The Anatomy of a Maladjusted Economy -- Credit Bubble Bulletin, by Doug Noland

PrudentBear.com ^ | 12/6/02 | Doug Noland

[arete]

To dream that we will forever enjoy the capacity to trade newly created (electronic) dollar balances (financial sector IOUs) for foreign-produced goods becomes only more fanciful in an era of out of control current account deficits, an acceleration of manufacturing winnowing, a heightened loss of global competitiveness, and, not unimportantly, Fed governor references to “printing presses.”

I want my own printing press for Xmas. I can't wait for Greenspan's final helicopter drop.

Richard W.

[arete]

The Goods Producing sector lost another 40,000 jobs during November, increasing eight-month losses to 332,000. That so many producing jobs have been lost in the face of (ultra-easy Credit-induced) booming auto and home sales is further evidence that something is amiss. To those that continue to trumpet the “underlying soundness of the U.S. economy,” we suggest digging deeper. Indeed, 28 straight months of declining employment has reduced the number of manufacturing jobs back to the level from November 1961. Still, those with rose-colored glasses are quick to point out that, overall, employment has increased 174,000 since April. Considering the enormity of Credit excess and the reported increases in “output” during this period, the data suggest ominous portents for the American workforce. We will not celebrate the Service Producing sector’s creation of 506,000 jobs over the past eight months. With the number of Mortgage Brokers up 47,000, Health Services employment increasing 178,000, Education up 92,000, and Government jobs up 158,000, we see instead illumination of The Anatomy of a Maladjusted Economy.

What this economy needs is a few more tour guides and insurance salesmen.

Richard W.

[arete]

While money is again flowing to the corporate bond market - with spreads having narrowed significantly over the past month or so - there remain unresolved issues in the marketplace. A bankruptcy filing by United Airlines would be a further blow, with UAL bonds, company-related municipal debt, and aircraft leases in a myriad of special purpose vehicles all posing potential problems for “structured finance.” To what extent the vulnerable Credit insurers are exposed is today unclear. As for the ABS marketplace, we continue to believe effects from the likes of NextCard, Conseco, and National Century have yet to be fully felt. We expect Credit conditions to tighten. It is worth noting that widened ABS spreads have been rather sticky in the face of narrowing corporate spreads, with riskier asset classes seeing little in the way of recent improvement.

It's a house of cards. Wait until the housing market pops and all those mortgage backed securities take a hit. Greenspan will be delivering bundles of money with the morning newspaper.

Richard W.

[arete]

FYI

Comments and opinions welcome.

Richard W.

[Willie Green]

Even "high-tech" telemarketing jobs are kaput,
Automated by computers operating in India.

[dalereed]

When the housing bubble collapses my greatest fear is that HUD will take all the forclosed homes and not re sell them.

They will create the socialistd dream come true where almost everyone will be forced to live in government housing with all the rules and restrictions that go along with it plus creating a guarenteed voter base for themselves in perputity.

If that happens, the few of us that don't owe anyting on our homes will be taxed out of them to support the majority.

[sarcasm]

Indeed, 28 straight months of declining employment has reduced the number of manufacturing jobs back to the level from November 1961.

I haven't seen this reported elsewhere.

[willyone]

Buy puts on Freddie Mac and Fannie Mae.

[Starwind]

Let’s contemplate that we could still be enjoying the luscious fruits of the Great Stock Market Bubble; that is, if somehow everyone could have been convinced not to sell. If only the small investor, institutions, the gargantuan speculating community, foreign players, and the wealthy insiders would have just held tight.

I continue to have a problem with the characterization Great Stock Market Bubble. Yes there were abuses, some .coms, Enron, Worldcom, IPO laddering etc. But by and large most publicy traded companies were producing valuable goods and services for growing telecom/computer, biotech, etc sectors. It wasn't a bubble. It was real growth with some vastly overvalued stocks that would ultimately have been surgically taken out by the market.

But to lament that if only ...would have just held tight overlooks the reality of Greenspan's excessive ham-handedness in 1999, 2000, 2001 that first pumped and then killed interest-rate sensitive capital intensive industries, coupled with a tax code that confiscates gains (both real and unrealized) and converts what were 'paper' profits (of investors who otherwise were holding tight) into cash in government coffers which is then routed into non-producing sectors...is outright clinical denial.

[arete]

It is being consided. Been there and done that once this year for a nice profit. May do it again soon.

Richard W.

[arete]

I continue to have a problem with the characterization Great Stock Market Bubble

I agree. It was more like a delusional mania. Counting page views and eyeballs as future earnings or falsely believing that new age structured financing that would eliminate the business cycle was pie in the sky day dreaming.

Richard W.

[EVO X]

I continue to have a problem with the characterization Great Stock Market Bubble. Yes there were abuses, some .coms, Enron, Worldcom, IPO laddering etc. But by and large most publicy traded companies were producing valuable goods and services for growing telecom/computer, biotech, etc sectors. It wasn't a bubble. It was real growth with some vastly overvalued stocks that would ultimately have been surgically taken out by the market.

The Nasdaq fell from ~5000 to ~1120. It has recovered some and is now at 1422. The S&P fell from ~1500 to ~800 and is now at 912. I would call the Nasdaq run up a delusional mania and the S&P a bubble.

[David]

" I continue to have a problem with the characterization Great Stock Market Bubble . Yes there were abuses, some .coms, Enron, Worldcom, IPO laddering etc. But by and large most publicy traded companies were producing valuable goods and services for growing telecom/computer, biotech, etc sectors. It wasn't a bubble. It was real growth with some vastly overvalued stocks that would ultimately have been surgically taken out by the market."

The reference to the bubble is not to the quality or character of the business activities of the publically traded companies but to the price at which their stock was traded.

I tend to be a little more narrowly focused because I spent the better part of 30 years buying and selling companies with and for law clients. But price and valuation turn on what you can make with the business assets; as price and valuation of public companies turns on what the company can earn.

Historically, we have measured those values first as the ratio of the price to next years expected earnings; and often by dividend return; or price to sales; or price to gross margin; or cash flow or other elements.

Prechter has a scatter chart he publishes showing the P/E for every year for the last two hundred years. All years prior to 1990 fit in a tiny one or two inch box on the bottom left hand corner of an 8 1/2 x 11 inch pages; the 1990's occupy the rest of the page all the way out to the very tip of the upper right hand corner.

There was a price bubble because valuations were so excessive by historical standards as to defy rational description. Valuations are still at those levels.

Last time we saw a similiar situation was the 1920's. Valuations were excessive for the same cause but not so extreme.

Cause was, in the 1920's, fed printed money (credits) and made them available to the brokers as margin debt funding, permitting stock buyers to use the money to bid up the stock prices. In the 1990's the liquidty got to stock buyers through margin debt, residential mortgage debt, and debt on a whole bunch of other assets. Same result. We had a bubble because the fed created too much liquidity which was used to buy up the paper financial asset of choice--common stock.

[dalereed]

The union health and welfare and pension trusts, the private pension funds, and individuatl mutual funds have had a great deal to do with bidding the market to crazy levels.

The quantity of stocks didn't keep up with the inflow of money in the funds which created a bidding war, inflating the price, no different than the fed printing money creats inflation.

[Age of Reason]

Comments and opinions welcome.

OK.

Forget tax cuts.

Forget trickle down.

What's needed, is trickle up:

The government should give money to the poorest people, who will immediately spend it beacause poor people live hand to mouth.

Since the wealthier classes own the stores and means of production, they get the money without a tax cut, because sales go up with all the extra money the poor people spend on what the richer classes supply.

Economy thereby is jump-started and off we go.

Flame away. LOL.

[Age of Reason]

And, sadly, giving tax cuts in proportion to how much tax a citizen pays, will likely prolong a recession instead of end it.

It would be like hoping to prolong a game of monopoly by giving more money the the winner.

[dalereed]

So you support communism.

As far as i'm concerned the poor can either get off their sorry butts or lay down in the street and die.

[Age of Reason]

As far as i'm concerned the poor can either get off their sorry butts or lay down in the street and die.

I cannot think of any species that has evolved to be lazy about obtaining the means of its own sustenance.

Such a species would have died-off in the course of evolution.

But place a member of a given species where it cannot live the way nature designed it to live, and it will starve.

[EVO X]

Forget trickle down.

I think you still need trickle down. My aging parents put siding on their house, hired interior painters and poured a large driveway in the the last couple of years. They provided substantial income to at least a dozen or so people. They could probably put a few more people to work if the government didn't tax them so much.

[Starwind]

There was a price bubble because valuations were so excessive by historical standards as to defy rational description. Valuations are still at those levels.

There were many stocks whose actual growth was explosive by historical standards (SUNW, CSCO, as examples) and the prices ran up ahead of earnings because the companies and industry was sound, until Greenspan squeezed the growth out of the driving forces (Telecom, IT spending for e-commerce as examples). The prices would have stablilized. SUNW, CSCO growth rates were not sustainable, and they were overvalued at the time, but their values would have caught up in 1-2 years...that's not a terribly long horizon. And it was a rare opportunity, similar to investing in companies related to the railroad construction boom.

But yes, at present they are overvalued, even as far as they've fallen, their actual earnings have fallen more due to the contraction of the telecom and IT spending.