Thursday, July 2, 2009

Nassim Taleb: "It's a Full-Scale Crash"

from CNBC this morning (this was a great and sobering interview):
The financial system is crashing and action must be taken by the US government to convert debt into equity to produce a more stable environment, Nassim Taleb, author of "The Black Swan," told CNBC Thursday.

"You may have green shoots, whatever you want to call them, you may have temporary relief, but you are still in a world that's breaking," Taleb said on "Squawk Box."

Anything that's fragile like the financial system will eventually crash, he said.

"We're in the middle of a crash," Taleb said. "So if I'm going to forecast something, it is that it's going to get worse, not better."

The government needs to deleverage debt and not try stimulus packages that will inflate assets, he said.

"What makes me very pessimistic in not seeing any leadership or awareness on parts of government on what has to be done, which is deleverage $40-to-$70 trillion," Taleb said.

"The monkey on our back is debt," he added.

As an example, Taleb said banks should not be sending demands for larger and larger sums from homeowner in arrears on their mortgage. Instead the bank should offer to lower the monthly payments in return for part-ownership of the property.

"People would be able to start from scratch on a healthy basis. You don't want to wait for foreclosure," he said.

More from and About "The Black Swan"

© 2009


From Bloomberg:
Employers in the U.S. cut 467,000 jobs in June, the unemployment rate rose and hourly earnings stagnated, offering little evidence the Obama administration’s stimulus package is shoring up the labor market.

The payroll decline was more than forecast and followed a 322,000 drop in May, according to Labor Department figures released today in Washington. The jobless rate jumped to 9.5 percent, the highest since August 1983, from 9.4 percent.

Unemployment is projected to keep rising for the rest of the year just as the income boost from the stimulus package fades, undermining prospects for a sustained rebound in household purchases, analysts said. As companies from General Motors Corp. to Kimberly-Clark Corp. cut costs, the lack of jobs will restrain growth.

“This will be another jobless recovery,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. “We may get positive economic growth driven largely by federal spending, but people on the street will say, ‘Where are the jobs?’”

Stocks slid after the report, with the Standard & Poor’s 500 Index dropping 2.2 percent to 903.43 at 10:16 a.m. in New York. Treasuries rose, sending yields on benchmark 10-year notes to 3.512 percent from 3.538 percent late yesterday.

Dollar Strong on Weak Economic Data

Finally Some Buyers

Soybean Strength

New Lows for Stocks

Just shut up and sell!

Stocks - Still More Selling

Fourth Turning Predicted by Neil Howe

from John Mauldin's Outside the Box:

You don't need me to tell you that the United States and in fact the world are now facing a plethora of intractable problems. The world's former powerhouse economy, the U.S., is now the world's largest debtor nation – and by a wide margin. The nation has trillions in unpayable liabilities coming due on Social Security and Medicare, to name just two of many broken government programs weighing on the country. And our much vaunted democracy is increasingly dysfunctional – rotten to the core, truth be known – thanks largely to entrenched special interests and a voting public clamoring for their own piece of the pie, while trying to hand the bill off to somebody else.

Meanwhile, the economy – despite rigorous jawboning by the government and its many friends in the large banking institutions -- is in serious trouble, with the housing market buffeted by tsunami-like waves of defaults, foreclosures, overvaluations, historic levels of personal debt, and tight credit that has left the U.S. government as the sole lender in many markets.

Bernanke and his ilk may see green shoots, but what they're really seeing is the deep, green sea rising up once again to bury the economy.

That's the bad news.

The potentially good news, if you credit Howe's research, is that the Crisis we're now entering will change pretty much everything. While this change will entail a great deal of pain and a reduced standard of living for a large number of people, by the time the Crisis subsides, society will have pretty much remade itself in ways that no one can predict at this point... /If this is good news, "no thanks"! This is almost meaningless. All he's saying is that we will see cataclysmic change, great pain, and a reduce standard of living./

Most importantly, if Howe is right, this crisis is far from over. In fact, when I asked him where we are today on a scale from 1 to 10 -- with 10 representing as bad as the crisis will get -- he replied that we are at either 2 or 3. In other words, the worst is very much yet to come. And, per above, he expects this period of turmoil to take 20 years to play out. Thus, if nothing else, you may want to continue approaching matters of personal finance cautiously.

Secondly, if you're the type of individual that tends to get steamed up by larger and more intrusive government programs, you may want to take a few deep breaths and resolve yourself to the fact that this phenomenon is likely to get far worse before we see a return to celebration of individual rights.

Stocks: Bearish Head and Shoulders Reversal?

This daily chart is a classic head and shoulders top. If stocks drop through the previous low and support, it will be complete! We're heading that way!

Grains Selling Upon Open

With the powerful sell-off of corn and wheat over the past month, I wouldn't be surprised if this sell-off represents a good buying opportunity.

Stock Market Blood Bath

Pimco's Bill Gross says this economic stagnation will last several years!

Heading South in a Hurry!

Stocks are moving into the red at a faster pace. This jobs report is going to raise questions about whether the stimulus package has worked, and whether things are going to get worse from here.

Crude, Commodities Clobbered

Crude Oil - note the hit on crude when jobs report was issuedNatural Gas

California IOU

I see this as symbolic of not only California, but other States and local governments as the year progresses. Yesterday, Fox News was reporting that not only California, but several other states are facing budget shortfalls in the 25-30% range. It's ugly out there! I expect more government lay-offs as property tax revenues fall short of expectations this fall.

from LA Times:
Reporting from Sacramento -- After trying for weeks to fix a state budget gone out of control, Gov. Arnold Schwarzenegger and state lawmakers stood frozen in conflict Wednesday with the state at the brink of a meltdown.

A day after the state Senate failed in a late-night bid to close part of a deficit now projected at $26.3 billion, California Controller John Chiang took steps to begin issuing IOUs today to tens of thousands of companies and individuals that are owed millions of dollars by the state.

Jobs Report Looks Bad - Unemployment Rises to 9.5%

The headline says it all! This is suggestive of a long, drawn-out recession.

from Marketwatch:
- The U.S. economy shed jobs at a faster pace in June than in May, suggesting that the turnaround in the economy may take longer than expected.

Nonfarm payrolls shrank by 467,000 in June, higher than the 325,000 decline expected by economists surveyed by MarketWatch and the 322,000 jobs lost in May.

The unemployment rate ticked higher to 9.5% in June from 9.4% in the previous month. Economists had expected the unemployment rate to rise to 9.6%.

Run For Cover Sends Treasuries Higher

Stock Sucker Punch

Negative reaction to the jobs report, which showed about 25% more job losses than anticipated.

Wednesday, July 1, 2009

Correlation Between Dropping VIX and Flat Stocks

from Dr. Brett-
I recently posted on the topic of historical market investigations and how those can aid one's feel for markets. I find they can also provide longer-term context and ideas for short-term traders.

Here's a simple example. VIX has been making 20-day lows, but SPY has not been making 20-day highs. In other words, volatility is coming out of option pricing, but it is perhaps more due to stocks topping out and trading in a range than trending higher. One might think that such a pattern would have bearish implications going forward.

Looking back to 2000, we find that when VIX is making 20-day lows, but SPY is not making 20-day highs, the next 20 days in SPY average a loss of -.72% (76 up, 100 down). For the remainder of the sample, the average 20-day return in SPY has been -.16% (1215 up, 957 down). Indeed, when volatility comes out of the market and it's not due to price strength, intermediate-term returns have been subnormal.

Such information can provide background for the daytrader looking for reversals of strength going forward; it also can frame useful swing trades. For those testing historical patterns, the logic underlying this particular pattern might inspire investigations at other, shorter time frames. ;-)

Cotton Limit Up

from Flanagan Trading:
TODAY’S COMMENT: Cotton prices rose to limit gains on Wednesday, propelled by Fund buying. In recent days they have been liquidating positions ahead of the end of the second quarter, but, as they quickly re-entered those positions on the beginning of the third quarter and that buying moved the market. They did the same thing last quarter. Export sales of cotton, 164,000 rb, were good and within expectations while shipments, 345,100 rb, were better than expected. Export sales of corn, soybeans and wheat were all better than expected as well. This morning, the US Dollar Index is 44 higher at 80.32 and this is pressuring commodities. Crude oil is down $1.63 at $67.67. November soybeans were down 13 cents overnight at $10.02 ½. December corn was down 5 ¾ cents at $3.63 ½. December wheat was down 3 cents at $5.58 ½. China’s cotton futures and forwards were higher overnight. The markets will be closed tomorrow for the Independence Day holiday.

Dollar Downside

Following and ADP jobs report that was slightly worse than expected, the Dollar is getting slaughtered and is close to a down-side break-out. This is boosting crude oil, gold, and other commodities. Stocks are modestly higher, but extremely erratic.

Tuesday, June 30, 2009

"Remember, the second mouse gets the cheese."

from CNBC:
One commodity indicator worries /Art/ Cashin:

"With oil pressing up against key resistance here — if it gets above $74, $75, you could get a short-covering spike. That could really hurt the recovery that's beginning."

He cautioned trigger-happy investors not to jump the gun:

"Remember, the second mouse gets the cheese."

Treasury Recovery

As sentiment drops, flight from risk is taking over once again. Treasuries are finding solid footing once again as the flight to safety takes over.

Consumer Sentiment Unexpectedly Dips

Perhaps this is influencing the broad sell-off in the broader markets today. My gut tells me this is more a factor of the end of Q2, but this news is highly significant. If it leads to additional stock market contraction over the next few days and even weeks, this sentiment dip may be more than a one-month dip, and could evolve into self-fulfilling prophecy. We've taken out the Monday lows. There may also be some technical factors evolving, as a failure to reach a new top could lead to broader stock market selling in the days ahead. Today's sudden reversal sure looks like a bearish signal!

from Optionetics:
In other economic news, consumer confidence slipped in June to 49.3 from 54.8 in May. Within the report, those saying jobs are hard to get increased and the present situation index fell to 24.8 from 29.7. This is disappointing news for those supporting the view that the economy is set for a recovery in the fourth quarter of 2009...
The major market indices need gains today to end the month in positive territory, something that is in jeopardy in early trading. Nonetheless, the second quarter has been a very strong one for stocks, but now there are concerns about a possible double dip recovery.

and from Marketwatch:

A shaky consumer-confidence reading that aggravated investors' fears of weak profits and a prolonged recession pushed stocks lower on Tuesday.

New housing data were also glum, though the market managed to hold steady at the open following their release. The losses in major indexes began to pile up about a half-hour after the bell, when the Conference Board said its index of consumer confidence for June fell to 49.3, from a revised 54.8 in May, which was originally reported as 54.9.

The Dow Jones Industrial Average was recently down about 100 points, or 1.1%. The S&P 500 declined 1%, hurt by declines in every sector. The Nasdaq Composite Index slipped 0.6%.

Market analyst Art Hogan, of Jefferies & Co., said it is particularly worrisome that the confidence index in June fell below the 50 level again. Readings above 50 signal expanding optimism among U.S. consumers, whose purchases constitute more than two-thirds of gross domestic product.

Any reading below 50 would tend to be bearish for stocks. But it was particularly disappointing to see the report dip below 50 after rising above the important mark, effectively undermining Wall Street's recent consensus that major economic yardsticks are due to level off and then gradually improve in the months ahead.

"That kind of news is all you really need to get the market down in the sort of environment we're in," said Hogan. "You don't have a lot of conviction in this market, so there's really not much underpinning for a rally to begin with."

Crude Oil Symbolic of Broad Commodity Sell-Off

I have a feeling this is all due to the end-of-quarter attempts to lock in profits. I suspect this will present some nice buying opportunities.

Wheat - New 2009 Lows

Wheat and soybeans have dropped precipitously also, but these two crops are rising again as buying takes over. Wheat has reached a new low for 2009!

Corn: Limit Down!

The daily chart really shows the magnitude of the picture! In a single day, we've taken out both the late April and March lows! The USDA report this morning showed greater planting and better crop emergence than was expected for all the grains.

Socked Stocks

As the quarter ends, stocks are taking it on the chin this morning. Perhaps this is profit-taking. Fund managers are locking in solid returns for the first quarter.

Record UK GDP Contraction

The Pound is getting pounded today.

Not since 1958 has the quarter-on-quarter decline in GDP been greater, while the 4.9 per cent drop compared to a year earlier was the largest since records began in 1948.

“‘You’ve never had it so bad’ seems the most apt summary of the state of the UK economy in Q1,” said Ross Walker, economist at RBS. “Although to some extent this is ‘old news’, it does serve to emphasise the size of the hole out of which the UK must climb.”

The precipitous decline in GDP in the first quarter reflected the fallout after the credit crisis escalated dramatically from September of last year onwards and highlights the depth of the recession that the UK has been suffering.

But since the end of the first quarter there have been growing signs that the economy is stabilising. Manufacturing output actually grew in March and April, while survey data suggested the economy has returned to growth.The respected economics thinktank, the National Institute for Economic and Social Research, said it thought the economy began to grow again in April.

“The survey data suggest we have at least stopped digging, but the economy remains on course for a lacklustre pace of recovery,” Mr Walker said.

The Bank of England has warned that the economy faces a slow recovery, as banks remain fragile and lending weak.

The output of the construction was revised down to show a 6.9 per cent decline from the first estimate of a 2.4 per cent drop. However, the fall in output was actually less severe than the 9 per cent fall that a more recent ONS revision had suggested, which had led many to expect GDP to be revised down sharply.

Services output, which makes up about three quarters of the UK economy, was revised down to see a drop of 1.6 per cent rather than the 1.2 per cent orginally reported.

“Revisions to GDP are larger than usual, reflecting greater uncertainty in measurement during a period of rapid change in economic activity,” the ONS said.

The GDP figures confirmed that the recession began in the second quarter of last year, after the economy shrank by 0.1 per cent in the April to June period, rather than the 0.0 per cent decline originally reported.

The economy contracted by 4.9 per cent from its peak in the first quarter until the first quarter this year. That is worse than the 2.5 per cent drop in the 1990s recession, but less than the 5.9 per cent fall in the early 1980s recession.

Despite the dramatic contraction in the economy rating agency Fitch reconfirmed the top triple-A rating on the UK’s sovereign debt at stable - along with the US, France and Germany - refusing to follow rival Standard & Poor’s which recently changed the UK’s debt outlook to negative.

The household saving ratio fell to 3 per cent from 4 per cent in the final quarter of last year, as households’ real disposable income dropped by 2.4 per cent due to lower earnings, but consumption did not fall as sharply.

Business investment fell by 7.1 per cent during the quarter. Inventories made a smaller drag of 0.4 percentage points out of the 2.4 per cent fall in GDP, compared to the previous estimate of 0.6 percentage points.

“The UK national accounts ... underline the fact that the economic recovery is built on very fragile foundations,” said Capital Economics.

“With the annual rate pulled down from -4.1 per cent to -4.9 per cent, average GDP growth in 2009 now looks likely to be -4 per cent or weaker rather than the -3.5 per cent we previously expected.

“Note too that the breakdown is not pretty, with the renewed fall in the household saving ratio from 4 per cent to 3 per cent underlining that the adjustment in the household sector has a long way yet to go.”

Not since 1958 has the quarter-on-quarter decline in GDP been greater, while the 4.9 per cent drop compared to a year earlier was the largest since records began in 1948.

“‘You’ve never had it so bad’ seems the most apt summary of the state of the UK economy in Q1,” said Ross Walker, economist at RBS. “Although to some extent this is ‘old news’, it does serve to emphasise the size of the hole out of which the UK must climb.”

Treasuries Kicked In the Teeth

Monday, June 29, 2009

Self Review for Self Improvement

from Dr. Brett-

In a recent post, I emphasized that much of the development of trading expertise is a function of pattern recognition and the ability to act upon patterns promptly in real time. A classic example of performance by pattern recognition is the development of competence and expertise among radiologists. Reading an x-ray or other form of imaging means being able to detect normal variations from abnormal ones. In the beginning, to the untrained eye, most medical images will look alike. Only with repeated exposure to images and their variations will medical students learn to make and rule out diagnoses. No amount of book work can substitute for learning at the bedside and reviewing film with experienced physicians.

The trader who video records his or her trading has a powerful tool for accomplishing three learning tasks:

1) Seeing more market patterns and cementing those more firmly in mind;

2) Reviewing performance to assess areas of trading that need more work and to formulate goals for such work;

3) Reviewing performance to assess areas of trading that represent strengths, so that these can be crystallized and recruited during future trading.

When I left my full time work with proprietary traders in Chicago and began working with bank and hedge fund traders, I was surprised by the sophistication of the latter group in terms of portfolio management and equally surprised by that group's utter lack of feel for short-term market movement. Many times, a portfolio manager would describe an excellent idea to me and then execute it at the absolute worst time of day. I realized that, as savvy as the institutional traders were, they lacked the frequency of exposure to short term market patterns and hence had no real "feel" for when buyers or sellers were dominating (or losing their dominance) from minute to minute, hour to hour.

Traders who use video recording in essence double their exposure to market patterns--and to their own patterns as traders. Because pattern learning is a function of the number of repeated exposures to various configurations, the trader who not only views markets, but also reviews them, is more likely to enjoy an accelerated learning (and performance) curve.

The two most common means of recording that I've encountered in my work with traders is desktop video (software that records your screen) and actual video recording with a camcorder pointed at the screen. The former is available through programs such as Camtasia; the latter is best accomplished with a camcorder that includes a large hard drive.

Of course, it doesn't make sense to review the entire trading day, every trading day. In general, the best reviews come from your best trades and your worst: those will cement what you do right and what you need to improve. If traders only reviewed their single best and worst trades each day--what the markets did and what they did--I suspect they would be more likely to achieve competence, and would do so in less time than the trader who packs it in at the market close.

Remember, however, research suggests that it is not just what you review but how that makes all the difference in learning. The most powerful learning takes observations and turns them into concrete goals for future observation. Passive watching of markets (and one's own performance) is much less powerful than active watching and goal setting.

Wage Deflation and It's Impact on Jobs, the Economy

from David Rosenberg:
The deflation vs. inflation debate seems to be settling down, with everyone agreeing that we're seeing both at the same time.

The split is: Things we want to see going down are going up (oil, food) and things we want to see going up are going down (houses, wages).

In his latest piece, David Rosenberg talks wage deflation:

A survey conducted by YouGov for the Economist magazine found that 5% of
respondents had taken a furlough this year and 15% had accepted a pay cut
(see The Recession and Pay: The Quiet Americans on page 33 of this week’s

As wages deflate, workers are looking for ways to supplement their shrinking
income base, for example, by moonlighting. Indeed, a poll undertaken by and cited in the USA Today found that one in every ten
Americans took on an extra job over the last year; another one in five said they
intend to do so in the coming year. These numbers are double for the 45 to
54 year olds who now see early retirement, once around the corner, as an
elusive concept.

Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the
deflationary aftershocks that follow a post-bubble credit collapse typically last
for 5 to 10 years. Businesses understand better than the typical Wall Street
or Bay Street economist and strategist that everything from order books, to
output, to staffing have to now be restructured to adequately reflect a
permanently lower level of leverage in the economy.

Indeed, by our estimates, there is up to another $5 trillion of household debt that has to be eliminated in coming years and that process is going to require that consumers go on a semi-permanent spending diet. Companies see this,
which is why they are not just downsizing their payroll, but have also cut the
workweek to a record low of 33.1 hours. Fewer people are working and those
that are still working have seen their hours dramatically cut this cycle.
Companies are finding other ways to save on the aggregate labour cost bill as
well, which may be a factor reinforcing the uptrend in the personal savings
rate (see more below). For example, a rapidly growing number of employers
are now suspending contributions to worker 401(k) plans. According to a joint
survey by CFO Research Services and Charles Schwab, nearly 25% of U.S.
companies have either suspended their plans or are planning to do so (this is
up from 2% at the turn of the year). Again, how we end up squeezing inflation
out of the system when the labour market is clearly deflating wages and
benefits for the 70% of the economy called the consumer is going to be
interesting to watch.

The op-ed column by Bob Herbert in the Saturday New York Times really hit
the nail on the head on this whole ‘green shoot’ issue — how can there be
‘green shoots’ when the labour market is deteriorating at such a rapid clip
fully nine months after the Lehman collapse. The full brunt of the credit collapse may be behind us, but please, the other two shocks, namely deflating labour markets and deflating home prices, are very much still front and centre. For every job opening in the USA, there are more than five million unemployed actively seeking work vying for those jobs. That is unprecedented and nearly double what we saw at the depths of the 2001 recession. The
official ranks of the unemployed have doubled during this recession to 14
million and if you take into account all forms of labour market slack, the
unofficial number is bordering on 30 million, another record. For those who
still believe that we somehow managed to avoid an economic depression this
cycle because of a 13% fiscal deficit/GDP and a pregnant Fed balance sheet,
the Center for Labour Market Studies at Northeastern University estimates
that the real unemployment now stands at 18.2%, which is actually higher
than the posted rate at the end of the 1930s.

Nigerian Unrest Drives Crude Sharply Higher

from Dow Jones:
Crude oil closed Monday at the highest point in 2 1/2 weeks, as traders looked past a dreary appraisal of longer-term oil demand and reacted to supply threats closer at hand.

Light, sweet crude for August delivery settled at $71.49 a barrel, up $2.33, or 3.4%, on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled at $70.99 a barrel, up $2.07, or 3%.

Nymex crude is up 60.3% in 2009. Monday's close was the highest settlement since June 12.

Buyers were galvanized by the latest reported production outage in Nigeria's strife-torn oil-producing region. Royal Dutch Shell PLC (RDSA) confirmed it was halting some output after militants claimed attacks on two clusters of wells at the company's Estuary field.

More than 700,000 barrels a day in Nigerian output has been halted due to civil unrest in the country, whose sustainable crude-production capacity totals about 2.6 million barrels a day, the International Energy Agency says. As Nigeria's president offers amnesty to rebels, a spokesman for the main militant group said Monday it set off a "massive explosion" at Shell's offshore Forcados production platform.

"The situation in Nigeria is not going away," said Christopher Mennis, president of brokerage New Wave Energy in Aptos, Calif. "It seems to be getting worse and worse."

Live Cattle -- Limit Up Bull!

Limit up on live cattle today, with feeder cattle almost the same.

from Dow Jones:

CHICAGO (Dow Jones)--Chicago Mercantile Exchange live cattle closed sharply higher Monday, and August settled limit up, on fund-buying, short-covering and buy stops.

Feeder cattle also wound up sharply higher. July-through-October hogs ended higher, but other months finished mostly lower. And pork bellies settled sharply lower with February limit down.

Live cattle opened firm on underlying technical support and shorts that covered previously held positions. Last week's steady cash-cattle sales and positive beef-packer margins spurred talk that fed-cattle prices would be no worse than steady this week.

Cash-basis cattle last week fetched mostly $82 per hundredweight, which was comparable to the prior week's sales.

Spot-June, which will expire on Tuesday, made further headway after it set off buy stops on the way to a two-month top. Nearby-August peaked at an April 16 high soon after it broke through the 100-day moving average barrier.

Traders are now left wondering whether cash-cattle negotiations will keep pace with Monday's steep climb or fall victim to a possible downward adjustment on Tuesday.

Bearish players say Monday's run-up was nothing more than "window dressing" before the last trading day of the quarter on Tuesday.

Sunday, June 28, 2009

Is The End of the Recession Near?

from John Mauldin:

The End of the Recession?

I walked into the office yesterday evening and there was someone on CNBC talking about how the 50-day moving average of the S&P 500 rising above the 200-day moving average was telling us the market was getting ready to rise and the recovery had started. I listened to his babbling for another 2-3 minutes and couldn't take it anymore (and no, it was not my friend Larry Kudlow, who is a lot more balanced than whoever was on.)

We keep getting told that the market is telling us "something," usually that the recession is going to end. For some reason, people keep repeating the bromide that the market looks out about 6 months. To that I politely say, rubbish.

Riddle me this, Batman. Did the market see the recession in October of 2007? We were already in recession and the S&P 500 (see below) was making new highs! Where was the market prescience? Did it see the 25%+ drop in January of this year? And I could go back and cite scores of examples where the market "missed" the future turning points over the past ten decades.

What about the shibboleth that the market turns up 6 months before the end of a recession? Sometimes that is true. But does it mean anything? The same people who said it meant something last December and January are saying it means something now. But now it's June and the recovery is not here, so maybe the market wasn't telling us something in January after all.

Gentle reader, there will be a recovery. We will talk about what kind in a few pages, if we have the time. And it is (statistically speaking) likely that the markets will have turned up before the actual recovery. But does that mean anything today?

Go back to the chart above. Notice that in 2003, when the market finally turned up, we were already well out of recession. And the market had a very quick 12% or so drop while we were in recovery, while later we went on to a 90% run-up! Was the drop telling us anything, or do we explain it away?

"In the short run," St. Graham said, "the market is a voting machine. In the long run it is a weighing machine." The voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams. And it gets it wrong as often as it gets it right.

Let's look at this yet another way. This is an important concept, and it should be a component of your economic BS detector. The CNBC host talked in breathless terms about the importance of the 50-day average moving above the 200-day average. It means nothing until it means something, and we won't know what that something is for some time.

Earlier this week (Monday, I think) the 50-day average moved BELOW the 200-day average. The analysts at Bespoke Investment Group noted:

"Going back to 1928, this is the 25th time that the S&P 500 has declined through both of these levels on the same day. On page two we have provided a table showing each of these occurrences as well as the index's returns going forward. Based on those prior instances, the S&P 500's returns going forward have been notably negative. While the S&P 500 has averaged positive returns over the next week, average returns have been negative over the next month, three months, and six months." (emphasis mine)

But 33% of the time, the markets were up six months later, often by quite a bit. And sometimes down quite a bit, but on average only slightly. Which means that as a forward-looking indicator it is interesting but not anything I would put my money (or client money) on!

(I saw some reports that differed, selecting fewer such data points and suggesting that market returns were up after such an event. Logically, that can't be. Let's be generous and just assume sloppy research.)

Before major market moves down, the 50-day average will always move below the 200 average. And the reverse is also true. It is not a sign. It is just what statistically MUST happen. And sometimes they reverse themselves, and sometimes they don't. We have no way on God's green earth of knowing whether the two moves (both up and down) this week will be bullish or bearish six months from now, based simply on the moving averages crossing. You can make the data say anything you want, but you are still just guessing.

Sidebar note: Trend Following 101. I spend a lot of time analyzing trend-following money managers of one kind or another. Basically, they look at data and try to spot trends and then invest in them. A trader who is right 70% of the time is amazing and very rare. 50% is more like it for successful traders. But they have sharp risk controls that cut their losing trades and let their winning trades "ride." Being right 50% of the time can be profitable over time. (Being right 50% of the time is harder than it looks!)

But in the media you get these "analysts" who talk a good game, acting as if a 50-70% probability is something meaningful. "The market has turned. The recession is over." And they say that when we have the first balance-sheet recession in 70 years, yet they want to compare garden-variety recessions to what we have now. Again, we can only know which of the moves (above and below the 200-day moving average) will be the real "indicator" in six months. It is only an indicator today to the extent that we can drive our cars forward looking in the rear-view mirror.

The New Normal Is Still In Our Future

Now let's take that principle a little further. Last week I detailed how air, trucking, and rail shipping is down 20% year-over-year. Global trade is down about 30% in the major exporting countries (see below).

World trade shrinks: Chart 1: Year-over-year change in total exports from 15 major exporting countries (1991 to 02-2009) - Chart 2: Year-over-year change in exports from 15 major exporters between February 2008 and February 2009 (size of circles reflects volume of exports in 2008)

End of the world? Do we just keep falling? No. At some point, six months or a year from now, the year-over-year comparisons become easier. If you are at 100 and fall to 80, then a year later you are at 88 and voila! you have a 10% increase! And the perma-bulls will be talking it up. The fact that you are still down 12% from the peak is ignored.

The point is that we have fallen quite a bit in a lot of major categories. There is really only so much you can fall. And then when you reach that new lower level of the New Normal, you begin to rise. At some point, we will be on the path to "recovery." That does not mean that we will be back to the halcyon days of mid-2007 within a year. It just means that we have stopped falling and now have to adjust to the levels of the New Normal.

The Hidden Problem Within Unemployment Data

This is going to be most evident and painful in the unemployment numbers. Last month saw the number of unemployed rise by 345,000. What was not in the headline data was that 217,000 of those jobs were estimated from the "birth-death" ratio. The US economy creates new businesses that do not get counted in the data, so the BLS estimates what that number is, using previous data patterns. When the economy turns, it overestimates new jobs in recessions and underestimates them in recoveries. No conspiracy, it is just the best methodology we currently have.

But does anyone really think 200,000 jobs were created last month? The real number of lost jobs is worse than the headline. And next month the birth-death number will likely be over 200,000 again. Add another 100,000 or so to the headline number to get closer to reality,

Again, analysts talked about a turnaround because job losses were "just" 345,000. That is a higher number than any month in the 2001-02 recession, and larger than the month after 9/11. That is a green shoot? Yes, we will see the monthly unemployment numbers fall, but they are falling from historic highs. And based on some research by the San Francisco Federal Reserve, it is likely that we will see still higher unemployment that will persist for a while longer.

Let me quote and summarize through the research at (It is not long, and worth reading.)

"Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market. Specifically, we suggest that the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario."

Essentially, there are always workers moving into and out of employment. What they note is that the patterns seem to be changing. In the '70s and '80s, job losses were quick and deep, but the recovery was also quick. In the last two recessions, job recovery was noticeably slower, giving rise to the term "jobless recovery." It was the lack of hiring, and not firing, that was responsible for the slow employment recovery. MY thought is that before 1990 many of the job losses in recessions were from manufacturing. Businesses were quick to lay off and quick to rehire. We now have fewer manufacturing jobs, so the rehiring process has been much slower in recent recessions.

"The long and gradual return to pre-recession unemployment levels implied by the Blue Chip consensus forecast is consistent with a labor market recovery that is slightly weaker than that experienced in 1983 and slightly stronger than that experienced in 1992. However, should labor market conditions instead proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011."

That is not in any Congressional budget forecast. Want to run an election campaign at 10% unemployment levels?

"... What does all this mean for the course of the labor market? We combine data on involuntary part-time workers with the standard unemployment rate to arrive at an alternative measure of labor underutilization. We plot this measure in Figure 3, which shows that the labor market has considerably more slack than the official unemployment rate indicates. The figure extends this labor underutilization measure using the Blue Chip consensus forecast for the unemployment rate as a benchmark and then adding a share of involuntary part-time workers based on the proportion of workers in that category to the unemployed during the current recession. This projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate. This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates." (emphasis mine)

Was Income Really Up?

Now, let's turn our attention to today's headline. Income is surprisingly up. That has to be a green shoot, right? Well, not if you look at the underlying data.

Personal income from wages and salaries was down $12 billion in May. So how did income go up? A large increase in "government social benefits" and a decline in personal taxes accounted for all the gain, and then some. The increase was the effect from the recent stimulus package, which is (for now) temporary, and not the result of a recovering economy. Hardly green shoots. It is just borrowed money from another (government) source. In principle, it is not much different than home equity withdrawal, except that taxpayers are on the hook.

And those government subsidies are going to increase. Look at the graph below. What it shows is that the average duration of unemployment is at a 60-year high, and rising. It is now at 22.5 weeks. Unemployment benefits stop at 39 weeks, temporarily up from 26 weeks. More and more people each week are thrown into very dire circumstances when they fail to find jobs and lose the benefits. Care to wager whether, when Congress comes back from vacation, the time people are allowed to be on unemployment will be increased?

And speaking of the increase in government payments to individuals, what did they do with them? In aggregate, what is happening to this stimulus? The data came out today, and I must admit I was surprised. I have been writing for years that American consumers would start to save in this recession, but I (and nearly every credible observer I read) thought that we would see a more gradual rate of increase in the savings rate. The increase in savings has been nothing short of remarkable. (See graph below.)

From a negative 3% in late 2005 (the result of massive borrowing, primarily mortgage equity withdrawal and credit cards), we have risen to a positive 6.9%. That is the highest rate since 1993. The savings rate was less than 1% last August. And totals savings (on an annualized basis) was $608 billion in April, rising to $768 billion in May. That is a 30% month-over-month increase! Maybe the American consumer has found a new religion!

But, there is more than just a new savings fervor at work. Spending rose more than disposable income, so without that increased level of government transfer payments, it is unlikely that savings would have risen as much. Before we get too giddy about savings going through the roof, we need to wait a few months to see if this was the result of new savings religion or government transfer payments (stimulus), which will soon wind down

That being said, given the sharp increase in savings, it's no wonder shipping is down 20% and global trade in the exporting economies by 30%. No wonder retail sales are down, except for Wal-Mart and other lower-price venues.

Final thought for today. The Congressional Budget Office released another report this week, saying that the current deficit levels are unsustainable. They suggest that either taxes must increase by $440 billion or spending must be cut by a like amount, or some combination. If you assume some of the new health-care and other programs are enacted, the number comes closer to $700 billion.

This is not a Congress that wants to cut other parts of the budget by $700 billion. Raising taxes by $700 billion (over 4% of GDP) will dip us back into recession. Not raising taxes will result in debt that cannot be funded at anywhere close to today's rates. A recent IMF study is very sobering about the worldwide problem of growing country debt. Finding a trillion dollars in the market every year, when every other country is also trying to raise debt is simply not going to happen. It will destroy the dollar. There are few good choices in front of us, and fewer still good choices that are likely.

OK. One final suggestion for your weekend reading. Atul Gawande, writing in The New Yorker, weaves a very sobering picture of the problem of reining in health-care costs. He contrasts two Texas border cities with similar demographics, yet one spends twice as much on health care. One town has doctors who order every possible test and the other doesn't. There is no real difference in outcomes. And then compare it to other areas, and the problem facing any health-care policy becomes all too evident. Reportedly, Obama has had everyone read this, and you should too. It provides a very different angle on the problem.

Tulsa, London, and The Baltics

Last Tuesday I went to an Eric Clapton and Steve Winwood concert. At 64, Clapton can still play the guitar as well as anyone on this planet. It is always fun to see a man at the top of his game.

I get up early tomorrow, flying with family to get to Tulsa to be at my daughter Amanda's wedding shower, and then celebrating the twins 24th birthday tomorrow night. Amanda's wedding is August 22, right around the corner. If there is a recession going on, no one in the wedding industry seems to know. This is the second wedding in two years, and I still have two more unmarried daughters. It's a good thing the word retirement is not in my vocabulary. If we can't get the wedding budget under control, I am going to need about 600 new Conversations subscribers in July.

July 15th I leave for London and will guest host CNBC Squawk Box from 7-9 on Friday the 17th. Then on to Finland, St. Petersburg, and the Baltic capitals, and ending in Rome. (Why Rome? Because that is where we could get mileage tickets back to Dallas. But I might as well spend a few days.)

Then I (and my son Trey) will spend one evening and morning in New York August 5-6 before going on to Maine for the regular August fishing extravaganza with David Kotok and a rather fun crowd of economists and other ne'er-do-wells. It is a tough ticket to get, and I am glad to be invited.

There are lots of exciting things happening in my business, and we will be making announcements in the next few weeks. You have a great week.

Your going to listen to more hard blues analyst,

John Mauldin Copyright 2009 John Mauldin. All Rights Reserved

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