Friday, April 10, 2009

Unemployment Shocker in Australia.

One of the reasons I like The Daily Reckoning is that it actually features Australian issues as well as other places. It does not focus on terrorism or islamisn etc...for that in Australia I have Sheik yermami and a few other good Aussie bloggers. It does however, focus on the economy and in this issue, unemployment amongst other topics.

The following is a few paragraphs from the latest newsletter. You can get the full stories by going to the link in the righthand side bar in this blog.

Unemployment Shocker
The Daily Reckoning Australia.

Buenos Aires, Argentina - Melbourne, Australia
Friday, 10 April 2009

From Dan Denning in Melbourne:

--The stock market is closed today in Australia for Good Friday. That will give us all weekend to digest Friday's rather large rally on Wall Street. Stocks on the ASX were down for the week but finished strong on Thursday. Yet on Wall Street, it was all guns blazing with the Dow up 246 points and back up over 8,000 again.

--So are good times here again? It depends on who you ask. For example, if you ask one of the newly unemployed in Australia, they will probably say that good times are definitely not here again. The ABS reported yesterday that the unemployment rate jumped from 5.2% to 5.7% in March.

--That puts the jobless rate at the highest level since the 1991 recession. That's not the scary thing, though. The scary thing is that it was also the largest monthly jump since 1991. Like a virus that jumps from one species to another, the financial crisis has jumped from Wall Street to Main Street. And if it's as severe on Main Street now as it was on Wall Street late last year...ugh.

--Australia is one such exporter of raw materials to China. And thus, if the World Banks' predictions are to be believed, Australian stocks might be begin diverge from tracking the U.S. indexes as the East Asia affect gets priced into resource shares. But maybe that's already happening!

--Today, everyone admits that there will be trillions more in losses for banks. What no one knows is whether the huge declines on global stock markets in the last year reflect this reality, or whether there is still a considerable amount of self-deception among investors about stocks.

--Bill Bonner in Buenos Aires, Argentina:
The state of the economy can be summed up this way, according to our friend Barry Ritholtz, author of The Big Picture blog and the forthcoming book Bailout Nation.

--Though in Los Angeles, where we just came from, the economy seems to still be floating along, unfazed. It turns out that the worst financial crisis since the '30s wasn't affecting the City of Angels...or so it seems.

The restaurants were full. In the streets, people ambled around, apparently buying things. The freeways were clogged with expensive autos.

What has changed?

Nothing we could see.

--People who have no jobs, or fear losing their jobs, are poor consumers. They hesitate. They procrastinate. They make do.

That's why retail shop vacancies are at a 10-year high. If people aren't buying, you don't need space to store merchandise that you won't sell them.

--Addison in Baltimore, with surprising news about home prices in The City that Never Sleeps:

"Looks like the Manhattan housing bubble is finally cracking under the strain of the credit crisis," says Addison today, taking a break from our marathon editorial meetings.

"Preliminary first quarter data released today show a 60% annual crash in sales of Manhattan co-op ands condos. Average co-op prices fell as much as 24% in the same timeframe, but condo and apartment prices are still relatively firm...for now.

-- "Home prices in Manhattan are still outrageous - there are currently 350 apartments for sale there with asking prices over $10 million.

--back to Bill in Argentina:

In our book, Financial Reckoning Day, which we wrote with Addison Wiggin, we argued that the United States was following Japan into a long, on-again, off-again slump. We wrote the book in the early 2000s and were proven wrong almost immediately. Instead of a long, Japan- like slump, the U.S. economy took off and soon turned itself into the biggest bubble the world had ever seen.

Now, that bubble has burst. Everything is beginning to turn Japanese. The financial crisis is straightening our hair. It's taking inches off our height. And it's causing us to like raw fish!

Japan never got out of its slump. Instead, asset prices in Japan are lower than ever. And the Japanese economy is contracting faster than any economy did during the Great Depression. And to make matters worse, deflation is back. Consumer prices are now falling...again.

--The difference between this bout of deflation, and other periods of deflation in Japanese economic history over the last 18 years, is that now they no longer alone. Switzerland is already in deflation too. And so is China. China has lost 20 million jobs since the beginning of the crisis. Asset prices have collapsed. And now, consumer prices are going down too.

Like Japan, China and Switzerland are exporters. When Americans don't buy, China, Switzerland and Japan don't sell. And soon, their factories go quiet...and their workforce is idled.

--Will the United States soon have falling consumer prices too? Will it finally follow Japan into a long slump?

Yes...and maybe no.

There is a big difference between the United States on one side and Japan and China on the other. The United States is not an exporter; it's an importer. Nor is it a creditor; it's a debtor.

When the Japanese economy fell off the truck in the early '90s, its people had savings. They could wait out the correction. They didn't have to cut spending and increase savings; they were saving enough already. In fact, when consumer prices fell, Japan's savers got richer; they could buy more things with less money.

But the United States can't wait out a correction in comfort. Its people have debts, not savings. Deflation doesn't make them richer; it makes them poorer. And in order to pay their bills, they have to cut spending and increase saving. This puts further downward pressure on the economy and creates a very uncomfortable situation for Americans. The more they save to pay their debts, the more the economy contracts. The more it contracts, the less revenue they have available to save.

--But wait. Isn't there a way out? Isn't there some magic the Fed can perform...some abracadabra, perhaps, from Tim Geithner? What if we get a lot of smart people together in a room, as Thomas Friedman suggests? Won't they be able to figure something out?

We don't know...but we wouldn't bet on it. Tomorrow...what we can learn from Argentina...

----How to Survive in This Economy
by Michael Covel

The vast majority of Wall Street uses fundamental analysis alone. They are the academics, brokers, and analysts who spoke highly of the new economy during the dot-com craze. These same Wall Street players brought millions of players into the real estate and credit bubbles of 2008. Millions bought into their rosy fundamental projections and rode bubbles straight up with no clue how to exit when those bubbles finally burst. Consider an exchange between a questioner and President Bush at a December 17, 2007 press conference:
Questioner: "I wanted to ask you [Mr. President] - I'm a financial advisor here in Fredericksburg [Virginia], and I wanted to ask you what your thoughts are on the market going forward for '08, and if any of your policies would make any difference?"

The President: "No (laughter), I'm not going to answer your question. If I were an investor, I would be looking at the basic fundamentals of the economy. Early on in my presidency, somebody asked me about the stock market, and I thought I was a financial genius, and it was a mistake (laughter). The fundamentals of this nation are strong. One of the interesting developments has been the role of exports in overall GDP growth. When you open up markets for goods and services, and we're treated fairly, we can compete just about with anybody, anywhere. And exports have been an integral part, at least of the 3rd quarter growth. But far be it for me - I apologize - for not being in the position to answer your question. But I don't think you want your President opining on whether the Dow Jones is going to (laughter) be going up or down."
The President's view is a typical fundamental view shared by the vast majority of market participants. Consider further an excerpt found in Yahoo! Finance's commentary; it outlines a single market day:
"It started off decent, but ended up the fourth straight down day for stocks early on, the indices were in the green, mostly as a continuation from the bounce Monday afternoon, but as the day wore on and the markets failed to show any upward momentum, the breakdown finally occurred. The impetus this time was attributed to the weakness in the dollar, even though the dollar was down early in the day while stocks were up also, oil prices popped higher on wishful thinking statements from a Venezuelan official about OPEC cutting production whether or not these factors were simply excuses for selling, or truly perceived as fundamental factors hardly matters."
Millions of readers read this type of drivel every day. Worse, thousands watch Jim Cramer of Mad Money fame promote similar nonsensical beliefs every day. Predictions based off of fundamental analysis don't work for the vast majority of market participants. Great example? Not many predicted the October/November 2008 market crash! On top of not being able to predict, fundamental analysis leaves many with trying to pick bottoms or trust that conditions will always improve. One of the great traders of the twentieth century, Ed Seykota, nailed the problem with fundamental analysis:
"One evening, while having dinner with a fundamentalist, I accidentally knocked a sharp knife off the edge of the table. He watched the knife twirl through the air, as it came to rest with the pointed end sticking into his shoe. 'Why didn't you move your foot?' I exclaimed. 'I was waiting for it to come back up,' he replied."
Don't we all know an investor who is waiting for "his" market to come back? The financial website marketer Motley Fool has a back-story, a narrative behind how it started, that reflects the folly of literally banking on fundamental analysis as a solution for making money:
"It all started with chocolate pudding. When they were young, brothers David and Tom Gardner learned about stocks and the business world from their father at the supermarket. Dad, a lawyer and economist, would tell them, 'See that pudding? We own the company that makes it! Every time someone buys that pudding, it's good for our company. So go get some more!' The lesson stuck."
The Motley Fools' David and Tom Gardner's pudding story might be cute, but it is Forrest Gump-like simplistic (and wrong). Their plan gets you in, but it doesn't tell you when to get out or how much of the pudding stock you must buy. Unfortunately, many people believe that simple story is a good strategy for making money. That is a sad state of affairs.

--Editor's Note: The above was excerpted with permission from Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets by Michael Covel (FT Press; 2009).

Michael Covel is an author, director, and founder of Covel's books include the best selling Trend Following: Learn to Make Millions in Up or Down Markets, which has sold over 100,000 copies, and The Complete TurtleTrader: The Legend, the Lessons, the Results. Covel also wrote, directed, and produced the documentary film, Broke: The New American Dream. Covel has been interviewed by Bloomberg Radio, Technical Analysis Magazine, Barron's, and others.

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