Re-visiting last week’s 2010 Overview
Last week our executive summary gave the following probabilities to outline our view of the calendar year ahead –
"Macro Market Outlook and Assigned Probabilities (as at 13 January 2010)
- 2% probability…..Economic recovery, new bull market takes out previous highs.
- 70% probability….Economic recovery with several double-digit retracements, one possibly close to 20%.
- 50% probability…..Recovery, but muted subdued advance.
- 40% probability…..Double dip recession, more stimulus and bail-outs required.
- 30% probability…..Secular bear-market continues with index levels going below 800 and 4000: Current retracement began at circa 1550 for S&P 500 with 1100 as the top of the downtrend channel, corresponding with XAO equivalents of 6800 and 4500.
- 6% probability….’The great recession’ morphs into ‘the great depression’. This is the Robert Prechter et al view."
‘Probability’: A measure of the relative likelihood of occurrence of each of the above observations. The 6 values above do not have to add to 100. For example in 2 above there is a 30% chance that something else will happen; in 1 above a 98% chance.
COMMENT, CONJECTURE, and a RE-STATEMENT
Amongst our Ecinya confidants (people whom we talk to on a regular basis) there was general agreement and acceptance of our stated positions for the year ahead with just marginal differences in emphasis, although a few commented that the probabilities should add up to 100. To satisfy these views and to also, hopefully, add an additional layer of clarity we now provide the following re-statement of the assigned probabilities, but this in no way over-rules the precision of the six above:
- Recovery with retracements, recovery comprising muted, subdued advance …….. 60% probability
- Double dip recession, more and/or new stimulus, secular bear overtakes…………..33% probability
- All other possibilities, new bull, depression, something we are unaware of……………7% probability.
THE VIEWS OF OTHERS OF SOME REPUTE AND TRACK RECORD
The global economy is recovering from the international financial crisis faster than expected, but IMF Managing Director Dominique Strauss-Kahn warned that growth was still largely driven by government stimulus measures and countries risked a return to recession if anti-crisis measures are withdrawn too soon.
International Monetary Fund 18/1/2010
The National Federation of Independent Businesses recently reported that faced with weakening demand and falling expectations small businesses are still cutting back on inventories and sacking labour. This is appalling news given that small and medium sized businesses drive the US job market. If they cut back or even refuse to hire there is no way big business can pick up the slack. Never mind, though, President Obama and his brilliant economic advisors have come up with a million dollar winner: "green jobs". Each job will cost $135,000 in stimulus money. Pathetic.
Gerard Jackson, BrookesNews.com 17/1/2010
The world is falling into what ultimately will be an inflationary depression. This will cause the death or near death of the world’s principle reserve currencies: US Dollar, UK Pounds, Euros, Swiss Francs and Yen, and it is unfolding. Insolvency, both moral and fiscal is unfolding: debt spirals on many levels of the developed world will be resolved ultimately with the printing press, this year, next year and until the rest of the world abandons the current FIAT paper and the ultimate Crack-Up Booms unfold. When the broad masses who have bought the hope realize it is a lie, and their hope turns to fear, this QE-induced (Quantitative Easing) high will turn into a blind panic as the G7’s safety nets FAIL; many markets will crash and others will soar and the most helpless will turn into angry mobs as they have no skills and their economies no longer produce blue collar jobs that create the middle classes – those jobs have been driven offshore by public serpents, crony capitalists, trade unions and banksters. G7 Central banks and governments are fully committed to restoring the expansion!!! Debt is exploding higher in government as income and revenue are in FREEFALL. It’s no coincidence that the fed and UK central bank asset purchases are larger than the budget deficits. The Fed is purchasing toxic assets, MBS and agency debt and central banks are recycling the money back into another TOXIC asset: US treasuries.
Ty Andros, TraderView.com 14/1/2010
So this is the backdrop as we look into the future. Unemployment is rising and is likely to remain stubbornly high (over 10%) for some time, except for the few months this coming summer when the Labor Department will hire hundreds of thousands of temporary census workers. The savings rate is rising, and consumer spending is at the very least challenged. The stimulus starts to drop sharply in the latter half of the year. States, counties, and cities are short about $260 billion and will either have to cut services (and thus jobs) or increase taxes. Housing is likely to get weaker, as there are large numbers of defaults coming because of mortgage-rate resets this year and next. Valuations on stocks are in the high range, and do not portend well for long-term returns. Further, Congress is likely to allow the Bush tax cuts to expire and to add insult to injury with some form of large tax increase for health care. Between the local, state, and federal tax increases, we could see a massive increase in taxes of perhaps $500 billion in a $13-trillion economy, or about 4% of GDP. Think about that for a moment. It is likely we will begin 2011 with close to 10% unemployment, if not higher. Christina Romer’s work shows that tax cuts have a three-times benefit to GDP. Tax increases presumably have a similar negative effect. (Ms. Romer, by the way, is President Obama’s Chairwoman of the Council of Economic Advisors. This is not a partisan idea.) This is the great experiment to which we are going to be subjected. There are those who agree with Art Laffer and company that tax cuts are a positive for the economy (that would include your humble analyst).
Thus, I am faced with a great deal of uncertainty as I look into the future with my forecasts. I almost titled this letter "The Year of Waiting," because there are so many important developments we are waiting on. Will they actually raise taxes in such a soft economy, or will cooler heads prevail and the increases be postponed, or at least phased in over 4-5 years? What will the health-care bill look like? There are so many things that could significantly change any predictions. As I have written for years, the stock market drops an average of over 40% during a recession. If we go into a recession in 2011, it is highly unlikely that there will be an exception to the bear market rule. But this market seemingly wants to go higher. Smart people like my partner Steve Blumenthal argue with me that the technicals say we could go a lot higher in the short term. And he may very well be (and probably is) right.
This is a trader’s market. It is not time to buy and hold large indexes or high-beta stocks and expect to be made whole over the next ten years. Hope is not a strategy. But waiting for the "shoe to drop" is frustrating, I know. However, that is the situation we find ourselves in. The current environment is quite different than 1982, when the last bull market started. Rates were falling; they are now likely to rise over time. Taxes were going down. Valuations were at historical lows, not high and rising. Inflation was coming down. And on and on. The current environment is not one in which bull markets are born. The futures market is pricing in rate hikes from the Fed beginning this fall. I highly doubt a politicized Fed will hike rates with unemployment over 10%, ahead of a November election. We are going to have a very easy monetary policy for longer than most observers think.
The Fed has painted itself into a very tough corner. Raising rates in a high-unemployment environment is risky. Bernanke knows what happened in 1937 and does not want a repeat. But by keeping rates too low for too long, they risk an asset bubble or two. And the federal fiscal deficit of over $1.5 trillion is not making their situation any easier. The Fed has announced it is ending many of their various and sundry programs in the first quarter. They have essentially been the mortgage market. What will happen to rates? I think that is one of the reasons why Geithner has essentially lifted any limit on explicit guarantees for Fannie and Freddie. It will be seen as higher-paying government debt. It will also cost you, Mr. and Ms. Taxpayer, hundreds of billions in increased deficits, as they are telling those entities to eat the losses from large numbers of loan modifications. This is outrageous on so many levels. Congress should at least have to approve this.
So let me end by saying that, as we face the next crisis – and we will (there is always another crisis) – we will find we have not fixed the causes of the last one. We still have banks too big to fail, we have not put the credit default swaps on an exchange, we have not reinstated Glass-Steagall, Barney Frank’s bill (which was not the one that came out of committee) now makes it exceedingly more difficult to short stocks, we keep in power the same people who missed the problems the last time, and the list of bad policies bought (typo intended) to you by bank lobbyists grows ever longer. If the current bill looks like it was written by the bank lobby, that’s because it was. But it means we will have to face the same problems all over again.
John Mauldin Frontlinethoughts 9/1/2010
ECINYA COMMENTS ON THE ABOVE
At the risk of repeating ourselves ad nauseum we cannot subscribe to the ‘end of the world as we know it thesis’ for three main reasons. Firstly, we all live in the nominal GDP world and we do not ask the check-out chick to calculate our grocery purchases in real dollars i.e. adjusted for inflation and using a base year of X. The nominal world is alive and well and we get out of bed in the morning, access our transport and go to work; we live in a house, have a holiday etc etc. All of our income and disbursements are in nominal dollars.
Secondly, we live in a world of fiat currencies. We do not buy our gasoline or groceries in gold. Fiat money is defined in our Economics Dictionary as ‘inconvertible paper money in support of which there is no reserve or specie. Governments issuing such money usually gives it the quality of legal tender". This is Bernanke Bullion, and before him Greenspan Guineas. Give people enough and because they have purchasing power they think they are wealthy, and they spend. Provided there is excess capacity, inflation is unlikely to be a problem.
Thirdly, despite its importance, the dominance of The United States of America is waning and China, India, Brazil, and Russia is on the rise. This means there are other economies that can meet all or part of the US growth shortfall.
Note the space given to John Mauldin who travels and preaches widely on investment matters. We have come to regard him as a ‘voice of reason’ and a compiler of wide and diverse opinions and who is capable of summarising them into actionable conclusions. We look forward to the day when he returns to his natural state of being ‘bullish’. Bullish means you believe markets are going up, and ‘bearish’ means you think markets are going down. Being a ‘bull’, markets go up forever, and being a ‘bear’ markets go down forever. The nuance, the distinction, is critically important.
PM sets high bar for productivity gains
..shouts the front-page headline in The Australian Financial Review. Productivity is a very difficult measure of progress, but nonetheless, useful. But productivity is not assisted by a relatively poor tax system, a relatively inflexible industrial relations system, high nominal interest rates and poor fiscal policy and implementation. Mr Rudd has a habit of talking in parables stretching beyond measure. In this case he is talking about "the next four decades". Given that a decade is 10 years, how important today is the year 2050? As Peter Walsh (former Labor Finance Minister) recently said: "Mr Rudd is an economic illiterate".
A question we often ask ourselves is "Why does Labor appear to be economically incompetent?" The reason is that they try to do too much and they are ‘bleeding hearts’, romantics who live in the past and are prone to any contemporary sob story that comes along. In the final analysis they satisfy no-one. The exception to this was the Hawke-Keating-Walsh-Bernie Fraser- Lindsay Fox- Bill Kelty nexus that managed to provide a blend of idealism and pragmatism that gave measurable progress.