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More Great Thoughts from Jeremy Grantham

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I always look forward to Jeremy Grantham’s Quarterly Letter.  Grantham is the Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), an investment management firm, entrusted to oversee approximately $97 billion in client assets.

Unlike many asset managers, Jeremy Grantham has a social conscience.  As a result, during the past few years we have seen him direct some sharp criticism at President Obama, Tim Geithner, Ben Bernanke and – of course – Goldman Sachs.  Grantham fell behind schedule when his Third Quarter 2011 Letter was delayed by over a month.  As a result, Grantham’s Fourth Quarter 2011 Letter was just released a few days ago.  At 15 pages, it earned the title “The Longest Quarterly Letter Ever”.  As usual, Grantham has provided us with some great investment insights – along with some pointed criticism of our ignorant legislators and mercenary corporate managers.  What follows are some selected passages.  Be sure to read the entire letter here (when you have time).

To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point: capitalism and corporations have absolutely no mechanism for dealing with these problems, and seen through a corporate discount rate lens, our grandchildren really do have no value.

To move from the problem of long time horizons to the short-term common good, it is quickly apparent that capitalism in general has no sense of ethics or conscience.  Whatever the Supreme Court may think, it is not a person.  Why would a company give up a penny for the common good if it is not required to by enforced regulation or unless it looked like that penny might be returned with profit in the future because having a good image might be good for business?  Ethical CEOs can drag a company along for a while, but this is an undependable and temporary fix.  Ethical humans can also impose their will on corporations singly or en masse by withholding purchases or bestowing them, and companies can anticipate this and even influence it through clever brand advertising, “clean coal” being my favorite.  But that is quite different from corporate altruism. Thus, we can roast our planet and firms may offer marvelous and profitable energy-saving equipment, but it will be for profit today, not planet saving tomorrow.

It gets worse, for what capitalism has always had is money with which to try to buy influence.  Today’s version of U.S. capitalism has died and gone to heaven on this issue. A company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners.  So, rich industries can exert so much political influence that they now have a dangerous degree of influence over Congress.  And the issues they most influence are precisely the ones that matter most, the ones that are most important to society’s long-term well-being, indeed its very existence.  Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising.  And one of the first victims in this campaign has been the truth.  If scientific evidence suggests costs and limits be imposed on industry to protect the long-term environment, then science will be opposed by clever disinformation.

*   *   *

Capitalism certainly acts as if it believes that rapid growth in physical wealth can go on forever.  It appears to be hooked on high growth and avoids any suggestion that it might be slowed down by limits.  Thus, it exhibits horror at the thought (and occasional reality) of declining population when in fact such a decline is an absolute necessity in order for us to end up gracefully, rather than painfully, at a fully sustainable world economy.  Similarly with natural resources, capitalism wants to eat into these precious, limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today.  You don’t have to be a PhD mathematician to work out that if the average Chinese and Indian were to catch up with (the theoretically moving target of) the average American, then our planet’s goose is cooked, along with most other things.  Indeed, scientists calculate that if they caught up, we would need at least three planets to be fully sustainable.  But few listen to scientists these days.  So, do you know how many economic theories treat resources as if they are finite?  Well, the researchers at the O.E.C.D say “none” – that no such theory exists.  Economic theory either ignores this little problem or assumes you reach out and take the needed resources given the normal workings of supply and demand and you can do it indefinitely.  This is a lack of common sense on a par with “rational expectations,” that elegant theory that encouraged the ludicrous faith in deregulation and the wisdom of free markets, which brought us our recent financial fiascos.  But this failure in economic theory – ignoring natural limits – risks far more dangerous outcomes than temporary financial crashes.

*   *   *

As described above, the current U.S. capitalist system appears to contain some potentially fatal flaws.  Therefore, we should ask what it would take for our system to evolve in time to save our bacon.  Clearly, a better balance with regulations would be a help. This requires reasonably enlightened regulations, which are unlikely to be produced until big money’s influence in Congress, and particularly in elections, decreases.  This would necessitate legal changes all the way up to the Supreme Court.  It’s a long haul, but a handful of other democratic countries in northern Europe have been successful, and with the stakes so high we have little alternative but to change our ways.

*   *   *

Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence.  Fifty and one-hundred-year horizons are important despite the “tyranny of the discount rate,” and grandchildren do have value. My conclusion is that capitalism does admittedly do a thousand things better than other systems:  it only currently fails in two or three.  Unfortunately for us all, even a single one of these failings may bring capitalism down and us with it.

Keep in mind that the foregoing passages were just from Part II of the Quarterly Letter.  Part III is focused on “Investment Observations for the New Year”.  Be sure to check it out – it’s not as bearish as you might expect.  Enjoy!



 

Government Should Listen To These Wealth Managers

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A good deal of Mitt Romney’s appeal as a Presidential candidate is based on his experience as a private equity fund manager – despite the “vulture capitalist” moniker, favored by some of his critics.  Many voters believe that America needs someone with more “business sense” in the White House.  Listening to Mitt Romney would lead one to believe that America’s economic and unemployment problems will not be solved until “government gets out of the way”, allowing those sanctified “job creators” to bring salvation to the unemployed masses.  Those who complained about how the system has been rigged against the American middle class during the past few decades have found themselves accused of waging “class warfare”.  We are supposed to believe that Romney speaks on behalf of “business” when he lashes out against “troublesome” government regulations which hurt the corporate bottom line and therefore – all of America.

Nevertheless, the real world happens to be the home of many wealth managers – entrusted with enormous amounts of money by a good number of rich people and institutional investors – who envision quite a different role of government than the mere nuisance described by Romney and like-minded individuals.  If only our elected officials – and more of the voting public – would pay close attention to the sage advice offered by these wealth managers, we might be able to solve our nation’s economic and unemployment problems.

Last summer, bond guru Bill Gross of PIMCO  lamented the Obama administration’s obliviousness to the need for government involvement in short-term job creation:

Additionally and immediately, however, government must take a leading role in job creation.  Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed.  The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper.  That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.  Our labor force is too expensive and poorly educated for today’s marketplace.

*   *   *

In the near term, then, we should not rely solely on job or corporate-directed payroll tax credits because corporations may not take enough of that bait, and they’re sitting pretty as it is.  Government must step up to the plate, as it should have in early 2009.

In my last posting, I discussed a February 2 Washington Post commentary by Mohamed El-Erian (co-CEO of PIMCO).  El-Erian emphasized that – despite the slight progress achieved in reducing unemployment – the situation remains at a crisis level, demanding immediate efforts toward resolution:

Have no doubt, this is a complex, multiyear effort that involves several government agencies acting in a delicate, coordinated effort.  It will not happen unless our political leaders come together to address what constitutes America’s biggest national challenge. And sustained implementation will not be possible nor effective without much clearer personal accountability.

One would think that, given all this, it has become more than paramount for Washington to elevate – not just in rhetoric but, critically, through sustained actions – the urgency of today’s unemployment crisis to the same level that it placed the financial crisis three years ago.  But watching the actions in the nation’s capital, I and many others are worried that our politicians will wait at least until the November elections before dealing more seriously with the unemployment crisis.

On October 31, I focused on the propaganda war waged against the Occupy Wall Street movement, concluding the piece with my expectation that Jeremy Grantham’s upcoming third quarter newsletter would provide some sorely-needed, astute commentary on the situation.  Jeremy Grantham, rated by Bloomberg BusinessWeek as one of the Fifty Most Influential Money Managers, released an abbreviated edition of that newsletter one month later than usual, due to a busy schedule.  In addition to expressing some supportive comments about the OWS movement, Grantham noted that he would provide a special supplement, based specifically on that subject.  Finally, on February 5, Mr. Grantham made good on his promise with an opinion piece in the Financial Times entitled, “People now see it as a system for the rich only”:

For the time being, in the US our corporate and governmental system backed surprisingly by the Supreme Court has become a plutocracy, designed to prolong, protect and intensify the wealth and influence of those who already have the wealth and influence.  What the Occupy movement indicates is that a growing number of people have begun to recognise this in spite of the efficiency of capital’s propaganda machines.  Forty years of no pay increase in the US after inflation for the average hour worked should, after all, have that effect.  The propaganda is good but not that good.

*   *   *

In 50 years economic mobility in the US has gone from the best to one of the worst.  The benefits of the past 40 years of quite normal productivity have been abnormally divided between the very rich (and corporations) and the workers.

Indeed “divide” is not the right word, for, remarkably, the workers received no benefit at all, while the top 0.1 per cent has increased its share nearly fourfold in 35 years to a record equal to 1929 and the gilded age.

But the best propaganda of all is that the richest 400 people now have assets equal to the poorest 140m.  If that doesn’t disturb you, you have a wallet for a heart.  The Occupiers’ theme should be simple:  “More sensible assistance for the working poor, more taxes for the rich.”

I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  Back in November of 2010, economist John Hussman of the Hussman Funds discussed the consequences of the administration’s failure to do what was necessary:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The plutocratic tools in control of our government would never allow the stockholders and bondholders of those “too-big-to-fail” banks to suffer losses as do normal people after making bad investments.  It’s hard to imagine that Mitt Romney would take a tougher stance against those zombie banks than what we have seen from the Obama administration.

Our government officials – from across the political spectrum – would be wise to follow the advice offered by these fund managers.  A political hack whose livelihood is based entirely on passive income has little to offer in the way of “business sense” when compared to a handful of fund managers, entrusted to use their business and financial acumen to preserve so many billions of dollars.  Who speaks for business?  It should be those business leaders who demonstrate concern for the welfare of all human beings in America.


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Wall Streeters Who Support The Occupy Movement

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Forget about what you have been hearing from those idiotic, mainstream blovaitors – who rose to prominence solely because of corporate politics.  Those bigmouths want you to believe that the Occupy Wall Street movement is anti-capitalist.  Nevertheless, the dogma spouted by those dunder-headed pundits is contradicted by the reality that there are quite a number of prominent individuals who voice support for the Occupy Wall Street movement, despite the fact that they are professionally employed in the investment business.  I will provide you with some examples.

On October 31, I discussed the propaganda war waged against the Occupy Wall Street movement, concluding the piece with my expectation that Jeremy Grantham’s upcoming third quarter newsletter would provide some sorely-needed, astute commentary on the situation.  Jeremy Grantham, rated by Bloomberg BusinessWeek as one of the Fifty Most Influential Money Managers, finally released an abbreviated edition of that newsletter one month later than usual, due to a busy schedule.  In addition to expressing some supportive comments about the OWS movement, Grantham noted that he will be providing a special supplement, based specifically on that subject:

Meriting a separate, special point are the drastic declines in both U.S. income equality – the U.S. has become quite quickly one of the least equal societies – and in the stickiness of economic position from one generation to another.  We have gone from having been notably upwardly mobile during the Eisenhower era to having fallen behind other developed countries today, even the U.K.!  The net result of these factors is a growing feeling of social injustice, a weakening of social cohesiveness, and, possibly, a decrease in work ethic.  A healthy growth rate becomes more difficult.

*   *   *

Sitting on planes over the last several weeks with nothing to do but read and think, I found myself worrying increasingly about the 1% and the 99% and the appearance we give of having become a plutocracy, and a rather mean-spirited one at that.  And, one backed by a similarly mean-spirited majority on the Supreme Court.  (I will try to post a letter addressed to the “Occupy … Everywhere” folks shortly.)

Hedge fund manager Barry Ritholtz is the author of Bailout Nation and the publisher of one of the most widely-read financial blogs, The Big Picture.  Among the many pro-OWS postings which have appeared on that site was this recent piece, offering the movement advice similar to what can be expected from Jeremy Grantham:

To become as focused and influential as the Tea Party, what Occupy Wall Street needs a simple set of goals. Not a top 10 list — that’s too unwieldy, and too unfocused.  Instead, a simple 3 part agenda, that responds to some very basic problems regardless of political party.  It must address the key issues, have a specific legislative agenda, and finally, effect lasting change.  By keeping it focused on the foibles of Wall Street, and on issues that actually matter, it can become a rallying cry for an angry nation.

I suggest the following three as achievable goals that will have a lasting impact:

1. No more bailouts: Bring back real capitalism
2. End TBTF banks
3. Get Wall Street Money out of legislative process

*   *   *

You will note that these three goals are issues that both the Left and the Right — Libertarians and Liberals — should be able to agree upon. These are all doable measurable goals, that can have a real impact on legislation, the economy and taxes.

But amending the Constitution to eliminate dirty money from politics is an essential task. Failing to do that means backsliding from whatever gains are made. Whatever is accomplished will be temporary without campaign finance reform . . .

Writing for the DealBook blog at The New York Times, Jesse Eisinger provided us with the laments of a few Wall Street insiders, whose attitudes are aligned with those of the OWS movement:

Last week, I had a conversation with a man who runs his own trading firm.  In the process of fuming about competition from Goldman Sachs, he said with resignation and exasperation:  “The fact that they were bailed out and can borrow for free – it’s pretty sickening.”

*   *   *

Sadly, almost none of these closeted occupier-sympathizers go public.  But Mike Mayo, a bank analyst with the brokerage firm CLSA, which is majority-owned by the French bank Crédit Agricole, has done just that.  In his book “Exile on Wall Street” (Wiley), Mr. Mayo offers an unvarnished account of the punishments he experienced after denouncing bank excesses.  Talking to him, it’s hard to tell you aren’t interviewing Michael Moore.

*   *   *

I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong.  He sees it as part of the business model.

“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said.  “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”

Mr. Kramer’s contention was supported by a recent analysis of Securities and Exchange Commission documents by The New York Times, which revealed “that since 1996, there have been at least 51 repeat violations by those firms. Bank of America and Citigroup have each had six repeat violations, while Merrill Lynch and UBS have each had five.”

At the ever-popular Zero Hedge website, Tyler Durden provided us with the observations of a disillusioned, first-year hedge fund analyst.  Durden’s introductory comments in support of that essay, provide us with a comprehensive delineation of the tactics used by Wall Street to crush individual “retail” investors:

Regular readers know that ever since 2009, well before the confidence destroying flash crash of May 2010, Zero Hedge had been advocating that regular retail investors shun the equity market in its entirety as it is anything but “fair and efficient” in which frontrunning for a select few is legal, in which insider trading is permitted for politicians and is masked as “expert networks” for others, in which the government itself leaks information to a hand-picked elite of the wealthiest investors, in which investment banks send out their “huddle” top picks to “whale” accounts before everyone else gets access, in which hedge funds form “clubs” and collude in moving the market, in which millisecond algorithms make instantaneous decisions which regular investors can never hope to beat, in which daily record volatility triggers sell limits virtually assuring daytrading losses, and where the bid/ask spreads for all but the choicest few make the prospect of breaking even, let alone winning, quite daunting.  In short:  a rigged casino.  What is gratifying is to see that this warning is permeating an ever broader cross-section of the retail population with hundreds of billions in equity fund outflows in the past two years. And yet, some pathological gamblers still return day after day, in hope of striking it rich, despite odds which make a slot machine seem like the proverbial pot of gold at the end of the rainbow.  In that regard, we are happy to present another perspective:  this time from a hedge fund insider who while advocating his support for the OWS movement, explains, in no uncertain terms, and in a somewhat more detailed and lucid fashion, both how and why the market is not only broken, but rigged, and why it is nothing but a wealth extraction mechanism in which the richest slowly but surely steal the money from everyone else who still trades any public stock equity.

The anonymous hedge fund analyst concluded his discourse with this point:

In other words, if you aren’t in the .1%, you have no access to the derivatives markets, you have no access to the special deals that hedge funds and other wealthy investors get, and you have no access to the resources, information, strategic services, tax exemptions, and capital that the top .1% is getting.

If you have any questions about what some of the concepts above mean, ask and I will try my best to answer.  I’m a first-year analyst on Wall Street, and based on what I see day in and day out, I support the OWS movement 100%.

You are now informed beyond the influence of those presstitutes, who regularly attempt to convince the public that an important goal of the Occupy Movement is to destroy the livelihoods of those who work on Wall Street.


 

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Losing The Propaganda War

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The propaganda war waged by corporatist news media against the Occupy Wall Street movement is rapidly deteriorating.  When the occupation of Zuccotti Park began on September 17, the initial response from mainstream news outlets was to simply ignore it – with no mention of the event whatsoever.  When that didn’t work, the next tactic involved using the “giggle factor” to characterize the protesters as “hippies” or twenty-something “hippie wanna-bes”, attempting to mimic the protests in which their parents participated during the late-1960s.  When that mischaracterization failed to get any traction, the presstitutes’ condemnation of the occupation events – which had expanded from nationwide to worldwide – became more desperate:  the participants were called everything from “socialists” to “anti-Semites”.

Despite the incessant flow of propaganda from those untrustworthy sources, a good deal of commentary – understanding, sympathetic or even supportive of Occupy Wall Street began to appear in some unlikely places.  For example, Roger Lowenstein wrote a piece for Bloomberg BusinessWeek entitled, “Occupy Wall Street: It’s Not a Hippie Thing”:

As critics have noted, the protesters are not in complete agreement with each other, but the overall message is reasonably coherent.  They want more and better jobs, more equal distribution of income, less profit (or no profit) for banks, lower compensation for bankers, and more strictures on banks with regard to negotiating consumer services such as mortgages and debit cards.  They also want to reduce the influence that corporations – financial firms in particular – wield in politics, and they want a more populist set of government priorities: bailouts for student debtors and mortgage holders, not just for banks.

In stark contrast with the disparaging sarcasm spewed by the tools at CNBC and Fox News concerning this subject, The Economist demonstrated why it enjoys such widespread respect:

So the big banks’ apologies for their role in messing up the world economy have been grudging and late, and Joe Taxpayer has yet to hear a heartfelt “thank you” for bailing them out.  Summoned before Congress, Wall Street bosses have made lawyerised statements that make them sound arrogant, greedy and unrepentant.  A grand gesture or two – such as slashing bonuses or giving away a tonne of money – might have gone some way towards restoring public faith in the industry.  But we will never know because it didn’t happen.

On the contrary, Wall Street appears to have set its many brilliant minds the task of infuriating the public still further, by repossessing homes of serving soldiers, introducing fees for using debit cards and so on.  Goldman Sachs showed a typical tin ear by withdrawing its sponsorship of a fund-raiser for a credit union (financial co-operative) on November 3rd because it planned to honour Occupy Wall Street.

The Washington Post conducted a poll with the Pew Research Center which compared and contrasted popular support for Occupy Wall Street with that of the Tea Party movement.  The poll revealed that ten percent of Americans support both movements.  On the other hand, Tea Party support is heavily drawn from Republican voters (71%) while only 24% of Republicans – as opposed to 64% of Democrats – support Occupy Wall Street.  As for self-described “Moderates”, only 24% support the Tea Party compared with Occupy Wall Street’s 45% support from Moderates.  Rest assured that these numbers will not deter unscrupulous critics from describing Occupy Wall Street as a “fringe movement”.

The best smackdown of the shabby reportage on Occupy Wall Street came from Dahlia Lithwick of Slate:

Mark your calendars:  The corporate media died when it announced it was too sophisticated to understand simple declarative sentences.  While the mainstream media expresses puzzlement and fear at these incomprehensible “protesters” with their oddly well-worded “signs,” the rest of us see our own concerns reflected back at us and understand perfectly.  Turning off mindless programming might be the best thing that ever happens to this polity.  Hey, occupiers:  You’re the new news. And even better, by refusing to explain yourselves, you’re actually changing what’s reported as news.  Because it takes a tremendous mental effort to refuse to see that the rich are getting richer in America while the rest of us are struggling.  Maybe the days of explaining the patently obvious to the transparently compromised are finally behind us.

By refusing to take a ragtag, complicated, and leaderless movement seriously, the mainstream media has succeeded only in ensuring its own irrelevance.  The rest of America has little trouble understanding that these are ragtag, complicated, and leaderless times.  This may not make for great television, but any movement that acknowledges that fact deserves enormous credit.

Too many mainstream news outlets appear to be suffering from the same disease as our government and our financial institutions.  Jeremy Grantham’s Third Quarter 2011 newsletter will be coming out in a few days and I’m hoping that he will prescribe a cure.  My wilder dream is that those vested with the authority and responsibility to follow his advice would simply do so.


 

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Unwinding The Spin

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We are caught in a steady “spin cycle” of contradictory reports about our most fundamental concerns:  the environment and the economy.  Will China financially intervene to resolve the sovereign debt crisis in Europe and save us all from the economic consequences that loom ahead?  Will the “China syndrome” finally become a reality at Fukushima?  When confronted with a propaganda assault from the “rose-colored glasses” crowd, I become very skeptical.

Widespread concern that Greece would default on its debt inflamed lingering fear about debt contagion throughout the Eurozone.  Economist John Hussman, one of the few pundits who has been keeping a sober eye on the situation, made this remark:

Simply put, the Greek debt market is screaming “Certain default. Amésos.”

Meanwhile, the Financial Times reported that China Investment Corporation has been involved in discussions with the government of Italy concerning Italian bond purchases as well as business investments.  Bloomberg BusinessWeek quoted Zhang Xiaoqiang, vice chairman of China’s top economic planning agency, who affirmed that nation’s willingness to buy euro bonds from countries involved in the sovereign debt crisis “within its capacity”.

Stefan Schultz of Der Speigel explained that China expects something in return for its rescue efforts:

The supposed “yellow peril” has positioned itself as a “white knight” which promises not to leave its trading partners in Europe and America in the lurch.

In return, however, Beijing is demanding a high price — the Chinese government wants more political prestige and more political power  .  .  .

Specifically, China wants:  more access to American markets, abolition of restrictions on the export of high-technology products to China as well as world-wide recognition of China’s economy as a market economy.

Even if such a deal could be made with China, would that nation’s bailout efforts really save the world economy from another recession?

As usual, those notorious cheerleaders for stock market bullishness at CNBC are emphasizing that now is the time to buy.  At MSN Money, Anthony Mirhaydari wrote a piece entitled, “The bulls are taking charge”.

Last week, Robert Powell of MarketWatch directed our attention to an analysis just published by Sam Stovall, the chief investment strategist of Standard & Poor’s Equity Research.  Powell provided us with this summary:

Consider, at a place and time such as this, with the economy teetering on the verge of another recession, none of the 1,485 stocks that make up the S&P 1,500 has a consensus “Sell” rating. And just five, or 0.3%, are ranked as being a “Weak Hold.”

*   *   *

From his vantage point, Stovall says it “appears as if most analysts are not expecting the U.S. to fall back into recession, and that now is the time to scoop up undervalued cyclical issues at bargain-basement prices.”

However, in S&P’s opinion, it might be high time to “buck the trend and embrace the traditionally defensive sectors (including utilities), as the risk of recession — and downward earnings per share revisions – appear to us to be on the rise.”

On September 14, investing guru Mark Hulbert picked up from where Robert Powell left off by reminding us that – ten years ago – stock analysts continued to rate Enron stock as a “hold” during the weeks leading up to its bankruptcy, despite the fact that the company was obviously in deep trouble.  Hulbert’s theme was best summed-up with this statement:

If you want objectivity from an analyst, you might want to start by demanding that he issue as many “sell” recommendations as “buys.”

It sounds to me as though Wall Street is looking for suckers to be holding all of those high-beta, Russell 2000 stocks when the next crash comes along.  I’m more inclined to follow Jeremy Grantham’s assessment that “fair value” for the S&P 500 is 950, rather than its current near-1,200 level.

While the “rose colored glasses” crowd is dreaming about China’s rescue of the world economy, the “China syndrome” is becoming a reality at Japan’s Fukushima nuclear power facility.  Immediately after the tragic earthquake and tsunami, I expressed my suspicion that the true extent of the nuclear disaster was the subject of a massive cover-up.  Since that time, Washington’s Blog has been providing regular updates on the status of the ongoing, uncontrolled nuclear disaster at Fukushima.  The September 14 posting at Washington’s Blog included an interview with a candid scientist:

And nuclear expert Paul Gunter says that we face a “China Syndrome”, where the fuel from the reactor cores at Fukushima have melted through the container vessels, into the ground, and are hitting groundwater and creating highly-radioactive steam . . .

On the other hand, this article from New Scientist reeks of nuclear industry spin:

ALARMIST predictions that the long-term health effects of the Fukushima nuclear accident will be worse than those following Chernobyl in 1986 are likely to aggravate harmful psychological effects of the incident.

As long as experts such as Paul Gunter and Arnie Gundersen continue to provide reliable data contradicting the “move along – nothing to see here” meme being sold to us by the usual suspects, I will continue to follow the updates on Washington’s Blog.


 

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More Wisdom From Jeremy Grantham

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One of my favorite commentators, Paul Farrell of MarketWatch, recently discussed some of the prescient essays of Jeremy Grantham, who manages over $100 billion as chief executive of an asset management firm – GMO.  Paul Farrell reminded us that Grantham warned of the impending financial crisis in July of 2007, which came as a surprise to those vested with the responsibility of paying attention to such advice.  As Farrell pointed out:

Our nation’s leaders are in denial, want happy talk, bull markets, can’t even see the crash coming, even though the warnings were everywhere for years. Why the denial?  Grantham hit the nail on the head:  Our leaders are “management types who focus on what they are doing this quarter or this annual budget and are somewhat impatient.”

Paul Farrell is warning of an “inevitable crash that is coming possibly just before the Presidential election in 2012”.  He incorporated some of Grantham’s rationale in his own discussion about how and why this upcoming crash will come as another surprise to those who are supposed to help us avoid such things:

Most business, banking and financial leaders are short-term thinkers, focused on today’s trades, quarterly earnings and annual bonuses.  Long-term historical thinking is a low priority.

Paul Farrell’s article was apparently written in anticipation of the release of Jeremy Grantham’s latest Quarterly Letter at the conclusion of the first quarter of 2011.  Grantham’s newest discourse is entitled, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”.  The theme is best summed-up by these points from the “summary” section:

  • From now on, price pressure and shortages of resources will be a permanent feature of our lives.  This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
  • We all need to develop serious resource plans, particularly energy policies.  There is little time to waste.

After applying some common sense and simple mathematics to the bullish expectations of immeasurable growth ahead, Grantham obviously upset many people with this sober observation:

Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period.  Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution.  Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels.

We have all experienced the rapid spike in commodity prices:  more expensive gas at the pump, higher food prices and widespread cost increases for just about every consumer item.  Many economists and other commentators have blamed the Federal Reserve’s ongoing program of quantitative easing for keeping interest rates so low that the enthusiasm for speculation on commodities has been enhanced, resulting in skyrocketing prices.  Surprisingly, Grantham is not entirely on board with that theory:

The Monetary Maniacs may ascribe the entire move to low interest rates.  Now, even I know that low rates can have a large effect, at least when combined with moral hazard, on the movement of stocks, but in the short term, there is no real world check on stock prices and they can be, and often are, psychologically flakey.  But commodities are made and bought by serious professionals for whom today’s price is life and death. Realistic supply and demand really is the main influence.

Grantham demonstrated that most of the demand pressure on commodities is being driven by China.  This brings us to his latest prediction and dire warning:

The significance here is that given China’s overwhelming influence on so many commodities, especially in terms of the percentage China represents of new growth in global demand, any general economic stutter in China can mean very big declines in some of their prices.

You can assess on your own the probabilities of a stumble in the next year or so.  At the least, I would put it at 1 in 4, while some of my colleagues think the odds are much higher.  If China stumbles or if the weather is better than expected, a probability I would put at, say, 80%, then commodity prices will decline a lot.  But if both events occur together, it will very probably break the commodity markets en masse.  Not unlike the financial collapse.  That was a once in a lifetime opportunity as most markets crashed by over 50%, some much more, and then roared back.

Modesty should prevent me from quoting from my own July 2008 Quarterly Letter, which covered the first crash.

*   *   *

In the next decade, the prices of all raw materials will be priced as just what they are, irreplaceable.  If the weather and China syndromes strike together, it will surely produce the second “once in a lifetime” event in three years.

For the near-term, we appear to be in an awful double-bind:  either we get crushed by increasing commodity prices – or – commodities will become plentiful and cheap, causing the world economy to crash once again.  It won’t bother Wall Street at all, because The Ben Bernank and “Turbo” Tim will be ready and willing to provide abundant bailouts – again, at taxpayer expense.


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Jeremy Grantham And Ike

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As an avid reader of Jeremy Grantham’s Quarterly Letter, I was surprised when he posted a Special Topic report on January 14 — so close to release of his Fourth Quarter 2010 Letter, which is due in a couple of weeks.  At a time when many commentators are focused on the 50th anniversary of John F. Kennedy’s historic Inaugural Address, Jeremy Grantham has taken the opportunity to focus on President Dwight Eisenhower’s Farwell Address of January 17, 1961.  (Grantham included the full text of Ike’s Farwell Address at the conclusion of the Special Topic essay.)

One passage from Ike’s Farwell Address seemed particularly prescient in the wake of the TARP bailout (which was not a success) and the “backdoor bailouts” including the Maiden Lanes (which were never to be repaid) as well as the cost of approximately $350 billion per year to investors and savers, resulting from the Federal Reserve’s zero-interest-rate-policy (often referred to as “ZIRP”).  Keep those Wall Street bailouts in mind while reading this passage from Ike’s speech:

Crises there will continue to be.  In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties.  A huge increase in newer elements of our defense; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research – these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.

But each proposal must be weighed in the light of a broader consideration:  the need to maintain balance in and among national programs – balance between the private and the public economy, balance between cost and hoped for advantage – balance between the clearly necessary and the comfortably desirable; balance between our essential requirements as a nation and the duties imposed by the nation upon the individual; balance between actions of the moment and the national welfare of the future.  Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.

In his Special Topic report, Jeremy Grantham focused on the disappointing changes that caused Ike’s America to become 21st Century America.  After quoting Ike’s now-famous admonition about the power of the military-industrial complex (for which the speech is frequently quoted) Grantham pointed out that the unrestricted influence of corporate power over our government has become a greater menace:

Unfortunately, the political-economic power problem has mutated away from the military, although it has left important vestiges there, toward a broader problem:  the undue influence of corporate America on the government, and hence the laws, taxes, and social policies of the country. This has occurred to such a degree that there seems little real independence in Congress, with most Congressmen answering first to the desire to be reelected and the consequent need to obtain funding from, shall we say, sponsors, and the need to avoid making powerful enemies.

*   *   *

The financial resources of the carbon-based energy companies are particularly terrifying, and their effective management of propaganda goes back decades.  They established and funded “independent” think tanks and even non-profit organizations that have mysteriously always come out in favor of policies favorable to maintaining or increasing the profits of their financial supporters.  The campaign was well-organized and has been terrifyingly effective.

*   *   *

The financial industry, with its incestuous relationships with government agencies, runs a close second to the energy industry.  In the last 10 years or so, their machine, led by the famously failed economic consultant Alan Greenspan – one of the few businessmen ever to be laughed out of business – seemed perhaps the most effective.  It lacks, though, the multi-decadal attitude-changing propaganda of the oil industry.  Still, in finance they had the “regulators,” deregulating up a storm, to the enormous profit of their industry.

Grantham concluded his report with a suggestion for the greatest tribute we could give Eisenhower after America ignored Ike’s warnings about the vulnerability of our government to unrestricted influences.  Grantham’s proposed tribute to Ike would be our refusal to “take this 50-year slide lying down”.

To steal a slogan from the Tea Party, I suggest the voters need to “take America back” from the corporations which bought off the government.  Our government has every intention of maintaining the status quo.

In the 2010 elections, voters were led to believe that they could bring about governmental reform by voting for candidates who will eventually prove themselves as protectors of the wealthy at the expense of the disappearing middle class.  In the 2008 elections, Barack Obama convinced voters that he was the candidate of change they could believe in.  In the real world of 2011, economist Simon Johnson explained what sort of “change” those voters received, as exemplified by the President’s appointment of his new Chief of Staff:

Let’s be honest.  With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout.  The risk inherent to our financial system is now higher than it was in the early/mid-2000s.  We are set up for another illusory financial expansion and another debilitating crisis.

Bill Daley will get it done.

Just as Jeremy Grantham explained how Eisenhower’s concerns about the military-industrial complex were materialized in the form of a corporate-controlled government, another unholy alliance was discussed by Charles Ferguson, director of the documentary film, Inside Job.  Ferguson recently offered an analysis of the milieu that resulted in President Obama’s appointment of Larry Summers as Director of the National Economic Council.  As Larry Summers announced plans to move on from that position, Ferguson explained how Summers had been granted the opportunity to inflict his painful legacy upon us:

Summers is unique but not alone.  By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government.  What few Americans realize is that the revolving door is now a three-way intersection.  Summers’ career is the result of an extraordinary and underappreciated scandal in American society:  the convergence of academic economics, Wall Street, and political power.

America needs new leaders who refuse to capitulate to the army of lobbyists on Capitol Hill.  Where are they?


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Fedbashing Is On The Rise

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It seems as though everyone is bashing the Federal Reserve these days.  In my last posting, I criticized the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2).  Since that time, I’ve seen an onslaught of outrage directed against the Fed from across the political spectrum.  Bethany McLean of Slate made a similar observation on November 9.  As the subtitle to her piece suggested, people who criticized the Fed were usually considered “oddballs”.  Ms. McLean observed that the recent Quarterly Letter by Jeremy Grantham (which I discussed here) is just another example of anti-Fed sentiment from a highly-respected authority.  Ms. McLean stratified the degrees of anti-Fed-ism this way:

If Dante had nine circles of hell, then the Fed has three circles of doubters.  The first circle is critical of the Fed’s current policies. The second circle thinks that the Fed has been a menace for a long time.  The third circle wants to seriously curtail or even get rid of the Fed.

From the conservative end of the political spectrum, the Republican-oriented Investor’s Business Daily provided an editorial on November 9 entitled, “Fighting The Fed”.  More famously, in prepared remarks to be delivered during a trade association meeting in Phoenix, Sarah Palin ordered Federal Reserve chairman Ben Bernanke to “cease and desist” his plan to proceed with QE2.  As a result of the criticism of her statement by Sudeep Reddy of The Wall Street Journal’s Real Time Economics blog, it may be a while before we hear Ms. Palin chirping about this subject again.

The disparagement directed against the Fed from the political right has been receiving widespread publicity.  I was particularly impressed by the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009.  Here is the most-frequently quoted portion of Bunning’s diatribe:

.   .   .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Michael Grunwald, author of Time magazine’s “Person of the Year 2009” cover story on Ben Bernanke, saw fit to write a sycophantic “puff piece” in support of Bernanke’s re-confirmation as Fed chairman.  In that essay, Grunwald attempted to marginalize Bernanke’s critics with this statement:

The mostly right-leaning (deficit) hawks rail about Helicopter Ben, Zimbabwe Ben and the Villain of the Year,   . . .

The “Helicopter Ben” piece was written by Larry Kudlow.  The “Zimbabwe Ben” and “Villain of the Year” essays were both written by Adrienne Gonzalez of the Jr. Deputy Accountant website, who saw her fanbase grow exponentially as a result of Grunwald’s remark.  The most amusing aspect of Grunwald’s essay in support of Bernanke’s confirmation was the argument that the chairman could be trusted to restrain his moneyprinting when confronted with demands for more monetary stimulus:

Still, doves want to know why he isn’t providing even more gas. Part of the answer is that he doesn’t seem to think that pouring more cash into the banking system would generate many jobs, because liquidity is not the current problem.  Banks already have reserves; they just aren’t using them to make loans and spur economic activity.  Bernanke thinks injecting even more money would be like pushing on a string.
*   *   *

To Bernanke, the benefits of additional monetary stimulus would be modest at best, while the costs could be disastrous. Reasonable economists can and do disagree.

Compare and contrast that Bernanke with the Bernanke who explained his rationale for more monetary stimulus in the November 4, 2010 edition of The Washington Post:

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.

*   *   *

But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.

Bernanke should have said:  “Pushing on a string should help us fulfill that obligation.”

Meanwhile, the Fed is getting thoroughly bashed from the political left, as well.  The AlterNet website ran the text of this roundtable discussion from the team at Democracy Now (Michael Hudson, Amy Goodman and Juan Gonzalez – with a cameo appearance by Joseph Stiglitz) focused on the question of whether QE2 will launch an “economic war on the rest of the world”.  I enjoyed this opening remark by Michael Hudson:

The head of the Fed is known as “Helicopter Ben” because he talks about dropping money into the economy.  But if you see helicopters, they’re probably not your friends.  Don’t go out and wait for them to drop the money, because the money is all going electronically into the banks.

At the progressive-leaning TruthDig website, author Nomi Prins discussed the latest achievement by that unholy alliance of Wall Street and the Federal Reserve:

The Republicans may have stormed the House, but it was Wall Street and the Fed that won the election.

*   *   *

That $600 billion figure was about twice what the proverbial “analysts” on Wall Street had predicted.  This means that, adding to the current stash, the Fed will have shifted onto its books about $1 trillion of the debt that the Treasury Department has manufactured.  That’s in addition to $1.25 trillion more in various assets backed by mortgages that the Fed is keeping in its till (not including AIG and other backing) from the 2008 crisis days.  This ongoing bailout of the financial system received not a mention in pre- or postelection talk.

*   *   *

No winning Republican mentioned repealing the financial reform bill, since it doesn’t really actually reform finance, bring back Glass-Steagall, make the big banks smaller or keep them from creating complex assets for big fees.  Score one for Wall Street.  No winning Democrat thought out loud that maybe since the Republican tea partyers were so anti-bailouts they should suggest a strategy that dials back ongoing support for the banking sector as it continues to foreclose on homes, deny consumer and small business lending restructuring despite their federal windfall, and rake in trading profits.  The Democrats couldn’t suggest that, because they were complicit.  Score two for Wall Street.

In other words, nothing will change.  And that, more than the disillusionment of his supporters who had thought he would actually stand by his campaign rhetoric, is why Obama will lose the White House in 2012.

The only thing I found objectionable in Ms. Prins’ essay was her reference to “the pro-bank center”.  Since when is the political center “pro-bank”?  Don’t blame us!

As taxpayer hostility against the Fed continues to build, expect to see this book climb up the bestseller lists:  The Creature from Jekyll Island.   It’s considered the “Fedbashers’ bible”.


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Listening To Smart People

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As the mid-term election cycle reaches its climax, we find ourselves exposed to an increasing amount of stupid pronouncements by desperate politicians, overworked commentators and plain-old idiots, who managed to attract the interest of television news personnel.  I was particularly amused by the recent outburst from Juan Williams about the fact that he gets nervous when he sees people in “Muslim garb” boarding a plane in which he is a passenger.  NPR saw fit to fire him for making a remark described as “inconsistent with our editorial standards and practices”.  Despite the widespread hand-wringing over the “bigoted” nature of the statement, I was more focused on its stupidity.  Does Juan Williams seriously believe that terrorists would board a plane dressed in Muslim garb?  I would assume that all terrorists learn in Jihad 101 that the traditional garb for airborne martyrdom is the Adidas warm-up suit.  Wearing “Muslim garb” for such an occasion would serve only as an offer to be waterboarded.

Another example of election year asininity is the thought that someone could get elected to the Senate by claiming that the incumbent opponent of said candidate “actually voted to use taxpayer dollars to pay for Viagra for convicted child molesters and sex offenders”.  It was beginning to appear as though stupid has become the “new normal”.

Finally, some fresh air came along when a few news outlets reminded us that there are still some smart people among us.  The Los Angeles Times was kind enough to publish an interview with Elizabeth Warren, conducted by Jim Puzzanghera.  President Obama decided to appoint Professor Warren to launch the newly-created Consumer Financial Protection Bureau out of fear that a protracted confirmation battle would ensue if he appointed her as director of that agency.  With non-stop news coverage currently focused on the recent disclosures of fraudulent conduct extending from the mortgage origination process right through the foreclosure process, it would seem that the election-eve interview would provide an opportunity to assail the targets of the new agency.  When asked whether she would support the scattergun approach of seeking a nationwide foreclosure moratorium “while bank paperwork problems are being worked out”, Professor Warren gave us a glimpse of some traits we haven’t seen in a while:  restraint and common sense.  Here is her response to that tough question:

This agency will not veer from its support of American families, whether it’s in the foreclosure crisis or elsewhere.  But no one would want this agency … to act before it had collected all of the necessary data and thought through the options.  The (state) attorneys general are moving fast, and at this moment, I think that’s the right response … with emphasis on “at this moment.”

Professor Warren wasn’t the only smart person to draw some curiosity from the ADD-addled news media this week.  My favorite stock market guru, Jeremy Grantham, released his latest Quarterly Letter on Tuesday.  Its Halloween-based theme made it impossible to overlook.  As usual, Mr. Grantham gave us his unique, brilliant perspective in exposing how the Federal Reserve’s reckless (if not actually criminal) monetary policy helped cause the financial crisis and how Chairman Bernanke’s anticipated move toward more quantitative easing could make a bad situation worse.  Here are a few gems from Grantham’s must-read essay:

And these are most decidedly not normal times.  The unusual number of economic and financial problems has put extreme pressure on the Fed and the Administration to help the economy recover.  The atypical disharmony in Congress, however, has made the Federal government dysfunctional, and almost nothing significant – good or bad – can be done. Standard fiscal stimulus at a level large enough to count now seems impossible, even in the face of an economy that is showing signs of sinking back as the original stimulus wears off. This, of course, puts an even bigger burden on the Fed and induces, it seems, a state of panic.  Thus, the Fed falls back on its last resort – quantitative easing.  This has been used so rarely that its outcome is generally recognized as uncertain.

*   *   *

And of all of the many mistakes of the current Administration, the worst, in my opinion, are directly related to this fiasco:  the inexplicable choice of Geithner, who was actually placed at the scene of the crime in New York and whose fingerprints were on the murder weapon, and the reappointment of  … gulp … Bernanke himself, about whose reappointment much juicy Republican criticism was made, all of it completely justified in my view.  There may, however, be a small ray of hope.  The recent Fed appointee, Vice Chair Janet Yellen, said not long ago, “Of course asset bubbles must be taken seriously!”  She also said, “It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk taking.”  Yes, sir!  Or rather, madam!  A promising start.  These sentiments, of course, are completely contrary to the oft-repeated policies of Greenspan and his chief acolyte, Bernanke.  Perhaps she will slap some good sense into her boss on this issue.

*   *   *

Since it is customary in polite society to apologize for causing distress, on behalf of the Fed, let me apologize for the extraordinary destructiveness of its policies for the last 15 years.  Bernanke’s version of an apology, delivered in January this year to the American Economic Association, was to claim that the Fed’s monetary policy during the 2000-08 period was appropriate, and that there were no major failings, such as missing the housing bubble completely, that were worth mentioning.  This stubbornness in the face of clear data is right up there with efficient market believers.  And very impolite indeed.

Now I have to go back to waiting another three months for Jeremy Grantham’s next Quarterly Letter.  As always, the current one will be tough to beat.  In the mean time, it’s nice to know that there are some smart people around, capable of providing solutions to our most pressing problems.  If only those vested with the authority to implement those ideas were paying attention   .   .   .



A Wary Eye On The Indicators

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March 1, 2010

The past few days brought us some observations by a number of financial commentators, who expressed concern about how our economic recovery is coming along.  Although none of the following three are ready to start sounding alarms, they all seem to share a similar tone of discouragement.

Don Luskin of The Wall Street Journal ’s Smart Money blog began his February 26 piece with an explanation of how proud he used to be about the accuracy of his May, 2009 declaration that the recession had ended.  Although he still believes that he made the right call back then, the most recent economic indicators have muddied the picture:

I made my recession end call in May because of an entirely different set of statistics, designed to be predictive rather than merely to recognize what has already happened.  What worries me is that these statistics have all started to get a little worse recently.

Luskin explained that although initial unemployment claims reached their peak in early April, the four-week moving average has risen 7 percent from where it was a few weeks ago.

Over history, upticks like that have no predictive value.  There have been many of them, and very few have led to recessions.  Still, 7% is a big reversal.  In May when I got excited about the drop in claims, that drop was only about 4%!

Luskin found another disappointing trend in the fact that earnings expectations for the S&P 500 are now growing at a much slower pace than they were in April.  Two other trends concerned him as well.  The fact that the dollar has rallied ten percent in the last couple of months raises the question whether “the fear that gripped world markets in 2008 and 2009” could be returning.  Finally, the fact that the credit spread between Treasuries and “junk bonds” is now at six percent after having been below 5%, brings a little discomfort simply because of a move in the wrong direction.  Nevertheless, Luskin is still optimistic, although his perspective is tempered with realism:

So is the economic recovery over?  I don’t think so.  I think it’s just being tested.  None of the indicators I use to detect the onset of recession are giving signals.  But it’s haunting, nevertheless.  After the horrific global recession we went through, you’d think we ought to come roaring back. We’re back, but we’re not exactly roaring.

In Sunday’s Washington Post, Frank Ahrens wrote an article discussing three indicators that “spell trouble for the recovery”.  Here’s how he explained them:

— On Wednesday, the Commerce Department reported that January new-home sales dropped 11.2 percent from December, plunging to their lowest level in nearly 50 years.

— On Tuesday, the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey’s “present situation index” — how confident consumers feel right now — which hit its lowest mark since the 1983 recession.  On Friday, the Reuters/University of Michigan consumer sentiment survey also showed a falloff from January to February.

— On Thursday, the government’s report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted.  Forecasters expected new jobless claims to drop by about 20,000.

Taken together, what do these reports tell us?

We’ve got a long way to go to get out of this economic mess, and we may be actually losing a little ground.

At the conclusion of that piece, Mr. Ahrens added that another factor holding back recovery is the current state of activity in the stock market.  Investors seem to be exhibiting caution, uncertainty and “a hard-to-shake sense that we haven’t hit bottom yet”.

As I frequently point out, one of my favorite financial gurus is Jeremy Grantham of GMO.  The February 26 issue of Bloomberg Business Week featured an article by Charles Stein concerning Grantham’s career.  In the section of the piece discussing Grantham’s current outlook, we see yet another view toward a very lean, slow recovery process:

Grantham’s favorite asset class today is high-quality U.S.stocks, companies defined by high, stable returns and low debt.  The allocation fund had 31 percent of its money in that category at year-end, sometimes called blue chips, according to the GMO Web site.  In the interview, he said he expects such stocks to return an average of 6.8 percent a year over the next seven years, compared with 1.3 percent for all large-cap U.S. stocks.

Emerging-market stocks may rise about 4 percent annually in the next seven years, as investor enthusiasm for economic growth in developing countries carries the stocks to unsustainable levels, Grantham said.

“Why not go along for the ride?” he said.  The MSCI Emerging Markets Index returned an average of 22 percent in the past seven years, compared with a gain of 5.5 percent by the S&P 500 index.

U.S.government bonds will return 1.1 percent a year over the seven-year period, according to the latest GMO forecast.  The Bank of America Merrill Lynch U.S. Treasury Master Index rose 4.3 percent from 2003 through 2009.

Grantham said he expects a difficult, not disastrous, period for the economy and investments.

“It will feel like the 1970s,” he said. “One step forward, one step back.”

None of the three gentlemen whom I have quoted here are seeing visions of rainbows and unicorns in our economic future — at least not for the next few years.  Be sure to keep the opinions of these experts in mind if the cheerleading by some perma-bull, TV pundit motivates you to “get in on the ground floor of the next stock market rally”.  You could save yourself a lot of money and even more pain.



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