Damned If You Do Damned If You Don't

The following piece from the Telegraph makes a couple of points worth noting. First, credit is still pretty much non-existent, which is old news. Second, the act of governments around the world reducing interest rates is hampering lending, not enhancing it. This fits squarely into the unintended consequences category, but it is a consequence that will take a long time to undo. The government is now the lender of first, last and only resort and will be for a long time. Just ask the auto industry.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3685332/BIS-warns-of-collapse-in-global-lending.html

And it looks like we will soon be partial owners of the auto industry, whether we like it or not. Kinda like being part of some big national mutual fund. Perhaps we should give this mutual fund a name. I am open to suggestions, so feel free to leave comments. I am thinking something along the lines of All The Crap In the U.S. High Loss Fund.

http://www.bloomberg.com/apps/news?pid=20601087&sid=as5Uh_CslqcI&refer=home

Not Going Back

I have commented regularly on various reasons why the market will not be returning to its lofty highs of 2007 any time soon. Basically, those highs were attained with debt funded spending that will not resume any time soon. The following technical analysis from Aleph Blog agrees, finding that stocks in general are expected to earn a measely 2.26% a year for the next decade. For a baby-boomer generation on the verge of retirement looking to regain the 30-40% hole this recession just created in their retirement plan, this is not good news. But, you say, this is not possible. Equity investments average closer to 7 - 8% over time. Well "over time" is a big concept that may not correlate that well to a given decade or two. Just ask Japan's, whose lost decade is now looking more like a lost couple of decades. Hopefully this is wrong. Certainly there will be individual days where the market gains more than the 2.26% in a single day, like yesterday. But it is certainly possible that the next decade will be as anemic as the last. Nonetheless, the author at Aleph does note some alternative investments that may do better than stocks. Diversification is worth consideration.

http://alephblog.com/2008/12/09/a-reason-to-sell-stocks-amid-the-rally/

Of course there are plenty of folks who will tell you to stick to your guns and maintain a long term approach if you can. A lot can be said for the concept that right now is perhaps the worst time to take money out of equities, if you have not already done so. The chief investment adviser at Vanguard delivers the sage advice you will hear from most investment advisers. He does note you need diversification and you really need to look at your time horizon.

https://retirementplans.vanguard.com/VGApp/pe/PubVgiNews?ArticleName=BearLongViewTranscript

That Consumer Thingy

Over two thirds of our GDP is dependent on consumer spending. It was consumer spending that got us out of the last two recessions. But for various reasons, consumers for the most part are not spending now and will likely not resume their splurge any time soon. I have discussed some of the reasons for this, such as high debt load, job losses, stock losses, under water mortgages and the like. There is a reason I have not discussed that deserves some attention - fear of losing a job. Apparently with the unemployment rate rising quicky (even with the cooked government numbers that understate true unemployment), the percentage of people afraid of losing their jobs is skyrocketing. And such fear is undoubtedly putting a dent in spending. I agree with Obama, we have not yet reached bottom.

http://www.financialarmageddon.com/2008/12/less-than-optimistic.html

China Cliff Diving

Not too surprisingly, exports out of China are declining and industrial production will only rise about 5%, it's lowest rise since they started tracking it. This is a country that needs closer to 9% gain to basically tread water, due to the growing need for jobs, so a 5% gain is effectively a recession for China. This Bloomberg article mentions social unrest. When you have over a billion people, the phrase "social unrest" is not to be taken lightly. If for no other reason the article is worth reading as it quotes from Fan Gang. I like the name.

http://www.bloomberg.com/apps/news?pid=20601087&sid=abgmrMVPWrQw&refer=home

"Decidedly Bleaker" or "Significantly Weaker"

Oh what a difference a month can make. The economic situation, according to SunTrust, became "decidely bleaker" between the end of October and now.

http://atlanta.bizjournals.com/atlanta/stories/2008/12/08/daily24.html

Fed Ex, on the other hand, decided to go with "significantly weaker macroeconomic conditions." Either one seems to sum it up nicely.

http://biz.yahoo.com/bw/081208/20081208006344.html?.v=1

16% of All Mortgages To Go Into Foreclosure

Credit Suisse is predicting 8.1 million foreclosures by 2012, which is 16% of all mortgages. The number could be as light as 6.3 million or as heavy as 10.2 million. They believe subprime has peaked but will continue at high levels for a couple of years and that non-subprime will increase.

As I have said, I do not see the recession ending and the economy improving until the housing mess bottoms out. We are reverting to mean and the high foreclosure rate will undoubtedly cause us to overshoot the mean rather decidedly. With heavy foreclosures forecast through 2012, I continue to expect this to be a long drawn out affair. Hunker down!

http://calculatedrisk.blogspot.com/2008/12/credit-suisse-forecast-81-million.html