As I conduct my regular daily readings of various blogs and news sites I cannot help to get a very uneasy feeling brewing out there. The negativity is running very high in the political realm and from those who report on economic events. I keep seeing tag lines like; “expect more social unrest” when people report on things like the Berkley protests, which are disturbingly violent I might add. When I hit my favorite Libertarian blogs the feeling is more uneasy as I keep seeing words like revolution being used.
When you add in the Washington factor where our elected leaders are going to hammer unpopular legislation through, with no compromise, it makes me even more uneasy. There is no doubt that we need to make painful decisions in order to get our fiscal house in order, but that usually means less spending, not more. Unfortunately, our current political leaders do not see it that way and are hammering through more spending, in particular the health care reform bill. Look, I know we need to do something, but not this. Deducting money from Medicare and then adding it back in to other areas is not rational, this bill is not paid for and will make costs rise not fall.
Regardless, people are not happy about unpopular legislation being thrown down their thoughts. The kicker is that people like Nancy Pelosi come out and say that programs like Social Security and Medicare were unpopular when they were enacted. I guess what she means is that politicians know what is best for Americans and we should keep our mouths shut. We all know how right politicians are their track record speaks for itself just look at the stellar decisions they made over the last 10 years. Iraq was a great decision, the prescription drug coverage was fantastic (albeit unpaid for), the PATRIOT Act was a winner, free speech zones were fantastic, how many stimulus bills did we have again – they worked out well, eliminating a paper trail for voting is a sure disaster waiting to happen, and need I go on?
Politicians do not know what is good for Americans, they know what is good for them and getting reelected. Well, they did used to know how to get elected until now. If they pass this next unpopular batch of legislative nightmare on the docket they are in for a rude awakening come November because the people are coming for them. My only hope is that people come for them at the polls and not in any other way. Based on what I have read combined with the recent plane crash in Texas into the IRS building I think we might see more people going out to make a statement. Meaning, some nut job will more than likely blow something up or worse.
Who knows what will happen in the future, but we know that the average person feels left out right now. Wall Street got their massive bonuses and, for them, nothing really changed with the exception of having to play defense in the media. At the end of the day, the average person knows they got nothing over the past 2 years except for a higher future tax bill and, maybe, they got to keep their job, but we know about 20% of Americans were not so lucky as they are either unemployed or underemployed. Wall Street though, they are fine. Washington, well, they are doing OK as well as campaign contributions, from Wall Street, are still coming in and many have received raises. Clearly, there is a double standard and John Edwards was completely right when he said there are 2 Americas.
Discontent is here and that discontent could become a powder keg if not rectified. The unfortunate thing is I do not see how the public can be pacified, especially as this thing we are in deepens as we are now seeing. Things could get ugly and politicians need to figure out that they are representing the people and start acting that way. It is beyond me how they cannot see that Americans view them as being on the wrong path, but, again, that is politics and they will be surprised if they get voted out in November.
It was funny to see many of the pundits spin bad data on the weather. This equates to my daughter saying the dog ate her homework. It is hard to believe the snow is to blame for higher initial jobless claims when we are in the middle of winter. However, I will concede that retail sales will be pretty horrible because of the weather, but other pieces of data, well, not so much of that weak data can be blamed on some snow.
Housing starts stink because the housing market is in trouble and even massive government stimulus is not helping. My guess is this data will probably improve in March to April because of the last minute rush to buy homes, but I would not count on that being much of a bump. What is worse is that the President wants a permanent moratorium on foreclosures which is doing no one any good and, in fact, will hurt banks that would not be able to collect or sell an asset that is earning them anything. I am referring to Obama’s demand that before a foreclosure can happen it has to pass through the re-modification process. Capitalism is officially being suspended until further notice.
As far as jobless claims are concerned, they are going to get worse as far as I can see. I am basing this on antidotal evidence of firms continuing to announce layoffs and a jump in the mass layoff indicator a few days ago. It is crazy to think employment will improve when you have blue chip companies announcing layoffs and claims are heading back above 500K a week. This is not because of the weather it is because the economy stinks. David Rosenberg calls this a Houdini recovery and he is correct. Besides a statistical recovery and a rally in equities, which is odd considering the dismal news over the past 2 weeks, the average person is worse off than they were last year. Again, unless it has been snowing for 8 months it cannot be blamed on the weather.
Perhaps it is snowing in Greece as well, that will explain their financial problems. It is true that the weather hurts certain things, but it has a rather limited impact on employment. After all, snow removal companies would probably be hiring. The weather might hurt retail sales, but with more people using the internet, me included, to shop I would not buy the soon to be claim that the weather killed retail sales. This is all about uncertainty in the world and to deny that there is uncertainty is simply crazy.
We have problems all over the place from domestic issues to possible sovereign defaults. Let us not forget we will witness municipal bankruptcies in the near future as well, chapter 9 is the more likely bankruptcy procedure. Health care reform is back and will be passed, whether you like it or not, and believe me you should be careful what you wish for because this means higher premiums for everyone. Do you really think Anthem raised prices 39% because they wanted to? Nope, it is because, I as speculated months ago, they know they are out of business in 4 years. All of these things mixed with tight credit conditions means tons of uncertainty.
Why the markets are not down 200 points, I do not know. However, it appears that Goldman Sachs was a huge buyer or S&P 500 futures yesterday, according to Zero Hedge reports, which made this a futures driven rally, check out the trading between 3 and 6AM for more weird futures action. I do not want to spread conspiracy theories, but all I am saying is the markets are trading very odd right now. I am still very bearish, how could anyone be bullish with the horrible data we have seen as of late? This is not 1 week of bad data, but 2 months worth of bad data and the market ignores it, weird.
As I had suspected, months ago, jobless claims are rising rapidly every week now. We are almost back at 500K a week for initial claims as all those temporary workers are let go from retail, that is my suspicion at least. I remember claims that once the initial claims fell below 500K we would see job creation. However, the only creation of jobs were the wonderful accounting gimmicks from the BLS as they take more and more people out of the workforce, dropping the unemployment rate and making the monthly employment report look much better than it really is.
The trend is clear now, unemployment is getting worse. Even though the initial claims data is volatile it is the best barometer to what the employment number is going to look like. Unless the government has hired far more census workers than reported I expect the employment number to look pretty bad next week. Of course, there is the ever transparent way the BLS does remove people from the roles, but most people now look for that. It is also clear that the 1M jobs the BLS were forced to add to the unemployment number in February shows that their models are broken and should be adjusted, perhaps remove the birth/death model altogether.
There is no way that the ‘backlog of filings’ is to blame as they made the claim, a couple weeks ago, that they were all caught up. The only real reason for the worsening situation is that the job market is worsening. Even the mass layoff indicator is way up again, not a good sign, which means the employment number will get much worse. The good news is that no trader believes the data coming out of Washington and, based on the confidence numbers we saw, the public is also not buying that things are better. The man on the street usually has a better grasp on how things are out there versus the ivory tower economist who does not have a clue, usually.
On the bright side durable goods orders were through the rook, until you ex-out autos or transportation altogether. However, that number really is volatile and is not indicative of any real recovery, unless you are Dennis Kneale. There has been some improving data out there, but this is a statistical recovery and nothing more. From my perspective this makes equities very overvalued.
I was reflecting on events this past weekend trying to put a game plan together and weighing what is going on in the world. I can honestly admit that I do not know what will happen, no one ever really knows, but I do know that things are very uncertain in our world. We are all in the same boat and trying to make decisions that are best for our families, our wallets and our piece of mind. Unfortunately many of the things we are planning for are outside of our control.
It is reasonable safe to assume that our futures never depended more on the decisions that are coming out of Washington, well, at least not since the 1930’s at least. However, Washington is now only one piece of the pie as our world is walking in stride as one. While decisions in Washington directly impact our lives, for the love of God pay attention to what they are doing, now we are also faced with the consequences of decisions that come from China and the EU. Decisions made overseas will have a direct impact on what happens here in the USA and on our investments. Never before have the world markets have been so in tune with each other. In fact, you would be surprised to see that the correlations between all the markets follow each other so closely over the past 6 years or so.
This correlation has really put the efficient frontier and diversification risk reduction strategy into question. In other words, diversification between international and domestic equities might not reduce risk as much as we think, I will get charts to prove that when I get the go ahead to publish them. The irony is that it is not so much markets ruling the day, but politics. The decisions that come from governments now impact the markets much more than you might care to realize. This is important considering that government stimulus from around the world is largely responsible for propping up global growth at this point in time.
Domestically, I was watching parts of CPAC this weekend and was extremely disappointed in what I saw. Granted, I did not watch the whole thing, but enough to know that the R’s, as in Republicans, have no idea what they are doing. Unfortunately, either do the D’s, as in Democrats, know what they are doing either. Both parties fail to take responsibility for their actions and neither party really understands the issues facing the country at this point in time. Sure, they talk a good game about fiscal responsibility, but neither is serious and, frankly, the R’s have grown government way more than the D’s have over the past 30 years. In fact, Ronald Reagan had grown the deficit by a whopping 189% yet we credit him with being a fiscal conservative, huh?
While many of you may think I am a right winger I am not, I am a political atheist. It is not that I do not take a stand on any issues or beliefs I have just come to the conclusion that the party I would belong to simply does not exist at this time. If I were to align myself with any party it would be the Libertarian Party on the strong money principle, but I also recognize that the free markets will never be able to regulate themselves. The proof of this was 2003-2007 as the free market rolled on and some Einstein somewhere thought it would be a good idea to push no document loans to anyone who would be foolish enough to take one. You cannot honestly tell me that these incredibly smart people did not know these things were bad loans at the time. They knew and they also knew that they only needed a couple multimillion dollar bonuses to be happy.
My point is that we have no real political leadership and they simply are pushing what they believe is the right policies. However, they do not know what they do and they do not understand that the problems facing America are those silly policies to begin with. To them, though, it is all about reelection and keeping their power, if that is not a true statement then we would have had term limits on Congress instituted decades ago, but we don’t. It comes down to the real fundamental problem in America is that we do not have the will to make those tough decisions. I really believe that the products we buy demonstrate our beliefs and we have way to many “I” products being bought which means we all only care about ourselves.
All of this adds to the uncertainty that I feel and the feeling I have in my gut is growing by the day. There are so many problems out there that are not being addressed and when we do address them we simply throw billions of dollars at it which merely wallpapers over the roots of the problems we face. The very problem that we have is that we are waiting for Washington to solve our problems. How can we expect self serving Congressman or Senators to solve the problems we face? Half of them are multimillionaires and the other half are probably on the take somewhere along the way. Yet we trust them to solve our problems or understand the average person, good luck with that.
I watched this weekend as former politicians lambasted Obama while they ignored their roles in the problems we have. I watched them blatantly distort the facts about where we are and how we got here, sorry folks, but it took a whole lot longer than 1 year to get to where we are. I watched them roll out with no new ideas or inspirational speeches and I distinctly got the feeling that they simply think that because they have an R in front of their name they will get elected because they are different from the President’s party. Maybe they will, but I think it will be much harder than they think because 10% unemployment, 18% by U-6 or much higher if we re-add the people the BLS removed from the labor force, is a real problem that both parties have to take responsibility for.
On top of the domestic political uncertainty we have global uncertainty. We have Europe in or on the brink of a major crisis with the PIGS. We have China who is really upset over us, do you blame them (?), over selling weapons to Taiwan and the Dali Lama, not to mention the mini trade war we have brewing. China is also taking their stimulus off the table, or so it appears, along with India. Those economies play a huge role in the global growth story and if they are tightening their belts this is a problem for that story.
Finally we have Iran, of how I love the nut jobs in Iran, whose leaders are actively seeking to become a nuclear country. While they technically are a nuclear country they want to take this to a much higher level with missiles and warheads. Call me crazy, but I have a real problem with a country that has loose cannons running it and they have reached a level where they have nuclear fuel along with a missile that can reach orbit. Sorry folks, but the story about the mouse they launched into space was not about a mouse and it shows their intentions which should make us all very nervous. Thank God I do not have to make policy decisions about what to do about them. I just hope Obama and company make the right decisions in regards to handling them.
All of this uncertainty is not being felt by me alone, but by millions of people. There seems to be no end to it and as each day passes more uncertainty gets added to the fire. The odd thing about this is that the markets just do not care. I guess when computers trade some 60% of the volume on the exchanges, according to CNBC, the uncertainty does not matter. Regardless, it is clear that no matter who is in charge or making the decisions their options are becoming very limited and the outcomes are all looking the same. The best case scenario I foresee is massive inflation and dollar devaluation, over a few years time, and the best case scenario is massive inflation and dollar devaluation.
As I stated earlier, the only thing we can do is pay attention to what is going on and make the best decisions we can for ourselves and our families. I have several friends, smart people I might add with CFA’s and MBA’s, who are leaving the country or adhering to the guns, gold and God philosophy. I have honestly never seen such smart people head for the hills like this before. I am not in that camp, although I do love gold and precious metals, but they might just be right. However, it is possible, I guess, that all of this uncertainty will pass by and everything will be fine, but mathematically speaking, well, I give that a very low probability.
The Fed just raised interest rates to .50-.75% on the discount window. What does this mean? Nothing. It is simply just a measure to shut people like me up and to encourage banks to go to the private markets for capital. Essentially, this was a populous encouraged move and will have a negative impact on equities, but do not concern yourself with this.
This hike will not hurt corporate bonds, but treasuries and equities, ouch! The bottom line is that the Fed is not selling its assets so, again, this is meaningless at best. If they raise rates above 1% then be worried, but other than that, who cares. Ben, apparently, has just had enough of the negative mean people like me. However, this could prove difficult for Treasury as they have to place so much paper on to the Street. It is also a move to “prove” that this statistical recovery is for real, which it is not. A meaningful rate hike would be well above 1%, don’t hold your breath for that anytime soon.
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