Alan Moore Commentary 1-1-2011
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As I stood at the counter of a Taco Bell ordering my lunch that comes with a free drink to seniors, I couldn’t complete the transaction because I didn’t have my wallet with me and had to trudge back to the car to get it; but it wasn’t anywhere to be found. As I searched, it dawned on me, from the colored beads hanging on the mirror, that I was in the wrong car; and so I jumped out quickly and found mine close by, but couldn’t get in because I couldn’t find my keys. Going back into the restaurant, the teenage order-taker held up my key chain when he saw me and said: "Dude, you can’t do the car without these! My grandfather forgets his all the time." Imagine my hurt from his impudence: moi…. mistaken for a grandfather? Compounding my frustration, my wallet wasn’t in the car, so Taco-less and hungry, I sped home for some money and got a ticket on the way: two tickets actually, one for speeding and one for not having a license. It wasn’t a good day and it made me think about claiming my social security early. Reflecting further on these events, I tried reciting the Gettysburg Address that I memorized in High School; I could still do it, which led me to believe that I am not old, just growing older. However, the "die is cast" and I am certainly not getting any younger and can’t avoid a colonoscopy any longer…….. My risk-taking days are behind me and I can afford to eat at Taco Bell from now until deficit-doomsday, if I can keep track of my wallet and my colon holds up. I only confess my slight ‘faux pas’ so you can understand why an affinity for cash correlates directly with age: there just isn’t enough time to make it back if you lose it in the stock market or any market. Compounding my anxiety, Taco Bell may have grandfathered-in the free senior drink, but my wife prefers lobster. It all comes down to the wallet; for me at least, it is not the size of the wallet that counts, it is the wallet in hand at the taco stand---- if memory serves me right.
Although investors lament the lack of GDP growth, the Merrill Lynch bullishness index is at an all time high and the average cash allocation by investment managers is down to 3.5%, usually it is 6%. On the surface, two other bullish signs are the VIX Volatility Index which has dropped to 16 in the wake of some very large uncertainties and margin debt hit $300 billion, which is back up to the 2007 bubble level. Under the surface, the VIX may signify complacency -------too many people are in the market and even borrowing to buy stocks, banking on significant GDP growth next year. Still, as the VIX collapses, corporations continue to pile cash on balance sheets; it now averages 10% of their assets. Obviously, they are vexed by the VIX, playing it close to the vest and not investing yet. On the bearish side, money is leaving Muni bonds as state budgets collapse, and interest rates are moving up despite QE-2. The next big thing will be massive municipal bond defaults requiring a QE-3. In the mean time, credit card debt has fallen 10% and consumers are starting to spend again, even though debt levels are still very high; albeit, not all retailers are doing better; this was announced 12-14-10:
" NEW YORK (MarketWatch) — Best Buy Co. reported an unexpected decline in fiscal third-quarter profit Tuesday, as lower demand for televisions and videogames led to a sales shortfall in the U.S., spurring the No. 1 U.S. electronics retailer to cut its full-year forecast. Same store sales were down 3.3%. "
Despite sagging Best Buy stores, revised numbers on the shrinking trade deficit will have a positive effect on GDP in the 4th quarter, it may come in closer to 3% than the projected 2.5%; still, I will stay in cash a while longer, because this news will cause interest rates to rise more. The dilemma is: which cash to hold; the Euro is going to weakened more when Spain blows up, and the dollar will continue to move all over the place: I don’t know much about the British Pound and all the others trade in small volumes and are manipulated by pegs and capital controls. Therefore, in a default to ignorance, I stay in dollars. Eventually, I think the European Union will collapse and the German Mark will be resurrected. Germany is the real strength in Europe and I can’t imagine the Germans being so stupid as to jeopardize their financial stability by co-signing the proposed "Euro-bond- slush- fund" in order to bail out the PIIGS whenever they pig-out. The Germans know the PIIGS will never pay off the bonds in full at maturity, and this proposal is just another punt of de-unification. Even if Merkel supports the PIIGS, the voters won’t in the next election.
Politically, Sara Palin seems to be ahead in the polls for the Republican nomination in 2012, but she is not my "cup of tea", party or not. I see on her reality show that she can shoot caribou and catch fish with the best of them. She has become a media phenomenon, promoted as a gun toting, bear-tracking, plain-talking, true- grit pioneer one day and defender of the faith the next; as if skeet shooting qualifies her to be Commander in Chief of the military and religious fervor is a substitute for leadership. I think she lacks both skills and god help us if she is elected. Who could be more divisive than Bush and Obama? Sarah could. By just running, she could fracture the Republican Party like the last time Caesar said hey to Brutus on the Senate steps. I can see the headlines now: "Sarah Im-Palin Boehner."
This was announce d on MarketWatch 12-1-2010:
"Ninety three thousand private sector jobs were created in November according to ADP." "For the unemployment rate to remain at 9.6% employers would have to add up to about 150,000 jobs each month just to keep the unemployment rate steady, said Dan Greenhaus, chief economic strategist with Miller Tabak. "You would want to see 300,000-plus jobs created a month to start meaningfully impacting the unemployment rate," Greenhaus said. Elsewhere Wednesday, outplacement firm Challenger, Gray & Christmas reported that November’s pace of downsizing "surged" to the highest level since March, with employers announcing plans to reduce payrolls by 48,711 jobs."
Subsequently to the ADP report, the unemployment rate went up to 9.8% on December 3rd as the Government said only 39,000 jobs were created in November. The Labor Department subtracted 300,000 jobs, as a "seasonal adjustment", from the data that month to reflect the temporary hiring done by retailers; that negative effect may reverse in December (WSJ 12-4-10, pg A4). Despite the data plugs, Christmas spending will be up a lot, perhaps as much as 5% over last year; albeit, retailers will be tenuous about permanent hiring due to shrinking margins; therefore, I expect a blah jobs number to be reported next Friday mainly because of the added "seasonal adjustment". Three hundred thousand fictitious jobs will be added in to offset the layoff of temporary help due to the end of the Christmas buying season. Unemployment benefits stop at 99 weeks and there will be no shortage of 99ers in 2011: That will be the Grinch that steals Christmas zeal.
The big picture concerning the relationship between GDP growth and employment was defined by an advisor to President Kennedy, economist Arthur Okun---- Okun’s law, as it became known, says: "GDP growth of 2.5%(the natural long-term growth rate) is necessary to just maintain the unemployment rate where it is, and for every 2 percentage points above that rate, the unemployment rate will drop by one percentage point." If Okun’s law holds true, it would take sustained GDP growth of 6% for a year to bring down the unemployment rate to 7.8%------ fat chance of that happening in 2011.
Whatever next Friday brings the jobs picture does not bode well in 2011, even though the tax compromise promises hope ------not from the extension of Bush tax cuts------ from the reduction in the payroll tax rate from 6.2% to 4.2%, which is additional cash flowing to spenders. The 2% drop will mean anyone making the SS wage base of $106,800 will receive a $2,136 tax cut on top of the old Bush tax cuts. Who said Obama wasn’t a good Republican? Anyway, let’s hope some of it trickles down to support home prices, which are projected to fall another 10% according to the Case-Shiller Index, as another avalanche of foreclosures occur in 2011. The foreclosure moratorium, quantitative easing and deficit spending just punt the debt problem down the road, and that may work until we get bogged down in inflation. Despite the problems, the Dow climbed a "wall of worry" and rallied more than 260 points on the day of the ADP jobs announcement; then went another 100 when the tax compromised was announced and kept going. Long-term treasuries have dropped 15% in price in a month and bond-holders are selling, moving the money into the stock market in search of alpha. Several readers have questioned my 100% cash position in emails back and forth that went like this:
Me: "you want answers?"
Reader: " I want the truth."
Me: "You can’t handle the truth.
Even though your portfolio hasn’t gone anywhere in a decade, your house is underwater and you haven’t gotten a raise in three years….. I stand on that wall of worry watching for bubbles coming out of the abyss. I didn’t create the abyss, the politicians did; and you want me on that wall, you need me on that wall to warn you of unfathomable government policies that can destroy whatever assets you have left. The truth is the financial hole is getting deeper with every quantitative easing, with every bailout, with every bill passed in Congress requiring more spending. I can’t in good conscience recommend the stock market just because everyone is doing it. The economy is going sideways until the QE-ball hits the ground; and which way the ball bounces is hard to tell------That’s how a punt works, but 4th down and ten is nothing to cheer about."
That ball took a bounce toward recovery in December following a sharp uptick in consumer spending, and a 17% increase in car sales in November and a better manufacturing report. It is the next bounce I am worried about. The ISM order index has been declining for four months and inventories are now quite large---Is a strong Christmas enough to change that? The diesel fuel use index has declined for several months; therefore, fewer goods are being transported----- this index has been the best directional indicator of all. In addition, the European debt problem will persist and inflation is rising fast in India and China. Otherwise, the glass is either half empty or half full depending on whether you are an optimist or a pessimist. Being neutral by not owning any stocks or bonds, I look at the glass and see it as being twice as big as it needs to be. There is a lot of excess capacity in the economy in the form of human capital that must be budgeted as overhead for at least 99 weeks: by that time, skills have rusted and the house is history, while good jobs remain a myth.
Due to a provision in the Financial Regulations Bill passed last July, the Federal Reserve Bank had to come clean on where the bailout money went. It turns out, that starting in September of 2008, 3.3 trillion dollars was advanced to banks all over the world, not just to the ones in the United States. Apparently, we bailed out Germany, Switzerland, France and the UK in addition to the five biggest banks in the USA and various hedge funds; we even saved Harley Davidson. There is little doubt that the real panic occurred at the top: with Bernanke in Washington on speaker phone, Paulsen and the heads of the largest banks (Jamie Dimon of Morgan and the CEO of Goldman Sachs in particular), huddled in a room and quaked with fear………. putting out propaganda that the ATM machines would stop and small businesses would not be able to issue payroll checks if any one of the major banks failed. That was a bunch of crap. There was no panic on Main Street; it was all on Wall Street. There is no doubt that half the bailout money was wasted and everyone should know which half. The local banks always had deposits on hand to cover checks, and ATMs are electronic devices that don’t cease to work unless there is a power outage. All bank accounts were guaranteed up to $250k and the FED placed an unlimited guarantee on business transactional accounts under the "TAG" program—payrolls were never in jeopardy. The wasted half was the bail-out of corporate executives and shareholders, when 98% of bank deposits were insured. The bailout was a shame and just another punt for bank leverage and CEO tenure. Bernanke was interviewed recently on 60 Minutes and his upper lip quivered uncontrollably the whole time; particularly when he was asked about the Fed’s role in creating the housing bubble: He said he didn’t see it coming……… The Chairman of the Federal Reserve Bank, with a PHD in economics and all the data in the world at his finger tips, didn’t see it coming. This is the guy in charge of the economy.
I allude to punting because I was the punter on my college football team. Standing 14 yards behind the line of scrimmage, with my eye on the center, I could always see the whole field before the ball was snapped; albeit, once it was kicked, I could never predict where it would bounce. I feel like I’m still in the same position observing the stock market, because there is no one down field that can catch--- and the ball is in the air.
The "value proposition" of the metaphor is that you can explain a complex economic situation or theory with a simple story. That is not to be construed as talking down; it is talking straight to reason.
Here is another point driven by a metaphor…………… Kim Kardashian, playing golf while being pressured by the press, hits a ball into the rough landing in the middle of an ant village; she proceeds to swing her club repeatedly, missing the ball every time and tearing up the ground in her wake of divots. One of the last ants left turns to another survivor and says: "If we are going to stay alive around here, we better get on the ball." (Economic translation: the Federal Reserve Bank’s repeated QE swings at GDP growth are going to eventually tear up the economy and the only safe place to be is in cash. Otherwise, trust Bernanke to replace your portfolio divots----Isn’t that what a "Fed Put" is all about?) I think Bernanke has as much control driving the economy as Kim does driving a golf ball. They are both "famous for doing nothing" and don’t perform well under pressure.
The pressure will come when inflation hits 3% and there has been unprecedented interest in commodity investing with that scenario in mind. As a result, commodity prices are high, maybe even bubble high. Investment managers are buying them for inflation protection, but really as a speculative trade; although, commodities only 45% correlate with the CPI during periods of very high inflation such as in 1980; otherwise, they do not offer much protection at all (Financial Times 12-13-2010, pg. 2). The so-called super cycle in commodities is not supported by the data over the last 75 years, which is punctuated by sharp rises in commodities for a short period, only to be followed by decades of falling prices---take gold for example (1979 to 2000)—as interest rates rise, gold will suffer.
Of all the doubtful inflationary hedges, a TIPS bond could be a decent long-term investment (Note: only the yield is protected, not the price of the bond which will fluctuate inversely with interest rates); I still think buying foreclosed real estate is the only game in town and I continue to make random offers----no luck yet, the banks take months to even look at my offers.
In the case of inflation, the bond market will ultimately control it, not the Fed (the Fed will raise rates belatedly, after a big rate-rise occurs in the markets). A 5% inflation rate over a quarter or two would jack the corporate bond rate up to 8% and the economy would double dip, thereby bringing the inflation rate down fast. Normally, inflation travels in cycles that last two to five years; this time may be different because of today’s debt levels, which are twice as high as in the early 1980s. In addition, it will be hard for inflation to exceed 3% without some stellar job growth increasing wage pressure, and employment is generally forecasted to remain anemic through 2011.
Businesses are now generating the same revenue and profits as back in 2007, with 7.5 million less workers---why would they ever hire them back if they don’t need them? That is the basic problem: a sideways economy is not good enough to increase jobs. Therefore, pouring onto the national debt won’t do much for employment, it will only make an interest rate induced spending contraction more severe when inflation does appear, even if a little bit. There is no quick way out of the problem and quantitative easing is not the answer………….. that is like giving a drunk a bottle at an AA meeting to stop his shaking, so he can stand up to confess at the podium----with the launch of QE-2, the drunk is now standing there mumbling something. Nevertheless, ending government stimulus cold turkey won’t work either. The best case scenario is for the consumer to not spend more in lieu of paying down debt and increasing savings, over the next four year period. That way, the economy could regain sustainable growth after real buying power was restored. However, politics interfere with forbearance, and the government continues to pander to delaying the inevitable: a decline in asset prices to the bargain point, which would stimulate real demand.
Currently, money is running out of bonds into the stock market pushing up multiples and I have no idea how high it will go. The money has to go somewhere, right? Risk says that trade is crowded, and I prefer being wrong in cash, rather than right in stocks, even as the rally continues and the economy slowly recovers. Just remember, my view of risk should not be your view, because we all face different situations. I know my risk tolerance, but you must determine yours.
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