Saturday, February 28, 2009

Past Tense

The time to have been worried about financial assets and deflation was 1 year ago.  I am sticking with my Dow 6000 bottom (unless the oil import numbers decelerate further), 650 on the S&P.
Actually, I should say that I give the probability of Dow 6000 holding a 80% probability, and a Dow 5200 a 90% probability.  

This is much like 3 card monty or "the shell game".  You gotta keep you eyes on what is coming, not what has been.

The U.S., and the rest of the world really, is between a "Rock and a Hard Place", and Obama has chosen the "Rock" (I have no idea which would have been better).

The U.S. budget will total $3.6 TRILLION, with a deficit of $1.75 TRILLION in 2009, and $1.2 TRILLION in 2010 (anybody want to bet those projected deficits will prove optimistic?), with the 2009 deficit a staggering 12.6% of GDP.  Ok so far?  

Where does the administration, Wall Street, the Media, WHOEVER propose to GET the nearly $3 TRILLION in financing we are going to need over the next 2 years?  The entire f***ing world has less than $7.4 TRILLION in reserves, and that was last year's data.  Since that time world trade has contracted briskly, and other governments have had need of their reserves to finance their OWN deficit and stimulus spending, (China alone has budgeted over $500 BILLION), so that number is surely less than $6 Trillion as i write this.

Did I mention that the U.S. will not see a budget deficit of less than $1 TRILLION at any point in the next decade or 2 (or 3)?  Or that just to get to the $1.2 TRILLION deficit in 2010, the Obama budget claims the U.S. will grow by 3.2 % in 2010, 4% in 2011, and 4.6 % in 2012?  If not, then what?  What's "Plan B"?  Look, I don't make this stuff up.  I am a career analyst and when somebody tells me a + b + c = d, I check their math.  If it does not add up, it does not add up.  

For the guys working the lights, there is only ONE lever left to pull.  They cannot borrow from Martians.  They will have to monetize some (or all ) of the national debt.  This is an absolute CERTAINTY.  The only debate is WHEN, and that WHEN just ain't that far off in the distance.

If you have been a diligent worker and saver, now is the time to take that dream vacation, climb Kilimanjaro, vist the Taj Mahal, dive into the jaws of a harem... whatever.  With whatever is left over, buy productive farmland, precious metals, livestock, timber, fishing boats, a Mine, 
 Ag futures... (you are on your own as far as timing).

This scenario will end our deflationary experience, although I can't say exactly when.  My sense is that the turn will be swift and stunning - a "shock and awe" kind of thing.  Kind of like the equity market over the past 6 months.

Good Luck!

Mentatt (at) yahoo (d0t) com

11 comments:

bureaucrat said...

Yeah, that's the big "if" ... when will it turn? Mr. Shedlock would say that this could go on for some time .. perhaps years ...because we still aren't willing to look at the generational and fundamental shifts in thinking that may be taking place. People are going to borrow less and spend less. No more granite countertops. The kids of the boomers are going to see what this will do to the confidence of their over-confident parents, and the kids will become the "children of the 1930s and 1940s," drastically lowering their expectations for their entire lives. We also have 30 years worth of higher interest rates coming (1950-1980: up; 1980-2010: down; 2010-2040: up) which can't help, and since deflations really can't be fought with anything other than time and bankruptcies (and Obama and his gang won't allow those), the "turn" the financial community is begging for may not come for some time. Mr. Schiff, however, thinks it will happen yesterday. :)

Greg T. Jeffers said...

My bet is less than a year, and my friend the Mad Scientist thinks 90 to 180 days.

Please read the numbers again: $3 TRILLION in just 2 years... don't worry about granite countertops and flat screen TV's, they just don't add up to the $3T.

I like to let it all hang out. There is no other source of capital. The mathematical facts are what they are. I provided you with the link to the world's forex reserves, and the link to the U.S. budget deficit. This is not an "indeterminate equation".

Donal Lang said...

I don't often disagree with you Greg, but I just don't see what would constitute a 'bottom'. So far we've seen a leftover of retail sales as shops destock, and stimulus funding keeping jobs in the auto and other industries, and municipalities getting deeper into debt rather than sacking people. Once all that runs out of money we'll enter the next turn of the spiral down; auto-industry, public sector and retail layoffs, and the consequent drop in property values again.
If the real economy is going down, and companies can't borrow any more (or even re-finance existing debt because the states have sucked up any spare money), what is it that you think will constitute a 'bottom'?

Greg T. Jeffers said...

For the Dow I took JPM, C, BAC and GE to ZERO, and discounted a little further for good measure and arrived at 6000.

For the S&P which is market weighted, I took the financials to certain number to reflect the big four failure, and then applied a 6% weighting for the financial sector at that level, meaning the remaining must be worth 94% and came up with 650.

If the market realizes what the Fed and Treasury will have to do, the market will actually RALLY sooner (IMBO). Remember, big time monetary inflation is good for stock prices...

Of course, I could be wrong. If something in the data changes I will change my mind too...

Donal Lang said...

I can see that you will probably get a pause in the down trend, because other analysts will take the same path and respond to the 'buy' signals that the analysis indicates.

But if we've learned anything so far, real economics will out. To find a floor there has to be a recognisable value. That value is either trading/profit multiple, or asset value. If almost all businesses are declining and unemployment is rising fast, where is the profit multiple going to be? And if asset values are 'valued to market', where will those values be?

There's no export market, a falling internal retail market, a collapsing banking sector and world oil production is declining. Bear in mind, Japan has just run into a wall, and seen a 60% fall in exports in the last quarter!

I think values will fall, pause, then fall again. I don't see what can stop them. I don't see a floor.

But I'll be happy if you can convince me otherwise!

Greg T. Jeffers said...

For your scenario to come to pass, the world economic system must go into terminal defaltion, and then wink out of existence.

That is not possible in NOMINAL terms in a world in which the largest economy is going to consume 50% of the world's reserve currency in 2 years.

Greg T. Jeffers said...

Also, Oil production has NOT peaked, and my bet is it will be a few years before that matters.

This is actually VERY good news, unless one was hoping for mass hunger and political unrest. The steep recession we are experiencing MIGHT (I said MIGHT) give us enough time to make the policy adjustments we will need to make.

The bigger issues for the moment, is the financial system - and that CAN be solved. Energy, in the long run, can only be lived with.

Of course, I could be completely wrong, but that is how I am playing MY hand at the moment.

Don said...

What you suggest is a logical conclusion.

But there's also the possibility of a black swan event.

Too many variables. What happens in the event of a major war?

Etc.

bureaucrat said...

There ain't gonna be any major wars. Who are the aggressors? Even Hitler built up Germany for 10 years before he tried anything. Who would be doing that now? Wars aren't so easy. :)

Anonymous said...

Where's J P Morgan when you need him?

sharon said...

thanks for sharing.......

___________________
Sharon
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