Thursday, March 13, 2008

Short recession, Long recession, credit bubble?

I just witnessed a bull/bear debate. At least it was sort of a debate. It was really an opinion from one party and statistics from another about the current situation. The poor gal that was hosting the debate, usually Maria, but the Asian girl instead, was squirming. I know she was really nervous about getting the bearish side out of the man who was supposed to be presenting the bullish news. The man with the statistics agreed that a long recession wouldn't turn stocks up 12% after a few months of recession. The last one didn't, as the bottom of the market didn't happen until about a year after they said the recession was done.

There is one major thing wrong with all markets today, in that they have it all broken down from the past what the market will do in the future. This means there really isn't any use for the current picture, just hold on and you will get rich in a year or at least well. The bull case forgets that the gain after the recession starts is geared to short recessions and geared to markets that discounted themselves significantly before the recession started. This one made a new peak when it was clear we were having credit crunch troubles and the recession was likely coming. There is no thought of a recession because the traders have no experience of recessions and because they studied the past so accurately, they know they can't get out now because they are going to miss 12%.

This holds in the gold market as well. 1980 was 28 year mistake, meaning if you bought at the top that seems to be the natural target, you spent 28 years with your money devaluing and no interest waiting to get even nominally. Instead of seeing 1980 as it was, they see it as the real value of gold. In fact, they seem to be oblivious to the idea that gold can have a speculative valule more so than a real value. It went to $800 in 1980 dollars, so it should go back to $800 in 1980 dollars again. Gold should be $2400 and the recession should be over and bulls be rich in a matter of months. Both won't happen and if one doesn't happen, it is quite likely the other doesn't happen too.

The Asian analyst, the one with the post recession start statistics, noted the 1988-1990 recession. He fails to note that it was 1992 before the market really took out the 1987 highs and stayed up there. Second, the 1987 trough was lower than any trough after that and third, stock valuations were 50% of what they are now. Fourth, a credit bubble started building in the late 1980's and blew up in the 1990's and has created the values today Anyone with a brain, as the other analyst tried to indicate, has to recognize the credit bubble has burst and it probably isn't going to be resurrected again. There is likely $20 trillion in debt in the US and much more worldwide that has to be wiped out and we are just starting. Most of it will come out of the earnings and defaults of SPX companies. Stocks depend on credit for their valuation. Without the capacity to increase the after interest real money supply, there is no growth in corporate earnings. In fact, they probably decline along with the capacity to pay dividends.

It hasn't occurred to most folks what is going on. What is going on in the world is a speculative craze that ignores everything. They keep talking bad news on CNBC. I remember what bad news was, it was 9% unemployment. Instead, they spin anything that is good news and only talk about the bad news in light of the good news they just received. An example is the mono-line insurers who were hardly mentioned except in indicating they were undergoing a successful bailout. Meanwhile, the decline in retail sales isn't even posted this afternoon on the Prudent Bear page.

The structured finance business is breaking down. This means we not only won't import as much from Asia, but most likely will scale down consumption of everything. The system is seeking capital and it is only a matter of time before prices have to decline to meet the available capital, as what has been floated on credit is now seen as to risky for the banks and for the entities and people leveraging their capital.

We have a problem in that everyone is bullish. They might be bearish for a few days, but the first time some idiot indicates we are finished with the bad stuff (SP saying we were near the end of the subprime write downs, like that is the entire ball of wax out there), the markets are off to the races. When the Fed says they will help the system digest forced liquidation of FNMA mortgage backed securities, the whole world takes it as if the Fed gave away something. The truth is the banks owe them back the treasuries and any margin in the meantime. The Fed printed nothing and gave away nothing. The system is that much in hock on a cash basis.

The effects of a credit bubble can only be replicated by another credit bubble. The system has taken some losses, but they had home equity to blow up the leaking bubble during the dotcom meltdown. There isn't any home equity this time and there won't be much left of the credit bubble. We have trillions of losses and debt shrinkage ahead of us.


qqq bear said...

I wish you luck with your blog. I believe you are on the right track with deflation. The "money" they thought they had in their home is dwindling...

mannfm11 said...

I always appreciate your input qqq. You might be the coolest guy on the PB board because you have good insight and don't get in the middle of too much mess. I think gold could go to the moon, as it is clear oil has gone right through the stop signs on its way into a bubble. Gasoline stocks are at 15 year highs and it appears they don't matter right now. It is kind of like PE's didn't matter in the Nasdaq or the SPX in 2000. At some point there will be world wide glut and maybe even a slowdown in consumption as well, like a huge slowdown in consumption. In a few months, it is quite likely we are going to move from the world mopping up on the excess credit the banks had to put out there for the paper they were stuck with to where is the credit. I think the hedge funds are next in line as toxic matter in the system. There is too much credit and not enough capital. Put up a dime and make a dollar has been the beat for a few years. Now it is going to be hope for a dime on the dollar.