Long time no post!

Well,

It has been quite some time since I've last posted, back in early October in fact. Much has happened over the last few months. Financially, we are worse off than back in October of 2008. The stock market has fallen another 2000 points, or some 55% lower than the DOW's high of 14150. The credit markets remain stymied and are still largely non-functional, the government has gone from the lender of last resort to the lender of first resort for most mortgages, credit cards, and consumer loans such as automotive loans - in fact through a combination of fiscal policy and monetary policy via either loans or guarantees - our federal government has put up some 9 trillion of monies - some 2 trillion of which has been spent on this crisis to date. Corporate earnings are under increasing pressure and are still falling, with no end in sight over the next six months according to prevailing statistics. There is not much to be upbeat about looking ahead over the next six months. Long term, I have no doubt that we will recover, but there are many obstacles in the near term that concern me that need to be dealt with now.

First off, we need serious regulatory reform. The regulatory systems currently in place were built to oversee and regulate relatively simple financial transactions. The complex financial instruments ala CDO's, CDO squareds, RMBS's, CMBS's, and the list of acronyms goes on, are so complex, each containing hundreds or thousands or even ten's of thousands of financial instruments themselves. These types of financial instruments are too complex for the current regulatory system to handle. Even the ratings companies and the systems used by the ratings companies are largely defunct and need reform. The entire system needs to be re-thought from the ground up. Statutes such as FASB 157, or mark to market accounting, are at this point contributing to a continued downward spiral of our nation's banks and until we stop the bleeding so to speak, it will continue to get worse.

Second, we need a coordinated global effort to stem the financial crisis that continues. We need the G20 nations all on the same team. Individual uncoordinated efforts to fix the problem will fail due to the law of unintended consequences, particularly in the G7 nations that drive the majority of global GDP. What one country does may have unintended consequences in other countries. The danger of the eastern European banks and nations defaulting on debt is real, which will in turn put the western European banking sector, who has largely financed the eastern European block, in somewhat dire financial circumstances. A default of the western European banking system would have global repercussions to say the least - and would require the equivalent of some 15 trillion dollars to prop up and avoid insolvency - a sum that is beyond the individual countries in the EU to provide - and the EU itself is unlikely to have the backing of the member countries to attempt a resolution.

Third, we need to avoid a systemic breakdown of global trade practices. I've said before and I'll say it again, the world is flat, we are all dependent upon one another in some form or fashion. If the G20 countries adopt protectionist trade practices, the global recession will quickly become a global depression.

Specific to what is ongoing here in the U.S., I have increasing concerns surrounding how our current administration is handling the financial crisis. I don't see many positive developments that are going to help our country return to economic growth. What I do see is our federal government spending trillions of dollars we do not have on supposed stimilus spending that largely will not help our economy in the short term. Put another way, the budget that Obama's administration has proposed and his ten year plan, contains more deficit spending than all other previous presidential administrations combined since the inception of our nation. At the same time we hear a lot of rhetoric about financial discipline, but it is only rhetoric in my view at least. YMMV. :-) What I do see is an overzealous administration that is bent on significantly expanding the role of government for the long run. This does not translate into a quick economic recovery for the private sector - given the basic premise that government exists at the pleasure of the private sector since government only exists by taxing the private sector to begin with. Increasing government taxes by definition taxes the private sector at a time when the private sector is already reeling from the financial crisis. Do we want unemployment and negative GDP growth to continue for a longer period of time? Then let's continue to grow the government by all means. But if we want to return to healthy economic growth sooner rather than later, then we need to fix what is broken in our financial markets, and we need to not significantly grow the government. Unfortunately, I don't see any well thought out resolutions to either of these problems. I see a lot of big government spending proposed in an effort to take over our healthcare system and to significantly increase the cost of energy for all Americans to the tune of 1000-1400 dollars per year per American family by implementing a cap and trade system.

So, at least right now, I wish I had more upbeat words for this post, but I just don't see much to get excited about that is going to turn around our economy right now. Longer term, moving into the latter half of the next decade, I see a LOT to get excited about, provided we let the private sector innovate and remain free to do so, there are technologies around the corner that will significantly change the way we live - in many cases so much so that we cannot imagine the fact that our lives will change more in the next 20-30 years than they have in the last 200-300 years.

From a secular market analysis perspective, assuming the last bull market ended in 2000, we can expect the next bull market to start somewher around 2017, perhaps a bit before that or a bit after. If your investment horizon is anything within the next 10-15 years, it is my opinion that the "buy and hold" philosophy is going to be painfully disappointing for most folks and for most "investment advisors" that stick to this investment philosophy. I have a good deal of my 401k monies in absolute return style investment funds and I have since the summer of 2008. I still have roughly 25% of my longer term investments in stock funds, select funds that are relatively well positioned for market volatility and do not have to adhere to a buy and hold type investment philosophy. I have been buying stocks since DOW 8500 and still continue to buy on a monthly basis. The prevailing question I get is, how low will stocks go? The answer depends upon how we deal with the problems I've outlined above. If we see adoption of protectionist trade practices and a corresponding breakdown in global trade, then we will see a lot more pain in the markets, I'd estimate DOW 4000 or possibly even lower. That is the worst case scenario in my view. There is a good chance we could also see similar DOW numbers if we fall into a liquidity trap here in the U.S. - which for those who don't know means that no matter how cheap the Federal Reserve makes money - nobody spends money - and we continue to see price deflation over time - which contributes to continued asset deflation. This is what happened to Japan over the last 15 years - pray we don't fall into this same trap, as it will be very painful if we do. If we can manage to avoid a trade breakdown and a liquidity trap - then I'd still say there's a good chance we could see further deterioration in the markets as a result of current downward pressures mostly on corporate earnings. The fact is that we had enjoyed several years of record corporate earnings even well after the recession of 2001, and we were due for a normal cyclical business recession right around now. Since the financial crisis has made what would have been a normal cyclical business recession much worse - in my view we can expect corporate earnings to come under more pressure than they otherwise would have. The fact that corporate credit is severely restricted, and that the commercial paper markets are still relatively frozen except for the paper being bought by the Federal Reserve's newly created lending windows, means that we'll see more earnings contraction than during a normal cyclical business recession. With that in mind, it would be my guess we'll see DOW 6000 before all is said and done - maybe a bit lower maybe a bit higher. Given we've already seen DOW 6500, we don't really have much further to go to see this market low.

Well, that's about all for now. Sorry that this post didn't have much good news in it from a financial perspective. That said, we should all cherish the time we have to spend with our families and friends. They are what matter the most in life no matter what happens short term with our economy.