Bad News Bottoms

[DrStool]

I'll be eagerly waiting.

 

I don't know much, but I think the real economy is cutting its credit needs as we speak. Look at the fed H8 form, just released. And I don't think the virtual economy can expand money if it's not based on the needs of the real economy.

 

Same for private debt. The outstanding mortgage debt is collapsing at increased speed.

 

That's a point I made in the Radio Free Wall Street podcast. Debt is collapsing, in part because people WANT to reduce their debt load. Banks can't lend if people don't want to borrow.

[DrStool]

To me, the entire problem comes down to reasonable valuation of real assets. That's why the mortgage idea is a winner. It's also why the 'new banks' idea is a huge winner. It's why the revaluation of housing stock is a winner.

 

It's why suspending mark-to-market is a terrible, awful, loser.

 

Think about it. Every single one of the economic problems the US faces are to do with incorrect valuation of assets, including forward values.

 

Market flows being what they are, the *instant* that assets of any variety start smelling like they're correctly valued with a chance of bring about an economic returm, liquidity will POUR into that sector. You've already seen a whiff of this in tech and also (incorrectly IMO but still) in BAC.

 

This is why the dump-to-700-and-rocket-to-1100 scenario makes sense to me.

 

I am not a permabear. I think of the current crunch as the prequel to the greatest bull market of my lifetime. The interconnectedness of the world, the velocity of capital, the incredible productivity of emerging markets... everything is in place.

 

But the current tactics are delaying the patient's recovery. The fever needs to break. The moment it does, hold on to your hats.

 

I'm definiately not optimistic. Your thinking is more in line with Russ's. I'm afraid that the debt load will blow up the US Government, and that interest rates will rise into the stratosphere. Might a hyperinflation go along for the ride? Don't know, but maybe.

 

Only time is the cure.

 

In the late 40s the debt/gdp was way, way above current levels. Like twice or so. And it all went down.

 

Ah, but my friend, you are missing a very important point. We won WWII, and were the only ones still standing at the end. Everyone else suffered tremendous industrial and infrastructure destruction. We were the industrial engine of the world, a massive exporter of manufactured and agricultural products and had no competition at all from 1945 until the mid to late 50s.

 

Today, we're a beggar, the biggest beggar in the world, and our competitors can do almost everything we can do in most industries. They can do it cheaper, in many cases faster, and in more than a few cases, better than we can.

 

That's not to say that the stock market won't have massive rallies. It will. But I think not just yet.

[snorkels4]

unsane, hows your track record? if you caught the down move from sept i guess you can let out a too the moon rally cry without raising too much dust. if this mega rally fades to another disaster will your voice fade into memory like da (to da moon) chief or will you be able to catch it and post the same. no disrespect as you did present a good case, just wondering. theres just too many latter day bears and premature bulls on the web. probably some holes somewhere in your thesis just like the bear case. thats what makes a market.

[alceringa]

Hot day here in Melbourne, Australia, a new record! <temperature in Celsius>

 

has actually reached 46.4 in my suburb (Caulfield), that's 115.5 Farenheit Caulfield weather station

 

No air conditioning at my place, currently 34.5 Celsius inside (94F), cool change is due in the next few hours.

 

Can't complain, electricity is still on! unlike the previous heatwave the week before last

 

 

To put that in perspective:

 

1) Melbourne, Australia is much like San Francisco CA-same latitude (South as North) and near cooling sea breezes.

 

2) The morgue in Melbourne (and the one in Adelaide, South Australia) is still full from those that succumbed in last weeks heat wave. Story

 

 

Meanwhile, a bit further north in Oz, tropical areas of Queensland are in the midst of near biblical sized flooding. 1 million square kilometers have been declared as "flood emergency" areas.

 

Just under 30 rivers in the state are reported in full or moderate flood stage with literally hundreds more reported as "lightly flooding". Many rivers having crested in the 12 to 14 metre range. (That's 37 to 44 feet.)

 

Many outback towns are out of food supplies and completely surrounded by water, with no way in except by boat or helicopter.

 

Fires rage, floodwaters rise in Australian extremes

[unSane]

unsane, hows your track record? if you caught the down move from sept i guess you can let out a too the moon rally cry without raising too much dust. if this mega rally fades to another disaster will your voice fade into memory like da (to da moon) chief or will you be able to catch it and post the same. no disrespect as you did present a good case, just wondering. theres just too many latter day bears and premature bulls on the web. probably some holes somewhere in your thesis just like the bear case. thats what makes a market.

 

I was out of the market completely by mid-August and have been basically on the sidelines since then. I didn't catch the down move, although I was expecting it, but I wasn't caught by it either. Right now I'm simply playing mechanical systems on SKF, SRS, SSO, EMD, ES and NQ with the very occasional discretionary trade. The mech systems do much better than I do. MUCH better.

 

 

I'm not a big speculator. I'm happy to let the market tell me what it's doing and tag along. That's impossible right now, so I just let the mechs do their thing.

 

I've no intention of getting back into the market until we see a full capitulation, an honest to God puke day, like November's but worse. I don't have a figure in mind but we have already beaten the 2002 and 1998 lows. I don't know how much more the bears want. 740 would do it for me. We will loiter there for about a nanosecond.

 

It would not surprise me to see a restest of 800 with a dip below 700 and that's all she wrote.

 

This board is surprisingly (to me) US-centric. UK has a horrible RE problem just like the US, but there are a lot of countries which did not inflate debt in the same way. It has been a standing joke in Canada that the average Canadian drives a car two models lower than the average American. Some Canadian banks are slightly exposed to the CDS debacle and a few have questionable RE holdings but overall they just have not had the same issues. I came from the UK and have been telling friends for the last 10 years to GTF out of real estate and start renting. That's how obvious the bubble was.

 

I know a lot of people involved in Canucky finance and business and the most common feeling is frustration rather than panic. The same in the movie business, which is my day job. People are still going to movies... in fact the box office is doing just fine... the issue is studios and minimajors attempting to roll over their lines of credit. Here again, it's not like Disney or Paramount are going to zero... but the Weinstein Company might. Sure there is cost-slashing going on at the studios but they were ludicrously overmanned before. Many of the studios were involved in dumb acquisitions over the last few years and are happy to cut dead wood loose. Consolidation, like New Line into Warners, is eminently sensible. Honestly, that's all good.

 

I follow Doc's Fed reports with enormous interest. No doubt the US faces a fiscal nightmare. But that is a much more local phenomenon than the global credit squeeze and reflects an ongoing seismic shift in the balance of global economic power. Commodity stocks are recovering in part because people expect dollar-denominated commodities to appreciate in value, in dollar terms, as the US currency fails.

 

The bottom line is that when assets are fairly valued and will produce an economic return, people will buy them. Liquidity will seek them out... ESPECIALLY if the dollar tanks and treasuries slide. Where else will the money go? There are not enough mattresses on earth to stuff all that money into.

 

I have a friend who manages an income fund, a few hundred million $. It it down from $10 on launch a few years ago to 0.35c now. I talk to the guy and, honestly, he isn't worried about it. They are busily buying back their own stock and have suspended dividends to pay down debt. In the long term, their SP will reflect the economic value of the consituent companies. In the meantime, the undervaluation gives them a whole bunch of opportunities.

 

I lived through the misery of the UK in the late 70s / early 80s (I was young!) and what emerged from that debacle was Cool Brittania, a genuinely radical re-imagining of the country. I'm guessing the US will pull its own rabbit out of the hat.

 

Please don't mistake my long term optimism for short term bullishness. However I think we will see a (possibly catastrophic) bottom some time this year and at that point I'll be ready to go long on pretty much anything.

[drwells]

From Across The Curve

 

http://acrossthecurve.com/?p=2794

 

There is another rumor (which if I had been a pure journalist I would have placed first) which holds that the Obama Administration is giving serious consideration to placing FNMA and Freddie Mac on balance sheet. That would make their debt ?pari passu? with Treasury paper.

 

=============

 

Doesn't sound good, unless you are looking for higher yields...

 

Makes sense. All three are garbage.

[drwells]

That's a point I made in the Radio Free Wall Street podcast. Debt is collapsing, in part because people WANT to reduce their debt load. Banks can't lend if people don't want to borrow.

 

Think it's been a while since I posted this, so here goes:

 

http://www.mises.org/mysteryofbanking/mysteryofbanking.pdf

 

?The Fed tried frantically to inflate after the 1929 crash, including massive open market purchases and heavy loans to banks. These attempts succeeded in driving interest rates down, but they foundered on the rock of massive distrust of the banks. Furthermore, bank fears of runs as well as bankruptcies by their borrowers led them to pile up excess reserves in a manner not seen before or since the 1930s.?

 

http://www.mises.org/rothbard/historyofmoney.pdf

 

?[T]he inflationary policies of Hoover and [Federal Reserve Board Governor Eugene] Meyer proved to be counterproductive. American citizens lost confidence in the banks and demanded cash ? Federal Reserve notes ? for their deposits (currency in circulation rising by $122 million by the end of July), while foreigners lost confidence in the dollar and demanded gold (the gold stock in the United States falling by $380 million in this period). In addition, the banks, for the first time, did not fully lend out their new reserves, and accumulated excess reserves ? these excess reserves rising to 10 percent of total reserves by mid-year.

 

A common explanation claims that business, during a depression, lowered its demand for loans, so that pumping new reserves into the banks was only ?pushing on a string.? But this popular view overlooks the fact that banks can always use their excess reserves to buy existing securities; they don?t have to wait for new loan requests. Why didn?t they do so? Because the banks were whipsawed between two forces.

 

On the one hand, bank failures had increased dramatically during the depression. Whereas during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million, since the depression struck, 17,000 banks had been failing per year, with a total of $1.08 billion in deposits. This increase in bank failures could give any bank pause, especially since all the banks knew in their hearts that, as fractional reserve banks, none of them could withstand determined and massive runs upon them by their depositors.

 

Second, just at a time when bank loans were becoming risky, the cheap-money policy of the Fed had driven down interest returns from bank loans, thus weakening banks? incentive to bear risk. Hence the piling up of excess reserves. The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of the banks, and the more deposits were redeemed for cash.?

[Pretzel Logic]

For anyone who cares, I have updated my Ewave counts.

 

The move off the January high initially seemed very straightforward. The declines were impulsive, and the rallies were corrective. That convinced me that the next leg down had started. That is still a possibility, but after today, it is not so straightforward. So, I present the various possibilities, and all y'all (the plural of "y'all" is "all y'all") can decide fer yerselves.

 

1) The red count. This count says the next downleg has started, but we have a complicated 2nd wave correction. This would make the current rally a bulltrap (note that I said the current rally might be a bulltrap, not that the current rally is bullcrap. That part isn't in question: we all know this rally is bullcrap.). Under this count, we would be making new lows very soon.

 

2) The green count. I am now giving this count a 50/50 with the red count. This shows that the recent decline was wave b of 4 (i.e- a beartrap). So we have one more fairly fast rally to 1000-1150 on the SPX before we start the REAL decline (i.e. a BIGGER bulltrap).

 

3) The gray count. I give this one maybe a 5% chance, but it's possible (okay, fine, so that makes the other two counts 47.5/47.5 instead of 50/50). This says that primary A completed with the Nov. lows, and we are in (a) of B -- (a) would complete in roughly the same area as 4, then correct down in (b ) (this would probably play out as a successful retest of the lows), then a BIG rally in ( c). The whole move, if this is part of B, could last most of the year and near the end would fool the masses into believing that all's well. We would then have primary C down, which would most likely play out as a Shorty-type Armeggedon.

 

So that's what I've got after much head scratching tonight. Hope it's of some use to somebody.

 

[Jorma]

To me, the entire problem comes down to reasonable valuation of real assets. That's why the mortgage idea is a winner. It's also why the 'new banks' idea is a huge winner. It's why the revaluation of housing stock is a winner.

 

It's why suspending mark-to-market is a terrible, awful, loser.

 

Think about it. Every single one of the economic problems the US faces are to do with incorrect valuation of assets, including forward values.

 

Market flows being what they are, the *instant* that assets of any variety start smelling like they're correctly valued with a chance of bring about an economic returm, liquidity will POUR into that sector. You've already seen a whiff of this in tech and also (incorrectly IMO but still) in BAC.

 

This is why the dump-to-700-and-rocket-to-1100 scenario makes sense to me.

 

I am not a permabear. I think of the current crunch as the prequel to the greatest bull market of my lifetime. The interconnectedness of the world, the velocity of capital, the incredible productivity of emerging markets... everything is in place.

 

But the current tactics are delaying the patient's recovery. The fever needs to break. The moment it does, hold on to your hats.

 

 

We don't need no greatest bull market of anyone's lifetime. Great bull markets prima facie mean a mis allocation of capital. They mean inflation of assets. They require monetary insanity.

 

There used to be arguments about when the great bull market started after the depression. When Americas economic might emerged during and after WWII. Many placed the start at 1942, or 1948.

 

I know long term non log charts or not constant dollar charts are considered bad form but imagine that a generation ago people thought some date in the 40s was the start of a great bull market. Oh sure the period from the mid 40s saw the huge rise in standard of living of Americans but it's obvious now that bull market from the mid 40's to 1970 or so was just pathetic.

 

We can have, well in theory anyway, the greatest bull market of anyone's lifetime or we can have more balanced and justly distributed economic growth. DOW 8000 isn't some kind of depression or hell on earth. It's perfectly fine.

[DrStool]

I was out of the market completely by mid-August and have been basically on the sidelines since then. I didn't catch the down move, although I was expecting it, but I wasn't caught by it either. Right now I'm simply playing mechanical systems on SKF, SRS, SSO, EMD, ES and NQ with the very occasional discretionary trade. The mech systems do much better than I do. MUCH better.

 

 

I'm not a big speculator. I'm happy to let the market tell me what it's doing and tag along. That's impossible right now, so I just let the mechs do their thing.

 

I've no intention of getting back into the market until we see a full capitulation, an honest to God puke day, like November's but worse. I don't have a figure in mind but we have already beaten the 2002 and 1998 lows. I don't know how much more the bears want. 740 would do it for me. We will loiter there for about a nanosecond.

 

It would not surprise me to see a restest of 800 with a dip below 700 and that's all she wrote.

 

This board is surprisingly (to me) US-centric. UK has a horrible RE problem just like the US, but there are a lot of countries which did not inflate debt in the same way. It has been a standing joke in Canada that the average Canadian drives a car two models lower than the average American. Some Canadian banks are slightly exposed to the CDS debacle and a few have questionable RE holdings but overall they just have not had the same issues. I came from the UK and have been telling friends for the last 10 years to GTF out of real estate and start renting. That's how obvious the bubble was.

 

I know a lot of people involved in Canucky finance and business and the most common feeling is frustration rather than panic. The same in the movie business, which is my day job. People are still going to movies... in fact the box office is doing just fine... the issue is studios and minimajors attempting to roll over their lines of credit. Here again, it's not like Disney or Paramount are going to zero... but the Weinstein Company might. Sure there is cost-slashing going on at the studios but they were ludicrously overmanned before. Many of the studios were involved in dumb acquisitions over the last few years and are happy to cut dead wood loose. Consolidation, like New Line into Warners, is eminently sensible. Honestly, that's all good.

 

I follow Doc's Fed reports with enormous interest. No doubt the US faces a fiscal nightmare. But that is a much more local phenomenon than the global credit squeeze and reflects an ongoing seismic shift in the balance of global economic power. Commodity stocks are recovering in part because people expect dollar-denominated commodities to appreciate in value, in dollar terms, as the US currency fails.

 

The bottom line is that when assets are fairly valued and will produce an economic return, people will buy them. Liquidity will seek them out... ESPECIALLY if the dollar tanks and treasuries slide. Where else will the money go? There are not enough mattresses on earth to stuff all that money into.

 

I have a friend who manages an income fund, a few hundred million $. It it down from $10 on launch a few years ago to 0.35c now. I talk to the guy and, honestly, he isn't worried about it. They are busily buying back their own stock and have suspended dividends to pay down debt. In the long term, their SP will reflect the economic value of the consituent companies. In the meantime, the undervaluation gives them a whole bunch of opportunities.

 

I lived through the misery of the UK in the late 70s / early 80s (I was young!) and what emerged from that debacle was Cool Brittania, a genuinely radical re-imagining of the country. I'm guessing the US will pull its own rabbit out of the hat.

 

Please don't mistake my long term optimism for short term bullishness. However I think we will see a (possibly catastrophic) bottom some time this year and at that point I'll be ready to go long on pretty much anything.

 

Hmm....

 

Optimism is a wonderful thing. Since I am part of the Canadian economy for almost half the year, and since I have family members involved in the Canadian economy, including the broadcast media, health care, wholesale food distribution, and banking, I have a different perspective on what you are describing up there. I also worked for a Canadian brokerage firm on Wall Street back in the 80s.

 

What I see as the Canadian cultural traits of apathy, optimism, and what I think of as head-in-the-sand mentality, that I have seen in both Anglophone and Francophone communities I think causes Canadians in general, like most Americans, to misunderstand much of what's going on in the greater surroundings. They are pretty good about seeing what's wrong with the US, but not so much with their own situation. Even my son-in-law, who is an extremely intelligent fellow and who was the risk manager for a huge fund of funds affiliated with a Canadian institution, was able to describe for me the problems that were beginning to appear in 2007, but he never understood the implications of what he was seeing. He remains optimistic today, while I do not.

 

As someone pointed out today, Canada reported a loss of 129,000 jobs last month. To put that in US equivalent terms, it would be 1,290,000 or so, in other words 2 1/2 times the rate of US job loss.

 

I don't see much of a recovery in resource stocks, although I am somewhat more optimistic about precious metals for the time being (which could be short, it depends on what happens next week). The collapse of the commodities bubble has devastated and will continue to devastate the Canadian economy, particularly in the prairie and Western provinces which are resource dependent economies. Tax revenues have collapsed. The Federal and provincial budgets are sinking in to deficit.

 

Populations are aging around the world. Government finances are collapsing around the world. Capital, and the ability to access what capital there is, will be diminishing for years, and governments will suck up everything there is in a desperate fight to stay alive. We face decades of instability, and wave after wave of government financed mini-booms, followed by massive busts.

 

That's how I see it. I'm a deeply optimistic person about some things, always hopeful that the future will somehow work out ok, but when I look at the facts and the data, I feel hopelessness. I just don't see a way out. The problem is only partly economic and financial. Much of it is demographic as well.

 

I don't think this is going to play out the way you see it in economic terms. And my long term technical work on the market in the Stocks package of the Wall Street Examiner Professional Edition suggests that the market will go much lower and the decline will last much longer than you expect. 2010 should be an up year after a bad start, but another top is due in 2011-12, with lower lows coming our way before mid decade.

[DrStool]

We don't need no greatest bull market of anyone's lifetime. Great bull markets prima facie mean a mis allocation of capital. They mean inflation of assets. They require monetary insanity.

 

There used to be arguments about when the great bull market started after the depression. When Americas economic might emerged during and after WWII. Many placed the start at 1942, or 1948.

 

I know long term non log charts or not constant dollar charts are considered bad form but imagine that a generation ago people thought some date in the 40s was the start of a great bull market. Oh sure the period from the mid 40s saw the huge rise in standard of living of Americans but it's obvious now that bull market from the mid 40's to 1970 or so was just pathetic.

 

We can have, well in theory anyway, the greatest bull market of anyone's lifetime or we can have more balanced and justly distributed economic growth. DOW 8000 isn't some kind of depression or hell on earth. It's perfectly fine.

 

Not only is a non log chart bad form, it is misleading. It grossly misrepresents the size of the move off the base in the 1940s. A tenfold increase is a tenfold increase, no matter how you slice it. If you ended your chart in 1969, that bull market would like like the greatest in history, which it was at that time. My uncle became a many times over multimillionaire because he had the good fortune to have a good income in the 1930s as a pediatrician, and he had faith in America. He boucght stocks with every penny he had from the mid 1930s and throughout his long and distinguished career. He ultimately became the chairman of the finance committee of the American College of Physicians.

 

But your overall point that great bull markets end in massive dislocation is absolutely correct. The bull market deluded Lyndon Johnson into thinking we could pay for a war and a Great Society. As a result there were massive dislocations by the late 1960s. Bush thought he could pay for a war, cut everybody's taxes, and have an Ownership Society, because of the great bull market that began when Raygun busted the unions and his nut case economic team convinced the world that deficits don't matter. Greenspan decided that irrational exuberance in equities markets was so much fun that he ended up promoting even more of it.

 

So in a sense, looking at your chart, I guess I do see your point which I think is that we piled one massive bull market on top of another one with the ill effects becoming not only cumulative, but geometric. So maybe the question is which base or trendline this correction of excess and misallocation will return to.

[DrStool]

By the way, I strongly recommend that everyone read Noland's summation this week ( at the end of the report) on the government finance bubble. In my view Noland has had more things right in understanding what is going on and where things are headed than any other person we know. He's not a market timer, by far, but his understanding of the overall financial milieu is unparalleled.

 

http://www.prudentbear.com//index.php/comm...in?art_id=10186

[unSane]

Hmm....

 

You're missing one thing, Doc.

 

 

I was drunk when I wrote that.

[unSane]

Although I will add that by 'greatest bull market' I mean a sustainable bull market rather than another bubble and blow off.

[DrStool]

You're missing one thing, Doc.

 

 

I was drunk when I wrote that.

 

 

A true Canadian in winter.