questionable business enterprises. These programs reflect a philosophy of DWIT—Do Whatever It Takes—to stabilize the economy now. Maybe I should call it DimWit? In my opinion, a perfect example of unwise policy has been the economic support of the automotive industry, especially GMAC.
On the stimulus package
I expect little bang for the buck from the latest economic stimulus plan since most, if not all, of the anticipated positive economic effects will be offset by an increase in personal savings and a reduction in U.S. exports.
On Congress
My confidence is being undermined by this new financial system and era. The House of Representatives responded to the voices of the mob, when it voted 328 to 93, to punitively tax AIG employees in an ex post facto fashion. Many of these employees committed to aid in AIG’s corporate restructuring and expected their employment contracts to be honored.
Outlook on the Markets
My financial market outlook is rather cautious. I believe the recent stock market rally is nothing more than a bear market rally. It is being driven by some highly optimistic expectations.
On the government's bailout policies.
At FPA, we fundamentally disagree with these “rescue” programs since we believe our impaired financial system is being distorted by protecting inefficient and questionable business enterprises. These programs reflect a philosophy of DWIT—Do Whatever It Takes—to stabilize the economy now. Maybe I should call it DimWit? In my opinion, a perfect example of unwise policy has been the economic support of the automotive industry, especially GMAC.
On the stimulus package
I expect little bang for the buck from the latest economic stimulus plan since most, if not all, of the anticipated positive economic effects will be offset by an increase in personal savings and a reduction in U.S. exports.
On Congress
My confidence is being undermined by this new financial system and era. The House of Representatives responded to the voices of the mob, when it voted 328 to 93, to punitively tax AIG employees in an ex post facto fashion. Many of these employees committed to aid in AIG’s corporate restructuring and expected their employment contracts to be honored.
Outlook on the Markets
My financial market outlook is rather cautious. I believe the recent stock market rally is nothing more than a bear market rally. It is being driven by some highly optimistic expectations.
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