How dumb is that statement?

[Cardboard]

"Initial claims must remain below 600,000 for at least three weeks before it's safe to say the job market is recovering, she added."

 

http://money.cnn.com/2009/07/09/news/economy/initial_claims/index.htm?postversion=2009070909

 

I can't believe that "investors" are happy with new unemployment claims just below 600,000 a week. This is absurd. The reality is that unemployment keeps on rising and that 15% is now not out of the question. I cannot imagine overall corporate profits rising in the short term under such environment.

 

Sadly, this is looking more and more like the Great Depression. They say that it resulted from higher taxes, higher interest rates and protectionism. Bernanke is an expert on the topic and is trying his best to avoid it, but what I see is that it is being repeated differently despite his best intentions:

 

1- Taxes are climbing in various states because they are running huge deficits.

2- Interest rates are climbing on the long end, which is what really matters, because the federal governement is not raising taxes to pay for its deficits or cutting its spending. They are looking to even grow these deficits with new programs.

3- Protectionism is climbing with America putting pressure on the dollar to become more competitive, buy in America incentives and Asians looking for internal ways to grow. Asians are looking to get out of this circle of selling goods to the U.S. to acquire treasuries which longer term will impact #2.

 

Cardboard

[woodstove]

One of the stats that's floating around in news articles is capacity utilization of 65 pct.  I assume that's industrial/manufacturing capacity.  Probably does not refer to retail/distribution capacity, or office organization capacity - though the latter would be affected by state/local govt slowdowns.  Maybe overall economic infrastructure capacity utilization of 80 pct?  Whereas 90-95 pct might be normal??

 

I wonder if there is a similar calc re labour capacity - ie some calc of capability of people to do productive work, vs actual productive work being done (considering underemployment of skills as well as full unemployment).  Might give another way to look at economic activity.  Bet this is already done, and I just am not aware of the statistics.  Any take on that?

 

Just wishing for another way to look at the economy, instead of focus on every tweak of a volatile number like new unemployment claims.

[Eric50]

This is the perfect storm for the US economy:

 

- jobs creations over the past 10 years were primarily in the financial and construction sectors;

- not only unemployment is rising by more than 500,000 every month but the working week is now about 33-34 hours (from 40 a couple of years ago...);

- the federal government is bailing out all the weak players so the cleansing is not happening as it should be, i.e. we are not seeing any creative destruction;

- US debt is out of control and I have not idea how they are going to finance their deficits. Some states (California) are also almost bankrupt.

 

Buffett's investing philosophy implies that the US economy is strong over the long term. I'm sure he is right but I'm not very optimistic for the next couples of years... On the positive side, we'll have great opportunities to make lots of money on the coming chaos!

 

Eric

[mpauls]

One of the stats that's floating around in news articles is capacity utilization of 65 pct.  I assume that's industrial/manufacturing capacity.  Probably does not refer to retail/distribution capacity, or office organization capacity - though the latter would be affected by state/local govt slowdowns.  Maybe overall economic infrastructure capacity utilization of 80 pct?  Whereas 90-95 pct might be normal??

 

I wonder if there is a similar calc re labour capacity - ie some calc of capability of people to do productive work, vs actual productive work being done (considering underemployment of skills as well as full unemployment).  Might give another way to look at economic activity.  Bet this is already done, and I just am not aware of the statistics.  Any take on that?

 

Just wishing for another way to look at the economy, instead of focus on every tweak of a volatile number like new unemployment claims.

 

 

Normal capacity utilization appears to be in the 80's.

 

 

[scorpioncapital]

Between 2005-2009 the rate of annual inflation was in the 3% per year range (official numbers). During this period some commodity businesses and oil went very high. Today many people are saying that if inflation picks up, commodity prices are the way to profit. But I think we are going to be in a low interest rate environment for a while but still commodities can do well. If currently the rate is in the 1% range, then just a move back to 2-3%, which doesn't seem that high could return commodity prices back to where they were 2 years ago. So I'm not at all convinced that very high inflation is necessary for energy and commodities to do well.

[woodstove]

Thanks MPauls for that capacity utilization info.  OK, so normal is 80-pct-ish and recent is 65-68-ish, so economy is running at 80 pct of normal.  Should put employment at 80 pct of normal, which might be 95 pct say, or about 77 pct of available workforce.  Less maybe due to job substitution - ie, people taking jobs less than their skill sets, working part time etc.  Still significant social disruption.

 

Website resources ... www.federalreserve.gov/releases/G17/ and http://en.wikipedia.org/wiki/Capacity_utilization

 

Regarding the choice of investments, commodity prices, inflation vs deflation ... my take on it ... two approaches, trading or store of value. For stores of value, one has choices of currency equivalents (including bonds and preferred shares), or operating businesses, or tangible assets.  Some diversification seems in order, because cannot predict any particular future very well - currency, commodity demand, etc - and there may be unusual pricing when one wishes to draw down some value from storage for redeployment or consumption.

 

Commodities represent an alternative currency, is another approach to thinking about store of value.

 

For example, Imperial Oil is about 10 pct of my portfolio at present.  Plan to trade around the edges of that position, based on price flux, but the core position is based upon viewing IMO as a long term call on oil futures.  Reserve life for IMO recently went up significantly due to decision to proceed with Kearl River project, so now calc says IMO has 20 years of reserves ... but all that really happened is that a firm decision was made to swap $8 billion for extraction in future years, not even coming onstream for several years.  That is, IMO is a short-currency long-future-oil position.  And because the company will increase production rate with Kearl and other projects, the reserve life calc is likely not 20 years either.  Nonetheless, having about 10 pct in IMO feels like a safe-enough store of value, combined with Fairfax and Berkshire which are value stored in astute financial operations, plus a significant slice of US business economic processes.

 

None of those positions - IMO, Fairfax, Berkshire - needs to be interpreted in terms of anticipated inflation/deflation for valuation.  Each has characteristics, such as skilled management and financial strength, which will render them robust value in the face of fluctuations in currency/stuff exchange rates.  Catching the peaks and troughs of pricing of their shares in the market can be profitable, but that is another aspect - trading not store of value.  The impact of inflation/deflation expectations on trading is more trying to figure out how the news of the day will affect the flow of funds into/from securities.

 

[Packer16]

What pulled us out of the Depression free fall was devaluation of dollar denominated debt.  During the 1920s, the US had built up very high levels of debt 200% of GDP (although today our level is closer to 400% of GDP).  The delay of this devaluation just caused the debt burden and real interest rates to sky rocket.  The amount of overcapacity was incredible.  Hoover's approach was initially to encourage addition investment creating more overcapacity resulting in declining prices and stress on debtors.  The strains on the banking system were very high as the collateral on there asset values was declining but the dent remained the same.  Eventually, he developed the RFC to provide loans to private businesses, banks and local governments. 

 

Some key differences today are 1) there seems to be an inflationary/spending bias versus a production/investment bias in the early 1930s, 2) the banking system is stronger (in part due to the inflationary bias which will not impair collateral as much as in the early 1930s) and the gov't will step in if there is a systematic failure (although the value of this becomes less and less as financial position of the US gets worse) and 3) we don't at this point have trade issues.  I think the trade argument for the Depression is more a natural result of the overcapacity issue. Historically, the overcapacity issue has not been an issue as the cycles of various industries were not in sync. 

 

Packer 

[vinod1]

"The arguments for and against ultimate inflation are both

unusually weighty, and we must decline to choose between them."

 

- Ben Graham, Security Analysis

 

Vinod

 

[Grenville]

For what it's worth Hoisington is still sticking to deflation.

 

There new commentary for Q2 is out:

http://www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf

 

[Cardboard]

I agree with most observations made by Hoisington. However, they are absolutely convinced on deflation and that it will be positive for long dated treasuries. I am not sure at all about that.

 

I think that the Japanese comparison is weak in the sense that Japan was the largest creditor nation in the world when it entered its crisis while the U.S. is the largest debtor nation. If you are making a comparison between the two cases I believe that this is too important of a fact to simply dismiss it.

 

There are actually many more differences which have to prevent this event from being exactly the same. In the end it could somehow look similar, but there are things that will behave wildly differently and this could include long dated treasuries.

 

Cardboard

[scorpioncapital]

A Fed governor recently stated that if the fed short term rate is 0% in 2 years it will be a sign of failure and Japan style deflationary spiral. So keep your eye on the Fed rate. If it stays at zero, we are in trouble.

[Packer16]

I agree with Cardboard.  Hoisington provides a good history lesson to what has happened in the past but what will happen now will be different because folks have very little tolerance for lenders who are not their citizens.  The only time since the depression that a country has not devalued its debt is Japan because of the large amount of internal savings that funded the debt.  As more US debt is held by foreigners, the higher the incentive to devalue as the effects will not be to US citizens but to foreigners.  The initial reaction will require higher rates but where else will the money go? 

 

Packer