…why wasn’t everyone shouting: green shoots! green shoots! ??? After all we only lost 467,000 jobs in June and revisions to April and May subtracted 8,000 jobs, so we weren’t off that far from the three month average of 436,000 and much better than the six month average of 564,000…so ignoring May’s ‘low’ 322,000 (which was seen as an inflecton point by some optimists at the time…just as they saw the ‘dip’ below 600,000 on weekly jobless claims that lasted one week…but hey if you are never an optimist how can you possibly get in front of the herd…but on the other hand using FILO (first in last out) means that if there is a fire you are DEAD!), being lower than the string of six month averages could be an inflection point and it is actually below the 472,000 twelve month moving average! Hip hip….hooray! But getting serious the market finally decided it is serious…serious enough to look down and even look back for the past half month and ask as Admiral Stockdale did after being harpooned by Ross Perot: “Who am I? Why am I here? …and we all know what that got him…and Perot!
Anyone who used the term ‘green shoots’ since its utterance in Congressional testimony by Fed Chairman Ben Bernanke last March (did it cause the market turnaround?), and which if you Google it will get you 778 million results! Here is one you might find interesting…especially since TB has said on several occasions that this time is worse than the Great Depression (and we are in denial that is is even a depression at all):
What’s striking is the optimism: story after story says, in effect, that the worst is over and recovery is just around the corner:
(Name and title omitted), predicts an abrupt recovery in stock and commodity prices by Labor Day due to current consumption exceeding production. Distinguishes between two types of depression, “V”-shaped and “U”-shaped.
One thing that surprised me about the WSJ story, however, was this assertion:
Of course, the current recession is nowhere near severe as the Depression. A great series of charts by the (omitted) shows that by almost every measure the Great Depression was more severe by this point in the cycle.
When was that written? March? April? How about in 1930 in the WSJ and thoughtfully reproduced by Paul Krugman (NY Times, Opinion, June 23, 2009), which referred to a WSJ. The more things change the more they do remain the same! The two omissons were Col. Ayres, VP Cleveland Trust (who even would listen to a lowly VP these days), and Council on Foreign Relations, which TB redacted to make you think about it. So if the Great Depression was merely a depression compared to the Great Depression, what does the New Great Depression make this depression…er…recession?
TB would argue that the reason this time is different than other post Depression recessions is that during the Big One a family had only one worker (thus doubling the odds of at least one spouse either losing a job or having hours reduced, and also the debt levels plus savings requiring both to now work just to keep up with the monthly payments. Furthermore, the lack of fiscal restraint at the state and local level means that they are having to now charge for free services or raise taxes to keep from laying off even more workers (a reader also sent some articles on the Hamptons – East Hampton and Southampton where budgets were fudged to ensure elected officials stay elected and like Orange County Moody’s didn’t pick up on it…why do we pay for those ratings anyway or more importantly rely on them accept to protect advisors from lawsuits?)
The payrolls report also pointed out two glaring areas: first, 52,000 government jobs were lost…these being temporary workers which caused the increase in government job in prior months this year…and contrasts to an average of +4k for the last 2, 6, and 12 months!; second, was temporary workers which declined by 38,000 after falling by just 8,000 last month compared to the six and twelve month averages of -54k.
Why isn’t the stimulus including a lot of government employed jobs for all those ‘shovel ready’ projects? After all you aren’t going to find them at the states where one-fourth have unemployment and several are following California’s lead to the abyss.
While TB was right on the direction of the stock market he missed it by just shy of a week due to his theory on T+3 settlement for hedge funds being the key as it has now for four of the last six quarters (he also erred in thinking payrolls data would be .
Charles Kindleberger, a brilliant man, along with Hyman Minsky (Minsky Moment, not Minsky’s Follies), set out the seven stages of a financial crisis, here they are with TB’s comments on what happened:
1. Displacement – the aftermath of the 2000 crash, recession, and 9/11.
2. Boom – led by housing which fueled home equity withdrawals due to low interest rates
3. Bubble – derivatives embraced by Wall Street and hedge funds fueling an insatiable demand for product resulting in a lowering of credit standards. Also, a surge in commodities prices due to banks entering into limitless commodities index swaps which caused inflation fears to soar yet were baseless.
4. Financial Distress – borrowers unable to make payments on subprime loans which was hidden until the SIV crisis hit taking foreign countries and banks with it
5. Crash – what ensued from investors finally feeling the pain and panic at banks and shadow banks.
6. Revulsion/Discredit – a loss of confidence in our banks and even the governments ability to rescue them or the economy drove stocks to lows suggesting that even the soundest of banks were on the brink of default.
6-1/2 – TB’s Rule -Optimism…Green shoots, talking about the huge rally from the March lows in percentage terms in an effort to get investors minds off the real loss of wealth
7. – Depression – if TB’s rule is correct and there is a realization that even the experts don’t have a clue or are in abject denial – it is the final straw that causes stocks to languish for years or even decades…Pimco’s Bill Gross says a decade, to Neil Howe, who believes in 80 year cycles and thus sees this lasting for 20 year (or less if we have another world war)…but relax as we are already two years into it! See…not so bad!
To add to the complexities, the markets are now more highly correlated than at any time in the past 25 years or more making hedging or even diversification difficult if not impossible.
So what is the best investment? Save and do that by paying off your high interest debt. There is no greater return than you can anticipate…18-24% and when it is gone your monthly ‘nut’ is dramatically reduced (be careful on your 5-6%) mortgage though as a lack of liquidity in housing may make that preferable to having too much of your assets tied up in your home…and where you are if you have owned your home for ten years or more and not withdrawn equity. One of the first tax benefits to go may be the $250,000 ($500,000 per couple) exemption from capital gains on a home sale…after all they are currently discussing eliminating the mortgage deduction which would have been a good idea 20 years ago but would be a disaster today. But think: who benefits from that 250k deduction? Certainly not the majority and especially not the lower 80% of taxpayers.
The Bible of the Navy before adopting The Uniform Code of Military Justice was Rocks and Shoals…that is where we are today and we must not founder!
The coming week will be interesting and hopefully shed some light on where we are headed. The first quarter started off with a major rally…actually a continuation; the second with a rally that took us thru mid-May then slowed but still was a good quarter, in fact the best in years. This quarter, the first to not begin with a rally this year is off to a rocky start. Stay tuned.
The coming week will be interesting and hopefully shed some light on where we are headed. The first quarter started off with a major rally…actually a continuation; the second with a rally that took us thru mid-May then slowed but still was a good quarter, in fact the best in years. This quarter, the first to not begin with a rally this year is off to a rocky start. Stay tuned.
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 3, 2009.
