The Barnard Observer
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Home Picks Figures Great Investors Vault Misc Contact c2003-08 Thomas Barnard
19 More Days Like This and the Dow is Gone
The Narrative
Cheer up. At one point yesterday the title of this piece would have been 13 days and the Dow is Gone.
I am not much motivated to write a piece but many have asked me to write up some kind of narrative. I don't see the light at the end of the tunnel yet. There is a large inventory of houses and cars to be worked through before real demand will perk up. And even that demand can be reduced by the same demand destruction that has eaten into demand for oil. In other words, kids who got themselves into condos 5 or 10 years earlier than normal because of ridiculously easy credit may re-habitate with their folks.
It will be interesting to see how Christmas works out. Consumer confidence indexes are at 25 year lows, we will have to see if that translates into action (or inaction, meaning not buying). In any case, retail should drop off in any case after Christmas, and this is why I am not seeing the light at the end of the tunnel.
The Election
I am taking Warren Buffett's position when Obama was still running against Hillary Clinton, and McCain had sewn up the Republican ticket. He felt that no matter who wins, we will be better off than we were.
But I'm afraid leadership may not be able to do a whole lot. Raise taxes? How can we raise taxes when the economy is in the tank? This doesn't make sense. Obama can tax the rich, but it didn't work for either Herbert Hoover (who raised the top rate from 25% to 63% to balance the budget) or for Franklin Roosevelt, who left high taxes in place. A tax I personally would favor would be a gas tax if the price of oil really, really collapses. I would favor this because we should bear down on a course of energy independence to avoid the craziness we've seen in oil prices, and because military actions in far off places are not working very well to our benefit, and they are very expensive.
Spending programs? Well, maybe, but the problem is that our deficit is already large and if we don't want to see the dollar sink to peanuts, we'll have to reign in the spending. Again, personally, I favor spending on energy programs and infrastructure. Let's cover the nation in wind turbines and solar cells.
Gold
This year gold has gone through the same gyrations as everything else, but in the end has not done much. My take is that you have to watch inflation. Inflation has moved up, but everyone these days is more concerned with collapse and deflation than all the money being pumped into the system to keep everything afloat. Making credit easy only works if someone will use the credit. But now borrowers are much less interested in borrowing.
But inflation could be a real problem. Our deficit is unbelievably huge. $500 billion. If our bonds don't sell for any reason, we'll have to pay higher interest rates, and that could eat into the budget, and spending for other worthwhile programs will be frittered away on bond interest payments.
My God, Here in America
Greed and avarice are going to do us in. Everyone thought they were going to make a fortune on their homes, and agreed to ridiculous mortgages because they would only need it for a year or two, and then they'd move on to the next money-maker house. Homeowners were greedy, the mortgage bankers were greedy, the investment bankers were greedy. Huge lapses in judgment by Fannie Mae and Freddie Mac, but somehow they achieved the profit figures, if only by a micro milimeter, necessary for the CEO and his team to get their bonuses.
And what's the result? Fannie Mae and Freddie Mac have been nationalized. The largest insurer, AIG, has been nationalized. Pretty soon they'll have to nationalize General Motors. Perhaps one of the now "too big to fail" banks that have been cobbled together by the FDIC will also end up nationalized. Like Citibank.
Republicans want to blame the Democrats for failing to pass some legislation a couple of years ago, but believe it or not, Fannie Mae already has an oversight regulator. But for sure they needed another one because the one in place failed to do its job.
Probably the biggest problem is that no remembers a really serious recession, and the caution that would engender. We are about 70 years out from the Great Depression. So, common sense which has aided us all these years has vanished. Regulation can help, but what happens is that humans will try to outwit the regulation, "game" the regulation. So, we end up having to endure these hiccups in a capitalistic type of system.
But back in the Great Depression, banks and insurance companies were not nationalized. Are we on the slippery slope to socialism? Sure seems that way, but we have only ourselves to blame. Capitalism regulates most severely. Now no one wants to lend.
Get ready, though, it's not just here. The Netherlands just nationalized one its banks, Fortis. Iceland was voted the "best country to live in" last year, but now its economy is in shutdown. Its four largest banks owe $100 billion. This for an economy with a GDP of $14 billion, and a population of 320,000. The contrarians would say we should have known they were in for trouble when they were voted best country to live in.
Is China immune? I don't think so. People forget that the Chinese had to shuffle a lot of bad loans when they wanted to sell shares in one of their banks to the west. There are a boatload of bad loans that have made by Communist party officials.
We may have years of lousy growth just as the Japanese had after its stock market collapsed in 1989.
Energy
The main story is that speculators, who have clearly been running the show, are more afraid of demand destruction than inelastic demand, demand that will continue no matter what. The big Mo is now on the down slope.
Investment Advice
We have seen a few of these very severe looking down days. Both times we have seen 15 to 1 declines to advances, and yesterday only 2 new highs in the NYSE and 1,663 new lows.
I have been promoter of bad ideas, so kindly take that in mind. I liked Suntech and it is down, and I liked HEV and that is down. The only idea I've had that was any good was to buy mutual funds that short the market and cash.
I don't think we have seen the bottom yet; however, I do not think we will see the bottom until the next administration. There are just too many bank failures and layoffs to go. In 1929 there were important meetings to save it all, just like the ones they have been doing recently, but it took a couple of years to reach the bottom.
On the other hand, Microsoft has a $40 billion buyback program in place. My pal in the oil patch says that he read that the market is valuing Exxon's reserves at $10 per barrel. Oil will not get that low. And there is what everyone knows, not every mortgage is bad. Most are still paying their mortgages or refinancing out of ARMs. Things are getting a little ridiculous, and it's going to take more than 20 days for the Dow to go away.
We may see more classic capitulation sometime next year, or maybe the year after that. Unfortunately, I do not see a robust recovery at this point. I have felt for a while that China's internal recovery will drive the world, including the U.S.A.
Since I don't think the worst is over, cash is a good idea. Keep an eye on inflation. Since I don't see huge demand driven inflation, I am not invested in gold presently, but keep watching.
Interestingly, the tiny bulletin board stocks have done better than the rest of the market. They may have already hit rock bottom lows. If a stock is down to ten cents, maybe it is harder for it to go lower yet.
I closed my shorts yesterday, but I don't feel this is the end of the damage, that may be a year or two away. But I certainly feel that stocks could bounce up and then move sideways for a while. I have no advice other than cash at the moment. Of course, cash would be a bad idea if we are looking across the valley to bull market on the other side. If that indeed turns out to be the case, these are very low prices. You could probably trade this market, it has been very volatile. If you are a dollar averager, keep dollar averaging.
Just so we're clear, I only wrote this to provide yet one more narrative, not because I think I have a clue.
October 7, 2008