TheHipHopBillGates
04-23-2009, 06:15 PM
It's not natural for Americans to abandon a dream, but continuing to believe that the economy is on the verge of a turnaround would be a costly mistake.
Americans, sunny and outgoing, are about to hit the skids in their love affair with hope.
Normally, of course, hope is a wonderful thing. Barack Obama ran his presidential campaign last year on a theme of hope. Bill Clinton liked to refer to himself as the man from Hope. One of the most popular comedians in U.S. history was named Bob Hope. The Hope Diamond is one of the crown jewels of the Smithsonian collection.
Yet hope is a silent killer when it comes to investments. It is the masked destroyer of capital and dreams, the ironic opposite of its definition. And that is why government officials and corporate executives have learned to exploit hope when their backs are against the wall and they see the guns of fate pressed to their temples, as they do now.
For every worry, a plan
If you think about it, every tall tale about the adequacy of banks and the state of the economy that the past two administrations have foisted on the public has depended on our natural hopefulness for its success.
Concerned that the banks' books contain so many permanently impaired loans that their solvency is in question? Create something called the Troubled Asset Relief Program that leads investors to hope, at least for a while, that the government will buy the bad loans.
Concerned, a few months later, that the effects of that effort are wearing off? Create a Public-Private Investment Program that makes investors hope, at least for a while, that private fund managers will buy the "toxic" assets.
Concerned that toxic loans and bonds that remain on banks' books will sink them if normal accounting standards are applied? Eliminate the standard called mark to market, which forces banks to accept current low values as their real values, so that investors can hope, at least for a while, that the loans are worth more than the paper they're printed on.
Concerned that emerging economies have so overextended themselves with credit that they can't pay back European banks? Create the illusion of a trillion-dollar International Monetary Fund contribution at a Group of 20 summit that leads investors to hope, at least for a while, that the problem is solved and that Eastern Europe can roll over its debts.
Concerned that investors think banks are losing money faster than their executives are losing hair? Let them call their first quarters profitable as long as losses are not counted, so that investors can hope, at least for a while, that these fictions will come true.
Concerned that investors are catching on to this scam? Turn loose an official such as Federal Reserve Vice Chairman Donald Kohn, who tried this week to give investors hope that steadier consumer spending and home sales, together with those dolled-up earnings results at banks, indicate the U.S. economy is poised to stage a gradual recovery later this year.
A crushing dose of reality
If none of that works, let White House chief economist Larry Summers spread the hope that the recession is easing by telling reporters the economy has presented a "more balanced picture" in recent weeks. Or let Fed chief Ben Bernanke wax lyrically about "green shoots." Or even have the president open the window on "glimmers of hope."
Enough already. I'm all for hope, shoots and glimmers -- that sounds like a New Age law firm -- but let's let some reality shine in. The data are balanced only if you put a thumb on one side of the scale.
listed 13 reasons to be optimistic this week, including a surge in mortgage refinancing, rapid money growth, a surge in tax refunds, fiscal stimuli, lower mortgage rates, a positive yield curve, a boost in Social Security payments and a global tsunami of central bank initiatives.
But you can't put their letter aside halfway, because they follow up with a cascade of catastrophe, including continuing constrictions in credit, a crushing of consumer net worth, an acceleration of home price declines, a rise in the savings rate toward 8%, private-sector deleveraging that's likely to persist for years and a negative-feedback loop entwining a decline in profits with declines in capital expenditures, employment, retail sales, state and local budgets, ad spending and export-oriented foreign economies. The economists finish with a conclusion that the Obama administration's efforts to raise taxes, rewrite contracts and add carbon taxes will discourage investment for years.
Are these pros and cons really balanced? Well, Rod McKnew, a banking analyst at boutique broker-dealer Newedge, who's been right on the crisis for the past two years, wrote this week in a note to clients that, according to his data, 16 key economic indicators are showing weakness. "Some balance," he concludes, adding, "The north wind keeps coming in about midnight and cutting down the green shoots."
Some of McKnew's weaker numbers: consumer confidence, the unemployment rate, average hourly earnings, the Producer Price Index, industrial production, capacity utilization, housing starts and building permits.
If you get right down to it, it's not hope versus some ethereal despair but hope versus what's really happening. Larry Jeddeloh, the chief analyst at TIS Group in Minneapolis, observed that virtually the exact same language of shoots and glimmers appeared in 1931 just before the second wave of the Great Depression. And it was the second wave that was the killer then, not the first (the first merely took down the stock market).
The first wave of our current recession was actually far worse, and faster, than the one of the 1930s, Jeddeloh says, considering that the CPB Netherlands Bureau for Economic Policy Analysis estimates that world trade fell 41% from November to January and that over the past year industrial production has fallen 31% in Japan, 19% in Germany, 17% in Brazil, 13% in Russia and 11% in the United States -- staggering blows from which economies don't just get up and walk away.
Crash helmet in hand
Sigh. I hate to leave you on such a gloomy note, so here's some data to optimize your optimism. ISI analysts figure the odds are low but rising that U.S. gross domestic product will come in positive in the second quarter. The potential will increase if the following five gauges keep improving: unemployment claims, the manufacturing purchasing managers' index, the price of copper, stock prices and the money supply.
And the good news, if you really feel like exercising your American right to believe in unicorns and mermaids, is that the ISI analysts figure there's a 70% correlation between the depth of a recession and the pace of recovery. Using a mathematical construct called regression analysis, ISI says that a GDP recession of 3.7%, which is where this one is likely to average out if it ends soon, could be followed by a 7.8% gain in the first year of recovery. That would shock a lot of people primarily because the exits from the past two recessions, which were mild, were quite slow.
The best analogue of the recent past would be the 6.9% recovery out of the deep 1957 recession. The mild 2001 recession, with a 0.2% loss in GDP, worked out to a 2.2% estimated recovery using ISI's math, and it was actually 1.9%. The 3.7% recession in 1957 worked out to a 7.8% estimated recovery versus 6.9% in reality.
Personally, I'm hoping we dodge the bullet. But professionally and practically, I'm keeping the flak jacket on and the crash helmet at hand.
If you want to go the first route in the stock market, buy the best of the recovering retailers and mall operators that are running from low levels lately, such as Lululemon Athletica (LULU, news, msgs), Chico's FAS (CHS, news, msgs), Nike (NKE, news, msgs) and Kimco (KIM, news, msgs), or just the exchange-traded retail fund SPDR S&P Retail (XRT, news, msgs).
If you want to go the other way, just hang tight with cash and nice-yielding bond ETFs such as iShares Barclays MBS Bond (MBB, news, msgs) and PowerShares Insured National Muni Bond (PZA, news, msgs). If you're not sure, sort of a mix of hope and concern -- I think that makes "cope" -- mix and match with a heavier weighting with the group you feel more strongly about.
http://articles.moneycentral.msn.com/Investing/SuperModels/investors-leave-hope-for-dead.aspx?GT1=33009
Americans, sunny and outgoing, are about to hit the skids in their love affair with hope.
Normally, of course, hope is a wonderful thing. Barack Obama ran his presidential campaign last year on a theme of hope. Bill Clinton liked to refer to himself as the man from Hope. One of the most popular comedians in U.S. history was named Bob Hope. The Hope Diamond is one of the crown jewels of the Smithsonian collection.
Yet hope is a silent killer when it comes to investments. It is the masked destroyer of capital and dreams, the ironic opposite of its definition. And that is why government officials and corporate executives have learned to exploit hope when their backs are against the wall and they see the guns of fate pressed to their temples, as they do now.
For every worry, a plan
If you think about it, every tall tale about the adequacy of banks and the state of the economy that the past two administrations have foisted on the public has depended on our natural hopefulness for its success.
Concerned that the banks' books contain so many permanently impaired loans that their solvency is in question? Create something called the Troubled Asset Relief Program that leads investors to hope, at least for a while, that the government will buy the bad loans.
Concerned, a few months later, that the effects of that effort are wearing off? Create a Public-Private Investment Program that makes investors hope, at least for a while, that private fund managers will buy the "toxic" assets.
Concerned that toxic loans and bonds that remain on banks' books will sink them if normal accounting standards are applied? Eliminate the standard called mark to market, which forces banks to accept current low values as their real values, so that investors can hope, at least for a while, that the loans are worth more than the paper they're printed on.
Concerned that emerging economies have so overextended themselves with credit that they can't pay back European banks? Create the illusion of a trillion-dollar International Monetary Fund contribution at a Group of 20 summit that leads investors to hope, at least for a while, that the problem is solved and that Eastern Europe can roll over its debts.
Concerned that investors think banks are losing money faster than their executives are losing hair? Let them call their first quarters profitable as long as losses are not counted, so that investors can hope, at least for a while, that these fictions will come true.
Concerned that investors are catching on to this scam? Turn loose an official such as Federal Reserve Vice Chairman Donald Kohn, who tried this week to give investors hope that steadier consumer spending and home sales, together with those dolled-up earnings results at banks, indicate the U.S. economy is poised to stage a gradual recovery later this year.
A crushing dose of reality
If none of that works, let White House chief economist Larry Summers spread the hope that the recession is easing by telling reporters the economy has presented a "more balanced picture" in recent weeks. Or let Fed chief Ben Bernanke wax lyrically about "green shoots." Or even have the president open the window on "glimmers of hope."
Enough already. I'm all for hope, shoots and glimmers -- that sounds like a New Age law firm -- but let's let some reality shine in. The data are balanced only if you put a thumb on one side of the scale.
listed 13 reasons to be optimistic this week, including a surge in mortgage refinancing, rapid money growth, a surge in tax refunds, fiscal stimuli, lower mortgage rates, a positive yield curve, a boost in Social Security payments and a global tsunami of central bank initiatives.
But you can't put their letter aside halfway, because they follow up with a cascade of catastrophe, including continuing constrictions in credit, a crushing of consumer net worth, an acceleration of home price declines, a rise in the savings rate toward 8%, private-sector deleveraging that's likely to persist for years and a negative-feedback loop entwining a decline in profits with declines in capital expenditures, employment, retail sales, state and local budgets, ad spending and export-oriented foreign economies. The economists finish with a conclusion that the Obama administration's efforts to raise taxes, rewrite contracts and add carbon taxes will discourage investment for years.
Are these pros and cons really balanced? Well, Rod McKnew, a banking analyst at boutique broker-dealer Newedge, who's been right on the crisis for the past two years, wrote this week in a note to clients that, according to his data, 16 key economic indicators are showing weakness. "Some balance," he concludes, adding, "The north wind keeps coming in about midnight and cutting down the green shoots."
Some of McKnew's weaker numbers: consumer confidence, the unemployment rate, average hourly earnings, the Producer Price Index, industrial production, capacity utilization, housing starts and building permits.
If you get right down to it, it's not hope versus some ethereal despair but hope versus what's really happening. Larry Jeddeloh, the chief analyst at TIS Group in Minneapolis, observed that virtually the exact same language of shoots and glimmers appeared in 1931 just before the second wave of the Great Depression. And it was the second wave that was the killer then, not the first (the first merely took down the stock market).
The first wave of our current recession was actually far worse, and faster, than the one of the 1930s, Jeddeloh says, considering that the CPB Netherlands Bureau for Economic Policy Analysis estimates that world trade fell 41% from November to January and that over the past year industrial production has fallen 31% in Japan, 19% in Germany, 17% in Brazil, 13% in Russia and 11% in the United States -- staggering blows from which economies don't just get up and walk away.
Crash helmet in hand
Sigh. I hate to leave you on such a gloomy note, so here's some data to optimize your optimism. ISI analysts figure the odds are low but rising that U.S. gross domestic product will come in positive in the second quarter. The potential will increase if the following five gauges keep improving: unemployment claims, the manufacturing purchasing managers' index, the price of copper, stock prices and the money supply.
And the good news, if you really feel like exercising your American right to believe in unicorns and mermaids, is that the ISI analysts figure there's a 70% correlation between the depth of a recession and the pace of recovery. Using a mathematical construct called regression analysis, ISI says that a GDP recession of 3.7%, which is where this one is likely to average out if it ends soon, could be followed by a 7.8% gain in the first year of recovery. That would shock a lot of people primarily because the exits from the past two recessions, which were mild, were quite slow.
The best analogue of the recent past would be the 6.9% recovery out of the deep 1957 recession. The mild 2001 recession, with a 0.2% loss in GDP, worked out to a 2.2% estimated recovery using ISI's math, and it was actually 1.9%. The 3.7% recession in 1957 worked out to a 7.8% estimated recovery versus 6.9% in reality.
Personally, I'm hoping we dodge the bullet. But professionally and practically, I'm keeping the flak jacket on and the crash helmet at hand.
If you want to go the first route in the stock market, buy the best of the recovering retailers and mall operators that are running from low levels lately, such as Lululemon Athletica (LULU, news, msgs), Chico's FAS (CHS, news, msgs), Nike (NKE, news, msgs) and Kimco (KIM, news, msgs), or just the exchange-traded retail fund SPDR S&P Retail (XRT, news, msgs).
If you want to go the other way, just hang tight with cash and nice-yielding bond ETFs such as iShares Barclays MBS Bond (MBB, news, msgs) and PowerShares Insured National Muni Bond (PZA, news, msgs). If you're not sure, sort of a mix of hope and concern -- I think that makes "cope" -- mix and match with a heavier weighting with the group you feel more strongly about.
http://articles.moneycentral.msn.com/Investing/SuperModels/investors-leave-hope-for-dead.aspx?GT1=33009