The “long run” used to be one of the most popular topics among investors, particularly institutional investors. In recent months, discussion of the long run has disappeared from view.
Indeed, the possibility the long run has run away is one of the few pieces of good news I have been able to find in the financial and economic turmoil of recent months.
The cold statistics have hardly been encouraging for the traditional view. On a total return basis, the Ibbotson data show that the S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts.
http://www.ft.com/cms/s/0/267900e0-0360-11de-b405-000077b07658.html
Chinese electricity growth and GDP growth had a .99 correlation from 1991-2007. Last year, electricity growth was 5.5% while GDP was up 9.5%. In January Chinese electricity growth was DOWN 13%. The first two weeks of Feb did rebound to be slightly positive, but the January number is truly staggering. There might be some effect from the holiday calendar, but it is a YOY analysis so the effect should be negligible. 1st quarter GDP numbers wont be available for a few months, but I don’t’ think you need to wait that long to draw some scary conclusions. While I have long doubted the official Chinese numbers on both statistics, it is a relationship that makes sense and should be followed.
SAN FRANCISCO (MarketWatch) — Gov. Arnold Schwarzenegger is expected to declare a drought state of emergency for California soon, according to media reports Friday. Schwarzenegger is expected to sign the proclamation following three dry winters that have left California state and federally operated reservoirs at their lowest levels since 1992, according to The Associated Press. (Corrects to attribute detail to the AP.)
This article pretty much says alot about whats taking place in Europe. The scary part is that Germany is the “Best of Breed”! Look for more of the same coming out of Eastern Europe at some point. This is not good.
Feb. 27 (Bloomberg) — When Berlin resident Simone Klostermann returned from vacation and couldn’t find her Mercedes SLK, she thought it had been towed. Police told her the 35,000- euro ($45,000) car had been torched.
“They’d squirted something flammable into the car’s engine block in the gap between the windshield and the hood,” said Klostermann. “The engine was completely destroyed.”
The 34-year-old’s experience isn’t unique in the German capital. At least 29 vehicles were destroyed in arson attacks this year, most of them luxury cars, according to police. The number is already about 30 percent of the total for 2008. The latest to go up in flames was a Porsche, on Feb. 14, two days after a Mercedes was set alight in a public car park.
http://www.bloomberg.com/apps/news?pid=20601109&sid=auZeM63nrgzo&refer=home
http://www.marketwatch.com/video/asset/water-shortages-threaten-industries/AE4037AA-58F3-497C-BA8D-07F4D57329F7?dist=hplatest
I have been finding myself out-contrarianizing myself. Everyone is depressed, so I figure we might be near a bottom. But then I heard someone else say the same thing and I thought to myself, “Hmmm, if everyone is expecting a tradable rally, we’re probably going down.” Of course, tradable, is not what I do, so I’m left confused…which is where I think many are. I haven’t been able to fully comprehend the numbers we’re talking about for a lot of reasons, but mainly because they are staggering. A billion seems like such a small number these days. With economists glibly talking of the $800+ billion stimulus package being too small, GM needing God-knows-how-many-more-billions to stay alive, etc.
So I’m left thinking about a few themes that I keep coming back to: I don’t see rates being raised in the near future, I don’t see taxes going up, and spending isn’t slowing. It leads me to think that our Treasuries won’t be that attractive for long, even if our economy will be, so I’m wary of the longer end on bonds. I hear of China buying up access to resources and can’t help but wonder why if they believed a significant slowdown was in place. So I have to assume they believe they will need the resources, so I’d like to be overweight there. Thatsabet has posted some good stuff on water, and I like the space, along with alternative energy, carbon emmission trading, etc. that are going to benefit from Obama and Co. Healthcare is too complicated. The trends (demographic, political, etc.) are in its favor, maybe. Healthcare tech, bioinformatics, etc. – yes. Drugs – I’m not sure. Healthcare Insurance – I’m not sure. Lastly, the question in all of these cases is whether the individual companies are trading cheap enough to warrant an investment here. There are good investments in my mind. Not to trade. Not to hold for 6 months (average holding period of stocks these days). The themes are long-term themes so the investments have to match. If you’re looking for trading ideas, these themes are the wrong reasons.
Everyone seems convinced that the PIGS (Portugal, Italy, Greece, and Spain) will opt out of the EURO when times get tuff. This is the 2nd piece that points to Germany walking. I concur. Being short the EURO seems the hard trade at the moment. Should it break the mkts are in trouble.
Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2JbfmRZSr7A&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEIIz2AfO_HE&refer=home
http://www.youtube.com/watch?v=Xbt30UnzRWw
And so it continues…I tend to agree with the ultimate conclusion. Deflation is not a concern at best, periodic at worst. The true concern should be inflation…
http://www.marketwatch.com/news/story/Will-inflation-emerge-victorious/story.aspx?guid=%7BCEACC3FA%2D3198%2D42F7%2D814A%2DD5395C3905E4%7D
Stocks are dead for the rest of your life. That’s the gist of my exclusive interview with the head of PIMCO Total Return — the biggest bond fund you’ve never heard of. But you should know PIMCO because its chief, Bill Gross, is one of the world’s most powerful bond investors.
Last September it looked like he was “helping” the U.S. government by advising it to put Fannie Mae and Freddie Mac into conservatorship. While this wiped out stockholders, Gross’s Fannie/Freddie bonds were boosted by the U.S.’s decision. In addition to running a $747 billion asset management firm, Gross’s PIMCO advises the U.S. on its $251 billion commercial paper program and its $500 billion fund to buy mortgage-backed securities. Gross shared his economic outlook with me yesterday in an exclusive interview — and he’s not optimistic.
http://www.dailyfinance.com/2009/02/26/bill-gross-the-747-billion-bond-man-declares-the-death-of-equ/
I came across this book and thought it was worthwhile. It’s called The Numbers Game by Michael Blastland and Andrew Dilnot. (http://www.amazon.com/Numbers-Game-Commonsense-Understanding-Politics/dp/1592404235).
Here is an excerpt: http://www.theweek.com/article/index/93464/The_last_word_When_numbers_deceive
It looks at how most people, including professionals, don’t understand the meaning of numbers, how statistics are misused, and how dangerous decision are when based on misunderstood statistics. It’s not about finance per se, but the implications are consistent.
Feb. 26 (Bloomberg) — On a cloudless December day in the Nevada desert, workers in white hard hats descend into a 30- foot-wide shaft next to Lake Mead.
As they’ve been doing since June, they’ll blast and dig straight down into the limestone surrounding the reservoir that supplies 90 percent of Las Vegas’s water. In September, when they hit 600 feet, they’ll turn and burrow for 3 miles, laying a new pipe as they go.
The crew is in a hurry. They’re battling the worst 10-year drought in recorded history along the Colorado River, which feeds the 110-mile-long reservoir. Since 1999, Lake Mead has dropped about 1 percent a year. By 2012, the lake’s surface could fall below the existing pipe that delivers 40 percent of the city’s water.
As Las Vegas’s economy worsens, the workers are also racing against a recession that threatens the ability to sell $500 million in bonds so they can complete the job.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a_b86mnWn9.w&refer=home
In an earlier post I made the comment that a mileage tax was NOT in the best interest of Americans. After further thought I have partially changed my mind. In a science filled with unintended consequences a Mileage Tax could possibly make sense. When the electric car does become mainstream any gasoline tax and that lack of NEED for gasoline would CRIPPLE tax reciepts. Maybe the DOT Chair is actually thinking long term. That being said, the bill for a mileage tax will NOT pass as the constituents, lobbyists, and residents will cry fowl. Back to the drawing board!
http://www.huffingtonpost.com/2009/02/20/mileage-tax-considered-by_n_168506.html
“What will happen when creditors begin to smell default wafting on the wind from the intellectual, moral and political swamp of Washington, D.C.?”
“They will demand more interest. At first, it might not be much: 4 percent, 6 percent. But as the depression spreads, spending accelerates, deficits climb and tax receipts fall, the rate that creditors demand might soar to 10, 20, 40 or even 80 percent. In 1998, annual bond yields in Russia reached over 200 percent before the government finally threw in the towel and defaulted. Now, barely a decade later, some of its banks are in the same trouble. Bloomberg (2/11) reports, “Yields on bonds due next year from Moscow-based Transcapitalbank and JSC AIKB Tatfondbank in the Russian republic of Tatarstan are trading at yields above 80 percent, up from 12 percent in August.” Prices of outstanding bonds, of course, collapse when yields surge. Concern about this very eventuality in the U.S. is why I have consistently recommended Treasury bills. If rates go up, we will continue to earn more and more interest.
“The U.S. government is the only institution that can keep promising a higher and higher interest rate and still have many people confident that it will pay. In a crisis, rising interest rates for Treasury debt could serve as a “black hole” for money. As rates rise, many people sell other investments to lend at these “attractive” rates. In such a situation, T-bonds would be the primary engine of falling prices, as they suck value from other investments. If this scenario unfolds, it will be the lunatic center of the credit crisis.
“So this is another way that gold and bond prices can go down at the same time. As T-bond yields go up, prices fall, and if investors rush to sell other assets to receive high yields, other investment prices will fall.
“This is hardly a guaranteed scenario. Maybe the government will begin spending less than it takes in, thereby shoring up its credit rating. Maybe the rush to own real money will keep gold rising. But unless Congress, the Treasury and the Fed change their behavior, rising interest rates for T-bonds seem inevitable.”
General | MacroMan | 
February 27, 2009 7:25 pm | 
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