Contrarian Stock Market Investing News - Featuring Bargain Stocks » Downturn

Slow Down . . . or Else

David Galland — Mon, 16 Nov 2009 11:07:23 +0000

Slow Down… or Else
By David Galland, Managing Editor, The Casey Report

On a whim following our Denver Summit – and despite truly abysmal weather – Casey Research CEO Olivier Garret and I cabbed it down to a local public golf course for a quick nine holes. Afterwards we were returning to the hotel through a neighborhood best described as poor, but not disreputable. While our cab made its way down a side street, a radar gun-wielding policeman leaped out of the bushes down the block, pulled the trigger, and waved our immigrant cab driver to the curb. The offense, we soon learned, was going five miles an hour over the speed limit in a school zone… well after school was out and with no other children in sight.

Waiting for our ticket to be issued, we watched as another of Denver’s finest jumped out of a hidey hole on an intersecting street, fired off his radar gun, and proceeded to pull over another slow-moving perp. With such a low tolerance for excess speed, it struck me that what the police were doing had a lot less to do with protecting the public and much more with revenue harvesting. And that the school zone was just a cover for a bonus penalty on the ticket.

Being naturally curious, I subsequently poked around and confirmed my impression. Studies have proven that, in bad economic times, municipalities look to replace flagging revenues by turning the dial up on ticketing.

These studies show that, in the year following a downturn in revenues, municipalities issue “significantly more” tickets. Specifically, a 10% decrease in revenue growth results in a 6.4% increase in the growth of traffic tickets.

In Red Ink in the Rearview Mirror by the St. Louis Fed, the authors make some astute observations about the nature of this sort of revenue harvesting. The following excerpt is worth a read and some further pondering, as it paints a clear stripe down the road leading to your wealth.

The notion that local governments may use traffic tickets as a revenue tool has received considerable attention in recent years largely because of the growing use of traffic cameras to enforce red-light violations. While most studies find that red-light cameras have reduced right-angle collisions and red-light violations, some studies have also noted a significant increase in rear-end collisions following the installation of the cameras, making their net effect on safety a point of contention.

Combined with the fact that local governments frequently share in the ticket fines with camera manufacturers, many observers have concluded that red-light cameras are revenue generation devices rather than tools to improve public safety. In a more general sense, this view essentially holds that local traffic enforcement policies, much like other government policies, may be a function of two (often opposing) motives of public officials – political interests and public interests (Becker 1986; Saffer and Grossman 1987; Mixon 1995).

Given the limited revenue-raising options, erosion of property and sales tax bases, and a general distaste for tax increases by the public, local policy makers are under increased pressures to find alternative revenue sources (Tannenwald 2001; Crain 2003; Brunori 2006).

[…] Traffic tickets provide an attractive revenue source for local governments because the amount of revenue that can be generated is often unrestricted, they provide a mechanism to capture revenue from non-residents and non-voters, and most traffic offenses possess a low strict-liability threshold to achieve a conviction (as opposed to the higher criminal intent standard).

That reminds me of the reign of Caligula and how he instituted rules allowing for the wealth confiscation of anyone found less than enthusiastic about his particular form of government. Over time, this became a major source of revenue for the increasingly bankrupt state.

As was revealed more recently in California’s budget wrangling, the states and municipalities are experiencing rapid declines in their revenues. With property tax revenues plummeting, local governments – and there are about 90,000 local taxing authorities in the U.S. – are scrambling to find new revenue sources, including levying income and sales taxes.
And by turning up the heat on cab drivers that go five miles an hour over the speed limit.

Then there’s this from the British, who may have a great sense of humor, but it seems to be balanced by their lack of irony, given they provided the stage for Orwell’s 1984. According to the Times of London…

People who emit more than their fair share of carbon emissions are having their pay docked in a trial that could lead to rationing being reintroduced via the workplace after an absence of half a century.

Britain’s first employee carbon rationing scheme is about to be extended, after the trial demonstrated the effectiveness of fining people for exceeding their personal emissions target. Unlike the energy-saving schemes adopted by thousands of companies, the rationing scheme monitors employees’ personal emissions, including home energy bills, petrol purchases and holiday flights.

Workers who take a long-haul flight are likely to be fined for exceeding their annual ration unless they take drastic action in other areas, such as switching off the central heating or cutting out almost all car journeys. Employees are required to submit quarterly reports detailing their consumption. They are also set a target, which reduces each year, for the amount of carbon they can emit.

Those who exceed their ration pay a fine for every kilogram they emit over the limit. The money is deducted from their pay and the level of the fine is printed on pay slips. Those who consume less than their ration are rewarded at the same rate per kilogram.
(You can read the full article here.)

The whole carbon footprint issue and the massive taxes associated with it are literally nothing more than a ploy to keep the government and its supporters in (taxpayer-provided) high corn. That it is a ruse is clear when you examine a recent Bloomberg poll on what the public is actually concerned with…
To view the results of the poll click here

(Thanks to Whatsupwiththat.com for bringing that poll to our attention.)
This is all headed in the wrong direction, and for the decidedly wrong reason of not wanting to address the underlying problem of too much, and too expensive, government.

The list of slippery acts of officialdom trying to boost its revenues at the expense of those with low political coverage could fill a book, but I will leave off by sharing an eye-opening video from ABC News, about the government grabbing safe deposit boxes and selling the contents.

If you want to avoid being stripped of your wealth, it is time to stand up. Alternatively, the point where you’ll want to consider voting with your feet is rapidly approaching.

Doing nothing, on the other hand, will just leave you as a sheep to the shearing pen, or worse.

Keeping an eye on the big trends is the main job of the Casey Report editors – even on their time off. Following their keen instincts what’s ahead and translating their findings into actionable opportunities to profit is the formula that has made subscribers to The Casey Report double- and triple-digit gains on a regular basis. How do they do it, and what’s in it for you? Click here to learn more.

The best way to get through a debt crisis?

Bill Bonner — Thu, 05 Nov 2009 13:14:06 +0000

What’s the best way to get through a debt crisis? Straight through was our advice last week. For at least a thousand years, the business cycle went round and round without help from central bankers or economists. It is only since these geniuses have been on the case that really serious problems have arisen. The Panic of 1920 – in which the US government did nothing but cut taxes and spending – was quickly forgotten. The Panic of 1929, on the other hand, was followed by massive rigging and jiving by the authorities. It took 20 years and a world war to overcome; today it is still remembered today as the Great Depression.

Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely –but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode.

Finish reading the complete article at The Daily Reckoning.

Will Bernanke Kill Santa Claus?

Andrew Snyder — Wed, 04 Nov 2009 13:57:19 +0000

Baltimore (TFN): The Fed is meeting today. And I ask who cares? At this point, Bernanke and his troupe of politicians masquerading as economists are in so far over their heads, no matter what they do or say, you can bet the move is designed to protect their butts, not yours.

With the global economy taking off without us and foreign interest rates already on the rise, the Fed is desperate to look bullish while acting bearish.

Anybody that has ever tried to prove the existence of Santa Clause or the Tooth Fairy to a six year old knows what Bernanke is trying to do. At this point, he’ll do anything to change the subject and focus the attention on something else.

With all of this talk about an increasingly deadly carry trade bubble, it is beyond obvious that American interest rates need to rise. If it doesn’t happen, soon enough all of America’s money will be invested in some high rise in China’s Guandong province… or Saudi oil.

But we all know Bernanke would commit career suicide by lifting a headliner like short-term rates even by a quarter of a percent. The blame for any upcoming financial downturn will be squarely on his shoulders.

For the youngsters in the room, he’ll be blamed for outing Santa Clause.

So what’s the guy to do? He’s already doing it.

The Fed is unraveling its plans to buy a whopping $1.25 trillion worth of mortgage-backed securities and $200 billion worth of other mortgage-related notes.

By March, the Fed’s massive buying spree will be over, once again letting the markets deal with a massive amount of very “un-transparent” securities. The same lion that brought the bull down is once again about to be un-caged, hungrier than ever.

If you thought the market had a hard time swallowing so many mortgage defaults, wait until $1.45 trillion dollars runs straight into 10% unemployment and a real estate market worth a fraction of what it was even a year ago.

And here’s the kicker, just by refraining from hitting the “buy” button, Bernanke effectively raises mortgage rates by as much as 100 basis points.

Let’s see… 10% unemployment, a weakened currency, deflating home prices and inflating borrowing costs. It’s a recipe for disaster.

At least Bernanke gets to keep his job and he gets the keen realization that he would not be in this bind if he never would have meddled with the markets in the first place.

We all knew the day would come when the Fed had to clean up its mess. That day has come.

***As if the markets have not shown enough contempt for government intervention, Uncle Sam is once again trying to throw sand into the gears and cogs of American business.

This time they want us to pay workers for not showing up to the job.

Thanks to a representative from California (there’s a surprise), legislation is working its way through Capitol Hill that would force employers to pay an employee for up to five days worth of sick leave if the worker is diagnosed with ANY infectious disease.

The rational side of my brain says there is absolutely no way this is going to make it the White House. The harm it would do to production is simply too immense to deny, even by politicians.

But the irrational side of me can already imagine the last-minute phone calls. “Sorry boss. I can’t flip burgers today. Got herpes. See you on Friday to get paid.”

Gotta love where we are headed.

Why We’re Trapped in an Equity Bear Market Until 2018

Contrarian Profits — Wed, 15 Jul 2009 19:34:35 +0000

Equities “are now barely through an 18-year secular bear market,” says our favorite underground analyst David Rosenberg. As illustrated by the nearby chart, US stocks have a historical tendency to move in 18-year cycles.

This chart blew us away. Stock prices are supposed to move at random. So how do we explain such a seemingly orderly pattern? To answer this question you have to also consider the cyclical movements of commodities prices. Take a look at the chart below. It shows the trend in commodity prices between 1982 and 2000 – an 18-year upswing in equity prices.

As you can see, commodities entered a secular bear market just as equities entered a secular bull market. And vice versa.

The reason for this is actually relatively simple. As costs for raw materials increases corporate profits decrease. Eventually, the decrease in profits causes demand to fall for commodities… and prices fall.

This fall off in prices then reduces investment in the acquirement and production of raw materials, which in turn reduces supply. As supply gets tighter prices begin to rise again. Investment in commodities becomes once again profitable, and the cycle completes itself.

This story gets really interesting when you consider that during the vicious sell off in commodities last year prices bottomed far higher than in previous recessions.

According to Rosenberg:

In the 2001 recession, the oil price bottomed at $19.33/bbl; in 1990, it bottomed at $16.81/bbl; in 1982 at $28.48/bbl; and in 1975 at $10.11/bbl. We bottomed this cycle at levels that were peaks in prior cycles. The same holds true for copper – it hit its trough at $1.39/pound this time around versus $0.630 in 2001 and $1.00 in 1992. Ditto for the ‘softs’ – soybeans bottomed at $8.48/bushel this time, compared with $4.15 in 2001, $5.42 in the recession of the early 1990s and $5.32 in the early 1980s downturn.

What does this mean for your investments? Put simply, this implies that “the floor is in” for commodities. Consider adjusting your portfolios accordingly.

A Tale of Two Depressions

John Mauldin — Tue, 23 Jun 2009 15:36:44 +0000

This week’s Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today’s downturn.

They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.

This week’s OTB will print long, but it is primarily charts. Please note that I have re-arranged some of the new charts to cut down on space because of some duplications. Word count is not all that much and it reads well. I will be referring to their work in future letters as well. Have a great week!

John Mauldin, Editor
Outside the Box

A Tale of Two Depressions

New findings:

World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
World stock markets have rebounded a bit since March, and world trade has stabilized, but these are still following paths far below the ones they followed in the Great Depression.
There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only “half a Great Depression.” The “Four Bad Bears” graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

Comparing the Great Depression to now for the world, not just the US

This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

Updated Figure 1. World Industrial Output, Now vs Then (updated)

Source: Eichengreen and O’Rourke (2009) and IMF.

Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

Updated Figure 2. World Stock Markets, Now vs Then (updated)

Another area where we are “surpassing” our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

Updated Figure 3. The Volume of World Trade, Now vs Then (updated)

Sources: League of Nations Monthly Bulletin of Statistics,http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

It’s a Depression alright

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.

That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

Policy responses: Then and now

Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

Updated Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

Figure 5. Money Supplies, 19 Countries, Now vs Then

Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF’s World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

Figure 6. Government Budget Surpluses, Now vs Then

Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.

[They added some country data in their revision that I put here, hence the two figure 5's, but they are labeled as such on the website and I did not change their labellling – JFM]

New Figure 5. Industrial output, four big Europeans, then and now

New Figure 6. Industrial output, four Non-Europeans, then and now.

The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below;

New Figure 7: Industrial output, four small Europeans, then and now.

Conclusion

To summarise: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

Source: A Tale of Two Depressions

11 Reasons To Remain Bearish on US Stocks

Contrarian Profits — Tue, 12 May 2009 17:59:48 +0000

Our own bearish beliefs remain unchanged. From day one, we’ve said the current rally is one for suckers. But we admit suffering certain twinges of regret; stocks have proved more resilient than we expected. Here’s a quick bullet list of why we remain bearish on stocks’ near-term prospects:

1) We don’t like the smell of fish. This rally began with a ‘leaked’ memo from Citigroup announcing a return to profitability and was given legs by banks’ bogus quarterly earnings. Washington has added to the stench with its fudge tests for banks, its PPIP proposal and its active campaigning to relax mark-to-market accounting rules.

2) Much of the buying was caused by short sellers covering their positions (a massive “short squeeze”).

3) “Junk” stocks have been leading the rally. The real winners have been beaten-down stocks with the riskiest outlooks. They generally have had the highest level of debt and the lowest return on equity.

4) Historically, sucker’s rallies are the norm, not the exception. Sharp crashes are often followed by sharp, but short lived, bear market rallies. The 2000–2002 bear market had three, with the Dow gaining an average of 21%. The 1929 to 1932 bear had six, with an average gain of 47 per cent. Even the poor Japanese have suffered their head fakes. The Nikkei has seen about 14 false downs since it crashed in 1991.

5) Generally, bottoms don’t feel like this. Bear markets typically end with a whimper rather than a bang. A recent study by Hussman Econometrics analysed numerous US market bottoms and bear market rallies. It revealed that, with the exception of the 1987 crash, the month before the lowest point of a downturn saw a gradual descent.

6) Stocks are still too expensive. As Yale University professor Robert Shiller says, all four big bubbles of the 20th century troughed at between 5 and 8 times earnings. Stocks did not even fall below 11 times earnings in the recent low.

7) Insiders have been selling the rally. According to TrimTabs, April saw the lowest level of insider buying ever recorded, with insider selling 14 times as high. And companies sold 64% more shares than they bought.

Sentiment isn’t low enough yet for our taste. As Russell Napier says in Anatomy of a Bear , “For the great bear market bottoms, you need a society-wide revulsion with equities. It just doesn’t smell like the big one yet.”

9) The risk of corporate bond defaults is at highs unseen since the Great Depression. Moody’s expects the corporate default rate in the US to reach 14.6% by year end – a near doubling from the first quarter’s default rate of 7.4%.

10) Corporate earnings continue to suffer. Earnings weren’t as bad as expected last quarter. But they are expected to continue to decline until sometime next year.

11) The S&P 500 remains under its 20-month moving average. Every sustainable bull market has been marked by the S&P rising above its 20 month average.

Suffice it to say, we’re sticking to our guns. As Merrill Lynch economist David Rosenberg recently counseled, “For those that missed the big nine-week move, don’t worry. Be patient. The story was right – the tortoise always wins the race.”

As Economic Reports Worsen, Experts Predict a Longer Downturn

William Patalon III — Mon, 09 Mar 2009 17:08:08 +0000

Back in December, with the U.S. recession in its 12th month – and showing no signs of abating – Money Morning Contributing Editor Martin Hutchinson warned that an “L”-shaped recession was very possible.

The U.S. recession is now in its 15th month, and many economists now expect the downturn to last until 2010 – if not longer. In fact, some economists now say the U.S. malaise could easily evolve into the virulent “L-shaped” downturn that Hutchinson predicted – a development that would guarantee both the maximum pain and the slowest recovery, experts say.

“I said in December that the recession could be ‘bloody-L shaped.’ With the huge deficits, that now looks the most likely outcome – and believe me when I say that it will be very bloody,” Hutchinson said this week. “The economy will bottom quite soon, but every time it tries to emerge the drags of the federal deficit, the huge bank bailouts and the huge money creation will drag it back.”

Noted Hutchinson: “It won’t get all that much deeper – it’s not 1929-33 – but my estimated emergence date is about 2013. The economy will remain essentially flat till then, although wobbles may make [it look like a “W-shaped” recovery] –until you realize there are more than two bends in the ‘W’.”

Nouriel Roubini, the professor with York University’s Stern School of Business who predicted the current financial and economic crises, wrote in the March 1 edition of The New York Times that the recession could last a total of 36 months. The U.S. slump – instead of following a typical “U” shaped rebound – “may turn into a more virulent L-shaped near depression,” he wrote.

Reports Keep Getting Worse

U.S. gross domestic product (GDP) contracted at a 6.2% annual pace in the fourth quarter of 2008, the U.S. Commerce Department reported Feb. 27. That’s the biggest drop since 1982, and was far more than analysts had anticipated, Money Morning reported.

The government had earlier estimated the drop in fourth-quarter GDP at 3.8%. The subsequent revision of 2.4 percentage points was almost five times as large as the average adjustment. Global trade, which contributed a 0.1% gain in the advance report, actually subtracted half a percentage point from growth last quarter, indicative of the truly worldwide nature of the current financial crisis.

“Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third,” the Commerce Department said. “The largest contributors were a downturn in exports and a much larger decrease in equipment and software.”

The U.S. economy lost 651,000 jobs in February, the fourth month in a row where job losses were right around the 600,000 mark. The unemployment rate rocketed to 8.1%, its highest level in more than 25 years. The U.S. economy has now shed 4.4 million jobs since the recession began in December 2007, with more than half coming in the last four months.

Thanks to a seemingly unending stream of bad news or disappointing economic reports, the Standard & Poor’s 500 Index has sold off sharply and trades at or near 12-year lows.

“This is what falling off a cliff looks like,” Lawrence Mishel, president of the Economic Policy Institute, told MarketWatch.com. [For a complete analysis of the February employment report, check out this story, which appears elsewhere in today’s issue of Money Morning].

Optimism in Short Supply

Because the U.S. economic landscape is so dour right now, economists say there could easily be another two to four years of malaise.

“I find it quite easy to imagine two consecutive years of contraction,” Harvard University financial historian Niall Ferguson, a financial historian at Harvard University, said in one of 11 assessments by economists that appeared in The Times. “I don’t rule out two more lean years after that,” he said. Bloomberg News summarized the assessments in an article last week.

Although the burst of the housing bubble, the U.S. financial system morass, global trade problems and soaring joblessness are all key contributors, the drop-off in consumer spending is the key culprit, since it accounts for 70% of the country’s economic activity.

Because U.S. consumers are in such bad shape financially – and are obviously both angry and scared – any “whiffs of growth [this year] are likely to herald a false dawn,” Morgan Stanley Asia (MS) Chairman Stephen Roach told The Times, noting that he doesn’t expect to see the economy begin to actually expand again until late 2010 or early 2011.

And when the recovery does begin, it will likely be weak – if not downright anemic.

For one thing, history shows that – after a severe banking crises – an economic system typically takes as long as four years to return to its prior personal income peak, says University of Maryland Economist Carmen Reinhart, an economist at the University of Maryland.

George Cooper, author of “The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy,” said that while the recession – as technically defined – could be over by the end of 2010, “the broader credit cycle will likely remain a significant drag on economic activity well into the next decade.”

Some Bright Spots?

There are some optimists – including former U.S. Federal Reserve insiders Alan Blinder and William Poole. Both Blinder, the former central bank vice chairman, and Poole, the former president of the St. Louis Fed, are both on record predicting an upturn in the economy late this year.

Blinder, a Princeton University economics professor, said that “housing must hit bottom at some point,” Bloomberg reported.
When that happens, house-hunters could come out in droves, said Eric E. Schmidt, the chairman and chief executive officer of search giant Google Inc. (GOOG).

“Americans love a bargain,” so the economy will get a boost from consumers jumping in to take advantage of once-in-a-lifetime buying opportunities, Schmidt said.

James Grant, editor of Grant’s Interest Rate Observer, agrees that falling housing prices will jump-start growth. But he’s just not willing to predict when that will happen.

“Today’s low prices, painful though they may be, are the market’s own shovel-ready stimulus,” Grant wrote in his Times Op-Ed piece. “Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again — just don’t ask when.”

Source: As Economic Reports Worsen, Experts Predict a Longer Downturn

Five Solid Companies That Can Help Your Retirement Planning

Martin Hutchinson — Wed, 04 Feb 2009 15:58:26 +0000

If you save for retirement through a 401(k) plan, or have large IRA or Keogh Plan assets, you probably hurled your last statement in the bin. If you’d been making contributions consistently over the last decade, your last annual or monthly statement probably showed that the current value of your plan was well below the amount you had actually invested.

At this point, the temptation to work as long as possible, and then blow what remains of your savings on a round-the-world cruise and a suicide pill is considerable.

However, such despair is unwarranted.

Unless you have already given up all paid employment, or absolutely have to retire in the next year or two, the current bear market may have made your eventual retirement prospects more secure, not less.

You see, the most damaging factor for your retirement happiness was not the current downturn, but the preceding decade-long bubble.

Let me explain.

Savers who devote an equal amount each month to their long-term plans benefit from an important mathematical principle: Dollar cost averaging. Under dollar cost averaging, you put in the same amount of money each month, so that amount buys more shares if prices are low than it does if prices are high.

Thus, if a mutual fund trades at $1 in month one, $2 in month two and $1.50 in month three, then a dollar-cost-averaging investor investing $300 per month will buy 300 shares in month one, 150 in month two and 200 in month three. After his month three investment, he will own 650 shares at a cost of $900, for an average cost of $1.3846. Since the average price of the shares over the three months was month three’s $1.50, he has made an extra $0.1154 per share compared with the average share price.

That’s why prolonged bull markets are so bad for retirement investors (unless they are lucky enough to retire before the bubble bursts). In this case, the Standard and Poor’s 500 Index stood at 459.27 at the end of 1994. Then after February 1995, when U.S. Federal Reserve Chairman Alan Greenspan moved to an ever-easing monetary policy with low interest rates, it took off for the stratosphere. It passed its current level of 825 in early 1996, and except for a short period in 2002 has traded above that level ever since.

So, even though retirement savers from 1996-2008 thought most of the time that they were doing very well, in reality they were buying shares at an over-inflated price, and just about every one of their monthly contributions is currently showing a loss.

It’s not the current bear market that has caused that loss. Stock prices in 1996-2008 were always at excessive prices, so a major correction was bound to happen sometime. If the correction had happened in December 1996, when Greenspan made his famous “irrational exuberance” speech, the market would have on average been substantially lower over the subsequent 12 years. And a retirement investor who had saved over that period would be substantially richer today because he would have owned significantly more shares of the mutual fund in which he had invested.

The wise retirement savers who have a few years to go should hope the current lower stock prices stick around, maybe even go lower still provided they recover before they has to draw on the savings or convert them into an annuity. By continuing to invest regularly at these lower prices, the return from dividends and capital appreciation will compound more quickly, particularly if they buy stocks that have a substantial dividend yield.

Even if their savings remain adequate, they shouldn’t convert them into an annuity because annuity rates are currently very low. With long-term Treasury bonds yielding less than 3%, actuaries factor that exceptionally low return into their annuity calculations.

Right now, a 65-year-old man who buys an annuity can expect to receive only around $74 per $1,000 of investment, without any protection for inflation or guaranteed minimum return if he dies quickly. Once interest rates rise, as they are almost bound to, that annuity rate will rise in step with them.

Rather than convert into an annuity, the retirement saver should simply invest in stocks that are both solid and yield more than 7.4% – and there are still plenty of them out there. That way, he can achieve the same return as an annuity while preserving, and maybe even increasing, his principal – in addition of course to any further monthly payments he can make while still working.

By building a portfolio of such stocks including a selection from emerging markets, he can take advantages of the higher-dividend payouts frequently found outside the United States.

Finding stocks with dividend yields equal to or greater than an annuity yield was tough when the S&P 500 was at 1400. But at 800, it’s a lot easier, even if you want to avoid the financial sector for obvious prudential reasons.

Such solid companies as General Electric Co. (GE), BP PLC (ADR: BP), Du Pont (DD), Newell Rubbermaid Inc. (NWL) and Limited Brands Inc. (LTD) yield well over 7% currently, and that’s without venturing into emerging markets companies.

If your retirement portfolio has been decimated, don’t despair. At these lower stock prices it will be much easier to build its value up again, and because stock yields are higher you won’t need so much capital to generate the income you want to live well.

Source: Retirement Investing: How Bear Markets Can Help Your Retirement Planning

Global Financial Illness

Bill Bonner — Fri, 09 Jan 2009 19:15:36 +0000

The world markets have begun a correction – and the governments are determined to stop it…the days of ’stuff lust’ are long gone. Replacing private spending with public spending…in the fight against global financial illness the Fed can’t cure the patient. The U.S. empire may be too old and tired to battle this downturn…the 50th anniversary of Cuba’s revolution…tune into the Critic’s Choice Awards on VH1 tonight and cheer for I.O.U.S.A.!…and more!

Poor Adolf Merckle. The tycoon must have been down to his last billion or so. He was “broken” by the credit crunch, says the Financial Times. He wrote a farewell note and stepped in front of the 7:38 Express on its way to Munich.

As far as we know, the worldwide meltdown has claimed as much as $30 trillion dollars, according to one figure we saw, but relatively few lives. That makes it a comedy…not a tragedy.

Too bad for Herr Merckle. He didn’t appreciate the humor of it.

Yesterday was a bad day for investors. They are all expecting a recovery. Instead, the patient got sicker…the Dow fell 245 points. Oil slipped down nearly $6. And gold? Et tu AU? Yes, gold fell too – down $24.

So, here is a good place to take up our guesswork about what is going on in the world’s markets and what we should expect.

It all seemed too simple, a few days ago. It was. Too simple, that is.

The world’s markets have begun a major correction. The world’s governments – led by the United States – are determined to stop it. They want people to spend like there was no tomorrow. But people are acting like every day is tomorrow. Instead of spending, they are beginning to save.

Then comes news that vacancies in malls are at a 10-year high. Malls are places where consumers buy stuff. The days of stuff-lust are over. Ergo, less retail space is needed.

But if they buy less stuff, fewer people are needed to sell stuff…to make stuff…to move stuff…to count stuff and so forth.

“Pink slips pile higher,” reports the Associated Press. Employers cut nearly 700,000 jobs in December. The total for last year, when the final counts are made, is expected to be about 2.4 million. But the job losses have barely begun. It was only at the end of 2008 that most businesses realized they were in trouble. The real job losses will come this year.

The unemployment rate in November was about 6.7%. In December, it was said to be around 7%. If you put into the number all the people who have given up looking for work, the figure would go to about 12%. But even that will seem like full employment after the tsunami of job cuts hits this year.

Since so many Americans live without substantial reserves – savings – the pressure on Misters Obama and Bernanke to ‘do something’ will increase. What can they do? Spend money.

“US deficit set for post-war record,” reports the Financial Times. Reports today tell us that Obama says deficits will go “over $1 trillion.” One estimate put it at $1.2 trillion for ‘09. We’ve seen others at $1.5 and even $2 trillion.

What they are trying to do is two things: replace private spending with public spending…and cause consumer prices to rise.

But replacing private spending with public spending, alone, is a task that would have staggered Hercules. In the past, the U.S. consumer could be counted on as the planet’s chump of last resort. He didn’t have any money. Still, when an economy slumped, he nevertheless kept spending – buying on credit. Gradually, the whole world economy came to rely on him. But now he’s stopped borrowing; in the last 12 months net consumer lending has collapsed. With neither more income nor more credit he has had to stop buying. And without buying from the U.S. consumer, the world economy is dying in a ditch.

Of course, U.S. rescue teams are on the scene. But if the U.S. government is going to save American households, it practically has to save every gadget maker in China…every call center in India…every rubber plantation in Malaysia…all the wine makers in Bordeaux – all the industries and jobs that relied on U.S. consumers. Otherwise, prices fall.

Even the United States can’t afford a bailout of this magnitude. Trillion-dollar deficits won’t be enough. Martin Wolf, in the FT, quotes a report from Levy Economics – “even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.”

With rising unemployment the pressure to ‘do something’ grows. And the feds redouble their efforts. And this is where we find the basic logic our forecast:

In the fight against the global financial illness, the feds can’t cure the patient. All they can do is to deliver larger and larger doses of their quack medicine – until the patient dies.

*** A few days ago, this seemed so obvious, we worried that it was too obvious. Mr. Market doesn’t reward people for doing the too-obvious thing. He sets them up. Then he destroys them. He always seems to find a way.

The Barron’s survey told us that Wall Street’s strategists all believe stocks will go up in ‘09. The only question is how much. The bulls think they’ll go up and keep going up. The bears think they’ll go up…and then go back down again.

And currently, there’s more money on the sidelines – waiting – than there is in the game. U.S. money market funds now exceed the amount in equity funds, for the first time in 15 years. According to the dominant view, this money is just itching to get back in the game and score a major victory. Battered in ‘08…it wants to get even in ‘09. This attitude, we hasten to point out, is not what you find at the end of a bear market…it’s what you find at the beginning of one. People still think that they will make money in stocks – it’s just a matter of time! And how much!

Will Mr. Market give these people what they expect? Or what they deserve?

We don’t know, but we see two possibilities:

The first is that there is no significant rally. Instead of going up, a torrent of bad financial news washes stocks further downstream in the first quarter. There, they will stay for the next 5, 10, or 15 years…until they give up all hope of ever making any money in the stock market.

The second possibility is that stocks do rally…strongly enough that that money now on the sidelines comes back in – just in time to get wiped out by the next major leg downwards.

*** If we were in an earlier phase of the imperial cycle – such as we were in 1920 – we would ride out the bust…liquidate the mistakes…and bounce back stronger than ever.

But this is 2009…not 1920. The empire is now old and tired. It has been burdened with so many fixes, rules, privileges and safety nets it cannot compete in many key industries. It is also heavily in debt…and running a trade deficit and a public deficit that sink it further into debt each day.

At this stage, Americans do not boldly face the future…they want protection from it. And so the feds flex every flabby muscle trying to hold it back. Of course, no one can stop the future. Birds gotta fly. Fish gotta swim. And the future’s gotta happen.

All the feds can do is to make it happen in a different way. Almost certainly a worse way. More tomorrow…as we keep thinking…

*** We also promised, yesterday, to tell you how you could escape… Americans already have a huge burden of private debt. Now, their government is adding an even huger new burden of public debt. How are you going to get out of this stalag of debt? What will happen to it? What effect will it have on your investments?

Hmmm….our answers will have to wait another 24 hours…we’re out of time for today.

*** This year marks the 50th anniversary of Cuba’s revolution. How things change! As a note in the Financial Times reminds us, a half century ago a young lawyer took charge in Havana while an old general ruled in Washington. Now a young lawyer takes charge in Washington while an old general tries to hold on in Havana.

Source: Global Financial Illness

What Shape Will the U.S. Recession Take: U, W or ‘Bloody L?’

Martin Hutchinson — Fri, 26 Dec 2008 13:00:14 +0000

Right now, the conventional wisdom seems to be that the United States is looking at a “U-shaped” recession and recovery. Output declined gently in the third quarter, is dropping sharply now and will continue dropping sharply in the first and possibly the second quarter of the New Year, finally bottoming out and beginning a slow recovery thereafter.

That’s the natural pattern that most recessions follow. However, this has been a pretty unnatural recession, with a number of highly artificial actions undertaken to fight it, meaning we must plan for the possibility that it won’t be a “U” pattern, but will instead follow a less-frequently seen pattern.

When you think about it, the alphabet presents a number of fun shapes, patterns or trajectories that an economic cycle might follow. There’s a slightly slanting J – a shallow downturn followed by an energetic, near-vertical upswing. There’s an L – a descent into the recessionary pit, followed by a total refusal to recover – kind of like an accident victim who flat lines on the way to the emergency room. There’s an O, round and round in circles, never going anywhere – you can think of that as being the typical pre-industry economy, without significant technological change.

When the Roman Empire collapses or the Industrial Revolution happens, you get a (possibly upside-down) Q, in which the economy escapes from the static O, to move down or up in the Q’s tiny tail. There’s an R – round in circles for a time, followed by a sharp descent into the economic mire: That’s static – albeit cyclical – economy, where some environmental disaster hits, causing output to tank.

There’s both the U and the V – the latter being an economic cycle where a slump is immediately followed by a sharp rebound, with no period of depressed activity at the bottom.

And of course there’s the W, the classic “double-dip” recession, like the one the United States experienced in 1979-82. W-shaped recessions can be further divided into two types: There’s the “lazy W,” in which the second downturn is worse than the first; and there’s the “energetic W,” in which a deep recession is followed by a shallower one that is barely a blip in a strong recovery.

The recession of 1979-82 was a slightly lazy W, whereas the 1929-41 Depression-era downturn can be thought of as a very deep energetic W, in which the second dip (1937-38) was still part of the same overall economic event, but was much shallower than the first.

Had the United States been on a gold standard with an administration determined to maintain budget discipline, the current unpleasantness – which started with a major banking crisis – would probably have followed a V-shaped trajectory. The banking crisis would have caused output to descend rapidly to a considerable depth. But once a bottom was reached, the U.S. economy would have recovered almost immediately, showing a period of extra-rapid growth as output returned to a normal trajectory.

That’s how it worked in pre-Keynesian gold standard days, when governments and business followed the downturn advice of onetime U.S. Treasury Secretary Andrew Mellon, who said it was wise to “liquidate everything.” The economy might descend to an unpleasant depth, but once it turned, the forces that would fuel the recovery were very strong. Thus, the recoveries after the recessions of 1893-96 and 1920-21 were both exceptionally vigorous by modern standards.

Most modern recessions are U-shaped, rather than V-shaped. When a recession hits, governments run budget deficits while central banks lower interest rates and allow the money supply to expand. That limits the depth of the downturn, but it also reduces the speed of the recovery, since the natural stimulus from a smaller downturn is weaker, while the government stimulus wears off after a while. That’s what we got in 1991 and 2001; in the latter case, the U.S. government stimulus, both monetary and fiscal, was very strong indeed, so the recession was extremely shallow, but recovery was exceptionally slow.

In 1979-82, we had a W-shaped recession. The first leg was caused primarily by U.S. Federal Reserve Chairman Paul A. Volcker’s now-famous attack on inflation, in which he boosted interest rates well above their normal level, and choked off economic activity. That caused the first dip, which was ended by monetary relaxation. However, monetary policy was tightened again in late 1980, so we got a second dip, which was not balanced by the usual fiscal stimulus, and so proved to be quite deep. Being deep, the second half of the W was followed by a strong recovery from 1983.

This time around, both the initial banking crisis and the fiscal and monetary stimuli have been exceptionally strong. That raises the possibility of a W-shaped double-dip recession. Initially, the stimulus may act like a shot of adrenalin, causing the downturn to abort and be succeeded by what seems like recovery. However, the stimulus must inevitably be temporary, and will produce both extra-rapid money supply growth and an extra-deep budget deficit. That is likely to lead to a second downward leg, this time accompanied by unpleasant inflation, as the “hangover” from the excessive stimulus is felt.

Even more unpleasantly, we could see an L shape – “Bloody L,” if you’ll allow me to use a British Cockney phrase, reflecting the unpleasantness of the outcome. That would result in a situation in which the ultra-low interest rates left in place too long fuel inflation, while out-of-control public spending produces deficits that permanently dampen growth, so recovery never really arrives at all.

That can happen: Japan in the 1990s had an L-shaped economic downturn, although with zero growth rather than a prolonged recession. More ominously, Argentina after 1945 transitioned quite quickly from a rapidly growing, buoyant economy into a global basket case, with occasional bursts of hyperinflation. That’s the worst-case scenario for the United States. It’s not likely, but neither is it impossible.

So what are we most likely to see? The factors causing short-term strength are currently powerful. The collapse in oil prices has caused retail sales to be considerably less weak than expected, stronger consumer confidence and leading indicators both point to an approaching economic bottom, and the stock market is up more than 10% from its November low.

Instead of a “worst” down quarter, the first half of 2009 may see a period of unexpected strength, with cheap mortgage money producing an apparent bottom in the housing market, a bottoming out and initial recovery in U.S. gross domestic product (GDP), and an additional bounce in U.S. stock prices.

Don’t be fooled if this happens (though by all means try and make a buck or two out of the short-term stock market bounce). The Obama “stimulus package” and massive federal government slush funds will exact a price – in the second and probably deeper leg of a lengthy lazy W recession – the much-feared “double-dip” downturn.
Source: What Shape Will the U.S. Recession Take: U, W or ‘Bloody L?’