This chart (courtesy of Mish), shows that contrary to hype, retail has not recovered to anywhere near pre-crash levels, though the consumer culture is still very much alive.
Many of the world’s stock markets have already retraced large portions of the entire rally from the 2009 lows, but US equities have a long way to go before they give traders a scare. Judging from the sanguine attitudes expressed by various managers on Bloomberg TV, the majority remains firmly convinced that the lows are in and that any sell-off is just a healthy correction on the way to new all-time highs. This is exactly the same attitude expressed from late 2007 to mid-2008 before the crash got underway in force.
Stockcharts.com
Since we are still in the early phase of the credit deflation and most people remain unconvinced of its magnitude and implications, this next decline in asset prices could be very swift and deep, driven by the panic of recognition. Technical support has already been taken out, and dip buyers will be less eager, since they have seen that stocks can indeed crash. We could see an unrelenting slide like the two years from April 1930 to July 1932.
There won’t be another bounce of the magnitude we’ve just seen until real value is restored by attractive dividend yields. A 7% yield on today’s dividends would put the S&P 500 at 350 or the Dow under 4000, but this assumes dividends won’t be cut and that the recent years of extreme overvaluation won’t be matched by an era of extremely low valuations as the culture of financial speculation dies off.
This via Dave Rosenberg (free sign-up required):
BLEAK JOB MARKET OUTLOOK
We said before that what really stood out in this “Great Recession” was the permanency of the job decay. Of the eight million jobs lost, three-quarters were in positions that are not likely coming back.
We just heard from the National Association of Manufacturers that fewer than 30% of the manufacturing jobs lost in the sector will be recouped in the next six years. So here’s a bit of math: if this holds true for the economy as a whole, and assuming a normal cyclical upturn in the labour force participation rate, then the nationwide unemployment rate would be 15% in six years’ time. How anyone can believe that we can squeeze inflation out of that scenario is truly one of life’s many mysteries.
We have to let Kondratieff winter play out and do its job of debt liquidation before the long-term employment cycle can start up again. With extend-and-pretend and mark-to-fantasy, this is going to be a long process.
Long Wave Analyst
As for manufacturing jobs, good luck with that. The US educational system pretty much seals the fate of anything engineering rated — my advice there is keep your kids out of those unionized prisons. Better to pool resources with friends and hire tutors and (Chinese-speaking) nannies. I wonder, how many government teachers can an iPad replace?
Eric King is one of the best financial interviewers out there, so he gets the best guests of anyone I know.
Listen to the MP3 here, recorded last Saturday, March 20.
Take-aways:
The last of the bears are capitulating, just as the last of the bulls turned bearish last winter. Everybody loves stocks after a 73% rally, and there is huge psychological pressure to be bullish.
The market only gives away free money for so long (unbroken strings of up days often come near the end, as in Spring 1930).
The last two times that the market made a double top (July/Oct 2007 and the 2000 top), the Nasdaq surged at the very peak, leaving the Dow and SPX behind. SPX has just barely made a new high, but it feels like it’s much higher than in January.
GDP expansion is very weak compared to the stock rally, bank lending and jobs are still trending negative.
This is not a recession that has ended. This is a depression that has had a big countertrend rally.
States are all bankrupt, because they always spend too much. Governments always go bankrupt in the end. (Interesting factoid: Nebraska’s constitution outlaws borrowing by the state, so they are in the best shape).
All of the dollar-denominated IOUs are going to be worthless in the end. The government’s backstop has delayed this, but the debt will still go bad. The central banks will not take on all the bad debt, so the governments are trying, but they will ultimately default themselves.
Hyperinflation is not an option with all this debt. Default (deflation) is inevitable. Government defaults are deflationary.
Cycles are part of the human social experience. Muni defaults haven’t happened since the 1930s, but that is only because that was the last time we were at this point of the debt cycle. Munis will end up as wallpaper — no way the states can pay them off.
Conquer the Crash was released in 2002, but the stock market rose for 5 more years and the credit bubble got even crazier before finally topping in 2007, but the extra debt is just making things worse now that we’re at the point of no return.
We have a return of confidence. AAII (American Association of Individual Investors) survey shows about 25% bears, same as October 2007 and May 2008 tops. This is not a good buying opportunity.
Every investing group (individuals, pensions, mutual funds, etc) has been overinvested for 12 years. Mutual funds are only holding 3.5% cash. They have never given up on stocks, even in March 2009, which was nothing like in the 1970s and early 1980s.
Very few people think we can end up like Japan, and keep breaking to new lows for 20 years. Everybody always has a “story,” a narrative as to why the market is going to keep going down (at bottoms) and up (at tops). (Story today, IMO: PPT manipulation and money printing will drive stocks up forever). The story is often exactly wrong at the top and bottom.
Interest rates do not drive stocks. Lower rates are not bullish (just look at the 1930s or 2007-2008). Rates went up from 2003 – 2007 as the market rallied. People’s logic is always incorrect at the turns. Nor do earnings drive prices: stocks fell 75-80% in real terms from 1966-1982 as earnings rose.
Oil and stocks have a correlation that comes and goes – sometimes none, sometimes very positive, sometimes very negative. No predictive power.
Markets have a natural ebb and flow that arises from herding processes in a social setting. Reasoning about causation is a waste of time.
Economists jabber on about all kinds of causation, but they never offer statistics that pass muster.
Bond funds are going to slaughter the masses. The public always buys the wrong thing at the wrong time, and a wave of defaults is coming.
The dollar is likely starting a major rally (up 9% since fall, 11% vs euro). Prechter was early on that call but it still was a good one. Might be the start of a renewed wave of deflationary pressures.
The message in the new edition of Conquer the Crash remains, “get safe.” Find a safe bank, hold T-bills or treasury-only mutual funds, cash notes, and some gold and silver. No downside to safety.
Maybe legislators are finally ditching Keynesianism for some real solutions, while acknowledging the reality of what is likely to be a decades-long slump:
WASHINGTON—In a bold new measure intended to address unemployment among young professionals, lawmakers from across the political spectrum agreed on legislation Tuesday to subsidize the cryogenic freezing of recent college graduates until the job market recovers.
The bill, expected to swiftly pass in both houses, would facilitate the subzero preservation of any graduate of a two- or four-year educational institution. Sponsors of the initiative said that with the national unemployment rate at just under 10 percent, it only made sense for young job-seekers to temporarily enter a state of supercooled stasis.
“Finding employment is extremely difficult for today’s college graduate,” Sen. Kay Bailey Hutchison (R-TX) said. “Our current economy offers few options for the millions of young men and women desperate to join the workforce.”
“Were we to freeze these graduates at the height of vigor and ambition, however, there’s a chance we could revive them during a more prosperous time,” Hutchinson continued. “When the economy finally bounces back—10, 20, even 30 years from now—we’ll have an entire generation thawed out and ready to contribute.”
View on the Yahoo! Tech Ticker by clicking here.
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I’m with Mish in this debate of course, since a credit implosion trumps a money printer, I but have the utmost respect for the adroit Swiss. The two of them have much more in common than either has with most other money managers or commentators.
I totally agree with Faber that the US is not a civilized nation anymore, entirely due to the expansion of the state. I could say the same about the UK, Canada, Australia and most of western Europe. The whole region feels like a big kindergarten where the teacher wears a .380 and a bulletproof vest.
Taleb thinks hyperinflation is a strong enough possibility to justify way OTM bets on gold (long) and bonds (short). The one bit I agree with is the long gold / short stocks play (though I think gold is likely to fall with stocks, just not as much), and I suspect that deflationist Hendry would concur.
Hendry thinks that deflation is here to stay, that nations will start to default, and that the market will at least start to worry about sovereign defaults by nations like Germany and the US (even if they don’t actually default, he’ll make money in that situation as the price of insurance goes up).
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(The video cuts off when Hendry passes the mic, and I don’t have a link to the rest. If anybody else does, please post it.) (EDIT: http://2010.therussiaforum.com/news/session-video3/ Minute 24:00 and after. Thanks Charles!)
Hendry makes a point I’ve made myself: the euro is like gold for countries like Greece (they can’t print it) so it will have to default.
Hendry says his porfolio is inspired by Nassim, but basically the opposite. He’s fed up with other people’s opinions. The hedge fund guys are “so uncool.” He doesn’t talk to brokers, and he reads nobody else’s research.
Debt loads are bound to squeeze all of the vitality out of the risk takers in the market.
UK interest rates are at the lowest since the Bank of England was established in 1692. He is betting that the central banks won’t raise rates in the next 4 months and he will make 4x his dough if right.
He thinks the sovereign default scenario today is like the mortage bond situation three years ago.
Now, who is the true contrarian? Is hyperinflation really a black swan right now? Every chat board on the net has been buzzing about it for years. When Taleb said every human being should short treasuries, every human being agreed with him!
Mish offers some graphical evidence that the recovery is simply not.
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See his whole post here, as a well as some interesting comments on trends in concert ticket sales.
Here’s one more chart I pulled from Fred:
Civilian Employment – Population Ratio
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If these were stock charts, I’d say that they had broken their positive trends, but are oversold. There certainly is no evidence of a recovery in the economy. GDP is just a BS number that includes government spending, and the way the government measures unemployment is a joke.
He said that exactly 12 months ago yesterday:
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Here he is again on November 23 last year, calling for another decline in 2010 at least as bad as 2008, as well as a bullish call on the dollar:
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And here is a video from Yahoo just a few days ago. Crappy quality on this recording, but not unwatchable. He shows that mutual fund cash levels are at record lows, meaning managers are “all in.”
Also, individual investors have piled into municipal and corporate bonds, which are awfully risky at these prices.
According to Bloomberg, the big bears are circling China.
Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”…
…The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”…
Risk for Commodities
Last month, banks lent a further 1.39 trillion yuan — almost one-fifth of the target amount for the whole of 2010. Also in January, foreign direct investment climbed 7.8 percent to $8.13 billion. Retail sales during last week’s Lunar New Year holiday rose 17.2 percent from the same period in 2009, according to the Ministry of Commerce.
While China’s resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.
In January, the central government ordered banks to curb lending, which put China’s stock market into reverse. In a sign, in part, of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People’s Republic. On Feb. 12, the eve of the one-week Lunar New Year holiday, China for the second time in a month ordered banks to set aside more deposits as reserves. The Shanghai Composite Index has fallen 8 percent year-to-date, after gaining 80 percent in 2009.
Bidding Up Prices
“If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd.
The stimulus tap that Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed-rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the single most expensive engineering project in Chinese history.
Some beneficiaries of the government efforts have plowed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 percent in January from a year earlier, according to government data.
…Chanos, a short-seller who was early to warn about Enron Corp., is one of a growing number of investors sounding the alarm. “Right now, the Chinese market is overheating,” George Soros said in a Jan. 28 interview.
Wait, I thought Soros was a Keynesian. Isn’t printing and spending the way to perpetual prosperity?
Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.
Ordos is really comedic. Check out this video:
