A Second Hand Conjecture

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Russ Roberts:”Oh Please-President Bush has lost the right to say this.”

Also, he has a great Mea Culpa on why he missed this, and a discussion that fits right into my theme about how many missed this meltdown, and advice for those of us who did and might think too much of ourselves:

I should mention first that the few people who did see it coming were not necessarily any wiser than anyone else. Some of them had predicted nine of the last five recessions. A stopped clock is right twice a day. Even those who claim to have foreseen this mess couldn’t make the case well enough to alarm very many other people. And if you want to know if they were really wise or just selling a different story because the market was less crowded on the pessimistic side, you’d have to look at their bank accounts. Did they put their money where their mouth was?

Wall Street and economics are littered with the figurative corpses of those who got a big call right and got lots of attention and then became a joke as their prescience proved to be just luck.

By the way, in answer to the last question, yes I did, on behalf of myself and our clients.

Oh heck, two other gems from Cafe Hayek’s Don Boudreaux:

As Milton Friedman wisely pointed out, “If you cut taxes and revenues go up, you haven’t cut taxes enough.”

Revenues have gone up.  So tax cuts have been inadequate.

Also:

Popular sentiment has it backward: the bigger the unproductive firm, the more vital it is to let it fail.

Megan McCardle gives a touching and heartfelt explanation of why opportunity cost has to be considered in regards to GM in “Save the Rustbelt.”

Speaking of Megan, she has inspired a true decining institution to ask for a bailout:

But Megan McArdle at The Atlantic came up with a compelling argument:

“The news business is special. Without us, you wouldn’t know anything. Besides, it provides millions of low-paying, insecure jobs to overeducated yuppies who are going to move back home, into your basement, if you don’t do something, quick.

“And the news business is the other industry that can, all by itself, send the real economy into a tailspin. You think you’re worried about a depression now? We could make you really depressed. I’m not threatening, or anything; I’m just saying, it’s a nice country you’ve got here. It would be a real shame if someone convinced consumers to stop buying Blu-Ray players and shift their savings into canned guns and ammunition.”

Her colleague Ross Douthat added this:

“And remember — as a wise man once said, what’s good for The Atlantic is good for America.”

If it’s good for The Atlantic, it’s even better for Playboy. At least, that’s what we think.

Heck, I can get behind that!

Of course Glenn Reynolds has a similar theme with political partisanship:

FINALLY, A THIRD PARTY that I could get behind.

Meanwhile Hormel is betting that the present economic situation is a bullish sign for Spam! Fascinating stuff really, as Spam has a number of devotee’s. My wife spent time in Hawaii this summer studying Pearl Harbor, and came back and marveled at the many uses Spam is put to there, including in faux Sushi.

Unfortunately some of the latest data is really disturbing for everything else.

For those who commented on my two previous posts at QandO, thanks. I think the comments had more information than my posts, and gave me a good chance to flesh out a number of ideas.

Worried about what is in store for banks in Europe? You should be, and past history says it could be pretty ugly.

Finally, are stocks cheap? Is now a good time to be buying US stocks? Maybe so. Here are some things to think about.

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The insufferable Peter Schiff has a video going around, which frankly, is just brilliant. He may be unpleasant at times, but he nailed this thing, and took mounds of abuse while doing so. More importantly, I KNOW HOW HE FEELS!

The resentment, irritation, condescension and, at times, outright hostility to my Cassandra act makes me wish I had a video of my own. Sigh…

Oh well, it pays to remember that Cassandra was right. I was never as sure of myself as Peter, but risk management isn’t about knowing you are right, but knowing what could go wrong and whether it is likely enough to act upon.

As an aside, Peter is no big government type, and he goes to prove that despite the media focusing on Roubini and others (who do deserve a lot of credit) that people across the ideological perspective warned of this. Thus having seen this coming is not the same as being correct about what to do about it, since those who saw the oncoming train differ markedly on that score.

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I wonder if the juxtaposition of that headline and that photo was intentional?

Anyway, over at Risk and Return I follow up Dale, McQ and my discussion of the markets and the economy during the last couple of podcasts with some thoughts, observations and suggested readings on the investment climate we are in now. Lots of links, some enlightening graphics and views from those who saw this coming, including, ahem, me.

There are hopeful signs, but large risks. How cheap are stocks? What are the risks that remain? Will recent government moves help?

My own view is that some of it will, though it is not ideal, but possibly close enough for government work.

Let me know what you think in the comments here or via e-mail.

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from Megan McArdle.

Don’t look.

I looked yesterday, but I’m just going to pretend I didn’t.

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Today the Fed went to the Treasury and asked for a line of credit. You know, the lender of last resort has had to turn to our Treasury to protect their balance sheet.

Want to see something weird. Go here and look at the treasury market. In the bond world, a 1% move is huge. So check out what has happened in the US Treasury market. Especially the 13 week Treasury bill. It’s yield collapsed by over 97.67% today.

Astounding, truly astounding.

My father who invested (and very successfully) through the late sixties/early seventies nifty fifty era, the bear market of 72-74, the market low in 1981 and Black Monday in 1987 says this is the most incredible market in all of his experience. It certainly eclipses anything I have seen from 1980 forward.

Update: Courtesy of Eddie Elfenbein:

At one point today, the yield on the three-month Treasury bill (^IRX) hit 0.01%!!

One Freakin Bip!!

This means that the risk-free rate is now in direct competition with the underside of your mattress.

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Personally I think we have been negative since November. Given the large positive number in the third quarter, the barely above break even number in the fourth quarter virtually guarantees that the economy went negative sometime in November and December. However, if we are not, it is highly likely coming. Here is a graphic which should put it in perspective. From Moody’s we get this look at freight (Click to enlarge)

That is a pretty stunning collapse. Few things correlate with economic activity more than freight, and for rather obvious reasons.

While I have been very negative on the economy shorter term for some time, I will say I doubt this will be a particularly deep recession. On the other hand, I also expect it to be rather drawn out. Obviously I could easily be wrong on both counts.

I will repeat what I have said over and over, in a probabilistic world we cannot know the future, but we can say that the risks are rather high and we should all consider lowering the amount of risk we face. That means more cash in our savings accounts, more defense in your portfolios (if you are going to take risk, make it risk that doesn’t correlate with US financial markets) and reducing debt.

With both financial markets and housing prices I would be wary. Your situation may differ, but I keep hearing people say things must be attractive at this point. Housing is a much better deal than it was, etc.

That is exactly right, but I suspect that this also likely holds true. It is approximately 4 1/2 hours from Baton Rouge to Shreveport. Alexandria lies halfway between. When my children ask me how far we still have to go, while I undoubtedly have far less distance to go than when I started, I still have just as far to drive as I have already driven.

In many areas of the financial markets and housing things may be less expensive than they were, but they are still way too expensive and there is a lot more bad news coming down the pike.

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The Fourth quarter GDP numbers came in this week, and then the Fed went ahead and cut rates further. That is 125 basis points in about a week.!

I have a roundup of news, related opinion and other reactions at Risk and Return.

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As I noted earlier, Dale Franks was curious about how Harley Davidson (HOG) would do on its latest earnings release:

One earnings report to watch this week, though, is Harley-Davidson (HOG). It’s a solid company with a loyal customer base—I’m one of them actually—but, motorcycles are a luxury item. For every guy like me that rides practically every day, and uses a motorcycle as their primary transportation—there are about 10 guys that ride for maybe 2,000 miles a year. Or less. Those people are gonna stop riding—and buying—new motorcycles.

In fact, if the rumors are true, they already have, and Harley’s results for last quarter will be below analysts estimates. In the last year, Harley sold substantially fewer motorcycles than in 2006. Also, Harley’s stock has already lost about half of it’s value in the last year already, and disappointing earnings for last quarter won’t help.

The thing is, Harley is an interesting proxy for luxury buying. If Harley’s sales are looking bad on the 24th, when earnings are announced, that’s a pretty good indicator that consumers are shutting off buying non-essentials, a good indication of belt-tightening, and general economic cooling.

So what happened?

Revenue for the quarter was $1.39 billion compared to $1.50 billion in the year-ago quarter, a 7.7 percent decline. Net income for the quarter was $186.1 million compared to $252.4 million, down 26.3 percent versus the fourth quarter of 2006. Fourth quarter diluted earnings per share were $0.78, a 19.6 percent decrease compared to $0.97 in the fourth quarter of last year.

[...]

“Harley-Davidson managed through a weak U.S. economy during 2007,” said Jim Ziemer, Chief Executive Officer of Harley-Davidson, Inc. “As we announced in September, we reduced our wholesale motorcycle shipment plan for the fourth quarter, fulfilling our commitment to our dealers to ship fewer Harley-Davidson motorcycles than we expected our dealers worldwide to sell at retail during 2007,” said Ziemer.

[...]

Revenue from Harley-Davidson motorcycles was $1.12 billion, a decrease of $105.5 million or 8.6 percent versus the same period last year. Shipments of Harley-Davidson motorcycles totaled 81,206 units, a decrease of 11,642 units or 12.5 percent compared to last year’s fourth quarter.

[...]

U.S. retail sales of Harley-Davidson motorcycles decreased 14.2 percent for the quarter. The heavyweight motorcycle market in the U.S. decreased 9.0 percent for the same period.

[...]

For the full year of 2007, worldwide retail sales of Harley-Davidson motorcycles decreased 1.8 percent compared to the prior year. In the U.S., Harley-Davidson dealer retail sales decreased 6.2 percent for the full year; international retail sales increased by 13.7 percent. The U.S. heavyweight motorcycle market was down 5.0 percent for the full year of 2007.

To recap, miserable in the US, but offset to some degree by strong sales overseas. I think that meets Dale’s requirement for a bearish signal for the US economy. That was also at the low end of estimates. Yeah, it is getting whacked.

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A fascinating look at the development of the iPhone and its impact upon the structure of the telecom industry. More than being a snazzy and popular device, the iPhone has changed how the relationship between players in the telecom industry works. There are long term economic, and yes, investment ramifications in this change.

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