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Thoughts from the Frontline

The End of the World, Part 1

August 27, 2011

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What Is the CBO Seeing (or Smoking?)
The End of the World, Part 1
Who Will Rescue the Rescuers?
The Problems of Debt in the Eurozone
Thoughts on Jackson Hole
Some Thoughts on Getting Older

Fine, then. Uh oh, overflow, population, common food, but it'll do to

Save yourself, serve yourself. World serves its own needs,
listen to your heart bleed – dummy with the rapture and
the revered and the right, right. You vitriolic, patriotic, slam,

fight, bright light, feeling pretty psyched.

It's the end of the world as we know it.
It's the end of the world as we know it.
It's the end of the world as we know it and I feel fine.

R.E.M. song from 1987

It’s not really the end of the world, but to read some of the analysis and data over the past week, it’s hard not to wonder if it’s not the beginning of the Endgame at the very least. There is more to cover than I can really do justice to, but we will just start. We HAVE to look at the US data first (briefly) and then on to Europe, where it will may be the end of the euro experiment, depending on two voting populations. Can you spell “Banking Crisis,” gentle reader? A nod to Bernanke’s finger-pointing speech, some links on the scourge of high-frequency trading, and we end on a positive note about the Boomer generation growing older. And, I answer the question that is burning in your brain: “How many years of US corn production will China’s dollar reserves buy?” Write your answer down now. This letter may print out longer than usual, as there are plenty of charts. Let’s skip the “but firsts” and jump right in.

What Is the CBO Seeing (or Smoking?)

Last week I finally stopped being wishy-washy (with my 50-50% chance of a recession call) and said the US would be in recession within 12 months. And suggested that you consider moving to the sidelines your longer-term equity investments, except your conviction stocks. (I have some of those in the biotech space and simply intend to buy more if the prices go down. But remember, I am looking out ten years and expect an eventual bubble, so I...

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Robert Johnson

Aug. 27, 2011, 1:07 p.m.

I don’t believe boomers will be selling their stocks to finance retirement. I and I believe many now trade stocks long and short. Using AlphaKing as my timing guide I have been able to profit whether markets go up, down, or sideways. The inverse ETFs make it easy even in my IRA. I have only best wishes for the economy and markets, but since we have idiots in Congress, and I can’t control the markets, I am comfortable profiting during declines as well as advances. I could never understand the economy and banking as well without Mr. Mauldin’s help. Thank you.

Michael Falk

Aug. 27, 2011, 1:06 p.m.

The StreetTalkLive article’s logic is flawed. Consider the following:

The Boomers are far from a homogenous group. The assets attributed to the group are not even remotely evenly-divided. First, the wealthiest will likely not liquidate holdings, but prefer those companies that pay dividends. Our tax code’s step-up in basis will likely push this approach. Why sell? Second, those with too little savings cannot be assumed to liquidate their holdings or liquidate them as fast as described. EBRI’s 2011 Retirement Confidence Survey showed that 74% of people expect to work for pay in retirement. A potential consequence could even be an increase in savings in lieu of any selling based on working longer. And, for those in this group that do actually retire; their de minimus per capita holdings are not likely to make a dent in the market. Third, for those Boomers with per capita wealth “in the middle”, the devil is in the detailed data. Without knowing more, no conclusions can be made.

There cannot be sellers without buyers… who will be the buyers? They buyers could be institutional in nature (no mortality issues). These are already the biggest investors today. Or, the buyers may likely be foreigners. This pool of investors is much larger than the Boomers and globalization is expanding. For demographics to be used (I do like them), they need to be global. Finally, the U.S. population is growing while Japan’s has been shrinking. That in and of itself raises significant questions about that comparison.

Historical data… really? Haven’t the Boomers changed everything in their wake? Haven’t they already signaled that their retirements will be (need to be) different than their parents? The report said they “… have already diversified in preparation for retirement.” How was this causation established? It seems to me a couple of bear markets in the last decade may have had something to do with the diversification.

Relating solely to investments, income has primacy for retirees, and growing income is even better. Where, outside of dividend paying stocks can this be found? That is not to say stocks are low risk, but are bonds today any better? Furthermore, aren’t cheap stocks (P/E < 10) with high dividends (>3%) low risk? It’s not the asset class, but rather the asset price that denotes risk. Professionals managing money (should) know this, and could actually buy stocks for their Boomer client’s even while they are retired.

It’s not that the report/article’s conclusions will be wrong – only time will tell. However, the causation established for a dormant stock market is weak at best.

Rodger Malcolm Mitchell

Aug. 27, 2011, 12:27 p.m.

The euro nations are monetarily non-sovereign. All monetarily non-sovereign governments (including the U.S. states, counties and cities) must have currency coming in from outside their borders. There is no exception to this rule.

The U.S. states counties and cities have dollars coming in from the federal government (which is Monetarily Sovereign) and from exports. Germany has euros coming in from exports. However, not all euro nations can be net exporters, so mathematically, some euro nations always will be in, or close to, failure.

The sole long term solution for the euro is for there to be a United States of Europe, with the EU supplying euros to those nations that use euros.

“Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”by Rodger Malcolm Mitchell, June 5, 2005, in a speech at the University of Missouri, Kansas City. [Full text at http://rodgermmitchell.wordpress.com/2010/05/12/the-meteorology-of-economics-speech-at-umkc/]

Bruce Malcolm

Aug. 27, 2011, 11:07 a.m.

“I am not so sure, though. I think the Boomer generation is a little different from previous generations”.

I thought the most dangerous words in investing are “It’s different this time”?

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