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Why I think it's getting worse before it's getting better.

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August 26, 2010 – Comments (20)

There is a Simpson's episode where Chief Wiggum has somehow caught his tie in the hot dog turning apparatus at a gas station.  As the machine slowly reels him in, Chief Wiggum says:

"Oh boy, this is going to get worse before it gets better..."

As I have reviewed the economic indicators, I have shared Chief Wiggum’s reluctant feeling of despair. 

Several weeks ago, I announced that I had sold 70% of my positions to cash, and am mostly sitting on international stocks.  However, since that time, I have felt guilty for not providing an explanation for my move (I think the "just trust me" argument is unfair).  So I would like to briefly explain why I feel the way I do and provide some resources that will help you feel as crappy as I do.

1)  The housing market is a giant stink bomb.

a)  Record low new home sales

b)  Home delinquency rates have climbed up to 12% and still show no signs of slowing

c)  Building permits remain at their pathetic 2009 levels

Why should you care?: A stinko housing market has a significant negative impact on employment and manufacturing.  Not to mention significantly decreasing your net worth.

2) Consumers are not spending

a) Loan approval rates for sub-prime loans remain at ~18% vs 70% of pre 2008 numbers.  Keeping this whole segment fo the population from spending as usual (not saying this is bad in the long term).

b) Personal savings rates are back to their 1993 levels and are still climbing.

c) Credit cards have managed delinquency rates by lowering credit limits.

Why should you care?: Well, 70% of our GDP is linked to consumer spending.  If consumers are shifting (by force in some cases) from consuming on debt to building up savings our economic growth will be much slower (I personally think that this is a great trend, and will provide greater future stability, but it costs us short term growth).

3) Manufacturing is slowing

a) While PMI and other manufacturing numbers are still technically growing, their rate of growth has significantly decreased over the last few months.  When you consider where we were a year ago, manufacturing needs to grow slowly and continually over a much longer period to put us back where we would like to be.

b) Inventories appear to have been rebuilt.  This means we can't depend on restocking to pump up manufacturing like it has over the last several quarters.

c) The Bureau of Economic Analysis recently restated their Q2 GDP growth down to 1.7%, generally 2.4% is considered treading water

In conclusion, it is tough for me to see these indicators and not feel that we are either plateuing or entering our double dip recession. 

It is important to note that their are at least 2 additional factors that may have a significant negative impact on the economy. 

a) The government has only one lever left to pull to prop up the economy, increase the deficit (or throw Obama out of the White House, but I don't see that as a practical hope).  However, as we have seen, increasing the deficit is, at best, a temporary solution. 

b) Society is hell bent on seeing a double dip.  They require it before they can feel confident again about spending, hiring, or growing.  And I think Q3 and Q4 will give it to them.

What do I think is the solution from a national view?  I think we need to start talking about retraining our unemployed masses with skills that can turn them into producers again.  If the manufacturing jobs are unavailable, lets train them in the service industry.  Lets sacrifice a degree of our quality of life to address the unsustainable export/import balance.

So what can be done on a personal level?  I am not sure.  However, I have taken 70% of my money out of the market and am watching from the sidelines.  I think foreign markets may be a good answer to this problem, if I hadn't already gone to 9 years of higher education I would consider that as well.  I also think putting your money in a home at this point makes some sense (I did this myself). 

Here are a few links that can help you develop an informed opinion on the economy (without having to depend on the spin provided by the media).

http://www.aar.org/NewsAndEvents/RailTimeIndicators.aspx

http://www.census.gov/manufacturing/m3/historical_data/

http://www.census.gov/const/permits_cust.xls

http://www.ism.ws/ISMReport/content.cfm?ItemNumber=13339&navItemNumber=12958

http://www.bea.gov/National/nipaweb/TableView.asp?SelectedTable=58&Freq=Qtr&FirstYear=1947&LastYear=2010

http://www.federalreserve.gov/datadownload/Download.aspx?rel=H15&series=bf17364827e38702b42a58cf8eaa3f78&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn&type=packagehttp://www.federalreserve.gov/Releases/ChargeOff/delallsa.htm

 

20 Comments – Post Your Own

#1) On August 26, 2010 at 9:24 AM, catoismymotor (< 20) wrote:

That's some mighty fine police work there, Lou.

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#2) On August 26, 2010 at 9:36 AM, mtf00l (45.03) wrote:

What do you mean by "putting your money in a home"?

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#3) On August 26, 2010 at 9:58 AM, anticitrade (99.15) wrote:

#2) I don't think it is a bad time to buy a home (low prices, low interest rates, and it provides you with a physical assett if the economy gets overly "wonky").  Naturally, this depends on if you currently own a home, where you live, and how much you may have for a down payment. 

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#4) On August 26, 2010 at 10:51 AM, Option1307 (30.31) wrote:

Thanks for the thoughts, +1.

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#5) On August 26, 2010 at 11:00 AM, portefeuille (98.74) wrote:

some charts to cheer you up.

20 Bullish Charts

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#6) On August 26, 2010 at 11:03 AM, portefeuille (98.74) wrote:

and of course good old ifo survey for the German manufacturing industry ...



enlarge

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#7) On August 26, 2010 at 11:19 AM, Pick1es (25.41) wrote:

#2) I think he means putting money under his mattress in his home

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#8) On August 26, 2010 at 11:31 AM, Jbay76 (< 20) wrote:

good post, good information.  I generally agree with all that was orignally posted and am slowly moving my investments into cash and international companies that pay dividends.

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#9) On August 26, 2010 at 11:37 AM, russiangambit (29.06) wrote:

> What do I think is the solution from a national view?  I think we need to start talking about retraining our unemployed masses with skills that can turn them into producers again.  If the manufacturing jobs are unavailable, lets train them in the service industry.  Lets sacrifice a degree of our quality of life to address the unsustainable export/import balance.

I was reading Bloomberg popularity issue recently. On the jobs: the most popular job - shopclerk at 4+ mil, next is cashier at 3.5 mil , next is food processor at 2.7 mil etc. Noen of these jobs require training. They pay around 20K or less a year.

I think the issue is that most people don't aspire to be a shop clerck and live on 20K a year.

There needs to be some policy of developing industry in the US, similar to germany. But that requires 10-20 years planning while  in the US 6 months planning is considered long-term and much saner  education system than we have in the US currently.

In the US shopping and service and marketing are really already at the level of the art form. It seems that 305 of population is  employed selling things to each other. This is not a way to build wealth of a nation. We need somthing productive to move the eocnomy forward.

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#10) On August 26, 2010 at 12:01 PM, Momentum21 (98.47) wrote:

Very good post and I definitely respect your opinion...stepping aside when things don't feel right to you is a wise decision in my book.

My only problem with it is that if you are committed to "playing the game" over time, how do you really know where fair value is at any given time? 

Emotions play a role...and emotions can be costly perhaps...

This roller coaster looks familiar to me! : ) 

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#11) On August 26, 2010 at 1:17 PM, anticitrade (99.15) wrote:

#10)  I totally agree with your comment.  This is actually the reason I didn't pull the trigger earlier.  Picking individual stocks that you feel are mispriced is much easier to logically explain than picking overall market timing. 

I have written (and erased) 4 different explanations to why I am investing based on a macro economic call.  Regardless of how I try to craft the message, it ultimately leads to the same inevitable conclusion.  Macro economic investing is fundamentally based on arrogance. 

Yet, as much as I hate arrogance based investing, I prefer it to losing money defending that very principle.

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#12) On August 26, 2010 at 2:10 PM, JakilaTheHun (99.90) wrote:

I'm starting to get intrigued by stocks again.  I've been very neutral/moderately bearish over the past few months.  I didn't do a dramatic sell-off, but I haven't been very excited about buying into much of anything either (with a few exceptions). 

There is still a lot of macro stuff that makes me nervous, but so long as I can find attractive valuations, I will continue to buy in.   The things that make me nervous on the macro level:

(1) East Asian Mercantilism

(2) The long-term viability of the Euro

(3) The flaws of the Dollar Reserve System

My belief is that a lot of the economic instability (huge booms, huge busts) is driven by currency issues.  The currency issues created extremely imbalanced trade.  Imbalanced trade results in less than optimal worldwide growth (it could even be forcing long-term economic contraction).  

I'd like to see the "Bretton Woods II" system abandoned (i.e. Dollar Reserve System) and replace it with something such as the SDRs.   China needs to eliminate its currency peg (which is harmful to both Americans and the Chinese).  The Euro needs major reform --- otherwise, Spain, Portugal, and Greece are going to continue to get destroyed, while Germany, Finland, and Netherlands prosper. 

So all this is in the back of my mind and makes me very nervous.  Still, I'm willing to take gambles on companies when the valuations get attractive. 

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#13) On August 26, 2010 at 2:34 PM, QualityPicks (32.11) wrote:

All is relative :) I think it got better already. Now it could start getting worse again as you say. But we certainly had a government-paid-for semi-recovery :) as a matter of fact, the government is still borrowing money to pay for stability.

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#14) On August 26, 2010 at 5:00 PM, guiron (38.47) wrote:

Society is hell bent on seeing a double dip.  They require it before they can feel confident again about spending, hiring, or growing.

I disagree. What people are looking for is hiring to increase, and business is looking to the elections for certainty about the tax situation next year - once they have clarity they may start hiring. A capitulation moment might help anyway, but not sure it's necessary.

And I think Q3 and Q4 will give it to them.

That may be true. My opinion is that we will see malaise in the markets until around the beginning of October, then we'll see an increase in equities until the election, where we'll probably get a gap up into the next rally. At the least we're going to see trouble until we're out from under this news cycle- another week or so. 

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#15) On August 26, 2010 at 11:23 PM, awallejr (61.07) wrote:

I swear Porte, every time I see that chart of yours in #6 I think it is a depiction of the BP oil spill.

And why are we talking about capitulation?  If we didn'rt have that back in March of 2009 then what do you expect? You think Alstry is right?  That the market will just crash to 3000, despite the fact that we aren't facing back to back negative 6 GDP quarters, or a totally freezing of money lending?

Market expanded on "fake" growth during the last decade mainly because those bozos in Washington, with Clinton's blessing let Wall Street into the money lending game, which never should have been done.  They exploited for as long as they could until it no longer became tenable.  Market "corrected" and the excess was expelled.  It will now take time to heal, but no reason why we can't heal. 

The Fed plans on being accomodating as possible. However, what Congress and the President does is important. And it is there that I personally have conerns.  Instead of concentrating on job creation, all we've seen so far was wasteful spending (a stimulus plan that was more with throwing money to temporarily plug budget gaps) and imposing greater costs on society (I.e., health reform).

I said this before, the easy money has been made.  I think the "new norm"  (I really am starting to hate that term) is volatility due to computer's taking over the trading world. But I think selective stock picking is the name of the game now, with concentration on those that generate income  greater than what CDs and Tbills yield.

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#16) On August 27, 2010 at 8:39 AM, ElCid16 (94.04) wrote:

"There needs to be some policy of developing industry in the US, similar to germany. But that requires 10-20 years planning while  in the US 6 months planning is considered long-term and much saner  education system than we have in the US currently."

Russian, these sound just like Jeff Sachs' comments yesterday morning on CNBC.  Politicians are solely focused on getting in a quick (6-12 month) fix so that they can get re-elected.  They're not willing to make any long-term, difficult changes to the way our society currently operates.  I know this is the same comment we hear every day from the hard-core libertarians on this site, but it's so true and is such a fundamental flaw in the way our country operates.

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#17) On August 27, 2010 at 2:49 PM, hall9999 (94.14) wrote:

Here is the best blog around on the subject.  

It's going to get better, then worse, then better before it gets worse.

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#18) On August 27, 2010 at 3:39 PM, awallejr (61.07) wrote:

Sorry Hall9999 you failed to consider alternate universes in your analysis and/or ascension;p

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#19) On August 30, 2010 at 5:44 PM, TigerPack1 (33.46) wrote:

Good debate of ideas...

My nutty idea of late, is we may need a serious market meltdown the next month or two, to actually change Washington politics and get the country moving forward again sometime next year.  Others are starting to think this way also.  Clearly a BUYERS strike today on Wall Street.

I worry that if we do not change government policy course drastically the next few months, we are destined for stagflation, HYPERINFLATION and social turmoil in an escalating fashion the coming decade.  This November may be the last and only chance voters have to right the ship.  I can see ever greater deficits and money printing and regulation standing the economy still or moving it backwards in 2011-2012.

Recessions are part of the NORMAL economic cycle... BEN, CONGRESS and OBAMA believe they should be abolished, but there are many unintended consequences and real costs to pay for following this line of reasoning and tampering with the "free" market... GET OVER IT!

-TigerPack

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#20) On August 30, 2010 at 10:29 PM, Mstinterestinman (< 20) wrote:

Bring back the tax credit I want a discount when I pay for real estate ;) lol

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