Financial mess goes mainstream

When Saturday Night Live actually starts making fun of the price-tag of a new social program, be very afraid...

H1N1 finally peaked?

Seasonal influenza in the United States normally peaks around the end of February in late winter. Swine flu, however, may have peaked 3 1/2 months earlier, in early November. If the new downtrend in influenza-like illnesses continues, then the worst may be over for H1N1.

To be free, or not to be free

Tomorrow (November 9) marks the 20th anniversary of the fall of the Berlin Wall, a symbolic event that punctuated the roughly two year-long collapse of the Soviet Union and its Communist satellites from 1989 to 1991. The wall itself held East Berliners captive for 28 years, but if we include the entire post-war Soviet occupation along with the Nazi regime (National Socialists) then eastern Germany was under one form of socialist dictatorship or another for 56 years. Fortunately for Germans, the world in 1989 recognized tyranny for what it was, even when wrapped in the good intentions of egalitarianism, and pressure was brought to bear on the inhuman regimes in Eastern Europe and Russia.

My, how times have changed. Today we are on the brink of a major loss of liberty right here in the nation that used to be the champion of freedom around the world. Americans are only one Senate vote away from becoming sheep to a government health shepherd that's ready to tell us what we can't eat, what we can't do, and how we should live our lives.

Not ironically, our President Dear Leader B. Hussein Obama has declined an invitation from those liberated Germans to attend the ceremony commemorating the fall of the Berlin Wall.

H1N1 Red Alert - or not.

Thanks to the H1N1 "Swine Flu" virus, more Americans are now ill with influenza than at any time in the past 3 years. However, the mortality rate due to influenza is still lower than the typical mid-winter rates from regular seasonal flu.This is welcome news, because it means that H1N1 is currently milder and less deadly than regular influenza. Hopefully the current outbreak will effectively inoculate the population against future H1N1 outbreaks before the virus has a chance to mutate into a more deadly strain.

Mayday

My favorite commentator, Victor Davis Hanson, has just written a stark analysis of our present situation. As usual, his piece is packed with more historical references, insightful personal recollections, and straightforward distillations of ideas than you'll find anywhere else. Here's an excerpt from the column All Falling Down:

The difference between the 5th century BC and late 4th century BC at Athens is debt – and not caused just by military expenditures or war; the claims on Athenian entitlements grew by the 350s, even as forced liturgies on the productive classes increased, even as the treasury emptied. At Rome by the mid-3rd century AD the state was essentially bribing its own citizens to behave by expanding the bread and circuses dole, while tax avoidance became an art form, while the Roman state tried everything from price controls to inflating the coinage to meet services and pay public debts.

For those not familiar with the history, the 4th century BC and 3rd century AD happened to coincide with the end of independent Athens and the beginning of the end of the Roman Empire, respectively. Of course war usually accompanies the fall of great civilizations, and we may be no exception:

Remember, Jimmy Carter was loved up until about 1978, as he bragged of human rights, slashed defense to use the money for more entitlements, promised to get troops out of Korea, sold out the Shah, intrigued with the exiled Khomeini, pooh-poohed communists in Central America, sold warplanes without bomb racks to our allies, lectured on the inordinate fear of communism and sermonized how no one would die on his watch. ...

And then somewhere around 1979 the world finally sized him up — and the result was a bleeding American goat crossing the Amazon as the piranha swarmed. Radical Islam was on the rise. The Soviet army invaded Afghanistan. Nicaragua blew up. Iran took hostages. And in reaction Carter devised brilliant strategies like boycotting the Olympics and arming jihadists in Pakistan — and more lecturing us from the rose garden. He wanted a flashy hostage rescue mission — after slashing defense in 1977-8: but the two don’t mix, as he learned.

The message I get from all of this is "Brace for impact."

Dividend yield below 2%

Dividend payments from corporations continue to shrink. If one extrapolates all dividends over the past three months out to a full year, then the dividend yield of the S&P 500 index now stands at 1.97%.

Up until the mid 1990's, the normal range for the S&P yield was between 3% and 6%. In the late 1990's the yield made its first ever sustained dive below 3% as the dot-com bubble inflated prices. The yield finally rose back above 3% briefly in early 2009 as prices collapsed (yield = Dividends/Price) but since March it has been falling steeply as prices have risen and earnings have continued to dry up.

Assuming that earnings and dividends stabilize (an optimistic supposition) and that the yield returns to its historically familiar range, then the S&P 500 can be expected to fall eventually to between 720 and 360. However, if earnings and dividends continue to fall, then the "fair value" price range will be even lower.

Happy Columbus Day

Today I celebrate Christopher Columbus' first voyage of discovery because he was the ultimate trailblazer for the freedom-seeking English farmers who followed and founded the United States of America. The list of accomplishments of this relatively young nation with such humble beginnings is truly astonishing:

• Started a worldwide democratic revolution that is still underway today.
• Purged slavery from itself in its deadliest war to date.
• Liberated hundreds of millions of people from Fascism, Nazism, Communism, and other forms of totalitarianism.
• Saved and prolonged well over a billion lives around the globe by curing diseases and improving food production.
• Invented most of the technology that you see around you, from the light bulb in your lamp to the airplanes overhead to the internet that sent you this text.
• Westerns, stand up comedy, and Rock and Roll - need I say more?
  

More than anywhere else in the world, the adventurous spirit of Columbus lives on in America, which has landed men on the Moon and explored every planet in the Solar System.

God bless America, and happy Columbus Day to the billions of beneficiaries around the world.

Why I'm not tracking market technicals right now

I mentioned a while back that I was taking a break from making market forecasts. After the March low, I began to suspect that prices weren't playing by the normal "rules" - either fundamentally (PE or yield) or technically (price formations, volume, etc.) This chart of the S&P 500 index confirms my suspicions.

Normally I'd be inclined to say that the S&P is in an ascending wedge formation, which forecasts an eventual drop through the lower trend line. However, as the chart shows, prices have instead risen through upper trend lines twice already, so I'm doubtful that the new upper trend line is any more meaningful. My favorite sentiment indicators have been showing optimism about stock prices rather than pessimism, which is usually not a favorable condition for a rally like this.

Meanwhile, the dividend yield of the S&P 500 has fallen to near 2%, which is phenomenally overpriced by historical standards. My hat is off to those who have profited from this six-month rally, but everything about it seems far too speculative for me to comfortably participate in.

Trough between waves, or pre-tsunami lull?

According to Federal Reserve Chairman Ben Bernanke, the recession is probably over, but I'm following several blog commentators who are making reasonable arguments that the worst is yet to come. The question is, "Who's right?"

Regular storm-tossed waves off of Maui

The tsunami approaching the coast of Khao Lak, Thailand

It seems to me that debt is the one broad issue that distinguishes the two opposing viewpoints. A diverse group of pessimistic online pundits like Mike Shedlock, Karl Denninger, Max Keiser and bloggers on Fool.com argue that we are near - or have already exceeded - a total debt threshold that can no longer be sustained. When all forms of debt are considered together, including the Federal debt, mortgage debt, consumer debt, etc., the picture looks pretty grim. Total debt as a percentage of the nation's gross domestic product (GDP) was remarkably constant for decades, but started to increase in the mid 1980's and has been growing steadily ever since.


Karl Denninger has made a graph that breaks down the debt into categories, and it clearly shows that a recent retreat in mortgage debt and consumer debt has coincided with an accelerated increase in public debt.

It doesn't take a genius to realize that private debt (much of it owed to a few large banks) has simply been transformed into Federal debt over the last year or two by way of the trillion-dollar bailouts/stimuli. Notice too that when the Federal debt momentarily stopped growing in the late 1990's, mortgage debt growth kicked into high gear.

On the other side of the debate, the people in high offices who were proponents of the bailouts and stimulus packages, and who are suggesting that the worst is now over economically, are noticeably silent on the subject of the ballooning Federal debt. I'm neither an economist nor an accountant, but I'm pretty sure that debt can't increase forever without major negative consequences. It also makes sense to presume that the greater the debt is when the bubble finally pops, the greater the pain will be.

I'm afraid the economic pessimists have made stronger cases than the optimists up to this point. To some extent the current reprieve in corporate earnings and stock markets has to be the aftereffect of the astronomical Federal spending programs, but I fear that this only delays the inevitable day of reckoning, and ensures that the eventual fall will be deeper. The most reasonable solution - letting banks fail when they take too many risks and slashing the Federal budget - is still painful in the short term, but would ultimately lead to a sustainable recovery more quickly. However, elected officials in Washington are too worried about their own jobs to suggest such "heartless" measures. They would rather bail out the irresponsible banks, increase the national debt, and print money like mad to keep voters placated at least until the next election.

Much of the current economic data supports the pessimistic outlook. Unemployment continues to rise, a new round of mortgage defaults looms, the dollar is losing its value internationally, and state governments who can't print money like the Feds are running out of it.

I've been doing my best to plan for the worst, but I wonder if there is even any "high ground" to run to in this case. (The folks in this video saw the tsunami coming and got out of the way just in time.)

(Swine) Flu Update

Influenza in the U.S. is now at the highest level since the winter of 2007-2008, with 21 states reporting "widespread" activity.

Every state in the Southeast has been hit hard. (wunderground.com)


Given official reports and anecdotal evidence that I'm hearing, it's pretty clear that this is the second wave of H1N1 Swine Flu, which is acting independently of the normal seasonal influenza that peaks in the winter. I'm sticking with my prediction that the Swine Flu will reach a high peak in a few weeks, and that any widely available vaccine will be too late to make much of a difference.

September 17, 1939-2009

This is a joke, right?

Exactly seventy years ago today, the Soviet Union began its invasion of eastern Poland, in accordance with the Molotov-Ribbentrop Pact that it signed with Nazi Germany. Thousands of Poles would die defending their country from Russian forces, and tens of thousands died later at the hands of the Soviets in group executions, torture, and mass deportations.

Today on the seventieth anniversary of this horrific event, the United States has announced that it will scrap plans for a missile defense shield in Poland and the Czech Republic, mostly in response to protests from Russia. Even for those in the West who oppose the missile shield, there's no denying that the timing couldn't be worse. Poland already has plenty of historical reasons to resent the choices made by the U.S. and Britain regarding Russia:

1. Britain declared war on Nazi Germany for invading Poland, but looked the other way when the Soviets did it two weeks later. The U.S. wasn't moved to help at all.
   
2. The U.S. and Britain allied with - and supplied - the Soviets from 1941-1945.
3. The Soviet Union was allowed to occupy Poland again after the war.

Thus my gut reaction to today's news is "Oh no, not again." I hope that this move to appease Russia at Poland's expense doesn't prove to be prophetic, but I know that history has a tragic way of repeating itself.

If you're not already feeling blue...

Here comes the big bad Swine Flu.

Late summer is normally the low point for influenza activity in the United States, but that's not going to be the case this year. The following graph from the CDC shows influenza activity for the the past 52 weeks (red) and the previous two years (green and blue).

I've added a red arrow to highlight the most recent data from last week. As you can see, in the past two weeks influenza activity has jumped from a somewhat elevated summer plateau up to levels that are usually seen during the worst part of the winter. State-by-state data confirms that an early outbreak is in progress, with the southern half of the country feeling the worst of it at the moment. (From wunderground.com using data from the CDC)

The big concern this year is the new strain of Swine Flu (H1N1) which most people have less natural immunity to, and which apparently has the potential to mutate into a more deadly pandemic strain. It would be a pretty big coincidence if H1N1 wasn't behind this unusually early outbreak. There was hope that a vaccine for H1N1 could be developed and distributed in time, but I'd say all bets are off now. (At times like this I'd be happy to pay double the normal cost for a vaccine, and shield vaccine companies from exorbitant lawsuits.)

I'm doing what I can to avoid infection and to minimize the pain if I don't. I've deployed my own bottles of hand sanitizer at work and at home. I've got cans of soup stashed away, juice in the 'fridge, and a fresh bottle of cough medicine in case I succumb.

I can think of one way to forge a win-win situation out of all this: at the peak of the H1N1 influenza outbreak, which could arrive in just a few weeks, they could declare the anticipated bank holiday and shut down the banks for a bit while we're all cooped up in our homes. It's not like we're going to need the money for shopping or travel at that point anyways.

Mirror, Mirror

Exactly two presidential terms after the 9/11 attacks, things are repeating or persisting in ways I never would have imagined.

Eight years ago, nineteen Muslim men under the direction of Osama attacked the United States, prompting a final showdown with Hussein.

Today the President of the United States is B. Hussein Obama, the son and stepson of Muslim men. Is this more than a coincidence - a subconsciously motivated choice perhaps by voters who opposed the War on Terror in general, and the invasion of Iraq in particular?

Eight years ago the collapse of the twin towers left an empty, smoldering space in lower Manhattan.

Today Ground Zero is still an empty space. Why do I suspect that, had the attacks occurred in 1931 there would have been a new skyscraper on the skyline by 1939, despite the Great Depression?

Eight years ago we were suffering the consequences of a speculative bubble in the stock market.

Today we are suffering the consequences of an even larger speculative bubble in real estate, the stock market, consumer credit, and skyrocketing national debt.

I can still remember my raw emotion and my view of the future in the days following September 11, 2001, as I watched the smoke rising from the Pentagon, replays of the towers collapsing and people jumping to their deaths. If someone had told me back then where we'd be eight years later, I would have concluded he was nuts.



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Update 9/12/2009: It's come to my attention that the Dow Jones Industrial Average closed at 9605 yesterday (Sept. 11, 2009) and at 9605 eight years earlier on Sept. 10, 2001. (The market was closed on Sept. 11, 2001, so the Dow was frozen in place at the same 9605 level for a week.) That's too weird. There's more mirroring going on than I was even aware of when I named this post.

Problem-solving 101

Question: What do these three things have in common?

Answer: I bought each of them with my own money in order to solve a problem.

My office is in a rather old building on an even older campus, and that means we have an archaic climate control system. The centralized air conditioning is primitive, and in a good fraction of the offices and classrooms in my department it is simply incapable of keeping the air cool in the summertime. This wasn't even a particularly hot summer in my part of the country, but still it was common to see fans placed in open doorways as a last-ditch effort to stay cool. The same thing happens every year: people in the hot offices complain to the maintenance staff to fix the problem; maintenance never gets around to fixing the problem; and then the hot people switch to complaining about the poor maintenance.

I had a different response to the heat. Several years ago, when I realized I couldn't keep my new office cool enough, I bought my own air conditioner for $80 at Walmart. I now have perfect control of the temperature in my office during the summer, and even on the hottest days I can make my office as cool as I want. Now, you might think that the hot people around me would copy this simple yet phenomenally effective solution, but you would be wrong. The complaints about maintenance have continued unabated.

The heating system here is equally crude. Every office has exposed steam pipes near the outside wall with a simple valve that losely controls the amount of heat radiated by the pipes. Of course, the central system that distributes the steam operates unevenly, and sometimes we arrive at work in the morning to find our offices baking at 85 degrees. That prompts people to turn off the valves and open the windows, which eventually cools the offices too much and ... well, you get the picture. I bought a space heater with a thermostat for $30 and closed my steam valve, and now I stay an even 70 degrees throughout the day, every day. Problem solved.
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Last Spring my university was part of the insane nationwide push to purge trays from cafeterias, so now eating in the faculty dining room has become decidedly less convenient. Instead of being able to put a salad, an entree, a cup of soup and a drink on one tray and then walk to our tables, we now have to make two or three trips back and forth between the table and serving area in order to assemble our meals. It's comical to watch professors in suits and ties ignominiously shuttling around with plates balanced on their arms, and the sound of a dish shattering on the floor is not uncommon.

Besides the inconvenience of not having trays, I have concerns about sanitation. Without trays, utensils end up resting directly on a table that someone else has just eaten on, and at the end of the meal we resort to carefully stacking our used plates on an unsanitary communal pile. It's all the more ludicrous to do these things given the occasional outbreaks of Norovirus and the looming threat of Swine Flu. In response I bought two cafeteria trays online for $5 apiece. I brought one of the trays to the dining room for the first time today, and although I got some bemused looks from my colleagues, it worked like a charm.
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Why am I talking about these things? At the very least I can claim to have a unique perspective among academics when it comes to problem-solving. My first instinct is to rely on myself to find the simplest solution, rather than hope that someone else will solve it for me. I've done the same thing now in anticipation of another financial meltdown: opening multiple bank accounts and hoarding cash in case the worst happens. I hope nothing happens, but if it does, there are quite a few academics around me who can't say I didn't warn them.

Economic pessimists: too many?

When in doubt, my instinct is to bet against the herd.

In 2007 there were only a small number of people predicting the looming disaster to come. Popular investing gurus like Ben Stein, Jim Cramer, and Bob Brinker only saw happy days ahead. When it came to the housing market, public television and late night advertisements featured people like Robert Kiyosaki and John and Greg Rice singing the praises of real estate investments.

We all know how that turned out, but now I'm starting to see the opposite phenomenon. Ben Stein, who usually advises us not to worry about the occasional bear market, is now expressing fear that the SEC is not doing its job to prevent corruption, and contemplating the possibility that "this time it's different." Robert Kiyosaki, who only a few years ago was saying that it's foolish not to go into debt, is now vaguely advising people to prepare for the worst. I happen to be in agreement with the pessimists right now, but I'm weary of seeing too many people join the doom-and-gloom camp. I don't think the pessimists are an overwhelming majority yet, but they seem to be growing in number.

Even if most people become bearish on the economy in the next several months, I'm still not sure what that would mean. Despite my contrarian philosophy, I can't help thinking that if we really do tax, borrow or print our way into financial oblivion, then sentiment may become irrelevant at some point. Is it ever possible for the herd to be right?

Unanticipated coincidence

I got the nickname "Hodar" in high school from variations of my first name, "Jody." Whether or not I have the talent described in the third item on Google, it's not the reason I use this name for my website.

Diversifying for Armageddon Part 2

In my March post, Diversifying for Armageddon, I voiced my fear that the FDIC would run out of money, meaning that future bank failures would cause savings and checking accounts to go up in smoke. My solution was to diversify my savings among several institutions as well as build up a pile of actual cash.

Today Karl Denninger voiced a similar concern on The Market Ticker. Although he's convinced that the FDIC is nearly out of funds, his worst-case scenario isn't quite as bad as mine. He thinks that the next banking emergency would force the FDIC to limit the amount of monthly withdrawals allowed for each account, thereby preventing a total collapse of the banks and giving the system time to recover. Even so, because the limit for one account may be too little to live on, he suggests the same solution that I proposed in March: spread your savings between as many banks as possible, thereby multiplying your personal withdrawal limit.

It is thus my position that even if you are well under FDIC limits you must move money around now so you have multiple bank accounts and thus if your withdrawals and access to your funds are "rationed" in a similar fashion you will be able to access what you need to pay your electric bill, put gas in your car and buy your food.

Food for thought - so to speak.

Insanity

This little detail of the federal Cash for Clunkers program eluded me until just now: Dealers who obtain the traded-in cars are being forced to destroy the engines to make sure that the cars aren't re-sold on the market.

I understand not wanting to pay the $4,500 for the same car more than once, but couldn't we just record the VIN# of the cashed-in car to prevent fraud? As it stands, the program is destroying some perfectly good cars - ones that could be re-sold for cheap to needy people, or even better, DONATED by dealers to charities.

Here we are in a major recession, with an increasing number of people unemployed and unable to afford new cars, and the government is paying people to destroy working vehicles. For some reason I'm reminded of the vehicle-less victims of Hurricane Katrina who were trapped by government incompetence; I wonder what they would think of this program?

Coincidentally, I just made my last payment on my big roomy gas-guzzler. If and when the time comes, I'll give it away to someone who needs it before I let it be destroyed.

Bans on leveraged ETFs

Well, well, well....

A few brokerage firms have recently banned the sale of leveraged ETFs to their clients.

At least three brokerage firms have decided not to sell leveraged exchange traded funds a month after the Financial Industry Regulatory Authority Inc. warned brokers that they “typically are unsuitable for retail investors” who hold them longer than a day.

Hat tip: Bespoke Investment Group.

Pause

It's probably obvious by now that my attention isn't focused on the stock market to the degree that it was earlier this year or last year. Not only have I been trying to get some traction going in my day job, but I'm concerned that the next economic shoe to drop will threaten the funding situation in my field. In other words, I'm trying to do a good job where I am while simultaneously thinking about what to do next.

I'm learning the hard way that I really shouldn't try to time the market if it's only an afterthought. Therefore I've cashed out again, and I'm probably going to stay in cash for many months - not because I think the market will be flat, but because it will work out better for me financially. I may still post about economic issues, but I'm taking a break from dissecting market signals for a while.