Recession Watch: March

[Dachs]

Isn't that quote from Aliens?

Yes, it is. Valve put a homage into Left 4 Dead.

 

[innonimatu]

Also, not everyone can be a venture capitalist, which you seem to be implying a "true" investor is.

That is true investment - expending resources in order to produce something. Trading shares of the institution doing that production is just... trading.
Economically that trading is positive for stock traders (for obvious reasons) and for stock owners by providing liquidity their stock. It produces no goods and only a service with dubious usefulness. Is that stock liquidity desirable? It's funny that this has barely been questioned...
Stock can in fact be regarded as a special case of money, with two peculiarities:
i) they're not uniform (but neither is currency, now) - which means that the dividends they bear fluctuate more than interest rates; which is rather odd, because interest rates can only be paid as a result of capital profits...
ii) they theoretically carry some kind of power over the conduct of a business; this is a lie, or so I've been arguing.

About the first point: there are more effective means of holding stock that the typical "small investor buys and sells small quantities of stock". The value of banks and funds is precisely that they aggregate stock, making dividends (and the profits of speculation, but thats a zero-sum game in the long term) more uniform. But for some reason the advocates of funds and banks refuse to carry this logic to its inevitable conclusion: that some kind of collective - national - ownership over listed companies stabilizes the whole economic system, and maximizes the advantages which banks and funds are supposed to bring.

The second point then becomes especially important, because it is the only justification presented for not using the collective ownership model. If it is false - if ownership of stock is not tied to control over companies - then publicly owned companies are effectively feuds of its management, and having those somehow "nationalized" cannot really make that worse, and indeed can be sued to introduce some form of democratic control over companies - I mean, of democracy is good enough for government...

Under these circumstances (if stock holders have no real control over management) the model of private ownership of stock is reduced to a mere entitlement to profits. An entitlement which people get just because they, out of luck or through long work, accumulated capital and bought stock. They might as well have deposited it in a bank, for interest without the risk of speculation, and with the bank possibly buying stock in a larger scale. Or invested in a fund doing the same. In the end it always comes to the same thing: profit and interest become indistinguishable ownership becomes entitlement to money without further work.

Really, is it that difficult to take the next step? Just as once (not very long ago) political power was owned by those with property (from the roman census to 19th century british elections) we now have profits owned by those with property. In politics we moved from than to a more democratic system, we'll eventually do the same with control over public corporations and with profits. Because, frankly, owners of stock don't have any natural right to profits (and the idea that they control corporations if a fiction), as wealthy individuals didn't to political power, just by virtue of being wealthy. The original investors and owners of privately held business do deserve to keep control over what they create - but not past the point where their creation gains a life of its own as an institution, supporting itself, eventually enduring for centuries after their founders and real investors are dead.
Where the limit should exist... that will be the future problem to keep economists busy, if my guesses about where we're heading are right.

 

[yesboii]

http://finance.yahoo.com/news/Wall-Street-tumbles-anew-as-apf-14513291.html

The Dow dropped below 7000 for the first time.

 

[JerichoHill]

http://finance.yahoo.com/news/Wall-Street-tumbles-anew-as-apf-14513291.html

The Dow dropped below 7000 for the first time.

The Dow is 30 companies, and not even the leading ones, as pointed out earlier.

And this isn't the first time its been below 7000. You mean the first since like, 1996

But folks, the DOW isn't the metric to be watching!!!

 

[innonimatu]

The Dow is 30 companies, and not even the leading ones, as pointed out earlier.

And this isn't the first time its been below 7000. You mean the first since like, 1996

But folks, the DOW isn't the metric to be watching!!!

For once we agree! But because people are watching the Dow, where it goes becomes important - if it falls much further people will give up on stock, and then we'll see panic sales, triggering sales of other assets (bonds, etc)... well, I'm sure you see how it'll end.

 

[yesboii]

I meant for the first time in a while. Sorry, I was a little out of it when I posted.

 

[Whomp]

For once we agree! But because people are watching the Dow, where it goes becomes important - if it falls much further people will give up on stock, and then we'll see panic sales, triggering sales of other assets (bonds, etc)... well, I'm sure you see how it'll end.

There are two ways to invest either predicting or reacting. Predicting is near impossible to do, at least for me since you have to be right twice, so instead I react. When I find a great business that's yielding 10%-30% on cash flow I can afford to wait it out. Cash does not lie.

 

[Maimonides]

http://finance.yahoo.com/news/Wall-Street-tumbles-anew-as-apf-14513291.html

The Dow dropped below 7000 for the first time.

The Dow is 30 companies, and not even the leading ones, as pointed out earlier.

And this isn't the first time its been below 7000. You mean the first since like, 1996

But folks, the DOW isn't the metric to be watching!!!

For once we agree! But because people are watching the Dow, where it goes becomes important - if it falls much further people will give up on stock, and then we'll see panic sales, triggering sales of other assets (bonds, etc)... well, I'm sure you see how it'll end.

About seven years ago, it was clear to me that real estate in general was over-priced & getting worse. I knew then that I could make money buying real estate purely as an investment & I had the cash & credit to do so, but I was shy of real estate. Real estate is not a buy & forget investment. It has constant expenses-upkeep, repairs, property taxes, etc.

I bought a home to raise my family in-not an investment. My wife & I said we'd stay in it for five years, but we're still there & I'm not desperate enough to put a house up for sale in this market even though this is a great time to trade up to better accomodations.

I bought a grocery store including the real estate it sat on, but that was a long-term investment that provided a steady paycheck plus many other benefits so long as I operated it successfully. I wanted the real estate because I'd rather build equity & charge others rent than pay rent myself. Not to mention that real estate-holding businesses are more attractive to investors than renting businesses. The price was right & my bank gave the nod.

Last August I knew that the stock markets would be heading downward for an extended period. I told myself that, if the DOW fell to 7000, I'd put money in the stock market again. I have stocks that I bought many years ago & have held on to, but I haven't bought a stock (besides in my co-op wholesaler) in about 20 years. A few months ago, the DOW almost hit 7000, but rebounded. Today, it went below 6800.

Being a red-blooded greedy human, I'm now thinking that it's bound to go lower, but my instinct, my brain is telling me to stick to the plan & stop second-guessing myself. Any stock I buy today I'll still own ten, twenty years from now so I shouldn't worry that the market will go lower as it will certainly be well over where it's at right now in a decade or two.

The big, big question, of course, is how low will it go? Where is the bottom likely to be? I'm dying to hear the opinions of CFCers like JerichoHill, Whomp & Integral, but also anyone else who has a head for business. It looks to me like we're teetering on the edge of an economic precipice, but I'm not sure if we'll fall all the way back to bankers selling pencils in the streets or if we'll hang on the edge for several months before getting a handhold good enough to pull ourselves back up.

Either way, I'm buying stock tomorrow.

There are two ways to invest either predicting or reacting. Predicting is near impossible to do, at least for me since you have to be right twice, so instead I react. When I find a great business that's yielding 10%-30% on cash flow I can afford to wait it out. Cash does not lie.

Sorry, but would you clarify that? By "wait it out" do you mean wait until the business with good cash flow declines before investing/buying or do you mean buy it while it's doing well & wait for it to grow more? Just curious.

"Cash does not lie." Quoted for truth. That reminds me of the poster in my Ask A Grocer thread who asked me why I preferred cash receipts over electronic/plastic since it cost me labor to handle & count cash. I answered that having to count cash is a great problem to have.

 

[mrt144]

That is true investment - expending resources in order to produce something. Trading shares of the institution doing that production is just... trading.
Economically that trading is positive for stock traders (for obvious reasons) and for stock owners by providing liquidity their stock. It produces no goods and only a service with dubious usefulness. Is that stock liquidity desirable? It's funny that this has barely been questioned...
Stock can in fact be regarded as a special case of money, with two peculiarities:
i) they're not uniform (but neither is currency, now) - which means that the dividends they bear fluctuate more than interest rates; which is rather odd, because interest rates can only be paid as a result of capital profits...
ii) they theoretically carry some kind of power over the conduct of a business; this is a lie, or so I've been arguing.

About the first point: there are more effective means of holding stock that the typical "small investor buys and sells small quantities of stock". The value of banks and funds is precisely that they aggregate stock, making dividends (and the profits of speculation, but thats a zero-sum game in the long term) more uniform. But for some reason the advocates of funds and banks refuse to carry this logic to its inevitable conclusion: that some kind of collective - national - ownership over listed companies stabilizes the whole economic system, and maximizes the advantages which banks and funds are supposed to bring.

The second point then becomes especially important, because it is the only justification presented for not using the collective ownership model. If it is false - if ownership of stock is not tied to control over companies - then publicly owned companies are effectively feuds of its management, and having those somehow "nationalized" cannot really make that worse, and indeed can be sued to introduce some form of democratic control over companies - I mean, of democracy is good enough for government...

Under these circumstances (if stock holders have no real control over management) the model of private ownership of stock is reduced to a mere entitlement to profits. An entitlement which people get just because they, out of luck or through long work, accumulated capital and bought stock. They might as well have deposited it in a bank, for interest without the risk of speculation, and with the bank possibly buying stock in a larger scale. Or invested in a fund doing the same. In the end it always comes to the same thing: profit and interest become indistinguishable ownership becomes entitlement to money without further work.

Really, is it that difficult to take the next step? Just as once (not very long ago) political power was owned by those with property (from the roman census to 19th century british elections) we now have profits owned by those with property. In politics we moved from than to a more democratic system, we'll eventually do the same with control over public corporations and with profits. Because, frankly, owners of stock don't have any natural right to profits (and the idea that they control corporations if a fiction), as wealthy individuals didn't to political power, just by virtue of being wealthy. The original investors and owners of privately held business do deserve to keep control over what they create - but not past the point where their creation gains a life of its own as an institution, supporting itself, eventually enduring for centuries after their founders and real investors are dead.
Where the limit should exist... that will be the future problem to keep economists busy, if my guesses about where we're heading are right.

------------------------------------------------------

You'll get no argument from me about the bolded part.

But the italics bold part is merely wishful thinking on your part and is not the logical conclusion of anything. Nor is the idea that stock holders don't have say in hwo the company is run; while it comes as no surprise, private equity firms and activist investors do have the power and control to influence the company (Cerebrus as an example. Carl Ichan as another.) The thing to keep in mind though is that the small individual investor has no real say...

and is that necessarily a bad thing? Democracy is good enough for the government but the government is poorly run and inefficient because of bureaucratic idiocy that isn't answerable to the public.

anyway, Im getting kind drunk of tequila and jarritos but I will admit that I admire the amount of thought you put into things and the compassion you have for your fellow man.

 

[Snorrius]

http://finance.yahoo.com/news/Wall-Street-tumbles-anew-as-apf-14513291.html

The Dow dropped below 7000 for the first time.

4000 seems like more and more feasible . Hear is the funny excerpt from the history of Dow Jones (for example here):

Falls .59 to close at 41.22. This decline from Sep. 03 1929 totaled 339.95 for a percentage drop of 89.19%

So, if 14,164.53 was a peak then 89.19% drop would lead to 1446.15 . Is not 4000 quite generous? Also consider it took few year to fall this low during Great Depression, so we still have time.

 

[Camikaze]

From Sydney Morning Herald:

The Reserve Bank has defied expectations by leaving its key interest rate on hold for the first time in seven months as it waits for the full effect of previous rate cuts to spur the economy.

The central bank left the cash rate at 3.25%, the lowest since 1964, arguing that Australia is relatively well placed to weather the economic slowdown. Analysts had forecast at least a 0.25 percentage-point cut.

'The Australian financial system remains strong,'' RBA Governor Glenn Stevens said in an accompanying statement. Mr Stevens said the recent round of cuts delivered by the central bank over the past six months was ''working to deliver large reductions in interest rates to end borrowers.''

He also said that demand in Australia hasn't weakened ''as much as in other countries.''

Analysts said today's decision was a close call given the deteriorating outlook for most of Australia's main trading partners, which will eventually dent demand at home. The RBA, for now, is taking an optimistic view.

'It's a sunny statement,'' said Su-Lin Ong of RBC Capital Markets. ''We they think that at this juncture they've done enough.''

''There's no denying that the global backdrop has weakened," she said. ''I still think it was a close decision today."

The share market was little moved by the news, falling only a few points on the announcement, before rising again. Both the benchmark S&P/ASX200 and All Ordinaries indexes ended the day down about 1% for the day.

The dollar jumped on the RBA's decision to leave rates unchanged, viewing the statement as a sign of confidence in the resilience of the local economy. It recently bought 64.11 US cents, up more than half a US cent on its level just before the RBA announcement.

Treasurer Wayne Swan said the Government's stimulus package had ''cushioned'' the economy but he reiterated things were likely to worsen before they improve.

''We are in a difficult time in our national economy and we face big global challenges,'' Mr Swan said.

''As I said before, things will get worse before they will get better.''

Today's pause comes after the Reserve Board slashed 4 percentage points from its key interest rate since September in a bid to prevent the global recession from taking hold in Australia.

The RBA noted that the Federal Government's stimulus packages - totalling more than $52 billion - are yet to work their way through the economy, while interest rates are already about as low as they have ever been.

''Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably,'' Mr Stevens said.

''Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead,'' he said.

In recent weeks, economic data has painted a conflicting view of the economy, with higher-than-expected fourth-quarter business investment but sharply lower profits and reduced stockpiles as firms brace for cutbacks.

Although the RBA chose not to act this month, forward-looking views of the economy suggest Australia may not be able to avoid the global recession which is dragging down the US, European and many Asian economies.

Today's RBA pause, though, may not last long.

"The RBA admits there is a lot of weakness in the global economy but believes there is plenty of stimulus in the system and will keep rates under review,'' Nomura's economist Stephen Roberts said. ''My guess it's a temporary pause before cutting again next month. Ultimately I think the rates will go down to around 2%."

JPMorgan chief economist Stephen Walters said. "We're still looking at 2.75%, we haven't changed that, so we're probably just pushing that out''.

"I think the tone of the statement reveals a lot of uncertainty, that's fair enough, there is a lot of stimulus in the pipeline, there are a lot of moving pieces in the global economy.

"They are clearly not sure what they should be doing, but they have put a lot of stimulus in place, so they are going to wait and see how that plays out over the next few months. The cash rate is still going lower, but very much determined by what happens offshore still.''

However, Mr Stevens warned that markets were fragile and it was too soon to see the effects of stimulus measures.

"Conditions in global credit markets have improved since November, but sentiment remains fragile," Mr Stevens said in his statement.

"Share prices have weakened and banking systems in several major countries are still under pressure, as authorities work towards a resolution of the balance-sheet problems. Significant macroeconomic policy stimulus is being put in place around the world, but it is too soon to see the effects of those measures."

Compared with its overseas counterparts, the RBA has a lot more room to cut rates.

The US Federal Reserve's benchmark rate is already close to zero, the Bank of England's rate is at its lowest since its formation in 1694 and the European Central Bank will probably cut its main rate later this week to 1.5%, the lowest level in a decade, according to analysts' forecasts.

The next key figure for the local economy will come out tomorrow when the Australian Bureau of Statistics releases fourth-quarter GDP growth figures, revealing whether the economy contracted in the final three months of 2008.

A revision downward to the third quarter's 0.1% meagre rise would mean Australia has been in recession since the middle of last year if the December quarter growth rate also came in negative.

Other figures out today on retail sales and trade were better than expected.

So, it appears things aren't as bad here as feared after all. Although I should bite my tongue until growth figures come out tomorrow.

And another article on retail and trade news. Good news:

Stronger than expected exports have reduced the risk that the economy contracted in the December quarter.

The Australian Bureau of Statistics said today the smaller-than-expected $6.49 billion current account deficit in the December quarter, from a revised $9.49 billion in the September quarter, will boost the economy, contributing 1.5 percentage points to the nation's fourth quarter GDP.

The median market forecast was for a deficit of $7.5 billion.

Other data out today showed retail sales unexpectedly rose in January thanks to the lingering boost from government hand-outs, suggesting fiscal and monetary stimulus was helping support consumption.

Analysts said today's current account data may just be strong enough to prevent growth having slipped into the red in the fourth quarter.

"This could be sufficient to ultimately ensure December quarter GDP growth remains firmly in positive territory, preserving Australia's unblemished 17-year economic expansion,'' said Moody's Economy.com analyst Matt Robinson. "We wait with baited breath.''

''The net exports look like it's going to add to GDP growth quite considerably now, so they're probably going to push tomorrow's GDP into positive territory, if only just,'' JPMorgan chief economist Stephen Walters said.

''There's still a chance of getting a negative, with potential revisions for Q3, but less likely to get one in the December quarter,'' he said.

However, Mr Robinson said the strength seen in the GDP figure tomorrow won't last indefinitely.

"With global demand for Australia's commodities continuing to wane during the first half of 2009, a fillip from net exports in following quarters is probably unlikely,'' he said. "Thus, Australia is expected to succumb to the overwhelming effects of the global economic downturn and enter recession during 2009.''

Analysts, in a survey by Bloomberg before the current account numbers were released, said they expected fourth quarter GDP growth data to be flat.

Retail sales also held up better than expected in January, a more recent reading, as consumers shopped for after-Christmas bargains despite rising fears for job security.

Monthly retail sales gained 0.2%, seasonally adjusted, in January to a record total of $19.2 billion from an increase of 3.8% in December, the Australian Bureau of Statistics said. Analysts expected them to decline 0.5%.

''Retail sales were surprisingly strong,'' said Mr Robinson, who said he had been looking for a "pretty strong recoil" instead of growth in January.

The Federal Government unveiled a $10.4 billion fiscal stimulus package in October, followed up with a second stimulus plan at the start of February worth about $42 billion.

''0.2% growth means the Government's stimulus package has translated into relatively strong retail sales performance...The Government should be applauded for that,'' Mr Robinson said.

The dollar was steady after the data. Bill futures held firm as investors wagered renewed turmoil in global markets and grim economic news abroad would push the Reserve Bank of Australia (RBA) into cutting rates later on Tuesday, even if policy makers would like to pause.

Interesting prediction at the end.

 

[RedRalph]

PS: Might as well call this thread "DOW WATCH" No one seems to get it that the DOW isn't the sole indicator of economic health. The DOW measures the 30 largest companies! 30!!!!

JH, while the DOW obviously isnt the sole or even best indicator of the US economic health, you yourself admitted that a large part of how big this recession/depression now gets is down to psychological factors, and given that a lot of people do think the DOW is a big indicator, isnt there a strange paradox where because people believe the DOW is a big indicator, it becomes one because of it's psycholigical effects even though it isnt one?


(I realise you may have to read that a few times before it makes sense, but trust me, it does)

@ snorrius, I still think 6,000 will be the low, but having said that, your prediction, which frankly looked ridiculous when you made it first, is now beginning to look decidedly possible.

 

[Rashiminos]

The big, big question, of course, is how low will it go? Where is the bottom likely to be? I'm dying to hear the opinions of CFCers like JerichoHill, Whomp & Integral, but also anyone else who has a head for business. It looks to me like we're teetering on the edge of an economic precipice, but I'm not sure if we'll fall all the way back to bankers selling pencils in the streets or if we'll hang on the edge for several months before getting a handhold good enough to pull ourselves back up.

After an extended bounce, I'd say an environment where the DOW goes below 1000. After reductions in employment and shipping reverberate throughout the globe, constant shortages in necessary resources will continue to impede recovery. Some of those shortages may be due to new geopolitical changes.

 

[JerichoHill]

We're not going to fall to 1000. If we did, stocks would be the least of our worries.

Maimonides, I am actively hunting for and buying good stocks on the cheap in companies with strong long term value. Yes, it is a gamble, but I'm willing to roll the dice that Coca Cola is a cheap buy right now. I'm not throwing money I need for important stuff into the market, I'm throwing beer money into the market (so to speak).

I've been really happy with my Netflix investment. Up 13% since I bought in, and compared to the market, its bested it by double.

There are some great opportunities out there. Some real stinkers too.

 

[Mise]

You know, I've always wondered something, perhaps this is a good place to ask. People always tell you not to gamble with money you need or have a use for -- that investing and gambling is fine, as long as you do it with money you don't mind losing. You have put aside X dollars as money that you need, and Y dollars as money you don't need and don't have any use for.

But why would you want more money that you don't need? Why would you want even more useless, throwaway, beer money? It doesn't make sense! Perhaps I'm the only one perturbed by this cognitive dissonance: if the money you're gambling is worthless, then surely any money you win from gambling is equally (or even more) worthless -- why would you bother?

 

[Ziggy Stardust]

It's not worthless. It's extra money. Money you don't need is money you can use for enjoyment.

Why have sex beside the times you want to make babies?

 

[PiMan]

You know, I've always wondered something, perhaps this is a good place to ask. People always tell you not to gamble with money you need or have a use for -- that investing and gambling is fine, as long as you do it with money you don't mind losing. You have put aside X dollars as money that you need, and Y dollars as money you don't need and don't have any use for.

But why would you want more money that you don't need? Why would you want even more useless, throwaway, beer money? It doesn't make sense! Perhaps I'm the only one perturbed by this cognitive dissonance: if the money you're gambling is worthless, then surely any money you win from gambling is equally (or even more) worthless -- why would you bother?

Wants not needs. I might want a big screen TV but only have half the money I need, I could spend months saving more, or I could take a chance.

 

[Mise]

It's not worthless. It's extra money. Money you don't need is money you can use for enjoyment.

Why have sex beside the times you want to make babies?

I don't see how that relates to my post. Sorry.

Wants not needs. I might want a big screen TV but only have half the money I need, I could spend months saving more, or I could take a chance.

Then the money you already have isn't worthless, and you shouldn't gamble with it!

In other words, it's not throwaway beer money, it's big screen TV money.

 

[JerichoHill]

You know, I've always wondered something, perhaps this is a good place to ask. People always tell you not to gamble with money you need or have a use for -- that investing and gambling is fine, as long as you do it with money you don't mind losing. You have put aside X dollars as money that you need, and Y dollars as money you don't need and don't have any use for.

But why would you want more money that you don't need? Why would you want even more useless, throwaway, beer money? It doesn't make sense! Perhaps I'm the only one perturbed by this cognitive dissonance: if the money you're gambling is worthless, then surely any money you win from gambling is equally (or even more) worthless -- why would you bother?

The money I'm gambling is not worthless. I'm investing into the market and other vehicles with money I don't need to survive in the short or medium term. Investing is something that helps create and foster my long term interests and goals.

When I said beer money, that would be its next best use. However, its best use, what provides me greater expected utility / returns in the long run, is to invest with it.

This is not a difficult concept

 

[Ziggy Stardust]

Would you see how it relates if I call it luxury money?

"Money you don't mind losing" ... I don't think there's such a thing. Money you can handle losing maybe?