Thursday, August 19, 2010

Bookkeeping: Putting Some Index Shorts Back On

The market was hit with a one two punch today in an otherwise quiet economic week.  Philly Fed, reported at 10 AM, was dismal and just the tonic needed to break below S&P 1085 as traders were trying to mostly ignore the weekly unemployment claims.  With the S&P 500 here sitting around 1080 I will add 2% allocations into short BGU + TNA (4% total).  I still am wary of snapbacks since this market is very stubborn.   My "stop out levels" will be around 1085ish.  On the other hand, if we break below last week's lows of S&P 1070 I will now be adding to short positions since there are no upside gaps to deal with, and we have a much more clear path down.

Each bad news item go forward is bad for the economy, but the stock market is not always the economy & bulls can claim it just means more QE down the road.  However, with both the bond market screaming bad things, and semis, and now weekly jobless claims, the evidence is beginning to really mount that there was no recovery other than a 'statistical one' that was bought and paid for with a few trillion thrown at the economy by the Fed/government.  Most of that spending/quantitative easing simply bought the country some GDP points and now we are left with the debt, and a fattening Federal Reserve balance sheet.  And no solution but to keep doing what doesn't work, but to do it bigger.

I expect a lot of this in the months and indeed quarters to come... the push pull between bad news being bad, but encouraging speculators because it means Ben Bernanke will be tossing money on us all.  Just as I said in late 2008, the "real economy" does not need this money because it's about lack of end demand.  [Feb 9, 2010: It's Not about a Lack of Financing, It's About Lack of End Demand I just underestimated how incredibly effective it would be at bloating asset prices.  In effect, the "economic recovery" I have been looking for is now being exposed as some of the drugs that have been injected into the patient are fading.  [Dec 15, 2008: The "Economic Recovery"]  In effect "here we go again".

People have been asking me for some updated economic views - frankly what I wrote in that December 2008 piece holds true today.  It simply was (and is) being masked by never before interventions by various arms of our central control.  If those crutches were taken away (i.e. the tide was allowed to go out) you will not want to see what is remaining on the shoreline.

From 2008 - sounds like PIMCO's "new normal" in retrospect huh?  (p.s. I  still have not been offered a single investment banking 'strategist' position despite being well ahead of the herd with these predictions that now are becoming 'consensus' 2 years later) ;):

Now folks, I am thinking ahead of the curve so while everyone is obsessing about the recession and when it bottoms I want to already begin to obsess about the much hyped "recovery". And why I believe it's a completely narcissistic American view to believe we'll "be back" first. Let me outline for you what we are "right sizing" in America

  1. Automotive (16M yearly auto sales was based on house ATM)
  2. Newspaper/media (structural change as advertising moves online)
  3. Mortgage Brokers (based on house ATM, easy credit)
  4. Realtors (based on house ATM, easy credit)
  5. Investment Banking (based on house ATM, easy credit)
  6. Misc Financial of all types (house ATM, easy credit)
  7. Retail (house ATM, easy credit)
  8. State and local government jobs (house ATM, easy credit)
I'm sure I'm missing a few. Some of my favorite pundits appeared on CNBC in late 2007 and 2008 and after denying a recession, came to such far flung conclusion as "why does it matter anyhow? housing is only 4.5% of GDP! Stop obsessing!" As I outline above - well almost everything outside defense, healthcare, Walmart, McDonalds, agriculture, and federal government spending depends on our own nationwide Ponzi scheme of continued house appreciation layered with debt upon debt. Now, I will say with the $400B, err, $600B, err, $800B... err $1 Trillion Stimulus plan we will temporarily be offsetting some of those losses with construction jobs galore, but it's all on a relative basis and unless we plan on making this turn from a 2 year program to a 30 year program, those jobs disappear at some point (by which point the government hopes the housing bubble is reborn so an easy transfer from building bridges to homes is completed)

...we need technological innovations that create jobs "here" and not in the lowest labor cost markets the world over. And a lot of them. We will have a "V" shaped "rebound" from the gosh awful quarters that will be Q4 2008 and Q1 2009 - and then we'll be sitting in that lovely -0.5% to +1% GDP area for quarter after quarter after quarter. You are going to be lucky to get what you saw in 2003-2004; if you remember we called it a jobless Bush recovery for a reason. GDP improved but job creation was at best, muted; jobs were not being created in enough numbers in relation to population growth. But we solved that in 2005+ with easy credit and housing ATM. And then we got our "economic boom"; which versus booms of the 90s or 80s was still relatively limp and mostly based on financial engineering. I do believe this is what we face ahead as we "recover" - years of suboptimal growth as decades of over consumption and these more recent structural global issues manifest.

We are right sizing industry after industry to what consumption SHOULD be, not what it WAS. What will that post super credit bubble world look like? What would a world of 1997 or 2002 level credit look like? Where do you think state, local, and federal taxes will be in 2 years? 5 years? 10? to pay for all we are promising? Is anyone paying attention to the structural global changes that are happening under the surface that are (mostly) unstoppable? [Do the Bottom 80% of Americans Stand a Chance?] Not everyone was simply "irresponsible" the past half decade - many in the middle class were tapping their home to survive in an increasingly expensive country as the percentage of profits in the United States devoted to labor fell to lows not seen since the 1920s. Income inequality and wealth distribution not seen at levels since the 1920s are not just coincidence - the "New Gilded Age" didn't really work for the many as "trickle down" economics didn't quite go to textbook the past decade. Further, on the global stage as median wages in high income countries continue to suffer as "global wage arbitrage" plays out, we can only hope the credit spigot returns so we can stave off reality for another half decade. Or the government is successful in finding new bubbles. Because, for the middle class to "rise" again, either (inflation adjusted) wages need to begin to rise, or their ability to leverage needs to be regained. The latter eventually putting us right back into the spot we are now at some point in the future. 


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