Schulz on Market Cycles Economics

SOMC Economic Themes: updated last 3/12/10

January 2010: Depression 2.0 continuing (first posted on somc 11/2008).
The 6 D's:
1) Debt (unsustainable government, especially the developed nations)
2) Demographics (aging US, Eurozone, Japan, and soon, even China)
3) De-leveraging (de-bubbling, tighter credit)
4) Defaults (debt...real estate, corporate, government)
5) Devaluations (currencies, Competitive Currency Devaluation, debt, ratings)
6) Distribution of wealth and work (from developed to emerging nations, a 20+ year process)
    the emerging markets and people have and are learning "how to do complex work better for less"

Wealth and Income Destruction:
(not in the order of economic magnitude, which is complex, changes with time)

First: Subtracting the Positives:

1)    Decrease in Stock Values
2)    Decrease in Housing Values
3)    Decrease in Credit available
4)    Decrease in Income (jobs)
5)    Decrease in Sales (business failures)
6)    Decrease in Profit Margin (economic contraction)
7)    Decrease in Speculative Margin (de-leveraging, credit contraction)
8)    Decrease in Dividends (major income source)
9)    Decrease in Bond/Interest return    (income for many more)
10) Decrease in Productivity (increase in inefficient Government interventions)
11) Decrease in Hope (a valuable commodity, risk/investment aversion)
12) Decrease in Real Social Security and Medicare Benefits
13) Decrease in City, State, Country and Corporate Benefits and Services (decreased quality of life)
14) Decrease in Mobility (20%/yr moved in 1955, now only 12%), trapped by housing illiquidity

Second: Adding the Negatives

1)   Increase in Government Budget Deficits
2)   Increase in Corporate and Public Debt
3)   Increase in Pension Deficits (Pension Ponzi)
4)   Increase in Social Security Deficits (Social Security Ponzi)
5)   Increase in Health Care Deficits (Medicare Ponzi)
6)   Increase in Demographic Negatives (largest economies with aging populations)
7) Increase in Taxes (to pay for the government expenditures and pensions)
8)   Increase in Interest Rates (As the Debt burdens come due)
9) Increase in Savings Rate (a huge shorter term negative...less spending)
10) Increase in Liquidations (means less open store sales and lower prices/profits)
11) Increase in City, State, Country and Corporate Bankruptcies (negative feedback loop)
12) Increase in Option ARMs refinancing (many, if not most, cannot be restructured)=bank liability
13) Increase in Commercial Real estate debt due for refinancing; more bank balance sheet losses

ASSESSMENT: In selected currencies, for awhile, Cash is King, along with some Gold, in local currency.
NOT LOSING IS GAINING.
And, in these times, Trading for those with Discipline and Temperament can help.

Gold, precious and rare metals have now been added to the mix of "currencies". China expecially has been hedging its US Dollar exposure by buying gold and other precious metals, minerals and mining rights.
    Several components of the Unemployment report that matter:
1) Average hours worked per week
2) Average hourly earnings
3) Length of time to find work
4) The underemployed (either by hours, wage, or type of work accepted)
5) Those who have stopped looking
6) Length of time required to return to previous income level
7) Percent of exhaustion of IRA, housing equity, or other retirement resources
8) The flux of the underground economy (from undocumented workers to barter to cash under the table) etc.
        Many of these are not easily found nor determinable. The reported unemployment rate (BLS statistics are at best lagging, and inaccurate. Compare TrimTabs.com) and jobs lost are almost inconsequential for the real effects on the real economy for the future. This "jobless recovery" will be worse than the last--2003 through 2007. Employment opportunities, for those in Europe, Japan, and the US, are being shipped permanently into the emerging markets. With increased education, skill and education, the emerging nations "can do it better for less".   Developed Demographics work against employment as well. As the "productive years" wane, saving becomes paramount.

Sept 2009:
1) Global debt levels are unsustainable
2) In a futile attempt to combat these debts, nearly all global governments engage in currency protectionism
3) To maintain credibility, the governments need to articulate specific, quantitative exit strategies
4) The political will to do this is very unlikely
5) Therefore, the "recession" will exacerbate
6) In the US the debt/GDP ratio rises to 80+%
7) Both savings and unemployment rates rise to greater than 10% (underemployment 20+%)
8) The "recovery", given these dynamics, will be minimal to non-existent
It is fairly simple. Occam's razor.
If a "depression" is assumed, these come to fruition.
Outside of the summer into fall stock and commodity rally,
     Cash is King, with some Gold, in Your Local Currency.
     If you need a cash flow, somc recommends buying TIPS on Dips.

6/23/09    Robert Prechter (Elliott Wave) was interviewed on Bloomberg recently.
"We are in a Bear Market. The recent stock rally is the first wave up of two Bear market rallies. We are now in a corrective wave down, that will last for a month or so. Then the second rally will appear, and last into late fall or early 2010. After that the Second serious Major wave down, to new lows, will begin. We are in Deflation mode (depressionary) for 2-3 years. IOUs are worthless. There is an ongoing decline in the value of credit. Around November 2009 the public will realize that they are being scammed. All the stress tests were bogus. On 3/26 he said: Wave theory is clear here: Stocks are most likely to rally for awhile, and gold likely to fall. That, however, will be temporary. Stocks have not reached their ultimate low, nor gold its ultimate high. Cash is a great place to be for the next couple of years, and, as always, some gold...just don't buy it quite yet. Gold is the best hedge against the depreciation of any currencies. Long term, I am bullish on gold."
The TAO 4 Aspectarian reflects the wave movement of markets.

11/18/08: One of somc's favorite charts is the prices of the DJIA divided by Gold.
A simple long term ETF strategy is:
1) Buy SPY with a Sell of GLD (long/bullish stocks)
2) Sell SPY with a Buy of GLD (short/bearish stocks)
Those spreads trend for years into decades. We're in #2.

10/10/08: After the further bank nationalization, and global central bank imposed intervention, one of my favorite and recommended interest rate analysts, James Grant, on the Scandal, wrote:
"Senator Schumer speaks about the RFC (soulution to hold toxic assets) which was a New Deal creation (from) the Great Depression in which GDP, peak to trough, went down 45% in dollars as the economy was sawed in half. That's why they had debt problems. Today we have debt problems with what may or may not be a recession and the nominal GDP in dollars is rising. This speaks to an unprecedented calamity of incompetence among people who earn seven and eight and up figures a year. This is a scandal. The talking heads who so blithely talk about the taxpayer's money and the RFC ought to consider just what a horror show Wall Street and its facilitators have brought us to...What no one has stood up for in the last two frightening weeks is the institution of markets...Maybe AIG could not have been quote "let go." But let us at least pause over the cadaver of free markets and take off our hats."

7/31/08:     The nationalization/socialization of the US banking system has begun in earnest (through the FED's actions, backing Bear Stearns, and others, and assuming risky private sector collateral) as well as of the housing sector (backing Fannie Mae and Freddie Mac, through Congress, the US Treasury and the FED); soon to follow, next year, will be the medical industry. All of these are necessitated by a long history of excessive spending and mismanagement leading to the inexorable decline of the USD=government out of control. The total US debt is now overwhelming, and the devaluation of the USD pays for this debt with cheaper US dollars. Democracies in decline usually follow this route. At some point, the risk becomes hyperinflation and/or depression (amplification of the current Stagflation). All along this process, the US middle and lower classes suffer as their relative purchasing power diminishes.