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Posted by on July 21, 2008, 2:13 pm
More rah rah nonsense to make you sit back and accept 100s of billions
in bail outs and pretend it doesn't matter.
On Sat, 19 Jul 2008 09:15:11 -0700 (PDT), Don Tiberone
>http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2008/07/18/the-world-will-not-end.aspx
>
>by John Mauldin
>
>The World Will Not End
>Take a Deep Breath
>9% Growth in Housing or a 4% Loss?
>A Little Stress
>
>
>Housing starts rose 9% and the market cheerleaders proclaimed that we
>have seen a bottom. But not if you look at the actual numbers. New
>unemployment claims were OK, but not if you look at the actual
>numbers. And inflation was simply ugly, no matter what numbers you
>look at. However, oil is down and there is reason to think it may have
>further to go on the downside. We cover all this and more, as we first
>look at why the world is not going to end.
>
>Take a Deep Breath
>
>It is easy to find bad news these days, and the torrent that seems to
>keep coming can ruin a person's summer (or winter, for my southern
>hemisphere readers). The credit crisis, as noted last week, is nowhere
>near an end. Housing, as we will see, is actually getting worse.
>Foreclosures, auctions, government bailouts, higher taxes, inflation,
>the price of energy and food - the list goes on and on.
>
>I thought, since so many think of me as a rather bearish person, I
>would show you my more optimistic side. Yes, I am bearish in the short
>term, for reasons I have documented at length in this letter. But long-
>term I am a wild-eyed optimist.
>
>With all the negative news thrown at us today, why is the United
>States not in the midst of a deep recession? How, many of you ask, can
>I be so sanguine as to suggest a milder recession and a Muddle Through
>Economy?
>
>First, things are somewhat different now than in the '70s and early
>'80s. Back then, a great deal of the US and developed world economies
>and their resulting employment were linked to manufacturing, which was
>largely geared to domestic sales. Exports were a much smaller part of
>the economy for most businesses. When the economy and consumption
>slowed down, manufacturers laid employees off rather rapidly.
>Unemployment would soar and a V-shaped recession would occur.
>
>Now, the number of people employed in manufacturing is less in
>percentage terms than it was back then, and more of what is produced
>in the developed world is bought by a growing developing world.
>Exports from the US are booming. The number of TEUs (the large
>containers on ships: Twenty-foot Equivalent Units) moving through the
>ports of Los Angeles and Long Beach is up 23% in May year over year
>and up 26% since the beginning of the year. Because of the weak
>dollar, imports are down by 7% year to date. It is export growth that
>is keeping the US from sliding into the usual deep recession.
>
>So, not only is manufacturing not down as in usual cycles, it is up
>quite handsomely for many products, except of course for automobiles,
>which are not just in a recession but facing a depression. But that
>growth in exports is keeping unemployment from going to 9%.
>
>But let's take a longer-term outlook. My view has been, and is, that
>we are in for a period of very tepid growth that will last through at
>least 2009. We have to work our way through the after effects of the
>twin bubbles of housing and the credit crisis bursting. There is no
>magic Fed wand. That simply takes time. No (rational) government or
>Fed policy is going to change the facts on the ground (although they
>can make things worse). But, in the fullness of time, we will in fact
>get through this.
>
>If you look back over the decades, things are getting better. Goldman
>Sachs estimates about 70 million people a year worldwide are entering
>the "middle class" and that by 2030 two billion people will be in a
>far better condition than the poverty they experience today. That will
>also keep demand steady for all sorts of products and services
>produced in the developed world, even as our population (except for
>the US) declines.
>
>The old joke is that a recession is when your neighbor loses his job
>and a depression is when you lose yours. And a rise in unemployment
>and lower corporate profits are no laughing matter. But the simple
>trend is that we will adjust and free markets in America and the world
>will grow, as they have always done.
>
>My daughter and business partner Tiffani is getting married in three
>weeks on 08-08-08. Next year there will be 2.3 million weddings in the
>US, at an average cost of $30,000 (we have helped increase the average
>this year considerably). That is $72 billion on weddings. And many of
>those new families start with the need to find a place to live,
>furnish a home, and build their nest.
>
>Tiffani and her fiancée are an example. They have bought a home at a
>pretty good price in an older neighborhood that is fast becoming
>trendy, as there are a lot of wonderful restorations and teardowns.
>They have lived rather simply and find they "need" all sorts of items
>to make their house a home. Each day sees another delivery of gifts
>from their registry and a smile on her face.
>
>(Sidebar: When I first got married I seem to remember getting three
>toasters and not a lot of other things we needed. Now, couples
>register online for what they need and want, and when an item is
>bought it is taken off the list. How cool is that?)
>
>Last year a record 4.3 million babies were born in the US. Each of
>them will need all sorts of "stuff" - food, education, and places to
>live - in (hopefully) 20-25 years.
>
>Yes, consumers are cutting back, but they are still buying the basics.
>(See more below.) Manufacturing in the US is starting to make a
>comeback, with the lower dollar and management driven to compete
>globally. In free-market economies, every economic slowdown is
>followed by a period of solid growth driven by innovation. The point
>is that life goes on. Births, weddings, eating, living and enjoying
>friends and family. It is all part of the cycle.
>
>The next 20 years are going to see the most powerful wave of
>technologically driven growth the world has ever seen. The
>accelerating pace of technological change did not slow down last
>century through multiple world wars, scores of "minor" wars, a
>depression, all sorts of natural disasters, and an unbelievable amount
>of government folly. Why should that trend stop now?
>
>As we add two billion people to the middle class, we are also going to
>bring the internet to even billions more. The explosion in information
>and creativity that we have seen in the last 20 years will double and
>double again. A small percentage of those people are going to invent
>amazing new technologies, new drugs, and create companies that will
>make life better for all of us.
>
>That is one reason that technological growth will continue to
>accelerate. We will simply be throwing more people at an ever wider
>array of problems, and they will be able to share their discoveries at
>the speed of light.
>
>We are on the verge of a revolution in biotechnology that is going to
>truly revolutionize medicine. No one in 20 years will look back on
>today as the good old days. And it will probably create yet another
>stock market bubble, but that is a story for another letter.
>
>US diplomats are talking to Iran. Iraq may actually work out. In most
>places of the world, most people are better off today than they were
>20 years ago. There is still a lot of progress to be made, but the
>point is that we are making it. There is a ton of opportunity for
>those prepared to look for it. It may not be in the usual places, it
>may not be where we would like it to be, but it is there. World GDP
>will have roughly doubled (or more) by the end of the next decade.
>
>Yes, I know there are a lot of problems. Really big scary ones. I
>write about a lot of them all the time. But go back to any year ending
>in 8 for the last 100 years. When were there not problems? And in most
>times and places, the problems were bigger. And in the next ten years?
>There will be lots of problems. Some will be the same old problems and
>some will be new. I am not certain why mankind seems to have a need to
>find new ways to create mischief and lose money when the old ways work
>so well. But those too will pass.
>
>So, when you read about current problems - and I will point some out
>in the next few pages - just remember that things will work out.
>Markets will adjust, and the world will be a better place. Thi ngs
>will work out better for you as an individual if you anticipate the
>problems and make the proper adjustments, as much as possible, in
>advance.
>
>The next 20 years are going to be the most exciting time that the
>human race has experienced. Yes, there will be issues, but we will
>adjust. That is what we do. And now, let's look at some of the
>adjustments going on in the markets.
>
>9% Growth in Housing or a 4% Loss?
>
>When the news flashed on my screen that housing construction had
>jumped by 9%, I raised an eyebrow. That did not make sense given other
>data I was looking at. Immediately the media was full of talking heads
>and stories about the turnaround in housing and the end of the
>slowdown. I must admit to being a little confused.
>
>Then we find the rest of the story. Asha Bangalore from Northern Trust
>actually took the time to read the details. It turns out that New York
>City had a change in its construction codes, and that affected what is
>considered a housing start in the Northeast, especially in multi-
>family construction, which "jumped" 42% because of the code change. If
>it were not for the change, housing starts nationwide would have
>fallen by 4%. Because of the code change, housing starts jumped 102%
>in the Northeast. However, single-family starts nationwide declined
>9.3% in June, to an annual rate of 647,000 units. That level of single-
>family starts is the lowest since January 1991. Look at the following
>chart from Northern Trust. Does this look like a 9% increase?
>
>
>
>More Government Statistical Fun
>
>Each week we see a release of initial unemployment claims. This week
>initial claims jumped to 366,000 on a seasonally adjusted basis. But
>what are the real underlying numbers? Every Thursday, I get a thorough
>review of the actual data from John Vogel, going back and looking at
>trends over the past 8 years in the non-seasonally adjusted data. That
>can be more interesting.
>
>This week the actual number of initial claims of unemployment was
>475,954, compared to 383,839 last year (2007). And the number of
>actual claims has been trending up. Taking the three first weeks of
>the current quarter, we are still below the recession years of 2001-3;
>but the trend is not what you would like to see, and given the decline
>in consumer spending (see below) it is likely to continue to trend up.
>
>The actual data is very "noisy" and jumps all over the place, hence
>the use of seasonally adjusted numbers for public consumption.
>Economy.com thinks the difficulty may be in accounting for auto-
>related plant shutdowns in the seasonally adjusted number. Vogel
>speculates that employers are no longer waiting until the end of the
>quarter to lay personnel off but are doing it at any time in the
>quarter.
>
>Given the issues, it is likely we will see a rise in the number back
>toward the 400,000 range (SA) that we saw earlier last month. But just
>be aware that there can be something really different in the actual
>numbers.
>
>Below is a graph from economy.com showing where the employment
>problems are. The majority of the states are seeing payroll employment
>drop.
>
>
>
>Fannie and Freddie and Bears, Oh My!
>
>Let me see if I have this straight. It is OK to short oil but not OK
>to short Fannie Mae? Or is it that it is OK to be long Freddie Mac but
>not long oil?
>
>Oh, those evil speculators. As Barry Ritholtz points out, why is it
>that management blames speculators when their stock is being pummeled,
>when the usual reason is that management made some very bad decisions?
>
>And let's not forget the importance of rumors. We all know rumors can
>bring down a stock. So, let's start one. Let's start a whisper
>campaign that Goldman Sachs is going to have to take down $100 billion
>in losses next quarter, and then we can all short the stock. What
>would happen is that we would all lose our money when we had to cover,
>because there was no basis in fact.
>
>The best way for a company to deal with short selling is to increase
>earnings and blow the shorts out of the water. Good management trumps
>rumors.
>
>This week the SEC has made it more difficult to short Fannie Mae,
>Freddie Mac, and other large financial firms. They are actually going
>to enforce the rule already on the books that says you must actually
>be able to deliver the shares you are shorting.
>
>"Naked" short selling has been against the rules for some time. (That
>is, short selling a stock that you cannot actually borrow to sell.)
>Institutions make rather tidy sums offering the shares they own to
>short sellers for a price.
>
>Making it more difficult to short Fannie or Freddie is not going to do
>one thing for their balance sheets, which is the real source of their
>problem. As former Fed governor William Poole said a few weeks ago,
>they are basically insolvent. Five-year bonds sold by Fannie Mae yield
>90 basis points (0.9%) more than US Treasuries of similar maturity,
>almost double the average over the past 10 years, according to data
>compiled by Bloomberg. That spread, which translates to $90,000 in
>extra annual interest per $10 million of bonds, exists even after
>Treasury Secretary Paulson signaled the US would ensure the debt is
>repaid by offering larger amounts of backup financing and potential
>capital infusions.
>
>Given Paulson's guarantee, why would you buy US bonds when you can get
>the same guarantee and almost 1% more?
>
>Fannie and Freddie are private companies where the profits go to
>shareholders and losses go to taxpayers. There are a lot of people
>(including your humble analyst) who have complained about the current
>set-up. Basically, they were allowed to leverage their capital beyond
>what even your most leveraged hedge fund would think prudent. How
>could the value of homes go down? Leverage up and show huge profits,
>pay monster salaries and bonuses to management who did nothing but
>increase risk, and spend $170 million on lobbyists to make sure that
>no one changes the rules.
>
>Paulson had no realistic choice but to do what he did. But the true
>point is, he should have never had to make that choice. A real
>regulator would not have let them leverage their capital to the extent
>they did. If taxpayers have to invest one penny before shareholders
>are wiped out, then there is no justice. Fannie and Freddie should be
>broken up into several much smaller firms which are not too big too
>fail, their shares floated to new owners, and taxpayers should get
>preferred shares until they are made whole. And the implicit, but now
>explicit, guarantee should be taken away.
>
>And while we are on regulators, it is time for Bernanke and Paulson
>and SEC chairman Cox to force the credit default swap (CDS) market to
>move to a regulated exchange. If there is a major risk to my happy
>news scenario at the beginning of this e-letter, it is the credit
>default swap market collapsing. That is why Bear Stearns had to be
>rescued, and why other firms like them are too big to fail.
>
>If the CDS markets were on an exchange like any futures contract, Bear
>could have been allowed to fail. It would have been a sad day, but the
>Fed would not have had to risk $30 billion. Greenspan was wrong when
>he said these derivatives did not need to be regulated. They are good
>for the markets, and I think they are necessary. But let's put them on
>an exchange where there is clear transparency and the entire economy
>of Western Civi lization is not put at risk by some cowboys who decide
>to leverage up.
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