Friday, September 24, 2010

Warren Buffet: Recession Not Over

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Until we take a break between QE2 and QE3 all discussions of economics and reports will simply be for theoretical and intellectual reasons.  In the end, any market is made up of supply and demand.  If you have a relatively fixed supply of stock certificates (or sugar, coffee, whatever commodity) being chased by an ever increasing amount of fiat money, anyone who took Economics 101 and lasted through day 2 of class knows what happens to price.  The U.S. market was able to rally some 70%+ during QE1 even as Americans actually withdrew (on a net basis) money from the market - so you can see the power of "the not so invisible hand".  [Jan 6, 2010: Charles Biderman of TrimTabs Claims US Government Supporting Stock Market]

This is the template everyone is working on - again to repeat what I say each time, QE has very little to do with the real economy (don't believe the lies coming out of that mouth) and everything to do with goosing assets of all types.  Some portion of those gains in paper assets can then be rolled into the real economy I suppose over time via the 'wealth effect'... so the Fed simply is trying to repeat 1999 NASDAQ as the attempt to repeat 2005-2007 housing looks to be impossible.  (although we are trying mightily with record low mortgage rates, the return of 0% down mortgages - now government sponsored, paying people to buy homes via credits, and the like)

Whatever the case, this mantra has changed psychology and half the battle in the market is animal spirits.  If everyone believes act A will lead to outcome B, then it self reinforces to a great degree.  QE2 has not even begun but everyone is in a rush to front run the perceived asset inflation of all type, hence it has been self fulfilling.  Somewhere Ben is laughing watching the rat's lemming's in his lab experiment scurry.  So as I said, anything I post about economics go forward is to be read, processed and then discarded immediately since none of it matters until we take a break from QE2. (which again - has not even STARTED)  At which point Ben can start hinting about QE3 which should get speculators in a lather, front running assets once more... and we can keep this game going forever and ever (and ever!) Who needs a real economy anymore?  Manipulation of assets is so much easier.

To that end today around 10 AM came a very poor existing home sales number.  The market paused for a second... should it react to reality?  Nah, a permanent open market operation of dollars was going to be flooding in the market in 15 minutes, so let's start a new leg up ... and so we did.

(My only question to this "we can't lose" idea is why did the Japanese stock market not surge to all time highs with the amount of QE they did for a decade+? )

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This story on Buffet refuting the economy is out of recession is interesting not so much for his words but some of the statistics he gave on his businesses.  The railroad companies are acting as if we are back to 2007 global trade highs (in terms of stock action) but apparently economic activity is still far below peak levels.  That said, does it matter?  There is only so much supply of railroad stock certificates with ever increasing fiat money chasing it... you get the picture right?

  • Billionaire Warren Buffett says the economy remains in a recession, by his definition, because most people and businesses still aren't doing as well as they were before the financial crisis.  Buffett's assessment of the economy contradicts the view of experts who announced this week that the recession officially ended in June 2009. But Buffett says he uses a commonsense standard to evaluate the economy.
  • "On any commonsense definition, the average American is below where he was before, or his family, in terms of real income, GDP," (gross domestic product) Buffett said on CNBC. "We're still in a recession. And we're not gonna be out of it for awhile, but we will get out of it."
  • He said the government is running a federal deficit equal to 9 percent of the nation's gross domestic product, which is providing quite a lot of stimulus.  "It doesn't depend on calling it the stimulus bill to be stimulating. I mean, if the government is spending $3 for every $2 it takes in, that is, that is fiscal stimulus," Buffett said.

Here are some of the very interesting metrics:
  • Buffett gets insight into the health of the economy through the performance of Berkshire's subsidiaries.   Buffett said Berkshire's businesses are improving but at a slow rate.
  • He said Berkshire's Burlington Northern Santa Fe railroad, for instance, is probably doing better than many U.S. businesses, and it's only about 61 percent of the way back to its peak shipping volumes from the bottom of the recession.
  • And Berkshire's Shaw Carpet used to sell about 13 million yards of carpet a week. Buffett said that fell to about 7 million yards during the recession, so Shaw eliminated 6,500 jobs. Buffett said Shaw won't start hiring back until the business gets back to selling at least 10 million yards a week, and so far it's only selling about 9 million yards a week.


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