Poole: The Fed is printing money

My personal list of former members of the Federal Reserve who merit respect for their contributions to the world is rather short. Let's see... there's Paul Volcker and ... well, since he entered private practice, former St. Louis Fed President William Poole, who appeared on Bloomberg television yesterday to announce to the world that the Fed is printing money.

Click to play in a new window

You can skip right to about the 14:30 mark to hear the following comments regarding the minutes from the December FOMC meeting:

If the FOMC had set a reserve target, then that would have constrained the board in terms of authorizing new credit facilities. What's being done now is that the board's new credit facility are being financed by printing money which is completely out of context to what is supposed to be an FOMC responsibility.

Bill's other notable accomplishments this year include announcing to the world that Fannie Mae and Freddie Mac were insolvent in this Bloomberg report that appeared about two months before the GSE's were nationalized in September.

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One myth of investing apparently endures

Surely, one of the most horrible myths of investing in stocks over the last 25 years - the "average" rate of return as it applies to planning your future - will not survive the current downturn.

Surely, if they haven't already done so, your typical retail investor will soon realize that financial planning entails much, much more than historical performance data from Bloomberg, investment portfolios from Money Magazine, and a few simple calculations.

Well, if the business section of the New York Times has anything to say about it, maybe not...

Now that things have settled down a bit (that is, up until today), those individuals who haven't just been tossing their brokerage statements in the trash these last few months and are now curious about how long it might take to dig out of the giant hole that has been made in their 401k can turn to the Times' latest interactive graphic - Calculate Your Financial Comeback - to find out.

Just plug the numbers in, adjust your rate of return (as if it were that easy...), hit Calculate and you'll get the bad news.

By the way, what you see above are the default values - I'm not sure if it's a good or bad indication that they've started with a $100,000 investment portfolio and assumed a 40 percent decline.

The annual contribution of $5,000 and a four percent return look reasonable, but if the $100,000 less $40,000 defaults are representative of American investors, the current malaise all of a sudden makes much more sense.

Anyway, the answer produced when the Calculate button is depressed is that it will take six or seven years with a four percent return to get back to the $100K mark, prompting the inevitable questions, "Where can I get a super-safe 4 percent return these days?" and, "Does this mean I have to take on more risk to get a better return".
Don't forget that the result includes $5,000 a year in new contributions which accounts for about two-thirds of the $40,000 return to six figures - four percent interest on $60,000 amounts to just $2,400 a year.

That's depressing...

By the way, not long ago, I actually talked to one of those fellows who hasn't been opening up any statements or checking their balance online for months - he was still as happy as can be about the world around him.

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Pay or go calculator

Via Patrick.net comes this neat Pay Or Go Calculator from the Law Offices of Peter Fredman. Below are my best guesses for a typical buyer at the peak in our old SoCal neighborhood.

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A housing market bottom in 2011?

Thanks to a link from the Implode-O-Meter, it looks as though there are now enough samples to declare "2011" the winner in yesterday's home price bottom survey.
It's interesting that there are twice as many votes for "2014 or later" than there are for "2013". Anyone wanting to venture a guess for why that might be, please feel free to do so. The year 2014 is five years away making the peak to trough about ten years, meaning that we wouldn't see another home price peak until sometime in the 2030s, assuming the rise takes twice as long as the decline.

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"Millionaire" means something again

One of the many deleterious effects of the many recent financial market bubbles was that the meaning of the word "millionaire" was severely diminished.

The efforts of Regis Philbin and crew notwithstanding, the word had maintained the same weighty connotation early into the new century as gains in stock market wealth, while significant, were not nearly as broad based as what was to follow - housing market wealth.

A few years back, virtually any long-time homeowner in one of the housing bubble states who had also squirreled away a decent sum in their retirement savings could legitimately call themselves a millionaire, though, the value of one's primary residence is typically excluded in the official definition by those who study millionaires.

No matter.

All of that has changed so much over the last two years that, today, few argue that the definition of the word should be expanded to include home equity since there is so much less of the stuff today than there was back in 2006.

Combined with the more recent plunge in equity markets, it seems that one of the few bright spots in the current downturn is that some of the cachet of the word "millionaire" is being restored.

This report in CNN/Money explains:

Millionaires? More like $700,000-aires
While it may be hard to feel sympathy for America's millionaires, they're feeling the economic crunch, too - nearly a third of their assets have disappeared in the downturn, according to a consulting firm's report released Tuesday.

Spectrem Group said U.S. households worth $1 million or more - excluding their primary residence - have seen their assets decline by 30% during the financial crisis.

Almost one-fifth of the asset declines were greater than 40%, the report said.

"There's a huge amount of anger," said George Walper, president of Spectrem Group.

Nearly all the millionaires surveyed - 90% - said they "fear a prolonged economic downturn," the report said. On average, they believe it will last for another 22 months.

Maintaining their current lifestyles is also of concern, as 55% of respondents said they are worried they will not have sufficient assets to do so.

Don't let that last part about the lifestyles of millionaires throw you.

Despite what you may have been led to believe by Robin Leach and his ilk, it's not all "champagne wishes and caviar dreams".

One of the most important books out there, a book that every high school student should be required to read, is "The Millionaire Next Door". You can get the gist of the entire work simply by reading the first two pages that are conveniently reproduced below:
Ironically, this book was first published in the year 1998, the same year that the popular game show "Who Wants to be a Millionaire" debuted.

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Wednesday morning links

TOP STORIES
Hill aides: CBO to project $1.2T deficit for 2009 - AP
ADP employment index shows 693,000 jobs lost in December - MarketWatch
Alcoa to cut 13 percent of global work force - AP
Bank of America sells China bank stake - Reuters
Russia stops all gas supply to Europe via Ukraine - AP
Obama: $1 trillion deficits 'for years' - CNN/Money
Schwarzenegger Blocks Tax Rises as California Cash Crunch Looms - Bloomberg
Worst December for layoffs on record, survey says - MarketWatch
IBM May Cut Thousands of Jobs, Employee Group Says - Bloomberg

MARKETS/INVESTING
Oil Traders Seek Another 10 Tankers for Storage, Frontline Says - Bloomberg
Gold steadies, supported by dollar; platinum up - Reuters
Why governments can't stop market crashes - Globe & Mail
Bullish bandwagon: Too many editors have decided that bear market is over - MarketWatch
Millionaires? More like $700,000-aires - CNN/Money
Don't buy Wall Street's latest con - MarketWatch
Wall Street mess sends class-action investor lawsuits up 19% - USA Today

ECONOMY
Private sector shed 693,000 jobs in December - Reuters
Herd Quits Eden for Land of Perpetual Recession - Bloomberg
Economic 'bubbles have only begun to burst' - Vancouver Sun
Recession creates a load of problems for truckers - LA Times
U.S. retailers' 'bah, humbug' Christmas - MarketWatch
Straight talk on the economic crisis - LA Times

INTERNATIONAL
Zero Growth in China Is 2009 Black Swan Event - Bloomberg
Taiwan’s Exports Drop By Record 41.9% on Global Slump - Bloomberg
A homely parade in the currency ‘ugly’ contest - FT Alphaville
Indian software company chief quits in accounting scandal - IHT
Germany adds to global job woes after Alcoa cuts - AP
China warns of risks from "abnormal" cross-border capital flow - Window of China
Asia to Have 'V-shaped' Recovery, BNP Paribas Says - Bloomberg
Financial Casualty: Why Adolf Merckle Killed Himself - Time
Vietnam's Real Estate Market Feels Crisis - New American Media

HOUSING
Walk Away from your Mortgage Calculator - Payorgo.com
Mortgage applications dip despite low rates - CNN/Money
Half of Americans Oppose Bailout for Troubled Homeowners - HousingWire
How to tackle foreclosures and unemployment at the same time - Time
Manhattan Apartment Sales Drop, Office Rents Fall - Bloomberg
Jumbo mortgage loan rates put damper on refinancing - Boston.com
Florida’s Housing Market Won’t Recover Until 2011, Study Says - Bloomberg

FED/TREASURY/BANKING
Fed Revives Discussion of Explicit Inflation Target - Bloomberg
Fed Expects Weak Economy, Fears 'Prolonged Retraction' - Washington Post
Geithner must avoid Paulson's mistakes - Fortune
FOMC saw specter of depression, deflation - MarketWatch
Fed Policy Makers Saw ‘Substantial’ Risks to Economy - Bloomberg

INTERESTING
SHAQ'S BARGAIN - New York Post
Big-Headed Crickets Are Better Fighters - LiveScience

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Understanding money and inflation

I like the part where they say, "Gold and silver have become so valuable that they are seldom used in modern day coinage".

Part two is below:

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A special offer from Iacono Research

OK, the holidays are over - it's time to take a good hard look at what you're doing with your investment money in 2009 and, if I can be of some help with that, I'd be happy to oblige.

When writing for the blog, sometimes I forget that I have an investment website that keeps me quite busy over the weekends - Iacono Research - and that this is one of the main ways of letting people know about it. I'm about the world's worst promoter (I've always despised the sales aspect of writing an investment newsletter), so it wouldn't come as too big of a surprise if you've been reading the blog for months now and this is the first time you've heard of it.

Well, for the next nine days, to help ring in the New Year of 2009, you'll be hearing a bit more about my newsletter and then I'll probably not mention it again for at least a little while.

Anyway, here's the deal...

The $99 per year rate is back for a limited time only as part of a two year subscription:

Iacono Research - Two Year Special at $99/year

For those of you who insist that someone else do the math for you, that would be a one-time payment of $198 for a two-year term.

The regular rate is $159 per year or $279 for two years, so this represents a substantial savings over the regular price and this service remains well below the cost of many other investment newsletters that have produced results that pale in comparison.

Going back four years, the performance of the model portfolio looks like this, based on a starting value of 100 back at the beginning of 2005:
Three very good years in 2005 (+22%), 2006 (+25%), and 2007 (+24%) followed by a not-so-good year in 2008 (-27%) for a cumulative gain of just over 38 percent.

Is it worth it?

Maybe subscriber N.H. from Minnesota can help answer that question:

Tim, hello and Happy New Year. I want to start off with a compliment. I started subscribing to about four investment newsletters in 2007, including yours. Each has its own merits but overall I find yours the best value. In addition to the information you provide, and how you arrange it, I also like your tone and attitude, particularly that you acknowledge what you missed and regret. Thanks for helping us steer through these times.

Between now and next Thursday, when this offer expires, you'll be hearing a bit more about the investment service. First, as material for this weekend's edition is being prepared - a review of the year just completed as it relates to the performance of the model portfolio. Then on to other topics early next week.

Anyone signing up for a FREE 30-DAY TRIAL between now and January 15th will be eligible for the special rate for the duration of their free trial period (only one free trial per person, please).

Finally, the service comes with a 60-day money back guarantee with no questions asked, which, when combined with a free trial over a 30-day period means that you can have a risk-free look for up to 90 days.

For more, see the FAQ and look for the next update on this offer on Thursday.

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A bottom in home prices in 2009? 2010?

Almost exactly one year ago, a survey about the timing of an eventual bottom in home prices produced the colorful results shown below.
A fairly optimist bunch it seemed, the four realtors who answered 2008 were clearly more delusional than they were optimistic. At the time, it was noted:

If the 1990s housing boom/bust cycle in California is a good guide, we won't see a bottom in home prices nationally until five or six years after the peak which would put the next bottom closer to 2011 than 2009.

With the year 2008 now stricken from the list of options and an open-ended guess for housing perma-bears added at the other extreme, now's as good a time as any to give it another try.


Free Website Poll
Once it scrolls off the main page, the survey will be left up in the sidebar for a few more days and a summary will be posted later in the week.

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A look back at 2007 housing predictions

In looking back at material from a year ago as part of doing the normal year-end things around here, the item below was stumbled upon. It contains some very interesting looks both backward and forward from the vantage point of January 2008.

It seems funny to read this commentary a full year later.

Of course, it's not nearly as funny as reading the stuff that appeared back in 2005 when the housing bubble was at its peak and there was nary an indication that prices would begin plunging at horrific rates in a matter of just a couple years.

But one year ago, the handwriting was on the wall and anyone who was predicting a rise in home prices was either completely out-of-touch or an industry shill.

Interestingly, futures based on the Case-Shiller Home Price Index got the 2007 decline mostly correct but underestimated the 2008 plunge by a wide margin.

From December 30, 2007:

How so many economists got housing so wrong in 2007

Check out this story over at CNN/Money about just how bad some economists did with their 2007 housing predictions. Of course the nation's last two chief economists, Alan Greenspan and Ben Bernanke are at the top of the list.

Former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke, after reviewing home sales and mortgage rates in fall 2006, were hopeful that the market had bottomed out.

"It may be too soon to say that it's over. It may not be too soon to say that the worst is over," said Greenspan in an October 2006 speech in Richmond, according to press reports.

In a November 2006 speech, Bernanke said he saw some "encouraging" signs in recent housing reports.

"Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets," Bernanke said.
...
Lisa Panasiti, a spokeswoman for Greenspan, said the former chairman was referring in his 2006 remarks to real estate's drag on gross domestic product, and that housing's hit on GDP has since eased.

The laughing stock of all economists, National Association of Realtors Chief Economist Lawrence Yun (following in the footsteps of the former laughing stock of all economists David Lereah) throws in his two cents.

The (National Association of) Realtors expected only a 1 percent drop in the pace of existing home sales, and a 1 percent gain in median prices. Instead, 2007 will likely end with a12.5 percent plunge in the pace of sales, and nearly a 2 percent drop in prices, the first such decline on record.

The group's current forecast for 2008 calls for a 0.5 percent increase in the pace of sales, and a 0.3 percent rebound in prices. But Lawrence Yun, chief economist for the trade group, said that making forecasts is even tougher this year than it was a year ago.

Yun forecasts essentially flat prices in 2008. Yet, he also believes there's at least a one in four chance that prices will fall more than they did this year, and about the same chance that prices could rebound by 3 percent or more.

"I would not be surprised if home sales improves in 2008," he said. "At the same time I can also foresee a circumstance where buyers continue to pull back, the inventory sitting on the market continues to build and it causes prices to go down further."

And a voice of reason - one of only a handful of economists that made any sense when talking about housing, both before and after the bubble burst.

Robert Shiller, a Yale economist who had argued for years that a bubble was forming in real estate prices, points out that one group was on target about where prices would go - investors in a real estate futures market that he helped set up on the Chicago Mercantile Exchange.

Starting in May 2006, the CME set up futures contracts for 10 metropolitan real estate markets, allowing investors to bet whether prices would go up or down and by how much.

By the end of 2006 those futures were pointing to real estate price declines between 5 percent and 7 percent in those markets, Shiller said. That ended up in line with the 6.7 percent annual decline in the October reading of S&P/Case-Shiller home price index, which was the largest drop recorded in that 20-year-old price measure.

"I'm not normally an advocate of market efficiency, but there's something to be said when you're putting money on the line with your prediction, rather than just talking," he said.

Those futures today are far more bearish about future housing prices than most current economists - foreseeing an additional 4 percent to 14 percent drop in prices over the next year.

Dean Baker is also interviewed in this story so you get the whole gamut - from the naive optimism of two Federal Reserve chiefs and trade group shill to economist Robert Shiller and Dean Baker of the CEPR who actually sold his house a year or two ago and became a renter because he thought that the housing bubble was getting ready to pop.

Do you think Dean Baker bought any gold coins with any of the proceeds from his real estate sale? No, that would be asking too much of any economist.

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Marc Faber on Bloomberg

Another good interview with Dr. Marc Faber, this one over at Bloomberg where he's been a regular for many years (recent appearances at the likes of CNBC are somewhat unusual as he tends to go against conventional wisdom, something that abounds at CNBC).

Click to play in a new window

There's lots of good stuff in this one - the outlook for the global economy, oil, gold, base metals, natural resource stocks, World War III having already started...

On the subject of alternatives to the government solutions for the current problems, he was asked how he expected the populace to stand for the government doing nothing?

That's the problem of society. If people can not accept the downside to capitalism, then they should become socialists and then they have a planned economy. They should go to eastern Europe twenty years ago and to Russia and China for the last 70 years.

How do you tell that to somebody in Detroit who's losing his home today?

Why is he losing his home? Because of government intervention. The government - the Federal Reserve - kept interest rates artificially low and created the biggest housing bubble, not just in the U.S. but worldwide. That is what I'd explain to the worker in Detroit.

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Wednesday morning links

TOP STORIES
Obama Said to Favor $775 Billion for Stimulus Plan - Bloomberg
There is only one alternative to the dollar - Financial Times
Lawmakers set new mortgage bankruptcy bill - Reuters
US auto sales plunge whopping 36 percent in Dec. - AP
Willem Buiter warns of massive dollar collapse - Telegraph
US will emerge as undisputed top dog in 2009 - Telegraph
Bankruptcy filings jump by one-third in 2008 - AP
Prechter Sizes Up Gold in Deflation - GoldSeek
Why didn't SEC catch on to Madoff? Congress asks - USA Today

MARKETS/INVESTING
Oil up to over $50 on Russia gas, Mideast - Reuters
Gold Drops for 4th Day in London as Stronger Dollar Cuts Demand - Bloomberg
Pequot’s Wien Predicts Rallies in Stocks, Oil, Gold - Bloomberg
Gas prices rise for the first time in 16 weeks - Reuters
Is the Comex Doing Fractional Reserve Delivery of Gold? - Jesse's Cafe
The Ponzi Scheme in Every Hedge Fund - Time
“It’s tough making predictions, especially about the future.” - Saut, Raymond James

ECONOMY
Pending home sales index down 4% in November - MarketWatch
Obama Pitches Stimulus Plan - Washington Post
Lessons From The Great Depression - Time
Obama demands 'bold' action on stimulus plan - AFP
Automakers Fear a New Normal of Low Sales - NY Times
Bloomberg proposes ideas for federal economic plan - SILive
This Great Depression Is Just Getting Started - Seeking Alpha

INTERNATIONAL
Euro-zone inflation slows sharply in December - MarketWatch
Crystal, china maker Waterford Wedgwood collapses - AP
U.K. Consumer Confidence Declined to Four-Year Low in December - Bloomberg
Why Russia's woes should worry you - MSN Money
Russian gas disruption spreads across Europe - Globe & Mail
German officials negotiate terms of stimulus package - IHT
Canadian auto sales skid 21 per cent - Globe & Mail

HOUSING
Stimulus Package to Include Cram-Downs: Report - HousingWire
The 'McMansion' trend in housing is slowing - CSM
How to come out ahead in the 2009 real estate market - ABC2News MD
Economists seek solutions, signs of life in housing - Reuters
Sign of the Times: Even Homebuilders Prefer to Rent - HousingWire
Realtors Slam New Fannie Mae Fees, Bloggers - The Truth ABout Mortgage

FED/TREASURY/BANKING
Treasuries Drop Amid Concern U.S. to Sell Record Amount of Debt - Bloomberg
Fed Focuses on Consumer, Corporate Rate Spreads Over Treasuries - Bloomberg
New York Fed Begins Purchases of Agency Mortgage Debt - Bloomberg
GMAC’s Sweet Government Ride - NY Times DealBook
Credit crunch shows little sign of easing - CSM

INTERESTING
Farewell GWB - Kunstler, CFN
TV Converter Program Runs Out of Funding - Washington Post
China raps Google for allowing 'vulgar' content - SF Gate

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Ron Paul on U.S. Government Ponzi schemes

From today's Madoff Fraud Allegations & Financial Markets Regulation hearing during which Ron Paul calls fractional reserve banking and our social security system Ponzi schemes.

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David Lereah does a pathetic one-eighty

David Lereah's mea culpa first came to my attention weeks ago and has been noted on many other blogs and websites, the former Chief Economist for the National Association of Realtors finally fessing up to the fact that, for many years, he was simply a shill for the real estate industry.

At the time, it seemed like interesting news, but, even more so, it was a sad and pathetic development that really wasn't worth commenting on.

Then his mug showed up in the January print edition of Money Magazine (see below) which, around here, is normally bathroom reading material and, as a result, perused after sometimes lengthy delays from the day it arrives (there are many other highly objectionable items in the current issue of Money which, hopefully, will be enumerated in the days or weeks ahead).

All of that still didn't cause the story to breach the threshold that would cause something to show up here, but when this appeared at CNN/Money a short time ago ... well, that was it.

It was as if Money Magazine, perhaps guilt ridden after serving as such good "cheerleaders" along with Mr. Lereah a few years back, was more than happy to produce a scapegoat who would happily confess so they wouldn't have to.

Here's a brief history as to the reasons I might say something like this:

• May 23, 2005 - Shame On You CNN/Money!
• June 2, 2005 - Money Magazine Does Real Estate
• June 26, 2005 - Why is This Couple So Happy?
• July 25, 2005 - Money Magazine on "Cashing Out"
• Aug. 23, 2005 - The Housing Bubble Poster Boy
• Sep. 30, 2005 - Money Magazine Does a One-Eighty
• Feb 9, 2006 - Leave Your Equity Alone!
  

Note that the first item above is memorable for the following pearl from former Fed Chairman Alan Greenspan, less than a year before he retired:

"Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems".

They were dispensing all kinds of horrible (and costly) advice in 2005.

Anyway, Money Magazine has enough things to worry about now that its millions of readers are starting to catch on to the fact that "stocks for the long run" might mean much longer of a run than they had ever imagined.

It makes sense for them to attempt to disassociate themselves from any complicity in the burst real estate bubble, given the current condition of equity markets.

But, back to real estate and Mr. Lereah...

To get the full effect, you have to see the scanned image from the print edition:
Pathetic, just pathetic...

Leaning against his granite countertops when hundreds of thousands of former homeowners who thought he was telling the truth back in 2005 had to turn their granite countertops over to the bank, the little smirk, the casual tone, the change in outlook, the ham-handed acknowledgment that he was wrong but that he was just doing his job, so, it was understandable that he might be wrong and him taking responsibility for being wrong now is quite a noble thing to do.

Pathetic...

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What happened between 1939 and 1945?

Time and again you hear people say things like, "This may be the worst economic downturn since the Second World War" or, in other cases, "The current economic slowdown may be the worst since the Great Depression".

Increasingly, you hear the former rather than the latter. Why?

What exactly happened between 1939 and the mid-1940s?

Not much apparently.

In a story($) in today's Wall Street Journal, E.S. Browning provides the graphic you see to the right (a version of which was going to be created here just for this purpose, but no longer has to) and it clearly shows just a modest recession, following the end of the nation's longest nightmare in 1939, the Great Depression.

So, the question remains, why to people say, "the worst since World War II", instead of "the worst since the Great Depression"?

Is it because they are in some way hoping that by not saying those awful, emotionally charged words - the Great Depression - that they are somehow improving our future?

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Mutual fund performance in 2008...and more!

As word of 2008 performance trickles in, the final-year numbers confirming what everyone knew all along, it becomes clear that even the smartest guys in the room the year before weren't nearly as smart last year.

Short funds, treasuries, the dollar, the yen, and gold were about the only things that went up in 2008, Bloomberg reporting that 2007's star performer, Ken Heebner's CGM Focus Fund (CGMFX) which had gained 80 percent the year before, lost 48 percent in 2008.

At first glance you might think that, after two years, things are OK with CGM Focus, up maybe 20 or 30 percent, but a gain of 80 percent followed by a loss of 48 percent is actually a cumulative decline of 6 percent which, come to think of it, isn't all that bad, relatively speaking.

Here's what the fund looks like over a four-year period (all charts start with a value of 100 at year-end 2004, making for an easy calculation of cumulative performance):
Another fund mentioned in the Bloomberg story was the humongous Fidelity Magellan Fund (FMAGX) that fell 39 percent due to ill-advised bets on financial stocks.

Apparently the fund isn't so humongous anymore, falling from $110 billion eight years ago, when it led all other mutual funds in assets, to about $19 billion as of last month.

Here's what it looks like since 2005 (also note that these charts use the same left and right scales making for easy comparison - maybe an animated .gif will appear here later today...)
The Growth Fund of America (AGTHX), the fund that displaced Magellan as the largest stock mutual fund, posted the exact same result as its predecessor in 2008 - minus 39 percent.

Bloomberg says, "Combined with withdrawals, the losses dragged the fund’s assets to $116.5 billion in November after they reached $200 billion earlier in the year." Apparently, exposure to foreign stocks hobbled them.

Here's the longer view:
So far, Ken Heebler at CGM Focus is looking pretty good over the longer term - up 35 percent versus down 17 percent and down 14 percent for the two monster funds.

Of the mutual funds with more than $100 million, the Gabelli ABC Fund (GABCX) fell the least in 2008, down 2.6 percent (apparently not a single long stock mutual fund posted a gain).

Over the last four years, it sports a modest 20 percent cumulative gain.
At the companion investment website Iacono Research, it was not a very good year, but it was still better than most. With a loss of 27.4 percent, following three consecutive years of 20+ percent gains, a good portion of earlier gains are still intact and it comes out ahead of Mr. Heebler's fund by a few percentage points.

Many more sales earlier in the year would have lessened the damage, but the gold stocks are coming back very nicely at the moment.

Here's what it looks like after four years (three years of meticulously documented performance data available to subscribers or those testing out the service with a free trial, along with one year of data prior to the model portfolio being formalized in late-2005).
You'll be hearing more about Iacono Research this week as there is a special offer all ready to be announced tomorrow.

Of course, short funds were where all the big gains were last year, the Federated Prudent Bear Fund (BEARX) posting what looks to be about a 24 or 25 percent gain last year, part of a 57 percent cumulative gain.

Here's a nearly perfect looking chart since 2005. No, it is perfect - that's exactly what you want to see in a curve that represents your money and your retirement aspirations.
Of course the 10 and 14 percent losses in BEARX in 2003 and 2004 don't look so good, but this followed a gain of 63 percent in 2002.

If you go all the way back to 1998, the Prudent Bear Fund is up a cumulative 39 percent, once again proving the old axiom, timing is everything.

There was one other investment that did quite well in 2008 - just one more good year in a long line of good years since we rang in the new century. It has truly been the decade of gold, but here it is, the decade almost over, and most people don't realize it yet.

Over the last four years, you could have doubled your money by buying dumb old gold coins.
If you went back a few more years, you could have tripled your money.

Full Disclosure: Long gold, no position in CGMFX, FMAGX, AGTHX, GABCX, or BEARX

ooo

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Deflation explained

It's all about falling prices. Just think how far the computer and electronics industry would have progressed over the last ten years if demand hadn't been stymied by lower prices.

ooo

Read more...

Monday morning links

TOP STORIES
Regulators probed Madoff eight times over 16 years: report - Reuters
Dollar rallies against euro - AFP
Oil Curve Steeper Than '99 Shows Possible Gain in '09 - Bloomberg
Investors dump $89B in U.S. securities in historic fire sale - USA Today
Just how big is a $50 billion fraud? - MSN Money
US Stock Markets and 2009 - Kotok, The Big Picture
Iraq Production, Conservation Could Keep Oil Price in Check for Years - Seeking Alpha
Canadian oil-sand mines stuck as crude price plummets - TimesOnline

MARKETS/INVESTING
Oil falls as demand worries remain - CNN/Money
Gold Falls a Third Day in London as Dollar Strength Saps Demand - Bloomberg
Signs point to explosive rise in gold price - Mineweb
Abu Dhabi gold jewellery sales fall 40 pc in Dec - Economic Times
CGM’s Heebner, Fidelity’s Lange Falter as Markets Claim Victims - Bloomberg
10 resolutions for retirement - MSN Money
Portfolio Rebalancing - Don't Ignore Duration - Hussman

ECONOMY
U.S. Construction Spending Falls Less Than Forecast - Bloomberg
Obama seeks $310 billion in tax cuts - Reuters
Can the US economy afford a Keynesian stimulus? - Financial Times
Fighting Off Depression - NY Times
Where is the economy headed in 2009? - SF Gate
Hoyer: Stimulus unlikely before inauguration - AP

INTERNATIONAL
Nikkei index hits two-month high - BBC
Toyota, Nissan Lead Drop as Japan Car Sales Fall to 28-Year Low - Bloomberg
Tough times in India - Globe & Mail
Fall in oil price may trigger UK deflation - The Independent
China's young generation gets thrifty in gloomy economy - Reuters
Global Corporate Profits to Drop in ’09; More Bankruptcies Loom - Bloomberg
Low price of oil will fuel UK economy - Telegraph

HOUSING
The Bust is a Boon - CNN/Money
Foreclosure Crisis Hits Hispanics Hard - Wall Street Journal
Homeownership goals created house of cards - San Diego Union Tribune
Economic downturn could change tastes in housing - LA Times
Housing story is no longer a myth - Lansner, O.C. Register
Campbell County housing market a little more buyer-friendly - Gillette News

FED/TREASURY/BANKING
Deflation is new Public Enemy No.1 - MarketWatch
Fed, ECB prepare to tackle deflation head-on - Reuters
As Vacant Office Space Grows, So Does Lenders’ Crisis - NY Times
S.F. Fed: Serious risk of stagnation - CNN/Money
Fed's Evans backs stimulus moves: report - MarketWatch

INTERESTING
Madoff victims selling memorabilia on eBay - SF Gate
Franken to be declared Senate victor in Minnesota - Reuters
Top 10 Macworld rumors for 2009 - Fortune

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Deflation - it's starting to get silly now

So, let me get this straight...

After presiding over the inflation and bursting of the biggest financial bubble in the history of Mankind, in the process blessing soaring home prices that far outstripped any reasonable expectation of borrowers to repay and praising the "financial innovation" of Wall Street for facilitating such, the smartest economists at the world's most important central banks are now concerned (actually, "scared witless" as you'll see below) that prices may fall.

Yes, "Deflation is the New Public Enemy Number 1".

It says so right there in the MarketWatch headline in what is quickly becoming one of the silliest ongoing stories in the global economy - dimwitted economists are once again redirecting the discussion and a gullible public and financial media are going along...

Deflation is the problem now.

Never mind what led up to the current crisis.

More of what got us into this mess is required to get us out.

It seems "the drunk must be kept in Scotch a while longer".

Here she is, doe-eyed Janet Yellen, President of the Federal Reserve Bank of San Francisco to make the case for why all the stops must be pulled out - governments and central banks must borrow and print money as never before.
Now that short-term interest rates are at zero, Ms. Yellen favors the expansion of the Federal Reserve's recent unconventional monetary policy measures where anything and everything is bought with newly created money.

She also urged aggressive spending of newly borrowed money by the Obama administration.

The menace is upon us again.

The scourge of "deflation" is here, where individuals see prices dropping like a rock and defer purchases, pulling the rug out from underneath a consumer-led economy, creating a vicious downward spiral, an economic black hole from which there is no escape.

Never mind that people are scared witless because they fear for their job, their retirement accounts, their home, their children's future, and the Western way of life where overconsumption was the rule rather than the exception, something that, up until about a year ago, seemed like a birthright.

Consumers are pulling back because they see prices falling - it's DEFLATION!!

According to the MarketWatch report, central bankers are scared:

But many agree with Barry Eichengreen, a professor at the University of California at Berkeley, who called deflation "a very serious danger."

Central bank officials are "scared, if not scared witless" about the specter of deflation, he said.

The good news is that, because the Fed is so vigilant, the U.S. should be able to avert it, he said.

Fed officials would use the new unconventional monetary policy measures to simply buy up "anything whose price shows signs of going down," he said.

If only the Fed had been a so vigilant a few years ago.

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A common theme in year-end cartoons

Cartoons from Time, The Economist, and Tom Toles all have the same message about what lies ahead in the new year, particularly for President-elect Barack Obama.

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Sunday morning links

TOP STORIES
The End of the Financial World as We Know It - NY Times
Evans says Fed needs to mimic below-zero rates - Reuters
Ukraine: Serious natural gas shortages possible - AP
Asia needs to fully wake up to the scale of the West's economic crisis - Telegraph
The culture of scarcity - LA Times
SEC Said to Examine More Ponzi Schemes After Madoff - Bloomberg
Credit Bubble Bulletin - Year End Facts - Noland, Prudent Bear
U.S. Debt Expected To Soar This Year - Washington Post
U.S. governors seek $1 trillion federal assistance - Reuters

MARKETS/INVESTING
A year after $100, oil prices cut in half - SF Gate
'Silver prices will follow Gold in 2009' - Commodity Online
Peter Bernstein’s biggest worry? The dollar - Implode-O-Meter
Buffett Has ‘Nowhere to Hide’ Amid Berkshire’s Plunge - Bloomberg
The ‘permabear' keeps on growling in 2009 - Globe & Mail
Who is Comex paper gold manipulative short seller? - Commodity Online

ECONOMY
2008 Job Losses Probably Worst Since 1945: U.S. Economy Preview - Bloomberg
US stimulus plan to be ready by early February: lawmaker - AFP
Notion of fast U.S. recovery falls flat at parley - MarketWatch
Series spreads the blame on economy - LA Times
It's Time to Drop The Consumer Label - Washington Post

INTERNATIONAL
Savers hit with punitive rate cuts - TimesOnline
Chinese Manufacturing Contracts as Exports Decline - Bloomberg
China industry recovers slightly - Reuters
Banks defy Brown call to free up credit - Guardian
The Irish Economy’s Rise Was Steep, and the Fall Was Fast - NY Times
Housing market braced for brutal 2009 as prices and mortgage lending plunge - Guardian
Rates may sink to lowest since 1694 - Telegraph
BOJ's Shirakawa: yen rises hurt economy short term - Reuters

HOUSING
Home Prices in Selected Cities - NY Times
Beaufort Realtors: Housing market at bottom here, elsewhere - Beaufort Gazette
One constant in housing market: predictions - TampaBay.com
Seeing ahead in 2009 - Boston.com

FED/TREASURY/BANKING
Fed’s Evans Supports Stimulus, Sees ‘Sobering’ Debt - Bloomberg
Fed has abandoned monetary policy, critic says - Reuters
Chicago Fed: 'Big stimulus is appropriate' - CNN/Money
Time ripe for Fed inflation target: Bullard - Reuters

INTERESTING
Oregon considers subbing mileage tax for gas tax - LA Times
Rainbow Room to close restaurant, citing economy - AP

ooo

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What's Hot, What's Not

The right-most column below is about as close as you'll get to a 2008 version of this graphic from the Wall Street Journal and, interestingly, over the last week, everything was up. Over the last 52 weeks, the dollar comes out on top at +8.4 percent, but treasuries really should be added to this list as they about doubled that gain last year. That's one of the very big questions for 2009 - what will treasuries do?

Gold had a very good start last year but it declined yesterday, so its 2008 gain of about 6 percent shrunk to just a couple percent when looked at on a 52-week basis.

Similarly, broad equity markets had a horrible start last year but a fantastic day yesterday causing the 52-week loss to narrow sharply. For example, the Nasdaq was down 40.5 percent in 2008 but the 52-week change shrunk to -34.8 percent as shown above.

The one-day improvement for international stocks may have been even greater.

One of the best graphics in the Money and Investing section of the WSJ print edition is shown below from yesterday's paper which captures the final 2008 results.
Ouch!

The only country with a single-digit decline, Venezueala, has an official inflation rate of about 33 percent, so don't get too excited about investing with Hugo Chavez who now seems intent on taking over mining properties since the price of oil has plunged.

Remember that you need a 100 percent gain to recover from a 50 percent decline so, even if these stocks go up 20 percent this year, they'll still be down 40 percent from where they started 2008. If they go up 40 percent, they'll still be down 30 percent.

They really need to fix how these advance/decline percentages work!!

ooo

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Predictions for 2009

After a year like the one that has just concluded, it is more difficult than ever to see clearly into our dark and murky future, but that doesn't seem to have stopped people from making predictions of one sort or another about what might lie ahead.

Such is the case here, despite the brightly glowing orb to the right.

After taking a close look at last year's predictions the other day, it's pretty clear that things would have been a lot easier to call if it was known in advance that Armageddon was finally going to arrive.

Discounting Armageddon has been a profitable investment strategy up until last year.

The question today is whether what happened in 2008 was Armageddon - Part I, or just plain Armageddon. As you'll see below, from my vantage point, it looks more like the latter.

Off we go...

1. Another Bad Year for Housing

Once again, more pain in housing seems inevitable with liar loans and option ARM products reaching their critical years. If it already hasn't, that second home/investment property that seemed like such a good idea back in 2004 will turn into a nightmare in 2009.

As was the case last year, only real estate sales types will be predicting a rebound for home prices in 2009 though home sales will probably make a lasting bottom. Late-2009 and 2010 will be the time to start looking to buy property again, but there will be no need to hurry - contrary to what real estate sales types tell you, prices are not headed back up anytime soon. They may not go too much lower in 2010, but, except for places like Washington D.C. where the bailout business is booming, prices will be mostly flat through 2011 or 2012.

Next year, housing prices will fall another 10 percent nationally, based on the year-over-year change to the 20-city S&P Case Shiller Home Price Index for October 2009 (this report gets released at the end of December and showed an 18 percent decline last week.) It seems that home price declines have to ease up. For example, based on their current trajectory, by the end of next year the median home price in Los Angeles would be below $200,000, down from a high of $550,000 in 2007.

2. The Dollar Will Go Down

The trade weighted U.S. dollar rose in 2008, but that was an anomaly. There are many bad currencies in the world (most of them are bad, actually, the pound now probably the worst) but the greenback will have a hard time looking good on a relative basis after big negative GDP numbers are reported along with even bigger job losses.

The source of most of the world's financial market troubles over the last year or so will finally be appreciated by those who've been buying U.S. Treasuries and, despite the best efforts of the big players at the Comex, many of these people will buy gold instead.

By year-end, the U.S. Dollar Index will be at 70, after dipping into the 60s briefly, and economists will again marvel at how the trade deficit is shrinking due to higher U.S. exports, helping the U.S. economy to recover.

3. Broad Equity Markets will Rise

The Dow and the S&P 500 Index will gain 10 percent and most investors will be happy about this, not realizing that it would have to repeat this performance for the next four or five years to make up for the losses seen in 2008. It won't.

Foreign stocks will do much better than U.S. stocks - up about 20 percent on average by year end - and stocks in China will rise 30 percent. Here too, most investors will fail to appreciate the cruel nature of large declines and advances expressed in percentage terms - this will leave Chinese stocks 55 percent below where they began 2008 (i.e., before last year's 65 percent decline).

Gold and silver mining stocks will outperform all other equities in 2009 (this process is already well underway) and many retail investors will add gold stocks to their portfolio for the first time only to sell in a panic during the first correction.

4. Short-Term Interest Rates Will Stay at Zero

Short-term interest rates in the U.S. will end the year where they began - at zero.

Instead of the Fed funds rate, the new metric that will be used to gauge what the Federal Reserve is doing will be the Fed's balance sheet. Now at $2.2 trillion, this will grow to over $4 trillion by year-end, by which time the weekly H.4.1 report will become a major news event.

Ben Bernanke aged five years over the last twelve months - over the next twelve months he will only age two years.

5. Energy Prices Will Rebound

After dipping below $30 a barrel in the spring, the price of crude oil will rise to $100 by the time Hurricane season is over (hey, there's no election in '09) and end the year at $85.

Just when people were getting used to $1.50 gasoline, taking advantage of dealer incentives to buy Suburbans and Escalades again, the price at the pump will be back up over $3 and they won't be happy about it.

6. Gold and Silver Will Soar

The price of silver will double before ending the year at around $20 an ounce and gold will again surpass the $1,000 mark, finishing the year at $1,150. Inventory at the SPDR Gold Shares ETF will increase to over 1,000 tonnes and there will be 10,000 tonnes of silver in the iShares Silver Trust ETF. We still won't be sure whether the ETFs really have the metal, but no one will care.

An increasing number of retail investors will buy gold and silver for the first time and they'll sell in a panic during the first correction they encounter. They'll look back and think, "Precious metals are no more volatile than that S&P500 Index fund I sold last year. Why did I sell in a panic again? Maybe I should just invest in Hummels."

People will start talking about junior mining stocks at cocktail parties - just like internet stocks in 1997. (As noted the last couple years, I'm going to keep saying this until it's true).

7. The U.S. Economy and its Consumer Engine will Hit Rock Bottom

The personal saving rate will rise to four percent and both layaway programs and Christmas savings clubs will grow in popularity. This won't be good for the U.S. economy which will contract during the first two quarters and post anemic growth rates in the last two.

Much of the Christmas savings money will be raided late in the year as many consumers will think they've served their penance and, with money gushing out of the government and central bank, they will regain their spendthrift ways before year-end making for a spectacular Christmas shopping season as compared to the one that just concluded.

8. Reported Inflation will Dip into Negative Territory

We'll hear lots of talk about deflation as the overall Consumer Price Index dips into negative territory on a year-over-year basis by mid-year. At this point, we'll all be bathing in a virtual government money shower as policymakers desperately try to avoid the ignominious honor of being the first group to ever cause real deflation within a fiat money system (no, what Japan had was not real, hard-money style deflation - that was just baby-deflation).

The policymakers will succeed.

By the time the leaves start falling, we'll all be talking about inflation again as energy prices rise in what will look like an inverse, smaller magnitude version of what happened last year.

9. Four Million Jobs will be Lost

Nonfarm payrolls will decline by three million in 2009 and there will be downward revisions of about one million to prior years' payrolls data as the Labor Department grapples with its birth-death modeling once again, publicly confessing that it has utterly failed to provide any meaningful statistics about the labor market in real time.

Health care will be the only employment sector that adds jobs in 2009.

Teenagers all across the country will become disillusioned after having lived their formative years during the biggest financial bubble in the history of Mankind and then seeing it come to an abrupt end as home equity withdrawals are relegated to the history books. They will actually go out and seek work, though few will find any this year.

10. Websites will not Wise-Up

A growing number of websites will continue to annoy readers by automatically playing video clips when the page is opened (didn't we already go through this process about four years ago?). They'll believe their marketing staff that this really is an effective advertising technique, but they will fail to understand just how many readers are leaving, never to return, after having to search so many times for that damn Pause button.

ooo

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Manufacturing activity hits 28-year low

Well, equity markets seem to be shrugging off the first bit of horrible economic news in the new year - the steepest contraction in manufacturing activity since 1980.
The Institute for Supply Management's manufacturing index tumbled from 36.2 in November to just 32.4 in December, the lowest level since June of 1980 when the index registered 30.3.

The all-time low for this data series that began in 1948 was reached in May of 1980 at 29.4.

More details are available in this report at Bloomberg - none of them are good.

The ISM’s gauge of new orders dropped to the lowest level since records began in 1948, while export demand was also the weakest since those records started in 1988. The group’s employment index decreased to 29.9 from 34.2 in November.

The gauge of prices paid fell to 18, the lowest level since 1949, reflecting the drop in commodity costs. Economists had projected that the measure, which averaged 65 in 2007, would drop to 20.

All 18 industries tracked by the group contracted last month, the first time that’s happened since Norbert Ore took over as chairman of the ISM’s factory report in 1996.

“We’ve seen a tremendous amount of demand destruction,” Ore said during a conference call with reporters. “There is a significant inventory correction taking place,” he said, and added he couldn’t predict when manufacturing would recover.

It's funny - everything is up today except for gold.

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Mad at Madoff

The reference to the 2004 German anti-capitalist gang "The Edukators", a group who broke into rich peoples' houses to rearrange the furniture, is quite interesting.

ooo

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Friday morning links

TOP STORIES
Manufacturing Cools Around the World - NY Times
Russia, Ukraine Poised to Resume Talks After Gas Halt - Bloomberg
Who Saw The Housing Bubble Coming? - Forbes
Credit Freeze Puts Chill on Dealmaking, With Volume Down 29% - Washington Post
Past Financial Crises Suggest Pain Far From Over - Naked Capitalism
Semiconductor sales fall 9.8% in November - MarketWatch
The Most Distrusted Institution In America - Forbes

MARKETS/INVESTING
Crude Oil Declines as Traders View Year-End Gains as Excessive - Bloomberg
Gold eases as dollar firms, oil tumbles - Reuters
New Year, New Price Poll - The Oil Drum
Oppenheimer bond fund losses hit college 529 savings plans - USA Today
After worst year ever, commodities may lag recovery - Reuters
2008 Year Review and Outlook For 2009 - Grandich, Agoracam
Father-son market experts diverge on 2009 forecast - MarketWatch

ECONOMY
The new consumer: Tight-fisted and 'emotionally fragile' - Globe & Mail
Secondhand stores shine in weak retail market - CNN/Money
As Recession Deepens, So Does Milk Surplus - NY Times
Life after a six-figure salary - CNN/Money
Steel Industry, in Slump, Looks to U.S. Stimulus - NY Times

INTERNATIONAL
China, India, Russia factories slash output, jobs - Reuters
India Cuts Rates, Unveils Package to Spur Economy - Bloomberg
Sovereign Wealth Funds Take a Big Hit - BusinessWeek
World stock markets kick off 2009 brightly - AP
UK house prices suffered record drop in 2008 - Telegraph
New year nightmare brings spectre of 1930s-style depression to eurozone - Guardian
Worldwide, a Bad Year Only Got Worse - NY Times

HOUSING
Housing woes no longer a business myth - OC Register
Are Home Prices Still Too High? - Seeking Alpha
The housing market in 2009? It’s anyone’s guess - Wash. Biz Journal
Sacramento-area real estate market befuddled the experts - Sacramento Bee

FED/TREASURY/BANKING
Paulson blames global imbalances for credit crisis: report - AP
Credit crunch to intensify, Bank of England warns - Telegraph
Credit rating downgrade, real estate collapse crippled AIG - LA Times
US Treasury finalizes 4-billion-dollar loan for GM - AP

INTERESTING
Marines buy cows for Iraqi widows - LA Times
A Chinese family's hard path to riches - IHT

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Remember what happened a year ago?

In looking through material from exactly one year ago in preparation for tomorrow's all-important (and exceedingly difficult) predictions for the new year, the following chart popped up from the January 2nd post titled "That was interesting".
It seems that the first day of trading last year set the tone for the next six months.

While broad equity markets set out on their year-long decline, oil began at just under $100 a barrel and got a good head start on its move to almost $150 from which it began tumbling in July. Similarly, gold was priced about $50 below where it stands today but was getting ready to surge to over $1,000 in March when the Bear Stearns leg of the credit crisis began.

A short excerpt:

Well, that really started the year off with a bang. Of course it probably wasn't the kind of a bang that most people were expecting but it was a bang nonetheless.

Oil hit $100 for the first time (briefly, so they say) and finished at over $99. This Bloomberg report said, "Three-figure prices may bring energy costs near the tipping point that will cause global economic growth to falter."

Didn't they say that about $50 and $60 and $70 and $80 and $90?

Gold made a new all-time high at over $860 closing in New York at $856.70. This Bloomberg report noted, "Investors are pouring money into the precious metal as part of a commodity surge with the dollar under pressure from the prospect of more cuts in U.S. borrowing costs."

Memories...

When the damage was tallied, it turned out to be one of the worst opening days in history. A USA Today report the next day was the subject of this post that contained an interesting graphic and some bad math along with some ominous parallels courtesy of Floyd Norris.

USAToday reports on yesterday's dismal performance of U.S. equity markets noting that the decline was the steepest opening day loss since 1983.

Hopes for a strong start to the new year barely lasted a half-hour Wednesday as stocks ran smack into the exact same fears that caused so much trouble in 2007.

All three major stock market indexes started sliding following a morning report showing manufacturing activity slowed in December, and the selling accelerated after oil prices briefly spiked above $100 a barrel. The news fanned concerns that the economy could be teetering on the edge of recession — and triggered Wall Street's worst January-opening performance in 15 years.

Maybe my math is wrong, but that looks more like it should be 25 years, not 15 years.

Floyd Norris at the New York Times reported on the relative damage to the S&P500 via numbers provided by Howard Silverblatt. In this tally, yesterday's 1.4 percent plunge ranks as the 6th worst start to the new year.

Every one of the previous five came when the economy was in a recession, or not far from one.

Here’s the list:

1. 1932, down 3.7% on the first day. Thus began the last year of the worst part of the Great Depression. The National Bureau of Economic Research thinks the recession that began in August 1929 lasted until March 1933.
2. 2001, down 2.8%. A recession began in March.
3. 1980, down 2.0%. A recession began that month.
4. 1949, down 1.6%. A recession had begun in November 1948.
5. 1983, down 1.6%. A recession had ended in November 1982.

Now even if you make the leap that this somehow forecasts the economy, it doesn’t do much for the stock market investor. The stock market had great years in 1980 and 1983, and a good year in 1949. On the other hand, getting out at the beginning of 1932 or 2001 turned out to be a wise decision.

Today should be better.

Though it wasn't known until almost a year later, a recession was already officially underway at the time and, as it turns out, the next day was indeed better. After the 1.4 percent drop on Wednesday, the S&P500 finished Thursday exactly where it began at 1447.16.

On Friday, however, the index plunged a whopping 2.4 percent (no, it doesn't seem like a lot now, but it did back then) before going on to lose five percent for the month of January in the beginning of what would turn out to be the worst year for stocks since the Great Depression.

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