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Recession Lasting Until 2018 Is Worth Exploring: William Pesek
If Sakakibara is right, the global economy is in deep trouble. He envisions a broad slowdown that might drag on for seven to eight years. China can live a couple of years without U.S. and European growth, but eight?
Sunday Night Futures
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Weekend:
• Schedule for Week of November 24, 2024
Monday:
• At 8:30 AM ET, *Chicago Fed National Activity Index* for October. This is
a composite index of ...
5 hours ago
22 comments:
"Lawmakers calling for Ben Bernanke’s head forget why the Fed chairman is taking U.S. monetary policy into uncharted territory. It’s because Congress failed to pump enough money into the economy in the first place. "
When I first read this I didn't know whether to stop reading or "muddle through" to the end. Then I realized that CONgress did fail to put money into the economy, they put it into the banking cartel's hands instead.
GH--excellent point! When CONgress really gets down to work, we will finally have the inflation that BB is hoping to ignite, but so far has only bubbled the commodity and stock market.
That may be a ways down the road after our Tea Party austerity period :).
G.H.,
When I first read this I didn't know whether to stop reading or "muddle through" to the end.
That's what I was thinking as I was reading it. I'm a big fan of William Pesek though so I just kept reading.
Then I realized that CONgress did fail to put money into the economy, they put it into the banking cartel's hands instead.
My "Aha!" moment was spent realizing that very little of the vast amount of money spent has been aimed at job creation.
We can either "bail" the water or we can patch the hull. We've chosen bailing.
Anonymous,
When CONgress really gets down to work, we will finally have the inflation that BB is hoping to ignite, but so far has only bubbled the commodity and stock market.
The Plan
1. Commodity Bubble.
It's a short short-sighted shortable short-sale list. As with all bubbles, the timing is incredibly tricky though. Time it wrong and you're likely to lose/crap your shorts! ;)
Greetings!
What if job creation follows larger ROI/productivity?
My perception is that the stimuli may have worked and that corporations may be making the required high returns that will eventually lead to hiring in the next year+...
here is an interesting read:
http://thepoliticsofdebt.com/?p=541
Cheers!
Remy
I'm a big fan of William Pesek though so I just kept reading.
I appreciate that. It wasn't that I was knocking on the author, it was an alright article, it's just that the one paragraph practically jumped off the screen as I was reading it.
One thing that bothers me in these times is when people will defend wall street bonuses by saying that at least wall street works for their money while CONgress simply fritters away as much as they can, our money.
What I don't understand is how they can distinguish between the two anymore, banking and .gov. Without the implicit .gov guarantee the investment bankers couldn't chase the outsized returns of the risky risk-free assets. And the subsequent bonuses.
Risky risk-free...hmmmm...
Make Your Portfolio Safer With Risky Investments
"Which is considered the riskier portfolio: one that contains 100% U.S. Treasury bills (T-bills) or one that has 80% equity and 20% bonds? In absolute terms, T-bills are the definition of risk-free investment. However, an investor might have a long-term asset mix of 60% equity and 40% bonds as their benchmark. In that case, compared to their benchmark, a portfolio containing 80% equity will have less risk than one with 100% U.S. Treasury bills."
It seems they forget to mention that the benchmark was flushed down with the bathwater in the fall of 2008. And no mention of TIPs anywhere.
remy,
I read your comment and the article within your link last night and opted to sleep on it.
Here's my reply.
Unemployment peaked in the last downturn at 6.3% in June 2003. At that time crude oil (WTI) was $30.66 per barrel. I turned bearish in August 2004 based on excessive debt.
Unemployment may have peaked in this downturn at 10.1% in October 2009. Maybe. It's hard to say. Unemployment is behaving a bit "sticky" this time. Oil was $75.72 per barrel then.
Unemployment is now 9.8% more than one year later. Oil is now $88.90 per barrel. Ouch.
Since we're using "free money/credit" to stimulate growth and corporate profits due to a lack of suitable alternatives (again) then what is the unemployment rate going to be during the next downturn and what will the price of oil be at that time?
I can't predict. The reason is that I think we're force feeding inflationary pressures to China and something will eventually break again.
Here's another way I look at it. It might seem like things are getting better right now but...
1. We keep kicking the can down the road but each time we do the can gets heavier. At some point we'll need "Mechagod-bernanke" to kick it any further.
2. I turned bearish based on excessive debt back in 2004. I see even more debt now. It has simply been redistributed and allowed to grow. I'm therefore still bearish.
3. How are we doing at the task of addressing our long-term structural problems? I'd argue not well at all. We just add to them.
G.H.,
"It seems they forget to mention that the benchmark was flushed down with the bathwater in the fall of 2008. And no mention of TIPs anywhere."
Indeed! As a TIPS investor that's probably how I should prefer it. I really don't want other investors flooding into my long-term retirement "scheme" and driving down my real yields.
From your link...
"In the long run, safe investments like bonds and cash will never protect an investor against the risk of inflation."
Never? The bonds known as "Treasury Inflation-Protected Securities (TIPS)" and inflation-protected "I-Bonds" have done a more than adequate job for me over the last decade.
In fact, I plan to go "all in" on my IRA early next year as I participate in the 30-Year TIPS auction. It's money I'll start needing about 25 years from now and I figure 30 years is just about perfect. No IRA bond ladder. Just one bond. It's like obese diversification being forced onto a vegan and/or heroin diet, lol.
The yield is currently about 1.85% OVER inflation. Assuming inflation picks up at some point then I would be earning 6.85% if inflation is 5%. 30 years of that tax deferred in a 20% tax bracket should see my purchasing power grow by about 40% (after taxes). Not bad for something that "will never protect an investor against the risk of inflation" if I say so myself.
One more thought.
My IRA plan could still wipe me out of course. Our entire economy could collapse. That said, just imagine what the article's "risky investments" would be doing in such an environment.
My goal is and was...
If I am financially ruined then at least I won't be first! ;)
I plan to go "all in" on my IRA early next year as I participate in the 30-Year TIPS auction. It's money I'll start needing about 25 years from now and I figure 30 years is just about perfect.
This has yearning for yesteryear just a little....
Think of it, if you'd have invested your entire nest-egg in 30-year treasury bonds in 1982 you'd be getting back 100% of your principle in less than 2 years.
And all the while you'd have been getting a 15% annual payment to do with whatever you wanted, like...
...pay down credit card bills, pay medical expenses, do home improvements, take a vacation, or just cash out!
Dang, I've been seeing way too many of those reverse-mortgage commercials again...
Stag,
Good points! I did remember that Michael Moore Plutocracy article that in a way theorizes that the rich do a high portion of the spending and that the middle class (or lack thereof!) is not as important when it comes to the economy. Perhaps it's a combination of many things. I also think that the debt:gdp is not so important since most countries are in the same boat (the relative stability of one country over the next did not change much).
Re: china
I expect china to take a dive but they too have been exploiting the riches of the world (Africa, Iraq, Afghanistan...)and may hang in there for some time
time will tell.
G.H.,
Think of it, if you'd have invested your entire nest-egg in 30-year treasury bonds in 1982 you'd be getting back 100% of your principle in less than 2 years.
It would be very interesting to know what the 30-Year TIPS rate would have been in 1982 (had TIPS existed then). It is possible that it would have been roughly what it is now. In other words, it is possible that only those brave souls who opted to not have the inflation protection were the ones who benefited.
More power to them this time around. As a saver, I'd love nothing more than seeing those without inflation protection make out like bandits yet again (compared to my purchase). However, it is also possible that they'll regret their decision after 30 years have passed. That rear view mirror can be brutal.
remy,
"I did remember that Michael Moore Plutocracy article that in a way theorizes that the rich do a high portion of the spending and that the middle class (or lack thereof!) is not as important when it comes to the economy."
I bought that argument for a time as well. However, consider this.
The rich are not the ones propping up this country's many excess shopping malls. However, they do own this country's many shopping malls. So what would happen if the middle class stopped shopping there at some point?
The rich own our country's many excess commercial properties. I expect more pain there long-term, especially in those which were built to the sky (skyscrapers).
I would also add that we were told that we aren't nearly as reliant on the price of oil as we once were. That argument fell apart completely in my opinion when oil hit $145 a barrel in the last cycle.
The economy's price (so to speak), like most things, appears to be set at the margin. It's only about as good as its weakest link. That's my opinion long-term and I'm sticking to it. ;)
As a saver, I'd love nothing more than seeing those without inflation protection make out like bandits yet again (compared to my purchase).
I'm having trouble following this (my fault, not yours ;). Are you saying that you'd like to see the stock market/commodity bubble continue ascending in the short-term? How would that help your TIPs rates? Would it make the TIPs rates more attractive come next year when you plan to buy more?
(insert smiley scratching head here)
G.H.,
I'd like to see those without inflation protection do extremely well (i.e., make out like bandits). That means I do NOT want to see the commodity bubble continue ascending.
Keep in mind that inflation does not help me as a holder of long-term TIPS. It only hurts me. It just hurts me less than those without inflation protection.
Here's what I mean.
If I own 30-Year TIPS that pay 2% over inflation and inflation averages NOTHING over the 30 years, then I will make just 2% per year. However, that's a real increase in my purchasing power AND I pay next to nothing in taxes. That's a good thing. As a saver, that environment would be ideal for me.
If I own 30-Year TIPS that pay 2% over inflation and inflation averages 20% over the next 30 years, then I will make 22% per year. However, that's a decrease in my purchasing power since my tax burden will be extremely high each year. I'll be forced into a higher tax bracket and could easily pay 7% in taxes each year. That would bring my after tax return down from 22% to just 15% while inflation is running at 20%. Ouch. That's clearly a very bad thing.
Keep in mind that most of my nest egg is not within my IRA. The TIPS I own outside of my IRA are vulnerable to extreme taxation if inflation skyrockets.
I therefore have some inflation insurance with my TIPS but pray that I am wasting my money on it. It is exactly the same way I feel about fire insurance on my home. I do not pray for fires! :)
One more thought.
"Would it make the TIPs rates more attractive come next year when you plan to buy more?"
The thing I would like to see most would be a strong economy between now and then or just the illusion of a strong economy.
What I don't want to see between now and February is rising prices and slowing growth (stagflation). That's an ideal environment for TIPS (stagflation) and investors would no doubt flood back in (again).
So here I sit in conundrum land.
I hope for a strong economy while betting on the opposite.
I hope for no inflation while betting on the opposite.
I hope that other investors do not wish to own what I own. They only hurt me long-term by pushing up the price of my TIPS (and thereby pushing down the real yields).
It's not really that bad a place to be. It's hard to be disappointed.
Mark,
Dean Baker supports your week outlook for 2011:
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/gdp-outlook-in-2011
"Over the last four quarters GDP growth averaged 3.2 percent. However, final demand growth averaged just 1.3 percent over this period. In the most recent quarter, inventories were accumulating at almost the fastest rate on record. It is unlikely that the rate of inventory accumulation will accelerate further. Rather, the rate is likely to slow, meaning that inventories will be a net drag on growth in coming quarters.
In sum, there is every reason to expect that 2011 will be another year of weak growth with little, if any, decline in the unemployment rate."
whooops... meant to say "weak"
remy,
You built up my hopes of a week outlook and then brought me back down to earth again.
Oh the humanity! ;)
I should add that I have little opinion on 2011's economy. It's the long-term economy that greatly concerns me.
Mark, thanks for the details, now I understand your ideas.
I'd like to change gears for a minute and talk about opportunity cost.
...I plan to go "all in" on my IRA early next year...
Even though you are comfortable with the strategy that you've decided on, wouldn't you be wise to leave a portion aside for now. You may find better circumstances even in the short-term. Are you comfortable giving up the chance to invest in better opportunities short and long term?
And I hear what you're saying about long-term concerns. I'd point out again the concerns I raised with regards to where the money's coming from for future retirees, 20+ years out.
G.H.,
When I turned bearish in 2004 I was willing to embrace opportunity costs. I honestly felt that I would not do as well as the average investor. I still feel that way.
However, if I could permanently lock in my current standard of living then I would do it in a heartbeat. I would not feel deprived in the slightest. I have no great wants.
That's really all I tried to do then and that's all I'm trying to do now.
I think locking in a current standard of living is not a trivial one in this environment. Many have failed, some through no fault of their own.
My primary long-term concern as a saver is that real yields in the long-term TIPS continue to fall and I did not lock them in. That's its own opportunity cost. We've seen real yields fall on 5-Year TIPS to nothing. We've seen real yields on 10-Year TIPS drop to 1%. I've been predicting the death of real yields all along.
There's nothing at all bad about 1.9% real yields on 30-Year TIPS. It's a bit light but not by much. It's plenty good enough for me.
In theory, I should even do better than just maintain my current standard of living. A 1.9% real yield compounded tax free for 30 years is nothing to sneeze at. If inflation averaged 3% then the purchasing power within my IRA would grow by roughly 73%.
(1.049^30)/(1.03^30) = 1.73
"Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time." - Richard Russell
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