This is in response to a question to me regarding debt. I thought it appropriate to post here.
Q below in italics.
Why do we have to keep focusing on how much debt there is out there? Why can't we just re-leverage the debt out longer and clear the shelves and keep going?
I think we can. I think that the fact that there are so many Baby Boomers in their peak earnings and spending years confirms this. Consider these facts.
1. The bear market has lasted 18 months. Historically, bear markets turn at about this timeframe.
2. Greenspan has dropped interest rates six times this year. Historically interest rate cuts begin to show up in the economy six months after they occur, thus the first cut should be appearing soon.
3. Factory orders increased 2.5 percent after a 3.4 percent drop in April, the Commerce Department said. Orders excluding transportation rose 2.3 percent, the biggest gain in one year.
4. Non-defense capital goods orders excluding aircraft, a barometer of business investment in new equipment, rose 0.3 percent in May, the first increase since January.
5. Inventories at factories fell 0.3 percent after falling 0.2 percent in April, and shipments rose 2.6 percent. That brought the inventory-to-shipments ratio to 1.37 months from 1.41 in April. The ratio is the lowest since May 2000.
6. Orders for all durable goods, big-ticket items intended to last three or more years, rose 3 percent in May after falling 5.7 percent in April.
7. Orders for computers and electronic products rose 2.3 percent in May after declining 13.7 percent in April.
8. Semiconductor orders surged 32.5 percent after falling 40.3 percent a month earlier.
9. The market anticipates about six to nine months out. We are at that juncture where the economy should be humming along by then. The accumulation we are seeing in the market confirms this.
10. And last but not least, my friend who is a contrary indicator to me by his emotions, is scared to buy right now and is selling everything. Every time he panics and sells, I buy and make money. Every time he feels comfortable buying, I sell and go short and make money. So, I know this is not a very scientific indicator, but hey, it has worked in the past!
My reply to the above:
As long as people have jobs paying enough to finance the debt, AND the US$ stays strong, AND Greenspan does not have to raise interest rates, AND housing does not collapse, AND people keep buying, AND major companies like LU or MOT or NT do not go under, then I guess I see no reason why all this debt is not a problem at all. My way of thinking says we need a parlay of 6 factors, all successful to prevent a huge recession. I repeat a recession next year is a given. Just wish I knew when.
As for #1, how long was the bear market in the 30's, in the 60's at MAJOR peaks of irrational exhuberance as opposed to your basic recession?
As for #2, The infrastructure has been overbuilt. We do not need more fiber lines. MOT, JDSU, LU etc could go under. You can not get telcos to spend more when nobody needs what they got. You probably could not get banks to finance it anyway. Furthermore, long term interest rates have not budged in spite of 6 rate cuts! What does that tell you?
As for #3,4,5,6,7,8 After declining for months and months and months, of course there has to be an uptick. Is this just seasonal orders coming in finally or are we going to rebuild the internet? In other words, after this uptick what is going to keep it going. Is NOK going to sell more phones? After the next orders for routers come in are we going to rebuild the internet or will that shipment last for quite some time? Finally The National Association of Purchasing Management's index increased to 44.7 last month from 42.1 in May. Last month's reading, the highest since November, was boosted by gains in orders and production. Still, a reading below 50 signals a decline, and the index has been in the 40s since August. Once we see expansion how long will it last?
As for #9, The market does NOT and I repeat NOT anticipate 6 months ahead (not if you mean REALITY). The market does anticipate EXPECTATIONS 6 months ahead - a far far far different scenario. If what you said was true JNPR would not have been at 240 or whatever in NOV. JDSU would never have gotten as high as it did in the first place. OIL stocks would not have peaked and crashed in a month. Think about that, one month ago everyone thought gas prices would rise all summer. If the market looked 6 months ahead at REALITY instead of EXPECTATIONS oil stocks would have peaked in Jan or Feb. Mish says phooey to the market looking ahead. LOL
As for #10, Well once you know the pattern and play it too many times perhaps, just perhaps that pattern changes. Sound familiar at all?
mish |
