What we have is an epic battle between two powerful forces. The force of contraction led by deflating consumer credit (and all the points that you bring up) countered by the force of fiscal and monetary expansion led by inflation in government credit.

In this environment and the associated volatility it is better as an investor to only play a move or two ahead. Not three to five as conditions and ground realities can change rapidly. This means being flexible and not tied to any particular dogma.

By no means have any of the problems that created the financial crisis been solved. Banks still have impaired balance sheets which are getting worse as delinquencies and defaults rise. CDS is still traded over the counter with no supervision. Regulatory capture continues unabated. Off-balance sheet accounting gimmicks still prevail.

As you point out unemployment is bad. But there’s no chance anyone will roll off the dole in an upcoming election year. The government will keep ponying up, guaranteeing risk and subsidizing spending until they can’t. The Fed couldn’t be more clear as they have stated they will not ease on the gas until they see inflation. And all the pundits that the Fed and Treasury listen to from Krugman to McCulley are calling for inflation. The Fed has already crossed the rubicon with their alphabet soup lending vehicles accepting dubious collateral. No measure will any longer be considered extreme. The rise in asset markets have allowed many folks to raise capital and retire expensive debt.

The markets will consequently gyrate between optimism and pessimism. Some point in the future consumer balance sheets will be sufficiently repaired as is beginning to happen over the past 6 months with rising savings rate and that will set the stage for a more sustainable recovery. In the mean time we will see swings to the upside as government stimulus produces gains and swings down as the contractionary forces seem to grip investors minds.

The next meltdown occurs when government credit gets questioned and there is a cascading crisis in government’s ability to finance its debt. The world political and banking establishment is betting that by that time the worst of the contraction is over and private sector balance sheets are sufficiently repaired that such a meltdown can be prevented.

I know the consumer is saving, the fundamentals suck, the economic indicators lie and China is about to screw us over real good. And the month isn’t even over yet.

Great post and (finally) a reason behind a bull comment.

We tend to agree on debt, the response of governments around the world and what it will be again (more stimulus), and eventual inflation (don’t mean to put words in your mouth but I think it is safe to say you agree it will happen – when is the key). Our difference lies here:

“My earlier post was to point out that the ECRI leading indicators have a significant growth rate. Most of the companies that I follow are raising their production volumes and earnings estimate for the next quarter.”

What happens to these companies when inventory sits because people aren’t buying? Retail sales are down. Credit is disappearing and/or gone. Interest rates on used credit is rising. People owe more on houses than they are worth. New auto payments are starting thanks to CFC. Unemployment is still horrific and while “the numbers are not as bad” anymore they aren’t good either (the jury is still out if the last two months was a seasonal trend). Up to 1.5 million Americans will go off some sort of social assistance/welfare/government money by the end of the year. ETC. ETC. ETC. Where are people going to get the money to buy the inventory? If the inventory does not move, what happens to earnings estimates? If earnings estimates are off, that means demand was off, that means equities and commodities are currently way off.

Nice math, cvienne

“It was 4700 meters above sea level (for you greenhorns that’s many, many feet).”

Let’s calculate that in GreenBACKS, for fun (and for perspective)… 4,700 meters…

Take a building such as the dimensions of one of the former World Trade Center Towers…

The pile of greenbacks would need to be is 125 feet wide, 200 feet deep, and 450 feet tall… But to stretch the pile up to 4,700 meters, you’d need to get it to over 14,100 feet… That’s more than 31 World Trade Centers high…

Now the greenback fill of EACH of those World Trade Centers would be roughly 315 billion dollars… So the total amount would be between 9.5 and 10 trillion dollars…

So now if you compare THAT to the amount of cumulative debt that the present Administration plans to run over the next decade, it comes out be be roughly equal…

So I guess it depends on where you stand… You’re either in the ionosphere (needing an oxygen mask for survival)… Or you happen to be some kind of Andromeda Strain bacteria that somehow enjoys perfect pH equilibrium at that altitude…

Thanks :) I am enjoying the ride along with some great company like Grantham, Paulson, Fleckenstein, Faber and the host of this site who has leaned long all year while being short last year. Sailing means knowing the direction the wind is blowing! In fact I am having the best 2 years since I actively took over managing my portfolio.

Helene Christensen? Uh no, we aren’t acquainted…although my wife did recently curse her, causing her suffer a significant case of soroche, o sea la tumbó a distancia por celos sin fundamento!

She was supposed to show up at the project in Pallpata, Espinar but fainted in Cusco due to soroche (see above) and was whisked back to Lima post haste…not a very successful PR play. Long story short, I drank the yogurt meant for her, and shook the hands of the delegation that was expecting someone far less hairy and far more lovely – I am the kind of handsome that works in the dark. All very odd, all very true. I even gave a speech on human ingenuity and topography- I was a doozie! More stream of consciousness at play than in Dutch Schultz’s last words…I think I may have even changed the town’s slogan in my flight of fancy- It was 4700 meters above sea level (for you greenhorns that’s many, many feet).

How DARE you compare me with Wanger!… As ‘commish’ of TBP FFL I ought to fine your team! :-)

On the other hand… Maybe it was a compliment… After all, so far Wanger has it correct… But let me encapsulate that for everyone to keep it real…

The FIRST post I ever heard from was from Wanger talking about buying the 2-4% dips all summer (which means June on)… I don’t want to dredge up the ‘fact laced’ synthesis of that statement that I spelled out (it was a few weeks ago)…

But give Harry his due… The LATEST would have been if he’d actually SOLD razor sharp at the 1039 top a few weeks ago… I asked him where he was, and what his call was when the market hit 1,016… NO REPLY… He had another opportunity to reply at 4% (997), NO REPLY… So I assume he took flyer and bought 991 (even though the S&P had broken through HIS OWN imposed floor…

Where is he? Well, it’s still not broken out (above 1039)… It might, it might not… Andy T will tell you that 1044 and 1054 are important technical levels, so I’ll go with that…

Harry, be a dear and give us your calls BEFORE you make them…

Here… I’ll give you an example of how it’s done…cviennes NFL Week 1 Picks “against the spread” (cviennes picks are in CAPS – “units” are a measure of strength of pick)…

PITTSBURGH (-6) vs. Tennessee – 4 units
MIAMI (+4) at Atlanta – 0 units
Denver at CINCINNATI (-4) – 3 units
Minnesota at CLEVELAND (+4.5) – 1 unit
JACKSONVILLE (+7) at Indianapolis – 1 unit
DETROIT (+13) at New Orleans – 1 unit
DALLAS (-6) at Tampa Bay – 3 units
PHILADELPHIA (-1.5) at Carolina – 0 units
New York Jets at HOUSTON (-4.5) – 1 unit
Kansas City at BALTIMORE (-13) – 5 units – BALTIMORE/Survivor Pick of the Week
Washington at NEW YORK GIANTS (-6) – 2 units
St. Louis at SEATTLE (-8.5) – 3 units
CHICAGO (+3.5) at Green Bay – 1 unit
SAN FRANCISCO (+6.5) at Arizona – 4 units
Buffalo at NEW ENGLAND (-10.5) – 2 units
SAN DIEGO (-9) at Oakland – 1 unit

There… Now you can hold my nuts to the fire if my net unit picks record a loss…

See, it’s not so hard… NFL starts TOMORROW, not earlier this summer…

the fed has been buying treasuries and MBS using money creation-

how long can someone conceivably believe in that- literally a foundation based on worthless paper-

but by all means- ride the bullshit train to riches

As an investor I play with the deck that is dealt not what I wished I had. I separate my decision making for my portfolio relative to my preferences for economic policy.

Clearly, anyone with common sense will agree that you don’t solve a debt problem with more debt. And that you can’t substitute the government balance sheet for banks’ impaired balance sheets without risking the credit of the government. That being said I bet my portfolio that politicians will do whatever it takes including risking a bigger meltdown in the future for the short term benefit. That’s not how I would like it to be but that is what it is.

Additionally, we can be certain that if unemployment grows further and the economic downturn intensifies more and more fiscal and monetary stimulus will be thrown at the problem. The Fed and all the major central banks have clearly signaled that their monetary policy will continue to have a bias toward ease until they see inflation. Until they change their stance we must expect that they will act they way they have. My expectation is that government credit will continue to rise until they are forced not to expand by either the bond market or the currency market.

As far as how asset markets will respond no one knows. How I position my portfolio is to follow an established trend until it changes. There’s no value judgment here.

My earlier post was to point out that the ECRI leading indicators have a significant growth rate. Most of the companies that I follow are raising their production volumes and earnings estimate for the next quarter. I don’t see any volume of preannouncements that leads me to believe that companies will report in line with expectations. The consensus opinion is that the economy will contract with renewed emphasis in the short term. The contrary opinion is that it will surprise to the upside. That does not mean we have a sustainable economic recovery at hand – just a basis to inform a near term stance.

The markets have had a decent run. And Grantham was right on the money early this year to go long. No doubts risks have increased but sometimes a move last longer and there is no reason to take the short side at this juncture until it is clear that the market trend has reversed or the government is being forced to end their credit growth. I believe at some point there will be a great entry point to short government debt.