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alstry (35.70)

Alstry Calling THE GREATEST DEPRESSION

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December 10, 2008 – Comments (21)

I know there is Schiff, Roubini, Shedlock, and Taleb.  All have negative outlooks.  But none as negative as Alstry as far as I can tell.  Based on current conditions, it seems clear that the outlook appears for more extreme conditions than we had in THE GREAT DEPRESSION.

This is not something to be scared about, simply something to be prepared for......at this point, what I am not certain about is whether it will be a deflationary depression or an inflationary depression.  The former will be bad, the latter worse.

Based on reasonable extrapolation, it is not a stretch to forecast under/unemployment of North of 30%.....this includes those working but unable to make a subsistance living. 

In the thirties capital was flowing to America, now it is flowing to the rest of the world,  As a result, industries are packing up or shutting down.  But the problem is not just America centric, it is world wide,,,,and not just the countries that traditionally make headlines.....take a look at Iceland or Greece.

The problems are spreading, and faster than many think....the world is interconnected today in ways that never existed a couple generations ago.  My job loss blogs are simply evidence of a much bigger problem.  Before you can understand the forest, you must know the trees.....but don't get fixated on the trees or you will miss the forest.

This morning we are cheering a plan that likely will bankrupt the auto companies in 90 days....the desperation is reaching such obvious levels.....it leads one to ask....who is John Galt???

21 Comments – Post Your Own

#1) On December 10, 2008 at 7:19 AM, alstry (35.70) wrote:

LONDON (MarketWatch) -- Swedish engineering group SKF said Wednesday that it will shed around 2,500 jobs and reduce the working hours for many more employees after a slump in demand from the automotive sector.

Rio Tinto to Cut 14,000 Jobs

The cuts are really heating up as the weather turns colder.

And now the Fed wants to issue its own debt....for those of you that don't understand the legal and social implications of this....stay tuned....but at least some seem to be thinking...

http://market-ticker.denninger.net/archives/682-FLASH-Get-The-Stocks-For-The-Fed.html

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#2) On December 10, 2008 at 9:00 AM, alstry (35.70) wrote:

Office Depot to close 112 stores, 6 distribution facilities

What will it take for America to realize it is shutting down????

1000 Stores????

10,000 Stores????

100,000 Stores????

1,000,000 Stores?????

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#3) On December 10, 2008 at 9:17 AM, saunafool (98.66) wrote:

Alstry,

Nice to see you play a consistent tune. I have no doubt things will get worse than they are now, but I'm not sold on the Great Depression thing yet.

Here's why: First, the world has already guaranteed bank deposits. Basically, we haven't seen a run on the banks. Sure, no one had any savings anyway, but at least the capital out there is still cirulating--it's not hidden in matresses just yet.

Second, I think the major stimulus spending will buttress the economy starting next year. If you look at the GDP numbers from the Depression, Hoover basically took a pass and said that markets would solve everything and the economy crashed for 3 straight years. Roosevelt started spending money in 1933 and the GDP started recovering rapidly by 1934.

This time, at least, the government isn't sitting on its hands for 3 years before intevention, and people haven't lost their bank savings.

After all, the unemployment rate is still only about 7%. Sure there are huge job cut announcements, but I remember huge cuts being announced all through the 80's and 90's. The question is how long before new companies and new industries are created to create the growth in jobs somewhere else.

So, I think it will be very bad, but not worse than the Great Depression.

I only have one prediction: the dollar has to be worth a lot less at the end of this.

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#4) On December 10, 2008 at 9:53 AM, paintjockey (< 20) wrote:

Alstry-Paint Jockey has been blogging the Depression is here and it will be a Deflationary one. Fundamental error was not protecting the dollar. Trajic error is bail outs, fatal error is electing a clone of Jimmy carter for "change". A promise always given just before the elites dance and we pay the band. I still call it deflation and recession leading to a 1929-1935 style collapse. Get out of debt and be prepared to weather hard times.

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#5) On December 10, 2008 at 9:58 AM, angusthermopylae (41.33) wrote:

saunafool,

While I am also somewhat skeptical about another Great Depression (but less skeptical than I am of all the bottom-callers that periodically rise up), I do have a counterpoint for you:  

I think that the big and "smart money" people are already hiding their money in mattresses.  Here's how it's the same:  Treasury bonds have gone to negative returns, right?  That means that the "smart" people are willing to take a loss (no matter how minor) because they believe that putting it in anything else would be worse (like stocks, savings accounts, etc).  And we're not talking about Grandma's egg money--this is for people on the order of hundreds of thousands and millions per.

And why do we, stock market types and Fools, make fun of hiding cash in mattresses?  Because those people are "losing" money by not investing it in  stocks, savings accounts, etc.

My point?  The demand for Treasuries has gotten to the point where it is the rich man's mattress.  It pulls the money out of normal circulation and hides it away from the system.  Same affect.  At least with a mattress, you can get your cash out in about 30 seconds and go to the grocery or hardware store.

(On the other hand, I don't think this is a smart move.  Holding cash is easier, and allows you to get back in the game much faster.  I've got a good chunk of my tiny portfolio in BHY--13% annual yield at the moment, and I can switch it over to other stocks with a couple of clicks on my brokerage's web page.

I think the buys of Treasury bonds are putting themselves in the same fix as the auto companies when they announced 0% financing...short term it looks smart, but when the economy does turn around (magic 8-ball says 2-4 years), the flood of bonds on the market means they will take a HUGE loss)

Just my inflation-adjusted 2 cents.

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#6) On December 10, 2008 at 10:15 AM, alstry (35.70) wrote:

The negative interest rate on Treasuries is truly something historic. 

Sauna,

Yes bank deposits are protected, the problem is that there is more private debt than private deposits.  And many with deposits have little debt.  The problem is that there is relatively few with little debt and big deposits yet the economy is dependent on the many.

If we took every dime of money on deposit, it would only be a fraction of the requirement to pay down debt to a sustainable level.  Here in lies the problem....

We either hyperinflate or repudiate.....if we hyperinflate....we are all broke and the savers are penalized....if we repudiate debt, at least the savers are saved.

Now, it is only a question of which direction we go....either path leads to a very nasty period for a period of time.

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#7) On December 10, 2008 at 12:00 PM, saunafool (98.66) wrote:

alstry,

I'm with you. It doesn't look good for savers, and it looks worse for debtors, except that they will most likely end up just walking away.

angus,

I think the buying of treasuries is still better than hoarding mattress cash for the macro economy.

As long as there is big money willing to buy treasuries, the government can fund deficit spending--assuming the Keynsian response works.

I also think the people who think we've hit bottom are smoking something. No way. Bottom is at least 1 year out.

(Re: stock market bottom, I have no idea. I confess I'm a little bullish these days when I see Pfizer paying 8% dividends, Nokia paying 6%, Intel paying 4%. The stocks could return 0% for the next 20 years and be better than treasuries. They might go down another 50% before recovering, but I don't think these companies are at risk of disappearing.)

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#8) On December 10, 2008 at 12:39 PM, Mary953 (39.38) wrote:

History provides perspective - I agree with your sentiment there Alstry, so here is a little perspective.

Hoover did not try to manipulate the government to tackle monetary problems brought about by the Depression because there was absolutely nothing in the Constitution that allowed him to seize the assets of one citizen in order to give those assets to another.  He had been elected president because in a previous depression, Hoover used his personal fortune to plug/bail-out, at strategic points, specific companies that could then be used to stop the downward rush. He used, in other words, an economic scalpel instead of a club. As president, he did not believe he had that authority - and he was right.  Hoover went down in that time-frame's history as a demon.

FDR was a "pragmatist" who was extremely anti-business.  His alphabet agencies were unconstitutional but they did put a handful of people to work.  They did not have even a minor effect on the economy because FDR taxed businesses prohibitively (up to 75%) if it looked like they were actually amassing enough capital to expand or bring in more workers.  When an alphabet agency was declared unconstitutional, it was disbanded and reformed under a new name.  The public perception was that FDR cared and was trying to help them.  The reality was the exact opposite. By the early 1930's, the world was in depression, our country was no longer able to correct economically alone, and the massive demand of a World War was needed to restart factories and end the Depression.  Since FDR was still in office (and he was a truly great war-time president), he was declared the economic savior of the western world.

Note: Statistics can be manipulated to say anything, so to avoid being buried under the wrath of conflicting Internet sources, I have tried to refrain from citing any stats here.  Where I got carried away, try to go with the history and not the statistic.

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#9) On December 10, 2008 at 1:51 PM, alstry (35.70) wrote:

Mary,

If you are half as attractive as you appear intelligent....you may want to send Hugh Heffner a picture for an upcoming issue.

 

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#10) On December 10, 2008 at 2:20 PM, debtRichQuick (< 20) wrote:

First of all. Alstry, my good friend, this is not going to be the greatest depression. 1929 trades were done by paper, international money transfers took a year, and global ecommerce didn't exist.

We simply live in a different time. You know, just as well as I do that numbers can say whatever you want them to.

Paulson called this is a once is a 100 years crisis....but did securitization exisit to the extent it does now 15 years ago?? It makes sense this is a once in a 100 year crisis.

 Next, we had a huge run up in the retail/consumer sector and all the services that support it. This is merely an unwinding and once a new direction is given we will shift. This is like having to downshift on a hill when you're already slipping backwards, the drop picks up for a bit then the gears catch and it slows, and then the trek forward begins.

I have a couple finals this week, and then get ready. I'm going to devote some time to the greatest depression debate. I think you are missing the how big the psychology component is.

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#11) On December 10, 2008 at 2:28 PM, galtline (31.36) wrote:

This morning we are cheering a plan that likely will bankrupt the auto companies in 90 days....the desperation is reaching such obvious levels.....it leads one to ask....who is John Galt???

You will be contacted shortly...  ;)

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#12) On December 10, 2008 at 2:30 PM, alstry (35.70) wrote:

Debt,

As the person who I consider my best online friend...I truly look forward to the debate.  At least I know you have the horsepower not to quit.

Just to make this clear at the outset.....nobody hopes I am wrong about my position more than me....but even this bias does not cloud my objectivity.

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#13) On December 10, 2008 at 2:48 PM, Mary953 (39.38) wrote:

Alstry,

You and Debt are both aware of the 'psychology component' in the depression debate.  You see the economic news as a snowball already rolling toward depression.  Debt sees the snow still on the ground at a state of slumber.  Which is correct?  Is the inertia in the forward motion started or in the mass still at at rest?  After a good look around yesterday, I fear that your snowball may be moving.  I put it in "Lost and Found" this morning.  You will also find there the reason that your above comment is flattering but definitely not feasible. 

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#14) On December 10, 2008 at 2:54 PM, onepremise (80.16) wrote:

I second saunafool, I don't think we will witness a depression.  We're no where near 30% unemployment.  Granted there are going to be some tough times ahead of us and there will be more layoffs, but I don't think we will reach those numbers.  The market is actually starting to show some support for once so I assume the bottom is here or not to far off.  However, do expect more layoffs.  It's pretty common for the market to proceed the economy by six months are so.

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#15) On December 10, 2008 at 2:59 PM, djemonk (< 20) wrote:

I see a lot of people projecting astronomical unemployment numbers, but I still haven't seen someone defend them.  Would you like to be the first?  I'm willing to be convinced but no one's really made an effort to build a reasonable case for this.

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#16) On December 10, 2008 at 4:37 PM, Mary953 (39.38) wrote:

I am a bit more pessimistic than usual.  For that, I apologize.  I am an optomist by nature.  I would normally expect that our system of economic enterprise is too vast with too many inventive people for any short term difficulty to rattle. I am used to those people who remind that, "Even if unemployment is only {2%, 5%, 6.9%, pick-a-number}, if it includes you, then unemployment is 100%."  Been there, heard it. 

Over the last couple of weeks, though, friends have been calling.  Layoffs, shortages in hours and benefits, temporary fill-in positions that are terminated early because permenant employees don't want to stay out - just in case; all of these and more are tightening the budget screws in a dozen different households.  Parents moving in with children, grown children moving in with parents, surviving spouses merging households to save expenses just in case; these are not people who ever expected to give up their independence in matters of sharing kitchens, bathrooms, living spaces.  These are very basic ways that people are redefining the ways that they are willing to live in order to insure that the people they care about are protected.  Do I need this protection?  No.  I am fortunate.  Am I preparing my home to offer this protection to my extended family and my friends, just in case? Absolutely.  Does the need to think in these terms trouble me?  More than words can express.

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#17) On December 10, 2008 at 6:19 PM, amassafortune (30.01) wrote:

Before the Greatest Depression, there would need to be a Greater one - neither is in process. I am still hopeful this cycle will only match that of '74-'75 or '81-'83. 

The request for supporting evidence of high-end unemployment predictions in this string is justified. If companies start announcing second rounds of layoffs, higher rates could follow. A couple such announcements have happened in the financials. That can be expected in the extreme case of the banks, expecially after the takeovers. If second rounds of layoffs spread to other sectors, the snowball is packing it on as it rolls and execs are revising their 2009 business plans.

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#18) On December 11, 2008 at 4:31 PM, BenGriffin71 (28.40) wrote:

angusthermopylae,

Why would you choose BHY as your vehicle for owning fixed income?  This Closed End Fund is trading at a 10% premium to the underelying net asset value (when most closed end funds offer the benefit of purchasing dividend paying portfolios at a discount).

While some CEF may trade at a premium occasionally it is really a bad deal when, as in BHY's case, the expense ratio is high ( 4.1% !!! ), the assets are risky (1/3 of the holdings are low-junk: CCC or below), and the distribution is being paid for out of principal.  This is a sure path to dissapointing returns.

The worst of those sins for a SEF trading at a premium in a down market is the last one: making distributions using principal.  BHY has an income yield of 7.8% but management is paying out almost 12%, meaning they are forced to sell some of the portfolio to make distributions.  These sales have a good chance of being sold when the market is down.  Also remember those sales are out of the Net Asset value which is already below the market value... Add in some leverage (25% in BHY's case) and you've got a dreamy scenario...nightmarishly dreamy.

http://closed-endfunds.com/FundSelector/FundDetail.fs?ID=39824

 I feel compelled to warn you and anyone who may have read your post about CEF trading at a premium.  I(f you have a different opinion of the BHy, I'd be interested to hear it.

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#19) On December 11, 2008 at 5:03 PM, BenGriffin71 (28.40) wrote:

DebtRichQuick,

What did you mean, when you posted: 'but did securitization exisit to the extent it does now 15 years ago?'

 

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#20) On December 11, 2008 at 5:08 PM, BenGriffin71 (28.40) wrote:

....if we repudiate debt, at least the savers are saved....

Alstry,

Does Alstry have the patience to explain why the savers are saved?  Aren't many of the savers saving using the very debt to be repudiated?

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#21) On December 11, 2008 at 5:28 PM, BenGriffin71 (28.40) wrote:

>>> why do we, stock market types and Fools, make fun of hiding cash in mattresses?  Because those people are "losing" money by not investing it in  stocks, savings accounts, etc. .......... I think the buys of Treasury bonds are putting themselves in the same fix as the auto companies when they announced 0% financing...short term it looks smart, but when the economy does turn around (magic 8-ball says 2-4 years), the flood of bonds on the market means they will take a HUGE loss).

Angusthermopylae,

Bond buyers are often predominantly focused on 'real returns', being the continuously compounded nominal return, less the continuously compounded inflation.  So perhaps, the bond market hasn't had their cheese slip completely off their cracker just yet.  The bond market could just be predicting either, substancial additional deflation, followed by a delayed onset of the unavoidable inflation, or a long term slow deflation.

I don't know when it will turn either, and I also beliive eventually we will get a big sell off in bonds, either due to inflationary jitters, or big bear market stock rallies.  I have been picking up some TBT on dips.

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