(Gene's exclusive February 2007 forecast of an 'epic deleveraging debacle' initiating as the 'panic of 2007', and continuing into the 'crash of 2008', evolves towards what www.ingerletter.com sees as incredibly low equity prices; not exactly as most target.)
Gene Inger's Daily Briefing . . . for Monday October 27, 2008:
Good weekend;
Failure of 'risk management' . . . is really what this bear market has been about. On corporate; mortgage; homeowner; hedge funds; mutual funds; municipal bond funds; pension funds; individual consumers; state and local governments, and the Federlalis (a kind name for the Fed and big-spending politicians) … failure to maturely 'manage risk', is what led to the spending mania. That's not merely similar to all that we clearly persistently (sometimes at personal cost to enjoyment of my semi-senior years) tried to warn about in our 'Paul Revere' phase of early 2007, but was patently obvious to a (normally optimistic) analyst who has seen extremes before. A 'credit spree' leverage; a structured derivatives insanity; the unprincipled actions of rating agencies; the calm demeanor by which Paul Volker's 'best clerk' (a term he once used to describe Alan Greenspan) properly behaved a generation ago; but approached the bubble naively, given how much could have been done even with the post-9/11 low interest rates (an allusion to reigning-in profligate lending, irrespective of varying costs to rent money); to everything we have warned about since turning bull-to-bear in February of 2007.
Extensive 'triple video' technical analysis this weekend
Sure; there are many other aspects; not the least of which is the failure of the market to bottom on Friday. It's not as simple as failing to comply with a traditional washout it seems to me; but rather the failure of the market to send a message proclaiming this is over (portion reserved for ingerletter.com members). The world is coming apart as we forecast (no 'decoupling'; a myth we argued all along); and response to re-pricing behind the curve. It's vividly demonstrated by looking at this weekend's chart videos.
My ideas hold that the speed of communication is so swift; and the unanimity of belief in 'support' of historical levels is so great (if a bit ludicrous); that I suspect the market does something not seen before (more on that in all my video comments). Up to now, against pressures you don't even know about (short of black vans), as we discussed leverage and the way it was misused, or those waivers the Fed gave big banks in the Spring of 2007 (while pretending they knew nothing about 'net reserve violations' and technical insolvency; which was our point that Spring); we've felt they knew what was afoot (Big Foot). That's why starting early that year, I suggested this would absolutely be the most crucial call of my 39 years of projecting market patterns since pioneering the whole idea hourly on financial TV in Los Angeles back in 1969. Of course I wish it would be the most optimistic forecast of my life; as would be more fun. Unfortunately this projection was necessary to help investors protect the bulk of their funds, even if they weren't inclined to short since S&P 1600, along with a few of us who were willing to essentially not only sell at 1600, but to short every rally since then, so far until now.
Has something changed? It's trending, and I'll get into that further only via the video remarks for ingerletter.com members. Suffice to say this remains what I identified two years ago: a (then) upcoming 'secular deleveraging' of systemic financial insolvency issues, that left 'housing as a microcosm of the overall debt morass'. It's all still true. I do not disagree that after an ultimate low and basing period we get 'confidence', trust and revival. That's why last week's comment addressed: 'The Battle for Investment Revival' © Inger & Co. That battle roils; it's not over.
The 'National Socialization' (like I said horrible phrase) does not merit the same sort of 'global premiums' on multiples of S&P earnings as before. For now few consider in any reasonably perspective what a buck of earnings is worth in this new environment (are we again 'ahead of the curve' for valuations?). Surely worth less than when and if we again have 'greed' and entrepreneurial spirits unleashed to grow America. I do not just join a pack who say hooray or somehow sees stemming floodgates (a use of heavy debt to defend against big debt) as anything other than adding water to a lake; risking overflow, before you've repaired the dam (reform). I do not believe that newly consolidated bankers or insurance companies (the next Federalista targets) will have that hungry go-get-'em attitude that grew our generation's asset base; or of today's younger financiers. I am concerned the investment community doesn't see, or won't acknowledge, this aspect. Yes, we'll have more doctors and engineers and teachers, but we also do need entrepreneurs and incentives if we're going to revitalize the jobs prospects here in the U.S. Fine, so we get a gradual 10-year climb with deregulation allowing what I hinted at last year for the ensuing decade. However, from what level does that start, or with what vigor? We explored these issues all week; more in video.
Speaking of that; let's highlight key points (abbreviated now) of these assessments. I will then have a brief comment about the Daily Action finish; and we'll go to the video.
Forced selling by funds . . . was not nearly as much a factor Thursday while slightly desperate efforts to 'hold the line' from a symmetrical pattern threatening new lows to a great degree, dominated the final hour's action. During (that) day I advocated really avoiding some of the more 'whacko' bearish arguments increasingly out there. After reiterating over the past year my view that the Fed was addressing liquidity issues as the problem rather than seeing the core of the financial institutional challenge largely a 'solvency' issue, none other than Alan Greenspan appeared at Congress saying at the heart of the matter indeed it was solvency not liquidity. Well thanks Alan; glad you now concur with what we've said since tipping in insolvency story in 2007's Spring.
In my view (seriously) it was both; with the Fed acting as if it was the Depression; by invoking measures used to fight illiquidity rather than recognition that mostly all major banks that participated with the 'bailout' (Paulson calls them the 'good banks') are or were technically 'insolvent' due to leveraged SIV (structured) holdings. I have argued, and now the former Chairman concurs, they first had to buttress 'systemic liquidity' as needed , but that the major overall problem was solvency. That is also why I used the analogy of sitting on the beach in Thailand, watching curiously as the tide rolls-out, not realizing that much vanished liquidity will return, probably in a fast manner (to wit: tsunami) at some point for (further comments of forward action for ingerletter.com).
I do want to note that after-the-close Thursday we finally learned that our warning last week did hit a valid area too: that being the AIG draw-downs for CDS (Credit Default Swaps) in fact notable for not being discussed anywhere we heard. Now we hear that was $90 billion in deficiencies that they couldn't cover; and that means (as suspected last week) that the Gov'mint has to cut a check for 90 enormous for that settlement. It should infuriate people; but is a reminder that these issues are beyond governmental or authorized scopes. The other night Sec'y. Paulson mentioned on Charlie Rose that he couldn't save Lehman because they had no 'authority' at the time; well guess what now. The limitations of this whole situation are far graver than generally recognized. I find it interesting that with everyone looking for upside; nobody mentions the CDS's. (I also find it interesting that after grilling Candidate X and trying to humiliate Palin, now in Florida the Candidate X campaign blacklists an Orlando station for asking actual questions about wealth distribution and tax policy; the kind that should have prevailed earlier.)
Market trouble with this is (even in 1929) you do get rallies; and just because you do will not change the outcome, in terms of a dragged-out hard conflagration. Significant stress continues to exist and that's not just hedge liquidation (many will disappear as we've observed before), or mutual fund avoidance pre-fiscal-yearend completions as well as ex-dividend dates (many do have distributions because they made early year gains from positions liquidated after being held for many years domestic or emerged, now submerged as forecast, markets). Systemic failures (and contagions) were noted here last week as likely in Hungary and Argentina; and that occurred (Chavez is said to have funded the new Argentine President, and she is suddenly in disrepute there).
You also had a pending funding mess in Pakistan (we underlined that Country for the past couple months, but didn't get into details as everyone knew that was coming as it is a country dependent on cheap exports, for which there isn't much demand), and now in places as diverse as Kazakhstan. Even Borat would comprehend contagion. I am not going to name every country potentially affected, but (more for our members).
The global slowdown is just kicking-in aside housing related areas (at least in regards to those who spent 2007-2008 kidding themselves), and disagreed that markets fully have discounted what may befall companies in terms of earnings, or consumers with respect to pressures in their daily lives. We actually hope those technicians so cocky and comfy about it all being 'discounted' are right; but sadly, suspect they have valid ideas about how markets work based on their (youthful) histories. But this is our 'new era', so while prices are perceived as ludicrous and will rebound on occasion, there is really no bullish 'trend' argument to be made yet. If that changes we'll note it. For now it seems to be flailing to hold the Dow just off new lows for the bear market; not more.
Do I expect more forced selling and liquidations, to lower lows? Until certain criteria, or other factors, materialize to suggest otherwise, yes. While already low historically I do. Let's not put a number on it (already heard just because I mentioned lower S&P the other night); because I have no ironclad target, and usually don't (the market will tell me, or hopefully close enough). What I mentioned was just in-relation to what the market might be worth in a bear trend, if you contemplate drastically low S&P overall earnings next year vs the consensus. As to those who say 'none dare call it treason'; yes I'd called global extremists that; as seditious against 'we the people' of the United States; perpetrated by those acting as if unregistered, or foreign agents, manipulating our finances and markets (and manufacturing) to undermine us. Sure seemed like it.
Frankly (though I would not want to be an alarmist) the downtrodden nature of things just now, and the proximity to Elections, makes one a little nervous about other risks too, recalling the condition of the markets (and some odd London trading) during the summer of 2001. Is my caution similar to that expressed in August of that tragic year, when we shared security concern at a time when officials said there was no reason to be worried? Well, there actually was an airline alert at the time; so Washington didn't level with us about there being 'no warning' as they later said. We are uncomfortable expanding on this realm tonight, so while nothing specific yet; feel I should express it.
(O.K. there is something slightly more specific; ie: the radioactive Iranian ship; but we discussed that last night so you can refer to the archives to read the details on that.)
Debt bombs are not finished dropping . . . we hasten to note. We won't emphasize the $600 trillion or so in unwound derivatives; we won't emphasize the anti-American policies, forced-upon our citizens over the last two decades or so, by overly-globalist-centric politicians (more so than anybody on Wall Street) in ways compelling really all industries interested in their survival to outsource service or manufacturing to foreign sources (remember my guest speech to the American Footwear Association, first at the Boca Raton Hotel, and the next at the Canyon Spa in Palm Springs); and realize that one thing I argued about our own-forecast 2002-2006 cyclical bull rebound, was it was a huge 'reflation', desperately trying to maintain the old European-U.S. centric approach already mostly lost before even that cyclical upswing took place. Leaders, from the Fed down, now try to absolve themselves from responsibility; but alas we'd called them to task, considering falling on their swords now, an incredulous hari kari.
This 'global wealth distribution' is nothing new orchestrated by any current candidate; it's something both parties, in the name of free (but not fair nor with 'parity') trade had basically engineered. Fostered with a 'fiat' currency (that doesn't mean gold's good in terms of a hiding place except for brief times because it along with equities is liquid in ways that perpetuates it being sold, while the 'cash-raising panic' is ongoing, a point I have made for weeks). No wonder our 'leaders' always talk about deficits; rarely debt.
GDP is shrinking, not growing; household savings rates are nil; and it's a bit late for a series of well-meaning (wealthy) financial advisors to take the airwaves and talk to all our average citizens about debt consolidation and/or leasing vs. buying, or diversified investments (now that's ironic, as the so-called 'safe' big-caps where just the ones we thought most vulnerable to decline in the September/October forecast slide; no hiding places was the idea, with managers selling what they 'can' sell not necessarily desire to sell, in such an environment); plus all the talk about consumer revival or normalcy, is utter nonsense until you get some expectation of housing stabilization (and that for sure does not mean statistical factors suggesting more short-sales being closed); or heaven forbid anybody talk about the hedge guys not only liquidating, but the ones at all intending to stick around, getting loosing stocks off the books pre-fiscal yearends.
I am not (stay tuned) suggesting our problems simply end then; but even if we have a bit of visibility for an associated rebound thereafter (ah; hint), that doesn't mean it will come from anywhere near current levels (view the videos for more discussion of this). At this rate (reserved for ingerletter.com members only). That's why (few realize this, or implied reasons) my technical pattern call has actually been a 'bullish alternative'.
We're from Government; we're here to help (?)
Would that mean we're going into Depression? Who says we're not already, in parts of the Country. The credit obligations do not support the 'we're saved by Government' ideas; the incomes to expenses ratios don't either; and there is no prospect for faster resolutions of these issues. Then there is the 'corporate debt' aspect, which revealed awhile ago (think for instance 'why' GE had to pay 10% to raise money; if the 'bailout' was really helpful, no AAA-rated firm, and in GE's case they usually deserve that, will pay that kind of cost to rent money) that while firms were in good shape for a slowing; they generally were not positioned for the destruction of their global cabal, which had worked so well for them, if not for the citizens of the United States. (No this isn't at all anti-Republican; I said a year ago that Nixon and Reagan would rollover if they knew what criminality was performed in the name of deregulated global 'free' trade; or that neither would have countenanced stupid trading. And further that with Democrats in control of Congress for two years now; they could easily have intervened sooner to at least try to get things on some sort of parity basis; but they made no such moves. So in that sense Senator Candidate X is robustly right that we have to end trade lobbying; it is essential to bust-up the OPEC cartel by being energy independent quickly; and it is the worst case to have excessively cheap oil, which curtails drilling and alternatives; ensuring that oil goes to –reserved for members; more at a later time.)
Further . . . let's realize that the first inclination is to say, oh it's cheap again; let's all buy. (My opinion stated.) Clearly risk reduces as we go down; but this never was a normal decline (we've warned about that for going on 2 years; 'epic debacle' means 'epic', which by definition isn't typical or 'average'). So staying negative gets a good bit trickier as the market implodes; thus please be kind enough not to ask a bit of the impossible; especially when I anticipate sector rotational bottoms as they arrive over time. We did our best to keep as many investors who would listen safe throughout this carnage, and you know what; it doesn't matter if (reserved for ingerletter.com). More important now, is to realize that if as I suspect, we make new lower lows, you'll have to rally more than 10-20% just to get back to today's prices !
And besides, though the market's a discounting mechanism; does anyone consider it is discounting a much more moribund economy, and protracted consumer disaster at this point, versus everyone referring to 'discounting recovery'. What recovery? Why at this point? Why in six months? How do you unwind 20 years of consumer debt and at least 5 years of insane housing bubbles, in this compressed period of time? Maybe it is the market telling you that you don't; that the free market structure will be revised.
World Economic Prospects . . . are deteriorating further, we unfortunately noted in recent weeks. While 'systemic' salvation efforts mounted by various Fed, international or IMF, plus other organizations (like the G8), have reduced the prospects of banking catastrophes (which would induce the so-called middle-class collapse without a doubt had something not been done); they have not addressed maintenance of GDP output or similar markers that likely measure how deep the morass will get. Let's address it.
The U.S. economic structure going into our forecast 'epic debacle' call early in 2007, was already more precarious than what preceded the 'crash of 1929' (not to say that the outcome will be that deep); but that the debt structure we said then 'could' make it look like a 'walk in the park'. That's why our comparison to the post-railroad boom era or other events that dragged-on persistently; but emerged with new industrial rebirth.
Reckless consumer borrowing and spending above average 'means' persisted years beyond reasons, while colossal trade and budget deficits resulted in decimated U.S. core industrial bases; unmanageable mountains of debt owed foreign creditors, and a domestic policy that (by either Party) has unbelievable challenges now of reasserting U.S. primacy over its own affairs (due to the borrowing and obligations to foreigners), such that the kind of measures needed would hasten back to Smoot-Hawley and also the risks that entails, in terms of killing (analytical portion withheld for our members).
Instead of the support of a strong currency, citizens must contend with a modern Fed free to print insane monies as politicians dictate; with a danger of currency debasing, beyond anything we have seen (per our warning that inflation precedes deflation that precedes -certain action down the road). Rather than perceived benefits of falling consumer prices, consumers not pressed by basic costs into the nadir should (more).
At the same time, the public sector balances are compromised; as are very many key aspects like pensions, endowments, and everything on a National, state and/or local basis that you might expect, consistent with our 18-month 'great unwind deleveraging call'. Even with defrosting of the 'credit freeze', that will only be limited, won't restore consumer buying capabilities, which combined with a ratcheting down of everything is simply something that has to be accepted, before one can anticipate recovery tries.
I emphasize we have financial disequilibrium that has policy makers still thinking on a scale that is far too small for the gravity of the situation, as financial intermediaries for now are generally unable (or unwilling) to facilitate sufficient lending, and there is little doubt but that the targeted rescue sums are paltry relative to what has to be done not just in terms of money, but to refocus (after systemic stabilization) on the core issues, which stems from housing; recognizing that can't be abated by conventional thinking.
Summary: the depth of recession problems are yet to be faced; the world's not going to be the same in the future; and those buying blindly on rallies; probably didn't fully grasp that 'new reality' as the prospect. Not easy; but we tried to warn our very best.
There are bright sides to it (in terms of becoming more saving-oriented as a society; or focusing seriously on productive infrastructure and educational moves; as well as an overdue yearning to learn about our Nation by those who took things for granted); but those are long-run multiyear issues that should emerge from the chaos, provided we do not shift from right to left; somehow managing to gravitate towards the center.
Bottom-line: illiquidity was so gargantuan in the business world; and insolvency for much of the banking and institutional worlds; that for it not to triumph was delusional.
Lest anyone misunderstand; we need the 'velocity' of money to become energized a good bit (since toxic housing debt is a microcosm of the overall debt picture) and we still need to create 'velocity' in ways that 'empower we Americans' to revive a Nation.
Bottom line: macro signs as interpreted; including (updated recently) the following bullet points:
· Economic disequilibrium continues; especially for nations with fixed pegs; the crisis moves;
· It's alive; it's dynamic; and there are various derivatives fiascoes likely to yet-hit headlines;
· Eighteen month macro key forecast was correct: not short and shallow; but long and deep;
· (Balance of two dozen or so updated bullet points reserved for ingerletter.com members).
Further points: nearer-term issues to contend with beyond above; some with macro aspects:
· Derivatives issues linked to municipalities or pensions barely grasped (delinquencies galore);
· Hedge fund and mutual redemptions and even 'fund liquidations' not widely grasped nor over;
· Our year-long warning about Goldilocks globalism as extremist, has been robustly vindicated;
· (Additional bullet points for ingerletter.com members only; we invite you to join us each day).
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 what we projected long ago: 'a perfect storm'.
As the debt bubbles continue to deflate, there will be alternating moves to play from a trading perspective. In any event we retain a macro (forward-roll adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations.
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 also 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 combat here in 2008. Actions affirm they're very desperately engaged to stabilize fluidity of functionality; as we've argued for months; and has now gone into 'overdrive' so to speak (refer to prior comments for expanded discussions).
Issues continue including oil, terror; China; Pakistan; certainly all the Middle East, Europe; funny money NY economics. Noted for a year: international dependencies, as outcroppings of extremist globalism; neither pro-American nor conservative; even as true conservatives support fair trading; constrained spending; not squandering our US crown jewels. We must be 'Americans First'; or we can't consume from the world.
This has been consistently argued here for well over a year; clearly proved realistic.
Twenty months ago I commenced projecting an 'accident waiting to happen' ahead; saying that was affirmed historically after long-duration periods of free money (Gilded Age mentality) which doesn't create enduring liquidity; just gives that interim illusion. As 'games' and bottom-fishers essentially were 'out of bait' to attract investors, we'd viewed it as a scenario that can precede a washout and bottoming process initiation. Do not yet presume any particular price level as associated with Senior Index lows.
Since early 2007 we noted economic conditions more similar to post the Gilded Age ending in 1929, the panic of 1907 (hence our call for the start to be the 'panic of 2007' last year at the end of that Gilded Age, and it's NOT coming back; party over whether they like it or not, as they didn't or only thereafter 'conceded' there's needed rehab). It is not a structure entirely resolved by rate cuts, stimulus, 'miracles', arrogance of the few who think they can influence it. But it can be rescued by sound banking policies.
Not only is governance from the center appropriate; but essential to sweep a higher tide enhancing meaningful efforts to restore primacy to regain financial sovereignty. Meanwhile, the desperately needed leadership initiatives that deflect this being even a worse debacle than need be, are something demanded for months, are debated.
Enjoy the weekend,
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
~Gene Inger’s MarketCast™ (Intraday audio updates emphasizing S&P futures and market action)
