Today Warren Buffett said, "We're still in a recession. And, and we're not gonna be out of it for awhile..." His opinion is based on "any common sense definition" of a recession. This is largely at the core of why I am bearish on equities in the medium-term. Allow me to explain.
For most Americans, the level of unemployment is a much more convincing measure of the health of the economy than is the level of the stock market. While the Fed, Treasury, and Federal Government view the stock market as the nation's economic thermometer, the average American citizen views his or her income, job security, future direction of inflation for food, energy and other basic , and quality of life as the most important indicators of present and future personal financial health.
This is why so many citizens are growing increasingly angry. The Tea Party may in fact have accidentally capitalized on the 'taxation without representation' theme of the original Tea Party in Boston Harbor. Though I take it that the Tea Party's focus is more on re-instituting Christian, Conservative government with a fetish for Libertarianism, their frustration should be understood from the perspective of class struggle. I believe Tea Party activists can sense that the economic stimulus programs, 'bailouts', and interventions were if not by design, then at least in effect, bailouts for the wealthy corporate elite using tax dollars collected from the average working class American.
The competitive global currency devaluation, aka the 'race to the bottom', may keep capital goods and real estate from ever facing legitimate price discovery, but these efforts by the Fed aimed at debt monetization (see POMO), are done using taxpayer dollars. The increase in the money supply will increase the cost of basic necessities such as food and energy, which of course will most significantly impact the lower classes.
It doesn't take a conspiracy theorist to see the bigger picture. The top 20% in this country (the voters, campaign contributors, focus group leaders, lobbyists, corporate chiefs, etc) are primarily concerned with protecting themselves against wealth destruction. This is understandable, and why should anyone expect otherwise? The trouble comes though, when a private entity, the Fed, is able to buy a recovery in stock prices with taxpayer dollars. Of course the voting class will cheer, and the system may continue to splurge on debt, driving liquidty into stocks, and providing exit opportunities for corporate insiders who were, as a reminder, net sellers of their own holdings by a ratio of 260-to-1 last week.
The amazing thing about those who make bullish arguments for corporate profit growth is that they still maintain the irrational belief that top-line revenue can grow without a healthy middle class. In no industry can you actively destroy your own customer base and at the same time increase revenues. It is nonsensical. When one considers that 2/3 of US GDP is domestic consumer spending, it becomes obvious that we are still in a recession with 16% underemployment. As noted in previous posts, households continue to deleverage, and are doing so at the fastest pace yet. Consumers have undergone a paradigm shift. The thought of increasing personal debt for irrelevant goods has almost become akin to a social taboo. Even those who have excess savings aren't spending because not only is the outlook uncertain, but we've become a society of low-ballers. Why buy a house now when rates aren't going anywhere and the Fed is considering using the final arrows in their quiver to try their best to protect against deflation? People understand that this is a high stakes game with a very uncertain outcome. If the Fed fails to be successful, people don't want to be left holding the bag. Common sense dictates that home prices are still over-valued. The average American citizen in in his late 20's/early 30's does not have the capital or the confidence in the future required to purchase a home. The housing bubble priced many people out of the market. The American Dream has gotten that much further away, and much like the experience in Japan over the last two decades, I would anticipate that the rites of passage into adulthood such as childbirth, purchasing a home, etc will be put off until such time that job security, clarity over inflation, and home prices all adjust to levels at which a reasonable optimist would begin to move forward.
The cover of the most recent issue of Newsweek features an article on rethinking masculinity with the message "Man Up!" The article goes on to discuss men losing identity due to the loss of manufacturing and manual labor jobs, how men into their late twenties still live with their parents, etc. I couldn't get through the whole article as these anthropological battle-of-the-sexes fluff pieces never fail to disappoint in their efforts at serious journalism and tend to be written by some gender obsessed person who inadvertantly clings to anecdotal cliches rather than a grasp of fact based cause-and-effect sociological developments. What the article was failing to address (and why I gave up reading it) is that in a nation where the aging baby boomers are leveraging their children's future and defending the price of their homes, level of their 401(k)s, and their jobs, they remarkably, but inadvertently ensure lives that are worse off for their children. I believe that all people are at least partially the product of their environment (which is not to say I don't believe people can, and should, pull themselves up by their bootstraps.) The current environment is one that keeps our youth under-employed, over-stimulated, under-educated, and increasingly cynical.
To allow price discovery in hard asset markets, would be to allow discovery in the power of our nation's youth to innovate, grow, produce, thrive. Why do we still lag behind certain developing nations in terms of green tech? Your views on the global warming debate aside, why not launch a massive all-out effort to be the world leader in the electric car revolution (as one example.) This would bring back jobs, re-inspire our students to pursue fields in math and the sciences, and allow for a shift in the character and magnitude of the aspirations of our nation's citizens. This however, has not happened because entrenched interests continue to protect the value of their acquired possessions at all costs.
Price discovery in commercial real estate (CRE) would likely have tremendous positive benefits for future industry and job growth in the United States. If CRE pricing came down to a more rational, market-clearing level, jobs could be added back without doing as much damage to corporate profit margins. This would also allow fledgling entrepreneures to undertake projects without worrying about possibly being faced with the need to hire under-the-table employees, etc., just to cover the costs of doing business.
Where are our leaders? Why have we failed to learn the lessons of history? When Krugman writes of his desire to see increased protectionism against China, is he avoiding the truth about the Depression-worsening impacts of Smoot-Hawley for the sake of making his point, or is the influential Keynsian simply forgetting the one of the central tenaments of macro economics and the history of WWII? Perhaps Wen Jiabao was correct today when he suggested that it was America's preference to outsource all of our manufacturing jobs over the past few decades that is to blame for our trade deficit, and not the also undervalued Remnimbi. But don't tell that to the House Ways and Means Committee, because they have their hearts set on joining the trade war that China started today when they stopped shipping rare earth metals to Japan.
Meanwhile, the official story we are supposed to believe is that the investment landscape is far more benign (and more attractive) than it was in September 2008 when the stock market started really falling off the cliff. Maybe in the near-term this is true considering the Fed's promise to monetize U.S. debt, but then our issues were in the sphere of governments bailing out business. Now we are faced with governments bailing out governments. Which of these seems more malignant to you?
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