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TranceAddict Investors Club @ Marketocracy (pg. 148)
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| Krypton |
| Let them crumble. Restructure under bankruptcy. |
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| Krypton |
Do you guys believe we are in a bear market rally? Here is my take...
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For PDF version, go to...
http://finance.com/yahoo_site_admin/assets/docs/BearMarketRally_1.140124242.pdf
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http://www.finance.com
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Bear Market Rally?
The stock market has enjoyed a huge rally since March. But is it a bear market rally? Does it look good on paper but in reality bound to end? My answer is yes. This is a bear market rally and it will end. The recession is nowhere near over.
The government has taken unprecedented action with the economy on the principle of Keynesian economics. Keynes wrote in his The General Theory of Employment, Interest and Money that recessions were the result of insufficient aggregate demand. We have witnessed a drastic decline in aggregate demand. Sales in the consumer cyclical sector have done the worst. All you have to do look at the car industry. Who wants to buy a car in this recession? The most unlikely car producer, Toyota, has even incurred its first quarterly loss since 1950. Chrysler has filed for bankruptcy and General Motors is on the brink. The decline in demand is not limited to cyclical products like cars. Aggregate demand has fallen in almost every sector. Even oil demand has fallen drastically. The stock market has appreciated more than 20% since its March low but is this price rise justified? Has aggregate demand recovered? Are people buying more cars? Are people buying more computers? Are people buying houses again? Are banks lending again?
Another aspect of Keynesian economics is the role of government in a recession. Consumption and investment expenditures have fallen off as happens in a recession. Because a recession is caused by a decline in such aggregate expenditures, the only thing which will pull the economy out of recession is the restoration of aggregate demand. Consumers need to consume again. Investors need to invest again. Generally, consumers and investors will not jump back into the economy unless they have an incentive to do so. Government expenditure fills the void left by consumers and investors. This is the purpose of the American Recovery and Reinvestment Act of 2009 worth $787 billion. The government is consuming and investing with the aim of increasing aggregate demand. Only the government is capable of single-handedly stimulating the economy. Such action is demanded by the people who are suffering from the effects of the recession. The government would be in serious trouble if they did nothing.
The role of the Federal Reserve also cannot be discounted. The money supply has been increased by about $2 trillion. The banks have benefited most from this inflation as they were suffering a very serious liquidity crunches. Insolvency was practically inevitable if it were not for the actions of the Federal Reserve. Massive bank runs rivaling that of the Great Depression were in the works. This systemic collapse has been averted. The link between the Federal Reserve and Federal Government in their emergency intervention is the Federal Reserve has financed the $787 billion stimulus package.
All this intervention has finally bared fruit. Most notably, the stock market has recovered a lot of territory since March. But most importantly, confidence in the systemic integrity of the economy has been largely restored. No economic recovery is possible if the very fabric of the economy is ripped apart by bank runs, deflation, and ultra high unemployment. I attribute the rise in the stock market to the actions by the Federal Reserve and the Federal Government. Their stimulus has essentially worked…for now. Such government expenditures are unsustainable and are built upon deficits. The goal was to provide the atmosphere for a restoration of aggregate demand. Has this happened? Are consumers buying again? Are investors investing again?
Consumer expenditures have generally remained flat. Car sales have not recovered. In fact, hundreds of car dealerships are expected to close their doors. Unemployment claims are still rising. Sales in real estate are still flat or negative. A bright spot may be the stock market. Bargain hunters have entered the market en masse. But stock market recoveries need more than just bargain hunters. A bull market needs everyone investing. That has not happened. I expect this bear market rally to finally end initiating flat or declining stock market performance if consumer expenditures do not recover any time soon.
I believe the 10-Year Treasury bond yield is too high. I see this as an indicator of an overvalued market. This reinforced my belief we are in a bear market rally. I believe the yield should be below 3.23% and preferably believe 3%. That is where I believe the yield should be. It is currently above that and I expect to see the yield fall once again when the bear market rally ends.
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| Capitalizt |
| quote: | | Originally posted by Krypton A bull market needs everyone investing. That has not happened. |
and is not going to happen for quite a while. I think an entire generation of investors are going to be too frightened to invest any time over the next few decades. People who panic sold over the past 24 months will be afraid to get back in, and those 20 somethings who have never invested will be reluctant after seeing their parents lose half of their life savings in just a few years. Personally, I wouldn't invest at any level given what nonsense our government is engaged in today. Capitalism is pretty much dead now, and the market would have to drop 60% or so before I even became remotely interested in taking a gamble, and that's all it would be..a short term gamble. No long term money belongs in stocks with such an uncertain and unfavorable political environment. |
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| Krypton |
| quote: | Originally posted by Capitalizt
and is not going to happen for quite a while. I think an entire generation of investors are going to be too frightened to invest any time over the next few decades. People who panic sold over the past 24 months will be afraid to get back in, and those 20 somethings who have never invested will be reluctant after seeing their parents lose half of their life savings in just a few years. Personally, I wouldn't invest at any level given what nonsense our government is engaged in today. Capitalism is pretty much dead now, and the market would have to drop 60% or so before I even became remotely interested in taking a gamble, and that's all it would be..a short term gamble. No long term money belongs in stocks with such an uncertain and unfavorable political environment. |
I am nowhere near that pessimistic. |
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| Capitalizt |
| quote: | Originally posted by Krypton
I am nowhere near that pessimistic. |
a few reasons that might make you reconsider.. ;)
Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone: Mark Gilbert
http://www.bloomberg.com/apps/news?...lumnist_gilbert
May 21 (Bloomberg) -- The odds on the dollar, Treasury bonds and the U.S. government’s AAA grade all heading for the dumpster are shortening.
While currency forecasting is a mug’s game and bond yields can’t quite decide whether to dive toward deflation or surge in anticipation of inflation, every time I think about that credit rating, I hear what Agent Smith in the “Matrix” movies called “the sound of inevitability.”
Several policy missteps suggest that investors should stop trusting -- and lending to -- the U.S. government. These include the state’s pressure on Bank of America Corp. to buy Merrill Lynch & Co.; the priority given to Chrysler LLC’s unions over the automaker’s secured creditors; and the freedom that some banks will regain to supersize executive bonuses by giving back part of the government money bolstering their balance sheets.
Currency markets have been in a weird state of what looks almost like equilibrium for the past couple of months. What’s really going on is something akin to an evenly matched tug of war that fails to move the ribbon tied around the center of the rope, giving the impression of harmony while powerful forces do silent battle until someone slips.
“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,” Lee Quaintance and Paul Brodsky of QB Asset Management said in a research note earlier this month. [b]“In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”
Flesh Wounds
Why pick on the dollar, though? Well, not necessarily because the U.S. economy is in worse shape than those of the euro area, the U.K. or Japan. The biggest problem is that external investors -- particularly China -- have more skin in the dollar game than in euros, yen or pounds, which makes the U.S. currency the most likely candidate to meet the cleaver in a crisis of confidence about post-crunch government finances.
China owns about $744 billion of U.S. Treasury bonds in its $2 trillion of foreign-exchange reserves.
Chinese exports, though, are dropping as the global economy weakens, with overseas shipments declining 23 percent in April from a year earlier, leaving a nation that has already expressed concern about its U.S. investments with less to spend in future.
‘Heavy Hand of Government’
Those kinds of concerns are starting to surface in a steepening of the U.S. yield curve, driven by an increase in 10- and 30-year U.S. Treasury yields. The 10-year note currently yields 3.23 percent, about 235 basis points more than the two- year security, which marks a near doubling of the spread since the end of last year.
“When the government parks its tanks on capitalism’s lawns, that spells trouble for those who invest, add value and create jobs,” says Tim Price, director of investments at PFP Wealth Management in London. “Trillion-dollar bailouts do not only leave massive public-sector deficits in their wake, they also leave the presence of the heavy hand of government all over industry and markets, so the outlook for government bonds is less promising than the economic textbooks on deflation would have us believe.”
Earlier this month, the U.S. reported the first budget deficit for April in 26 years, with spending exceeding revenue by $20.9 billion, even though that’s the month when taxpayers have to stump up to the Internal Revenue Service and the government’s coffers should be overflowing. So far this fiscal year, the U.S. shortfall is $802.3 billion, more than five times the $153.5 billion gap in the year-earlier period.
Deathly Deficit
For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.
David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.
No Default
It is undeniable that the U.S. government’s ability to finance its borrowing commitments has deteriorated as its deficit has ballooned. Dropping the U.S. from the top rating grade, though, wouldn’t mean the nation is about to default on its debt obligations; there’s a subtle distinction between ability to pay and propensity to fail to pay. There’s also a compelling argument that no government should be enjoying the benefits of a top credit grade in the current financial climate.
Using the definitions outlined by Standard & Poor’s, a one- step cut into the AA rated category would nudge the U.S.’s creditworthiness into a “very strong” capacity to fulfill its commitments, just weaker than the “extremely strong” capabilities demanded of AAA rated borrowers. That seems an appropriately nuanced sanction -- albeit one that the rating companies might turn out to be too cowardly to impose. |
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| Krypton |
| Well, the government can't balance the budget if the economy is in the ter. They have to do this deficit spending and once the economy recovers, then they can finally curtail the deficit spending, balance the budget. I'm not saying that's what they'll do, but, that's what they must do. I still support the economic stimulus and increase in the money supply. |
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| jerZ07002 |
| quote: | Originally posted by Krypton
Well, the government can't balance the budget if the economy is in the ter. They have to do this deficit spending and once the economy recovers, then they can finally curtail the deficit spending, balance the budget. I'm not saying that's what they'll do, but, that's what they must do. I still support the economic stimulus and increase in the money supply. |
actually, the government doesn't have to deficit spend, but since the government has chosen this course, the next steps are reduce deficits, balance budget, and then create surpluses to pay down the national debt. |
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| Capitalizt |
| I actually think we are at the point where it is impossible to pay off the debt without devaluing the dollar at least 50%. Think about it.. This year alone we are adding $1.75 TRILLION to the national debt. The CBO has already projected an additional $9 trillion will be added over the next 10 years..but let's ignore that for a while. Even if we have balanced budgets every year for the forseeable future, the government will need to create a $100 billion surplus every year for the next *20 YEARS* just to cancel out 2009's deficit! We need 2 decades of $100 billion surpluses just to cancel out this year's wreckless spending..amazing. Has the government ever had a budget surplus more than 1-2 years in a row? No. Our politicians have an insatiable appetite for spending and will never allow surpluses to continue for very long. When you realistically look at the matter and factor in the $9 trillion added from 2010-2010 + countless trillions more in social security/medicare benefits from 2010 onward + huge amounts of interest on that $20 trillion debt, there is no way in hell we are ever going to make a dent in it. Our only option is to "write it off" as a bad liability, which essentially means ordering the fed to print a few trillion dollars and to pay it off with "new money"..which will mean the death of the dollar. As the article above said, "the sound of inevitability" is in the air. It's only a matter of time. If you invest, position yourself accordingly. Get out of paper and into hard (unprintable) assets. |
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| Shakka |
| I'm gonna go out on a limb and say "no," but does anyone here subscribe to or read Stephanie Pomboy's work (MacroMavens)? She did a great walkthrough yesterday of how the hell the government will attempt to pull off this deficit spending without either 1) causing a significant increase in rates down the road, crowding out private investment, or 2) completely trashing the dollar. It's not pretty and she has had a great market call for the last 5 years or so since leaving ISI to go independent. |
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| Capitalizt |
| Why don't you post an excerpt for us shakka? I'd be interested in it. ;) |
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| Krypton |
| The debt is very daunting but I think we can still turn this around. |
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