Tuesday, August 25, 2009

Thesis on the Market Recovery

It's been a few weeks since Warren Buffett's op-ed piece, "The Greenback Effect". Obviously the concerns being portrayed are one of a depreciating US currency. I personally see this as being only half the story.

I personally believe that most of the developed world is building a Ponzi scheme of debt, financing each others' ambitious infrastructure plans that will save capitalism from collapse. I don't doubt that this will have been the best approach given the circumstances in the marketplace at the time (frozen credit markets and a catatonic consumer base).

I theorize that the US currency may not fall versus most currencies worldwide, but most currencies will depreciate against hard assets and useable commodities, like oil, copper, etc. With the flood of cash, and some evidence that the credit markets are thawing (see the 750,000 cash for clunker deals that have taken place - at least some of those had to be financed), I expect that the velocity of cash will accelerate quickly through the economy, increasing demands for credit, in order to "get ahead of the curve". As companies will start showing increasing profits and revenues through this "cheap cash", the cash will continue to produce increasing cash through the marketplace (courtesy of the economic multiplier). This cash won't generate jobs as quickly as people anticipate - the market is not quick to bring jobs back into the forray, but productivity gains will continue to increase. The middle class is squeezed by the fact that jobs don't return as quickly as the economy does, and the price of goods increases by worldwide demands. Therefore, middle class individuals lose on two counts: less job stability and inability to increase compensation at the rate of inflation. Until we reach full employment, middle class employees are squeezed, and their wealth is reduced in real rather than nominal terms.

Wednesday, August 19, 2009

Buffett's latest take - an Op-Ed in the New York Times

This is an important report about the implications of opening the coffers of debt to save the U.S. economic system from collapse. More to follow.


Saturday, August 8, 2009

Hurricane Season - the Ace in the Hole for the Market?

While hurricanes pose huge risks for cities and individual safety, they may provide another reason for commodities to rise, and inflation to arrive sooner than most analysts think. The Atlantic basin, while quiet, is warming up, and looks like it will bring its share of storms in the coming months. With the Gulf of Mexico already in the 80s (Fahrenheit), it will become a concern (as it does every late summer) to funnel major hurricanes into the major refineries and the major U.S. oilpatch. This year, this will almost certainly bring with it $80 oil, increasing prices for many commodities, and potentially, another reason for the market to move up.

Sunday, August 2, 2009

U.S. GDP - A Primer for the Second Half

Last week, second quarter GDP numbers came in with a contraction of 1.0%, better than the expected decline of 1.5%. While nothing to cheer at, the pace of contraction has now been pared, and we finally appear to be stepping out of a technical recession, although increasing unemployment will make the recession feel a lot longer.

The topic on most economists' minds is whether the recession is officially over. I think that we are likely to see a very steep recovery in GDP, contrary to most economists. The reason I say this is from the interesting news stories we have seen in the last week or so.

For one thing, inventories in most sectors are already at very low numbers, and big-ticket items like houses and cars are now being purchased hand over fist thanks to the current and prior U.S. administrations' willingness to burn cash like a California wildfire. In four days, the entire $1b "Cash for Clunkers" budget was used. Given the average car costs about $28,000 and the program provided $4,500 in cashback for trade-ins, this means about $6.2b in vehicles were sold (about 222k cars) - in four days! Last year, the US sold just over 16m cars and trucks, without any government sponsorship. The auto manufacturers have already reduced their inventories significantly, temporarily and permanently shutting down plants across North America.

When inventory is sold at such extremely high rates, especially when the forecast is for government programs to last 12 weeks, it makes me feel that the American consumer is again willing to spend money more quickly than Wall Street thinks. The pent-up demand will push inventories to ridiculously low levels in these big-ticket items, meaning higher prices, and a push back to inventory builds, and higher employment in the near-term (6-9 months, rather than 18-24 months). While the US household has been beaten and bruised, it is a resiliant entity, prepared to buy, buy and buy some more.

Unlike the recovery of 1982 (when we had "V" like recovery - like I anticipate this time around), we have Fed sponsorship in the recovery, with trillions of dollars sloshing through the economy, and we are likely seeing the first signs of acceleration of this moneyflow through the market place (with the highest credit worthy consumers snatching up vehicles and homes). This makes me a believer that we will see massive worldwide growth, a return to increasing commodity prices, and a more permanence to the inflationary conditions plaguing North America in the 2005-2008 period. Commodity capital projects have been halted or delayed and developing countries are showing signs of growth and demand, making me convinced that we will see demand overtake production very quickly, and we will need to wait for capital projects to end before the inflationary pressures reduce to more normalized levels.