Well, it has taken some time
Posted by Ray on August 24, 2010 under Economy, Main, Markets | 
Be the First to Comment
I have been writing about the decaying economic data for some time now and have taken some heat for being a pessimist or a permabear, but now it appears that I was correct. It is also striking that almost a year ago I called this current economic funk we are in a Depression. I said one of the reasons why we do not recognize a modern Depression is because there is no need for soup lines and the like. In today’s world everything is automated with food stamps, 40M Americans are currently on food stamps a huge YoY increase, we have unemployment benefits (99 weeks currently), the HAMP (loan modifications), energy assistance, public housing and a slew of other safety nets available to those in absolute need.
Since we have all of those programs our growing economic troubles can remain out of sight and mind. We can be told things are improving because the data says it is. Never mind the fact that unemployment is “only” at 9.5% because people are so discouraged that they left the workforce. To me the most telling sign is the food stamp data which is just unbelievably high with almost 12% of Americans in need of public assistance just to feed themselves, think about that for a minute. That kind of takes the wind out of my sails about being right about the current economic climate. I never wanted to be right, but the data was never strong nor did it point to a sustainable recovery, which was merely a statistical recovery to begin with.
I have been silent for a few weeks because I have not felt so hot and I was letting the data set in. I think it is clear now that the recovery was not really a recovery and when the stimulus stops we are in deep trouble. As Rosenberg said, when businesses are dependent upon government spending for growth we got serious problems, I am paraphrasing the statement, but it is close enough. He was right all along and the permabulls have a rude awakening coming their way in the near future. Whether it is the Hindenburg Omen or just a slew of bad data, which will get worse, stocks are way overpriced, period. We will or the market will correct this error for us by forcing a multiple compression and it will either happen all at once or over a period of days, but it is coming.
My last call was to look into leveraged ETF’s for long dated treasuries, UBT or TMF, and gold, GLD or physical. This trade was profitable, UBT, which I own, was about $86 and it is now $102.43 and GLD was about $116, it is currently $120. Those were good trades that required guts in the face of deflationary forces and the fact that you were looking at a leveraged ETF, which are very dangerous, but they worked. I suspect that it will continue to work, but I would not, besides gold, buy the pair trade here. The Fed told us what they were going to do, monetize some debt on the longer end of the curve, and I suspect they will continue in the near future, we might now Friday for sure, but if they do more QE look for a $1-2T figure.
Ben Bernanke wants to flatten the yield curve to force lending by banks, but it will not work. It is a good theory for Ben, but the reality is banks do not want to lend and consumers do not want to borrow. QE will also not do anything to boost money velocity and I am not sure why anyone would possibly think it would. Banks will merely do what they did before the credit crisis and take on more risk so they can play a different yield curve other than treasuries. As we know, that did not work the last time so why anyone would think it will work now is beyond me, but I am sure that banks will take more risk to boost profits. After all, they are too big to fail.
The outlook for the markets is not good as Ireland just got downgraded and I think we will see some weak data at 8:30 tomorrow as well. Unemployment claims, a leading indicator according to, well, me and PIMCO, are rising and another week +500K will be devastating. Also, the employment report survey was out the very week we saw that 500K print, not good news for the unemployment figure out a week from this Friday. The Philly Fed, Richmond Fed and the Empire Report’s were not very good and I think we will see close to 50 on the ISM survey out next week, perhaps lower than 50 so be ready. All the data is pointing to very, very weak near-term economic pain ahead, there is little doubt about that.
I realize that balance sheets are rich with cash right now, but that means nothing as companies are merely hoarding cash at this point. It is, the cash on hand, good for corporate bonds though, which I still love. The outlook from CEO’s is also becoming more mixed, John Chambers from Cisco was not optimistic, this should scare you because this guy is always optimistic. Basically, much like in 2000, CEO’s merely did not foresee a slowdown in the immediate future, which is very surprising and takes down the credibility of many corporate leaders, in my opinion.
Because of all of this I am more bearish now than I have ever been in the past. I am positioned for a correction and pulled most longs off the table. I am in longer duration treasuries along with my UBT play, long gold, silver, corporate bonds (no high yield to speak of), some international holdings (frontier markets), a few biotechs, and inverse ETF’s. My long holdings are all dividend paying stocks with very low P/E’s and strong balance sheets. Blind belief that the market is going to head higher is insane and, frankly, we have just seen an insane rise in equity prices to begin with. That time is now over and the bears will come back to take control. I find it difficult to believe no one saw this coming, I have written about it and many others as well. The data never lies, ever, but the people reading the data usually have a reason to spin it in their favor.
Subscribe to Annuity IQ's FeedLS Blogs
