Daily Investment Interpretations

January 30, 2009

2009-1-30:     The U. S  markets fell again Friday. The NASDAQ Composite declined 31.42 (-2.08%) to 1,476, the Dow lost 148.15 (-1.82%) to end at 8,001, and the S&P 500 fell 19.26 (-2.28%) to 826. Oil was essentially unchanged at $41.68, while gold added $21.90 to close at $928.40. The VIX rose 2.21 to 44.84. 
    One of the major causes for Friday's slide was, on the surface, paradoxical. The Gross Domestic Product (GDP) for the last (4th) quarter of last year was down 3.8%, its worst quarterly decline since a 6.4% decline in 1982.
    (GDP fell by 0.5% in the 3rd quarter of 2008. Traditionally, a recession is declared after two consecutive quarters of negative GDP growth, so by those standards, the recession didn't begin until the summer of 2008, but the National Bureau of Economic Research, which gets to decide such matters, has concluded that the recession began at the end of 2007, "based on job losses and other factors".) 
    Economists had been expecting a GDP decline greater than 5%, but the number came out better than expected. So why didn't the stock market rally on this "good news". The problem is that last quarter saw a buildup in inventories, as factories kept churning out goods faster than people bought them. This sets us up for a really bad first quarter of 2009 (to be reported in late April) as factories under-produce to permit the clearing of existing inventories.
    Also, a sizable part of the this "GDP relief" was provided by government spending. Private spending cratered.
    The S&P 500 finished down 8.6% for the month, its worst January on record. (The second closest occurred in 1916, when the S&P also fell 8.6% in January. By the end of 1916, the S&P lost 4.19% for the year.) Since legend has it that as January goes, so goes the rest of the year (the January barometer), As goes January, so goes the year?, this doesn't bode well for the rest of the year. However, Mark Hulbert argues, Don't write off 2009 yet. The Motley Fool concurs
    Research by Quantitative Analysis Service shows that January is accurate 65% to 75% of the time. (April is the other "forecasting month".) Dow Jones Indexes give January an 87% accuracy figure since 1979.
    However, others
have written off 2009: The worst is still ahead - and here's why and Gates predicts four-year downturn
    In Permanent Link to The Geithner put, Paul Krugman explains that the administration is proposing to buy up only those troubled assets that have been written way down in value--that is, deeply discounted. That tends to protect the taxpayer, and it also avoids paying a bargain-basement price for assets on banks books that are keeping their assets' declared values where they are, rather than forcing banks to further reduce the official evaluations of their remaining assets, lowering their already-dangerously low bank reserves. Dr. Krugman states that "This might--
might--work out OK.", but that it would mean stockholders taking the risks and the losses, with stockholders receiving any gains.
    In Permanent Link to Damnification, Dr. Krugman mentions the
paradox of thrift. While saving money rather than spending it is a good thing for an over-indebted society, it can be a disaster if everyone does it at the same time. If people save rather than spend, consumption and production falls off, leading to layoffs, leading to further cuts in consumption, leading to further cuts in production, leading to further layoffs. This means (1) that people who want to pay down debt won't be able to do it if they lose their jobs, and (2) if prices and wages fall over time, debts become relatively larger and harder to pay off even for those who keep their jobs. Dr. Krugman writes, "and we're only in the early stages of a slump that, in the words of the Congressional Budget Office director,

    'absent a change in fiscal policy, CBO projects that the shortfall in the nation's
     output relative to potential levels will be the largest--in duration and depth--since
      the Depression of the 1930's.'"

    He concludes that, "yes, running up large debts is risky; but dong nothing is even riskier."
    In Permanent Link to Saving, investment, Keynes, evolution, Paul Krugman laments the lack of knowledge of fundamental economics that is being displayed by some vocal economists... like discovering that some eminent biologists are not only creationists, but "have never heard of the the theory of evolution and the concept of natural selection".
    In Permanent Link to Another temporary misunderstanding and Permanent Link to Read before linking (wonkish), he refers to someone who is arguing that a temporary increase in government spending would have a smaller impact upon demand than a permanent increase. Dr. Krugman argues that a permanent increase in government spending entails the government's paying cash for their added  spending--it becomes a line item in the federal budget--whereas a one-time expenditure can be "put on the credit card" with the repayment spread out over a period of years.  
    In Permanent Link to Breathtaking and staggering, Paul Krugman quotes Dean Baker, who's having some fun with the Washington Post's generous use of staggering, overwhelming, ginormous superlatives in describing the expense of the stimulus plan. Dr. Krugman points out that the Bush tax cuts cost about $2 trillion over the course of ten years. He saks, "Did the Post find this cost staggering? Inquiring minds want to know."
    From Minyanville, we have, "Five Things You Need to Know: Conspiracy of Fools." and "Five Things You Need to Know- America Has Always Depended On the Kindness of Strangers", both by Kevin Depew. The second article points out that at the bottom of the 1974 recession, our debt to Gross Domestic Product maxed out at 1.08. Today, it's nearly 4-to-1... too much debt for too little real income. It points out that in spite of all the money the government is printing, there is actually a shortage of dollars. (Remember that dollars are the world's reserve currency.) Kevin Depew argues that gold should be down in the $600 to $700 range by early 2010, as holders of gold sacrifice their precious metal store to get more dollars. Finally, the article calls for a continuation of today's gloomy mood at least for another year.