Peter's Portfolio: Shorts and Longs

My cubes short is now slightly in the green while SVA continues to ramp up – albeit with a little healthy profit taking last Friday. Still looking to add to ARDI this week. Watch it now because if it starts running up in anticipation of the Oct. 27 earnings call, you know that the insiders are making a buck.

Holding ARTX, ASTM, LVLT, EWG, and EWJ. Sure would like to get a little inspiration for a new stock but the fact that I ain't seeing anything is an indicator in and of itself….

Hedging Your Bets With Matt Davio: That Was Then…

To look forward, we sometimes need to look back. But one lifetime is not enough. Call me old-fashioned, but the years of the roaring '20s and the stock market and huge spending boom which preceded the 1929 top do seem to foreshadow the period we are living through now. 

After the Tech and Internet Boom of the 1990s, the market peaked and the stock market bubble burst. We now remember 2000 ushered in a two year plus stock market slide, but nothing to rival the Wall Street Crash of 1929-1932. The generosity of our modern Federal Reserve has, so far, saved us from a slide into economic crisis. People have kept spending, using cheap borrowed money, and easy credit supported by rising house prices. As I write this, the property bubble is still growing, and our American dream of never-ending abundant times are still intact. In those older days of my grandfather's youth, people were also ambitious and optimistic. They traded up when possible, and borrowed money if needed, in order to improve the quality of their lives. 

Within a few months, the economic climate had changed, and my grandfather lost his job, making it impossible to keep up the payments on a new car along with the new cars of many other unfortunates who also lost their employment and their regular wages. And with the job losses, the stock market crash of 1929 morphed into a severe downturn in the economy.



   

The slowdown was aggravated by a collapse in credit. In the roaring twenties, it was easy to borrow money, for building new homes or buying new cars. Some, like my grandfather who had worked as a mason, got credit beyond what that they could readily service. So when the work dried up, and money got tight, the payments became impossible. In the thirties, America became glutted with repossessed cars and houses for sale. Demand for new products faded, and the wheels of industry slowed to a crawl.

In Greenspan's case, the motion he is seeking is that of dollars, since the economists of our time bizarrely measure growth in our economy in terms of spending, not in the number of jobs being created domestically. Greenspan's wheel was set in motion in the 1990s and early years of this new century, when the Fed made repeated cuts in interest rates. Lower rates, have worked like the accelerators on the economic machine, triggering spending spurts as homeowners refinanced their mortgages. But this Greenspan mechanism may meet the same fate as did great Grandpa's generation.

Like the aggressive home and car buyers of the 1920s, people of our time have believed it is safe to borrow aggressively to improve their lifestyles, particularly when their homes have risen in value. Higher debt levels in a falling interest rate environment often come with little or no increase in monthly mortgage payments. So why not take the extra money, by borrowing more, when it seems it will be so easy to repay through a fixed payment, backed up by the security of a fast-appreciating home.

It is not a closed system, nor is this financing done in a vacuum. Money borrowed through our modern refi's has gone only partly into property investments. Consumer spending has shot up also. 

An important part of that money has circulated out of the US to China and Japan to pay for the imported goods that keep flowing into our country. Fortunately, our new bankers in the Far East also want to keep the big wheel turning, since from their point of view, all those exports to America create jobs back in China and in Japan. They also realize that the competitiveness of their goods in the global market might be endangered, if their currencies were to rise sharply against the dollar. So they have been investing their growing surpluses of dollars back into the US, usually buying Treasury Bonds. And this recycling operation has seemed like a virtuous cycle for the US economy. Strong foreign buying of bonds, have allowed Greenspan to keep both long and short term rates down. Confidence in the momentum of the economy has grown, even though actual job creation has remained anemic, weaker than is normal in a recovery coming out of recession.

The net result of the action of Greenspan's money machine is that Debt has grown in the US, while China and Japan have accumulated massive holdings of US debt. Meantime, other investors seeking better returns than on US government T-Bonds, have gorged themselves on mortgage-related debt, the product of the refi boom. By mid-2004, U.S. Household debt had risen to 86% of GNP, up from 64% just ten years earlier, and foreigners hold a majority of US treasury debt, up from almost insignificant amounts in 1994. (source: Comstock Partners, as quoted in Barrons, 25 Oct.2004)

So the wheel turns round and round, with consumer goods flowing into our country. Because the money flowed back from exporting countries- we have paid for purchased goods, not through working and earning higher incomes, but simply by increasing our debt. So far, this vendor finance, recycling operation has seemed painless. For a long time, we hardly noticed as debt built-up rapidly in the form of increased household mortgage debt and as massively increased liabilities of the US government. But the bad news is that, slowly and quietly, the US has lost control of its own destiny.

The economic models couldn't get his wheel to turn forever. And neither will Mr. Greenspan be able to keep the foreigners money rolling into a profligate consumer economy. At some point, the Chinese and Japanese will lose their appetite for US debt, and when that happens we are likely to see a sharp collapse in the dollar. When that shock hits, interest rates may need to rise to much higher levels to bring our lenders back. And high rates will have a potentially disastrous impact on our overheated housing market and the fragile US economy which has lost so much of its manufacturing industry to workers in foreign countries. Meantime, the US debt bubble grows inexorably, and the system becomes more unstable.

The inevitable friction reveals itself in higher commodity prices, as the Chinese appetite for commodities like Energy and Metals grows along with their expanding economy. They are beginning to realize that it is better to hold commodities that they need to fuel their economy, and gold which holds its value, rather than dollars which are backed by nothing more than a future promise to pay.

I wonder what will happen to Greenspan and our economy, when we wake up and discover that the wheel that keeps turning on cheap money and seemingly-perpetually growing debt cannot go on growing forever. The excess of the Twenties, were followed by the Long dark days of Depression. Our excesses will also bring a long period of repair and correction too. I can only hope it will not bring on another depression.

I am amazed when I recall that our modern concept of "core inflation" excludes food and energy. As if we could ever get by without these items. Instead, our current low inflation has been kept low by all those cheap things, from clothes to shoes to phones, which can be manufactured in China, which is maintaining its currency link to the US dollar, perhaps artificially, by recycling all those excess dollars from export sales to us.

It does sound bleak, and very miserable. But the human spirit does not get crushed so easily. When everyone is enduring hardship together, something often blossoms from hardship: co-operation, generosity, and a sense of kinship. 

If hard times do return to America, I believe that once we get over the initial shock over the changes in our living standards, things will be alright. In times of abundance, we forget our neighbors. In times of hardship, we remember them, and they remember us. Then, maybe the true spirit of America can be reborn. America the wasteful, and America the world's policeman, can both be assigned to the dustbin of history. A new America, with a bigger purpose, can then emerge: the historical America of the inventive spirit. We can help ourselves and the world to find and build new forms of energy which will be less wasteful of limited resources, and kinder to future generations and the flora and fauna with whom we share the planet.