The world is in a very tough spot right now and the word of the day is social unrest. On top of the news from the Middle East we got some, in my opinion, pretty bad jobs numbers on Friday. Of course if it was a good report it is because of the ‘economic recovery’ and when the report is bad it is because of snow, rain, wind, Earth or whatever else they want to say instead of the truth, the economy stinks.
There was not one good piece in the jobs report, not one. Sure, an unemployment rate of 9% was the headline given to us, but doesn’t this strike you as being odd since the BLS just added in some 300K under reported job losses from last year? On top of that we had, unadjusted, horrible initial claims reports for January and even the adjusted reports stunk. Even though the economy did add jobs governments are laying people off which is a problem as this will likely continue on into the future. Overall, there is still some 5 people for every open job right now, think about that and then think about how long it will take for unemployment to actually come down, especially with new workers coming into the work force through population growth.
We are not going anywhere in the near future and for proof of this look at Bernanke’s speech the other day when he basically guaranteed QE3. As an aside, I love how he said QE2 worked because asset prices, stocks, and bond yields were going up. Umm, wasn’t QE2 supposed to create negative real interest rates? And since when do we use the stock market as a barometer for economic growth? In fact, QE2 did work if you thought it would benefit stocks, but it has failed miserably for the other areas it was supposed to help, i.e. jobs, economic growth and negative real interest rates.
However, QE2 did have a successful side effect that only a few people have realized, it has overthrown a couple of governments and probably will topple a few more in short order. Remember how I said you can get inflation without money velocity? It is kind of happening and just imagine what will happen when banks actually lend again. Now, Ben says food prices are from emerging market demand which is true, but it is also because of bad harvests, which will continue, and the fact that commodities are valued in USD’s which have been sliding down in recent weeks.
This means food prices have risen for the poorest countries in the world to levels that are just unsustainable. When food prices rise in America we can weather the storm for a while, but in some countries food at lower prices consume 50%+ of the average families budget so they do not have the luxury of riding out the storm or cutting back they simply go without. They can only do this for a little while before something gives and we have witnessed what happens when that something gives way. I also believe we have only seen the beginning of the problem as no one has figured out that this year’s wheat harvest is likely to be very, very, bad and we will see much higher prices in a few months. The weather is whacky and I have a strong suspicion that the Midwest will not produce what we are used too this year. If that happens things could get very interesting and perhaps, just maybe, we will stop paying farmers to grow food in order to turn it into fuel, use sugar instead which we pay farmers to not grow… get the picture yet?
Things are getting interesting and I am trying to stick around to see how it all ends. In the meantime I believe that one must be long commodities, silver and softies for sure, and stocks until QE is over, which is likely to be never. I say that with a caveat as I believe if QE3 does happen stocks might get very choppy and at some point people will figure out that ZIRP + interest on excess reserves + QE = Really Bad News and is bad monetary policy. Then again, only a few have figured it out so far so maybe I am too optimistic.
The ISM is due tomorrow at 10:00 AM and this is a pretty important number because it may confirm whether or not we are seeing economic expansion or not. The estimates are for a print of 53, but many are expecting a number below that print. I am in the camp of a number below 53, perhaps closer to 50, but any number above 50 is considered economic expansion. However, if we get a print below 52 it will show a downward trend since the cash for clunkers program ended and proof that without government intervention the economy cannot stand on its own.
I urge everyone to read beyond the headline number when the report comes out, regardless of the number. The underlying data is important since it will give you a gauge of employment, orders, inventory and a bunch of other important information that will help you figure out what is going on in the real economy. My feeling is that if this number disappoints it will not be good for the markets and, in my opinion, even if the number is met it may not be good enough because of the lofty valuation of equity prices.
On Friday there were several people on the TV saying how healthy this correction is for the “new bull market” and they are right about the correction being healthy. However, I disagree on the whole new bull market theory simply because of a lack of participation from retail investors and the weak volume we have seen all the way up. Even if you look at GDP estimates moving forward you will see that 3Q09 is the best that most economists expect and from here until 4Q10 they expect GDP to decline into a negative number once again, even Goldman expects this to happen.
No one knows what will happen in the future, but what we do know is that the foundation for a meaningful recovery is not here yet. Credit is contracting, not expanding, unemployment has leveled off at severely negative levels and that is not good and is a leading indicator. The only thing that was positive in 3Q09 was earnings and all the growth was from overseas which proves the US is in poor shape at best. If things were getting better the Fed would raise rates to at least .25%, but they cannot because that will kill banks who are buying treasuries right now. If you are an economist I guess statistically things look OK, but the problem with economists is they are terrible at real world observations and see what they want to see.
In the real world, things are very bad and the recession is not abating in any way shape or form. In fact, from the folks I talk to most feel this is a depression, not a recession. This is confirmed by the recent consumer sentiment numbers that came out last week as well, again if things were so good why did the sentiment index fall so much? If you have a secure job things are great I am sure, but if you are a regular person or your firm depends on financing from CIT, well, too bad because you are too small to save, sorry. I guess you should have given more to the winning political party or unionize to win favor and get a seat at the table with the big boys. Oh, let us not forget that an astounding 40% of some $7T in US debt has to be rolled next year on top of the new debt we need to issue to keep the lights on. Regardless of that ISM number I am staying short.
There is no question that the cheap dollar has had its benefits for the US in the short-term. It has propelled earnings higher for most firms who deal internationally, narrowed the trade deficit and pushed stocks higher at the expense of our buying power. It has also pushed oil and commodity prices, mainly gold and other metals higher, as well as the dollar continues to touch new 52 week lows.
There is a point where the cheap dollar begins to lose its appeal and begins to concern traders and we have to wonder if we are there yet. After we breached the 76 level on the DXY I actually expected to see a rebound in the greenback simply because it is such a crowded trade and other countries have also printed vast amounts of their currencies as well. However, this seems to not be happening and we are at the point where the 75 handle is in jeopardy of being breached.
Frankly, at this rate we are heading right to the 2008 lows of the 71-72 levels and there is not much there to stop it from going lower. All I have to say is if you thought $147 barrel oil was bad, try $200 or more a barrel. Yes, it could get that bad and food prices could go up as well, even though we technically have deflation energy prices would and could create inflation. This would be catastrophic considering we have massive wage deflation and a huge unemployment problem right now. I am inclined to believe that the treasury or the Fed would intervene if we breached those levels, but my faith is not strong and given the trading programs and deep pockets of the banks, ironically, because of the Fed it could become a crisis.
The odds are against this happening, but it does exist. If this does happen it would also not be good for stocks as there is a difference between cheap money and worthless money. It is not like I am the first to warn of such a problem, Jim Rodgers warned of this type of currency crisis in the recent past and thought it could be either the USD or the Sterling, since we both started down the same destructive paths. I will say that I believe the next 2 weeks will be critical for the greenback and everyone should keep an eye on it for an indication of its direction. A steep move in either direction would mean a selloff in equities.
This is not just my opinion, but that of Deutsche Bank Chief Economist Norbert Walter. He brings his concerns to an interview to CNBC.com and he has very strong, reasonable concerns for his comments. I am on the same page as he is and have brought my concerns over the economy and the dollar to my readers for a long time now. This, in my opinion, merely ads credibility to my opinion and throws aside the thought of those green shoots we hear so much about.
If things were fine then we would have seen some real action from the Fed today, certainly if things were as fine as CNBC and other media outlets claims it is at least. Regardless Mr. Walter went on to say; “I believe that the rescue packages brought on have been so costly for so many governments that the exit from this fiscal policy will be very painful, very painful indeed,” he said. “Some of us are already talking about a W-shaped recovery. I’d probably talk about a triple-U-shaped recovery because there are so many stumbling blocks here to get out of this.”
This sounds pretty familiar to me as it is the same concerns I have echoed for some time now. However, I am not so bleak in my outlook and expect a W recovery and pray that we do not have a triple U pattern, which is possible, but, hopefully, unlikely. He went on to say that many companies thought the recession was going to be shallow and did not layoff people even as sales deteriorated, but that will change in the near future, according to Mr. Walter.
He also has concerns over Australia’s potential interest rate increase in September, which is possible, and says the “markets will certainly shiver” if that happens. He, as I, also has concerns over the dollar as the current administration wrestles with health care and has put an exit strategy on the backburner of the Fed’s monetary stimulus. The Fed’s actions will only increase our troubles as cheap money got us here in the first place, but now we have so much more to worry about than cheap money like the monetization of our debt and the printing of more dollars.
Mr. Walter went on to say; “there are big concerns of about the direction of the U.S. dollar.” Followed by; “I’m deeply worried about the worries of those investors who have invested a lot, really a lot into the dollar” like the Chinese, Japanese, Arabs and Russians, he said. All of those countries, with the exception of Japan, have voiced some concerns over the safety of the dollar. Their concerns are with merit, I might add, as we are issuing more debt and have monetized a lot of our debt and I am sure that will continue after October.
He concluded with these comments; “If they have second thoughts about the quality of this currency then the dollar is bound to weaken” which means higher long-term interest rates for a country where government debt is approaching 100 percent of gross domestic product, he said.
If that happens, “2010 could be a worrisome year for all of us,” he said.
These comments are echoing my concerns, but they are even darker than I thought is possible. This is why I have always allocated more of my money to non US securities, usually keeping only 20-25% in the US and the rest invested internationally, mostly Asia. I have also taken great pain to find other alternatives such as precious metals, GLD and SLV are OK, but physical metals never hurt, and sovereign government debt, like the PCY which I have talked about a lot.
Regardless, these are not just my opinion and we should look at what Mr. Walter is saying with an open mind. While it is unlikely that we will have a doomsday scenario, like a currency crisis, but it certainly does not mean that things will not get very bad. This is why I believe in hedging and others should as well, but I digress.
Ever wonder why he talks about the very few of his picks that actually go up and not the countless that plummet? I know he has to disclose his positions, finally, but disclosure also makes people buy the stocks he buys, so its still front running in my opinion.
Regardless, he has been so wrong so often that it is hard to keep track. He says the worst is over and JP Morgan says things are getting better. That is partially true, JP Morgan said things are stabilizing which in Cramer world means things are getting better.
I do not doubt that banks have stabilized to some degree, after all the government said no major bank will fail, we guarantee it. However, that does not mean that unemployment will not increase and there are not problems still ahead. Foreclosures are still happening and as consumers stop buying firms will fail which will lead to commercial real estate problems. Not to mention that banks are not lending to people which does mean less delinquencies to come.
Here is the really funny part. In 3Q09 when we do comparable earnings to 3Q08 we will see staggering earnings which will solidify the “things are back to normal” group. Based on a 35% discount to S&P 500 earnings for 2009 I place a fair value on stocks at this level. But if we take the earnings per share versus a 12 P/E ration, which is what a few analysts are suggesting, that puts the S&P much lower than March lows.
I may be wrong, I admit it, but I know that Cramer is not right and the proof will be next week when we have a sell off and he is back to the “we must be careful” boat. Frankly, this guy is an ego maniac and has given shitty advice to say the least. Look at SNDK, SanDisk, when he said the companies board should be fired last fall when they declined a bid from another firm. Now he says the stock is moving higher and BUY, BUY, BUY. I realize the market is fluid and I know how to trade, but this guy is dangerous to investors, period.
Here is his rant about how he is always right and people like me suck.
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