Tuesday, May 5, 2009

Love the rally then sell it

There is a recovery going on. It is a recovery like life support is a recovery for a stroke. This is a NY banker manufactured story recovery, started by our commander in chief Ben Bernanke and carried forward by our emperor, Barach Obama. I am wondering what modern economic statistics are about? I am also wondering how many years they think we can put it on the account we can't pay in ever increasing amounts and actually call it a recovery? It is kind of like pumping blood in faster than it leaks out is called getting well.

The latest story is pending home sales have gone up. What is a pending sale? I spent a few years in real estate and I recall a pending sale is one that is under contract, but hasn't closed. From what I have been told by a sister that is a mortgage broker is that the staffs at the mortgage wholesales like Well Fargo, Chase, Citi and others have been cut so much that underwriting times are weeks now instead of hours as they were. This means there isn't any buying a home today and getting it closed in 3 days, which is Friday, but instead maybe 2 or 3 weeks. There is a mile of difference between preapproval of a mortgage and a closable loan package, which is necessary to have a closing. Thus saying there are more pending sales now is like saying there is more water because the river has been dammed. There is no more water coming down the river until is starts spilling over the spillway. In this sense, if you don't follow me, it is quite likely pending sales would go up if another week is added to the typical transaction.

There are other things that make a recovery in housing a lie. For one, barebottom sales in foreclosure aren't normal sales in a market. They could very well be the area that marks the market price of housing when all is said and done. Also, 4.5 million sales on an annual pace is hardly a housing bust, but instead a pre-bubble record. Thus we have seen a market go bust while rampant speculation has continued. There is more. The Fed and the government have manufactured a mortgage rate that is probably 1.5% below that the market would normally settle at. Also, there is the recent massive tax credit given first time homebuyers. Credit, under historical terms, isn't tight. It is probably still easier than it was in the 1980's here.

Next, we get into autos. I would guess that if autos get back to a 12 million to 14 million level, this is going to be called a boom. Thus a bust level of auto sales is a boom while a boom level of housing sales is a bust. How many thousands of dollars of US subsidy are we going to see per unit in the auto industry in order that Obama keep one of his pets, the UAW, in business? You can bet it will be enough that to pull the plug on this operation is going to be a big blow.

Then we have the banks. Has there ever been a bigger smokescreen in history? The US economy will be irrepairably ruined when this fiasco is done. Charlie Munger of Berkshire Hathaway fame has called for the end of credit default swaps. I wonder how we ever begin to float enough credit to keep the world afloat without the risk sharing added with default swaps, which are really nothing more than insurance, like PMI insurance or bond insurance for municipals. Who is to say that the depression didn't start in 2000 because of these instruments?

There is much more about the banks. For one, all the money the tax payers have given the banks is now owed back to the banks. Capital equals bonds and t-bills. It will never be extinguished. There is more, as they have done away with mark to market accounting. Plus it is plain to all that pay any attention that the big NY banks and Wall Street firms openly flaunt the capacity to manipulate the markets. Look at GE, a near bank riding a AA rating while being carried on lifesupport by the Fed? The whole thing is a farce and the ones that know it the best are the banks, who want nothing to do with other banks paper.

This is a different recession or depression or whatever one likes to call it. The game collapsed on its own. Few realize the long side speculation that has gone on all the way down. Sales of existing homes have never fallen below what were previous records. The price of oil is driven up with every rumor there might be a recovery, even though supplies are near 20 year records and growing. Copper is beyond $2 a pound, likely driven to that level by Chinese hoarding in light of the mechanizations of the Fed and the US government deficits. We are not looking at a demand shut down collapse, but an oversupply collapse where much of the oversupply is still subject to speculation.

There is not a lot being done for the reduction of debt. The US government has instead guaranteed the repayment of trillions of dollars that otherwise would be in default in markets that would be otherwise totally insolvent. Exports in Asia have collapsed, yet we are told every day how good these economies which depend on exports to run are doing and how they will lead the recovery. They aren't leading much of anything and if the US government didn't have the power it still possesses, I highly doubt they would be functioning. This is a collapse of the capacity to service debt along with a misalignment of assets and liabilities in the area of financial intermediation. Bank loans need bank credit to be paid and the credit represented by deposits rests in the hand of those that don't owe. At the same time, fed policy literally forces some to speculate to earn anything on their savings.

There are 2 avenues that we face. One is a slight recovery followed by the second dip of a recession. I think this is a manner of lying that we had a recovery, aka 1980, when the perception we were falling into a recession was interupted by some cloudy statistics. I don't buy the idea that 1980 was a double dip recession, but instead an easing of a Fed induced slowdown for political purposes. This wasn't a Fed induced slowdown as was 1980. This was a collapse.

The great secret is there aren't any Asian miracles. There are only excessive US credit expansions that Asian use to expand their own economies. US credit expansions have been inflation of home prices along with equity extraction for the past 40 years. The equity extractions are a done deal and there really isn't anything to drive demand in the US now with much of the excess equity gone. Absent a new equity driven recovery, we are to languish, much as the Japanese did once their real estate bubble burst.

There is one difference between the US and Japan. Japan had a huge export economy that was kept afloat for a long time out of the credit expansion in the US. Once that credit expansion ceased, exports in Japan collapsed close to 50%. The same happened in Germany, another country that had a rough 1990's. Countries have not been able to print credit for long and survive, which is about what surplus government spending amounts to. There are plenty of theories, but there is only one truth and the truth is the world is in for a long period of credit liquidation.

In the meantime, if you own stock, enjoy the rally. It could end tomorrow or it could go to 10,000 and above 1000 on the Dow and SPX. I believe in the end it will be compared to the rally that followed the 1929 crash. Many were looking for a crash, but I don't know what you call a move from roughly 11,000 to 8,000 in a matter of day if it is not a crash?


kevin said...

Keep posting Sir, its always good to see you writing.

mike.montchalin said...

What are the chances that debt can be successfully monetized?

And from an individual point of view, where does a liquid person hide?

mannfm11 said...

Mike, I don't believe the debt can be monetized. For one, capital markets are capital markets. Second, all bank debt is monetized when it is created. There is quite an unusual manner of thinking to understand the process, but there are still liabilities and assets and in the case of debt, both are the same. The assets of the banks and other operations are the liabilities of others and the assets of others are the liabilities of the banks. Thus, there really isn't a savings rate per se.

Thus, if the Fed was to monetize a billion dollars in anything, it would be liable for the billion dollars. Only in the case of the government printing cash in general and passing it around is there a monetization and of course this eliminates the interest. When the Fed buys t-bills from banks, the banks really don't get anything but credits to pass around to other banks. Plus, they lose their interest bearing securities. Never forget that if the security the Fed is buying pays interest that the Fed gets back more than it loaned out. Plus, the Fed can assist the market in raising rates. You might note that in the early fall, t-bills were yielding .01% while the Fed funds rate was 1% or higher. The Fed didn't cut interest rates, they were already cut. In fact, all the t-bills out there could be borrowed and sold in a repo agreement.

Mark-Jan said...
This comment has been removed by the author.
Frans van Dongen said...

Good Post. But where do you put your money in?

Opusherringhead said...

Good to find your blog. Always appreciated your writings and was dismayed to find you MIA on another site.

mannfm11 said...

What is the matter with cash? You don't like cash and aren't a skilled trader, put some of it in gold. If you think the market is a buy and hold, find some bonds of companies you trust. They are priced better than the market for long term return. If you think the US government collapses, get out of the US. This stock market is going to end up where it started in the 1990's, under 3000

garyalan said...

good to see you are posting more regularly. It is absolutely true that it is extremely difficult to have a loan approved right now. I have near perfect credit and to refinance to a lower interest rate loan with a 40% LTV took almost a month. bank kept asking me about other houses that I owned outright. I have never seen anything like it. I was ready to walk and the bank finally dropped all of their questions. I can't imagine what marginal borrowers with higher LTVs are going through.

garyalan said...

So do you really believe that that the DOW will drop to 1,000 (1987 levels)? I have a hard time believing this with all of the recent money creation and buying of the long bond by the fed. I think that we are in for an inflationary depression. The mountain of money already spent will eventually push the cost of necessities much higher. The coming Obama tax increases to pay for the debt will increase unemployment and ensure that Americans suffer a large drop in the Standard of Living. The economy will never recover once we face higher energy costs from depletion of a non-renewable resource.

Also, have you ever heard of Martin Armstrong's "waterfall Event" where he is proposing that the US is looking into a outright repudiation of the dollar due to our debt reaching unpayable levels in the near future? If so would you please provide your thoughts on the possibility of such an outcome.

Frans van Dongen said...

Mann thanks for your answer. I have most of my euro's in cash. I keep thinking where do I keep my money, I'm afraid of a collapse of the banking system and I don't want to lose my money. What do you recommend?