A fitting end to 2008… an easy money crisis “fixed” with more easy money
Equity bottom still out of reach… two historic ratios provide ample evidence
Bill Jenkins on the big currency story of 2009: death of the euro?
Worldly markets close the books for 2008… The 5 awards “Worst Index of the Year”
Jobless claims down, but numbers (and media) deceive… Patrick Cox explains some common misconceptions
How should we celebrate New Year’s Eve? Perhaps with a fitting microcosm for all of 2008: 24 hours after receiving a $6 billion taxpayer handout from the Treasury, GMAC — the financial arm of GM — announced a year-end 0% financing push on five different models.
GMAC, along with other auto lenders, put the kibosh on free loans in October, when the world instantaneously realized, “Hey, maybe credit shouldn’t be so easy!” Today, they’re back. Never mind that GMAC is borrowing money from the Treasury at 8% and lending it out at 0%. Just move those ’08 models off the lot, GM, you don’t have to worry about making bad loans until they’re at least 30 days past due.
If there’s any cure for a crisis begat with too much easy money, damn it, it’s MORE easy money.
(Sounds of cheers, applause and general crowd approval.)
The Fed also granted GMAC the “bank holding company” pedigree it pleaded for last week… even though GMAC has yet to reveal the results of a capital-raising effort that the Fed deemed necessary for them to be a “legit” bank.
Under their new status, GMAC too will be able to start taking bank deposits from unsuspecting American savers. (Heh. Good thing there aren’t too many of those left.)
Despite the giant free lunch at GMAC, loan issuance in the U.S. plummeted 55% in 2008. Banks lent “only” $764 billion in the U.S. this year — the lowest amount since 1994.
According to data released today from Reuters Loan Pricing Corp., institutional borrowing and loans for leveraged buyouts saw the biggest cutbacks this year, both decreasing over 80% from last year.
So if loans are scarce and the market stinks… no surprise that investors are sitting on historically huge piles of cash , right?
According to data from Bloomberg and the Fed, the total value of U.S. cash holdings, bank deposits and money market funds exceeds $8.84 trillion. That amounts to 74% of the entire market cap of U.S. equities — and the highest ratio since 1990.
But it’s possible we haven’t seen the half of it…
“In July of 1982,” explains Dan Denning, “the total cash position was 95% of total market cap. Stocks bottomed at that point, and the S&P 500 rose by 36% over the next six months, according to Bloomberg.
“Then there’s 1974. The total cash position of investors actually exceeded the stock market capitalization by 121%. Then, between October 1974 and March 1975, stocks rallied by 31%. So what does it all mean?
“Well, you have come to a fork in the road. How you see the cash surplus tells you a lot about yourself. The obvious conclusion, based on the examples cited by Bloomberg, is that a surge into cash as a percentage of the total equity market cap precedes a rally in stocks. That’s the good news.
“The bad news is that the current cash-to-market-cap ratio has not reached historical extremes. For it to do that, the cash position would have to rise even more, or stocks fall even further or some combination thereof. And even then, there’s no guarantee investors will return to stocks.”
Another indicator of the true value of U.S. stocks: The S&P 500/gold price ratio returned to 1 this week for the first time in 17 years. In other words, one ounce of gold hasn’t been able to buy one share of the S&P since 1991.
But again, while this ratio may be near historic averages, there still seems to be plenty of room on the downside for stocks… or upside for gold.
When the ratio of stocks to gold collapsed in 1971, it fell 93% over the next decade, to a low of only 0.17. So far, during this correction, the ratio has fallen only 82%. Leaving plenty of room for stocks to fall more… and/or gold to rise.
If you’d like to buy some gold today, an ounce goes for just above $860. Since spiking to $885 Monday, it’s been slowly trending back down.
While gold has been drifting lower, the dollar is still sweet-talking investors. The dollar index is up nearly a full point from yesterday, to 81.6
“The euro could die in 2009,” forecasts our new currency man Bill Jenkins.
“When the European Union was formed, most supporters saw it as the cat’s pajamas. Strongly growing economies, all banded together, ready to take the economic world by storm. And so long as the party lasted, everybody was happy. Everybody was making money. The wine was flowing in France, and the beer in Germany.
“But now that the flasks and kegs are empty, all the party food has been consumed and it’s time to pay the caterer, all the participants are looking at each other to see who is going to pick up the bill…
“A number of the euro countries are in real trouble… Spain, Italy and Greece, just to name three. At the same time, chief member Germany, which has always been the economic muscle behind the euro (and a model of fiscal reliability) is falling into recession. They will no longer have the "excess" to help bring lagging countries along.
”Add that to the fact that now many of the eurozone countries are crying out to the ECB for ‘stimulus.’
”Who is going to pay for that? Germany, of course! Are they willing to do that? Probably no more than you and I are willing to pay for a bailout for Mexico! Additionally, had Germany not been sharing its wealth with the less-productive nations of the ‘zone,’ they would certainly be in a much better economic position right now…
”Needless to say, if the European Union begins to fragment, the euro will go into the toilet. Where will all the currency chasers turn then? I would suspect right back to the dollar. Now, don’t get me wrong, if this happens, and that is a pretty big if, it is not going to be next week. But we need to keep our eyes open on the big trends to see where there is opportunity to make some money.”
Further around the world, most Asian markets closed the books on 2008 early today. Thus, we’re ready to present one award for the year… the worst performing major market:
China’s best known index fell a remarkable 65.2% in 2008. That’s nearly $3 trillion in share value. We’d say Chinese investors are way worse off than their American counterparts… but the SSE rose over 300% between 2006-2007.
As we write your 5 Min. this morning, other markets around the world are still rounding down their last day of 2008. Check us out Friday and we’ll kick off the New Year with a full wrap-up of worldly gains and losses. Some of the world’s minor markets will report some dreadful drops (poor Iceland).
U.S. market makers are trying to end 2008 with a bang. The Dow, S&P 500 and Nasdaq all shot up over 2% yesterday. Traders were curiously emboldened late in the day when GMAC became a bank holding company and hinted it would kick off an aggressive lending program soon.
Today started a bit more cautiously. As we write, the Dow is near break-even.
Initial jobless claims have fallen to their lowest level in two months, the Labor Dept. reports today. First claims for unemployment fell by 94,000, to 492,000, last week, way below expectations.
But don’t expect an unemployment bottom. This latest reading was skewed by part-time holiday hiring. And really… what kind of jackass fires people during the holidays anyway?
The real employment number? Continuing claims. A total of 4.5 million people are currently collecting unemployment benefits — the most since 1982.
No shock then that consumer confidence has hit another record low. The Conference Board’s measure sank to 38 in December, from 44 the month before.
The group started this survey in 1967… today’s reading marks the lowest score on the books.
But we’re starting to get suspicious of that consumer sentiment survey, too. Our Patrick Cox helps to explain why:
“It is important that we understand that the stock market is not the economy. Even people who are not investors tend to make this mistake. It’s easier to make that mistake if you’re personally invested. On the surface, however, it’s obvious that economies don’t change as dramatically as the market does. Paper losses can be painful, but they don’t translate directly into the destruction of real assets.
“I am pointing out the obvious because I’m so sick of mainstream media’s economic coverage. We know, in fact, that our so-called Fourth Estate has the collective IQ of an underachieving adolescent. We know this because the mainstream media utterly failed to cover the oncoming credit crisis. They did so even as rational analysts were screaming that Fannie Mae and Freddie Mac were headed for a cliff. When the media spin current events, remember how wrong the pinheads were until now.”
Patrick goes on to show that unemployment in the Great Depression didn’t soar until after the market crash of 1929. The worst joblessness of that era began a year later, after the Smoot-Hawley tariffs were passed… then really took off in 1932 when the new administration came in with promises to “fix” everything. Then, unemployment skyrocketed, culminating with one in four Americans out of work by early 1934.
If you’re currently an Agora Financial Reserve member, read the rest of the story — including Cox’s explanation of how and why nuclear will “go green” in 2009 — here. If you’re not currently a member, you still have 48 hours to claim your spot and get AF’s top level of research for life… at a substantial discount.
“I wonder how,” a reader begins, “the National Retail Federation expects President Obama to help retail sales by reducing sales taxes when President Obama does not run the states. Have they forgotten that states charge, collect and spend those sales taxes?
“A point that doesn’t seem to be made often enough is that the $20 billion in savings is fraudulent. Forgetting for the moment the obvious indirect costs, if the states get $20 billion less, then they will have $20 billion less to spend. The citizens who save $20 billion will then have $20 billion in fewer state services to enjoy. The retailers are losing too. The states in which they are located will be forced to raise fees on retailers to make up for the lost revenue.
“Even if the NRF is able to correctly state the request to an Obama administration, and then somehow get that $20 billion from the federal government, it is still a robbing Peter to pay Paul situation. Now the federal government will have $20 billion less to put into other programs on behalf of its citizenry. And the money doesn’t exist anyway!”
“Igor Panarin’s prediction,” writes a reader, referring to yesterday’s 5 , “that the United States would proceed into civil war and could conceivably split up into six pieces is the kind of drivel that would come from a former KGB member. He’s either highly delusional, is processing our financial hard times through the lens of Russian political history or is just trying to get some notoriety by trying to come up with something so far-fetched that the bored journalists will run this ‘hot’ story.
“The freedom of speech that our country provides pretty much guarantees that the majority will always hear the whining and complaining from countless minority and special interests. This may give outsiders the impression that this country is divided and morally depraved. Despite our shortcomings, the majority of the U.S. population knows that this is still the best country to live in and will fight to our last breath to keep it a single, sovereign nation.
“Although, I do have to admit that there would be some humor in seeing someone like Nancy Pelosi bow to the directives of Hu Jintao.”
“Although I tend to agree with Igor Panarin,” writes another, “that the U.S. may undergo a ‘disintegration,’ I believe it will be more economic, with associated food riots, rising crime and other symptoms of a society in decay/distress. What will not happen is a partitioning of the U.S. proper to the wannabe superpowers.
“Why? The U.S. has 270 million firearms, out of a total of 650 million civilian-owned firearms worldwide, approximately 90 small arms per 100 citizens. We who have prepared will certainly insist (over my dead body) against any foreign state assuming control or ‘reversion.’ Besides, these entities have as much, if not bigger problems, than the U.S., except for, maybe, Canada.”
Happy New Year, eh?
The 5 Min. Forecast
P.S. Again, we’re running the best deal of the year for our highest level of investment research and insights. But the offer ends in 48 hours. Don’t delay. Before too long, you’ll have champagne and streamers competing for your attention and you may miss out. Check it out, right now.