Thursday, December 2, 2010

The Big Picture - and Why it Only Matters when it Matters

Let us assess the big picture landscape....

  1. The United States is engaged in an ultra low interest rate environment to attempt to stoke the economy via artifical means.
  2. The country has exited a technical recession, although to many it feel like we remain in one.
  3. Despite many quarters of 'non' recession, net job creation has been kaput - we have been in a jobless recovery.  Jobs have not even kept up with population growth.
  4. But.... consumer spending seems to be picking up as you 'never doubt the American shopper'.
  5. Said consumer is finding non traditional means of funding her spending (i.e. not out of savings nor wages)
  6. U.S. multinationals are increasingly the world's global elite class - moving labor around to low cost centers, lobbying for beneficial tax law in every country they operate, while expanding revenue across the globe.  Profits are flush.
  7. Our central banker - while hissed at in dark corners of the internets (sic) - is largely worshiped by the Wall Street elite (for whom he serves, one nation, under...) 
  8. The country faces massive and growing long term deficits, which it only talks about addressing 
  9. Our political system is dysfunctional
  10. Crony capitalism aka "socialism for the large corporation" is the pervasive economic system in the country.
  11. We are at war.
  12. There is large - and growing - income inequality in the country.
  13. Local and state governments have made tremendous long term promises to the government class via pension and healthcare, that they cannot possibly pay off.
  14. The stock market put in a choppy year with a nice rally in the fall, after having a tremendous return last year.  Which followed a traumatic generational selloff.
  15. China is roaring.
  16. Healthcare costs are out of control.  University costs?  Higher rates of inflation the past decade than healthcare.
  17. The middle class is being slowly and surely eroded as globalization changes the complexion of the country; many of our old goods producing jobs are now gone - replaced by lower paying service jobs.
  18. A majority of the so called 'solutions' being employed by the federal government and especially central bank are simply kick the can ploys, which are creating massive long term inefficiencies and misallocations - from which we will pay dearly.

What am I describing above?

Late 2004.

Why am I telling you this?

Because sometimes seeing the big picture is a hinderance.  All these things apply in late 2010 as they did in 2004. Indeed the stakes and imbalances are even larger now as we are seeing things done to kick the can by central bankers never conceptualized in the past - other than in white papers. 

But guess what - kicking the can, living in alternative realities, worshiping a deity named Greenspan Bernanke can work for long periods.  We'll sing.  We'll dance.  We'll buy stock.  We'll look around (some of us nervously) and wonder how we pulled the rabbit out of the hat (yet again). Indeed anyone who raised these issues in 2004 would have been technically correct to be very worried.  But most likely missed out on years of gains in the stock market.  Indeed, the issues only grew in stature and worsened as the economy "surged" in 2005, 2006, and 2007.  Making anyone who talked about these things a 'perma bear'... or worse 'an idiot'.  Even though in truth they were a realist; but a realist with far too much clairvoyance.  

Our market is increasingly short sighted.  Heck a large proportion of the trading nowadays is in 1/4000th of a second increments - hence anything over 2 seconds is "long term".  Any and all things that kick the can and push the issues out another week, another quarter, or another year is a cause for celebration by the speculator class who only lives for tomorrow.  After all "it all works out in the end".  Until it doesn't.

Larger point being, we have some tremendous issues ahead of us.  Just as we had in the 'improving landscape' of 2004.  But if you drank the Kool Aid in 2005-2006, the United States looked like clear sailing ahead for a decade - jobs (many based on a central bank induced bubbles) finally came to life in 2005, housing (for some) went up 10-15% a year (or quarter!), people were getting rich overnight by the "wealth effect", everything was super awesome.  Within the temporary alternative reality.  It didn't matter to markets.  Until it did.  

I expect the same in the coming years - although we've raised the stakes even further this time around by not taking the medicine and moving the private sector's losses on the taxpayer's balance sheet.  Our margin for error during the next cyclical recession is much smaller.  Many more Americans now live on the edge, dependent on never seen levels of government support.  Many are peeved at the actions of the past few years, which favor the 'bond holder class' over the taxpayer; will they accept the same type of bailouts in the future?  And the central bank is already operating at emergency levels even during a 'recovery'.  One day market forces will rear their ugly head, as the excesses and misallocations will overpower the dam being built.   And the same excuses, and questions about not learning from the past will be asked as we saw in 2008.   But we don't know when this day comes - could be in "2005", "2006", "2007", or "2008".

The same thesis must apply now (and always) - be aware of the long term reality, don't buy into the hype, but participate in what the market gives you in the near term.  That does not mean one has to be sanguine about the situation; indeed if one thinks too much about it, one can get physically ill.  But if we are led to the promised land of S&P 2000, 3000, or 4000 before the next implosion, I'll happily go there ... and then hopefully make money on the dark side during the implosion too. You can have a speculator hat, and an economist hat - and often they can't both be worn at the same time.

In the meantime we can play 'the game', but always with one (beady) eye towards the exit door since all these chairs on the deck .... well they are all on the same ship.  The band sounds nice, but way off in the distance there appears to be an iceberg.  (No worries though, this ship can never sink - the Queen Elizabeth (QE) 14 will catch our distress signal in case of emergency)  So for now, we dance.  Look, there is some Kool Aid being served by the waiter... mmmmmm, looks good.

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