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Just thinking out loud....



November 19, 2009 – Comments (16)

Just a few things I'm pondering...

1) If China's economy is still full speed ahead, who's buying their exports? Why did they have record car sales, but stable gasoline sales? If their biggest worry is inflation and the yuan is still coupled with the dollar, is there any possible way to pull this off with higher domestic demand?

2) The market is trading at a huge P/E and the unemployment rate is still horrible. The consumer is not spending and I think that continues until we create jobs. The banks are not lending which is restraining the velocity of money and to make it worse they are putting that money that they are hoarding into the market at record levels. What happens to that record amount of bank money in the market when we finally realize that companies don't have the revenue to meet current valuation?

3) There are 2 ways I see us creating new jobs. The first is to allow deflation to occur and suffer a few years of pain and rise from the ashes. I don't think the government will allow that to happen as it is political suicide. The second is to create a second massive stimulus plan that is focused on creating jobs. I'm sure that in this case the consumer will start spending again and increase the velocity of money. How much inflation will result? What happens if banks stop hoarding their money and start lending at the same time?

If anyone else has been thinking about the same things, add your thoughts here.


16 Comments – Post Your Own

#1) On November 19, 2009 at 11:20 AM, MGDG (32.92) wrote:

#3--Were definitely in a tough spot Chris. After decades of feeding the credit junkie, withdrawal symptoms are nasty. I don't particularly care for the amount of Stimulus provided and where it has been going. If money was going to be spent, I would have preferred to see more of it go to infrastructure improvement and energy efficiency.

If we continue to provide stimulus, I shudder to think what the debt service will be like if interest rates rise to double digits. Yes, I remember 30 year Government Bonds paying 16%. I think we've gone deep enough into this, that the fix will be painful. I think by the time they begin to direct more stimulus money to job creation, it will be too little too late and won't be spent where it would have it's greatest impact.

If were going to create and spend stimulus, we should produce something with it. At least with infrastructure improvements we will have an asset that provides a benefit to the taxpayer. I just think it would be used for too many pork barrel projects that wouldn't give us the best return on the money spent.

#2--Valuations do seem too high for the earnings that will be produced from growth rather than cost cutting and how will we get growth, when the cost cutting is increasing unemployment. Taking profits and waiting for better valuations would be a course I would pursue for myself. Banks have been tightening the screws on the consumer by raising rates, raising minimum payment terms and lowering credit limits. This should keep a damper on spending for while, making profits harder to attain for many companies.

#1--I wonder about China. Who is buying their goods in meaningful quantities and will they begin consuming themselves? If they become a consuming nation, will they have an appetite for foreign goods?

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#2) On November 19, 2009 at 11:52 AM, russiangambit (28.71) wrote:

> The second is to create a second massive stimulus plan that is focused on creating jobs.

But how can government create private sector jobs? All it can do is to create overhead jobs, like SOX compliance jobs that were created after SOX. These are not productive jobs though? I don't think government can solve this. The best thing for it is to get out of the way and let the chips fall as they may. Then people's survival instict will kick in and they will create jobs. As long as there is explicit government support, it is not happening.

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#3) On November 19, 2009 at 12:00 PM, outoffocus (23.84) wrote:

There are 2 ways I see us creating new jobs. The first is to allow deflation to occur and suffer a few years of pain and rise from the ashes. I don't think the government will allow that to happen as it is political suicide. The second is to create a second massive stimulus plan that is focused on creating jobs.

I disagree...sorta.  The best way to create jobs is to encourage entreprenuership.  Smalll businesses create jobs.  The small businesses generally become big business that create more jobs.  So far most of the "stimulative" measures taken have been at the expense of small businesses (taking preference on big business) and  the middle class (those who are in the best position to and are more likely to start their own business).  Also, all the stimulative measures encourage people to "look for jobs" instead of business opportunities.  I agree with your first point about deflation because creativity is born out of necessity and deflation would create that necessity.  If we never have necessity and our currency keeps getting devalued, what incentive is there for people to start businesses and be creative?  The middle class will be too busy trying to stay afloat.

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#4) On November 19, 2009 at 12:14 PM, ChrisGraley (28.54) wrote:

Actually I think we agree quite nicely outoffocus. I too think encouraging entrepeneurship is a good idea and would create more long term jobs. That way you can help avoid the problem that russiangambit brings up and having a temporary job band-aid put on the problem. I'm still a little peeved that the first stimulus went to arrow subsidies and teapot museums though, when the nation's infrastucture is crumbling.

We seem to have the same thoughts on the issue MGDG and that's a good point about #2, in the fact that the banks are actually cutting their own throat by tightening credit. They are hurting the same companies that they are investing in.

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#5) On November 19, 2009 at 1:00 PM, catoismymotor (< 20) wrote:

1) Ditto. You points plus some made by others have convinced me to reduce my exposure to the Chinese markets for the foreseeable future. Since August I have sold four of my five Chinese stocks. Up to this point they have served me well but now I make other moves.

2) The general p/e level of the market is high. But solid buys with low p/e's are still out there. IPHS, ECOL, FFH are just three that I suggest looking at. At this point if you choose to buy I say buy to hold them, whichever you choose, for five years. I also suggest setting some cash aside should a market correction occur so you can take advantage of some sale prices.

3) The Fair Tax. It would act as a wonderous tonic for this ill economy.

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#6) On November 19, 2009 at 1:13 PM, Teacherman1 (< 20) wrote:

I agree with your point about creating jobs.

This should have been the second priority, after addressing the immediately impending financial implosion.

I am all in favor of providing health care for as many as possible and for getting a handle on future costs, but it should have waited until a more stable time. The immediate need could have been handled with a smaller, simplier, short term program for those who are/were "twisting in the wind", but this "rush to get it done" will result in something that could create as many problems as it solves.

Infrastructue (badly needed anyway), and help for small businesses are in my opinion, the way to go about it. 

Good post and raises food for thought.

JMO and worth exactly what I am charging for it. 

Have a nice day. 

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#7) On November 19, 2009 at 1:25 PM, ChrisGraley (28.54) wrote:

Agreed on #3 cato, but repealing the 16th amendment would require a constitutional amendment and a 3/4ths majority of the states.

It will never happen, so eventually the liberals would take advantage of both the national sales tax and the income tax. It's like giving crack to an addict. they wouldn't be able to help themselves.

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#8) On November 19, 2009 at 2:05 PM, catoismymotor (< 20) wrote:

Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master. - George Washington


I say that repealing the 16th Amendment is possible. It was passed, so it can be repealed. It is all just a process. To give up on a good idea has never served anyone. What would have happened if the leaders of the Civil Rights Movement, Women's Suffrage Movement, Revolutionary War and Magna Carta had thrown in the towel because the task was deemed to be to arduous or even impossible?

The IRS has been turned into the teeth of a all too busy federal government. It is my calling to help throw a muzzel on the beast so it can no longer bite. By working for the Fair Tax I am doing what I can to make this a better place for people to work and live their lives. I am working for you, even though you plan on leaving in the near future.

Perhaps Quixotically,



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#9) On November 19, 2009 at 6:31 PM, ChrisGraley (28.54) wrote:

I wish you well on that conquest cato but I think you are in a David vs Goliath situation.

Hopefully this will be history repeating itself, but you are facing political parties with hundreds of years of practice.

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#10) On November 19, 2009 at 6:51 PM, Tastylunch (28.59) wrote:

Why did they have record car sales, but stable gasoline sales?

The same reason manufacturing in 2008 was "up" but electiricy usage was down. One of the wto numbers is almost certainly wrong. But wrong in what way we don't know.

I agree in genreal but the real question to r e: china.

 Is When or if this will be discovered by the investors/markets.Or I guess when they will care.

China seems like they can stimulate indefinitely. This could really hard to time.

Acclaimed shortseller Jamer Chanos (exposed Enron) seems to be in the soon camp, I'm not so sure. Jim rogers doesn't seem worried...

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#11) On November 19, 2009 at 8:22 PM, ChrisGraley (28.54) wrote:

I do believe they are producing cars, but I think those cars are sitting somewhere idle. They have been hoarding commodities and up until this point I thought that was to combat inflation. Now they seem to be hoarding outputs as well as inputs. I seriously don't know what to make of this, but I know enough to stay away from what I don't understand.

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#12) On November 19, 2009 at 9:11 PM, Tastylunch (28.59) wrote:

Well that's kind of my point. I think we are basically saying the same thing

We know nothing about those "cars". they could be built and destroyed, they could built and stored, the sales could be just paper committements, they could be booking future sales early, there are all sorts of possibilities...

all we know is less gasoline is being used than what likely should be.

I know enough to stay away from what I don't understand

always  a good plan, even if you spot a bubble in the making, predicting when it will pop can ruin you if you aren't careful. 

Believe it or not I was short real estate for a while in 2005. That didn't work out so well :( Dizzoh.

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#13) On November 19, 2009 at 9:37 PM, IIcx (< 20) wrote:

Maybe I'm missing the point but the Fed never spent the full stimulus, many of the programs don't come online until next year, and the Banks are paying off TARP so they can enjoy a xmas bonus without nasty politicians in their eggnog.

They don't need to do anything more then use what they have already committed?

The other part that's a wonderful indicator is shipping. Demand is going up : )


BMTI Daily Snippet 
November 19, 2009 at 11:34 AM 

Panamax demand is accelerating, designated by the BPI picking up a strong 4% today. The Atlantic is on fire for the Panamaxes as average rates climb by 4% in the last 24 hours. Fronthaul is some US$1,000 higher in general while the trans-Atlantic rounds, Pacific rounds and backhaul rates all rose by US$ 13-15,000 on average. It is becoming a heady period for owners as growing numbers move into negotiation mode and start on insisting on upgraded rates. Western Atlantic grain shipments are holding up the West while simultaneously activity is high in the Pacific, as vessels such as the 1997-built "Brave Wind" are fixed with a NoPac round for US$ 35,000 daily--similar business would've taken high US$ 20,000s only a week ago. 

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#14) On November 19, 2009 at 9:38 PM, catoismymotor (< 20) wrote:

# 9 - I appreciate your kind words. Keep in mind there are thousands of us working on it. Many are well aquainted with the inner workings of DC.

I hope you have a good evening. I would like to read about your most recent progress with your upcoming move.

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#15) On November 19, 2009 at 9:48 PM, standridge (< 20) wrote:

Cato.  I applaud your work on the fair tax.  I read the book and gave it to everyone I know.  Good luck because its simple and it seems we have become a very complicated nation.

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#16) On November 21, 2009 at 9:30 AM, MGDG (32.92) wrote:

Ilcx, I would be careful when looking at shipping indices. As Chris noted in #11, they are hoarding comodities and possibly storing output. This would mean we have increased shipping not based on actual demand for the items being shipped.

Our company arranges transportation for companies across the Globe and China is the only country currently requesting transportation and storage of the items being shipped. The shipping requests we have received for items actually being used in manufacturing or sold in retail, have continued to decrease.

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