Category Archives: depression

T-bill update: 90 day at 0.16%

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So this is what an old fashioned panic feels like. I think this is the beginning of the plunge that will take us to near 9000 on the Dow within a few weeks. But that won’t be the end. I’ll consider the possibility once we’re under 4000 or 2 ounces of gold per Dow unit, at least 2 years from now. Anyone who is unsure about their stock holdings should get out immediately. I don’t care how big and “defensive” a stock is, all equities are going down.

Click for sharper view. Source: Bloomberg

The Fed can’t hold at 2% if T-bills stay this low for long. Watch for a surprise cut.

Wall Street’s pain trickles down to the beach

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This story in Bloomberg today about Montauk, Long Island’s sport fishing industry should surprise no one:

One reason why boat operators are suffering is that regular customers aren’t booking appointments. Taylor Herman, 28, an avid angler who works with structured credit markets at HSBC Investments USA Inc. in New York City, usually makes five or six charter trips every year.

Now he is fishing off the beach at Montauk Point. The cost of a fishing trip and uncertainty in an industry that has bled New York of thousands of jobs in the past year are keeping him ashore.

“What’s at the forefront of my mind is that even if there is a bonus in this industry, in this market I probably wouldn’t let it go,” Herman said. “It is almost the most luxurious thing you can do, to drop $500 on a fishing trip that is a complete gamble.”

There you have it. Frugality is in. This guy has the cash, but knows he should hold onto it.

Herman said he knows a dozen people who have lost jobs at financial companies, and only one has found work. Employment in the securities industry in New York City dropped by 10,600 jobs, or about 5.5 percent, from mid-August 2007 through mid-July, said Jim Brown, an analyst with the New York State Labor Department.

This summer the tourists have cut discretionary spending, reflecting a regional economy down 18 percent in the last year, according to the Bloomberg New York City Metro Index….

18 percent? Jeez… if that is what an honest accounting of economic activity looks like, can you blame the BEA for cooking the books to inflate GDP?

Ripple Effect

“It’s a chain reaction,” said DeFina, 47, the owner of On The Dock. “The boats are empty, the docks are empty, the parking lot is empty. When people see that, they keep going.”

Fuel sales at Montauk Marine Basin this year may total 700,000 gallons, down from about 1 million in 2007, said Darenberg, the owner. That has cost him at least $200,000 so far this year, he said. The decline comes as he faces a $1 million bill in 2009 to install new fuel tanks to meet environmental rules.

“If boats don’t move, they don’t break,” said Darenberg, who also repairs fishing vessels and has a bait and tackle shop. “We’re trying to keep the prices down so people will go fishing.”

They’re trying to keep prices down – - that’s just what they should do, and is exactly how deflation works. Fishing tackle is actually a huge industry in the US, and as a fisherman, I have noticed soaring prices in the last 20 years. A decent light rod used to cost $15, with $50 being upscale, but now the respective figures are more like $50 and $200, and the number of highly discretionary gizmos for sale has exploded. Tackle manufacturers are going to have to retool for lower budgets: think Wal-Mart’s fishing aisle, not Montauk yacht clubs.

Remember the sub-plot in Jaws about the fragile tourism-based economy on fictional Amity Island? These towns are in for the toughest of times, since they rely on an overflow of cash and the confidence to spend it. In a depression, people will still come to the beach, but businesses like marinas and upscale restaurants, caterers and boutiques will find it hard to stay afloat.

Bull’s bear John Mauldin gets a lot more bearish

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Every week one or two different people, not always the same ones, forward me the latest missive from John Mauldin of Millenium Wave Advisors, LLC.  This is no surprise, since he claims to have over 1.5 million subscribers. Thanks for thinking of me, guys, but I’m a subscriber myself. I like how he presents ideas from this and that analyst and money manager, and it’s important to read popular writers to stay on top of the zeitgeist.

Mauldin’s catch phrase of late has been ‘muddle through,’ as he has been strolling through the wreckage of the economy with rose colored glasses on. All last year, he was making the case that we would only experience a mild recession and period of below-trend growth, and that a major bear market was not in the cards. For instance, here is presenting the old decoupling case:

“It is going to take some time for the economy to work itself through the current credit crisis and the collapse of the housing bubble. I suspect the US economy will grow below trend for at least another year. We will work through it, as we always do. But it is the return of the Muddle Through Economy….

The sectors that are outperforming are all large multi-nationals that get as much as 50% of their earnings from outside the US, and the global economy is doing well. Those that are not doing well are tied to US domestic consumer spending and the financials…

If we saw a 30% drop in the 40% domestically impacted sectors (with healthcare and utilities basically flat) and a 10% rise in the rest, that would be an overall drop of only about 7%, which is not much of a bear market in the total index, although there would be sectors that are ugly.”

So it was with some satisfaction this morning when I read Mr. Mauldin’s “correction” of his January 2008 predictions (he first re-prints his old predictions, then updates them):

” “So let’s get to the predictions. I think that we are in a recession for most of the first half of this year, and that we begin a slow recovery in the second half. It will be a Muddle Through Economy for at least another year after that. That would suggest that most companies will come under serious earnings pressure. If history is any indicator, that means we should see a bear market in the first half of this year. How deep will depend on how fast the Fed cuts, but I don’t think we are looking at anything close to the bear market of 2000-2001. Still, I wouldn’t want to stand in front of a bear market train.

“Consumer spending is going to slow, and it will be slower to rebound, for reasons outlined above. That will also make the recovery in the stock market a little slower. But I expect to become bullish on the market sometime this summer, if not before. I’m looking forward to it.”

To be blunt, that optimism now seems misplaced. I think we are likely to stay in recession for perhaps the rest of the year and well into 2009 before we start a very slow recovery. It is not time to get bullish on stocks, as I have been writing for the past few months. Earnings are going to continue to come under pressure, and earnings are what drive the stock market over the long term. We could see total S&P 500 as-reported earnings drop below $50. You do the math. Even with a 20 multiple, that does not yield a pretty picture.

I think we are going to test the recent lows and then watch the market go lower as the market gets disappointed in the earnings from the third quarter, and re-test those lows again. We are in for an extended period of Muddle Through, while we wait for the housing market to find a bottom and the credit crisis to abate.”

To be blunt, that optimism now seems misplaced. I think we are likely to stay in recession for perhaps the rest of the year and well into 2009 before we start a very slow recovery. It is not time to get bullish on stocks, as I have been writing for the past few months. Earnings are going to continue to come under pressure, and earnings are what drive the stock market over the long term. We could see total S&P 500 as-reported earnings drop below $50. You do the math. Even with a 20 multiple, that does not yield a pretty picture.

I think we are going to test the recent lows and then watch the market go lower as the market gets disappointed in the earnings from the third quarter, and re-test those lows again. We are in for an extended period of Muddle Through, while we wait for the housing market to find a bottom and the credit crisis to abate.”

Mauldin today even seems to repudiate decoupling, as he quotes Desmond Lachman of the AEI:

“… The ‘decoupling’ optimists are ever hopeful that China’s rapid growth, together with the rest of Asia’s emerging market economies, will offset any U.S. economic downturn. But they tend to forget that Asia is filled with export-dependent economies: in some countries, exports to the United States alone [emphasis mine] account for more than 10 percent of annual GDP. The “decouplers” also forget how relatively small these Asian economies still are, at least in relation to the G-7 industrialized economies. Even the vaunted Chinese economy is barely 15 percent the size of the U.S. economy.”

So here we are in August 2008: Housing prices are down 20% nationwide, Bear Stearns has collapsed,  bank runs have begun, Fannie and Freddie have been bailed out, global stock markets are down 20%, the commodities indexes are down about 25% from their peak in June, and even John Mauldin admits that S&P 500 earnings could fall to $50.

That last bit is the scarriest, since if Mauldin is thinking $50, who knows how low they can go? And by the way, the median bear market PE is not 20, it’s 10.

Now we know what the strong dollar policy is

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Paulson meant that he was waiting for the US-lead depression to catch up with the rest of the world and bring down rates in Pounds, Euros, Yen and Australian dollars. He’s a genius after all. It’s working:

Source: http://quotes.ino.com/chart/?s=NYBOT_DX

Even gold, that running vote of confidence in paper money, has backed well off the disconcerting 4-digit level:

Source: Kitco.com

How could people suddenly have such a preference for the dollar again? Don’t they know that it, like the Constitution, is just a goddamned piece of paper? Well, Paulson won’t admit this part of the policy, but you may have heard lately about people and companies going broke. Broke means no money (such as dollars). Since dollars accounted for a huge share of the bad loans made in the bubble, the implosion of that debt is akin to a shortage of dollars.

The dollars were never really there, just debt, but when you get a loan, it sure feels and works like money. And when it comes time to pay it back, money is what you need. Right now, nobody seems to have much of it, so those who do are getting the sense that they should hang onto it. That means a slower velocity of money (the pace with which it changes hands), which is deflationary by even by mainstream economists’ definition (M V = P Q).

So, who wants to guess how much longer Peter Schiff can hold out with his inflation case?