2nd Nov 2008. John Bird and John Fortune on Silly Money satirising the absurdity of the financial crisis.
Part I
Part II
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Hat tip Calculated Risk
The Endgame by John Mauldin
January 17, 2009
Deflation? Stimulus? Deleveraging? Recession? A soft depression? A return to a bull market? With all that is going on, how does it all end up? When we get to where we are going, where will we be? In chess, the endgame refers to the stage of the game when there are few pieces left on the board. The line between middlegame and endgame is often not clear, and may occur gradually or with the quick exchange of a few pairs of pieces. The endgame, however, tends to have different characteristics from the middlegame, and the players have correspondingly different strategic concerns. And in the current economic endgame, your strategy needs to consist of more than hope for a renewed bull market.
Rather than looking at just one year, in this week’s letter we take the really long view and ask what the end result or endgame will look like. There are three possible scenarios (and multiple combinations) that I can think of, we will explore each. Any of them could happen, so we will need to look at some signposts to get an idea of what is actually going to occur. I can make the following prediction that will be absolutely correct: Whatever scenario I lay out here, events and time will change what actually happens. But this will give you an insight into my longer-term biases, and that should be useful. As I tell my kids, put on your thinking caps.
There are a few housekeeping topics I need to cover, but I will do it at the end of the letter. I just did two interviews with Aaron Task and Henry Blodget at Yahoo Tech Ticker, and will provide the links. I also want to talk about the upcoming Strategic Investment Conference, April 2-4 in La Jolla, which is going to sell out. And make sure you get around to subscribing to my new information service, called Conversations with John Mauldin. I will be posting the first conversation very soon, and you don’t want to miss it! So, stay with me and let’s jump right into this week’s letter.
First, I have to address some more government data that can be misleading. We were told Thursday that initial unemployment claims were “only” 524,000. The talking heads immediately said that was proof the economy is simply bad, not falling off a cliff. Again, like last week, that seasonally adjusted number masks the real number, which was 952,151. That is not a typo. There were almost 1 million newly unemployed last week! That is up over 400,000 from the same week in 2008, while the seasonally adjusted number was up only 200,000. Last week the real number was 726,000, so this is a material rise of over 225,000, yet the
seasonally adjusted number suggests a rise of only 57,000 from last week.
The continuing claims data leaped over 500,000 to (again, not a typo!) 5,832,746. The length of time people are staying unemployed is also rising rapidly. We are up almost 1.5 million new continuing claims in just the last five weeks. That is a stunning rise of over 30% in unemployment claims in just over a month. The data is truly ugly, but it is what it is.
When you are in periods where there are deep outliers to the data because of very real turning points in the
economy (such as we are going through now), the seasonally adjusted numbers can mask the real underlying trends, both up and down.
Let me repeat a point I made last week, which is important and necessary for us to grasp if we are to understand where we are headed.
We are in completely uncharted territory in terms of the economic landscape. Like the USS Enterprise in Star Trek, we are boldly going where no man has gone before. But the captains of our fleet are Keynesians to their core (and they don’t have any Vulcan advisors). They don’t have any historical maps to guide us back to a functioning economy; they only have theory. The North Star they are guiding us by, for good or ill, is John Maynard Keynes, with a slight nod to Milton Friedman.
It is not a question of whether or not there will be massive stimulus. The question is simply how much and for how long. And my wager, as outlined below, is that it will be far larger than anyone would want to admit today. Think of Scotty, aboard the Enterprise, when Captain Kirk demands more power, “But Captain, I’m giving her all she can take. She’s ready to explode!” (But he always finds a little bit more.)
Let’s set the scene for where we are today. The US likely just experienced a 4th quarter with GDP down over 4%. Some estimates suggest 5%. For all of 2009 we are likely going to be down at least 1-2%, which will make this the longest recession since the Great Depression. Unemployment is headed to at least 9%. Consumer spending will be off by at least 3% this year and again in 2010, as consumers start to find virtue in savings, which should rise in the US to 6% within a few years. Housing prices are going to drop another 10-15%, taking homes back to a level where they may be more affordable.
Corporate earnings are going to be dismal for at least the first two quarters, with forward estimates being lowered again and again. (For a thorough analysis of earnings, look at the January 2, 2009 issue in the archives.) Global trade is falling rapidly, and it is likely that we will see a global recession this year, which will result in further negative feedback on US, European, and Japanese exports.
On a more positive note, oil is below $40, which is more of a stimulus to consumers than anything anticipated by the incoming Obama administration (at least as far as consumers go). With short-term rates at zero, adjustable-rate mortgages are actually not the problem anticipated a year ago, and many
homeowners are rushing to refinance their homes at lower rates. Large banks have indicated a willingness to actually cut the principle and interest on troubled mortgages, which might lower the number of defaults.
Conversely, the number of defaults is high and rising — throughout the developed world. It is likely to be 2011 before the housing market finds a real bottom and housing construction can begin to rise.
In September, I mentioned that my internet provider, Optimum OnLine by Cable Vision, was hijacking my typos and searches via their DNS Redirect.
The company line is that this is a form of search assistance — but that’s transparent bullshit. I didn’t ask for search, and I know how to use Google. Besides, this defeats the auto search/find/connect function built into Firefox.
This system-wide change was implemented on 9/22/08. You have to physically opt out by selecting a few menus on that page (see below). That was 4 months ago.
This morning, I had the same problem. So I opted out again.
Thanis evening, the DNS redirect was back.
Apparently, there is no permanent opt out. There isn’t even a temporary opt out — the best you can hope for is a “momentary opt out.”
Just goes to show you: Even a slight bit of monopoly power is so easily abused by these clowns.
Optimum OnLine is trying to do to the internet what the Dolans have already done to the NY Knicks.
~~~
You can try to opt out via the “About this page” (see below)
>>
>
New Optimum Search Results
(you need to click the About This Page to escape)
>
“About This Page” leads to an “About the Optimum Search Help” Page
(click the Opt Out of DNS Assistance Service to escape)
Watch the white box in the middle left portion of the screen. (Starting at 2:00 minute mark)
US Airways flight 1549 crashes in Hudson Bay NY. The flight plan was from LaGuardia to Charlotte. All passengers survived. The plane was a Airbus A320. Both engines were reportively sucked multiple birds possibly geese and both engines caught on fire. The pilot decided to do a water landing
Charlie Rose: A conversation with Lee Scott, CEO of Wal-Mart
I did an interview with NPR yesterday on the Bank of America, Citi bailouts:
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click for audio
Niall Ferguson explains money as a relationship between a creditor and a debtor
via NYT
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Source:
Sharp Trade Contraction Knows No Borders
FLOYD NORRIS
NYT, January 16, 2009
http://www.nytimes.com/2009/01/17/business/economy/17charts.html
Wednesday night, I suggested it was Time to Fire Ken Lewis of Bank of America. Since then, several other people have come out to echo those sentiments:
David Reilly, Bloomberg notes that the bad bet on Merrill follows a bad bet on China Construction Bank and an even worse bet on Countrywide:
Kenneth Lewis gambled big. He lost. Now taxpayers have to pick up his tab. For that, the Bank of America Corp. chief executive officer probably needs to go. At the very least, Lewis, who also is chairman, should give up one of his posts to bring greater accountability to the bank.
Not because one specific bet, Merrill Lynch & Co., is souring. Lewis could be forgiven if that were his only misstep.
It’s not. Since the crisis began, Lewis has misjudged the depth, breadth and severity of the storm that has crushed the global financial system. In doing so, he used capital that he should have been husbanding.
The WSJ’s Heidi N. Moore writes:
Making your bed, and then lying in it, is a quaint notion in the world of financial services in 2008.
Bank of America CEO Ken Lewis’s depiction today of his Merrill Lynch acquisition as a quasi-government rescue is, to be sure, a remarkable about-face. Lewis has made no secret of his desire to own a major investment bank, and he bragged of how Merrill Lynch fit the bill because of its extensive network of 17,000 brokers serving average investors. Lewis made a point of paying $29 a share for Merrill Lynch — a generous premium when he could have acquired it much less expensively as securities firms lost value — and he boasted that Bank of America required no “capital relief” from the government. Lewis’s decision to beat his chest about his own prowess by paying a high price and rejecting government help was a savvy move at the time — as Lehman was failing, the markets were rewarding companies that appeared strong. Rejecting government funds showed Bank of America was strong. The world has [since] changed.
Henry Blodget is even blunter:
As taxpayers are forced to digest the latest Wall Street-Treasury outrage–a secret bailout of Bank of America to the tune of $15 billion of capital and $120 billion of trash-asset guarantees–it’s clear that, this time, someone has to be held responsible. And that someone is Bank of America CEO Ken Lewis.
Unlike Vikram Pandit at Shitigroup and John Thain at Merrill, Lewis can’t blame the need for this bailout on his predecessor’s idiotic bets. Bank of America needs another bailout solely because of an idiotic Ken Lewis bet: His decision three months ago to buy Merrill Lynch.
No one put a gun to Ken’s head and said “You’ve got to buy Merrill.” There wasn’t some secret backroom Treasury deal where Hank Paulson forced him to take one for the team.
On the contrary, Ken Lewis bought Merrill because he had always wanted to own it and because he thought he was getting a good deal. Furthermore, he knew exactly what he was getting: A firm that, for four straight quarters had been forced to write down tens of billions of losses on idiotic bets and still had about $1 trillion of those bets on its balance sheet.
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Previously:
Time to Fire Ken Lewis of Bank of America (January 14, 2009)
http://www.ritholtz.com/blog/2009/01/time-to-fire-ken-lewis-of-bank-of-america/
Sources:
Bank of America’s Lewis Has to Pay for Blunders
David Reilly
Bloomberg, Jan. 16 2009
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=ag..fL1BCuXo
The Street Smarts of Bank of America’s Ken Lewis
Heidi N. Moore
WSJ Deal Journal, January 16, 2009, 2:03 pm
http://blogs.wsj.com/deals/2009/01/16/counterpoint-what-else-could-ken-lewis-have-done/
Ken Lewis Should Be Fired
Henry Blodget
Fortune, JANUARY 15, 2009: 09:04
http://money.cnn.com/news/newsfeeds/siliconalley/search/2009_1_ken_lewis_should_be_fired_bac.html
Within the S&P 500 there are about 52 companies dubbed “Dividend Aristocrats,” which are companies that hiked their dividends for 25 consecutive years, like McDonald’s and Wal-Mart. Barron’s Johanna Bennett explains
1/17/2009
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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