Third Party & Independents: Archives

Recessions in the U.S. (for the last 46 years) have been occurring every 2 to 11 years (about every 6.5 years). The last one was 2001/2002. The next recession will probably be anywhere from now to 2012. Based on the average, the next recession will probably occur by 2007. I don’t think we’re going to make it to 2007, much less 2012.

But, the much bigger question is:
How difficult will it be to recover from the next recession when:

• 68% National Debt to GDP (up from 33% in 1980) has never been higher since World War II , and the National Debt has never been larger than now, and the National Debt is quadruple the highest level in WWII (in 1950 dollars).


• median wages have declined for 6 consecutive years;


• Social Security (a.k.a. ponzi-scheme) it $12.8 trillion in the hole, and surpluses are being plundered (and replaced with worthless government bonds;


• the $8.4 trillion National Debt is costing tax payers dearly in interest (and rates are rising);


• inflation continues to rise because the crooked Federal Reserve (another ponzi-scheme; not a part of the federal government) is printing too much money … they have no choice, since defaulting on the interest payments would trigger something even worse;


• despite many predictions of the market to continue to climb until 2010, I don’t think we’re going to even make it to 2007;


• illegal aliens are costing the U.S. tax payers $70-to-$139 billion per year, and most politicians (despite polls showing most Americans are against that and another amnesty) are complicit in forcing the burden onto tax payers, and lying about the increased costs of education, healthcare, hospitals, welfare, Medicaid, insurance, law enforcement, and prisons; and congress is about to pass another amnesty (a.k.a. guest worker program); Republicans want cheap (untaxed) labor and Democrats want votes;


• Health care is becoming increasing unaffordable;


• energy vulnerability (no vision from our incompetent government);


• … more …

Watch for unemployment to start to climb again.
Watch for inflation to continue to climb.
Watch for interest rates to continue to climb.
Watch foreclosures to continue to climb.
Watch median wages continue to fall.
And watch the corruption in government continue to grow as voters continue to re-elect the very same irresponsible, bought-and-paid-for incumbent politicians that distract voters with nonsense issues.

Well, beyond my low opinions of Jon Markman, we are obviously entering an interest rate hiking period due to the inflationary Iraq war. Stocks are not good as a cyclycal investment, one should not be swayed into believing a well priced stock is not a good long term investment. There is a difference in long term investing and cyclic trading. Market timing is a commonly talked about, but nearly immpossible to execute strategy.

Our fiscal house is in dissarray by a President and Congress on a political mission of questionable course. In my opinion, most senior Congressional members should be in jail for fiscal malfeasance.

David

The stock market is a shell game. Always was,always will be.
Cash is king right now and will be for the rest of the year.
I have my money in euros..exect and 5% there by December.
It’s cyclicial,though.Investors have to put money someplace,so expect housing to bounce back in several months too.

Gergle, we agree. That is why I addressed 401K’s in the article, most folks can’t selectively by stocks in 401K’s.

SE, you are a smart person. It’s a pleasure to associate with another one. :-)

David:

I think you are wrong about recommending people sell stocks for the following reasons:

1. The market has an upward bias. In general the Stock Market increases over time.

2. Stock valuations are extremely low, as measured by the Federal Reserve. (About 30% undervalued). Earnings on the S&P are about 7% of stock price. Investors can “borrow” at lower rates and buy companies through stock purchaces. This arbitrage will balance out over time with either higher interest rates or a higher stock market. In the meantime it will act as a floor on the stock market.

3. Pessimism. When pessimism of high, (after 9/11) it is a great time to buy into the stock market. Conversely when optimism reigns (Like in the last part of the last decade) it’s time to sell. Right now stock investors are pessimistic.

4. We have a strong economy with corporate earnings surprizing on the upside. When earnings reports surpize on the upside usually the market goes up.

5. The Fed is near ending it’s rate hike schedule. The Fed is clearly saying that increases in interest rates are “data dependent”.

6. Commodity prices have moderated. The front cover of Barron’s magazine is bragging about commidities. It’s a sure sign we are at or near a peak.

7. There is no sign of a recession.

I would like you to write down the date and what the indexes are saying. I believe in a year or two those who fallow your advice will regret it.

Craig

Craig, all I can say in response to your reply is, leave it to a conservative to buy into a bear market heading down. SE and I will keep a tight grip on our fantastik returns the first 4 months of this year and let you and your followers fund the downward trend.

Late this summer, I intend to get back strongly in foreign markets, especially Asian, Middle Eastern and Canadian if interest rates rest, and there are no unexpected spikes in demand for oil that will carry into the fall. But, I don’t see how anyone could justify index funds through this coming summer in the face of increased oil demand and interest rates.

Craig, btw, investors said the same as you right up through 1929. I figure between 2012 and 2020, we will be perched just about the same place just before the ‘29 crash. Different regulatory environment and different markets to be sure, but, the fundamentals weren’t there in 1929 to support the lofty rise, and with either steep tax increases or steep entitlement cuts coming in the next decade, we will see again a rise which dismisses the years old negative fundamentals, precipitating another crash in markets first, followed by the economy. Consumers have no savings nor will they have the disposable income in the next decade, they do today, to sustain the economy through another recession.

David:

Craig, all I can say in response to your reply is, leave it to a conservative to buy into a bear market heading down

This is not a bear market. A bear market requires a 20% sell off that stays there. (not a short term bounce).

Your call to sell if reversed would have suggested we buy in 1999, and early 2000. After all, there was a record budget surplus.

Truthfully David, it is very hard to have a big bear market at these valuations. What you have 7% forward earnings on the S&P and US 10 year treasuries at 5% when historically those two statistics are at par, the market is seriously undervalued. It is as undervalued now as it was over valued in 1999.

You bring up 1929, but if you were to go back and look at stock valuations they were extremely high not extremely low as now.

Watch this. Corporations are sitting on Trillions and Trillions of cash and credit ability. In not one of your postings have you complained about Corporate fiscal balance sheets. That is because they are stellar. Corporations will use their cash (earning 4%) and their credit (5%) to buy these companies and earn 7%. It is a no brainer. It works like a floor under the market.

You are recommending that people sell something earnings of 7% to put it in something earning 4%, after a sell off. At the minimum you are a month late!! If you knew what the market was going to do, your post would have come out on May 1st!!!

Craig

Craig, your entire argument rests on what you consider only one criteria valuations and your base for that assessment is unclear. I view valuations in terms of record highs, and it remains to be seen if a 20% sell off is in the offing. The market has tumbled less than 10% already, and in light of the summers oil and gas rates and the inflation they are stimulating as well as Bernanke’s words indicating the FED ain’t done raising interest rates, selling now and avoiding another 10 to 13% loss seems prudent, as the author of the link in the article points out.

But, for every seller there has to be a buyer. I sold and am pleased that folks like you are on the buying side. If it weren’t for buyers thinking like you, I would have been unable to offload while my earnings were near their peak for the rest of this summer and into fall.

At least we won’t have to wait a few years to find out who was right on this one. Just another 6 weeks should tell on this summer’s correction taking place.

But the real topic and gist of this article is about the tax phobia Republicans have created which is going to continue to harm our fiscal policy for years if not a decade or longer, well beyond the time when it would have been appropriate to raise taxes.

David:

Craig, your entire argument rests on what you consider only one criteria valuations and your base for that assessment is unclear. I view valuations in terms of record highs, and it remains to be seen if a 20% sell off is in the offing.

Which index are you using that is at a record high?

At least we won’t have to wait a few years to find out who was right on this one. Just another 6 weeks should tell on this summer’s correction taking place.

Here is my quote:

I would like you to write down the date and what the indexes are saying. I believe in a year or two those who fallow your advice will regret it.

ooops “follow”.

Craig

S&P. May’s session high 1262.58 and testing of its 200 day moving average.

David:

S&P. May’s session high 1262.58 and testing of its 200 day moving average.

Not sure what you mean. The high mark for the S&P was . Until recently it was above it’s 200 day moving average. IT is testing it’s 200 day moving average on the way down.

I am sorry, I am confused by what you are trying to say. You are saying you “view valuations in terms of record highs” and are using the S&P 500.

The high for the S&P was over 1500 in 2000, and 1,326.70 on Monday, May 08, 2006. Viewing the S&P in terms of record highs makes the market look over sold. I am certain I must be missing your point. Can you try one more time?

I do understand the the market is testing it’s 200 day moving average. I also understand what that means.

Craig

Craig, I am using the May 8, 2006 high. I believe the market will correct to around 20% below that mark before fall is over. My 1262.58 is what I had in my notes as the recent high. I failed to update my notes on May 8.

Stock markets are interesting, but I do not think what we are seeing is really all about the stock market.

First, the new Chairman of the Federal Reserve, Ben Bernanke, is new. What does he mean when he says “x” or “y.” He is still trying to figure out how to communicate his intentions without causing everyone a nervous breakdown.

He must prove his chops for being hardcore against inflation- at least, nothing more a couple percent.

The cause for concern, the contributor to inflation is not one of the usual suspects. It is not rising wages. Instead, the rise in oil (other other commodities, but primarily oil) is driving inflation.

Normally, we like to ignore the effect of fluctuating components of the economy, like the price of oil. Economists like to look at core CPI, which excludes volatile elements such as the price of oil Years ago Greenspan said oil over $60 would be a serious problem. The problem is that oil has climbed very high, and stayed high. It is now showing up in the core CPI. Over the past 12 months we have seen inflation of just over 5%.

Much of the price of oil consists of uncertainty, a fear factor, if you will. Some estimate as much as $20 is built into the current price. (I do not think it was a coincidence Chavez from Venezuela asked for a minimum floor of $50).

It is too late to do anything about problems such as debts or deficits that would have affect the short term. It is notable that the Republicans did not push through the estate tax repeal. Several members of the Republican majority were allowed to quietly vote against repeal. Good thing, because making an even deeper crater in the budget deficit would have been flat out disastrous.

I would love to know how much Bernanke had to do with that… Quietly let it be known to Congress that he would raise rates 50 basis points this next go around if they dared repeal it.

But the real driver is oil. If the price of oil does not come down soon, the Fed will continue to raise rates, which will collapse the housing market. Since additional debt through refinancing mortgages has been the primary driver of the recovery, loss of that source of comsumer spending will spell certain death.

True story. 1700 Square foot home in the San Jose area, 40 years old, was just purchased for $925,000.

Anyway, there is hope; or at least, the day of reckoning can be delayed. Bring down the price of oil NOW, wash away the fear factor, and we have a chance. That would give the economy a chance to generate jobs (if combined with a halt to outsourcing).

Being withdrawing from Iraq NOW. Announce a new period of very friendly relations with Iran, whether they want it or not. Declare the War on Terror over, with nothing left but to mop up through ongoing intelligence operations.

All this could be easily implemented, it provides achievable goals through easily developed specific steps, and the drop in oil would relieve pressure on the Fed to raise rates much more.

Because if we do not chance direction, pretty soon, we will end up where we are headed.

PPI numbers Tuesday, CPI Wednesday.

Craig Holmes,

One may not be able to predict the stock market, but I could have predicted your response, and you could have predicted my response. Somewhere in-between, the truth lies. Eh?

I prefer David’s advice. I’ve seen enough to be pretty sure where the rest of the year is headed. Besides, one can always get back in the market anytime they want, provided you don’t have to pay some broker a bunch of fees. But, the question is: How far do you want to ride this down-trend, since it looks like it will last a while (perhaps the rest of the year). The rest of this year doesn’t look good.

The fiscal irresponsibility of the government is driving up interest rates, inflation, debt, %Debt to GDP, investment flight to one thing or another, etc. The instability and volatility is due to fiscal irresponsibility. What is amazing is how long it takes to play out, because the massive size of the economy and effects of globalization.

Speaking of shell games. That’s what the FED is. It is one huge ponzi-scheme. The FED is printing too much money, and borrowing. The goal of the FED is to play with money and rates and perpetuate as much instability and inflation as possible to shrink government debt. They have been doing it for so long 60+ years, we have come to expect it; we have come to think 4% inflation is a good thing. It is not.

We also have the inverted yield curve a few months back, which should not be ignored, since every time it occurred, and recession followed. That is a nervous factor. Hence, government has to pay more interest to borrow. The bad part is, what they can’t borrow, they print, and inflation grows worse.

By the way, almost everything has been on a run-up for the last couple of years. Can that last? Not likely.

As for stock prices, they are still overpriced.

The housing market is also overpriced, and some areas are way overpriced.

Foreclosures have been climbing for that last consecutive 15 months, and it is growing worse because people with Adjustable Mortgage Rates (ARMs) are getting hammered.

And, ofcourse … oil prices are not helping anything. This is also largely a result of a severe lack of vision by our government. Brazil is already largely on Ethanol. We could have been too, but not ever with our corrupt, bought-and-paid-for government … influenced by a few with vast wealth and power.

And, median wages continue to fall, as they have for the last consecutive 6 years.

Also, look at all of the .

But, other than all of those factors, everything is “very good”.

I agree with David Remer and Sicilian Eagle. Don’t ride the downtrend again as many did in 1999 to 2002.

… Also, look at all of the other factors.
How easy will it be to recover from the next recession(s) ?

Dan:

Something for you to think about. If the economy is in recovery, and median wages do not rise as usual, what happens? The one thing that shoud be irrefutable is that the last recession was in 2001. So we have had 5 years of recovery and average workers have not benefited. So where is the money? You have pointed out (rightly)that in normal recoveries, median wages increase.

The answer is corporate balance sheets. Not only are they good, but they are stellar. The money that usually goes to workers, has gone directly onto corporate profits. Corporate profit margins are at near record amounts as a percent of GDP. Debt is low, and money is in the bank. Corporations have set a new record for consectutive quarters of double digit year over year earnings increases.

So this recovery is remarkable in that Corporations have had record increases in profitability, while workers have had little if any increase in real wages. The two are probably directly linked.

If you divide the economy into three parts, government, consumers and corporations, (admitedly a bit oversimplified), leadership has been so far dominated by government (spending republicans) and consumers). Watch for leadership to shift to corporate spending.

Craig

Craig,
I think you are right about corporate balance sheets, but an important reason wages are not increasing is that hiring it taking place outside the US; in a word, outsourcing.

This explains why the unemployment rate is so low, yet competition for new hires does not drive up wages; the competition now includes India, China, and elsewhere. It also explains why graduates are doing relatively well too. Everyone knows a college graduate is the cheapest new hire, the biggest bang for the least bucks.

The unemployement rate is low because so many people fell off the radar. They did not find jobs. They are simply no longer counted. The Labor Pool Participation Rate is very low, only 66%.

With so much outsourcing, consumer spending cannot get any traction. Spending has been fueled by debt, specifically mortgage refinancing. But we are at the end of that tether due to rising rates.

With consumers less and less able to bail out the next recession like they did the last one, and Bernanke and two other Fed Directors spelling out concerns over inflation and slow growth ahead, it is the consumers and workers who are going to get the big squeeze if stagflation in fact becomes reality over the next 12 to 18 months. Getting out of it will be one helluva magic act without consumers to stimulate demand as they did within months after 9/11. That leaves government stimulus (more deficit spending) as the other approach to try to break out of stagflation. But, with debt and deficits already so high, the effect on interest rates would further slow some economic sectors.

As far as this eye can see, the lenders from the 30% credit card companies to the Fed’s overnight lending banks, are in the fat cat seat. Everyone else is going to have to tighten their belts a bit. Shakespeare had few thousands of words on this subject in a work titled The Merchant of Venice.

phx8:

I agree with the basic thrust of your post.

On the positive side, I would add above historical trend productivity to your list of reasons why labor costs are low and balance sheets are high.

I am not yet on board with your reason for the Labor Pool Participation Rate being lower than the 1990s. It could be many things. Early retirement, return to school, having babies. I would need to see some demographics on that. It could even be illegal immigration. Do you have a not political research article I could read?

On the economy is general the economist I read are spread between a fed generated slow down, and a average economy this year. Isolating on GDP, it seems like a fairly normal year for this stage of a business cyle, if we could just get those republicans to quit spending.

I disagree with many on the tax issue. I want to see the spending cuts before I’m ok with additional taxes. Why give Congress even more room to spend!!

Craig

Craig,
Sorry, nothing to suggest on Labor Pool Participation, other than it is listed on the government site. It is an odd number, and as you noticed, a lot of explanations could be account for the low number. It could be as simple as people living off the radar, in the black market.

Agreed, productivity has been huge, and I think it will continue to be an important contributor.

phx8:

Thank you. If you come across something let me know.

Just some random thoughts. I graduated from Seminary in 1982 with a modest job. Since that time, the economy has been remarkably stable for our country. Even counting the recessions of 1991 and 2001, the number of quarters with negative growth has been remarkably few.

In addition, debt has been cheaper and cheaper throughout my entire working years. In 1982 (love these war stories), I got an FDIC insured CD of 16.55%. In the early 1990’s I was glad to get a mortgage for 9%. Now I refinanced at under 6%.

If we track the history of a very stable economy as defined by no double digit unemployment, and lowering expectations of inflation and interest rates, the increased debt load seems to make sense for our country. That is a long long time of stability. (24 years).

I understand the doomsdayers point. Trends change. The next 24 years certainly will not see interest rates drop as much as the last 24 years, and they may even increase some, so what?
We have done this before. We went from low interest rates up to the peak in I think 1982. On a long term macro outlook, America did fine. We put a man on the moon during the time interest rates were moving up. We had no depressions.

(Sorry for this being long).

If I were going to predict the future on credit, since interest rates cannot drop much more, it would seem to me that credit would level off, and grow in the future at about the rate of the nominal growth of the economy. In other words, I believe credit use is tied to the supply and cost of credit. Since it cannot get much cheaper (although it can get a bit cheaper), it should stablize and balance out.

Thoughts?

Craig

Craig,
Personally, I have never understood investing on a 30 year time scale, never mind even venturing a prediction. Too much changes. Having said that, I see no reason why the US economy cannot innovate in unexpected ways, and achieve gains in the future that are hard to imagine today.
For example, energy resources could change dramatically.

It depends on people in political office behaving responsibly. It depends upon them embracing innovation & change, upon encouraging development of alternate energy sources, rather than working so hard to keep everything the same through Big Oil. It also depends upon responsible behavior in Congress, i.e., “pay-as-you-go.”

No amount of innovation will compensate for the gross mismangement of the finances of the nation.

phx8:

I agree with that. I think that is coming. Republicans are pretty angry at their elected leaders right now. Assuming issues move through cycles, it is pretty clear in my party that fiscal responsibility is going to return. There is a pretty clear and direct message being sent.
Republicans are livid about the spending. Livid may be to mild of a term.

Long term I am not worried about energy. I think we can innovate our way out of that. It seems logical that it will take some time.

Who is your favorite financial author? I kind of like Jeremy Siegel.

Craig

Craig,
No favorite. I read science fiction. I learned about markets as a stockbroker for a company called EF Hutton, 1986-92. It was a good company run into the ground by incompetent management. Learned some really interesting things about bonds, margining zero coupon treasuries and hedging them. Any more I just pick things up on the fly channel or web surfing, and I do not mess with anything speculative.

This sure is an interesting year. There are so many irons in the fire. But then there always are. Just today, I read two repected economists. One said the remainder of the year there will be no slowdown in the econony. The neutral fed funds rate should be 6%.

Then I have another one, who I read regularly with an open letter to Bernanke, basically warning of a serious downturn because liquidity in the economy is falling rapidly. This one made an interesting point. He said in 2003 we were worried about disinflation, because core prices were running at 1.5% to 1.75% per year. Now we are alarmed about inflation now that core prices are between 2.0% and 2.25%. He says to be changing from fighting disinflation to fighting inflation in so stark of method seems extreme for a .50% increase. That is a good point.

What I like about economists is they can explain to you tomorrow why they were wrong today.

Craig

Craig Holmes,

I agree about the record high level of corporate profits, but that is not comforting to workers as the median wages have fallen for 6 consecutive years, and the g a p between the have’s have have-not’s grows larger.
It has never been worse since 1929.

Corpocrisy and corporatism are growing, world-wide.

Too much influence on government, by a few with vast wealth and power, is worsening, world-wide.

The National %Debt to GDP has never been worse since WWII, AND the National Debt is quadruple (in 1950 dollars) what it in WWII ! Sure, there’s been growth in GDP, but the $Debt to GDP has grow from 33% in 1980 to the current 68%, and it’s going to get worse as we head into another recession with rising inflation, interest rates, nationwide foreclosures, and falling median income. Also, most of the jobs created the last 6 years are in government. And, everytime there was an inverted yield curve (as in last December) , a recession followed.

One thing is for certain … the irresponsibility of the federal government will make recovery from recessions for many decades to come more and more difficult, and if things continue on the current path, one of the next recessions could easily decay into something worse.

And, the major reason is the increasingly irresponsible and corrupt government, and the voters that tolerate it, which fuels more corruption.

So, are things getting better ? 76% say No.
Is the nation on the right path ? 76% say No.
Most Americans polled agree that government is corrupt (more so than the average American).

But too many of are still too lazy, and either don’t bother to vote, or keep re-electing the very same corrupt incumbent politicians.

This system of government that we have is in trouble as long as voters are too lazy to insist upon transparency, or are unaware how to achieve transparency.

Responsibility = Power + Education + Transparency + Accountability

Corruption = Power - Education - Transparency - Accountability

Dan:

I agree about the record high level of corporate profits, but that is not comforting to workers as the median wages have fallen for 6 consecutive years, and the g a p between the have’s have have-not’s grows larger. It has never been worse since 1929.

My point is that that is where the much of the money has gone in this recovery. Thanks to globalization, corporations do not have pressure to raise wages. Basically they are pocketing the money. Profits have never increased this much so consistently. Which is why this market is so undervalued.

By the way, Gold is now in bear market territory!!

Craig