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Slow economy could make markets rife with bargains
Smith says it’s a little bit early to move on financials. “That’s where the money will be made eventually, but the bloodbath might not be over right now.”
One sector Smith likes a lot: “the retraining of America.” An example would be ITT Institute, which trains students for careers such as hairdressing and massage therapy.
If the retraining of America is centered on hairdressing and massage therapy to make us more competitive with China, then our standard of living bloodbath will continue.
1. a ruthless slaughter of a great number of people; massacre.
“With a little bit of luck, and everyone should keep their fingers crossed, this should be very inflationary, and that’s a good thing. ... Otherwise, the stuff we’re paying on is not worth anything. Inflation helps the debtor.”
If "very inflationary" leads to massive unemployment like it did in Zimbabwe, Weimar Germany, and our 1970s, then the employment bloodbath will continue. As a side note, the bloodbath will continue as long as we think the monetary printing press can actually solve the problems of massive debt, massive overcapacity, and a world that has suddenly become much more competitive and fearful.
3. a widespread dismissal or purge, as of employees.
Nocera: JPMorgan's Profit Good for the Market, But Citi 'Going to Be a Bloodbath'
Continued deterioration and "the potential for [more] panic," is also Nocera's forecast. Any good tidings generated by JPMorgan's results today could be wiped out tomorrow by Citigroup, where a loss of $10 billion or more has been predicted. "It's going to be a bloodbath," he says.
If there is continued deterioration, the potential for more panic, and major banks continue to hemorrhage money, then the economic bloodbath will continue. In hindsight, history may show that it only took one of the three.
2. Informal. a period of disastrous loss or reversal: A few mutual funds performed well in the general bloodbath of the stock market.
Source Data:
Dictionary.com's Bloodbath
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
17 hours ago
12 comments:
Stag,
the bloodbath will continue as long as we think the monetary printing press can actually solve the problems of massive debt, massive overcapacity, and a world that has suddenly become much more competitive and fearful.
Bad news. The blood bath will continue. Earlier today I saw a headline on Yahoo! that said "Stocks Rally on Hopes of Bailout"
The "audacity" of all this "hope" is telling.
Obama's R&R plan looks like a big feel good green boondogle to me.
For the life of me, I can't figure why any Asian country would buy treasuries to support the proposed $800 billion price tag. If Obama's plan really is worthwhile, the Asians might as well use their money to implement the plan in their own countries.
We're printing $600 billion to buy MBS. What's another $800 billion.
mab,
The "audacity" of all this "hope" is telling.
Wile E. Coyote and Road Runner
http://en.wikipedia.org/wiki/Wile_E_Coyote
The Coyote could stop anytime -- IF he was not a fanatic.
Cartoon physics
http://en.wikipedia.org/wiki/Cartoon_physics
For example, when a cartoon character runs off a cliff, gravity has no effect until the character notices and reacts.
Too bad investors finally started to notice the ponzi schemes (Madoff, our banking system, international trade, ...). It sure put a damper on the Reality of Prosperity party.
These Bailout Parties aren't ponzi schemes though. No sir. Keep the noisemakers out. We're going to party like its 1999.
Most people just don't seem to get it though.
The banks are in trouble because the taxpayers are in trouble. Therefore, we'll simply borrow some more money from the taxpayers and give it to the banks. While we are at it, we'll use some of that borrowed taxpayer money and give it directly to the taxpayers. Win win. Everyone benefits and nobody pays.
Look, what I'm really trying to say here is that the more money we take from the taxpayers, the more money we'll have available to give to the taxpayers, minus a very small tiny amount siphoned off to prop up our failing banking system. That's all. No big deal.
Surely this must make some sense. Perhaps an example would help. Picture a family with one son named Peter Paul. Let's say the family doesn't have enough money to eat. No problem. Mom can borrow $15 from Peter Paul, buy a Big Mac with $5 of it, and hand $10 to dad. Dad can buy a Big Mac with $5 of it, and hand $5 of it to Peter Paul. Peter Paul can then spend the $5 to buy a Big Mac for himself. It's a win win situation. Everybody benefits and nobody pays.
I know what you must be thinking. Why didn't Peter Paul just buy three Big Macs in the first place? That's a really stupid question. It's the kind of question an amateur economist would ask. Peter Paul obviously couldn't afford to buy three Big Macs. The family didn't have enough money to eat. Remember?
This isn't rocket science.
Stag,
You will not believe this:
http://www.federalreserve.gov/boarddocs/testimony/2001/20010125/default.htm
Guys, I'm come here everyday. I like the nuggets of truth found in your humor. And I find value in the not so funny stuff, too.
I went through a good part of the comments found in "I'm Capitulating"--Some really good stuff in there that got me seriously thinking about a lot of things. Example: the concept of "excessive optimism", proof of which I'm seeing everywhere.
After reading the comments regarding the logic of buying and holding TIPS, I was really tempted to buy some. At one point, mab, you said you just couldn’t pull the trigger on burying cash in your backyard. I couldn’t really tell if you were serious there but I seriously think that’s a good option--nothing more available and liquid than that!
I can’t pull the trigger on TIPS, myself, because I don’t trust the government, one, and, two, I think there could be a very real need to sell TIPS before maturity at a substantial loss.
Actually, both my reasons stem from my inability to trust our government. The decisions being made by the governing class are desperate and I’ve never really trusted desperate people. What is our government, the FED, the Treasury, today if not a group of desperate people?
Anyway, just wanted to chime in here to let you know I look forward to reading your blog everyday. Keep it up. Don’t Capitulate again! You guys are great!
"Our economic system is critically dependent on the free flow of credit..."
Ben S. Bernanke--January 13, 2008, Lecture before the London School of Economics
"Our economic system is critically dependent on the free flow of unearned money..."
The truth
mab,
You will not believe this:
When people tell me that I will not believe this, my first reaction is a feeling that I should be very skeptical and look for reasons that perhaps I should believe it. That probably comes from watching too much financial news on TV though.
The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade. This is in marked contrast to the perspective of a year ago when the elimination of the debt did not appear likely until the next decade.
Oh man! I cannot believe this!
Thud! Thud! Thud!
That damn desk should know how to get out of the way of my forehead by now.
Anonymous,
First off, you really brightened may day. Thanks for the kind words!
I can certainly understand your concerns about TIPS. I have these same concerns. I'm not buying TIPS because I like them. I'm buying becuase I dislike everything else.
I actually expect losses and will be pleasantly surprised if I just manage to break even.
If deflation continues to set in there will be nominal losses but my purchasing power should hold. I don't mind having 10% less money if most things are 12% cheaper.
If inflation sets in there will be real losses as a larger and larger chunk goes to taxes. I do mind having 100% more worthless money if things are 98% more expensive. The taxes would kill me.
I'm settling on one of the least-worst evils. As you suggest, there's a chance that the government will simply refuse to pay me at all. I don't see much of anything I can do to protect myself against that though, so I'm not even going to try. It's kind of like saying that nuclear weapons are pointed at me. What can I do about it? Well, other than the obvious solution of buying an umbrella for protection. Hey, it keeps the rain off of me! I might get lucky! ;)
"Our economic system is critically dependent on the free flow of unearned money..."
Next you'll be telling me that our government is critically dependent on the free flow of unearned money being taxed.
That's just crazy talk. Crazy like a fox! In fact, it's just crazy enough to almost work for a few decades and then implode!
Anonymous,
One more thought.
I can’t pull the trigger on TIPS, myself, because I don’t trust the government, one, and, two, I think there could be a very real need to sell TIPS before maturity at a substantial loss.
In my opinion, the most likely thing to cause you to want to sell your TIPS before maturity would be heavy inflation (if only to pay taxes on their massive gains). I think there would probably be ample buyers though. There would have been in the 1970s. Let's just say I'd expect there to be more buyers than non-inflation protected treasuries anyway, lol.
Consider this. As inflation rose, the desire for TIPS rose even as their yields dropped and their prices rose. I was not certainly not immune to the effect. I would have done better waiting for the deflation before making the purchases last year.
During deflation, there's less of a concern. TIPS do have some deflation protection (you will get at least face value at maturity).
You are right though. TIPS are not very liquid.
I-Bonds are much better than TIPS in a worst case scenario environment. You can cash them at the bank anytime you want (VERY liquid), they are tied to the inflation rate, AND they are tax deferred up to 30 years.
I guess that explains why the government recently lowered the amount of I-Bonds you can buy in a year by 83% (from $30k to $5k). Nice to see that the welfare state is on top of safe stores of value destruction. Fortunately, I've been buying since 2000 though. I at least manage to somewhat protect some of my nest egg.
"That's just crazy talk. Crazy like a fox! In fact, it's just crazy enough to almost work for a few decades and then implode!"
There you go again with that excessive optimism! ;)
Have you guys read anything about Detroit lately? Check this out.
http://www.tribbleagency.com/?p=3598
About TIPS, I might want to sell if I lose the contract I have now and if I wanted to… say…use the money for starting up another business or…say…to buy a farm? I’ve got to stay productive somehow. It’s gotta be liquid. I-Bonds sound great! Too bad it’s only down $5k a year. What else?
Anonymous,
Holy frackin' crap!
If you stop looking at Detroit for even one year, things only get worse.
That link is worthy of its own post.
As for I-Bonds, you will be happy to know that technically you can buy $10k in a year still.
You can buy $5k in paper I-Bonds AND $5k in electronic I-Bonds.
You'll need to set up an account with treasury direct to do the electronic ones.
http://www.treasurydirect.gov/
I'm waiting until April to buy more this year. I want to see where real interest rates are headed. If they go higher, I'll continue waiting as the I-Bond rate will reset in May. If they go lower, I'll lock in April's low rate of 0.7% (plus inflation). I suspect I'll probably be waiting until they reset yet again in November.
I can't say it is a great (depression) plan, what with all these deflationary forces at play right now, but it's the only plan I seem to have, lol.
Stag,
I checked out I-Bonds earlier today. I like their liquidity--almost as good as cash--almost because you have to wait a year before you can redeem them. You can't really lose money during a deflationary cycle. You’re doing a little better than cash during an inflationary cycle, a lot better if it’s hyperinflation. I've read that long-term treasuries are the way to go during deflation but I don't know why. Seems to me you can lose money on long-term treasuries since no one intends to sit on them for 30 years. What happens when it’s time to sell? I am afraid I’m the little guy without access to inside information, behind the curve, too late. By the time I get to market I’ve lost a lot of money. I-Bonds are for the little guy, I think. Little guys don’t get ahead in leaps and bounds; they just gain what they don’t lose. Thanks for the tip. I’ve got kids that I can set up treasury direct linked accounts for.
You say “I actually expect losses and will be pleasantly surprised if I just manage to break even.” There are a lot of people looking back that wished they had planned with sobering expectations such as that. I’ve enjoyed your recent posts. Port Traffic was hilarious!
Have you guys looked at Doug Noland’s recent post at Prudent Bear?
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10178
This is a guy whose opinion I really respect; he seems a bit lost right now. He seemed lost since the implosion back in September. Kinda strange since he was writing about it and expecting it all along. Then he when the reality of it hit him he sort of faded, the blood seemed to go out of him, pale, afraid for his family, his little boy, the future. That reaction only led me to trust his opinion even more.
BTW, I saw that you had a post about Andy Xie. Actually, that’s how I found you. I was looking for the latest from Andy, someone I enjoyed reading back when. He’s always been dead blunt and straightforward about what he sees. That’s what got him in trouble at Morgan, I suppose. Have you read Nuclear Winter?
http://www.cibmagazine.com.cn/Columnists/Viewpoint.asp?id=713&nuclear_winter.html
Reading that I’m not sure where he stands. He says we should worry about inflation not deflation with Bernanke at the helm but then goes on to say that the total wealth of the world has likely declined by somewheres of 15 trillion and we could expect a decline of another 15 trillion for 2009. “It is not possible to get consumers spending again with wealth destruction of such magnitude.” That’s deflation. After the recession is over, he doesn’t see how the “global economy can resume robust growth quickly.” Again it doesn’t sound like a great argument for backing inflation. Seems like he’s going both ways at the same time.
Anonymous,
I've read that long-term treasuries are the way to go during deflation but I don't know why. Seems to me you can lose money on long-term treasuries since no one intends to sit on them for 30 years.
I guess it all comes down to how long you expect the deflation to last. If I thought deflation would last 30 years then I'd very much be buying long-term treasuries right now and holding them until maturity. I'd be locking in a very impressive real yield.
However, I expect inflation long-term. Therefore, I have bought and will continue to buy I-Bonds and hold them until maturity (the full 30 years).
The I-Bonds I bought in 2000 are up 72% so far (and tax deferred). Behold the power of compound interest. It doesn't hurt that they are earning 3.4% over inflation. It also doesn't hurt that there's still 21 years to go.
I doubt VERY much that we'll ever see I-Bonds yield 3.4% over inflation again in my lifetime. I-Bond rates hit 0% last year (a yield guaranteed to lose money after taxes) and they are only now back up to 0.7%. I'll take 0.7% if push comes to shove later this year, but I'm hoping we get another round of irrational optimism in alternate investments just before I buy. ;)
I read Andy Xie back when he worked at Morgan Stanley. I thought his thoughts closely matched my own. Every now and then I'll google search his name and see what he's currently saying.
Seems like he’s going both ways at the same time.
That's what I've been doing off and on since 2004. If I listen to the deflationists I'd be convinced that deflation is a certainty. They make really good arguments. If I listen to the inflationists I'd be convinced that inflation is coming. They make really good arguments. My overall theory is...
We're combining the deflationary Great Depression with the inflationary 1970s. In other words, industrial overcapacity meets the modern monetary printing press. I do not think two wrongs will make a right though. Both eras had high unemployment. Both eras had pain.
As for Doug Noland...
Bill Gross’s current investment thesis “buy what they [the government] buy” seems only to apply to fixed income.
I would argue that it shouldn't even apply to fixed income. Every time I make an investment I do it with the understanding that I could take it to the grave with me. I have rarely concerned myself with what other people would be willing to pay to buy it from me.
I'm with you on this one. I would not buy fixed long-term treasuries on the belief that I'd be taking those low nominal rates to the grave with me. In sharp contrast, I do buy TIPS with that understanding though. They are yielding roughly 2% over inflation, which is fairly well in line with the historical long-term non-inflation protected treasury performance (with TIPS having the added security of inflation insurance to lower the risk).
As I look forward, I only see one likely way I'd be forced to sell TIPS early. They'd be earning too much money during a period of high inflation and I'd therefore have to sell some to pay the enormous taxes. If I'm earning 12% and inflation is 10%, I have to believe that other people wouldn't mind selling their 2% nominal bonds and underperforming stocks (probably groing in nominal terms but not keeping up with raging inflation) and buying my 12% bonds though. That's just a hunch!
On the other hand, deflation would treat me much better even though I do have inflation protected bonds. In a 0% inflationary world, I'd only earn 2%. I'd pay very little taxes though, if any. Without the burden of enormous taxes, my savings would even grow slightly.
It reminds me of a story. In the 1990s, a coworker came into my office and asked if I thought Power Computing was a good investment. They were doing so well lately. I asked where he thought they'd be in 10 years. He didn't think they'd be doing all that well. I told him that I had no idea what Power Computing's long-term prospects were but if he didn't think they'd be doing all that well in 10 years, then he already knew what my advice would be.
He was right. It didn't take 10 years. It was also good that he didn't decide to buy the stock after seeing nearly two years of explosive growth.
http://www.nationmaster.com/encyclopedia/Power-Computing
As Apple's fortunes fell, Power Computing's fell as well. Apple started demanding higher royalties from Power and other clone makers, especially for higher powered models. This combined with inventory problems to cause Power Computing to sustain heavy operating losses during most of 1997, after two years of explosive growth.
What compels people to want to buy AFTER the prices have gone up? I will never understand. If a brand of cereal tripled in price overnight, most people would switch brands. So why doesn't that seem to happen in investing?
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