The double dip recession has already begun and besides us
the only other group we see heralding such an event is
Morgan Stanley’s Stephen Roach their chief economist. The
American consumer has run out of credit and buying power.
The debt levels are stultifying. The shoes will then drop in this
order. A fall in the market, real estate, credit and a derivative
debacle. The vaunted S&P earnings of $49.50 are not going to
be there at 35 times 2002 earnings. They’ll be $40 to $42.50. A
preview of things to come was displayed last week by
miserable earnings results from icons GE & IBM, both, of
which we are short. Cost cutting, short hours, unpaid
vacations and unemployment are taking their toll. A jab in the
pocket book has been delivered at the worst possible time by
higher oil prices. We predicted there would be little or no
recovery and we stick with that opinion. If over $2 trillion in
fresh money can’t do it nothing can. The depression has to be
allowed to run its course.
The supposed in-crowd just doesn’t get it. They think interest
rates are as high as they are in the real market because Alan
Greenspan won’t raise interest rates and that would be
inflationary. Wrong, rates are up because many see the US
economy still in trouble with little chance of real recovery,
which means a falling dollar, which leads to loss of yield that’s
why. Treasury yields have moved up and stayed up. Today’s
inflation is being neutralized by deflation. Inflation could go
slightly higher if the FED and Fannie and Freddie pour in
another trillion dollars. We are well aware that the spread
between 10-year Treasury yields and comparable TIPS yields, a
proxy for inflation expectations, has widened by 1/2% over the
last four months. We don’t find that significant. We also do not
believe that gold is higher because of eminent inflation. It’s
higher due to several other reasons. It’s the dollar. Other major
countries are raising rates and the FED can’t. If it does we go
straight back into inflation so the dollar will drop 5-15% this
year, yields will climb due to less payout and gold will move
higher. If gold breaks over $330 - $340 and ounce there is
nothing to stop it until it hits $512 an ounce. We believe this
will happen. We are still in stage two with two or three more
stages to go. Soon large amounts of foreign capital in the US
will move to other currencies and gold. When that move picks
up steam the FED will raise rates. The recovery will officially
abort and gold will rocket. How long did the experts think the
investing world would tolerate a current-account deficit of 5%
of GDP? The falling dollar also has the ability to crack the US
residential real estate market. If 10-year Treasury rates moved
up 1/2% to 5.70%, mortgage rates would move to 7 5/8% for the
30-year and that would stop both buying activity and
refinancing dead in its tracks. That would put jumbos at 8 1/8%
and with today’s home prices the median priced home is
almost in jumbo territory. This is where we are headed whether
we like it or not. How can one be bullish on the stock market
as earnings decline and P/E ratios average 35 times earnings?
Worse yet, how can the stock market go up when our
“president” tells us he’s going to have perpetual war for
perpetual peace?
We recommended the short sale of DELL Computer at $24.92
with a cover of $16.01. It trades around $27. a share. We believe
corporate spending on information technology will remain
weak and there is no big comeback in view. Personal computer
sales remain very weak and we see them weaker, perhaps 10%
weaker over just the near term. Also remember DELL is a low
margin player and desktop PC’s make up over 50% of profits
and notebooks 28% for a total of 78 to 80%. Layoffs and lower
incomes will eventually hit this market hard. Operating margins
are already at 7.3% this year down from 11.2% in 1999. The stock
is 36 times fiscal 2003 earnings. That is double what it should
be, thus we see Dell at $16.01. This is still a good short.
A Chilean judge has requested that extradition of Henry
Kissinger, infamous US Secretary of State, to Chile for his
crimes against the State in collusion with former dictator
Augusto Pinochet. The State Department has refused to
answer Judge Juan Guzman’s request. Fat Henry fled Paris last
year in a hurry rather than submit to a summons to appear
before a judge, who was looking into the disappearance of five
French citizens in Chile during the Pinochet years.
The Director of Medicare and Medicaid is Thomas Scully and
he refuses to testify before the Small Business Committee. Due
to the recent surge in the cost of health care he has run out of
money. The reason is tax cuts plus the war on terrorism equals
less for Medicare and Medicaid. Last year the administration
claimed that it could easily cut taxes without tapping the Social
Security surplus. Then came 9/11, which provided cover. We
predicted looting and that’s what happened. $665 billion for
perpetual war for perpetual peace. Unfortunately, $2 trillion is
being diverted. Medicare’s payment rates are increasingly
inadequate so many physicians now turn away Medicare
patients and service providers are going out of business. By
walking out Mr. Scully is breaking the law. The Administration,
in order to keep the economy afloat and to form a police state,
has to sacrifice Medicare and Medicaid.
If you are wondering why strong housing was important, for
every 10% gain in prices, there is a resultant 0.62% increase in
consumer consumption, whereas a 10% gain in stock market
values results in a 0.2 to 0.3% increase. This means the rise in
the housing market is much more responsible for the wealth
effect than the stock market. Even more disappointing is that
homes are more overpriced now than they were in 1990 and in
1990 you had to put 10-20% down to buy a home. Today 50% put
down less than 10%. Prices are coming down it’s just a
question of when.
Since the beginning of the year monetary aggregates have
expanded only slowly as interest rates have been held in place.
Imports continue to climb due to re-expansion of inventory
putting the current account deficit into 4.5 – 5% bracket. As
repatriation of foreign capital grows the dollar will continue to
weaken probably for the remainder of the year. Interest rates as
we said some months ago can’t be raised over the near term.
The ace Alan Greenspan is holding to ward off recession at
least temporarily is another 20-30% increase in monetary
aggregates. Having been only about 5% so far this year we
expect once it’s evident that the mini-recovery is over he’ll
again pour money and credit into the system. He can do this
because inflation is negligible. This would again prolong the
recession until he is forced to raise rates. Once rates go up he
will again increase aggregates, but at that point both fiscal and
monetary policy will be out of aces to play. The prolongation of
these problems will inevitably lead to deflation and depression.
While all this transpires it is inevitable that the dollar will sink
5-20% against various currencies. It’s our guess the
appreciation versus the Euro, Pound and Swiss Franc will be
10 to 20%. A lower dollar means higher costs for foreign goods
and services, but we believe that the deflationary drag is so
strong that inflation won’t become a problem. As you know
companies have little pricing power now and they’ll have even
less in the future, which means even lower profits and an
ever-lower stock market. The weaker dollar will impede imports
and increase exports, which will help cap the current account
deficit at 5%, although a spike to 6% is possible. As you can
see the very best we can hope for is stagflation in a
recessionary atmosphere. All bets are off if the housing and
credit bubbles break and that’s a distinct possibility. In regard
to interest rates, it is very difficult for the Fed to raise rates
when corporations, through interest rate swaps, have
themselves in short term paper. That’s to keep profits up. If
rates rise profits will drop like a stone. A 1% rise in rates would
increase corporate interest costs by 35%. A bitter pill to
swallow. Even using government figures unemployment
should soon be 6-6 1/4%, that’s 11-11 1/4% on our scale. The
budget deficit should be $250 – 300 billion this year as tax
receipts fall, hardly inducive to a strong dollar. |
