Double Journey

How sad is it that when I saw this article on determining social security benefits I instantly thought to myself, “I know exactly how much I will make in Social Security, $0″

According to the Social Security administration, we will start running Social Security deficits in a little over 6 years.  It will go bankrupt in a little over 25.  Since I won’t be eligible for Social Security for over 30 more years, I’m pretty sure there is not going to be anything left for me at that point.

What is the most sad is that I will have been earning the maximum amount for the maximum allowed time.  In other words, Out of all the people in the United States, I’m the biggest payer into Social Security.  Ironically, I’m pretty sure I’m never going to get a penny out of it.  What a scam.  If you ever wonder why I rant against government, this is just one other perfect example.

Just what we need.  Government oversight of a government organization who job is to give governmental oversight.  That doesn’t sound like a waste of money or a lot of bureaucracy.  I’m not saying I am in love with the Fed.  In fact I pretty much hate their monetary policy over the last decade.  By why have so many layers of bureaucracy.  Why not just scrap the whole thing and start over?

Market went down today by over 2%.  While this is not the first big pull back for the market since this insane run up, it is starting to feel like we have hit a top in the market and we now are going to test some technical levels below.

I have slowly gotten out of some of my short positions but stayed in them for the most part waiting for this turn.  I got a little bit more short today, but overall I still lost a lot of money as I’m a little heavy weight in some commodity names and in China, two things that did not do well at all.  I wanted to get a little bit more short in a few sectors but ran into a small snag when Etrade would not let me short some ETFs.  Seems as if it is difficult to borrow some of these, probably because there are still lots of people short this market.

I checked the levels on all my accounts and much to my surprise, I have a lot more cash on the sidelines than I realized.  Most of this is due to the fact that I’ve not been doing very much buying in the last few months and I’ve been earning money in my day job in the meantime.  I’m looking to buy something if the correction I predict actually happens but to be perfectly honest, I’m really not attracted to anything unless we get a very serious correction, a correction back down to the March lows.  I just can not get very bullish about where we are as a country.  Yes, we may have averted disaster in the short term.  But does anyone really think that all that borrowing our government did is actually going to turn out well?  How did that work out for all those people who took out those home equity loans?

The market had a small sell off today.  Nothing to get too worked up about but perhaps the start of something bigger.

But as this market tries to find its equilibrium point, it got me thinking.  Are we just going to keep cycling through bubbles?  And if so, how badly is it going to end?  If we do indeed keep putting off our problems, like all financial mistakes it will just be that much worse when the bill comes due.

Right now, the market has rallied about 50% from its lows.  This run-up is in a matter of months.   Does that actually sound normal to anybody?  The market has gone up this much because the government is pumping out cash like there is no tomorrow.  This has already had some effect that should cause people’s eyebrows to rise.  The rally has been very broad based.  And I emphasize the broad part.  Some of the worse stocks are doing OK.  Stocks of companies that should not exist have actually gone up with the rest of the market. When junk is doing well, you know you have a bubble on your hands.

Just look at the other bubbles that we have had in the last decade.  The valuation of some of the dot coms were just ridiculous.  Billions in “value” for companies with no revenue.  The housing bubble was probably worse.  Run down shacks were selling for small fortunes in parts of the country.

Bubbles take longer to form than just a few months, but maybe this one actually has formed faster because we have had the others one that preceded this one.  Maybe we aren’t even in a bubble and I’m making too much of this.  But I just don’t see how we can have possibly gone up this much this fast.  The future does not look bright from here.  Granted, expectations were so low as to be ridiculous before but anyone who thinks that we are going to just bounce off the bottom is just not looking around.  There really is not much of an economic recovery happening.  People are still losing jobs and companies are still pulling back.  Is this really news to get excited over?

The market continued its rally today.  This was in no small part to good news coming out of the government’s “Cash for Clunkers” program.  Most of the pundits out there are calling this a great success since this has risen auto sales month over month.  Something that hasn’t happened in a long time.  But is everything really that great?

In short, no.  I think the analysis that states that this marks the bottom of the recession is a little short sighted.  The problem with any program like this is that its long term effects are hard to measure and almost impossible to see.  While I have no doubt that the program had beneficial effects for the auto industry this month, its longer term effect is not so clear.  One problem that a government provided subsidy like this poses is the same problem we have had for the last decade or so.  What happens to auto sales six months from now when the money has run out?  Will demand still be there for automobiles or will yet another government stimulus be needed?  Are we just pushing sales to the near months and the expense of the far months?  How many of these sales would have happened without the stimulus? Compounding the problem, we will all pay for this with interest.

What most people do not realize is that this is a simple transfer of wealth from all of us to those who are buying cars now.   Government subsidies must eventually be paid for and that money comes from the income tax that we all pay.  I know for many people, this seems like a good thing.  I mean, it is free money right?  Sadly, no.  We all pay.  Does that mean I think the program is a bad thing?  Well the jury is out.  Being pro-environment, I’m at least glad some of the cars being traded in are being taken off the road.  But as an economic stimulus?  Sadly, I think it will fail.

Surprisingly, the market was unchanged on Friday despite major misses by Microsoft and Amazon.  With the market showing some resiliency despite disappointing earnings from these bell-weather stocks, one has to believe that the market is indeed up from here.

But it quite honestly does not make any sense.  We are not in for any type of recovery any time soon.  I think a lot of people are looking at the housing bubble popping like the tech bubble popping.  People believe that recovery is just around the corner and that companies’ earnings will follow.  I just really don’t see that happening.

One just has to look deeper into the numbers to see what is happening.  Most companies are beating expectations because of the bottom line, not the top line.  That is, their revenues are not that strong.  They manage to meet earnings because they have controlled their costs effectively.  This should be a good sign because it will allow companies to use operating leverage if the economy recovers.  Sales will grow faster than the cost structure meaning that companies will be very profitable on their way out.

But this assumes the economy is going to recover soon.  Look at what happened last time.  We came out of the problems we had by creating another asset bubble.  Housing.  By keeping interest rates low and allowing questionable lending practices, the government was  able to paper over the previous problems with brand new problems.  Of course, it took a few years to play out but like all deferred problems, the new ones were much much worse.  Further, the jobs that disappeared with the tech bust never really came back, they just reallocated.  We had a “jobless” recovery last time.  Many of the high paying tech jobs never came back.  Some were replaced by good paying real estate jobs but by all accounts more good jobs were lost than were made.

That is not going to happen here.  I just do not see us able to paper over the problems that we have now created.  They are too big.  The housing bubble will not be re-inflated so what will take its place?  Health care? Another tech bubble?  I honestly don’t see anything even remotely resembling a recovery back to where we were. Companies are being very cautious when it comes to raising their cost.  For most companies, the biggest single cost is headcount and most will not be willing to increase this anytime soon.  Flat is the new up and I think more than a few companies will be willing to forgo higher revenues for a more predictable and low cost structure.

So we will see a long period of cautious companies.  Risk taking will be dampened.  This will mean that we will have an extended period of high unemployment.  This should have the effect of keeping any sort of earnings growth muted because most companies have cut to the bone at this point and will not see any more gains achieved from there.

How much more can it go from here?  Like all other market movements, I have no idea.  The market can stay stupid far longer than anyone can anticipate.

California’s budget was finally passed last night.  The thing is nobody is happy about it, and that is probably a good thing.

Budgets are hard.  It is not something that most people understand.  I have to deal with this at work all the time.  I have a budget for the department.  I cannot simply spend more than my budget.  No matter how much work there may be I cannot just go hire a new person to do the work.  I have to to be very sure that the benefit of hiring someone, buying a new computer, or sending someone to training outweighs the problems that breaking the budget brings.  If it is not everyone ends up paying for it as the company will miss profit numbers and that results in budget cuts, i.e. layoffs.

This is a classic economics problem.  Economics deals with how to allocate limited resources against unlimited wants.  Nobody in California thinks they should give up their budget.  But California spends money on three major things.  Education,  health care, and law enforcement.  Of course nobody wants to take money away from teachers, nobody wants to turn sick people away, and nobody wants to free prisoners.  So given that, where do you expect California to cut?  When you have a budget gap like California, you cannot make a dent in it if you do not cut from the biggest ticket items.  And this is what California has done.  What else could they do?

As much as I love living here, I have to admit that things are not so great for some.  Unemployment is over 10% in the state.  Housing is still way too expensive.   Taxes are going to have to rise more than they already have (Sales tax is 9.75% in many areas).  So many great reasons to be here.  But for some, especially those in my age group, the negatives are starting to outweigh the positives.

Quick lessons on treasuries.  When the government wants to get more money it sells treasury bonds.  The government needs to do this to fund any spending in excess of what it can collect in tax revenue.  It essentially sells future tax revenue to whomever wants to trade it for bonds.

U.S. treasury bonds are bought by all sorts of people.  U.S. citizens buy them but so do foreign countries and their citizens.  The Chinese have bought quite a bit over the last decade or so.  The U.S. is seen as a very safe bet.  This allows the U.S. to borrow money at very low interest rates.  Some of the lowest interest rates in the world.  Like anything else, demand drives prices higher. Since the demand for treasuries has been high for several years, the price of treasuries has rallied higher.

One odd thing about bonds though is that as prices rise, yields drop.  That is, the more people want treasury bonds, the lower the interest rate the U.S. has to pay to people to buy these bonds.  This has allowed the U.S. to borrow money cheaply.   This has been great for the U.S. and has allowed it to finance a debt load in the trillions.

All that is changing and it isn’t good for the rest of us.  Today, the treasury auction went badly pushing the ten year treasury to just short of 4%.  Not high by historical standards, but high when you consider that short term treasuries are near 0%.   Why should you be worried?  Think about how debt spirals start.  The U.S. is going to have deficits as far as the eye can see.  The only way to fund this is to sell bonds.  Now the borrowing is getting more expensive.  So you have to issue more bonds to cover expenses.  Well this means more and more of the money is getting diverted to just paying the interest.  How to pay for all the interest?  Issue more bonds.  That creates more supply, lowering prices, and raising interest rates!  Rinse, repeat.

It’s like someone with massive credit card debt whose interest rate is rising.  They keep spending and using one car to pay off another.  It is a story that just doesn’t end up well.  I have a position in TBT, an ETF that shorts treasuries.   I will look to enlarge that position.

I decided to put my money where my mouth and sell America.  I did this by buying TBT which shorts the twenty year US treasury.  I am not a fan of this market as I think the market should be going down and the rally we are in is very persistent.  I went into this trade because it works for two reasons.

• In the short term, if the market continues to rally, treasuries will do badly as people become less risk averse
• In the long term, the U.S. is taking too much debt and is going to find it hard to continue to sell treasuries

Not everyone will understand the first point so I will explain it a little further.  People buy U.S. treasury bonds as a defensive play.  That is, if you think the market is going down, you buy U.S. treasuries because there is little change the U.S. will default on its debt.  The reverse is true too.  As the market rallies, people look to take on more risk.  They sell bonds so they can buy stocks.

I think the correction in treasuries is going to come fast and it is going to come soon.  I now have a medium sized position in TBT and will look to get an even larger position in the next few weeks.

GM has borrowed another $4 billion from the U.S. government as it prepares for a possible bankruptcy filing.  It just amazes me the amount of money we keep throwing at this problem in the hopes that this will someday be a successful company.  In a world where we are throwing trillions of dollars around, $4 billion might not seem like very much money but this is actually a ridiculous sum.

To put this whole thing in context, keep in mind that this now brings the total that the U.S. government has given to GM to a staggering $20 billion.  Do you know how many global companies have a market capitalization over $20 billion?  Just take a guess.  The number is about 250 companies in the entire world.

$20 billion is about the size of a Costco and a Sony.  It is bigger than well known companies like Dell, Nike, News Corp, and Best Buy.  The U.S. government could have bought any of these companies with the stake that it lent to GM.  Now I know people will argue that GM allows people to keep their jobs and keeps communities open and blah blah blah.  But wouldn’t it be smarter to invest this money in companies that actually have a chance of succeeding?  Wouldn’t it be better to invest this money at retraining these people for jobs of the future rather than giving them false hope that we can somehow save the American auto industry?  Heck, it would be a better idea to give money to new and innovative companies like Tesla Motors than it would be to keep throwing money at a dying company like GM.

Just one more reason I am certain I never want government deciding where money and capital should flow to.