The party is over and the Great Unwinding has come. David Rosenberg, North American Economist at Merrill Lynch, wrote an interesting piece entitled "The Frugal Future." While this is his outlook for 2009, it really paints a picture of changing secular trends. His outlook is rather gloomy, as he tends to consistently have bearish analysis. However, I think this piece makes good points and I agree with many of the points he makes.
Rosenberg believes that the US economy will be in recession throughout 2009 and into early 2010 before recovering. This is a consumer-led recession. The consumer accounts for 70% of US GDP and 20% of the global economy. He backs up and notes that the average of the 10 US recession since WWII has lasted 10 months, but the average of the 32 US recessions since the Civil War has lasted 18 months. The reason that recent recessions were milder by comparison was due to two things: favorable demographics (baby boomers) and an expanding credit cycle. He argues both are done now. He spends most of his time on why credit will not expand going forward.
The current recession started largely due to a speculative bubble in housing prices that came unwound with excessive defaults in subprime mortgages. This recession will be prolonged by falling household assets, long-term consumer debt paydown, and deflation. I believe the real story here is the Great Unwinding - consumers are paying down debt. I think we will see this last for several years, not just several quarters. With consumers directing dollars to paying down debt, instead of increasing consumption, we are in for an economic malaise that will last a long time. During the third quarter, households had a net debt paydown of $29 billion.
Household assets are also declining, which is not surprising given what has happened to real estate values. Remember, homes are the largest source of net worth for the average American. Many economists are looking for a near-term bottoming in housing prices, at which point they believe prices will rebound. This analysis misses the bigger picture. The bigger picture is that there is no pent-up demand for houses and no amount of interest rate easing will create demand. Home ownership is still at a near record level, and well above historical averages. Further, we still have a near record amount of housing inventory, which now stands at 11 months. And the housing inventory is holding steady in spite of the fact that housing starts have dropped 65% from peak levels over the past couple of years. Finally, the marginal new home buyer is not credit worthy. People with foreclosures on their credit history will be unable to purchase a new home. With unemployment trending higher (6.7% now, could be going to double digits!), I do not see a catalyst for demand. While I look for the government to do all it can to stimulate demand, there is simply no pent-up demand. The government will merely be pushing on a string.
Deflation will also weigh down the economy over several years. And I see the economy in a deflationary mode. CPI fell 1.7% y/y in November. OPEC announced its largest cut in production ever today - and the price of oil FELL to a 4-year low. Normally, production cuts induce oil price increases. The price of gas has fallen from $4/gallon to about $1.75/gallon today. This is the equivalent of a $325 billion annual tax cut. Twice as much as the "rebate" checks we received earlier this year. Yet, with all this stimulus, what is GDP expected to do in the fourth quarter? Many economists call for GDP to fall 5-6% this quarter.
Ultimately, we are seeing a secular shift in consumer behavior. We have our cars, we have our HDTV's, we have our computers, our cell phones. We also have the debt to go with it. I believe we, as a collective society, will be paying down debt for awhile. I do not think we will revisit the Great Depression, nor do I see us revisiting a Japanese-style stagnation of the 1990's. But, what we do have is the Great Unwinding. What do I advise doing in this environment? Pay down debt. What if you have already done this? Buy long-term US Treasury bonds and long-term high grade corporate bonds. Buy equities that pay consistent dividends and have a history of raising their dividends.
Wednesday, December 17, 2008
Monday, December 15, 2008
Top 10 Surprises For 2009
Former Morgan Stanley strategist Byron Wien puts out his Top 10 surprises for the upcoming year about this time of the year, which always makes for fun reading this time of the year for the Wall Street crowd. Mr. Wien bases his surprises on events that are outside the consensus thinking at the time, but ones he believes have a better than 50-50 chance of happening. Looking back, it’s amazing how some of his out-of-the-consensus calls turn out to be correct. To see Mr. Wien’s Top 10 Surprises for 2008, go to the following link: (http://www.portfolio.com/views/blogs/daily-brief/2008/01/02/byron-wiens-10-surprises-coming-in-2008). His calls focus almost exclusively on the economy and financial markets. Mine are more inclusive. However, I do not claim that any of these have a better than 50-50 chance of happening. Some will even require a miracle of biblical proportions in order to happen.
1. The credit crisis gets worse, not better. Despite over $1 trillion in rescue and bailout money, housing defaults continue to rise throughout the year. The government essentially becomes powerless to stop the tide of foreclosures. Housing prices continue to tumble throughout the year.
2. Interest rates continue to go lower. The 10-year US Treasury note, now trading at 2.55% as I write this, will drop below 2% in 2009. The possibility of an inverted yield curve starts to come into play, which is amazing considering the fed funds rate is below 1% and the 2-year T-Note is trading below 1%.
3. The price of oil will stabilize at $70/barrel. Oil current trades at $49/barrel, and many analysts expect the price of oil to go lower as the world economies sink into a recession. However, OPEC will actually cut its production so that oil prices may rise.
4. Unemployment reaches double digits. There have been whispers of double digit unemployment in the investment community, but no one wants to admit that this may actually happen.
5. Consumers will actually de-leverage their own balance sheets. In fact, I think this could be a defining event for several years, as consumption is reduced and debt payment increased.
6. Entertainment will be marked by the “Year of the Comeback.” Who will lead the way? Britney Spears. I wouldn’t be surprised to see a wiser, more mature Britney. Then again, she is still capable of the Trainwreck Britney of 2007.
7. At least 5 congressmen will get caught up in a scandal involving financial or sexual impropriety. Do these people ever learn?
8. A breakthrough hybrid car will be announced by either GM or Ford that promises to get at least 100mpg. The car will be promised by 2015. We will never see the car.
9. Oklahoma will win the BCS championship game, UConn will win the NCAA men’s basketball championship, Pittsburgh will win the Super Bowl, the LA Lakers will win the NBA championship, and New York will win the World Series…the Mets, that is.
10. I will get married. That would be the biggest surprise of all.
1. The credit crisis gets worse, not better. Despite over $1 trillion in rescue and bailout money, housing defaults continue to rise throughout the year. The government essentially becomes powerless to stop the tide of foreclosures. Housing prices continue to tumble throughout the year.
2. Interest rates continue to go lower. The 10-year US Treasury note, now trading at 2.55% as I write this, will drop below 2% in 2009. The possibility of an inverted yield curve starts to come into play, which is amazing considering the fed funds rate is below 1% and the 2-year T-Note is trading below 1%.
3. The price of oil will stabilize at $70/barrel. Oil current trades at $49/barrel, and many analysts expect the price of oil to go lower as the world economies sink into a recession. However, OPEC will actually cut its production so that oil prices may rise.
4. Unemployment reaches double digits. There have been whispers of double digit unemployment in the investment community, but no one wants to admit that this may actually happen.
5. Consumers will actually de-leverage their own balance sheets. In fact, I think this could be a defining event for several years, as consumption is reduced and debt payment increased.
6. Entertainment will be marked by the “Year of the Comeback.” Who will lead the way? Britney Spears. I wouldn’t be surprised to see a wiser, more mature Britney. Then again, she is still capable of the Trainwreck Britney of 2007.
7. At least 5 congressmen will get caught up in a scandal involving financial or sexual impropriety. Do these people ever learn?
8. A breakthrough hybrid car will be announced by either GM or Ford that promises to get at least 100mpg. The car will be promised by 2015. We will never see the car.
9. Oklahoma will win the BCS championship game, UConn will win the NCAA men’s basketball championship, Pittsburgh will win the Super Bowl, the LA Lakers will win the NBA championship, and New York will win the World Series…the Mets, that is.
10. I will get married. That would be the biggest surprise of all.
For The Love of Money
“For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.” I Timothy 6:10
“Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God." Matthew 19:24
The two Bible verses above really stuck with me as I read an article about preacher Joel Osteen entitled “God Wants Me to Be Rich” (http://www.portfolio.com/executives/features/2008/07/16/Megachurch-Preacher-Joel-Osteen). I have this feeling the two verses above never make it into Mr. Osteen’s sermons. The curmudgeon in me has a hard time embracing the “prosperity gospel”, as it is sometimes called, because it conjures up images of God wanting me to have a multi-million dollar house and a multi-million dollar bank account. While I admit these would be nice, I do not believe for one minute that God wants me to have these things. He may choose to bless me with these things as a result of my ability to work hard and work smart. What I believe God wants from me is to worship Him. Part of that worship entails stewardship of the money with which I am blessed.
Mr. Osteen is the minister at the country’s largest church. His church claims 45,000 members and generates $76 million in annual revenue, and carries $45 million in debt. Mr. Osteen does not draw a salary from his church, nor has he since 2005. However, all book royalties go to Mr. Osteen. He gives much of this back to the church. Still, at the end of the day, Mr. Osteen takes home quite a haul, perhaps justified given the size of the operation he oversees. I have no problem with the size of Mr. Osteen’s church, nor do I have any problem with any amount of money he may take home. But, as I contrast Mr. Osteen’s message with that of my own senior pastor (I belong to a church with 15,000 members and the pastor earns a comfortable salary), I come away with a sense that the prosperity gospel is not what Jesus preached. Does this mean that we should be poor? No! However, the accumulation of wealth for the sake of accumulating wealth and lavishing ourselves with only the most expensive items is not what God intended either.
My message in this is simple. Work hard, work smart. Work with passion, and work with pride. Invest wisely. If you make a ton of money, more power to you. I am not against making money. Nor do I believe in giving away so much that you become a charity case too. But give back to the community that has richly blessed you. Help those less fortunate. God does not want your outward signs of material wealth. He wants your heart and soul.
“Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God." Matthew 19:24
The two Bible verses above really stuck with me as I read an article about preacher Joel Osteen entitled “God Wants Me to Be Rich” (http://www.portfolio.com/executives/features/2008/07/16/Megachurch-Preacher-Joel-Osteen). I have this feeling the two verses above never make it into Mr. Osteen’s sermons. The curmudgeon in me has a hard time embracing the “prosperity gospel”, as it is sometimes called, because it conjures up images of God wanting me to have a multi-million dollar house and a multi-million dollar bank account. While I admit these would be nice, I do not believe for one minute that God wants me to have these things. He may choose to bless me with these things as a result of my ability to work hard and work smart. What I believe God wants from me is to worship Him. Part of that worship entails stewardship of the money with which I am blessed.
Mr. Osteen is the minister at the country’s largest church. His church claims 45,000 members and generates $76 million in annual revenue, and carries $45 million in debt. Mr. Osteen does not draw a salary from his church, nor has he since 2005. However, all book royalties go to Mr. Osteen. He gives much of this back to the church. Still, at the end of the day, Mr. Osteen takes home quite a haul, perhaps justified given the size of the operation he oversees. I have no problem with the size of Mr. Osteen’s church, nor do I have any problem with any amount of money he may take home. But, as I contrast Mr. Osteen’s message with that of my own senior pastor (I belong to a church with 15,000 members and the pastor earns a comfortable salary), I come away with a sense that the prosperity gospel is not what Jesus preached. Does this mean that we should be poor? No! However, the accumulation of wealth for the sake of accumulating wealth and lavishing ourselves with only the most expensive items is not what God intended either.
My message in this is simple. Work hard, work smart. Work with passion, and work with pride. Invest wisely. If you make a ton of money, more power to you. I am not against making money. Nor do I believe in giving away so much that you become a charity case too. But give back to the community that has richly blessed you. Help those less fortunate. God does not want your outward signs of material wealth. He wants your heart and soul.
Tuesday, December 9, 2008
The Government Must Do Away With Marriage
“For this reason a man will leave his father and mother and be united to his wife, and they will become one flesh.” Genesis 2:24
Why would I come to the conclusion that the government must do away with marriage? I read an article on Newsweek.com (http://www.newsweek.com/id/172653?gt1=43002) whose premise is that the Bible justifies gay marriage. I found the article deeply offensive, poorly researched and poorly written. Nowhere does the Bible justify gay marriage. So why do I come to the conclusion that the government needs to do away with all marriage?
I will begin by saying that I do not believe that we ought to shack up with whomever we please. I do not believe this is healthy for us as individuals, nor is it healthy for the children that may result from such activity. I do believe that men and women should marry, have children together if they choose, and raise those children in a safe and nurturing environment that will raise smart, productive, loving and law abiding people. I believe that men and women should marry in order to foster a life long intimate relationship with each other. Intimacy in every way, whether it is physical, emotional, or spiritual intimacy. But the government should do away with marriage.
I believe that marriage was created by God for purposes pleasing to Him. However, ours is a secular society, not a religious society. The verse from Genesis stated above makes it perfectly plain that God created marriage, not the state. And that God created marriage to be the union of one man to one woman. However, the meaning of the word “marriage” has become so perverted that it has lost almost all meaning. Heterosexual couples have perverted the meaning of marriage through an exceedingly high divorce rate, loveless marriages, and all forms of extra-marital affairs. Even in Biblical times, marriage was perverted by men who took many wives and concubines.
The solution is simply having the government quit recognizing marriage. Recognize all forms of “civil unions” under the law. Partners in gay unions can be empowered to sign medical consent forms, visit deathly ill partners in the hospital, and inherit money from a deceased partner under the spousal exemption laws. In short, a homosexual couple can have all the same rights under the law that heterosexual couples have.
What about marriage? I say you leave that to the church. Let the church be the only body that conveys marriage upon a couple. It could be a Christian church, a Jewish synagogue, an Islamic mosque, a Buddhist temple or some other religion that recognizes marriage. Marriage is God’s creation. Let those who are recognized “being of God” bestow marriage privileges. In this manner, “marriage” is more fully restored to its original intent. “Marriage” would carry a fuller commitment than a simple union in that the participants have pledged their love and fidelity to each other in the presence of God, not simply to the state.
Why would I come to the conclusion that the government must do away with marriage? I read an article on Newsweek.com (http://www.newsweek.com/id/172653?gt1=43002) whose premise is that the Bible justifies gay marriage. I found the article deeply offensive, poorly researched and poorly written. Nowhere does the Bible justify gay marriage. So why do I come to the conclusion that the government needs to do away with all marriage?
I will begin by saying that I do not believe that we ought to shack up with whomever we please. I do not believe this is healthy for us as individuals, nor is it healthy for the children that may result from such activity. I do believe that men and women should marry, have children together if they choose, and raise those children in a safe and nurturing environment that will raise smart, productive, loving and law abiding people. I believe that men and women should marry in order to foster a life long intimate relationship with each other. Intimacy in every way, whether it is physical, emotional, or spiritual intimacy. But the government should do away with marriage.
I believe that marriage was created by God for purposes pleasing to Him. However, ours is a secular society, not a religious society. The verse from Genesis stated above makes it perfectly plain that God created marriage, not the state. And that God created marriage to be the union of one man to one woman. However, the meaning of the word “marriage” has become so perverted that it has lost almost all meaning. Heterosexual couples have perverted the meaning of marriage through an exceedingly high divorce rate, loveless marriages, and all forms of extra-marital affairs. Even in Biblical times, marriage was perverted by men who took many wives and concubines.
The solution is simply having the government quit recognizing marriage. Recognize all forms of “civil unions” under the law. Partners in gay unions can be empowered to sign medical consent forms, visit deathly ill partners in the hospital, and inherit money from a deceased partner under the spousal exemption laws. In short, a homosexual couple can have all the same rights under the law that heterosexual couples have.
What about marriage? I say you leave that to the church. Let the church be the only body that conveys marriage upon a couple. It could be a Christian church, a Jewish synagogue, an Islamic mosque, a Buddhist temple or some other religion that recognizes marriage. Marriage is God’s creation. Let those who are recognized “being of God” bestow marriage privileges. In this manner, “marriage” is more fully restored to its original intent. “Marriage” would carry a fuller commitment than a simple union in that the participants have pledged their love and fidelity to each other in the presence of God, not simply to the state.
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