Simulated Boom?

I’ve been wanting to write about the economy for some time now, both because it’s interesting to me, and because I think we’re living in interesting economic times. If this sort of thing bores you, stop reading now (you’re already doomed anyway).

For the past couple years I’ve been watching the markets closely, trying to make sense of things and forming some models in my head. I made a large bet against the US dollar in 01/2006 (MERKX) and haven’t been disappointed so far. Last week I made another big move, changing my 401(k) asset allocation to 100% cash equivalents (FDAXX). My gambling money is out of stocks excepting of a single fund with holdings in the energy and natural resources sector. Even that may be a mistake.

I’m not really concerned about missing out on any market surge due to future interest rate cuts. If the market gains 1% and the dollar declines 1%, have you really gained anything? Think of what a foreign investor would see. The US market gains of the past few years look pretty sad when measured in euros. Now factor in inflation in the foreign currency of our choice. Has the “boom” market even been a reasonable store of value, let alone gains?

This all leads me to my latest market conjecture. Some pundits are now starting to talk about recession. It’s certainly hard to ignore the housing market and mortgage lender woes. Here’s the thing: When has a recession ever started with foreclosures and bank failures? These are trailing indicators. We’re now starting to see some leading indicators in consumer sentiment, reduced spending, and narrowing profit margins in consumer staples.

Isn’t it possible that we’re almost seven years into a stealth recession masquerading as a boom due to low interest rates and easy credit? Somewhere along the way people have confused debt with money. After all, they seem pretty similar until the repo man shows up. So here we are, with some indicators that we’re well into a recession and some indicators that we’re about to enter a recession. How long before we start hearing the “d” word? The next few weeks should be very interesting. I’ve placed my bets, have you?

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7 Responses to “Simulated Boom?”

  1. Dave Filice Says:

    Even with Fed rate cuts, the prime rate was high enough for a long time to bring trouble. The economy does not change instantly. I’m concerned by the recent 100 Bilion bailout of the mortgage companies by a group of mainstream banks. While the move is intended to reduce the risk of a real-estate collapse induced recession, the effect is to place mainstream banks at risk. Widespread bank failures might be the key to a depression.

    The cost of the war and the the cost of oil/energy might be as bad as high Fed rates. The Japanese went into deflation a decade ago and their low (zero?) rate interest rates didn’t help for a long long time. They called it “pushing on a string.”

    We have been in a bull market for a few years. Such markets “climb a wall of worry” and often continue to have new legs upward longer than one might expect.

    My guess is that the bull market will continue for a time, but I’m keen to the fact that we may be near a cliff.

    I have some small positions in the stock market. I had gone to cash around February, but recently got back in. I only bought stocks with zero debt and significant cash positions. In such stocks, I reckon that I should not lose more than 2/3.

    Today’s portfolio: CRUS STRT MCRL SNUS

    I don’t use Margin.

    I have considerred puts on stocks like AMR and CRM.

  2. travesh Says:

    Dave, didn’t know you followed the markets. I think we missed out on some interesting conversations!

    I’ll be rolling my 401(k) into an IRA within the next couple weeks and have been concerned with volatility in the current market. I don’t want my holdings to get caught in a downdraft during the transition. I’m willing to sacrifice some potential upside at this point for a bit of safety.

    I agree that the bull market may well continue for a while. Admittedly, I’ve got a terrible track record knowing when to get out of positions. Since I’m largely an index and sector fund kind of guy, I’m mostly thinking: will the major indices cross this point again heading downward? I believe they will. I’ll be happy if I can beat a long term buy and hold strategy. Everyone thinks they’ve got a good system until they get badly burned.

    My perspective really changed a couple years ago when I started seriously looking at the US dollar vs other stable currencies. I made a strong bet against the dollar and have no regrets thus far. One of the real questions going forward is whether we’ll see dollar inflation or deflation. My bet is that we see a lot more inflation before we see deflation. The Fed will pretty much ensure this if they continue to lower rates to buoy the stock market and ease existing debt. I don’t see low rates faciliting an economic expansion at this point; lending requirements are really tightening up, It seems more likely that low interest rates are intended to bring the credit boom in for a soft landing through purposeful inflation. This may prevent defaults / foreclosures / bankruptcies by allowing payback with devalued dollars. The spanner in the works is that other countries may choose to dump all dollar denominated assets, securities, etc. We’re seeing a bit of this already, and it could become dangerously hyperinflationary.

  3. Dave Filice Says:

    How on earth did you predict the fall of the dollar?

    It had not occurred to me that, since we buy so much imported stuff, that the dollar weakness translates to apparent inflation to the consumer.

    I guess your thread got me nervous. I closed all my positions. Two were even and two had nice profits. However, I would be doing better if I had held until near the close today. If I have more than a 5% gain in a position, I remember that most folk invest their money for a year to get 5%. So, I’m often guilty of selling too soon.

    I use Interactive Brokers (IB). A 200 share trade is $1 in comission, so I trade in and out like it was free.

    I’m feeling like a wimp today, but a profit is a profit….

    Debbie’s photos of the homestead were interesting. Under the house has some spooky looking areas. The mix of new and old electrical stuff would have me poking around for 50 year old mistakes. The house being on stilts suggests that the river sometimes becomes a flood. It is good that you have a boat!

    In the 1980s I would play options on the OEX, but in recent times I just trade specific stocks.

    I could live with a year of hyperinflation. I remember the days when I bought Union Electric with a 15% dividend, and there was no unusual risk in the utility stock. I wish I still had those shares from the 80s. Also, with Social Security, inflation is the only way I get a raise. The things they measure for COLA, and the things I actually spend on, are quite different.

  4. PaulR Says:

    … My cat’s breath smells like cat food.

  5. Your favorite Smartass... Says:

    Just wondering– nothing to do with eth adult conversation going on.. but Are we in a recession if People are still willing to Pay ridiculous Bottle service starting at $250.00 for a bottle of Smirnoff???

    Or do Recessions only affect Adult minded White collar ppl?? Cause the ghetto folks are still flossing like big time Ballers.

  6. Dave Filice Says:

    GDP over 3% for two consecutive quarters
    core inflation down
    Fed rates cut twice
    weak dollar makes American goods cheap to the world
    Walmart sales up

    There are some obvious negatives going on, but I think I’m turning bullish.

    I was at Walmart today during a weekday afternoon and the register lines were 5 carts deep. These were not one item shoppers. The carts were full. The parking lot wasl full like a hot shopping weekend.

    I’m bearish on Walmart because the key to their operation is cheap imports. A weak dollar should be killing them. However, what I saw today was booming.

    Just don’t buy BofA or a home builder.

  7. travesh Says:

    Dave,

    In general, I don’t believe the government statistics are accurate predictors. There’s a history there of changing formulae and selection criteria to cherry pick positive outcomes. I prefer to watch market actions rather than illusory metrics.

    Why has the Fed been cutting rates if everything is just fine? The Fed’s job is to protect the banking system. What’s good for the banking system is good for America? Maybe or maybe not. In this case, the Fed and Treasury are working overtime to prevent the insolvency of large, overleveraged financials. Add Citi, WaMu, E*Trade and others to BofA. The bad news is spreading.

    Dollar is definitely weak, but it’ll take years to rebuild the US industrial base to take advantage of that. GM is an interesting case lately, as they straddle financial and manufacturing sectors. Their 39 billion write-down (twice their market cap.) is a desperate cry for help as they head toward reorganization. Maybe they’re hoping for an old Chrysler-style bailout?

    Is Wal-Mart busy because people are shopping there this year instead of at higher end retailers? That could explain the crowds AND the low core inflation figures. 😉

    Everyone chooses to play the markets a bit differently. I’ve gotten burned by individual stocks, so I don’t play that game. Stock market’s been sliding sideways to down going on two rate cuts now. I think my current portfolio works whether the Fed keeps cutting or not. There’s talk of a possible emergency rate cut on Thursday. Bring it on! Or not. I’m short the dollar and long precious metals and commodities ETFs. My portfolio went to 0% stocks as of today. I couldn’t justify staying in energy, mining, and agribusiness stocks when I think the overall market is heading down. When there’s fear in the stock market, good companies and bad will be punished together.

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