According to Ben and now his number 2, Donald Kohn, there are no more asset bubbles in the US, none at all. This is coming from the same Fed that missed the mother of all housing bubbles and continually either lied to themselves or us to the severity of the bubble, when they realized it was busting, after the fact. These are not exactly what I would refer to as credible words of comfort when they messed up so badly to begin with.
However, considering we lost millions of jobs in the last 6 months alone and had horrible economic data all while the stock market climbed an unprecedented 60% from its lows, a feat that usually takes 2 years after a recovery has actually occurred, there is no bubble. Right. In my opinion we went from one horrific bubble, what was the mother of all bubbles, to the greatest ,biggest, most fantastic bubble of all time created by the Fed on purpose. I realize that everyone thinks everything is fine now that the market is up and we had a wonderful 3Q09 GDP figure, which will be revised down to 2.5-3%, that was 110% stimulus induced, and do not fool yourself and think it was not, but things are ugly.
We are still reporting 500K initial claims a week, last month if you look at the official number we actually lost some 276K jobs, the BLS added some 86K via the birth/death model, and unemployment is at 11%+. That’s right, I said unemployment is at 11%+ right now and I can prove it. According to the BLS they understated employment by some 800K in the beginning of this year, this was announced in September 2009 by the BLS, which means we are not counting some 800K people who are unemployed because the BLS fudges the numbers with the birth/death model, go look to see their actual numbers they add in HERE.
My point is that there has never been a point in history where the market climbed 60% from its lows in a mere 6 months while we are still shedding jobs. Given that employment has been overstated, or understated depending on how you look at it, and we have had weak or anemic, albeit better, economic data this equity move is unparalleled and is the basic definition of an asset bubble. Here are 2 other things that should make you say hmm, treasuries are doing very well, still, which is highly unusual in a economic recovery, come on stocks and treasuries can’t both be right, and precious metals are also going through the roof.
It is impossible to have every or virtually every asset class go up and have them all be right. According to the markets, which are horrible future forecasters, see September 2007 Dow 14,000 for proof, we are facing deflation or a continued recession with treasuries going up, inflation with commodities doing very well or a complete economic recovery with stocks and corporate bonds going through the roof. Do you see my point? They cannot all be right, it is not possible. I know I will get hate mail for this next statement, but here it goes, stocks are stupid money and that is a fact. Credit markets and the FX markets are always where the smart money is, hence the reason why those markets dwarf the equity markets. If you think about it you know I am right, stocks are last in line during bankruptcy!
The point I am making is this, equities are for gamblers, like me and probably you. The credit markets represent the smartest of the smartest money and what is that market telling you? Treasuries are saying there are still major problems out there, as they are going up, and corporate bonds are pricing in 2% GDP growth. Stocks, however, are pricing in some 4%+ GDP growth with job creation and even credit expansion, none of which is actually happening in real life. I can talk until I am blue in the face about valuation and such, but it will do absolutely no good because people do what people do, they see stocks go up and jump on at the very end to ride them all the way down.
In fact CNBC stated today that the retail investor is coming into the market now. Why? Because human behavior is predictable. They wait for things to go up and then see their friends buying stocks, making money and feel left out and jump on the bandwagon. I saw this happen in 1999/2000 only to see people get killed when the market corrected, which it will, because when we see the behavior I am talking about it is the sign of an asset bubble. It is what happened during every bubble we have had and then we will look back in a year and say how were these people so dumb to fall for it? For the record, I do not think all people are dumb I just think people make bad decisions based on faulty advice and herd mentality.
I also do not think retail investors are jumping into this market as net flows do not show that type of activity, equities still show net redemptions not in flows, so CNBC is flat out wrong. Oh, there is also no money on the sidelines so just forget about that argument it does not exist. That money is sitting in money market accounts because people want it liquid and/or it is part of an asset allocation. In fact, that money has not moved off the sidelines in 15 years so I highly doubt it will move now. If it did, which it is not, that is further evidence of a bubble driven by cheap money as the Fed is literally forcing people to risk their principle to make any return.
The Fed can say all they want that there is no bubble because you and I know there is a major bubble out there. Well, you should know that unless you think 60% rallies happen all the time in a mature market and economy. I think what the Fed is saying is that there is no bubble in securitization or in the housing market, which is debatable, but there is one heck of a bubble in stocks. The one thing I do know for sure is that all bubbles pop, I just do not know when, but this one will go soon and it will be spectacular.
That is exactly what today’s initial claims showed today with a firm number above 500K, likely revised higher next week, and stunning productivity of 9.5% with costs massively declining. As the title suggests, people are working harder for less pay and that is a green shoot, apparently, especially with poor same store sales, sorry, but they were bad. I know, CNBC says that this means that companies will be hiring again because productivity is unsustainable and they might be right, if the productivity calculations were not such a joke.
Considering JNJ, MSFT and a bunch of other defensive names are laying people off just as we are recovering means one thing, this is a statistical recovery. That is not a good sign for employment, in my opinion, not to mention I am willing to bet that local and state governments will trim payrolls, again, as well. I think same store sales shows that the consumer is not back, at all. I know, everyone said they were fantastic today, but they were not, at all. The discounters did OK and Saks did OK, but here is what you have to remember most of these stores closed down their nonperforming stores this year and this was YoY comparisons so it was like comparing someone sleeping to a corpse and the corpse won in some cases.
I know, there is going to be an inventory build, right? This pipe dream has been fed to us for 5 months now and the ISM shows inventories declining, still. So where is the inventory build, are we going to even have it that is the question at hand. However, has anyone ever considered the fact that businesses will intentionally keep inventories low for some time to come?
Here is why I am pretty sure this will be the case. Inventories are usually bought on credit, no one is extending any credit to anyone right now (see the Federal Reserve data for proof). People are simply not buying things the way they used to so stores will keep less on hand than they did in the past, go to any Best Buy and look in the computer section for evidence of that. Companies are finding they can deliver their products with current employment levels, which is bad and dismisses the claim about future hiring and the productivity and cost of employment is proof of that statement. If this inventory build was coming, like it was promised months ago, then it would be reflected in some data point, but I digress.
Frankly, 512K initial claims is a terrible number, still! That puts us on pace for another 2M initial claims this month, again. Ongoing claims did drop, but that is because this is the month when unemployment benefits were going to start to anyhow because people cannot collect it any longer, remember? However, that changed as Congress passed another extension of benefits so this number will climb, very, very soon, but let’s not let get those pesky facts get in the way of a recovery story. Until that weekly number gets below 500K, far below, only then will we have a recovery in the employment sector.
Somewhere someone sent me a comment that in a V shaped recovery employment does not rebound until well into the statistical recovery. The person referred to the 1982 recession when it took 6 months for employment to drop below 500K a week. That is great, but here is the thing we are now entering the fourth month of the supposed recovery and unemployment has not changed much. Here is the other important thing to remember, we had a vastly different recession then and political landscape. Reagan was elected, he dropped the IBM anti-trust suit and immediately began implementing business friendly legislation.
I am sorry, but whatever you think of Obama, he is no Reagan. He has raised tariffs on Chinese goods which has basically started a trade war, yes it is raging you just don’t hear about it, for example there s now a huge tariff on seamless steel pipes, nice job. Obama is not business friendly at all, unless you are a bank or have union employees, and is doing exactly the opposite of what Reagan did. I am sorry, but to draw a comparison to 1982 is a bit dumb given the current political environment. I hope we do recover and I think you would be hard pressed to find anyone who does not want us to get out of this mess, but given what the government is doing and the Fed I think they are making it worse. Pumping up bad assets through easy money does no one any good and will eventually fail one way or the other.
Proof of that is WFC and Fannie Mae with their recent actions with mortgages. WFC is switching to interest only loans for 10 years on a bunch of mortgages, probably the Pick-a-Payment loans, which have an average LTV of 105%. While that might work out over the long-term no one really knows what will happen and that is pretty risky. Although I do see the genius behind it as it keeps inventory off their books and the real estate market, but it is a huge risk nonetheless. Fannie is now allowing people to turn over the deed to their home and the owner can then rent it out. That is unreal to think that they are letting this happen, but again it is only to support the real estate market and is a horrible business decision. Let’s not forget that Fannie also reported a loss of $18B which may be increased by $5B if the tax credits are not sold to Goldman and Buffet while asking for another $15B from Uncle Sam.
I know, I speak blasphemy about the markets and the country as all I see is doom and gloom! That is not true, well, it’s not totally true. I just see all of this happening and everyone thinks things are just fine and that is not the case. I know things are getting better, I never said it wasn’t, but stocks are ahead of themselves and clearly the economy is not that healthy, take another look at the underlying GDP data for proof. Without Uncle Sam this thing would go down the tubes and the problem with that is all the borrowing we did to boost GDP is going to cost us a bloody fortune. Going deeper into debt to encourage more debt is just crazy and we are blowing bubbles with consequences. While I do not know exactly when the consequences will have to be paid I am sure it is relatively soon.
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