Monday, November 03, 2008

Crazy times

It's 1:00AM, that must mean it's time for a new blog post.

I've been watching the Asia/Pacific markets move up today. I so don't get what is happening in their markets today and the U.S. markets last week.

The engine of the world economy for the past two decades has been the American consumer. We buy stuff. Even when times were bad, we kept spending more money, carrying the global economy through a couple of downturns and recessions. We were the unstoppable juggernaut.

We did this by eliminating our savings (from 10% to 0 and occasionally less than 0), tapping into the equity in our homes (by HELOCs and refinancing), and by running up credit card balances.

But the engine has died.

In September, consumer spending fell by .3% in the U.S. That news came out last week, along with the most dismal report on consumer confidence ever.

Any bets on how the October numbers will look? They won't be better.

I'm trying to understand the thinking that has gone into the purchases in the market last week. There has been precisely zero new information indicating that the economy is going to improve anytime in the near future. In fact, every single bit of new information has been negative. Note that I'm not considering more debt (at the corporate level, or cheaper debt to banks a good thing -- that's like using bad tequila to kill a hangover).

I suppose that psychologically, the upturn in the market is driven by hope. A great many people hold out hope that the worst is over, that their 401(k)s and IRAs will start growing in value again. The baby boomers are going to need their money soon enough that they might be all but dependent on a market recovery coming soon. With all the media coverage asking whether or not the market has "found a bottom", perhaps people are expecting a V shaped market recovery.

I suppose that would be a comforting thought.

But, here's the hangup I have.

What exactly is going to drive the business growth that would warrant higher stock prices? Every step of the economic chain is either stressed or broken. I fully expect that after Christmas we will ring in the New Year by watching company after company go bankrupt. While these bankruptcies are necessary, the opacity in our financial markets today mean that it is nearly impossible which third-parties will be injured in any given corporate bankruptcy.

Market growth is supposed to be driven by a reasonable expectation of earnings growth -- not by the near certainty of unexpected negative balance sheet events.

For a graphical view of last weeks economic news, check out:

This has been an interesting week to have a bear-structured portfolio. If it wasn't for my near certainty in the economic mess heading our way, I would probably be pretty worried. Instead, it's been a good time to pickup a bit more "bearish" holdings on the "cheaper." If I'm wrong, I'll be one of those funny guys who lost money as the market got better.

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