Window Dressing

Dear Reader,

Kicking off today’s edition, I’m handing the controls over to the tireless Bud Conrad, chief economist here at Casey Research. He provides the latest update on the state of the U.S. consumer and their ability – or lack thereof -- to return to the economic driver’s seat anytime soon.

His report follows…

The Consumer and Business Are Both Tapped Out

Bud Conrad

Data published on Oct. 7 confirms what we all know, that the U.S. consumer is not borrowing to spend. In a world where credit has become so important to consumer spending, and where consumer spending drives 70% of GDP, the indicator confirms that the economy is still in slow-growth territory:

While overall consumer credit continues slowing and is now declining at a rate of close to 5%, the subset of revolving credit, namely credit cards, is slowing even more – by 7.8%.

And consumer credit isn’t all that’s on the decline: commercial and industrial loans are off 12%.

Borrowing tends to be a lagging indicator, as the aftermath of a recession still lingers in the minds of consumers, and is reflected in more cautious banking practices. As the charts clearly show, the whole private sector is still in record-low borrowing mode.

The government, on the other hand, is doing the opposite – borrowing like crazy – in an attempt to counteract the Great Deleveraging. If we didn’t have the government directly supporting specific markets, the trends in private-sector borrowing would likely be even worse. And, with them now falling at a record pace, they are already about as bad as it gets – confirming how serious the current recession is.

Push for Performance

David again. As we ponder the dichotomy between the fundamentals of the economy, which could be correctly summed up as “miserable,” and the continued rise in stocks, it’s hard not to wonder if the vision of the trading herd extends past the tips of their collective noses.

Don’t they see the data on struggling U.S. consumers, the former workhorses of the U.S. economy? Aren’t they aware that there is a trillion-dollar commercial real estate debacle coming? Or that housing is set up to take it in the neck again over the next two years as millions more homes are foreclosed? That double-digit unemployment is a certainty? The terrible consequences of a government run amuck?

The answer comes in two parts, “Yes” and “We don’t care.”

Any trader having achieved the point in their career where they have license to bet millions of dollars of client money in a single trade are usually reasonably well informed.  So, yes, they have to be looking at much the same data we are and recognizing the dark clouds on the horizon for what they are. (A friend of mine who operates in some of the most rarified air of high finance confirms this.)

The “We don’t care” part increasingly has to do with the fact that we are now in the final quarter of the year. Which is to say, the home stretch for 2009 – a period of time when maintaining one’s performance record for the year becomes job #1.

That desire to hang on to performance is, of course, a combination of securing one’s bragging rights – no one likes to be a laggard – and, even more important, being able to calculate performance bonuses.

Which begs the question, can the trading herd create a self-fulfilling prophecy? To some extent, they actually can. That’s because the U.S. stock market is relatively small, compared to other markets. For instance, the average daily trading volume of the New York Stock Exchange is $40 billion, a pittance compared to the $840 billion daily volume in U.S. bonds. As such, it is not immune from being pushed around.

Now, that is not to say that anyone is deliberately pushing around the stock market – though they certainly could be. Rather, it is that the big money managers are acting in much the same way a herd of wildebeests do when in self-protection mode – say, when being stalked by lions. Run together and you’re safe. Break off from the herd and the odds soar that you’re what’s for lunch. Or, in the human context, it’s coal for Christmas.

Of course, while money managers may be able to push the market about, they can’t wave a magic wand over the economy and heal all that ails it. Thus, the big unspoken plan seems to be for the herd to continue running on a generally bullish path past the end of the year, and then break in formation as the chasm of 2010 looms. Which is to say, run back into short-term Treasuries and the likes just before the really bad news breaks. The retail investor, not getting the signal, will keep running – right over the edge.

If no black swans land between now and the end of December, the herd should be able to keep the market within a fairly tight range from here. Gold, which has been moving sympathetically with the market of late, will probably also trade in a range, with both markets susceptible to the inevitable corrections. After December, all bets are off.

In an ideal world, that’s how it’s likely to work out. However, as you don’t need me to tell you, we don’t live in an ideal world. And so it would be a mistake to discount a black swan landing in the middle of the herd and spooking it into a panicked sell-off… an every-man-for-himself scramble to lock in what performance they have to that point.

The temporary failure of Congress to pass the initial bank bailout in September of 2008 was enough to send the DJIA down by over 700 points in a single trading session. What could it take this time around to alter the generally pacific scenario just described?

While I could attempt to identify what such a bird might look like, the list is too long to contemplate here, and so I won’t try. But that the list is long, and that there is real danger lurking ahead that the herd is well aware of, means that playing this bear market rally has little to do with investing at this point and everything to do with speculating. Or, if you are a member of the trading herd, performance enhancing.

Snippets

And this year’s winner of the Nobel for Nothing is… As I was writing this in the wee hours, I learned that this year’s Nobel Peace Prize was awarded to our very own President Obama.

The rationale for the prize was, according to the Reuters news blast, “for giving the world ‘hope for a better future’ and striving for nuclear disarmament.” 

In its citation, the Nobel committee further waxed, "Very rarely has a person to the same extent as Obama captured the world's attention and given its people hope for a better future." 

Excuse me? Or, as our many Canadian subscribers might put it, “Eh?”

If I understand it right, Obama’s winning entry in the competition was to be of mixed race and to give good speeches, including, apparently, one on nuclear disarmament (which I’m sorry to say I must have missed, as it must have been a good one).

In June of this year, commenting in our free Conversations with Casey (sign up here, if you haven’t already), Doug Casey talked about the Nobel Peace Prize. The context being a discussion that touched on another Nobel Prize laureate, Paul Krugman. Here’s Doug…

… the first thing that drew my attention in the ridiculous article was a laudatory comment about Paul Krugman, who, they point out, is a Nobel laureate in economics.

My first comment is that the granting of a Nobel Prize in economics is as meaningless and arbitrary as the granting of the Nobel Peace Prize, which is really just a prize in political correctness and whatever appeals to the mob at the moment. These things are all very arbitrary. They have had excellent economists, and they have had anti-economists nominated for the Nobel Prize in Economics. It’s as meaningless an award as the Peace Prize -- which has been given to criminal personalities like Kissinger and Arafat, and buffoons like Al Gore.

I couldn’t have said it better myself, and so I won’t try.

The “new” shipping route across the top of the world. As the Copenhagen Conference on Global Climate Crisis Featuring the End of the World as We Know It (or whatever the thing is called) approaches, the number of downright silly and alarmist stories on pending climate catastrophe will only grow in quantity and degraded quality. Soon, a small deposit of bird excrement found on the shaded side of a tree will be widely reported as proof of a dire new trend in shade seeking by overheated avians fleeing the sun’s scorching death rays.

One such story, of the first ever transiting of the Arctic by commercial ships, has recently received wide coverage. Eye-opening! Irrefutable evidence of anthropogenic global warming! Except, it’s not true… that route has been in use by the Russians for over 70 years. You can read the not-so-Gorey details here.

Friday Funnies

As we are approaching Halloween, I thought I would share this with you. It came in an email from a friend labeled “Why dogs hate Halloween.” It should have been “Why dogs hate humans”…

Pop Quiz on the Dept. of Energy

Thanks to reader Ross R. for forwarding this on to me.

Does anybody remember the reason given for the establishment of the Department of Energy.... during the Carter Administration?

Anybody? No?
 
Didn't think so! Ready??  

It was very simple... and at the time, everybody thought it very appropriate.  
The  Department of Energy was instituted on 8-04-1977… to lessen our dependence on foreign oil.

Hey, pretty efficient, huh???

And now it’s 2009 – 32 years later – and the budget for this “necessary” department is at $24.2 billion a year. They have 16,000 federal employees and approximately 100,000 contract employees. And look at the job they have done!

Good ole bureaucracy.

And now we are going to turn the banking system, healthcare, and the auto industry over to the same government? Hellooo! Anybody home?

And General Watson, writing in from Portugal, sent over the following.

Having a Slab Down Under. When I was young and living in Australia, I went with some pals to the Bathurst 1,000 km motor race. It’s the biggest race event of the year down under. As you may be aware, the Aussies have something of a well-deserved reputation for their drinking habits, habits which have always been in full display at the three-day Bathurst race. In order to control things better, starting a couple of years ago, the police there imposed a limit of “one slab” of beer per person, per day. A slab is slang for 24 cans of (large and strong) beer. Alternatively you can have 4 liters of wine per person, per day.

Oh, by the way, the only way to get to the races is by driving your car or riding your bike there.

What’s Up with the Swine Flu?

As readers of any duration know, we’ve been skeptical from the start about officialdom’s dire warnings on swine flu. Simply, if the thing was going to be a true pandemic, we in North America would see it coming a mile away… actually thousands of miles away, due to the fact that the flu season comes first in the Southern Hemisphere. Only once you begin reading about exponentially escalating mortality rates in places such as Australia, New Zealand, South America, etc., do you need to become alarmed. Until then, you can correctly dismiss talk of global pandemics killing millions of people as so much hype.

Even so, because it’s good to be informed about things, you might want to check out this recent study from the New England Journal of Medicine on swine flu. Some of the key findings are that, of the 272 patients hospitalized for the virus, 7% died. A significant percentage, but again, this was only for those patients admitted to the hospital due to complications from the flu. Given that the actual number of people who caught it but didn’t require hospitalization was much, much higher, the statistic is not nearly so alarming. 

The study also found that fully 73% of the hospitalized patients had underlying conditions – asthma, diabetes, heart, lung disease, that sort of thing.

Among other findings, of those admitted, 40% arrived with symptoms of pneumonia, which is always a dangerous illness. And those who started antiviral therapy early did best. Interestingly, if you are over 65 years old and don’t have a serious underlying condition, it looks like you are home free… only 5% of the people admitted were over 65.

Conclusion: Get the flu shot if you have underlying conditions. And, regardless of your condition, if you get the flu, demand your physician start you on antiviral therapy post haste. Pay special attention to the lungs, as that’s the real danger point.

But, as the disease is currently constituted, it is no more deadly than any seasonal flu… so don’t let the media get you all worked up about it.

The full journal report can be read here.

Russia Drops the Dollar?

Much has been made of the fact that the major oil-producing countries have been engaged in discussions about dropping the dollar as the official trading currency for global oil markets.

The Russians were one of the participants in this discussion. As they well should be, last month they took the lead as the world’s largest oil producer, producing almost 25% more oil than #2 Saudi Arabia. You can see the increase in their production in the chart below, which the folks at U.S. Global Investors were kind enough to forward. (The U.S. Global site has a lot of useful research on resources, check it out at www.usfunds.com.)

If you think things are geopolitically tenuous now, with our reliance on the Middle East for our oil, just wait until the Russians begin throwing around their weight in world energy markets. If the power politics they’ve played with Europe over natural gas are any indication, times will be a-changing.

And That, Dear Readers, Is That.

As I sign off, the markets haven’t yet opened – and won’t for another hour. So I will simply bid you a great weekend and, for our Canadian readers, a Happy Thanksgiving  weekend.

Speaking of which, here’s a fun thing you can try at home – if you are a Canadian or a non-Canadian visiting that beautiful country. Try asking everyone you meet about the origins of the Canadian Thanksgiving holiday. I guarantee you will be most amazed, because while every Canadian I have tried that with knows the story behind the U.S. Thanksgiving, none has ever – not once – been able to tell me the origins of their own version of the holiday.

So, what are the origins? It had to do with a lunch Martin Frobisher threw in Newfoundland in 1578 for a group of his fellow travelers. You can read details here…

Until next week, thanks for reading and for being a subscriber to a Casey Research service.

David Galland
Managing Director
Casey Research