Vindicated?

A dear friend who is responsible for me starting this blog a little over a year and a half ago asked me today if I feel vindicated by the market downturn the past several weeks. Two years ago I was simply emailing friends in my office about the approaching calamity and this friend referred to me as Chicken Little. As the sky began to fall in keeping with my predictions, he suggested I start blogging. He follows what I write - and undoubtedly is the first one reading these words - and knows that I am among the few that maintained a bearish stance over the past year as the markets rebounded. I told him no, I do not feel vindicated. But I have to admit, perhaps a bit. But I am not enjoying it. So why did I tell him no?

First of all, it is a bit early to get cocky here. A few weeks of downturn does not a bear market make. I certainly see no near term reason for things to reverse themselves from a bearish direction in any great way, but I have given up on predicting market direction. I am simply sticking to fundamentals and the belief that in the long term the market has to reflect them. I view the markets as possibly beginning to reflect reality at the moment, though would not be too surprised to see some major stimulus packages being announced in the U.S., EU or elsewhere soon to bring the markets back from the brink. I will comment on this possibility more below.

Second, I do not want to be right in my doom-and-gloom. I see no alternative given debt, unemployment and everything else on a world scale, but I would still love to be wrong. I have a three year old, a six year old, parents on Social Security, in-laws on Social Security and a host of other reasons I would love to see the economy rebound. Nonetheless, I have been planning my finances according to the fundamentals and reality - as I see it- and I do not see fundamentals as good for a very long time. If you see things the same way you may want to do the same.

Governments Between a Rock and a Hard Place.

I noted above that I would not be surprised if the U.S., EU or other governments came out with stimulus soon to bring the markets back to life. Okay, I may have fibbed a bit. The EU just did its nuclear option to address the Greece situation and probably is not anxious to do much more to address the Hungarian situation today. They would probably like to do something but have nothing left in the arsenal that they think would work, so they are stuck. After using it once, the nuclear option is no longer an option, and I suspect before doing it that was a topic of discussion, i.e. "If it does not work, we cannot do it again. We are screwed." From my perspective, it did not work and they are screwed.

The same is close to happening for the U.S. The U.S. still has a few bullets left but Obama and company have to be wondering how well their bullets will work and, at least for now, they probably want to keep their powder dry. The real devil in the details is debt. Greece, Hungary, Spain, Italy . . . etc. are largely in the mess they are in because the governments there are too far in debt. They spent their bullets - and then some - and have few alternatives left. They do not have the tax revenues to pay the debts. More stimulus will only add to the public debt problem. And the austerity measures currently being imposed on them will merely lead to economic stagnation/depression, which will further deplete GDP and tax receipts, only enhancing their problems. It is a vicious cycle that will undoubtedly lead to restructuring of debt or default. The elephant in the room that everyone needs to address is that it makes sense to restructure or default sooner, not later. We only add to the problems by waiting and throwing more money at it.

The U.S. will hopefully learn this lesson. Rather than spending trillions propping up too big to fail financial institutions and transferring massive amounts of money from taxpayers to the perpetrators who brought the pain, we would have been better served by biting the bullet, dismantling these companies and paying the price up front. Instead, we spent the bank saving them and promoting them merging with each other to build even bigger too big to fail institutions. The question now becomes, is the U.S. too big to fail. If it keeps up with idiotic moves, I am abstaining from the vote on this question.

PIMCO - The Voice of Reason

I admit a lot of my retirement is with PIMCO. Nonetheless, tooting their horn will not lead to any gain for me personally - that I am aware of - so here goes. Bill Gross and others at PIMCO seem to have their act together better than any other place you can put your money. They see a world of hurt ahead in the EU, a very slow recovery with a lot of unemployment issues (and a new normal) in the U.S. and they are warning investors that for the foreseeable future they need to learn to live with annual returns in the low single digits. They also caution that the alternative to low single digits - for those chasing more -could easily be losses. These, folks, are sound words. It is not a time now to be chasing gains. It is a time to hunker down and be happy with less.

Now Bill Gross and Mohamad El-Erain of PIMCO are both referring to our current economy as the "new normal," as in expect less spending and economic growth for now.

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

We have spent most the past couple of decades in one bubble or another - tech, real estate and such - so the "new normal" may actually simply be normal, i.e., without bubbles. I posted several times last year on what I was then calling the "new reality," which is the same concept, slightly different name.

http://financialspiltmilk.blogspot.com/2009/08/new-reality.html

Indeed, my first post on this, as I just found, was January 31, 2009. I attach the entire post here and will let you decide whether I was right or wrong.

http://financialspiltmilk.blogspot.com/2009/01/new-reality.html

As I described the new reality then, I simply noted we had for years, perhaps decades, lived beyond our means, accumulating debt to pay for it, and we were simply reverting to mean - perhaps below mean to pay off debt.

Worse Than the New Normal

My real concern at the moment has nothing to do with reversion to mean; nothing to do with the new normal or new reality; my concern right now is some level of meltdown. We averted for now a financial meltdown but in doing so may have set up sovereign meltdowns, which could have signifiantly worse percussions, including leading to new financial meltdowns as the financial institutions hold the sovereign debt. Now some of the sovereign problems -probably many - were due to countries not properly managing their spending or their economies/taxes not supporting government needs. Be it that or massive government deficit spending to deal with the recent recession, governments are in a world of hurt. I see defaults and restructuring coming and the real question is how the world governments deal with it.

On one front they can do as they have by throwing money at it and imposing austerity measures, which is wortheless. On the other, they can start affirmatively dealing with restructuring to avoid defaults and put a plan in place to deal with the ramifications of restructuring. The sooner the better.

Disclosures: I am heavily invested in PIMCO. Otherwise, none.