Financial topics

[JLak]

-=all kinds of great stuff=-

...and now with the Santelli video going around, a good deal of America is beginning to agree with you too. We're not scared of the unraveling. We're scared of MORE raveling. Sit back and watch what happens to the world as Atlas begins to shrug.

[Matt1989]

[Matt1989]

Why Stocks Still Aren't Cheap - Basic P/E Stuff

[mannfm11]

Matt, I saw that chart on another site. Kind of amazing how we caught the 1930 market from behind, which just might prove that government is pretty much helpless in this matter. If I had to devise a plan ahead of time, I am not sure I would have done much different than Paulson or Bernanke once it started. The most effective stuff done was likely the least popular, the TARP capital injections. This was not money put into the banks as people suppose, but capital put onto their balance sheet in return for a 5% dividend. This is beyond conventional reasoning because we are not taught how banks are actually arranged, but instead a childs vision or even the money and banking idea, which is farther off base than one might understand. The problem with bank capital is it isn't actually money, but the difference between what is owed to them plus what they have in assets and what they owe. What can be put in from the outside can only come out of what is owed to them, sans a government bailout. Thus, to replace $1 trillion in bank capital would necessitate the dropping of $1 trillion in money supply, because the money is credit on an accounting spread sheet and not cash, thus you would debit deposits and credit capital and leave that much less money on the sheet to pay the debts owed the bank. We have reached the region of no return I am afraid and a depression is about the only thing that will solve it.

The other post about stocks have a long way to fall? I think we are going to see your chart followed for 2 reason. One is the risk of owning shares of companies is going up with their lower cash flows and their earnings and dividends are likely to fall or be poor for a long time. Stocks will do as John says and go to the other side of the mean and will probably fall to 1/2 their value or less, which will be about a dime on the dollar or less against the top value. I am trying to figure out how they get there, but it appears that the Dow is going to have to have a series of companies go to zero and the replacements fall right into the single digit range, thus increasing the divisor to lower the relative value of XOM and CVX. These stocks, if oil demand remains stuck in the mud will be the CIti and BAC of the next year, as profits go up in smoke. Neither pay that good of a dividend.

[mannfm11]

You have some funny theories Gordo. For one, markets don't move in a straight line and the move on 10 year treasuries from about 5% to under 2.5% was a pretty significant move over the past 2 years. The idea they are now 2.75% doesn't exactly mean they have collapsed and my education said the real rate of interest was 3%, so the price still indicates deflation, not inflation. Second, the gold thing is another bubble, as the surplus cash from the poor lending decsions of banks is going to remain on the balance sheets as long as the FDIC exists. This isn't an indication of inflation, but instead a decision that since cash isn't earning anything and anything can happen, I might as well own gold as some of this paper that could go to zero. It is surely a thought in Europe with all the stuff going down there. Third, I just read Doug Nolands post last night and the spread on junk to treasuries is somewhat in excess of 12%, which means that junk is paying around 15%, not exactly a financial boom. Maybe it improved to the point that you might get a bid for junk bonds, but not exactly a form of financing. GM debt is now yielding 53% the last I looked. If you could get half the payment on 3 times the principal value of current market, you would have your entire investment back in 3 years. This isn't exactly a boom in junk paper and appears to be a very risky time to buy stocks that are still at the historical north end of valuations. Stocks are not cheap here and the economy is in doubt for a long time to come. My guess is the trend in real interest rates is about to reverse heavily. What this means is you won't be getting capital for the inflation rate plus 1% like has been the case in recent years. If treasuries are 2.75%, I wouldn't be shocked if the deflation rate over the next 10 years isn't 2% or so, which is going to make paying back debt a real testy subject. You going into the subprime lending business?

[StilesBC]

Generational Dynamics at work:

http://futronomics.blogspot.com/2009/02 ... me-us.html



Regarding the likelihood of John's crash. There are still black swan events to be had. The combination of pessimism and darkening social mood would doubtless lead any further uncertainty to panic selling. In any other part of the saeclum, we'd see this result in brief selling but then buyers coming in to "buy the dip." I doubt we'd see such buyers in a crisis era. Terrorist attack, natural disaster, sovereign default somewhere? Who knows. These things happen all the time, but it's the prevailing social mood at the time that determines the outcome on the stock market, not the actual event itself.

[Gordo]

First off I was quoting someone else (Kaplan) - I don't agree with everything in the quote. I completely agree with you about the fantasy of sideline cash for example. Although I've learned to give people a break when they talk about money coming out of treasuries or stocks. Really what they MEAN (even if they don't understand) is simply that selling was more aggressive than buying (i.e. sellers more eager than buyers). And to this point, there is definitely a cyclical nature to it. When aggressive selling climaxes, VIX and VXO typically spike and insider buying may also spike significantly -- this is exactly what we saw in Oct/Nov '08, and it was followed by a decent, if short lived bounce. I agree with Kaplan that we are due for another counter trend rally soon (might start next week). As you know, no money actually goes into or out of secondary markets (like the stock market). They are driven by mass psychology (confidence). If at any given time a majority of people believe we are likely to come out of recession later this year (indeed we may get positive GDP in Q3 or Q4) it may spur more aggressive buying. Look at a history of VIX/VXO - how many times in a decade do these hit 52 like they did on Friday? I expect a key reversal soon.

As for inflation/deflation, I'm still somewhat neutral. The deflationary forces are overwhelming, and yet the government is doing quite a good job of fighting it They are running deficits in the trillions. But that doesn't mean they will win the war against deflation as monetary velocity slows. Then again we just saw "surprise" inflation (above expectations) in PPI last week for example. Its too early to talk about commodities bottoms. Treasuries sure seem like they have peaked (TLT down almost 20% from its peak). As for 10 years of deflation - this is absurdly unlikely. Even in the great depression we only had 3 years of deflation, and this at a time when there was no FDIC so nothing to keep banks from collapsing + a dust bowl + 25% unemployment. We don't have those conditions today, and we won't have them (in the US) during this bear market, period. So comparisons are meaningless. Comparisons to Japan are even stupider since on a valuation basis, we already fell further than Japan did. On a price to peak earnings basis, we are currently at below average valuations (which doesn't mean we couldn't fall by a lot mind you).

p.s. You think MY theories are funny? What about John's wacky theories like FDIC will "run out" of money (how is that possible?) and there will be mass runs on banks? or the US Government will default on US Dollar denominated debt instead of just printing more $ (which wouldn't be so hard to imagine considering Roosevelt's 40% dollar devaluation in 1933). Or how about the prediction that so many people will try to sell stocks at the same time that computers will stop working for days? Heh.

You have some funny theories Gordo. For one, markets don't move in a straight line and the move on 10 year treasuries from about 5% to under 2.5% was a pretty significant move over the past 2 years. The idea they are now 2.75% doesn't exactly mean they have collapsed and my education said the real rate of interest was 3%, so the price still indicates deflation, not inflation. Second, the gold thing is another bubble, as the surplus cash from the poor lending decisions of banks is going to remain on the balance sheets as long as the FDIC exists. This isn't an indication of inflation, but instead a decision that since cash isn't earning anything and anything can happen, I might as well own gold as some of this paper that could go to zero. It is surely a thought in Europe with all the stuff going down there. Third, I just read Doug Nolands post last night and the spread on junk to treasuries is somewhat in excess of 12%, which means that junk is paying around 15%, not exactly a financial boom. Maybe it improved to the point that you might get a bid for junk bonds, but not exactly a form of financing. GM debt is now yielding 53% the last I looked. If you could get half the payment on 3 times the principal value of current market, you would have your entire investment back in 3 years. This isn't exactly a boom in junk paper and appears to be a very risky time to buy stocks that are still at the historical north end of valuations. Stocks are not cheap here and the economy is in doubt for a long time to come. My guess is the trend in real interest rates is about to reverse heavily. What this means is you won't be getting capital for the inflation rate plus 1% like has been the case in recent years. If treasuries are 2.75%, I wouldn't be shocked if the deflation rate over the next 10 years isn't 2% or so, which is going to make paying back debt a real testy subject. You going into the subprime lending business?

[tobyguy]

Or how about the prediction that ...

Firstly, let me say I don't agree with many "predictions" (if they can be called that) John makes in his blogs (so I'm responding to your comments without the generational dynamics rose colored glasses).
I personally find claims that it may happen tomorrow, next month, the month after, the year after or the year after that [but it will happen eventually] as neither here nor there (nor anywhere for that matter).
IMO anyone can make those "predictions" without really having to answer to them (because it can be argued that it will happen eventually).

I do find the depression and deflation discussions interesting though.... because I too believe it is coming (but often for different reasons). There are few people out there believing deflation is even possible. I personally believe they are wrong and it is already here and about to get much worse.

We don't have those conditions today, and we won't have them (in the US) during this bear market, period. So comparisons are meaningless.

Not YET is more accurate. Not since the Great Depression have we had this serious of a financial crisis. Not since the great depression have we had such a wide spread devaluation in all asset classes. We are more leveraged than people were in the Great Depression. There are many similarities but also differences. This is only the beginning, more is yet to come. Also, comparisons to unemployment rates is not like for like. They were computed very differently back then. We are currently more at 13-15% unemployment using the same metrics that were used during the Great Depression (either way we still have some time to go before it gets that bad, that is true).

Also, remember, the stock market was pegged to the gold standard up until 1934. If the same metrics were used today, we'd be at about 170 in the DIJA, that's real money for you. Why is it at just 0ver 7000 today? It's called inflation and the fiat system.

the US Government will default on US Dollar denominated debt instead of just printing more $ (which wouldn't be so hard to imagine considering Roosevelt's 40% dollar devaluation in 1933).

Think about what will happen if the US Government hinted that it was going to print more money (or "drop money from helicopter's"). What will bond holders do? What will many holders of US dollar denominated based assets do? They will dispose of any and all US dollar denominated assets in a flash. What do you call that? A reduction in the money supply! That is called DEFLATION, not inflation. Printing more money, will make matters worse and NOT better.

The same thing would occur if the market were to believe that the US was about to default on it's debt. Investors would dispose of all US dollar denominated bonds (treasuries) for the same reasons. And again, that would be a decrease in the money supply (aka DEFLATION).

Government's monetary policy can't control social mood swings. Inflation will only come when mass psychology changes from fear (negative) to euphoria (positive), which would happen irrespective of what a country's government does or tries to do. For the same reasons why bail-outs only work during bull market's. It's positive mass pyschology or social mood that makes such things possible and not government actions (or inactions).

In my opinion, governement action is only making things worse and delaying any recovery. Governments can't create real money or wealth out of thin air. They just move it from one location to another (from the savers/prudent people to to non-savers/non-prudent people). Governement takes wealth from the very people we need to turn things around when the time comes.

Tobyguy

[StilesBC]

Gordo,

I found a good site that I think you might be interested in:

http://www.isthisthebottom.com/

[John]

A bit off-topic, but here's some humor on a day when the Dow
Industrials fell to 50% of its peak.

** Great Depression and Dow Jones Industrial Average
** http://www.generationaldynamics.com/cgi ... 010.i.djia

From an online correspondent:

YOU KNOW YOU ARE LIVING IN 2009 when..

1. You accidentally enter your password on the microwave.

2. You haven't played solitaire with real cards in years.

3. You have a list of 15 phone numbers to reach your family of 3.

4. You e-mail the person who works at the desk next to you.

5. Your reason for not staying in touch with friends and family is
that they don't have e-mail addresses.

6. You pull up in your own driveway and use your cell phone to see if
anyone is home to help you carry in the groceries.

7. Every commercial on television has a web site at the bottom of the
screen.

8. Leaving the house without your cell phone, which you didn't have
the first 20 or 30 (or 60) years of your life, is now a cause for
panic and you turn around to go and get it.

10. You get up in the morning and go on line before getting your
coffee.

11. You start tilting your head sideways to smile. : )

12. You're reading this and nodding and laughing.

13. Even worse, you know exactly to whom you are going to forward this
message.

14. You are too busy to notice there was no #9 on this list.

15. You actually scrolled back up to check that there wasn't a #9 on
this list.

AND NOW U R LAUGHING AT YOURSELF

Go on, forward this to your friends. You know you want to.

John