Reasons to remain a bear
Buffett taught us that Mr Market is so irrational that only a fool would try to predict his short- and mid-term movements. So I stick to his teachings and continue to pick what I believe are undervalued companies and remain almost fully invested, as I do find interesting opportunities these days. However, given the horrible economic data that keeps pouring in – it’s hard for me to hold back my bearish sentiment. It almost hurts to read headlines these days. How can the press unanimously celebrate 2-3% growth in industrial order intake vs last month if year-on-year numbers are still down 10-20% or more (and we are now comparing to weaker, post-boom numbers)?
Anyways, these links provide fodder for the bears:
US: never before in post-Depression era has consumer credit fallen so dramatically (despite all the government stimulus):
To say that these figures are ugly would be an understatement. In fact, there is simply no way you can spin this – while this contraction in credit has to happen it has horrifying implications if our Washington policymakers don’t get on the stick and deal with the underlying issues here and now instead of pretending that everything is ok or worse, try to “borrow our way to prosperity.”
The important point is that we have never been here before in the post-Depression era. Any and all claims that “The Consumer has reached a bottom”, or “The Recession is over” (based on July data) or any such is pure nonsense. There is not only no sign of a bottom there is no change in the second derivative – that is, the rate of change continues to be essentially straight down!
http://market-ticker.denninger.net/archives/1418-The-Governments-Effort-Has-Failed.html
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Japan’s Debt Mountain
If there is a reason to expect about a prolonged economic winter in Japan, the most likely cause would appear to be an unsustainable level of sovereign debt. Thanks to nearly two decades of “stimulus,” Japan is burdened with debt like few other countries. Debt-to-GDP in Japan is now almost 220%. Netted against the large US dollar cash holdings Japan acquired in efforts to manage the dollar-yen exchange rate in the last decade, Japan’s net debt-to-GDP ratio is “only” 103%. But the ratio will surely grow higher. Japan’s budget deficit which had oscillated between 3% and 7% of GDP over the past five years, is running at nearly 10% in 2009.
It is hardly noteworthy in 2009 that the world’s second largest economy doesn’t meet the criteria to have qualified for European Union membership under the Maastrict treaty. Few of the other major economies do either, these days, least of all the United States. But to the simple-minded such as myself, it does seem odd that a nation with even a couple of credit metrics which rate on par with Weimar Germany and Argentina circa 2001 can hold down a “AA” credit rating. Stranger still are 10 year Japanese Government Bond (JGB) yields of slightly less than 1.3%.
http://www.gurufocus.com/news.php?id=68813
It seems that everybody is long gold these days. But why should the price of gold really go up – even if we are going to see higher inflation or currency crises?
Here a comment on gold from Warren Buffet: “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Also, there is massive potential supply from distressed nations: the top 5 gold owners as of September 2008 according to Wikipedia are USA 8,133.5t, Germany 3,412.6t, IMF 3,217.3t, France 2,508.8t and Italy 2,451.8t.
Isn’t the price of gold already artificially inflated? Wouldn’t it be smarter to go long commodities that are of real use like oil, copper or zinc?
Goldman Sachs skipped reporting December, during which it realized huge losses.
Now Morgan Stanley is doing the same thing.
Specifically, Morgan’s first quarter results report states:
As a result of the change in the Company’s fiscal year end from November 30th to December 31st, the Company had a December 2008 fiscal month transition period. The results for this period, which reflected a net loss applicable to Morgan Stanley of $1.3 billion, are presented on page 19 of the financial supplement accompanying this release.
http://www.nytimes.com/2009/05/13/business/global/13ship.html?_r=1&src=twr&pagewanted=print
SINGAPORE — To go out in a small boat along Singapore’s coast now is to feel like a mouse tiptoeing through an endless herd of slumbering elephants.
One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.
Hundreds of cargo ships — some up to 300,000 tons, with many weighing more than the entire 130-ship Spanish Armada — seem to perch on top of the water rather than in it, their red rudders and bulbous noses, submerged when the vessels are loaded, sticking a dozen feet out of the water.
Just when I really started wondering about what would happen to the USD once the Chinese decide to stop buying US treasuries and thus supporting American excesses, Rambo Ben stepped in and announced that he is going to “solve the issue” by printing 1 trillion (!) USD over the next few months.
As Jim Rogers says: “Printing money has never worked. Never ever in history!”. Or: “The idea that you have too much debt, too much borrowing and too much consumption and you’re going to solve that problem with more debt, more consumption and more borrowing? These people are nuts.”
Here a short decription of what happened to Zimbabwe (quoted from Yahoo! Answers): Zimbabwe’s farms were highly productive and the bread basket for much of southern and eastern Africa. Mugabe confiscated the farms and gave the land to his cronies — who knew diddly about farming and destroyed the productivity of the land. No more exports, no more income, no more foreign exchange. Therefore no money to pay his henchmen.
Mugabe started the printing presses rolling full-tilt to pay off govt employees, etc., without any income, foreign exchange, gold, or anything else to back the currency. The currency starts buying less: there’s no food grown so no food in the stores, no forex so no money to pay for imports. Lots and lots of paper chasing fewer and fewer goods.
It’s called hyperinflation and is notorious in economic history. Germany suffered hyperinflation in the early 1920’s. Argentina is another notorious recent case.
Hyperinflation is always caused by issuing excessive amounts of “money” with nothing to back it and no way to exchange it for goods and services due to lack of supply. Hyperinflation always results in economic collapse and a change in govt. In Germany, Hitler took over, you know the impact of that on world history.
Article argues that Western European banks (or whole countries, i.e. Austria) might collapse due to their Eastern European exposure. I agree.
I would like to point out though that European banks commonly insure their portfolios. Hence, American insurance companies might have significant exposure to this space as well. Anyways, the whole thing is quite troublesome.
http://www.arpllp.com/core_files/The%20Absolute%20Return%20Letter%200309.pdf
“According to the latest estimates from BIS, Eastern European countries
currently borrow $1,656 billion from abroad, three times more than in
2005 and mostly denominated in foreign currencies (ouch!). 90% of
that can be traced to Western European banks. About $350 billion
must be repaid or rolled over this year. Not an easy task in these
markets. Austrian banks alone have lent about $300 billion to the
region, equivalent to 68% of its GDP according to the Financial Times.
A default rate of 10% on its Eastern European loans is considered
enough to wipe out the entire Austrian banking system. EBRD has gone
on record stating that defaults in Eastern Europe could end up as high
as 20%.”
Fixed Income/Bonds, General | Rob | 
September 21, 2009 1:28 pm | 
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