A Repeat of the 1930’s?

November 7, 2008

My last and most important class of the year will be held on Wednesday, November 19th from 6-9pm. I will discuss the best and safest places for your hard earned $$$ and give a detailed forecast for interest rates and the economy in 2009. Can you really afford not to be there?
The picture above is from the early 1930’s but could soon be seen in many U.S. cities. I run a non-profit in Hollywood that has fed, clothed and found jobs for the homeless and poor for over 13 years. In the past few weeks we have seen a dramatic increase in the number of people we feed each week and today’s jobs report tells us we are in the beginning stages of a dramatic increase in unemployment. By the time our new President takes office on January 20th we will officially be in the worst economic setback since the Great Depression. October jobs fell 240,000 after declining a revised 284,000 in September and an also revised 127,000 in August. Last month’s number includes a phantom increase of 71,000 due to the government’s mythical birth/death model. One of the ways we measure the severity of the job environment is by watching the direction of monthly revisions and September lost an additional 125M and August 54M. The government always receives thousands of late replies to its monthly survey and they clearly show momentum picking up on the downside. When factoring in a constantly growing population today’s unemployment rate of 6.5% is sure to hit my 8.0% target in early 2009 with California leading the way at 10.0%. Retail payrolls fell 38,000 last month and are indicating a severe problem for owners of shopping centers who may soon find vacancy rates soaring as competition for tenants becomes intense. Temporary job services fell 34,000 after a 28,000 decline in September and shows employers are nowhere near the point of increasing their payroll because consumer demand is tepid at best. A key leading indicator points to large job losses in 2009 with those holding part time jobs because they couldn’t find a full time job soaring to a record high. The really bad news is that these job losses will soon put tremendous pressure on state and local governments as they attempt find new sources of revenue to pay for spending programs already in place. Governor Schwarzenegger announced on Thursday a 1.5 cent increase in the California sales tax but sadly this will actually drive revenue down as consumers continue to cut spending on everything except essential items. Michigan is a great example of a state that has increased taxes only to see thousands leave the state and thus create the opposite of the intended effect. With a growing list of companies that are being given loans/investments by the federal government it is only a matter of a few months before we see every mayor and governor head for Washington D.C. to ask for a share of the expanding bailout pie. Finally for those seeking full-time employment the federal government announced this morning it is in need of people to help manage the bailout program in the area of equity and debt. It might be a good place for mortgage brokers, real estate agents and investment managers to seek full time, secure employment because they tend to be good with numbers and the government is adding zeros every day to the deficit and bailout plan. 

Real estate prices and mortgages

Two years ago I wrote bear markets last longer than anyone expects or can tolerate and this version would be no exception. Unfortunately many in the real estate and mortgage industry are trying to hang on under the mistaken assumption that the good years of high income can be repeated again. (Sorry not in your lifetime). Hope has become a costly strategy for those that don’t like change but eventually they will learn the bear leaves few survivors in his once in a century visit to investment markets. The Federal Housing Finance Agency today announced the conforming loan limit (residential) in 2009 would remain at $417,000 with the jumbo conforming limit reduced to $625,500 from this year’s $729,750. Homeowners have seen the value of their homes decline and now have to suffer as the limit for Fannie & Freddie purchased mortgages are lowered. DE-flation creates lower asset and debt values but at least these mortgages are in dollars and not foreign currencies which have created massive margin calls for those speculators that moved their mortgages to lower rates in strong currencies (Hungary, etc). The next four years are going to be difficult for a society that is used to spending because credit was available and not saving because inflation is the best friend of borrowers except in a DE-flationary environment.

Yield curves

In my January 2008 forecast issue I recommended readers “back up the truck” for a once in a lifetime opportunity to bet on a widening yield curve with the spread between the 2 year Treasury and 10 year Treasury increasing to historic levels. This has been a home run call and created HUGE profits for those that jumped on board this non-stop train ride engineered by the Fed. The Bank of England’s historic move this week (not seen since 1854) of cutting the overnight rate by 1.50% to 3.00% has moved the English yield curve to its widest in many years. The one remaining yield curve that has not yet moved dramatically but offers the best risk return for the next 12 months comes from Japan. With the 10-year JGB rate slightly below the 2-year a breakout will occur when this relationship jumps above the 1.0 level. It’s amazing that so many have lost so much of their hard earned wealth this year in the stock market when the easy money is there for those that are willing to look beyond the typical investment arena of stocks. These same money managers continue to play the “reversion to the mean” trade as they continue to purchase stocks on the way down and add to losing positions without the use of stop losses. How much pain do investors need before they come to the painful conclusion that losing in company is not the answer to increased wealth. For those with the courage to “win alone” and leave the pack of those in the stands and take your place on the field of play the rewards are bountiful.

A year end stock market rally?

The Dow, S&P and NASDAQ rose 3%+ today in the face of awful economic news from the job market. A market that rallies on bad news is sure to rally even more on good news as investor expectations are reaching levels of extreme pessimism. Even the most severe bear markets have violent and sizeable rallies and U.S. stocks are set up for a good year-end rally that presents opportunities for traders only. Unfortunately very few investors have cash as they are completely “frozen” with their positions that have fallen in value this year and suffered massive losses because their advisors never recommended stop losses. Isn’t the excuse “I have never seen anything like this before in my lifetime” getting old? Or how about the manager that tells you the S&P is down 35% but you only lost 25% so you really made 10%….Can you spend the $$$? Of course not…but at least you can commiserate with your neighbors and friends who all lost a great deal of their wealth and retirement savings. Can you handle being at a dinner party where everyone lost but you won? Think about it and if the answer is yes, I suggest you try it; you might find it more difficult than you think. We are all swayed by public opinion and the news media and need these sources of information (usually not very good) to justify our investment decisions. In the next 12 months very few investors will make $$$ because of poor planning and a lack of discipline. Are you ready to change and do what is necessary to win in 2009?


The key to the U.S. economy next year is the consumer and the confidence needed to spend our way out of this economic crises. With a historically low savings rate of less than 2% and no availability of credit the average worker will be spending only what is earned and that brings a new era to anyone not alive in the 1930’s. Government funds invested in banks will not be used to lend unless guarantees are given that offset potential loan losses. The real question for 2009 is how will the government know when to stop giving handouts? Libor and commercial paper rates have plunged in the last couple of weeks due to massive injections of capital from the government but without this $$ these markets would again be frozen. The government can easily force interest rates lower but it can NOT force upon its people the confidence needed to invest and borrow. Only time can heal the wounds from the past three years and that is not something that comes easy for most Americans. We have learned to embrace inflation, borrowing and spending what we don’t have and have little patience when it is not available. 2009 will bring a call for inflation targeting by the Fed but NOT the old kind of limiting inflation but a cry for a return to the old days where rising prices covered the mistakes of investors who succeeded despite their lack of due diligence. The next decade will see a HUGE transfer of wealth from those that used leverage in the 90’s to those that understand how to profit from the DE-flation of the new era. History does repeat itself but only those who study hundreds of years instead of what they have experienced in their own lives were ready for 2008. The only thing good about getting old is that you have more experience than most of society, it’s time we begin listening to those that have the life experiences. President Obama’s first move should be to select former Fed Chairman Paul Volcker (81 yrs. old) as Treasury Secretary. It will bring back the man who curbed runaway high inflation in the 80’s back to financial markets that will soon be desperate for any inflation.

Before entering any investment, everyone should consult with their own investment professional and discuss the risk of possible loss of capital.