The Perfect L-Shaped Recovery

Since no one else will ask the question, I will; why in 2010 must the legislation of basic human integrity, still, is necessary? I know, man and money are not the stuff, of which, virtue is made, however, when will it sink in that tempting fate, especially during a secular bear market, ultimately, is a loser’s game?

The FinReg follies have concluded with TBTF banking left unmolested. If there were men, or women in charge, who would have said years ago, “…no thank you, this firm prefer not to do business in this manner”, the notional value of outstanding credit default swaps alone would not eclipse the insane $65 trillion dollars being demanded by Kim Jong-il, North Korea’s Supreme Leader, as reported in Forbes from an AP story, as war reparations from the US.

The denture-wearing Dodd-Frank Act is being hawked as the toughest regulatory piece of legislation since the 1930’s. Reinstating Glass-Steagall, strictly enforcing the Securities Acts of 1933, 1934, and the 1940 Investment Act would have been faster, cheaper, and more powerful. Progressive Republican, Judge Ferdinand Pecora is undoubtedly disappointed at the latest scion of his depression era handy work and he’s been dead since 1971.

If the BP Deep Horizon Project Manager had said “not on my watch” and stopped operating the drilling rig once it was discovered and reported that too many short cuts had placed the overall safety of the men, facility, project, and gulf of Mexico, into question.

Is it too much to ask that a dollop of integrity be used in Washington DC, as we enter the double-dip of the Great Recession, so that the proper mixture of program cuts, war funding, and tax increases is crafted with intelligence and vision?

Gee - 20?

North of the border, an amoral group of desperados, thieves, cutthroats, land pirates, scallywags, and mercenaries, oh yes - I’m not speaking of illegal immigrants invading Arizona, I’m referring to the G-20 confab being hosted by Toronto, Canada, at a cost of $1 billion dollars, to protect world leaders. The meeting ended with Europe committed to austerity measures while the US favors more spending.

I guess if you have almost destroyed the global banking system, the global financial markets, turned home ownership from a lifetime achievement reward into a daily nightmare, robbed the soon-to-be retired of their nest egg with a zero return over the previous decade, while paying actual retirees next to nothing for the use of their principal, and insisting that everyone’s standard of living for the next decade must become austere, for the greater good, then, protection to the tune of $21M an hour, including overtime, over a two day period, is necessary.

The European Union is on suicide watch, China’s foot is on the stimulus break before home prices and wages reach outer orbit, and Australia is smothering mining stocks with new taxes; so mining, one of Australia’s most powerful industries, smothered the career of the previous PM, and replaced he with a she. The USA and its states are broke, so are many of its citizens; the velocity of money is nearly a negative number, unemployment is not falling - but home prices are, The Gulf of Mexico is a challenge unto itself. Purchasing equities is a low priority.

The Bear Market

The secular stock market will experience severe head winds for the next few years. Highs in the popular averages have been made for 2010. The street is beginning to accept that there is no V-shaped recovery on the horizon; or a U-Shaped, nor a W-Shaped - the winner of the 2010 Post Great Recession Economic Silhouette is the letter L.

The final 1st qtr. GDP figure was 2.7%, down from 5.6% in the 4th qtr. of 2009. Consensus agreed at the outset that stimulus spending added roughly 2.5% in GDP growth.

That as a given, the organic GDP figures for the 4Q/2009 and 1Q/2010, respectively, was 3.1% and 0.2%. Averaging the two quarters, GDP growth is 1.65%. Congress, not passing the extension to unemployment benefits, is reducing in the economy, by an additional $5 billion, monthly, deposable income to aid spending, adding one more headwind to the recovery. Dodd-Frank will add to the cost of doing business. Massive layoffs are scheduled at the state and municipal levels. Tax selling will pick up as well.

In 2010, the way you win the money management game is by not losing.

Continue to buy gold on dips; GLD, IAU, SGOL, and gold bars and rounds. Cash is King. Don’t add to treasuries’ positions, with the 10-year note below 3%, and don’t sell any you may own– for now.

Apple Computer

Apple computer stock is a sell. The iPhone 4 is the greatest invention since electricity; this was proven with 1.7 million units being sold in the first three days. At the beginning of this year, everyone said the stock price would easily reach $300. It did not.

Some day it may reach that round figure, but not before the next market correction occurs. Apple will see $250 before it will see $300. It closed Friday at $266. If you want to own it, sell the 260 October put. If I’m right, the stock will come back to you. If you think I might be wrong, buy the 280 October call for insurance against a short-term bounce, though I doubt it.

The End of US Capitalism

History will point back at September 2008, as the beginning of the final economic decent into the first global depression of the 21^st century. If, the natural world’s symbol of the Great Depression was the dust bowl and drought throughout the 1930’s, then, hurricane and flood will become its substitute.

 America’s total world hegemony is indisputably on the wane.  Evidence to support this theory includes the nationalization of Freddie Mac and Fannie Mae, the bankruptcy of Lehman Brothers, and the surrender of Merrill Lynch to Bank of America.  Additional exhibits offered for the record includes the near drowning of the U.S. cities of New Orleans and Houston.  

 Metaphorically, the bull, Merrill Lynch’s signature mascot and Wall Street’s icon of capitalism’s vitality and unparallel economic period of prosperity in America, is corralled under duress, and, which may signify a coming collapse of middle class opulence, which might never be duplicated.

Macro Trends Spell Doom for Banks and Their Profits

The rise and fall of debt is continuing without abatement. In the U.K., bankers refuse to write new mortgages. U.S. consumers are tapped out. Businesses are finding their cost of borrowing prohibitively expensive to continue certain lines of business, i.e. consumer auto leasing at Chrysler Financial, all the while asset-backed portfolio valuation is tenuous and overvalued, at best.

After 30 years, two generations of consumers and businesses relying on hyper-credit to generate an enviable lifestyle for the middle and working class, trumpeting painless capitalism – all winners, no losers, and endless increasing corporate profits, that bubble has burst.

This perspective should be viewed from two positions, first, historical and secondly, relative to global living standards. The U.S. is the largest economic engine in the world. Household debt has tripled in the last 25 years.

In 2008, the inability to service debt is akin to the credit depression of the 1830's. Europe in the 1820's became mesmerized with transcontinental travel by train and flooded America with credit. The term transcontinental attracted money then the way dot.com attracted funds in the 1990's. A land rush, sponsored by the government, coincided with this period. Between servicing the railroad bonds debt and the leveraged real estate debt, remaining disposable income left little domestic spending for growth. Expansion became contraction. The great depression of the 1930's was more a function of technological advances increasing output, relative to consumption, thereby collapsing demand.

Our savings rate is the lowest in the developed world. It has dropped below 1 percent. Yet, we also buy more things than anyone else using maximum credit. Credit cards, home equity loans, secured and unsecured personal loans, loans against retirement accounts; any loan that continues the buy now, pay later, merry-go-round, until recently, without question and interruption, was marketed and consumed. Ironically, brokerage firms' margin accounts, the villain of the stock market crash of 1929, is our most conservative usage of debt, today.

Currently, home equity, which rose on cheap capital and hid stagnate wages this decade, has reversed while its cost has risen. Homes that were once ATM machines only three years ago are being repossessed in the tens of thousands each month by banks. Equity in an individual's home once was his or her greatest investment. Servicing debt on growing negative equity is becoming harder to do, both financially and philosophically, for underwater consumers. Prosperity from the mirage of supply-side economics has vanished for the masses.

Looking back, in the 1980's, deregulation through supply-side economics redefined risk and value. In the 1990's, heretofore, imprudent levels of credit, a peace dividend from the end of the cold war in the 1990's, and the integration of cheap global labor, provided the west a temporary and significant head start re-imagining comfort and convenience for the working and middle class.

Looking forward, new banking regulations, regardless of the outcome of the November elections, will restrict the future of credit and leverage for commercial and investment banks. The defense industry peace dividend was consumed years ago by the endless war on terror. Wages in developing countries are rising, and so is the cost of limited natural resources. And, the true bill on previous runaway debt created and consumed in a lax atmosphere is past due.

We are heading into a global recession. The IMF projects at least $1 trillion in total write downs. Total U.S. residential single family home real estate value is expected to fall another 5 per cent to 20 per cent; easily another $1 trillion in value. Bankers are considering reducing outstanding credit lines in the next two years by at least $2 trillion dollars.

Yes, banks and their profits are in dire straits.