Little Shoots of Horror
Has the economy turned a corner? One big enough to justify the gross overuse of the term greens shoots? Doubtful. And despite pleas from the cliche-swamped masses, media continues to bombard us with this overly-optimistic (and early) catch-phrase.
Exhibit A: Just today Forbes published an article called The Street Eases, But Green Shoots Abound. Really? They abound? Call me skeptical.
I think this post at ZeroHedge provides a more realistic picture. It argues that those Green Shoots are more like Venus Fly Traps. I’ve expanded the metaphor further, to a nastier plant: Audrey II, the man-eating crooner from Little Shop of Horrors.
Why so skeptical?
Because there is only one thing propping this market up – government intervention. And the scale of it is awe-inspiring. Bailouts have been arranged (directly or otherwise) for banks, commercial real estate, homebuilders, automakers, and insurers. What would happen if the Gov withdrew their support? Zerohedge sums it up well:
The problem is that despite what Bernanke is saying right now, that he doesn’t view government stakes in banks as long-term propositions, there is really no way to extricate the government without suffering the kinds of economic tremors on par with the Lehman collapse.
Roubini: We Can’t Subsidize the Banks Forever
A new WSJ piece by Nouriel Roubini and Matthew Richardson shines more light on the issue. It’s an absolute must-read. Among other things, they out-gloom the IMF’s recently-doubled loss estimates with their own:
the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak — $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate.
But Roubini wasn’t featured by mainstream media outlets today, despite his solid track-record. CNBC and others were laser-focused on pumping Ben Appleseed’s message that “All will be better in Q4 (unless something bad happens), and gosh, look at all those Pretty Green Shoots!” Bernanke’s track record should give pause to anyone tempted to listen.
Messrs Roubini and Richardson also highlight the fallacy of these so-called Stress Tests:
For example, the first quarter’s unemployment rate of 8.1% is higher than the regulators’ “worst case” scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year — the stress test’s worst possible scenario for 2010.
Why is the Fed so wrong, so often?
By now it should be obvious that we can’t trust predictions made by the Fed or Government. It’s clear that Greenspan and his Reserve blazed the trail to bubbledom, and that Bernanke is following along wholeheartedly. But why? I see 3 possibilities:
- They are simply academics in over-their-head, reliant on faulty models and trusting of crooked bankers
- They understand the problem, but think deceiving the public is a necessary evil, in order to provide a “soft landing”
- They are doing everything their power to rescue their buddies, and they justify this to themselves in any way that makes at the time
But their intentions really don’t really matter, for now. We should focus on their actions, which only prolong and exacerbate the inevitable pain. Many amateur investors, who tend to buy high and sell low, are destroying their portfolios because of the extreme volatility we’ve experienced. This volatility is largely due to government intervention, and possible manipulation via proxies in equity markets.
What’s really sprouting up? Moral hazards, like weeds.
We’re creating a new financial system, one more dependent on the government than ever. Banks and others can start taking ridiculous risks again, assured that the ol’ reliable taxpayer will bail them out if anything goes wrong. Weaning the market off the taxpayer-teet will be extremely difficult.
My only advice is to stay flexible, and prepare yourself for various outcomes: inflation, deflation, stagflation. It all depends on the whims of the Federal Reserve and Government, and the politicians that (kind of) watch over them.
I see bigtime-inflation as the most likely outcome, by far. But who knows? My beliefs regarding inflation are largely based on the writings of Bill Fleckenstein, who is fond of saying, “In a Social Democracy with a Fiat Currency, All Roads Lead to Inflation.” His message has become more emphatic as the Fed has gotten more radical and increased quantitative easing. I’ve read the deflation arguments, and they don’t make sense to me, other than in the near-term. How to prepare for possibly nasty inflation? Precious metals and cheap stocks with good cashflow, among others. I’ll go into this more in upcoming posts. This one has already dragged on too long.
Disclaimer: None of this information is investment advice. I am not a financial advisor. Always consult with a Financial Professional when making investment decisions.