People are certainly worried about a double dip and more layoffs. But I don't think that is why the housing number was down. Our government meddled with housing demand by offering tax credits for certain buyers. Just like "zero percent financing and cash back" down at yor local car dealer, sales were pulled forward. The number reflects the expiration of the tax credits and the results were predictable. The bears pounced on the number saying the economy is rolling over. Now it does appear the economy has slowed down a bit but Scott has frequently said recoveries can be uneven. And our government meddling doesn't help the process.
Give this a few more months and average the numbers out and you'll have a much clearer picture of home sales than jumping to conclusions over one skewed number.
Remember we are in an electon season. There are many, many vested interests in convincing the public the economy is bad. For many, the worse the better. There is a constant drumbeat of criticism of the current government and how terrible things are. Its easy for the bears to piggyback on the negativity with their own rhyming themes of gloom. Always remember the media must get eyeballs every day and bad news does it best.
The correction that began in May is still with us. Personally I do not believe it is justified but pessimism is rampant (fed by political rhetoric). Values are quite good and competition for money is virtually nonexistant.
I look at individual companies, gague their outlooks (like Exxon) and compare it to the gloom pervading our markets and come away with a disconnect that is palpable.
Markets can be this way from time to time. Keynes famously said, "markets can stay irrational longer than (you) can stay solvent". I continue to believe this market is highly irrational. My challenge (and that of other bulls) is to stay solvent until rationality prevails.
As I said in another thread, I believe the election will result in a significant shift in market sentiment. Like Scott, I sense a sea change in the average American's perception of this government and its policies. It will very likely result in at least a temporary wave of optimism and excitement. We will see how long it lasts.
I appreciate your recent specific suggestion of the VXX as a way to engage the economic changes we face. It is not my choice but I wish you luck with it.
The Hindenburg Omen is confirmed. Jane Chardonnay and JoeSixPack have been rushing the exit doors. The ICI says that Domestic Equity net cash flows have been negative for 4 months. I guess they concluded no mas after the May flash crash and now burning zeppelins.
marmico: Interesting reference to the Hindenburg Omen. I've heard that term mentioned a couple of times, but just used your link to get the definition for the first time. The irony is that I logged on here to share a new perspective on why I think the bulls are wrong, and I would summarize my explanation as the bulls are suffering from a well known human trait generally called Cognitive Dissonance: simultaneously maintaining beliefs in inconsistent ideas. After reading the definition of the Hindenburg Omen, I realized that's exactly what the omen picks up via wildly inconsistent market indicators (large number of new highs and new los simultaneously).
The dissonance I have been observing is based on qualitative observations such as:
1) The USA has been fiscally irresponsible for at least a decade, possibly two, and it's only getting worse; yet, people are sure we'll get a fiscally responsible government any day now.
2) The federal reserve has made it clear that they will do everything they can to stop deflation, they have almost unlimited powers to do so, and they have shown NO ability to get ahead bubbles (and actually feed them), yet long bonds are trading at levels consistent with persistent deflation.
3) Almost everyone consistently describes and explains the 2007/8 economic shock as if it was a cause, or rooted in a 2005-2007 housing bubble, of the shock instead of considering the large body of evidence that this so-called cause was actually a symptom of an underlying structural change (largely the result of demographics changes in my opinion, but I would also point to technology and world trade) in our economy and that of the world.
4) We're America and we have a history of solving big problems, so we'll solve this one without much economic pain; yet, America already has had several extended periods of economic pain with the most extreme probably being the great depression. At that time, we also defaulted on dollar debt when by fiat Roosevelt cut its value in half over night (against gold, the standard at the time). Sure we got over it, won WWII, and went on to improve our lives on those of many others around the world, but that took over a decade (that is, for those who didn't get killed in the war)!
Well, those are few of my examples of cognitive dissonance. We're in a dynamic situation, and it requires dynamic thinking which is difficult for us humans who are the product, of our experiences.
Another analogy that comes to mind is that over the past two or three decades, economic forecasting was like looking projecting what might happen next in a checker game, but now it's more like a chess game, probably a three dimensional chess game given it's no longer good enough to just focus on our country as the world economy is now much more interdependent.
I very much enjoy Scott's optimism, but in this instance, the preponderence of evidence indicates a double-dip is already here. Witness the continuing decline in employment levels in the US as a percentage of the population, and the continuing declines in home sales for example. However, I believe this double-dip is already priced into the markets, and saavy investors should be loading up on cheap equities, and particularly on "hard asset" equities. Also, technology stocks are likely to rebound quickly, so keep an eye on the NASDAQ. Single-family dwellings, business properties, and even labor are abundant and cheap these days. Staying in cash will prove costly after the inflation arrives in the next few years. What is crucial is that we prepare for the inflation and act now to what will likely be a sudden and sharp decline in the value of the dollar sometime during the next few years, or even the coming months. Inflation is the problem and inflation is imminent -- betting on deflation is "fool's gold" in my view. But yes, the double-dip is here and real, and we should all be taking advantage of the opportunities around us. In the meantime, I weep for the unemployed and especially those without skills -- I hurt for those who are suffering, including their families, some of whom I know. Compassion and help for the deserving should also be on our agendas. As always, thank you for the opportunity to comment...
It is a large function of the savings rate...we were 2% at the start of the recession and we are at 6.2% today. The savings rate averaged 7.5% over the 1980 to 1995 period....each 1% increase in savings reduces consumption by 110 billion....the 400 to 500 billion in increased savings corresponds with the drop in employment....since GDP per employee is around 100,000 per employee
brodero: you're falling into a Keynesian trap. Savings is not necessarily a negative for growth. The money saved by one person must be spent by another. A rise in the savings rate is indicative of a shift in the economy's pattern of consumption, not a decline in consumption.
Dr. McKibbin: Since you and I appear to be of like mind, I'm wondering why you favor investing in equities over precious metals? Don't get me wrong, I think the S&P 500 fair value right now is about 1100, and gold is probably around 20% overvalued here. But given we agree higher or run-away inflation will occur in the near future, won't the dollars that flow out of "fools gold" (dollar denominated bonds and cash) push up real gold prices more (and sooner) than stock prices?
Isn't this especially true give persistently higher inflation will lead to higher interest rates and an ultimate default on the debt by the USA, which will weigh on stocks more (and sooner) than precious metals?
Mark: There's a school of thought (chief proponent being Cliff Asness) that says that inflation should not be a problem for equities. On the one hand, high inflation raises the level of future cash flows. On the other hand, those higher future cash flows are discounted by higher interest rates. Result = a wash.
At some point, though, higher inflation is sure to be bad for equities, since it is very likely to lead to very tight monetary policy, which in turn is bound to lead to a recession.
Mark, quality equities are a well-established hedge against inflation, assuming that the equities are not highly leveraged. The literature in support of this claim is robust.
Regarding gold, I too have an interest in gold. But, no one should take the view that gold is somehow a better investment than a high quality stock or real estate holding. The reason is that equities and real estate collect rents and earn profits, which are then paid to the owners (and I am talking about value-investing in this market rather than growth, which is another subject for sure). Gold does not earn interest or rents, so the comparison is mute. Moreover, gold is subject to being politicized via public acquisition and price-setting (as in the 1930's), so I would not engage in positions in gold of greater than 5% of holdings (and even that would be high). Consider my technical analysis of gold prices at:
Unload variable debt that cannot be sustained via earnings (or reliable employment) and get your cash converted into very high quality stocks and real estate while the prices are low (and they are very low right now).
Eventually, I may change my views should treasuries start paying interest again, and I would not rule out 10-12% treasuries in the future, but we are not there yet. Note to that buying treasuring at current yields will only lose value in principal should interest rates increase (which is counter-intuitive, but true). So, you cannot buy bonds and home for growth the same way as in stocks or real estate. However, should treasuries rise to 10-12% rates, then I would buy in with gusto and fearlessly once those levels are reached. I might even hazard international diversification in bonds should rates go double-digit, as a hedge against sovereign risks. But again, treasuries now are horrible investments and will suffer declining yields as rates on new auctions of treasuries rise.
In summary, go for the highest quality equities and keep an eye on bonds, but get out of cash now before the inflation kicks in . And again, make certain that your leverage is funded by reliable income streams (or reliable employment) or get rid of the debt immediately.
My worry is long-term inflation, not short-term deflation. Hope this helps...
Isn't the big drop in home sales a sign that people are still worried about layoffs or a double-dip?
ReplyDeleteBill,
ReplyDeletePeople are certainly worried about a double dip and more layoffs. But I don't think that is why the housing number was down. Our government meddled with housing demand by offering tax credits for certain buyers. Just like "zero percent financing and cash back" down at yor local car dealer, sales were pulled forward. The number reflects the expiration of the tax credits and the results were predictable. The bears pounced on the number saying the economy is rolling over. Now it does appear the economy has slowed down a bit but Scott has frequently said recoveries can be uneven. And our government meddling doesn't help the process.
Give this a few more months and average the numbers out and you'll have a much clearer picture of home sales than jumping to conclusions over one skewed number.
Boy, this is really starting to feel like the late '70s. How long before Obama gives us a "malaise" speech?
ReplyDeleteBill,
ReplyDeleteHe's busy, on vacation. ;(
Bob
Bill,
ReplyDeleteRemember we are in an electon season. There are many, many vested interests in convincing the public the economy is bad. For many, the worse the better. There is a constant drumbeat of criticism of the current government and how terrible things are. Its easy for the bears to piggyback on the negativity with their own rhyming themes of gloom. Always remember the media must get eyeballs every day and bad news does it best.
John,
ReplyDeleteIsn't the market supposed to climb the wall of worry? where is that mantra now?
Pub,
ReplyDeleteThe correction that began in May is still with us. Personally I do not believe it is justified but pessimism is rampant (fed by political rhetoric). Values are quite good and competition for money is virtually nonexistant.
I look at individual companies, gague their outlooks (like Exxon) and compare it to the gloom pervading our markets and come away with a disconnect that is palpable.
Markets can be this way from time to time. Keynes famously said, "markets can stay irrational longer than (you) can stay solvent". I continue to believe this market is highly irrational. My challenge (and that of other bulls) is to stay solvent until rationality prevails.
As I said in another thread, I believe the election will result in a significant shift in market sentiment. Like Scott, I sense a sea change in the average American's perception of this government and its policies. It will very likely result in at least a temporary wave of optimism and excitement. We will see how long it lasts.
I appreciate your recent specific suggestion of the VXX as a way to engage the economic changes we face. It is not my choice but I wish you luck with it.
where is that mantra now?
ReplyDeleteThe Hindenburg Omen is confirmed. Jane Chardonnay and JoeSixPack have been rushing the exit doors. The ICI says that Domestic Equity net cash flows have been negative for 4 months. I guess they concluded no mas after the May flash crash and now burning zeppelins.
marmico: Interesting reference to the Hindenburg Omen. I've heard that term mentioned a couple of times, but just used your link to get the definition for the first time. The irony is that I logged on here to share a new perspective on why I think the bulls are wrong, and I would summarize my explanation as the bulls are suffering from a well known human trait generally called Cognitive Dissonance: simultaneously maintaining beliefs in inconsistent ideas. After reading the definition of the Hindenburg Omen, I realized that's exactly what the omen picks up via wildly inconsistent market indicators (large number of new highs and new los simultaneously).
ReplyDeleteThe dissonance I have been observing is based on qualitative observations such as:
1) The USA has been fiscally irresponsible for at least a decade, possibly two, and it's only getting worse; yet, people are sure we'll get a fiscally responsible government any day now.
2) The federal reserve has made it clear that they will do everything they can to stop deflation, they have almost unlimited powers to do so, and they have shown NO ability to get ahead bubbles (and actually feed them), yet long bonds are trading at levels consistent with persistent deflation.
3) Almost everyone consistently describes and explains the 2007/8 economic shock as if it was a cause, or rooted in a 2005-2007 housing bubble, of the shock instead of considering the large body of evidence that this so-called cause was actually a symptom of an underlying structural change (largely the result of demographics changes in my opinion, but I would also point to technology and world trade) in our economy and that of the world.
4) We're America and we have a history of solving big problems, so we'll solve this one without much economic pain; yet, America already has had several extended periods of economic pain with the most extreme probably being the great depression. At that time, we also defaulted on dollar debt when by fiat Roosevelt cut its value in half over night (against gold, the standard at the time). Sure we got over it, won WWII, and went on to improve our lives on those of many others around the world, but that took over a decade (that is, for those who didn't get killed in the war)!
Well, those are few of my examples of cognitive dissonance. We're in a dynamic situation, and it requires dynamic thinking which is difficult for us humans who are the product, of our experiences.
Another analogy that comes to mind is that over the past two or three decades, economic forecasting was like looking projecting what might happen next in a checker game, but now it's more like a chess game, probably a three dimensional chess game given it's no longer good enough to just focus on our country as the world economy is now much more interdependent.
Mark
I very much enjoy Scott's optimism, but in this instance, the preponderence of evidence indicates a double-dip is already here. Witness the continuing decline in employment levels in the US as a percentage of the population, and the continuing declines in home sales for example. However, I believe this double-dip is already priced into the markets, and saavy investors should be loading up on cheap equities, and particularly on "hard asset" equities. Also, technology stocks are likely to rebound quickly, so keep an eye on the NASDAQ. Single-family dwellings, business properties, and even labor are abundant and cheap these days. Staying in cash will prove costly after the inflation arrives in the next few years. What is crucial is that we prepare for the inflation and act now to what will likely be a sudden and sharp decline in the value of the dollar sometime during the next few years, or even the coming months. Inflation is the problem and inflation is imminent -- betting on deflation is "fool's gold" in my view. But yes, the double-dip is here and real, and we should all be taking advantage of the opportunities around us. In the meantime, I weep for the unemployed and especially those without skills -- I hurt for those who are suffering, including their families, some of whom I know. Compassion and help for the deserving should also be on our agendas. As always, thank you for the opportunity to comment...
ReplyDeleteIt is a large function of the savings rate...we were 2% at the start of the recession and we are
ReplyDeleteat 6.2% today. The savings rate
averaged 7.5% over the 1980 to 1995
period....each 1% increase in savings reduces consumption by 110 billion....the 400 to 500 billion
in increased savings corresponds with the drop in employment....since GDP per employee is around 100,000 per employee
PS: Here is what I see coming:
ReplyDeletehttp://wjmc.blogspot.com/2010/05/student-recently-remarked-to-me-that.html
The coming inflation will be very real...
brodero: you're falling into a Keynesian trap. Savings is not necessarily a negative for growth. The money saved by one person must be spent by another. A rise in the savings rate is indicative of a shift in the economy's pattern of consumption, not a decline in consumption.
ReplyDeleteI agree Scott...Savings is a good thing..just trying to explain why things are going so slow for the time being,,,
ReplyDeleteDr. McKibbin: Since you and I appear to be of like mind, I'm wondering why you favor investing in equities over precious metals? Don't get me wrong, I think the S&P 500 fair value right now is about 1100, and gold is probably around 20% overvalued here. But given we agree higher or run-away inflation will occur in the near future, won't the dollars that flow out of "fools gold" (dollar denominated bonds and cash) push up real gold prices more (and sooner) than stock prices?
ReplyDeleteIsn't this especially true give persistently higher inflation will lead to higher interest rates and an ultimate default on the debt by the USA, which will weigh on stocks more (and sooner) than precious metals?
Thanks for sharing your thought here.
Good article from the CEO of Intel.
ReplyDeletehttp://news.cnet.com/8301-13578_3-20014563-38.html?tag=mncol;1n
Touches on a lot of things that are mentioned in these comments.
Mark: There's a school of thought (chief proponent being Cliff Asness) that says that inflation should not be a problem for equities. On the one hand, high inflation raises the level of future cash flows. On the other hand, those higher future cash flows are discounted by higher interest rates. Result = a wash.
ReplyDeleteAt some point, though, higher inflation is sure to be bad for equities, since it is very likely to lead to very tight monetary policy, which in turn is bound to lead to a recession.
This comment has been removed by the author.
ReplyDeleteMark, quality equities are a well-established hedge against inflation, assuming that the equities are not highly leveraged. The literature in support of this claim is robust.
ReplyDeleteRegarding gold, I too have an interest in gold. But, no one should take the view that gold is somehow a better investment than a high quality stock or real estate holding. The reason is that equities and real estate collect rents and earn profits, which are then paid to the owners (and I am talking about value-investing in this market rather than growth, which is another subject for sure). Gold does not earn interest or rents, so the comparison is mute. Moreover, gold is subject to being politicized via public acquisition and price-setting (as in the 1930's), so I would not engage in positions in gold of greater than 5% of holdings (and even that would be high). Consider my technical analysis of gold prices at:
http://wjmc.blogspot.com/2010/04/course-of-inflation.html
Unload variable debt that cannot be sustained via earnings (or reliable employment) and get your cash converted into very high quality stocks and real estate while the prices are low (and they are very low right now).
Eventually, I may change my views should treasuries start paying interest again, and I would not rule out 10-12% treasuries in the future, but we are not there yet. Note to that buying treasuring at current yields will only lose value in principal should interest rates increase (which is counter-intuitive, but true). So, you cannot buy bonds and home for growth the same way as in stocks or real estate. However, should treasuries rise to 10-12% rates, then I would buy in with gusto and fearlessly once those levels are reached. I might even hazard international diversification in bonds should rates go double-digit, as a hedge against sovereign risks. But again, treasuries now are horrible investments and will suffer declining yields as rates on new auctions of treasuries rise.
In summary, go for the highest quality equities and keep an eye on bonds, but get out of cash now before the inflation kicks in . And again, make certain that your leverage is funded by reliable income streams (or reliable employment) or get rid of the debt immediately.
My worry is long-term inflation, not short-term deflation. Hope this helps...