The Death of M3

Posted by Ray on July 15, 2010 under Economy, Main, The Federal Reserve | Be the First to Comment

All the talk of the town is deflation, disinflation or disinflationary trends, what does all of this mean, is it bad and more importantly, should the Federal Reserve try to stop it? First, deflation is negative price growth year-over-year, we are not there yet even though I often say we are in a deflationary period, because we will get there, in my opinion. Disinflation or disinflationary trends are signals that show prices are declining and is how many economists or snarky bloggers, like myself, describe the trend before we hit outright deflation. In a nutshell, deflation is demand destruction or no end demand which means companies must drop prices in order to attract business. The most commonly referenced period of deflation is the 1930’s where, sadly, food was cheap, but people starved, houses were cheap, but people went homeless. Deflation has been framed as ugly, horrible and something that must be avoided at all costs.

Deflation during the good times is fine and we all reap the rewards, such as cheaper technology, i.e. cell phones or computers, which become cheaper because of competition from outsourcing and technological advances. No one minds paying lower prices during these periods of times and the Fed even doesn’t mind deflation during these periods, but they like it to remain in check. Because lower prices do not mean people are not buying the products, the opposite is typically true. Plus, other indicators usually show that only certain items are prone to deflation under normal conditions, usually technology related items. The Fed would only be concerned if they saw other items start to lose pricing power and the money supply shrinking, people saving more money, basically.

When people save their money, in an economy such as the U.S., it is devastating because such a large portion of our domestic growth comes from spending money freely on stuff we really don’t need. When we save we stop that wasteful spending this grinds our economy to a halt. In order to get sales going again companies start to offer incentives to get shoppers in the door. This usually means lower prices through either temporary or permanent sales on the price of the products they sell. Since these products are not selling the stores are not ordering new products which mean the raw materials to make the clothes or whatever begin to decline. Even if the product begins to move at reduced prices the company selling to the end user begins to demand lower prices for the product and even if they don’t ask for it the orders are so much smaller prices would fall anyhow. Essentially it is a chain reaction, this is pretty common knowledge, but it comes from one simple thing happening, people saving their money.

The other part of the equation of people saving their money is that money is taken out of circulation. This sounds counterintuitive to those who rail against the fractional reserve banking system since this system allows for more loans to be made if the deposit base grows. However, if the economy is bad banks simply do not make loans because they fear not getting repaid. Therefore, a higher savings rate means lower monetary circulation, commonly referred to as M3, which the Fed no longer produces by the way. In order to boost the money supply the Fed will try to encourage banks to make riskier loans by lowering interest rates. By lowering interest rates banks make lower rates of returns for doing nothing with their money so by loaning out the money to borrowers banks can make higher interest rates. In turn the borrower will go out and spend that money which will ultimately boost the money supply and, hopefully, boost final demand.

That is how things work in normal business cycles, but that is not what we have now. We have a very abnormal business cycle that happens once every few generations where we go through this huge leveraging cycle and then have to live through a period when we deleverage all the debt. The last time we went through this was in the 1930’s and the time before that was about 60 years before the 1930’s so about every 60 to 80 years we go through a super cycle of debt leverage that blows up. During these super cycles the consumer has so much debt that they just try to pay it off and does not waste much money on other items. This is bad for our economy which is built on a consumption model to the tune of 70% of our GDP. This lack of demand or demand destruction means people just will not spend unless it makes absolute sense to them, i.e. a generous tax credit from Uncle Sam. This demand destruction leads to lower prices which starts out as disinflationary forces, moves to deflation when prices finally start dropping YoY, which will happen soon.

No matter what the central bank does, the Fed, it on its own cannot change this deflationary trend when it has spent all of its ammo. When interest rates hit zero there is nothing the Fed can do to spur demand from a monetary policy point of view. Remember, this is a very unusual situation because in these super cycles not only are consumers saddled with debt, but so are the banks and the banks are usually saddled with worthless debts which make them insolvent. That was true 80 years ago and the same thing is true today because banks are not making loans nor do they want to. So what can the Fed do? They have insolvent banks and consumers that don’t want to spend and are trying to shed their debt loads.

Some people say more quantitative easing will be helpful. I ask how? We already did how much QE? $2T+ that we know of and that did nothing. In fact, mortgage rates have dropped even more after QE stopped and we have falling demand for housing so what will another round of QE do? All it would do is cripple the dollar and trust me, the dollar is going to be in trouble soon enough anyhow because of the bloated balance sheet the Fed has and our national debt load. QE will not boost money velocity at all. It might give banks more money for their balance sheets, but other than that it will not boost the overall money supply so I am totally perplexed as to why anyone thinks QE will work. We have no problem selling our debt right now either, so it is a total waste of time and resources. The negatives far outweigh the positives.

What else can the Fed do? Nothing. They are done or have done everything they can do. Sure, they can roll out with TALF again, but the market has no problem placing junk paper right now so what would the point be? The problem is simple, the consumer does not want to spend. Businesses do not want to spend. Does anyone know why this is happening? I think it is pretty simple, no one knows what is going to happen. The President is keeping everyone in the dark about where taxes are going to go, heck, we are not even going to get a budget for 2010, unreal! We still have no idea how health care reform is really going to impact us yet, how much will it cost, etc. The business environment is weak at best and CEO’s are too afraid to admit it, look how they get treated by the administration, as traitors!

The consumer, well, I wonder why they aren’t spending. We have weekly initial unemployment claims coming in at well over 400K, 4 week average is 455K. We have more firings than hiring’s going on right now. The work week declined and so did wages. There are 6 people for every open job. It is taking 35 weeks to find a new job if you get fired. People were feeling more secure about their job, but when initial claims began to heat up again that confidence disappeared, even H-P started laying people off again and I bet Google will announce layoffs very soon. Their debt loads are through the roof and banks raised all their fees on the consumer so it is taking longer to pay down debt. Foreclosures, delinquencies and now a story broke tat home owner associations are foreclosing on homes for pennies on the dollar over the dues not being paid, come on. To top it all off the Senate is not extending unemployment benefits, but they can pass a 2,300 page Fin Reg bill with no problem, what is wrong with those people?

It is fair to say that there are plenty of reasons to not spend money from the consumer’s point of view. From corporate America’s point of view there is also little reason to spend money and even if they did it is so little of GDP it doesn’t even matter. The bottom line is how do we get M3 to increase? Can money velocity get positive again and should we even try? In my opinion, I do not believe we can get money velocity to get positive again without a drastic event such as WWII. These super cycles have to work themselves out and that takes time and the more tinkering we do the longer it takes. Look at housing, if we did not do the tax credit we might have bottomed in housing prices already, but we will never know now.

The Depression lasted as long as it did because of the tinkering and those who say we had a relapse because stimulus was removed in 1937-38 simply do not get it. If we cannot attract buyers to the housing market at 4.5% interest rates and prices significantly lower than the peak it just is not going to happen for some time to come. The market has to find its own bottom and it will be painful, but we cannot simply throw money at it and hope it works out. We could do that in the 1930’s because we had savings and we had manufacturing, we have neither now. We started out in a horrible position, greatly in debt, and to get ourselves out we are advocating going much deeper in debt. The problem is we cannot grow our way out of the debt we have, we cannot afford another New Deal. The most important thing to remember about the New Deal to begin with was that it did not work, it was a majorly failed policy.

As painful as it is going to be I say we have to let it be. No more QE and I hope we do not do another stimulus, but we will, look for a Bush style check coming right around October. Money velocity will sort itself out when the deleveraging is over and that could be as fast as next year or as long as 2015, no one knows except the collective minds of the consumers. The bottom line is we may come out, the consumer and corporate America, stronger than when we came into this thing with less debt and important lessons learned. Our government and the Fed, well, I do not believe they learned anything and look for QE and stimulus money just in time to buy your vote in November.

Deflation, a reality

Posted by Ray on under Main | Be the First to Comment

Deflation is more than a pipe dream, it is basically here and it is global in nature. We saw a whole slew of data points come out over the past 12 hours and none of it was very positive from my lens since it all pointed towards either a slowing of the economy or deflationary headwinds. There is just no question that the second half of 2010 is going to be vastly different than the first half for America and 2011 is going to be worse than expected. To be blunt, when the Federal Reserve is telling you things are bad, things are much worse than you think. We are talking about the same Fed that got everything wrong or underestimated every problem we have had over the past 30 years. In their notes yesterday, wow, there was just nothing positive. We will have quantitative easing and it will be spectacular since we have no idea how this will impact the U.S. long-term.

China released its GDP figures last night, some 10.3% GDP, but its CPI was 2.9% compared to expectations of 3.5%. Some would argue that is good news, but I would disagree. With rapid growth you would expect to see inflation higher than 2.9% and if they are paying lower prices that means they are having end demand problems as well. Some say this ‘planned’ slowdown is good and maybe it is, but if China is the engine for the global economy and it is fulfilling its goal of a slowdown how in the world can that be good news for the U.S. or Europe? I don’t see it. I also see a stronger RMB as a major problem for China and the rest of the world, but I have beat that horse to death by now. Just remember, manufacturers with 3-4% profit margins cannot pay their employees more while their currency is rising and other currencies are falling or staying flat, a best case scenario for the U.S. and the EU. Watch out below in China and I feel much more comfortable in India or Brazil than I do in China at this point maybe even in Indonesia.

Data in the U.S. was horrible and there is no way to deny that. The initial claims data is very noisy since the seasonally adjusted data is looking for retooling of the auto industry which is not happening right now, but it makes the weekly number look real nice. Unfortunately, it is not reality and to put everything into prospective, last week’s number was revised up, this number, 429,000, will also be revised up as well and take a look at the unadjusted data set. The unseasonal adjusted data is flat week over week at 513,347 which looks similar to last week’s figure and shows how the BLS is not seeing through the distortions of the auto industry retooling and makes the case that seasonally adjusting doesn’t always work. Either way, this figure is a head fake and even Steve Liesman admitted that so what does that tell you?

The CPI/PPI, what can I say? Disinflationary at best and this is what the Fed is worried about. This problem is global, not just a U.S. problem and, unfortunately, looks a lot like what happened in the 1930’s which was made worse by Europe’s debt problems I might add, sound familiar? The Fed also said we are looking at 5 to 6 years of this, ouch, and this means equity prices should be trading at what P/E exactly? Certainly not 20, maybe 10, 15? No one knows, but we are way overvalued that much we all know at this point. To make a point about deflation let’s take a look at Marriott’s earnings, they were good, but if you look at their room rates YoY they were down across the board from 2009, I thought we were in the midst of a fantastic recovery? If Marriott has to cut its rates by 4% all over the world, except in the UK, what does that tell you about pricing power? There is none, they have to discount to fill rooms. Also, their luxury brands were flat and their lower end brands were doing much better, staycations anyone. Don’t bet on global growth, you will get slaughtered.

The Empire State report, from 19 to what??!! To say that we are not having a slowdown with an Empire State report slipping 15 points, 19.57 to 5.08, on top of the ISM making lower highs, the Baltic Dry Index plummeting and unemployment hideously high is insane. This is just the icing on the cake, in my opinion, I am sure some people will claim it is a one off event, but there is a clear pattern here and it is down. All of this means a slowdown, good earnings or not. This is also not a case of more stimulus with the exception of extending unemployment benefits, we need to let this thing sort itself out at this stage of the game. Unfortunately, we will get it whether we want it or not starting with quantitative easing from the Fed which will do nothing to boost money velocity. The bottom line, the Empire State report was awful and will likely not be talked about much today or ever again. The other Fed reports will likely show a similar slowdown as well.

Painful, I think that is the word we are looking for as we look at the data today. How or why futures are not down bit time, who knows. I think you would be hard pressed to find anyone, myself included, who said that 2Q10 earnings would not be good, but forward earnings are the key and all forward looking data points look terrible. The ECRI comes out tomorrow and it is pushing closer and closer to that -10% mark, but I guess that indicator only matters when we are on our way up, not on the way down. Be very careful in this market as it is devoid of reality at this point. Valuations will matter and the fact that we are seeing deflationary pressures mount from China to room rates at Marriott means you have to treat valuations differently. You cannot look at a 19 P/E and consider that cheap in a deflationary environment and we have very little experience in these environments to boot, so think deep value, ultra low P/E’s and high dividends from strong companies that do not need to go to the capital markets to raise capital. Good luck.

Quantitative Easing 2.0

Posted by Ray on July 8, 2010 under Economy, The Federal Reserve | Be the First to Comment

I have written about money velocity at length and what I think will eventually happen and much of my thesis is about to be put to the test. For whatever reason the market seems to think massively shrinking consumer credit is a good thing and that the Federal Reserve will be starting a new QE process very soon, which is the news this afternoon that coincided with the parabolic move late in the day. However, I cannot disagree with this more and believe that any quantitative easing will do nothing to help expand credit or increase the money supply to the public. We have at the very least disinflationary forced if not outright deflation and the Fed is already running negative real interest rates.

If you recall about a year ago there was a paper from a Fed of IMF official, the authors name escapes me, that recommended real interest rates to run at -5% annually. At the time everyone thought the man was nuts and he was/is in my opinion, but the only way to get real rates that low is through loose money policy and quantitative easing. The Fed has maintained, and will continue to maintain a zero interest rate policy forever as far as I can tell, a loose monetary policy and performed the only quantitative easing policy the U.S. has ever seen, $1.5T in agency and U.S. treasury paper. Unfortunately we still have no idea what the long-term impact of these policies will be, but they cannot be good. These policies are causing real rates to go negative and mortgage rates to plummet.

In order to get the target rate to -5% the Fed will need to buy much more paper than it owns now. My guess is another $2-3T in additional paper and, again, we will not know what the impact of this QE program will be to our economy or currency for some time, but it will not be good. I am not sure why the Fed or this President cannot figure out that interest rates really don’t matter and declining credit is actually a good thing. In fact, all of the “bad news” is really long-term good news as far as the consumer is concerned, not the employment or housing data, but consumer credit. This de-leveraging is just what is needed as we were all awash in debt and most people cannot or could not ever repay their debts. I have never seen a government so desperate to reignite indebtedness of the public like we are seeing right now, it makes no sense long-term.

So, the Fed will start QE again, what will this do? Nothing. Will it increase the money supply? Yes, but not the public’s money supply merely the banking sectors balance sheet which is supposedly flush with cash anyhow. Banks are not lending money because they know they will not get repaid, but borrowers simply do not want more debt either, a good thing! We have mortgage rates below 4.6% and there is no demand, it just doesn’t get much better than that right now, although I think mortgage rates go sub 3% soon. Quantitative easing will do nothing to improve that situation and it certainly will not boost the confidence in the USD which is more than likely the goal, remember, the only way to double exports in 5 years is to devalue the dollar, but it will not work.

The point is that all the QE in the world will not put money in your pocket or your employer’s bank account to give you a raise. Essentially, from a monetary point of view the Fed is done as it cannot get money into the system. QE will merely create inflation, but not the kind of inflation Ben wants, Ben wants wage inflation and QE will merely create dollar devaluation which is Weimar Republic type of inflation. The public also does not want more games or trickery from the government and it frightens me to think what could happen if Ben goes down this reckless path. Remember, just because there is not an impact from his current policies today does not mean there will not be negative implications from these idiotic policies a year or 5 years from now.

What Ben will tell Obama is to create a direct QE program, i.e. a Bush style stimulus, a big one. I do not believe this will go over very well nor do I think voters are in any mood to be bribed with their own money this year, but if one is unemployed and offered $2,000 could or would they say no? Probably not. This type of stimulus would create what Ben is looking for, wage inflation and money velocity, but make no mistake it will be a short-term boost only. We have a long time before we are out of this mess and we have much pain ahead of us. We need to suck it up and deal with it. Contrary to popular belief it is not Bush’s fault, it is all politicians fault going back 30 years and the only cure is pain.

We will still look for an easy way out and probably do QE with another stimulus, but make no mistake that will be suicide for our countries long-term financial health and our currency will be in major trouble if we choose that path. I hate to say it, I have friends who are unemployed, but we must take the pain as it will be shorter than looking for the quick fix. We are all credit junkies and we got to kick the habit.

Deflation, Inflation and Housing

Posted by Ray on June 22, 2010 under Main | Be the First to Comment

There is an interesting story from CNBC.com that illustrates that a bond trader is concerned that the bond market will collapse. It is not the fear that the bond market will collapse that caught my eye, it is the fact that he thinks deflation will fuel the collapse. I do not see that happening, exactly, yet at least. Clearly housing is still seeing deflation and we are not at the bottom yet either.

Logic dictates that we should all be gearing up for inflation, now, but the data does not lie and I can pull the most aggressive data I want and it shows ultra low inflation rates which is scary, frankly. With the massive printing and monetization of debt that we have seen over the past 2 years we should see some inflationary pressure, somewhere, but nothing. Not only has the Fed’s balance sheet grown, but it is growing and so is the national debt, at a record breaking rate. Still, inflation is nonexistent which is puzzling to all economists and policy makers, even housing that is given the most generous tax breaks and, recently, a huge tax credit to buy is showing that prices are falling, not rising. This is a severe problem and it is going to get worse.

Deflation will continue to rip through the economy as the deleveraging continues which could be for another 3-4 years, but there are always caveats which I will go over. The primary reason there is no inflation, this isn’t rocket science unless you are an economist, but credit is contracting and people are saving more which means less money is in circulation. Bank balance sheets are enormous right now, but the irony is they are still largely insolvent and even if they could lend why would they with 10% unemployment and initial claims coming in at 470K a week? All of this means prices will drop lower across all categories, except for food which I admit has me perplexed as well.

The primary reason is the fact that everyone is deleveraging and paying down debt. We live in a society that was driven by consumption, but that consumption was not organic, i.e. actual income driven, it was credit driven. Once that credit is gone, and it is long gone, consumption ends as we once knew it. Sure, we will have hot products like the iPad, why, I do not know, but that is not for me to decide and even those products have a certain shelf life meaning their appeal will eventually wear off. Especially when we have initial claims, on a monthly basis, at 1.8M which is twice the population of Montana and the target market, 18-30, is experiencing a high rate of unemployment.

This lack of inflation is not lost on the Federal Reserve and believe me they are worried about it. Tomorrow you will not see any drastic change in their language or actions. They will likely get rid of paying interest on bank deposits, what’s the point if inflation is nil. In fact, I am willing to bet, this will not be in the announcement, that the Fed’s balance sheet will get even bigger and what should concern you is the amount of currency swaps that appear on their balance sheet. Those swaps are for Europe’s banks that “are just fine” so they can settle their trades in the relatively safe reserve currency, the USD. If that number keeps growing the problems in Europe are much larger than we are being told. Europe will also weigh heavily on tomorrow’s decision and that will be a reason that no major action will be taken as well.

It is clear that deflation or disinflation is here at the moment and I am sure it will get worse, but it will also be somewhat quick. As many of you know the U.S. has decided to not pass an official budget this year. This is the first time this has happened in almost 40 years and there is only one reason I can speculate this is not happening, the $1.6T estimated by the President was a little too conservative and the actual number is probably much higher. Why debate that before the midterm elections? It would also bring the U.S. front and center in the whole sovereign debt fiasco that Europe is going through at the moment. Frankly, our balance sheet is much, much worse than what we are so critical about over in Europe and we haven’t even instituted socialized medicine, yet.

Deflation is great for U.S. treasury debt as investors can capture greater real returns and the treasury pays out little interest, but this is not going to last long. Our deficits and our tinkering in China’s affairs is about to bite us in the rear end in a big way. First, we owe too much and can never, ever repay it, there is just no way out of it and we cannot “grow our way out” and the people suggesting that are loony tunes. Second, I suspect the RMB, Yuan, China’s currency, will eventually weaken, I am very sure of it, but it may also strengthen in the meantime which would be humorous only because China would then be running big trade deficits, not surpluses, and would not have to buy our debt. I wonder how well our $40B daily auctions would go then.

I also wonder if Congress will actually pass the much dreaded Currency Manipulator Bill they are threatening China with, I think that is Smoot-Hawley on steroids. If both these things happen, China lets the currency strengthen to get the U.S. off their back, right before they drop it to new lows, and Congress passes their tariff act, that is essentially what it is, what would that do? It would force Americans to pay much more for goods, that is inflationary, and it would force China to either not buy more U.S. debt because there is nothing to hedge against and in all likelihood China would end up being net sellers of treasuries because all of their bubbles would have popped and they would need to get liquid. All thanks to politicians who have no clue how capital works. That would lead to inflation in a big way because all that inflation we exported over the years would wind up right back home where it belongs.  This, of course, is a worst case scenario.

What is more than likely to happen is the fact that the U.S. simply continues to spend and the bond market slowly begins to demand a higher risk premiums. Eventually it will end up like Greece where the U.S. cannot borrow at reasonable rates, but long before that the Fed will take matters into its own hands and begin to buy treasuries through quantitative easing programs, they did it once, they can do it again, right? Except this time it will be inflationary, but not from a money velocity point of view, from a dollar depreciation point of view. That is much worse because you actually do not have to increase money velocity to destroy the currency which will crush savers and the middle class.

The beauty of this is it doesn’t happen all at once, it happens over a period of months and the government will tell you this is a good thing. How you say? Oh, it is a perfect plan. Because we consume about 80% of what we produce domestically so we won’t see it right away, but what we will see is our exports increase dramatically, because the dollar is falling on the international markets. More people will become employed, sounds good right? Well, I am not done yet. As people become employed they spend more and prices rise and as prices rise wages will need to increase, but no one is buying our debt still, except the Fed. The money supply will have to keep growing to keep up with inflation so they print, monetize and send out more money to banks to get into circulation. Wages will increase at exponential rates, but it won’t mean anything.

You see, it is all fake, driven by the monetization of our debt and eventually the dollar will simply be worth nothing and no one will want to trade with us or at least do business in our currency which means production stops because you cannot exchange our currency for anything else, it is Zimbabwe. The printing of money is a dangerous thing and the economists who insist that what separates us from Greece is that we do have a printing press are right, but for the wrong reasons. It is much more dangerous that we have a printing press because we can do terrible things to ourselves and what I just laid out above it could happen. It might happen because there is historical precedence. There are 2 well documented cases, the Weimar Republic and Zimbabwe.

It happened, in both cases, quickly, very quickly and in Germany’s case they started out with deflation, much like what we have now. As the government repaid debt and tried to keep the economy going they printed money and they went from deflation to inflation in the blink of an eye. They were so efficient at printing money they eventually only printed money on one side of the paper, to speed up the process. They even used wood tokens so people could at least burn them for some value. It doesn’t take much to start down the path of inflationary cycles because neither the Germans or Zimbabwe wanted to be the poster child for hyperinflation, quite the contrary in fact, they, like Ben, think they can control events, capital. That is where they went wrong, capital has a mind of its own and once a path is determined it is tough to change course or stop it altogether. Some very smart men were in both countries and they failed at stopping the inflationary onslaught. I highly doubt our Fed can stop it since they admit they cannot see things coming anyhow.

As far as the folks who say these things cannot happen here, well, they can and they will. It is inevitable at some point and there is no way a deficit reduction committee can stop it or implement a plan to reduce our debt before it happens. There is no political will left in Washington to stop their spending ways. Especially with some 78M Baby Boomers about to receive the mother of all socialized benefits, how do you say no to the largest voting bloc in history? You don’t.  I believe that the whole deflation/inflation debate is irrelevant as we will have both. Plus, investing for deflation is really no different than normal investing, some bonds and strong dividend paying stocks which should be your core holdings anyhow. Inflationary investing, well, that is a different story and while I prefer toilet paper and gold you may prefer tobacco and food, either way. The point is, it is coming and you will not see it happening until it is here.

Initial Claims

Posted by Ray on June 17, 2010 under Main | Be the First to Comment

Unreal, it is just unreal, here we are 2.5 years into this recession and we are still seeing initial claims well over 450K a week, how? The pundits told us that employment had turned the corner months ago and we are in a strong “V” shaped recovery, but employment is a lagging indicator and should show real strength by March 2010. Well, it is half way through June and the only sector showing strong job growth is temporary government jobs, some recovery.

The 4 week moving average of initial claims is at 464,000 people, this is unbelievable and is not a good sign. To put this into perspective every month 1,856,000 are filing for initial jobless claim benefits, that is twice the amount of people that live in the entire state of Montana or two thirds of the population of Las Vegas, three times the amount of people that live in Boston Ma, you get the picture now? That is a lot of people. This is not a sign of job creation or job growth so it is beyond me how the President could have stood on that podium a couple weeks ago and proclaimed there is proof that the economy is getting stronger everyday when so many people are losing their jobs every day, not getting jobs.

I may be bearish and all, but this is beyond what I would call bad news and downright scary. People are not leaving their jobs for greener pastures, they are being laid off because business stinks. The proof was n the CPI which shows clear lack of pricing power or deflation dropped .2%, even taking out energy prices were only higher by .1% which shows zero pricing power except for iPads. What this means is the market is severely overvalued as it deserves to be trading at much lower price multiples based on deflationary pressures. We are not in 1930’s type deflation, but we are certainly heading in that direction, especially with Europe in turmoil right now.

To say there was any strength in today’s figures is simply lying to yourself and trying to spin bad news. I am sure the market will head higher because, well, the market sees no bad news until it is sitting on its chest, but it is clear as day that GDP is rolling over and employment is worsening, not improving. Would I short the market? Yes, but if you do not want to go short sell into rallies and buy bonds or stay in cash because when the market realizes it needs to compress P/E multiples we will move from 1,100 on the S&P to 900 in the blink of an eye. The market is not the discounting mechanism everyone tells you it is, just remember September of 2007 we hit all time highs when the crisis was hitting full steam, so higher stock prices is not indicative of a healthy economy.

One final thing, the parade of bulls on CNBC are long only mutual fund asset managers, where is their bread buttered, by having your assets in cash or in their funds? Think about that when listening to them dish out their “timely advice.”