Pile On: Hussman & Pragmatic Capitalist - Recession/Depression On

Prag Cap - The Third Depression

I was going to post these two links yesterday, but I wasn't feeling well (perhaps because I read them). I believe Hussman's post is a must read for everyone.

Whether these individuals are right is not really the point, the point is to be prepared because the probability they are right is very high. Whether the markets recover from this point or continue to crash, what is clear is that the US and the world have not chosen wisely and they will be forced to pay the price at some point. We failed to bite the bullet last time around and endure the short term pain necessary to correct the excess, thus we will have to do so at some point in the future and it will hurt more.

Sorry if this feels like piling on, I swear I'm not a pessimist. I'd still be willing to buy stocks even during market turmoil if they were priced right (of course its not exactly easy to know when they are priced right).

I think one fear that is in the market now is that of another hedge fund/bank blow up from unexpected lower interest rates (which is not unexpected but predicted by many, including myself). You see, many big investors have been betting on inflation and thus a run-up in interest rates, this hasn't happen and is probably causing big losses which could lead to short squeezes or illiquidity.

Fun times.

Scott Dauenhauer CFP, MSFP, AIF

There Is Hope: Krugman Predicts Third Depression

For those of you who read me regularly (both of you) you'll know that I have an aversion to NY Times and Nobel Prize winner Paul Krugman's economics. Today he called for a third Depression, which I tend to agree with. He believes we are in a deflationary spiral that will lead us into another Depression. This prognostication does give me a bit of hope as if he believes it, there is a higher probability than not that it won't happen.

Krugman is of the Keynesian school of economics - a school which worships at the feet of government and credits FDR with getting us out of the Great Depression (which is baloney). The basic premise is that the government should step in and spend if consumers and business stop - we must grow at all costs and this means massive deficits (Keynes also said deficits should be paid down in good times....but nobody listens to that). Krugman believes that because the world and US governments are not spending enough or are not committing to spend more that this will end in a deflationary spiral.

This is of course fundamentally incorrect and an example of how economists who approach problems from different viewpoints can also come to the same conclusions.

I share the same fears of Krugman (but don't consider myself an economist) but for different reasons.

One thing I'd like to point out in Krugman's piece that surprised me is how he characterizes depressions, I don't know if he just doesn't know his history or if he chooses to follow his own rechristened history:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

This statement is not true. Recessions are a construct of the Great Depression. When the US economy was headed back into Depression (rather it was still in one) FDR didn't have it in him to call it a depression, thus he created a new term "recession". Before the Great Depression the US experienced only depressions. So yes, after the the Great Depression Recessions were common and depressions rare - but historically this is inaccurate.

Regardless, when Krugman and I agree than things are either really bad or I am wrong. Guess its time to study some more.

Scott Dauenhauer CFP, MSFP, AIF

RBS: "Monster" Money Printing

Ambrose Evans-Pritchard continues with another column on deflation and what he sees as essentially a spiral which will end with the US Federal Reserve printing an enormous amount of money to prevent deflation. He cites a new an RBS letter to clients that talks of "Monster" money printing.

From the article:

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors.

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view, but it is anathema to hardliners at the Kansas, Richmond, Philadephia, and Dallas Feds.

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

I've been saying this now for months.

The question is whether you should take this seriously or brush it off as another doomsday perma-bear trying to gain headlines (Pritchard is not a perma-bear)?

My old self would have brushed it off and told you to stay invested, even if things fall they will come back - however that theory has not proven itself out. I'm not saying get out of stocks, I am saying that you should get out of risk assets if you can't handle significant fluctuation. Yes, you may miss out on some upside, but preservation of capital is of the utmost concern now. A bird in the hand......

Does this mean you shouldn't ever own stocks? No, I still hold an allocation to stocks but have lowered it significantly and will increase this allocation if we get a significant fall. However, realize that we don't know exactly how the government will act in the future - if the Fed embarks upon another round of Quantitative Easing (i.e. Money Printing) we could actually see an eventual rally of stocks to heights we never thought possible. Of course this QE induced melt-up will eventually crash as well.

Unfortunately the path to prosperity does not lie with an ever increasing debt-load.

My gut tells me to be very, very cautious in this market - for me this means not holding too much in the way of risk assets, but being aware that some great deals may come down the pipe. If we have another deflationary scare and if TIPS (Treasury Inflation Protected Securities) react the way they did in 2008 (late) we might have another opportunity to buy these at very good prices.

I realize that many economists are calling for inflation, massive inflation and hyper-inflation, in fact many of these economists are individuals that I have a high degree of respect for, which makes things all the more difficult for me in determining how to design client portfolios. I do believe we are in a deflationary episode, but also believe it could lead to significant inflation. Let me emphasize that I could be wrong, very wrong. This is why I haven't advised people to buy commodities, specifically gold and silver - though I have advised how to buy if they want and said that I don't believe its a bad idea to have some precious metals on hand along with paper money (outside of the bank).

Where I might have dismissed these bearish prognosticators in the past, I feel I was wrong to do so. They may not be right, but they are reflecting information that should be incorporated into your financial plan.

My stance may prove to be imprudent from a growth perspective, but I can live with myself if my clients earn only a few percent if the markets return 20% better than I can live with myself if my clients earn a few percent and the market falls by 50%. This is a Will Rogers market.

Scott Dauenhauer CFP, MSFP, AIF

Quoted in Forbes: Teachers Facing New Financial Pains

Quotes:

"They have no faith in the stock market and feel they've been misled that stocks produce a higher return [than bonds] or that they'll be rewarded for stock market risk if they just hold on long enough," he says.


Many school districts are also barred from giving financial advice or restricting vendors selling high-cost annuities from campuses, Dauenhauer said. That makes some teachers easy pickings.

"The insurance agents prey on the teachers fears," he said.

What's to be done? For starters, expect that your 403(b) will be as large a part of your retirement as your pension plan, and invest it accordingly. While some teachers may think that their non-pension retirement savings can be invested more aggressively because there is a backstop, Danhauer argues that teachers may find themselves on the hook for more of their health care costs down the line because of the shaky state of government finances.

"The 403(b) has been thought of as supplemental," he said. "My mission is to convince teachers that it is essential to a healthy retirement."


Scott Dauenhauer CFP, MSFP, AIF

Hall of Idiots: Krugman - Now and Later

Nobel prize winner & NY Times columnist continues to espouse ideas that have led and will continue to lead America down the path to financial ruin.

Krugman continues to push for more and higher spending with the idea that it will lead to a recovery - a Hoover/FDR position that extended the Great Depression by up to seven years.

Keynesianism is dead and proven to be a dud of an economic theory, yet it continues to be a popular theory - it is leading us to failure.

Scott Dauenhauer CFP, MSFP, AIF

Borrowers exit troubled Obama mortgage program

As I predicted when the program began, it is a disastrous failure.

Scott Dauenhauer CFP, MSFP, AIF

More Than 90 Banks Miss TARP Payments

Homeowners can't make their payments and now the banks can't either - unless of course you are part of the big five. Unemployment numbers are terrible and the BP oil spill is likely to bankrupt BP and cost our treasury hundreds of billions over the next decade. The May inflation numbers came in and we have...deflation for the second month in a row. While I'm sure I could find some good news it doesn't really matter - we have done nothing to restructure our financial system or to reform our out of control spending. As I wrote several weeks ago - get ready for a new stimulus - to bail out the states........and of course the details of such a stimulus started to dribble out last week.

The market may continue to zoom, but the news is not confirming it, we have major structural issues and we aren't dealing with them (get ready for housing bust II) - which will ultimately lead to a financial crisis that will make 2008 look like a toga party.

Scott Dauenhauer CFP, MSFP, AIF

Scientists Warn Gulf Of Mexico Sea Floor Fractured Beyond Repair | Before It's News

Scientists Warn Gulf Of Mexico Sea Floor Fractured Beyond Repair | Before It's News

A client of mine sent me this article, which, if true have huge implications for just about everything - our economy, our environment, future energy and our political bodies. The scariest part of this article is that they quote from experts that have real credibility.

Scott Dauenhauer

Bob Janjuah - S & P to hit 800, Massive QE Predicted

Bob Janjuah - if he's right......look out below. We should not discount what he has to say.