Gene Inger's Daily Briefing . . . for Monday June 29, 2009:
Good weekend!
Seasonal meandering aside . . . (as the relevance of an early-mid July rebound is a secondary consideration), the bulk of surveys suggest people either believe recovery has started, or is around the corner. This despite consumer frugality; limited stimulus in practical terms; Commercial Property price declines accelerating; and no genuine visibility to a bottoming for housing, much less a resumption of available credit as yet.
Much is made about the likely year-over-year GDP gains; how could it be otherwise? After all there’s a difference between being ‘in’ the forecast abyss, and clawing out by at least the fingernails. But a toehold on bare stability isn’t the same as real growth.
Also, states generally continue increasing taxes with the objective of covering all their costs, rather than trimming expenditures to stay within actual revenue brought in. At the same time, ‘we are’ absolutely committed to the concept of emerging from what is an ‘epic debacle’ that we projected (virtually alone in terms of a bull-to-bear transition back in the Spring of 2007). However, we just don’t believe we’re at a point of safety.
As a result, even in real estate (which I’ve warned about for four years now, believing residential property would top-out about a year or more before the stock market; with commercial property folding only later when consumer spending evaporated), people are hanging on (have they been propagandized?); holding off buying anything but the essentials (that’s the new frugality that makes sense), even taking vacations closer to home, plus restructuring their debt where they can. Government can’t stop a frugality trend, when the American people are hell-bent on reestablishing their own liquidity as well as safety-nets for the future. It’s incredible they even want to rekindle spending. In this regard there’s a conundrum of leaders telling the people to ‘not live above their means’, while concurrently trying to stimulate spending, without credit or serious jobs.
Nevertheless the official and unofficial policy (portion reserved for members). There’s a general, albeit nervous, sense that we've now gotten through the hardest times we will face, and that prosperity, if not just around the corner, is at least not too far off. It is fed also by the seasonal uplift that we’ve been talking about (reserved for members of ingerletter.com). Just fodder for glass-half full ‘happy days are here again’ crowds?
But what if that isn't true?
The other night we again highlighted parallels between the Great Depression of the 1930s and this current Great Recession+. Others compared the fall in US Industrial Production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. They thus conclude that things are resolving. Well, absolutely the shock or systemic aspect is behind; but if you look at some other historical patterns, or the real important story given scant coverage this week (Japan sinking into near-Deflation of an historical proportion), you might arrive at a conclusion other than the more typical ‘severe recession’, or ‘great recession’, and something closer to our term ‘Controlled Depression’, which is how we’ve described the evolution of our work, which believes that while we will get out of this mess in-time; much current optimism is misleading.
One economist refers to the current situation, with characteristic black humor, as only “half a Great Depression.” Recently we showed the well-circulated ‘Four Bad Bears’ graph comparing the Dow in 1929-30 and S&P 500 in 2008-9. It shows the US stock market since late 2007 falling just about as fast as in 1929-30; with the last rebound a bit more extensive (which we thought it might be particularly in financials and oils too; because some things are different this time; as some other things are possibly worse, like the insanity of trying to spend our way out of deficits by magnifying those deficits) but not negating (as fully described in the Daily Briefing text this weekend; not here).
Geopolitically you know what’s going on in the world. One note that is both positive in a sense (renewed cooperation for the first time that’s visible in Obama’s reign); and is ominous (because of some speculation about when things could get fairly nasty if the Iranian fascist regime survives) in another sense; is that we hear the United States and Israel are going to have major defensive anti-missile ‘exercises’ led by the USAF and supported by the USN late this year. Maybe someone is concern about hostilities if ‘Imadingbat’ survives. Impossible to say, but even the Egyptians and Saudis quietly have been talking (if not working) with the Israelis on regional defense; that’s a first.
Daily action . . . continues to believe there’s increasing awareness that events have taken an uglier economic turn outside the US, with even larger falls in manufacturing production, exports and equity prices. This is generally ignored or minimized in media reports; but not talking about it doesn’t mean it isn’t happening in Japan or in the UK.
Because this effort at a rebound (though minimal) was certainly allowed for after the hit earlier in the week (again seasonality); there is (reserved) beyond what I discuss in our accompanying ‘technical corner’ video overview of index chart pictures. A brief summary of earlier points made this week, and then the video outlook for next week.
Faith in economists . . . has become more sketchy than usual; though never was it a belief with compassion around these parts. A dismal science to be sure; but there was always a conviction that the Federal Reserve Board itself was above the frey. At this point I’d say that persistent truism (not to say they don’t err, in this case by delay, as we noted in 2007, because we knew they knew, but didn’t take it seriously enough in our view, and we said so calling for them to ‘get in-front of the curve’ back then) for sure exists; with the faith essentially ‘stirred but not shaken’ further at least for now. I tried to make the point that the real ‘cover-up’ (if one insists on using that term) was the ‘waivers’ not disclosing the ‘technical insolvency’ of the major banks noted by us in May of 2007, which is not to dismiss the current fracas; but to emphasize an even larger aspect having to do with the cover-up of technical insolvencies of major banks.
Aside growing Deflation in Japan or parts of Europe; the big story that nobody seems to extrapolate on a National basis, is California. (More on that next week once again.)
Consumers are wounded; commercial property issues are barely surfaced; we are resetting to the ‘new paradigm’ which everyone calls the ‘new normal’, and that has a multiple valuation quotient to it as well. For that reason we cannot remove risk from the plate at this time, and believe actually that irrespective of the next couple weeks, it remains an issue. I’m still suspicious of the North Koreans, but heard that Obama made some side deal with China (geopolitical speculation reserved for members).
Raising the issue of Bernanke’s integrity however, is ridiculous. He did what he could, and the real onus for problems predates to his predecessor. Had he been forthright in 2007 when we warned members to ‘get out of the market’; even worse panic would in all likelihood have occurred. All the Fed’s men of course knew about the ‘technical insolvency’ of the banks in 2007; that was our point in calling for the ‘epic debacle’ beyond merely a ‘credit crunch’ and ‘liquidity crisis’ as I had already forecast earlier in 2007; as part of my advocating selling into strength. I think it’s ironic that they focus on B of A / Merrill and hush-up the truly big oversight.
Certainly there are sectors that will be themes in the future. One may be (reserved); of course another will be (reserved). But as this is deflation, not inflation; bottoming action in the former isn’t here yet (aside the previous and completed rebounds we called for), and for the latter technical work would say a bit lower; but there again; that will not be enough to position you for a potential disruption (sorry; must reserve).
The inconvenient truth for all these guys is that this is what we said for over two years (and even the President has grudgingly agreed; though he expects to be given credit for pulling us out of it; albeit it at what level is never quite suggested); that the ‘epic debacle’ would last longer and be deeper than anyone was anticipating. Super bears are irrelevant too; because they have been typically negative for years or decades as opposed to ourselves (and a few others I suppose) who embraced this decline well in advance of the ‘crash and panic of 2007 and 2008’, but not so far as to have missed the preceding bull market, which we termed all along as a ‘cyclical reflation’ effort. At the same time we are probably alone that I know of having called (at the time) 2000 to be the ‘secular top’, with 2002 merely a cyclical low due to the reflation’s nature.
This is important because the pundits generally think investors should embrace what has happened and consider it a one-time event. Well; fine. However, the one-time is not over; most investors ascribing to those pundits views have lost major chunks of their investment capital (if not worse their homes, which we warned of in 2005-2006 was an accident to occur about a year or so before stocks crumbled in their wake); and what the analysts call ‘sale prices’ for stocks is absurdly Pollyannaish. Threats to the recovery are not miniscule as the peddlers argue; they are severe. That should of course be especially notable considering the amount of borrowings and obligations in our names that has been taken by Government. The Commercial Property debacle is evolving; stocks are only cheap compared to valuation in ‘not-to-be-seen-again’ eras; but of course they leave out that little detail. They also skip the competitive threat of higher interest rates (as become available) against stocks. Does that say stocks will not be a buy? Of course not; just selectively and during purges in the fullness of time.
The point of this is that we have never had a comparative period; never the debt and I think never the continuing and compounding risks that are too easily dismissed by a crowd more interested in generating activity than looking-out for ‘capital preservation’.
Summary:
What am I driving at in this comment (besides the point that we’re not done working off the recent excesses, even short-term): the 1930’s Great Depression was a global phenomenon. Some say it originated in the US (guess they missed Germany and the Japanese buildup, where things were already in transition); however it was clearly transmitted internationally by trade flows, capital flows and commodity prices; in a sense also something seen these days. That said, different countries were affected differently; which is today’s case. The US is not representative of their experiences now necessarily (such as India where most activity is domestic) and wasn’t then.
Our ‘Controlled Depression’ is every bit as global as that of the 1930’s. Earlier hopes for decoupling in Asia and Europe were disputed by us in advance, and proven right, as there really was no ‘great decoupling’; nor was there a big ‘Gold advance’ (argued to trade and we did, Gold and the Dollar, rather than assume the former rallied while the latter declined; in fact the opposite occurred much of last year just as I projected.
Increasingly there is evidence that events have taken an ‘even uglier’ turn outside the US, with larger unreported (by our media) falls in manufacturing production, exports and equity prices. There is no ‘perpetual comprehensive coordinated’ policy and just the opposite in some cases (balance reserved for ingerletter.com members only).
Industrial production has declined in the last nine months proportionally as severe as in the nine months following the 1929 peak; even if it’s not reported that way. What it means to me is that with all the presumed modernity applied to ‘reform’, much is the same. And that’s troubling. So what happens when/if the states and pensions start to falter; or the muni’s; or the money flowing into Treasuries; or any combination of this. I would say the picture is far more disturbing than what you’re reading in the press as to a prospect of recovery in the near-term (balance redacted in fairness to members).
Bottom-line (and the future will answer whether historians concur): this isn’t a simple recession; this isn’t even a ‘great recession; more likely it’s a ‘controlled Depression’. I wrote well over a year ago and occasionally reiterate, such would see efforts that purport to ‘save’ Americans, while in-reality prolonging the misery unintentionally. If it is that; imagine what happens to investors when they discover (section reserved as is too revealing of strategy). In a bear market the bears are right. Often of course not at turning points because people get emotionally involved; but in the midst of a trend; the projected S&P rally that ended with the fake-out over 950 was a ‘trap’ in just the way we outlined. That doesn’t mean we won’t get seasonal reprieve (more outlined).
At the same time we have tremendous ‘deleveraging’ still to contend with as outlined in these reports all year; despite our forecast for a February purge leading to a Spring surge and then risk returning; ideally by (timing aspects reserved for our members).
California may be the ‘Canary in the coal mine’ to focus delusionary pundits or others on what we have been talking about; and help sober DC’s profligacy in the process.
Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets will occur (some fairly wild), of limited duration. In event other developments unfold that could truly change prospects; we’ll evaluate.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by banks or other areas; following breakdown action, as we've outlined. Remember; back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first of the asset bubbles to deflate. We outlined structured investment vehicle failures; banking issues, confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'.
As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop retaining a macro (adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations. Technical analysis via video follows.
[Reserved for Subscribers]
Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. (Individual stock comments generally are provided in the video overviews only; once in awhile I'll have some thoughts here, where something's particularly emphasized or of technical nature necessitating some discussion. Increasingly most all is via video.)
In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues, as domestic issues absorb us more while as we must focus on Middle East and World War III avoidance.
Our 2007 view: we were heading into a recession or potentially worse. Preventing it descending into something akin to post-railroad debacles way back in the 1880's; is precisely what the Feds combatted back in 2008. Actions affirm they remain engaged to stabilize monetary fluidity or functionality; as we argued for months; and has now gone into 'overdrive' so to speak (refer to prior comments for expanded discussions).
Twenty-eight months ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now this market struggles with a mature rebound as the economy tries to restructure.
Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; (as delved into).
Our memories and feelings of the era passed, are noted in memoriam for a triple loss this week of Ed McMahon, then Farrah Fawcett, and Thursday of Michael Jackson.
Enjoy the weekend!
Gene
Gene Inger,
Publisher
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