Mixed Signals on China

Folks at BlackRock and Barclays tend to think China is a good place to put your money. They note the GDP growth rate of 6.8% in the fourth quarter and expected government stimulus that will lead to a growth rate of 8% in 2009. Moreover, the Shanghai Composite Index was up an impressive 9.3% in January. That is impressive in comparison to the nearly identical 8.8% change in the Dow, though for the Dow it was in the other direction.

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

As the linked Bloomberg article notes, the Shanghai Index was trading at 15.5 times reported earnings, versus 50 times reported earnings at the peak. That is low in comparison to where things have been, but is it truly that low in this environment? I tend to agree with the Chariman at Morgan Stanley Asia, who quite appropriately observes:

“Most of the juice in the Chinese growth results in the last five or six years have been export-led,” Roach said in a Bloomberg Television interview from Zurich. “How can an export- led economy lead the world out if its export markets are going south?”

Indeed, how can it? Seriously, if you know, please comment as I cannot see it. China's two biggest export customers, the EU and U.S., are not going on a spending spree any time soon (even though their respective governments are trying to stimulate one), so any expectation that China will just bounce back seems misplaced. China is indeed doing some things to support its domestic economy but this seems small considering its situation. We will see. I for one am not buying up shares of Chinese companies at the moment.

Let me add a couple more points to the equation. First, China computes its GDP a bit differently than we do. I noted this in some detail last week. As Nouriel Roubini pointed out, if it computed GDP the same way we do, its fourth quarter GDP would be pretty much zero. Moreover, given the 9% growth for the year, a 6.8% growth rate in the fourth quarter, even by China standards, suggests a serious decline late in the year. So any growth forecast tied to the China fourth quarter GDP is perhaps misplaced.

Second, the evidence of what is happening in China does not show the economy there being quite so rosy. Times Online had a nice detailed piece today on how the economic decline there is causing some significant social strife. They give plenty of examples of what is taking place. China is suffering with the rest of us and likely is or soon will be suffering much more. Accordingly, I think the folks at Barclays and BlackRock need to take another look.

http://business.timesonline.co.uk/tol/business/economics/article5627687.ece

Disclosures: None

THE NEW REALITY

One of the folks that commented on my Seeking Alpha piece last week suggested that we should give the fiscal stimulus plan time to take effect before being critical of it. Sounds logical, but let's digress for a moment.

If the plan looks wrong, smells wrong, and sounds wrong, why hold back? I know this is an area where no one has the right answer, or at least an answer they know to be right, but there are certain things that we should by all rights have a good sense about being wrong. Then again, I am talking about the government here, so I should know better. Nonetheless, what is wrong with the "current" plan? - let me count the (many) ways:

1. Well I am not really sure what the current plan is, for one thing. It seems to shift daily. Now I will give Obama some time to figure out what he is going to do, but we should not be getting reports daily on what is being considered. It just adds to the public belief that the administration has no idea what it is doing. From Bush, we expected it, but from Obama, we need leadership, we need confidence, we need conviction and we do not need a plan that shifts constantly.
2. Buying toxic assets from banks seems pretty stupid. Okay, let's shift a lot of junk from their balance sheets to ours. First of all, if we pay what this is really worth, the financial institutions are confessing insolvency right away. So we have to pay more than fair value, which inflates the value of toxic assets we do not buy, thereby adding more doubt to investors (not to mention we are paying too much). If a bank has a lot of over-valued bad debts on their books, why invest in them or trust them. So I do not see this working out well. But let's say it works in terms of removing toxic assets off the books, then what?
3. So we give them all this money. And then we let them do whatever in the world they want to do with the money. No, you say, we are putting strings on it this time. Okay, so we will put some restrictions on executive pay and bonuses and make them tell us how they are lending, but where does that get us? Why would we just give them this money and trust them to do the right thing? These are, after all, the companies that by-and-large got us into this mess. Can we trust them to lend to good companies that need the money to conduct business as usual or might they just use it to do what they think will make them the most money. WAKE UP PEOPLE!!!! These directors and officers are legally required to do what is best for their companies, not what is best for the U.S. taxpayers. And I suspect our interests are still not aligned just yet. Thus, I say we nationalize those "too big to fail" types that are technically insolvent so we can make the decisions on who needs and deserves the money. We can re-privatize later, but for now, we have the money, we call the shots. Cut out the middleman who has proven himself unworthy.
4. There is a serious problem I have noted here both recently and historically about whether our trading partners will support our debt-laden ways. We seem to have this big assumption that China, Japan, the Middle-East and so many other countries will support us incurring trillions of dollars of deficit spending. Yes they are supporting it, by the way, so far, but we cannot do this deficit spending without them, and soon, if we continue on this path, they will stop lending us the money. They already have major doubts and that is starting to be a big issue. It will, in my opinion, be a bigger problem for us in the years ahead. Perhaps even a bigger problem than the financial mess we face today.
5. Even if other countries support our deficit spending to support this plan, there is a major issue on whether we should incur this debt. I personally do not want to leave my daughter or grandchildren with having to pay off this massive deficit we are considering. I, for one, do not think we should be incurring trillions in debt for an ill-conceived or even a properly conceived plan. We cannot spend that much. OUR PROBLEM WAS SPENDING MORE THAN WE MADE SO THE ANSWER CANNOT BE THE GOVERNMENT ALLOWING US TO SPEND MORE THAN WE MAKE. Joseph Stiglitz, a Nobel laureate, can tell you better than me, and he thinks we are asking for major problems. http://www.bloomberg.com/apps/news?pid=20601087&sid=a.GJvNfWtCX0&refer=home
6. We will not get out of this until housing hits bottom, and I am talking a true bottom. The government and everyone else seems hell bent on propping up the market so it does not hit bottom. Well, false support leads to delayed pain. Right now, absent the government doing something stupid, I think the market should hit bottom early 2010 and perhaps late 2009. Just a guess, but it is based on what I have been reading about Alt-A loans resetting, where we are in the cycle and how markets tend to overshoot the mean. When we do reach bottom, it will allow banks to finally value their toxic assets to a certain degree. We will get there and the government needs to focus on us to surviving until then.
7. Last but not least - the new reality. This is probably my key comment here and perhaps one of the most significant I have ever noted on this blog. We have a new reality. The economy, at least in the U.S., was supported for the last five to ten years by consumers and home buyers spending more than we can afford. We were not living within our means. The fact that we are spending a lot less and that our houses are reverting to a proper price structure leads the government to think all is terrible. My take is that we are reverting to mean, we are correcting, we are arriving at price discovery, and our economy it reaching a stable level, a sustainable level. We may overshoot, but we are returning to mean. That is a very good thing. We need normalcy in our markets and pricing. This, to me, is not a recession, it is a correction. Let the economy correct, don't spend trillions to stop it. Yes, we need to spend money to control the pain and maintain companies that should be maintained, but otherwise, let us correct. As certain studies have shown, this new reality in some respects may be a better reality, at least for some.

http://www.nytimes.com/2009/02/01/business/01view.html?ref=business

Disclosures: None

The Bad News Continues

Keep those pencils sharpened as the records continue to be set.

Worst January in S&P History

You may have noticed stocks off a tad this month. Well, a tad is a tad of an understatement. S&P off 8.6% this month and that is a January record. And the Dow had that beat with an 8.8% drop, another January record, which is saying a lot because that beats a lot of terrible economic situations over the 113 year career of the Dow. I expected an Obama bounce and was sadly disappointed.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4DYRS8nD4gM&refer=home

The linked Bloomberg article talks about the January barometer, which is based upon January setting the tone for the year. Apparently it is right over 80% of the time. I do not consider this necessarily accurate on a scientific basis, but for this year I think it is accurate.

Now at the start of the month I predicted the markets would be down 10-20% for the year versus year end 2008. I am standing by that but am now thinking it could be a larger decrease. Let's hope not.

You may be reading this and thinking I am just another doom-and-gloomer, but you would be wrong. I have no predisposition. I am, however, not seeing any news that suggests that the worst is behind us. I am solid doom-and-gloom when the data suggests same and right now it is hard to read it otherwise. Some do, but they have been giving some less than credible predictions.

Not a Record, But Three More Banks Down

I have said repeatedly that my prediction of massive bank failures in 2009 was a no brainer, as in it took no crystal ball. Well, that continues to be the case. Another three down today.

http://www.bloomberg.com/apps/news?pid=20601110&sid=avXyR82JeMP4

Second Best to a Record

London luxury homes had their second worst decline in January (I know, who cares). I expect worse ahead. London is following the U.S. in its decline but unfortunately for them I anticipate their problems are significantly worse than ours. We will see, but I would move to Canada before the U.K.

http://www.bloomberg.com/apps/news?pid=20601110&sid=aM9uEAUYNgvI

Probably Not So Bad

I noted yesterday that Goldman Sachs predicted $4 trillion (with a T) in financial institution losses. I did not agree with it - I just reported it. Not good news from Paulson's old firm

Naked Capitailism makes a good point that this is more negative than Nouriel Roubini, a constant -yet usually accurate of late - doom-and-gloomer. He predicts U.S. financial problems of $1.9 trillion, less than 50% of Goldman. I only hope they are both wrong, yet I fear that Nouriel may still be calling things correctly. If so . . . I have no idea how bad this might get.

http://www.nakedcapitalism.com/2009/01/goldman-bank-rescue-may-reach-4.html

Disclosures: None

Record Setting Times

Record Bailout: If you think it is bad now - and we are already at fiscal stimulus record levels - it could be much worse. Folks at Goldman Sachs - you know Paulson's former employer - predict the bank bailout could run $4 trillion. Guess what, we do not have it and according to an article in the NY Times, the world is not likely to give it to us. Go figure. They need the money for themselves and with all this deficit spending, the U.S. is not quite the safe haven it used to be.

http://www.cnbc.com/id/28918543

Declining Economic Activity In, Well, Every Single State

We have been holding on for a while with a few states improving and one staying even but December marked the first time ever that all 50 states, yep every single one, showed a decline in activity. Yes the Fed Philly shows the coincident index down in a royal flush of bad news. Now that truly is impressive. It leads to a one month diffusion index of -100. What does that mean? Basically we got a perfect score in the wrong direction.

http://www.philadelphiafed.org/research-and-data/regional-economy/indexes/coincident/2008/CoincidentIndexes1208.pdf

New Home Sales

Yep, another record. Seasonally adjusted rate of new home sales of 331K. Now the records started on this in 1966, so certainly at some point in time it was worse, but hey, it is all relative.

http://www.calculatedriskblog.com/2009/01/record-low-new-homes-sales-in-december.html

Check out the Calculated Risk site for some pretty awesome cliff diving graphics.

Record Begets Record

So the low new home sales record leads to another record. This one is painful to see. Months of supply on housing is at an all time high of 12.9 months, as also reported by Calculated Risk above.

Continued Unemployment Record

Continued unemployment claims rose to 4.78 million last week, a new record. Not one in terms of percentage of unemployed, but one in terms of raw numbers.

http://www.workforcesecurity.doleta.gov/press/2009/012909.asp

Biggest Loss in 105 Years For Ford

Not a big surprise, but nonetheless, for a company this old, or any age, it is a record they would rather not set. Ford lost $5.9 billion in the fourth quarter to cap a full year loss of $14.6 billion. Shock - they are tapping their credit lines now before they lose them.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCT2mR1fO_EY

Just a taste of what is to come. Make sure you write those records in pencil and keep an eraser handy.

Disclosures: None.

Ready To Give Advice

I have had a number of comments either asking for advice or demeaning my posts because they do not give advice. I am not a financial advisor, so take this all in stride. I am an "investor" in my retirement account and a "speculator" in my brokerage. This simply means that I am looking for long-term value on my retirement and short-term gains in my brokerage. I only speculate with what I can afford to lose. So what is my advice?

My advice is to educate yourself on the markets, the economy, financial matters and the like. As they say, knowledge is power and, hopefully, you are reading this because you understand this. I am still constantly educating myself and expect to do so until I am six feet under and I highly recommend it. It has greatly increased my returns, especially on the speculative side of my life. For many years I lost money in my brokerage, with a few good years, but now I am on a pretty good streak. And what I have learned is to absorb as much data as possible and invest/bet accordingly. No single style will fit all circumstances. Last year I did put options on financial stocks to great benefit and this year I have mostly been playing the volatility, for decent gains. And there are a few stocks that have done well last year and this. I am just passing on what I think to be relevant. I regularly say what to do with the information is your choice and I mean that. You decide. I hope to make it an informed decision, but it is your decision. That, folks, is what this site is about. As much as economists try to muck this up, it is not that complicated if you look at the data. Just the facts.

Disclosures: None

And Now Some Cheery Words From The Fed

Finally some reality is setting it among our government officials. We are now past "the economy is strong" and "we have reached a bottom" type statements. Now we get cheery statements like the following from the Fed Open Market Committee (FOMC):

"Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant."

Downside risks are most decidely remaining significant. I could hardly have said it better myself.

http://www.federalreserve.gov/newsevents/press/monetary/20090128a.htm

Disclosures: None

I Second That Thought

I will not spend a lot of time summarizing this piece as it is relatively short and pretty much a must read. Jeffrey Sachs (a somewhat controversial figure) discusses what is wrong with our rush to stimulus. I must say I agree with everything he is saying. From running up debts that will trouble us in the future to spending money without proper regard to where it goes, there are plenty of problems with money spent to date and with the developing plans for how to spend the next $825 billion. Part of this is the usual impacts of the political process. Concessions must be made to get support. But this is a big test for Obama. He needs to push this through with minimal concessions. He needs to keep the support focused on where it can be the most productive. Certain things, i.e. tax cuts, have not worked in the past and will not work again, so we need to change our direction if we want to have any hope.

Yes, the market is up today, but my expectations remain down. The market was up on word that the new plan will buy up toxic debts from the banks that brought us here. We are becoming enablers and we will get what we deserve if we do not wise up quickly.

http://www.ft.com/cms/s/35438c54-ec8a-11dd-a534-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F35438c54-ec8a-11dd-a534-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.nakedcapitalism.com%2F

Disclosures: None