Tuesday, July 7, 2009

Listen and Learn

Hello Folks!

Before I get started with a few comments I BEG you to listen to David Rosenberg's appearance on Bubblevision today. It was perhaps the best explanation of what happens to an economy when a credit bubble collapses.

Everything David says here is backed up by facts and history. These are the two key points that Wall St loves to forget about as they try and lure you into buying equities.

One of the most striking points that I took from this video is the fact that our government has already spent more than twice what FDR did in The Great Depression. Yikes! That's pretty darn frightening when you think about it

He also explains that this is no average "10 months and out recession" that were common in the 70's, 80's, and '90's. This is a CRITICAL point in my view because most of the street has no clue what a consumer led recession looks like. Most of these analysts weren't even born yet when we last had one here in the US back in the '70's.

As a result, almost EVERY DAMN economist/analyst that I listen to in the financial news media continues to believe that this is your average "run of the mill" recession. They all think that we will be out of this recession by the end of the year. Many are predicting growth by the 4th quarter. That may happen because things fell off a cliff Q4 last year so it's very possible.

A question here for the "recovery" boys: What fundementals are out there to sustain this "recovery" once we get past the 4th quarter comparisons where the economy basically stopped? I haven't heard one logical answer from the "recovery" bulls on this one. FOLKS, HERE IS THE BOTTOM LINE: THIS WHOLE RECOVERY TALK BY Q4 IS A CROCK AND YOU ARE A FOOL IF YOU BELIEVE THIS!

Watch the tape. David does a hell of a lot better job then I do explaining why:

Part 2

My Take:

Great stuff eh? I would have loved to hear his thoughts around the currency issues and the risk of hyperinflation.

David obviously sees nothing but deflation ahead. If this is right, bonds could see a a huge rally. I am still on the fence here as I continue to worry about our solvency. However, David's thesis is solid as a rock and it could very well come to pass.

Basically we are in for one hell of a long road folks. The "Buy and hold" days are long gone. David believes we have at least another 8 years of pain and suffering as we crawl through this secular bear market.

I believe that its going to take longer than 18 years total(from 2000) to work through the excesses of this bubble because we foolishly created a second bubble(housing) right in the middle of it from 2003-2007 instead of simply letting the tech bubble deflate.

As a result, I believe we will have a lost generation before this is all said and done. I say this because we basically have to recover from two bubbles all at once. One is bad enough!

Will the bull be back? Of course it will someday. I also expect a few mini bull markets along the way as we work through this big ugly bear. One thing is for sure: The investing world will never be the same.

You are going to have to be much more active with your 401k in order to grow your nest egg properly. Diversification and nimbleness will be crucial as we navigate through this disaster. I am beginning to believe that once investors are burned once again as we break the lows, they may run to fixed income for a looong time(that is if it doesn't explode).

Portfolio's in the future will probably see 50% or more of assets in fixed income IMO. Stock exposure will become a much smaller piece of the pie. I think stocks will be considered "highly speculative" moving forward as the current generation licks their wounds after being burned multiple times by the market since 2000.

As a result, many financial planners and brokers will likely be forced to reduce their clients exposure to stocks. Can you imagine what this will do to the stock market as investment portfolio's make this transition? Ugly Ugly Ugly!

Be careful who you trust with your money with folks. Choosing your financial planner is one of the most important decisions of your life. Make sure you can trust them and if they have you 100% in equities right now run for the hills!

Bottom Line:

Lets talk a little bit about the market. We clearly broke through the 200 DMA on the S&P as the market went south by 2+% today. This is extremely bearish.

We are now sitting at some pretty important support levels. There is some decent downside resistance here around 880. A big move south tomorrow could force things to get ugly real fast.

Keep an eye on Alcoa tomorrow as earnings season begins. This is the first big name to report. Their CEO was fairly bullish based on a rebound in China so who knows they may surprise to the upside. Many of the big banks report next week. That should get really interesting.

Don't forget that we continue to sell billions and billions of treasuries throughout the next few weeks. We have a long end 10 year auction later this week. Keep a close eye on this one. The $35 billion 3 year auction went ok today. The bid to cover was decent(2.6 I believe) but the interest rate was a few points higher then what was expected. This tells you that investors are demanding yield as they watch our Ponzi spending game continue.

It should be an exciting few weeks as we watch all of this unfold. Fireworks and perhaps a Black Swan would not surprise to me.

I continue to hold onto the same positions. My current plays: BEARX(long term hold), Sept. SPY PUTS, GLD, SLV, SDS, and some old SRS that I bought at $85(ouch this one still hurts). I still hold onto that SRS to remind me that being stubborn and overconfident is a great way to end up in the poor house:) I think its always good to remember your mistakes. they always remind you that Mr. Market beats to its own drum.

I also own a few long spec biotechs. The rest(80%) is in cash and bonds.

Cash will be king if Rosenberg is right.

Until tomorrow!


Minton Mckarkquey said...

Great videos. I suspect that that average person will not be putting much into their 401Ks for years to come because:

- Employers' matching contributions has pretty much gone away
- Paycuts mean 401K contributions most likely drop
- Trust issues

The average person doesn't have the time or knowledge to actively manage their fund (which, as you say, they need to do).

Lots of problems here... I don't how much individual investments matter to the stock market, but I think J6P is running the other way and won't stop running for a long time.

EDC said...


Great post!

BEARX is a great long term hold and it is on sale right now.

Cash will be king, we have a credit based system with credit expansion the USD is the worst currency in the world thus will have the most credit destruction and as a result will appreciate the most.

BRIC talk of another currency, well if anyone knows anything about trade what would happen if we added tariffs to those imports?
if they shun our debt, what if we shun their exports/business/country model?
Really want to play hardball, watch them divest more from the USD and the FED pulls liquidity? (it means they sold low and bought high, which emotion is a mf'er).

Jeff said...


Great points.

PErhaps CD's become the new way to invest until Wall St earns back(if ever) its credibility.

A lot of damage has been done thats for sure.

It will be interesting to see how it all plays out.

Jeff said...




Things in the world could get ugly in a heartbeat if everyone starts playing ahrdball with each other.

I wouldn't be suprised to see a few wars break out over this collapse.

Trade wars were common in the '30's. I expect to see a rinse and repeat this go around at some point.

Ben said...

Great post Jeff.

I'm just starting with work at a new job and am going to be contributing 6% of my salary to my 401(k) to get the company match. Even if I do nothing with the money it's a pretty decent return since they match me dollar for dollar up to that 6%. Let's just hope they don't cut that, which I'm fairly confident they will not seeing as how I work for a European insurer.


Jeff said...



Congrats on the new job.

6% is a nice match. Throw it in a money market if they have that option and good luck!

snood said...

One thing is for sure: The investing world will never be the same.

I'm afraid Wall Street has still not gotten the memo.

Jeff said...



I agree.

The banks are too busy upgrading tech stocks to notice that there are no consumers left to buy them.


snood said...

The Wall Street deals seem to have replaced private investment monies with government bailout money.

Thats why I figure there will be a TARP II next year.

Jeff said...

I don't know about TARP II but it sounds like stimulus II is right around the corner!

I liked how the White House sent that feeler out today.

No signs of panic here(scarcasm here). Problems are not solved by just pissing away money.

Obama's administration is really frustrating.

In terms of dealmaking that's exactly what I think is going on too. The problem is the government money is temporary.

This is all going to end very badly.

Jeff said...


This cracked me up. Potentially the best line ever:

"P.J. O'Rourke, writing in "Eat The Rich" (1998), observed that: "Economics is an entire scientific discipline of not knowing what you're talking about." The only quibble may be with the "scientific" part."

Anonymous said...

It's a good time to read the economic theories of Irving Fisher, who wrote on periods of debt deflation noting that "excess debt controls ALL economic variables" (emphasis added).

Also, we're in a liquidity trap. That in itself adds deflationary pressure.

Personally, I think the near term scenario is so bad that government long bonds may well be the best investment.

Hyperinflation? Forgetaboutit! The next time we experience inflation, I bet we welcome it!

snood said...

My favorite Fisher quote:

"Stocks have reached what looks like a permanently high plateau." 1929

Jeff said...


Yeah I am starting to lean back towards deflation again.

We have a 10 year and a 30 year auction this week. I still don't see how treasuries are attractive as we continue to create tens of billions of them every week.

This is a tough call. The market however is signaling a deflationary collapse: Rising treasuries, asset prices collapsing, stronger dollar, and a falling stock market.

A treasury collapse is still on the table for me because I just don't see how we sell all of this debt.

Time will tell. This is certianly a scary market.

Jeff said...


Fisher must have been our 1930's "green shoots" economist..lol

Anonymous said...

Treasuries are attractive, I believe, because a lot of people are risk adverse given today's economic uncertainties. Others are perhaps deflationists who realize bonds are unlikely to decline like equities and commodities.

As for Fisher, he made a bad call in 1929 and his reputation suffered. Of course, his 1930s theory of debt-deflation has repaired it with some.

Jeff said...



Bonds up today as stocks tank.

My concern is when neither option looks attractive like we saw when the bond and stock markets collapsed in 1932.

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