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PeakTrader said...

This may be the weakest economic recovery in U.S. history.

There was a "soft-patch" in 2010, and we're in another soft-patch in 2011 (e.g. based on 1.8% real growth last quarter).

Within the next few months, will this soft-patch worsen, will the slow recovery continue, or will the recovery accelerate?

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PeakTrader said...

Another trend is the stock market may continue to grind higher, until the housing market begins the upturn (the S&P 500 had a "triple top breakout").

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VangelV said...

"Another trend is the stock market may continue to grind higher, until the housing market begins the upturn (the S&P 500 had a "triple top breakout")."

And pigs may learn how to fly. While the US market will have to turn up in REAL terms some time in the future there is no evidence that valuations are sound at this time. The S&P 500 has been falling against real assets since 2000.

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PeakTrader said...

VangelV, the U-shaped economic recovery will accelerate when the housing market, and related goods, begins to recover.

I stated before, asset prices are only residuals of economic policies that determine the production of goods & services.

When the housing market begins to recover, the Fed will begin a tightening cycle to preempt inflation, while real growth accelerates to close the output gap.

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VangelV said...

"VangelV, the U-shaped economic recovery will accelerate when the housing market, and related goods, begins to recover."

Think Japan in the 2000s and you see what the US is likely to look like. There will be no recovery in real terms.

"I stated before, asset prices are only residuals of economic policies that determine the production of goods & services."

No. They are the subjective judgement of millions of individuals. That judgement can turn on a dime at any time for a number of reasons.

"When the housing market begins to recover, the Fed will begin a tightening cycle to preempt inflation, while real growth accelerates to close the output gap."

There is no political incentive for the Fed to raise rates when there is so much trouble on Main Street, foreigners are hedging their UST holdings, and voters are pissed off.

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PeakTrader said...

VangelV, it's unlikely the housing market will stay at this historically low level for several more years.

There are fluctuations in asset markets, unexpected shocks, both positive and negative, rotation, e.g. from stocks to bonds, etc.

The point is it doesn't matter how many booms and busts take place in asset markets. What's important is sustainable economic growth (of goods & services).

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VangelV said...

"VangelV, it's unlikely the housing market will stay at this historically low level for several more years."

Perhaps you are right in nominal terms but in many areas the housing market is overpriced and ready for a fall, particularly if the Fed does what it says and ends the QE2 games. With so many Americans out of the job market and without any prospects that would allow them to afford the lifestyle that they chose I can see a continued erosion for many years in the future. And let us not forget the demographic trends, which are not favourable going forward.

"There are fluctuations in asset markets, unexpected shocks, both positive and negative, rotation, e.g. from stocks to bonds, etc."

You will get no argument on this point. Markets are volatile and there are always cycles driven by rotation, technological change, changes in monetary policy, etc.

"The point is it doesn't matter how many booms and busts take place in asset markets. What's important is sustainable economic growth (of goods & services)."

The problem for your thesis is the lack of savings. To have "sustainable economic growth" you need capital formation, not consumption. From what I have seen the US has been great at increasing the percentage of the economy that is dependent on consumption and has been dissaving for decades. That means that there will not be any "sustainable economic growth" for a long period of time.

If you want to become wealthier use the pullbacks in commodities as opportunities to hedge your USD based exposure. Once the trend followers pile on they can drive pullbacks much further than many expect and shake out the latecomers and weak hands who simply gamble and have no idea of what the big picture implies. If you are simply a naive optimist you are likely to get burned.

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PeakTrader said...

VangelV, the U.S. is the most capital abundant country in the world.

You may want to see:

St. Louis Fed: National Economic Trends

Published Issue

Page 14-Investment, percent of nominal GDP

You may also want to see: The Leontief Paradox.

The U.S. creates, accumulates, imports, and captures (in the global economy) more capital than any country in the world by far.

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VangelV said...

"VangelV, the U.S. is the most capital abundant country in the world."

Really? The last time I looked you were borrowing money from developing world countries to fund consumption.

"The U.S. creates, accumulates, imports, and captures (in the global economy) more capital than any country in the world by far."

Actually, it also prints more money, borrows, and consumes more than anyone else. It is the world's biggest debtor and has a balance sheet that would make a Spaniard cringe.

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Hydra said...

I usually think vange is off the deep end. Here, his arguments make sense. Asset markets depend on real economic growth, which allow the savings to create capital. If you have been wiped out in your home, are unable to save, and are about to retire....

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PeakTrader said...

If prices and interest rates were higher, Americans would spend less and save more. However, would that really benefit U.S. society?

Perhaps, poorer Americans will retire in Mexico, because it's cheaper, while ambitious Mexicans work in the U.S.

Or poorer Americans will work longer, which will add to future economic growth.

Anyway, nominal GDP growth, i.e. real growth and inflation (income = GDP = output) has been too low over the past few years, and when the country reaches full employment, the nominal value of assets will better reflect their real values.

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VangelV said...

"If prices and interest rates were higher, Americans would spend less and save more. However, would that really benefit U.S. society?"

If the rates were set by the markets it would be a good thing. And since you can't have capital formation without savings they are certainly beneficial to society. As Aesop's, story the Ants and the Grasshopper, shows consumption without savings is a way to ruin.

"Perhaps, poorer Americans will retire in Mexico, because it's cheaper, while ambitious Mexicans work in the U.S."

Not if the USD collapses. Poor Americans would be unable to afford to retire there.

"Or, poorer Americans will work longer, which will add to future economic growth."

They will have to work longer. But without capital formation there will be no jobs for them because there will be no real growth. Printed money is not capital. Even my kids know that. Perhaps you need to do a bit of reading.

"Anyway, nominal GDP growth, i.e. real growth and inflation (income = GDP = output) has been too low over the past few years, and when the country reaches full employment, the nominal value of assets will better reflect their real values."

You need capital formation and favourable tax and regulatory regimes for full employment. The US is missing all three at this time.

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PeakTrader said...

"Corporate America" has plenty of "capital formation" with strong balance sheets, including $2 trillion in cash.

However, the nominal value of some assets, e.g. housing, are below their real values.

When a million autos are dumped into the market, or a million Americans are unable to buy autos, then prices fall.

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VangelV said...

"However, the nominal value of some assets, e.g. housing, are below their real values."

What does this mean?

"When a million autos are dumped into the market, or a million Americans are unable to buy autos, then prices fall."

Correct. The same is true of housing. And there are millions of homes for which the mortgages are not being paid.

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PeakTrader said...

It means something is underpriced or undervalued.

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VangelV said...

"It means something is underpriced or undervalued."

Value is subjective and price is what it is. You assume that you can value things better than others and that you will see other people come around to your point of view. Frankly, I think that is a very dangerous assumption when one has a poor understanding of economic fundamentals.

As I said, there are hundreds of thousands of houses held by people not making mortgage payments or by banks who have not yet put them on the market. And there are ARMs taht are about to reset at levels that can't be handled by many families. All that inventory puts a great amount of pressure that will have real estate underperforming in real terms for quite some time. Many equities are still priced for earnings that will not materialize. They too will underperform in real terms. And if you are foolish enough to own paper gold, paper corn, paper oil, or paper silver you will have trouble making a real profit because of all the games and manipulation that is evident in the futures market. You could find yourself being totally right about the trends and the long term but wiped out by countertrend moves. The trick is to see reality as it is and act prudently. From what I can tell, you are failing to do so.

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PeakTrader said...

VangelV, the economy operates in more than two dimensions, which economists (including Warren Buffett and George Soros) understand. Making judgements on little information is dangerous.

It's also important to know your weaknesses and make adjustments. As one of my (female) clients once said:

Arthur,

Eventhough you suffered a losing streak during the recent months, you have performed beatifully. I have learnt a lot from both your winning and your losing trades. Personally, I believe in your huge potential and I have enormous confidence that in the long haul you will be a great success.

I have been following the market and your trades everyday, if you don't mind, I really want to tell you how I feel about your trades. You have all the potential huge winners, but most of the time you execute too soon, if you could learn to wait (which is what I am trying to learn), the return would be phenomenal.

I have been experimenting over the past year some of my observations which result in ten and twenty fold return in a short period of time. I wish I could implement it in a big way some day.

Thank you for your invitation to your investment club, I am VERY MUCH interested. Please count me in and let me know the details. XXX

There are few opportunities to make bold moves. However, sometimes, a little can be gained, on the margin, waiting for a great opportunity to show up.

May 3rd Trading Log (update):

Current Trade: Sold 300 SPY Jun 135 puts at $93,000 [about 135 1/4]. I bailed-out of the puts, on a market pullback for a small gain, because SPY is technically bullish with a "triple top breakout." However, a "fake-out" or a "break-out" is uncertain.

My portfolio is at $790,000 including over $715,000 in cash.

Calls Contracts

C Jan 4 2012 1,000

Puts Contracts

None

Portfolio at $100,000 on Jul 1st, 2007. Portfolio stop loss raised to $500,000. Stop loss will be strictly enforced and extreme caution will be taken if triggered to avoid large losses and preserve capital in "irrational" market periods.

Stock Portfolio (May 5th)

AMGN
C
CRIS
CTIC
DNDN
GLL
HGSI
IMGN
KBH
RMBS
SDS
SQNM
XOMA

It's interesting a homebuilding stock, KBH, was up in the down market.

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VangelV said...

"VangelV, the economy operates in more than two dimensions, which economists (including Warren Buffett and George Soros) understand. Making judgements on little information is dangerous."

I agree that using too little information is dangerous but from what I can tell there is plenty of information in front of us to suggest that you are wrong.

"It's interesting a homebuilding stock, KBH, was up in the down market."

It does not matter. You can't look at the noise and make any long term decisions about investing if you want to be successful.

If you look around you see that the middle class is in big trouble. We find that the, "share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010," that, "middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment," and that, "there are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps." When one in seven Americans is on food stamps and 18.4% of income is coming from government transfer programs things are not as rosy as you imagine them to be.

The employment situation is not getting any better with, "19% of working Americans now report that their firms are hiring while 25% say their firms are laying workers off."