By Gene Inger | 18 August 2008
Good Weekend!
Trading places . . . on a global scale, seems to be what's dominating this Olympics; as has occurred at other times in history (our recent comparison of Olympics 2008 with Berlin in 1936 wasn't intended to suggest 'the decline and fall of the West', as others are now increasingly suggesting, but rather to indicate our ongoing perspective about how many other activities in this decade are somewhat reminiscent of that 'prelude to World War' era). From our view, the actual prospects are at variance with the typical 'decline and fall' ideas; a possible surprise to investors who are well-aware we forecast this entire deleveraging, and at the same time were highly critical of the (rather facile) military 'assumptions' made going into the current war.
First of all, it's beyond the point of debating 'going into' a global recession, even while others still debate it. It's past the point of talking about 'Asian and European decoupling' it seems to us; even though others still argue about the economic roles of regions that, in their view (but not ours), have replaced the United States for the 'longer run' (leaving aside that, in the longer run, 'we are all dead'). Actually we are champions of believing that 'when pressed into a corner, America has a tendency to come out fighting', to 'show others what we're made of' if pushed sufficiently hard.
Despite the slide of our middle class; despite some arguments about demographic or other shifts (which are all very real; but also exist in many other developed countries— and often to a far worse degree— nor is the obverse demographics necessarily a thing of joy), now and in the future, barring some dramatic change in trend dynamics. And, also despite what in some circles is the presumed 'resurgence' of Russia, reestablishing tensions that existed a generation ago (less likely than they think, though there's no doubt Russia is saying, 'we're back; deal with it— we will no longer just be ignored'), the future is not entirely bleak. [[Do you think they 'faked' the entire 'decline and fall' of the Soviet Union just to 'suck' us in? : normxxx]]
That is not to say we don't have an ongoing credit debacle/catastrophe (worse than simply a crisis); a 'perfect storm' of epic proportions (as forecast here back at the tail-end of 2006 and beginning of 2007, prior to projected 'higher-highs' in the Averages masking a classic undercover 'distribution' during a 'strong' Dow and S&P); a churning commodity picture, and continued sensitivity to oil and other energy prices. We saw deleveraging as a 'big deal' before others did, and we think there's plenty of 'food for thought' with respect to where this heads next. We've outlined our view on 'why' the Dollar would firm (for the past two months; well before the rally, in-part based on a softer energy as well as harder-line from Russia); not because things are so great here, but 'relativity' was our early argument; since we rightly thought the 'strength' of Asia and Europe was simply overconfidence.
In the days and weeks ahead, we will expand upon these postulations and the events we anticipate; including ramifications for the debt (and Financial) markets, and the impossibility of early housing or economic lows. This will be very much in-keeping with our outline all year suggesting that those looking for '2nd half' or even 'early 2009' strong growth, were saying so absent any basis in fact for their views.
Do keep in mind that we were virtually alone in the past couple months calling for the rebound of the Dollar from a basing pattern— accelerated by strong geopolitical shifts. Notably, Russia's brazen actions strengthen, rather than weaken, Western alliances. [[But it sends a strong message to erstwhile SSRs and satellites not to expect much in the way of actual help from NATO or the West.: normxxx]]
We do however, want you to keep in mind the yet-reported peaking of ‘dire straits’ (a mild pun), related to strategic movements of ‘multiple naval squadrons’ at sea. Ours in the Indian Ocean and Red Sea (not necessarily the Persian Gulf as others report, with apparent presumptions of ‘staging’ being identical to tactics previously used), to allow ‘strike proximity’ to 'enemy' targets in the event an attack is ordered, eg, in response to a move by Iran against us, or against Israel, or whatever.
A presumed buying of ‘packages of foreclosures’ by the ‘sovereign wealth funds’ (SWFs) is invoking cynicism (and possibly a political backlash) that OPEC countries (Dubai is most mentioned) will take our money— enriching their oil-based coffers; then turn around and buy up thoseforeclosed foreclosed, middle-class, homes (at a huge discount) from the very people hard pressed by energy-induced inflation (spurred on by the owners of those SWFs); then rent those houses back to the same families; who will then send yet more profit to Dubai, or the like. Not to pick on Dubai; but talk about a new spin on petrodollar recycling. It is not something that is sustainable, and is exactly the kind of example as to ‘why’ the pundits and politicians pleased with foreign investment no matter what, don’t get it. In this regard, even a factory set-up here by a foreign investor, still sends profits abroad.
There are too many more aspects of this to explore for now. Still, for those sensitive pundits (including our hard-working Treasury Secretary), we need to reexamine some few things that are humbling. While there’s no doubt about that petrodollar[[ and sinodollar and indodollar?: normxxx]] recirculation, it was entirely predictable. If humble little us could see it, we assure you that (wool over their eyes or not) most of those other 'key' economists could too. I recall warning members that even internal SEC, Federal Reserve, and institutional or other economists picked-up on this, and were roundly ignored by the powers that be. Much occurred in terms of avoiding common sense policies economically, monetarily, and even militarily (witness the sacking of early Gulf War II leaders who warned of the risks of what and how we were doing). Better leadership now for sure, but that's the equivalent of guarding the chicken coup after the chickens have long since been carried off by the fox.
This will be put together again; but as we said last year, not swiftly nor easily. For sure there have been those who ‘think’ it all relates to oil prices, and that lower oil will be enough to cure all ills. We, for decades, have considered oil the most important of all single determinants of economic matters; but as this past two year’s brewing debt crisis was promulgated by an antecedent capital and solvency mess (of many years' longstanding, though not widely known while 'things were good' as we ascended those impossible heights), we for sure did not (and do not) believe that a substantial drop in oil prices alone [[which is coming, barring outright war: normxxx]] can or would correct the mess.
That’s pertinent because lower oil now just reflects lower demand— contracting or worsening economic conditions here and abroad— and while it helps with some very basic living costs (including and especially the cost of food), oil prices (and their sequalia) are not the crux of the problem. The global extremists would like to pin all of our problems on that, I think, because they are loathe to admit that their 'unfettered free trade' and 'unfettered use of leverage' were the real heart of the problem. [[Not to mention the foistering of mind numbingly complex mortgages on those who were completely incapable of handling the outyear payments or the sale of packaged securities marked as triple-A to unsuspecting lenders, wiping out at least a generation of trust in ANY KIND OF U.S. 'paper'.: normxxx]] That’s why we asked whether they were truly advocates for the United States, or advocates for deconstructing America's old financial hegemony.
Investors have to realize that being proactive often means being a bit early, even if doing so is ultimately proved correct. In some financial areas (like real estate) a bit early is not only preferable to being a bit late, but often the only way to extricate one's self gracefully. As to entry points (particularly in stocks), there is no inherent urgency unless a ‘washout’ has transpired, and even then (and only 'if significant') there is usually some period of basing and retesting. Some were simply unhappy that, in late 1999 and early 2000, we warned that our own super-bull tech stocks (stock picks that, in many cases, were up several hundred percent) wasn't sustainable. We were a bit early, but very right. Ditto 2002 for the low; ditto 2007 for the following high, and who knows, maybe we'll be a bit early for the next lows.
For now it seems reasonable to emphasize: multinational stocks are often vulnerable (both to happenings in the US AND to overseas events— that’s our ‘decoupling's a myth’ argument), to more than simply the stronger Dollar which, while unanticipated, had a stellar run-up because of the fear of a broader war in the Caucuses. [[AND, also because ALL of the overseas economies, excepting only the oil producers, are now tanking (pun intended) faster than the US!: normxxx]] Yes I know some traders think ‘Russia in charge’ of pipelines is a plus for the sole-sourcing of fuel; but we rather think that’s exactly the problem. That also means the ability to control the spigot, so in our view seeing that 'as a plus', couldn’t be more short-sighted. And that also gave our Dollar rally further ‘relative’ attraction.
Belatedly, the financial media is starting to recognize that Asian and European banks and institutions are also suffering large losses from those CDO’s, SIV’s, and other 'alphabet soup' packages of 'toxic waste'— as if that’s news. This isn’t news to ingerletter.com members of course; though to that crowd who seems to have ‘thought’ the world was decoupled indeed, it sure was.
Remember: institutional investors still expect that at least one other big financial firm will [[likely go belly up: normxxx]] Hence the ongoing effects on credit derivatives will pose fairly persistent and very serious threats to global markets. So far we've seen ‘bank sponsored clearinghouses’ instituted, probably a good first step, but 'exchange traded derivatives' would be far safer than keeping them changing hands over-the-counter [[and thoroughly opaque to lenders and borrowers alike— only those bankers and other fancy financial engineers who did the packaging were/are privy to seeing their 'guts': normxxx]], as is the current (very dangerous) case. [[How many hundreds of LTCMs, both big and small, must still be out there to cause the CBs to wholly abandon all of their long-held 'principles'!?!: normxxx]]
We have argued that the entire (core) income generating model supporting financial institutions top-lines in recent years are already toast. They are hardly likely in the near future to make any income from those 'securitization fees' which supported those huge earnings and share multiples that purportedly justified thier share prices preceding the breakdowns. How now will investment banks and many BIG brokers make money going forward? Not that way, thus a significant retreat (already underway extensively) to fee-based and far safer, 'conventional lending' gross income, which cannot and will not resemble anything like that cornucopia that has gone before (in recent years). [[Worse, those large investment banks and brokers must still spend years 'writing off' those rancid securites still on their books and which will continue to consume most of their earnings for that period.: normxxx]]
Bottom line: The following bullet points:
- Bank and other capital impairment remains the crux of the present economic crisis;
- Pyramiding mountains of compounding debt have not ended.
MarketCast. . . remarks forecast substantive failures by banks and others, following further breakdown action, as we've outlined. Remember, back in early 2007 we denied the 'liquidity' momentum as a canard, believing housing to be only the first of the asset bubbles to deflate. We outlined structured investment vehicle failures, banking issues, confluence of asset deflations, and more, continuing with few 'interruptions'— that we also anticipated long ago— 'a perfect storm'.
As mentioned earlier the number of banks on ‘watch lists’ are rumored to be [[well over 700. But 'only' 90, for public consumption: normxxx]] (Note that the real risk-adjusted return (RAROC) on assets from the 100 biggest U.S. banks has been falling since the early 1990s in the era of financial innovation. Now if insolvency is considered the order of the day -or nearly so— outlooks remain [[increasingly dim. By some extimates, the CBs are trying to soak up hundreds of $trillions in toxic derivatives with hundreds of $billions in fiat currency!: normxxx]])
As the debt bubbles continue to deflate, there will be alternating moves to play from a trading perspective. In any event we retain a macro (forward-roll adjusted) Sept. S&P ~1600 short irrespective of interim oscillations.
In summary . . events continue reminding us of the risks our Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues, as domestic issues absorb us more while as we also focus on Middle East and World War III avoidance. To those who say it’s not a ‘war on terror’ but just law enforcement; actually it’s both. What they should hope for is that the ‘war on terror’ isn’t like the 1930’s prelude to World War.
Twenty months ago I commenced projecting an 'accident waiting to happen' ahead; saying that was affirmed historically after long-duration periods of free money (Gilded Age mentality), which doesn't create enduring liquidity, but just produces that interim illusion.
Since early 2007 we've noted that economic conditions were more similar to those following the 'Gilded Age' which ended in 1929, or following the panic of 1907, (hence our call for the start to be called the 'panic of 2007', as we are at the conclusion of yet another 'Gilded Age'— which is NOT coming back anytime soon; party over whether they like it or not, as they didn't, only thereafter grimly conceding there's much rehab needed). It is not a structure entirely resolved by rate cuts, stimuli, 'miracles' (financial or otherwise), or the arrogance of the 'few' who think they can 'fix' it. But it can be rescued by sound Fed policies that, finally, don't just succumb to the hidden agendas of the banks and other 'fat cats'constituents, or to the politicians, who are for the most part uneducated in nuanced (or even gross) monetary policy or things financial.
Socialization or nationalization of financial institutions would automatically ensure the application of a lower multiple than historically seen on eventual profits [[just check out what's been happening in Venezuela and other like SA countries recently: normxxx]], even if there were further recoveries in ‘price’ from the lows (over time) but clearly not to old highs anytime soon.
We have also argued for decades (well before Boone Pickens) against what became a bankrupting capital outflow that devastates our capital-base and enhances the prosperity of our trading partners only, as well as the ability and leverage of those dubious commercial ties to influence us. Neither the Federal Reserve nor the rest of our 'leaders' were blindsided, nor bamboozled by those vociferous 'pundits', into action deleterious to our common welfare— but VERY beneficial to a few at the top. We've shown they were engaged, but perhaps believed (and still do) that these issues are so gargantuan that even the power of the US Federal Government was limited in dealing with the challenges [[ie, that the 'free market' would 'sort it all out' in the end : normxxx]]. Hence the solutions so far are bailouts [[and other stop-gap measures, which are NOT any real solutions as they simply : normxxx]] generate continued hardships for most Americans in the end.
What they advocate while proclaiming ‘free market capitalism’ actually is an interwoven Government, military, corporate, and social accord, nationally and internationally, that diminish individual rights, business risk-taking, and facilitates a dangerous paradigm shift [[eg, so that, once again, the international monopolists will rule, as before WWI.: normxxx]] Ironically, the loudest ‘saviors’ on both sides of the aisle (metaphorically) show a dearth of understanding of the advantages of simply not being outsmarted in international trade deals while maintaining free fair trade; of not undermining historically sound capitalistic spirits, while endouraging international trade.
[[Not only is governance from the center over all things inappropriate and reminiscent of the failed Soviet society architecture;: normxxx]] but investigative journalism that’s truly probing of the agendas of those in power is lacking. Those who seek to demean the worth of the American future, in ways that compromise our financial independence or more, should be deeply probed and revealed— and NOT by those who are too lightweight to confront the issues head-on, or too complacent, or too willing to be swept along in a tide that risks, at the margins, meaningful efforts to restore our international standing (both financially and politically), indeed, merely to regain our financial sovereignty.
Enjoy the weekend,
Gene Inger
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Normxxx
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