Search results matching tags 'Financial Crisis' and 'America'

America May be in Its Own "Lost Decade"

GaryHalbert — Tue, 21 Jun 2011 21:57:00 GMT

IN THIS ISSUE:

1. Already Half Way Through a Lost Decade

2. Why is This Economic Recovery So Weak?

3. Where Does the Economy Go From Here?

4. The Debt Ceiling Battle Continues

Already Halfway Through a Lost Decade

When most people hear the term “Lost Decade,” they immediately think of Japan during the 1990s after it experienced its own financial crisis. The lost decade in Japan followed a bubble economy in the 1980s which saw stock real estate prices triple in that decade, but then it all collapsed. Japan’s economy went essentially nowhere for the next 10 years. Actually, Japan’s economy hasn’t done well in the 2000s either, so it is now often referred to as the “Lost Decades.”

When the US financial crisis occurred and the recession unfolded in 2008, hardly anyone predicted that America would face a lost decade. Traditionally, the American economy has recovered robustly from recessions as demand has been quickly renewed. Within a couple of years after the only two deep recessions of the post-World War II period (1974-75 and 1980-82), the economy was growing in the range of 5-6% or more, rates that seem inconceivable today.

Despite President Obama’s unprecedented $820+ billion stimulus package and historic quantitative easing by the Fed, the United States is now halfway into a lost decade, economically speaking. From the 1Q of 2006 to the 1Q of 2011, the US economic growth rate (GDP) averaged less than 1% a year.

During that same time, the share of the population working has fallen from 63.1% to 58.4%, resulting in the loss of more than 10 million jobs. Another 8.5 million are working part-time because they can’t find full-time employment. The number of Americans who are working today remains almost exactly at its recession low point, and the latest unemployment report for May suggests that growth is slowing once again.

Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. Huge numbers of new college graduates are moving back in with their parents because they have no job or means of support. Strapped school districts across the country are cutting out advanced courses and in some cases opening schools only four days a week.

On the political front, it does not appear that any material reduction in federal spending will occur until sometime in 2013, if at all. Back in August, Republicans were claiming that they cut $38.5 billion in federal spending, but then were advised by the CBO that only a paltry $352 million in spending cuts would happen this year, as I wrote in my April 19 E-Letter.

Now, as we face the impending debt ceiling fiasco in early August, the word increasingly leaking out of Washington is that lawmakers on both sides of the aisle are quietly negotiating to raise the debt limit by enough to get us through the 2012 presidential election. They want to kick the debt can down the road yet again and deal with it after the elections.

So, we could indeed be looking at a lost decade. Consider this: The federal budget for FY2013 will have been passed long before lawmakers come back to Washington in January 2013. If they in fact get serious about cutting spending, which is far from certain, they will be working on the FY2014 budget in 2013.

If federal spending is cut significantly at that time, it will initially have a negative effect on the economy – reduced federal spending means reduced federal jobs. So it is entirely possible that the US economy languishes for a couple more years afterward, and there we have the lost decade – 2006 to 2015. It could happen.

Why is This Economic Recovery So Weak?

As noted above, the two previous serious recessions in the post-WWII era (1974-75 and 1980-82) saw the economy roaring back with GDP growth of 5-6% or more within two years after the worst of the slowdowns. Economists and investors alike are trying to understand why the current recovery is so tepid and unemployment remains above 9%.

The worst of the latest recession occurred in the second half of 2008 and the 1Q of 2009 when GDP fell at an annual rate of -4.0%, -6.8% and -4.9% respectively in those three quarters. We are now more than two years out from the recession lows, and the best quarterly showing the economy has delivered was in 1Q 2010 when GDP increased at a 3.7% annual rate. Since then it has declined with GDP growing at the rate of only 1.8% in the 1Q of this year. Most analysts don’t expect the 2Q to be significantly better as I discuss below.

There are numerous theories as to why the economy is not recovering much faster. Some analysts, including your editor, believe that part of the reason the economy is not recovering faster is the fact that the Obama Administration is running trillion-dollar deficits, and most business owners know that this can only lead to higher taxes down the road. But that’s not the only reason this economic recovery is so disappointing.

Some investors are confused when they read that US productivity increased significantly during and after the recession. For example, non-farm business productivity increased by 3.8% in 2009 and 3.9% in 2010 according to the Labor Department. The manufacturing sector alone saw an increase in productivity of 5.9% in 2010.

How could this happen? Obviously, companies have found ways to increase production with fewer workers. As noted above, the economy has seen a loss of over 10 million jobs since the financial crisis and the recession began. Unfortunately, many of these jobs will never come back.

The May unemployment report noted that the number of “long-term unemployed” (those jobless for 27 weeks and over) increased by 361,000 last month to 6.2 million. The long-term unemployed make up 45.1% of all unemployed Americans, and this percentage is growing. The long-term unemployed are increasingly finding that they cannot get jobs doing what they did before the recession, as their skills have grown stale in many cases. These people are increasingly being forced to take lower paying jobs or part-time work.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Continued high levels of unemployment are also taking a toll on consumer confidence and spending. The Consumer Confidence Index plunged from 66.0 in April to 60.8 in May. The University of Michigan Consumer Sentiment Index fell from 74.3 in May to 71.8 in the first half of June. These reports show that consumers are considerably more apprehensive about future business and labor market conditions as well as their income prospects.

The deterioration in the jobs outlook and six straight weeks of Wall Street declines sent Americans’ confidence in the US economy plunging to an average of -35 during the week ending June 12, a decline of nine percentage points from two weeks earlier , and six points worse than it was in the same week a year ago. Economic confidence is now approaching a 2011 weekly low as noted in the chart above.

Economic confidence reached its peak so far this year at -18 in February and then generally declined through the week ending April 24, when it reached -39 as gas prices surged and economic activity slowed. Economic confidence improved to -25 during the week after Osama bin Laden’s death. However, Americans have since become more pessimistic about the economy in early June, with confidence reverting to late April levels.

All of this has a negative effect on consumer spending. As the chart below illustrates, Consumers remain more interested in paying down their debts as opposed to taking on more of it, and that trend is not likely to change soon. The chart tracks private debt held by households and businesses. Total private sector debt held by consumers and businesses combined peaked at 283% of gross domestic product in early 2008 - nearly three times the size of the entire economy.

As you can see above, consumers and private businesses began to aggressively deleverage in the wake of the financial crisis and the recession by paying off debt and saving more. Private debt fell to 234% of GDP by the end of last year, though much of that decline resulted from bad mortgage debt shifting from banks to the government through the bailout of mortgage finance giants Fannie Mae and Freddie Mac.

Notice also how this trend of deleveraging accelerated sharply in late 2009 and 2010. The question is, how long will this continue? Carmen Reinhart, the co-author of the very popular book, This Time is Different: Eight Centuries of Financial Folly, puts it this way:

“I think we’re in for a lot of disappointment. If historic norms hold, deleveraging isn't pretty, and it is not a smooth process. We're already four years into this. I don't think the next six years look great."

Obviously, Ms. Reinhart believes that the deleveraging trend will continue and notes that households still can't afford the current debt levels, which are well above the average disposable income.

Where Does the Economy Go From Here?

For all the reasons noted above, and others, this recovery is very slow as compared to those following the last two serious recessions. And it’s likely to remain sub-par for some time to come. Most of my best sources now believe that GDP will grow at an annual rate above 2% in the second half of this year (as compared to only 1.8% in the 1Q), but most also agree that it will have trouble rising above 3% later this year.

Regular readers know that I subscribe to Blue Chip Economic Indicators (BCEI), along with many other services. BCEI produces a monthly report wherein it surveys the opinions of 50 leading economists and forecasters. I will volunteer that the so-called “50 leading economists” tend to be a bit on the optimistic side, as compared to most of the more expensive publications I read. Nevertheless, their monthly survey results are helpful in keeping track of what mainstream forecasters are expecting.

The latest BCEI survey didn’t hold any big surprises. As expected, the economists (on average) dialed back their forecasts from last month. The BCEI average estimate of 2Q GDP growth was downgraded to 2.6% from 3.2% a month earlier. I should point out that this survey was taken just days before the surprisingly negative unemployment report on June 3, so I wouldn’t be surprised to see another downgrade below 2.6% next month.

As for the second half of this year, the average GDP growth estimates were 3.3% in the 3Q and 3.4% in the 4Q. If the numbers above prove accurate, that would mean GDP growth of 2.78% on average for all of 2011. For 2012, the survey average was for GDP growth of 3.0% in the first half and 3.2% in the second half of next year.

There is a broad consensus among economists that the economy has to be growing by at least 3% just to absorb the apprx. 150,000 new workers which come into the workforce every month. Likewise, most agree that it will take growth of at least 4-5% over an extended period to whittle down the unemployment rate.

On that note, only two out of the 50 economists surveyed by BCEI predict growth of 4% or better in 2012. On the other hand, 19 of the 50 economists predict GDP growth to average less than 3% next year. Again, this group tends to err on the optimistic side.

While it remains to be seen what the US economy actually does over the next year and a half, the forecasts discussed above do not paint a pretty picture for President Obama. As noted, only two of the 50 economists surveyed believe the economy will be growing at 4% or above by election day in 2012. Likewise, it looks like the unemployment rate will still be well above 8% by that same time. This does not bode well for Obama’s re-election, but then again, the field of Republican hopefuls leaves a lot to be desired.

On that note, I am getting a lot of questions from readers who ask if I know whether Texas Governor Rick Perry will enter the race. The simple answer is, I do not know. However, the recent defections of Newt Gingrich’s senior political staffers, two of whom are long-time political aides to Governor Perry, makes a Perry run all the more likely.

Dave Carney, who had been Perry’s lead political consultant for years before joining Gingrich, is now reportedly in Austin working for Perry again. Rob Johnson, who was Perry’s campaign manager in the last gubernatorial election, also bolted from the Gingrich staff at the same time and is reportedly now working for Perry again. Coincidence? I doubt it.

Most of us on the right in Texas don’t consider Perry to be a true conservative, plus he’s got some baggage (including flip-flops). Of course, everyone else in the GOP field has baggage as well. I will give Perry this: he is a terrific campaigner. If he and his handlers believe he can win, I think his ego will make him get in.

Let me make one point abundantly clear: While Governor Perry is not as conservative as I might like, I would vote for him in a heartbeat over President Obama!

The Debt Ceiling Battle Continues

Since I veered onto a political note just above, let’s revisit the issue of the debt ceiling. Vice President Biden and a bipartisan group of congressional leaders have been meeting for several weeks to reach a compromise on raising the debt ceiling. According to Treasury Secretary Geithner, the government will have exhausted all of its borrowing authority on August 2. Currently, the plan is to get an agreement done before July 4 when Congress goes on its summer recess.

For the last couple of weeks, Biden has said he felt confident that an agreement could be reached by the end of June that could be sent to the House and Senate for a vote. As I discussed last month, there is little doubt that a deal will get done, although there may be a few meaningless fireworks just ahead. The final deal will almost certainly fall far short of what the Republicans are demanding in terms of spending cuts. Count on it.

The Republicans have two basic demands: 1) that spending cuts must exceed the amount by which the debt ceiling is raised; and 2) that there must be some spending cuts to entitlement programs. The Democrats are pushing for some tax increases to raise federal revenues, and they refuse to cut any entitlement programs. Biden’s confidence that a deal can be reached by the end of June may be wishful thinking.

Last week, Washington was rife with rumors of an agreement being hammered out by Biden and the six top congressional leaders entailing roughly $2.5 trillion in promised spending cuts that are to materialize or accrue in future decades in exchange for a $2.5 trillion increase in the government’s credit limit.

That would be a bad deal because it would not include a Balanced Budget Amendment that would bind future Congresses. The spending reductions could be easily undone, after the next election, in fact. It also means we would be passing up the chance to reduce current-year spending or repeal ObamaCare.

We’ve seen this movie before. Bipartisan summits in 1983, 1990, and 1997 all proved ultimately unfriendly for taxpayers but were great for the Washington spending class. Taxes went up, and the promised spending cuts never materialized or were later reversed.

In any event, it is not at all clear what will happen just ahead. Speaking on the CBS “Face The Nation” program on Sunday, Senate Minority Leader Mitch McConnell stated: “If we can’t do something really significant about the debt ceiling, then we’ll probably end up with a very short- term proposal over a few months, and we’ll be back having the same discussion in the fall.”

This carefully placed statement suggests that both sides are still far apart on reaching an agreement, and that the Republicans are prepared to essentially walk away from the talks and settle for a short-term increase in the debt limit. So it remains to be seen what will actually happen, but I continue to predict that some kind of deal will be made just ahead.

As discussed in my May 24 E-Letter, the Treasury Department has borrowed large sums of money from various government agencies and trust funds to keep the government afloat since the official debt ceiling was reached in May. As I noted last month, all of that money has to be repaid as soon as the debt ceiling is increased.

So just how much money do you think the Treasury has to borrow as soon as the debt ceiling is increased? $100 billion? $200 billion? $300 billion? Nope. They announced last week that the Treasury will have to borrow a minimum of $600 billion as soon as the debt ceiling is expanded. Wow!

To put that in perspective, the previous largest monthly deficit ever incurred was $222.5 billion in March of this year. That eclipsed the previous largest monthly deficit of $220.9 billion in February.

And finally, let’s not forget that the Federal Reserve will end its QE2 Treasury bond purchases by the end of this month. The 10-year Treasury bond yield has fallen from around 3.5% to near 3% over the last month or so due in part to new signs that the economy is slowing down. But I would not want to be long T-bonds when the Treasury starts borrowing $600 billion just ahead. Expect some wild financial markets when that happens.

I could go on and on with that discussion, but it’s time to hit the send button. Central and south Texas are having one of the hottest and driest Junes on record. Temps here in Austin have been over 100 degrees almost every day in June, and Lake Travis where we live is dropping every day.

Hoping it’s cooler where you are,

Gary D. Halbert

Stocks Have Risen When The Economy Is Down

RichardSchwartz — Mon, 03 Aug 2009 14:49:00 GMT

THE BIG PICTURE

The key thought: History shows the economy can be bad and the stock market good! Understanding that one idea is key to making a logical decision about the stock market here. I tried to get this across at Elizabeth’s 9^th birthday party to the family Saturday. The stock market is climbing its “wall of worry.”

THE SITUATION. My stock market and economic history studies of the Great Depression of the 1930s convinced me that stock market can rise while the underlying economy remains in a very weak condition. Because it’s happened before. In the 1930s depression, even while US unemployment remained at horrific, double digit levels for the whole decade and with few safety nets in place to help destitute Americans and with great ongoing divisiveness between political parties, the stock market posted a five year bull market run up, from 1932 to 1937. So, yes, there can exist a great disparity between the stock market and the economy. This confounding, confusing conundrum can exist as long as the economy is not sinking and/or when the economy stabilizes, no matter at whatever low level of economy activity. I believe that’s because the US capitalistic economy is essentially revitalizing and self-healing. Helped today, because over our history our capitalistic system has grown so large and diverse. In other words, first because Americans, with our continued open borders to any nationality, are a breed of extremely ingenious risk takers and thus will find ways to survive and prosper if allowed to do so. If, from time to time, when capitalism gets in a bind, it gets jumpstarted. Or gets the table reset when it knocked awry. Secondly, because today, there just are so many different industries, businesses, ideas, innovations in all parts and regions of America. Just meaning that while construction and manufacturing are down, maybe technology and the media are up. Or while Michigan is down, Tennessee is up. Or while big business suffers, smaller businesses spring up. I’m too provincial to see all this metamorphosis first hand and thus explain this concept more completely but what I see today is an America in downsizing mode, say moving to a rightsizing scale, but not in total collapse mode. Just like China, America in our own way is using this crisis, individuals one by one, businesses one by one, even the government is adjusting, although not totally because the government is itself the ultimate safety net when any major crisis hits. Our government, we’ve learned from past crises, is the rarely needed (thank goodness!) jump start provider, booster or table setter. Thus today America is using this financial crisis to rid our economic system of the bloat, the fat, all the long built up excesses, our bad behaviors and habits, particularly our overspending, even the corruption which always builds up during “unfettered capitalism,” seemingly prosperous but under the surface unhealthy, unsustainable times. Exactly why economists look at recessions as normal, healthy and needed cleansing events and why throwing money at any and all past downturns in recent decades led to this larger than life recent disastrous event. Schwartz View: My conclusion thus -- to get back to my opening statement that stock markets can rise while our economy is down and dirty, weak and lackluster and in substantial downsizing mode -- is that what investors mainly have to fear today is indeed fear itself. That fear partially coming from not being able to understand how the stock market can rise as we read about and see big economic trouble all around us. As I see it that’s investor’s biggest bugaboo now. We all know or should know that, as William O’Neil, founder of Investor’s Business Daily has always stressed, that success favors the optimist. Now I don’t mean the Pollyannas, I won’t besmirch the many of this ilk whom get be angry, they got their comeuppances by getting blindsided and riding the stock market down for 17 straight months between October 2007 and March 2009. But today, since we’ve moved past the bankruptcy risk, at least for the time being, no guarantees about future shocks knocking not us back down, we should overcome our fears and our misunderstanding of the economy and stock market relationship and again participate in the stock market to the extent of our own financial goals and objectives and how we’ve performed over the last two, years, during the bear market since mid-2007. To reiterate since this concept is so darn important, the hardest move to make is to buy stocks after this financial earthquake and while we see all the resulting damage around us. In other words, to separate the stock market from the economy. It’s very difficult for us investment professionals as well because every day we watch the stock market closely and/or read every update about each remaining financial problem. We all need to overcome our fears to make money during this full cycle. Easier said than done!

THE ECONOMY

The economy is so large and varied now that even with the shock and resulting dead stoppage of economic activity for many months, we’ve been able to stabilize the economy. Thanks to our government learning from our past travails and understanding its role. President Bush gets much credit but he’s gone now and thus last Friday I heard the first words uttered about an “Obama Miracle.” Pulling totally out of this massive slump is another thing and may take much time yet although we could post some surprisingly great numbers in coming months. Inventory rebuilding looks good statistically and allowing home foreclosures provides changes of ownership from the overextended to new risk takers. Still, over America’s 200+ year capitalistic history we’ve built a vibrant and reenergizing economic system so there’s always something good taking place somewhere and while the distressed and/or overbuilt areas of our economy right size the in fashion areas keep us moving forward. And our government has and is still performing admirably (sorry, I know many readers don’t agree with me), stabilizing our financial system and thus setting the stage to allow capitalism to provide us with future growth while at the same time realizing that any and all government intervention always adds additional drags on the economy and is trying hard to avoid such. While at the same time smartly tackling our long term deeply entrenched and ignored major issues and thus pointing America towards a more fundamentally sound future, remaining as one of the world’s leaders. Such as taking the lead in going green as the “clunkers for cash” program epitomizes. Americans really want to do their part and this program is providing one capitalistic way to do so. Getting polluting cars off the road while stimulating growth at the same time and in essence cutting back money supporting terrorism. I gotta love it! Schwartz View: So, we’re back on the right track in lots of ways and I’m delighted. But don’t get complacent. Please keep reading!

Please email me at RichardStk@aol.com for how the stock market will respond to the above analysis and whether, in the following THE STOCK MARKET and PORTFOLIO STRATEGY sections it’s time to buy the stock market today or not.

Monday Weekly Strategy

RichardSchwartz — Mon, 22 Dec 2008 14:37:00 GMT

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Monday, December 22^nd, 2008: So here it is, last letter ‘till Monday, January 5^th, as Lucy & I fly off to the white sand, warm blue waters of the Caribbean, maybe on a last hurrah (if the economy keeps sliding). I’m taking Cycles of American History & Rethinking the Great Depression books. Our routine is: Go to the beach, play backgammon, read & go out to dinner. Day after day. Warm our bones & work on new tans.

THE BIG PICTURE

Friday I saw John Bogle, who has been on Wall Street for 50 years and who created the first index fund, the Vanguard 500 Index Fund back in 1975, say investment bankers and bankers generally owe the country a huge apology (which I doubt we ever get). Their imprudent speculations and greed for massive fees from too complex speculations led to today’s financial sector problems, problems which have now fed out to the real economy hurting innocent, hard working, everyday Americans. Mr. Bogle says greed has even spread out to our whole economy, that we’ve morphed into in a “me first” society and it’s something we have to seriously take a look at. Thus capitalism, allowing markets to work unfettered of regulation and based on trust and trusting, has now been “deeply discredited.” Even the underpinnings of capitalism have changed radically. We’re no longer an ownership society whereby individual stockholders used to select and then hold 92% of all common shares; institutions 8%. Now institutions control 75% of shares through huge sums entrusted to them by others and have not invested prudently. Again, because of the incredible fees they got for investing. Mr. Bogle says they sure wouldn’t manage their own monies so recklessly. These institutions were supposed to be wiser than individuals but, again, it’s not their money. Supporting Mr. Bogle’s view is the revelation that 29 of the 30 largest losers in the Bernie Madoff Ponzi scheme scandal were institutions whereby just one of these fund of fund companies was paid $160 million in 2007 alone for recommending the Madoff “hedge fund.” In other words, where was the fiduciary responsibility, the prudency, the probity expected when we entrust institutions to manage 75% of our investments? Schwartz View: Regular readers know I’ve been distressed and pounding the table about a number of these societal issues for years. About capitalism running amuck, culminating its 30-year trend toward widening the gap between it and its counterpart, democracy, with President Bush’s skewed one way Texas twang policy saying the be all and end all is that “bidness is bidness” and thus stifling regulation. And about society becoming so uncivilized, we ended up booing our own hometown, beloved sports teams! So while no one wants to live through what may come next in the economy, I have to say America has finally woken up, albeit after the nightmare it usually takes to precipitate major change, and that we are now started down a long and arduous path, but one finally pointed in the right direction again. As one example, we’ve even started to SAVE once again; amazing! So, for myself, I guess sort of a contrary indicator in recent years, I’m becoming more optimistic and bullish on our future. Finally! “Go America Go!”

THE ECONOMY

It became apparent that the US economy was suddenly falling-off-a-cliff right after Lehman Brothers became the one firm chosen NOT to be bailed out by the Federal Reserve and US Treasury Department. (Looked back upon as a colossal mistake in strategy I’ve read.) Lehman’s bankruptcy rippled out far and wide and led directly to losses in some money market funds, a “breaking of the buck,” and thus then to a total loss of confidence. Now, by all accounts, the economy is in total free fall. This sudden screeching halt in US business activity has caused the same in our global trading partners and most everywhere I look is now in corresponding economic free fall. You extrapolate it for yourselves from here. One view I’m pondering is that many times sharp declines lead to the second leg of a V-move, back up, and we’re overdue. Maybe stocks, with their recent unwillingness to keep going lower on bad news, means Mr. Market (the consensus of large investors) sees some end out there to the economic free fall. Still, we’d have to see some economic revival to expect a sustained V snapback in stocks. For now, I see 2009 providing a steady stream of bad news every time we look up. Just like in the second year of the last Papa Bear bear market, back in 1974, a continuing stream of bad news back then ultimately overwhelmed all attempts to rally until the final months of that year. Schwartz View: The consensus I’m hearing is that this sudden, fall-off-the-cliff global economic contraction is NOT going to lead to a repeat of the depression-spawned 1930s starting with its four-year long period of contraction followed by its anemic recovery, a.k.a. the Great Depression. I hate to follow any consensus especially when this one’s been so wrong for so long. But my own history look backs and studies by Federal Reserve Bank Chairman Ben Bernanke, an expert on what went wrong in the 1930s, turning a recession into a depression, show that we raised taxes, cut spending and blocked global trade, just the wrong policies. So I sure don’t expect any exact repeat of those failed policies. Leading me to think out of the box and that maybe today’s Fed policy of battling a deflationary depression is also implementing incorrect strategy. How about worrying against runaway inflation spawning from all the money the US and now the world has and is still throwing at this economic slump? Just the problems we worried about in the early 1930s but didn’t occur. You know the old saying, people fight the wrong war, the old war, because that’s what’s still fresh in their minds. Thus, summing up, maybe we can’t expect much creativeness from the Fed pointing in the less obvious direction of battling inflation since they are entrusted with getting us through hard times. They will naturally, after learning certain lessons from the 1930s well, not break much new ground. One reason being that if their policies didn’t work, they would be heavily criticized for experimenting. Thus while everyone pooh-poohs an inflation problem, I still worry about one. Seems like the consensus, which may be correct, among the minority expecting and talking about an inflation problem, doesn’t expect one until 2010 at the earliest. Keeps me thinking about that quote I printed here back on Friday, December 5^th, from Sir John Templeton: “It’s impossible to produce a superior performance unless you do something different from the majority.”

THE STOCK MARKET

Maybe we’ve started off on a new, lasting stock market rally as many now say. Maybe the November 20^th closing low and November 21^st intraday low did end this bear market or at least this phase of it and start us up and on a new mini bull market. But I don’t think we can determine that from these final days of stock market trading this year. This jig jag, saw-tooth modest rally we’ve had in December – the Dow remains down -2.8% this month, but up +13.6% from its closing low on November 20^th – still looks like just a time killer rally to me after stocks fell -6% in September, -14% in October and another -5% in November. So while I’m off on my annual winter beach vacation, I’m leaving my managed portfolios hedged with a slight long bias, still with my modest overall about 20% or less market exposure which I’ve carried since late last year. You remember late last year? At least as a lesson learned for the future, if for no other reason. After the stock market rallied back from its original car wreck in July, in what amounted to a head fake, false move, dead cat bounce and pretty obvious sucker’s rally, and a failed break out to new highs by the Dow and S&P (while the rest of the stock market refused to confirm).

Anyway, last week I ended the letter by noting that psychologically we should rally since bad news couldn’t drive prices down in recent days. Technically we had what could prove to be two months of base building everywhere I looked on the charts (but bases which could easily prove false). Fundamentally we even finally had low enough market valuations, like P/E ratios, to support a rally as well. But how about a catalyst? Well, let me offer up: (1) much lower gasoline prices which keeps our wallets and purses fuller and healthier, and (2) the good feelings anyone watching our president-elect making non-partisan, non-political, non-ideological selections for his cabinet, should feel. There may be a wellspring of good feeling, a sort of honeymoon psychological effect on investors, business, consumers and most all of us as we hope our new president can perform miracles. Schwartz View: Unfortunately no one man is going to remake America overnight. So, while keeping an open mind and watching all unfolding developments, for now I’ll back history which says this “worst financial crisis since the Great Depression” has to lead to an extended Papa Bear market, one which lasts at least a couple of years. Not just for one year, where we stand today.

PORTFOLIO STRATEGY

I hate to follow or even agree with some of what I’m hearing about going forward strategy, especially if such is espoused by those who were so wrong all this year. I’m speaking specifically about Bob Doll, now at BlackRock as their “Trillion Dollar” fund manager. I don’t want to pick on anyone but since he’s been leading the charge forward as stock markets collapse and getting all the face time doing such, I guess I have to. I start off very skeptical because my belief is that these big money managers are not going to get on TV and recommend anything before they and their clients get first crack at their thinking, ideas and recommendations and position themselves accordingly. I already wrote awhile back many old stock market books talk extensively about how big money always used to try to sucker the little investors. The age old technical Wall Street term “distribution” implied big guys needed little guys to unload their big positions on to when they foresaw a bear market ahead and thus put on a bullish face. It took much time to unload huge positions these large investors stockpiled so much frenzied excitement about the stock market had to be built up as big money sold. What better way today than Bob Doll coming on CNBC ubiquitously and always saying we are now in a bottoming process. He said that back in March and those who followed him are much the worst after the October panic crash. Anyway, that’s all secondary, although supporting, my main point. My main point is that Mr. Doll now says next year is going to be a good one for those taking on risk, not for those playing it safe. Again sounds good to me, at least at first blush. We all know what goes down the most generally can bounce tremendously when psychology changes. But do we really want to buy really risky investments in just the early part of the second year of a big, bad bear market? I say no. Bear markets of this size and scope historically have taken a lot longer than one year to work through.

Net, net, probably Mr. Doll will be proven correct about taking on risk, if one doesn’t factor in any time period. I’d guess risky asset classes will move fast when this bear market ultimately does end but do I really believe its going to end soon? No. And if we do have a 2009 mini bull market, say because stocks have fallen so much, then I’m not going to count on Bob and other institutional investors to tell me and us exactly when to get back out. No, starting off next year next week, I’d suggest still playing our cards close to the vest. Yes, play modestly for a continuing rally but look at it for now as just a bear market rally.

Happy Holidays & Happy New Year!

Richard

Re-Regulation Begins a Multi-Decade Road

RichardSchwartz — Mon, 06 Oct 2008 14:39:00 GMT

THE BIG PICTURE

Today’s Big Picture view revolves around the probable coming re-regulation of the financial markets. History shows regulation of markets is similar to a grandfather’s clock pendulum swinging back and forth although not as regular. A brief look back to the start of the 20^th century, shows free markets and a first age of globalization, with the introduction of the telegraph and telephone, steamships and railways, at a peak. Millions even migrated without passports while trade flourished meaning free markets were in charge.

· Governments Take Charge. Then, in August 1914, with World War I, that age ended abruptly. WWI left people disillusioned and looking for something better and many turned to socialism and communism. The Russian Revolution in 1917 drew followers and essentially sought to end capitalism for good, making private property illegal. Socialists and other government controlled economic systems were winning the battle of ideas, governments were in charge, free markets were in retreat. In less than 30 years, one third of humanity, including Eastern Europe, China and the Soviet Union, would be living under socialism or communism. Capitalism looked to be doomed except for in America. The 1920s in America was still a boom time, Americans buying cars, buying illegal gin, buying stock. Radio was the Internet of the 1920s. It was a classic bubble. Finally the 1929 stock market crash started Americans on the way to despair, a complete economic collapse "with no ability to earn, repay, spend, consume." Everything spiraled downward while about half the banks in the US closed. America turned toward government for help and thus re-regulation with President Roosevelt’s numerous new government regulatory agencies. Around the globe, governments gained power … over free markets. In Italy, Spain and Germany fascism took charge. World War II then arrived and even afterwards people all around the globe still blamed capitalism for causing the depression. The whole world kept moving towards more regulated economies. England even went socialistic as Winston Churchill, the great war leader, was beaten by the socialists! Most of the world operated under this sort of government planning process for the next 30 years.

· Free Markets Regain Control. But in the 1970s free markets began a resurgence. Margaret Thatcher came to power in England with free market thoughts as did Ronald Regan here in the US. with his Reganomics. Both cut back on government regulations, giving markets more ascendancy and free markets again starting coming to the forefront. England started privatizing its economy while President Regan cut taxes and let free markets regain control as epitomized by breaking the air controllers strike. Thus capitalism got a free hand which lasted for aboutt 30 years, even through the dot.com boom and bust. But after last year’s incredible debacle with investment banks, money center banks, insurance companies, etc. losing billions after irresponsibly leveraging up their investments 20 or 30 times, it’s apparent to most everyone that, just like in the 1930s, we can’t afford to have any similar financial market collapse spawning from totally free markets to happen again any time soon.

Schwartz View: So after reviewing the history of the 20th century and seeing how over long periods, market regulation swings back and forth, I have to figure we’ve just started a long term swing back on the way to re-regulation. For more on this topic, I recommend you watch Commanding Heights, the Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw which was turned into a DVD and a PBS prouction, a wonderful esplanation of the battle for economic minds in the 20th century. Filled in some missing pieces for me and should for you all as well.

To Risk "Cleaning Out the System" or Not

RichardSchwartz — Mon, 29 Sep 2008 13:37:00 GMT

THE BIG PICTURE

Written Monday, September 29th, 2008: 6:30 a.m..

What happened in Congress last Friday – House Republicans refusing to go along with the government’s rescue plan – was caused by political/economic ideology combined with Americans not wanting to bail out Wall Street. With the men and women on Main Street contacting their representatives en masse to protest any plan at all to bail out Wall Street, some Republicans decided they were willing to test the thesis that not going along with the government’s plan risked Armageddon for the whole American financial system. Conservative capitalistic ideology says the best and only way to handle economic crises is to let the free marketplace work, meaning let those individuals and corporations who’ve made bad decisions fail. Famed investor Jim Rogers, who’s consistently said Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Henry Paulsen have been following the wrong road during this crisis, must have been pleased. Rogers also feels the best path is to let underwater financial concerns go bankrupt. He says bankruptcies have happened before, will again, and serve a purpose. They effectively clean out the distortions and excesses built up in the economic system so in the future we can start over and move ahead on a strong foundation. Not doing so would set up the same situation here in the US that caused Japan’s “lost decade” of the 1990s whereby the Japanese government let failed banks keep operating. Bailing out and keeping zombie-like banks alive here as well would just slow dramatically or even block America’s economic recovery. Bottom line, with terrific public opposition – calls coming in 100 to 1 against bailing out Wall Street -- late last week some conservatives decided to risk taking the whole country down and into the economic abyss and see what happens. They backtracked a bit over the weekend, giving in to the mantra that “we had to have a deal before the Asian markets opened.” Schwartz View: Boy, do I have mixed feelings! Invading Iraq because of itsreported stockpiles of weapons of mass destruction, proved that acting out of fear can be wrong. Thus when the government forecasts disaster ahead today unless we follow their rescue plan, it feels like they are crying wolf again. Plus I fervently believe we do need to “clean out the system” and show Wall Street we’ve stopped socializing their losses. On the other hand, common sense tells me at all costs we should avoid any economic meltdown which could morph into another 1930s-style depression. Finally I believe in letting the marketplace operate as freely as possible and I agree with the man on street that rich players who’ve gamed the system for so long should share the economic pain the rest of America has been feeling for many depressing years now. Making matters even worse and even more complicated is the absolute horrendous timing of this crisis. Our politicians wanted to recess and get out of Washington, DC last Friday to go campaign in their districts and certainly didn’t want to have to be forced into voting YES on any detested bailout plan. Now they all will have to explain to voters how “we’ll all sink or swim together.”