More of the same for household flow of funds

The Federal Reserve released their quarterly Flow of Funds report today that includes data through the fourth quarter of last year and the two charts that have appeared here for a number of years now have been updated and are shown below.

Now a year or so past the worst phase of the financial market crisis, household assets have recovered somewhat but it continues to amaze me how much they declined relative to the asset bubble that burst earlier in the decade.
Thanks to the inflating housing bubble, overall assets never fell between 1999 and 2002 after the stock market bubble burst and then, after 2002, it was "off to the races" again.

This time around, there doesn't yet appear to be a new bubble on the horizon, though technology stocks sure seem to be vying for that position.

As for the American consumer and their mid-decade fascination with real estate, as has been the case for a few years now, the debt seems to linger long after the valuations go away.

After some heavy lifting by the U.S. government in the many ways that they have found to subsidize the housing market, home prices seem to have leveled off, however, the associated debt is coming down only slowly.
While I don't know how the "Home Mortgages" line item above is determined, my guess is that the chart overstates the current amount outstanding due to the hundreds of thousands of borrowers who are now in one form of mortgage limbo or another with their fate already sealed, just the timing needing to be finalized.

Until that time, they still carry a home mortgage at the full amount and the banks still carry the loans at the full amount on their books, otherwise, we'd probably have seen a much larger decline by this point.

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Are stocks expensive?

For some reason, an important graphic was left out of the online version of this story in today's Wall Street Journal and it seemed like a good idea to reproduce it here from the print edition in an attempt to better understand the questions that David Wessel asks about whether stocks are cheap or expensive today, on the one-year anniversary of the low last March and a full ten years after the Nasdaq reached its all-time high back in 2000.

Anyone looking closely at this chart from Yale economist Robert Shiller would say that, at this point, stocks are a bit pricey. In fact, what's remarkable about the data below is just how expensive shares were a year ago when people talked of generational lows in valuations. As it turns out, early-2009 was the only period since 1991 when stocks were below the long-run historical average when calculated as Shiller has done.
While some would surely argue that we've reached a permanently high plateau for valuations since the 1980s, higher prices may have much more to do with how radically different the financial world is today than it was in the century before the 1980s.

With seemingly no limit on how much money and credit can be created and pushed into the system to make all sorts of asset prices levitate, is it reasonable to think that we'll ever see a secular bear market bottom like the ones in 1982 and prior?

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Biderman: Bond inflows "scary"

Charles Biderman of TrimTabs was on CNBC yesterday to talk about the most recent fund flow data and he characterized the continuing movement of money into bond funds as "scary", noting that many retail investors don't realize that bond funds aren't a one-way bet.

Yes, it's yet another unintended consequence of ZIRP (Zero Interest Rate Policy) where investors look at money market and CD yields of less than one percent and go searching for yield - after being burnt by stocks in 2008, the logical alternative is bonds.

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Dr. Doom brings the gloom

Marc Faber of the Gloom, Boom, and Doom report thinks that U.S. stocks could fall 20 percent after making new post-crash highs this spring. That would see the S&P 500 rising toward 1,200 and then falling back below 1,000 for the first time since late last summer.

He also thinks the euro is oversold and a good short-term bet, along with Treasuries.

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Greenspan: The danger of falling stock prices

The win by the Saints yesterday was something of an upset but, nonetheless, the graphic to the right that appears this morning in the "Meet the Press" section over at MSNBC is more than a little bit ironic in light of the predictions that former Fed Chairman Alan Greenspan and former Treasury Secretary Hank Paulson were making a few years back about the future of the economy and financial markets.

I haven't cued up the Meet the Press video just yet and may wait until later in the day as a glass of wine (or two) may be needed before it is deemed safe to watch these two together, but Bloomberg carried this report of the event in which more warnings were heard from the former Fed chairman about the dangers of falling stock prices.

Former Federal Reserve Chairman Alan Greenspan said a U.S. economic recovery is “going to be a slow, trudging thing,” and that he “would get very concerned” if stock prices continue to fall.

A drop in stock prices is “more than a warning sign,” Greenspan said yesterday on NBC’s “Meet the Press” program. “It’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity.”

It's surprising that Bloomberg writers Alan Bjerga and Vincent Del Giudice didn't see fit to include the seemingly mandatory disclaimers that have been included in stories about the former Fed chairman in recent years, something along the lines of, "Many blame years of easy money policies by Alan Greenspan for multiple asset bubbles over the last decade..."

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Investing for (or in) retirement gets harder

The newspapers are full of stories about how baby boomers who have squirreled money away are rethinking their investment approach, evidence coming from last year's net outflows from stock funds and the fascination that many retail investors now have with bonds.

With the combination of an increasingly "risk averse" baby boomer crowd that is rapidly approaching what they once thought was retirement age and after multiple collapsing asset bubbles seen over the past decade, you'd have to think that investing for retirement is now undergoing some fundamental changes - and these aren't the kind of changes that the folks on Wall Street will probably like.

A number of stories over the last few days have helped to make this point, starting with a USA Today report in which the lead interview subject makes it quite clear that he's had enough.

Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.

He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.

That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety.

But Blank has no regrets: "I have no desire to attempt to make back what I lost."

Forty years of investing and that's it - it's hard to blame Martin for his decision, but it's equally hard to understand how investing as we've come to know it since the mid-1980s can continue.

Recall that it was back in 1984 that 401ks were first introduced in the U.S. and ordinary folks were first given a modest amount of control over how their retirement money was invested. That morphed into near complete control years later and this all worked quite well up until the bull market in stocks ended in 2000.

The Christian Science Monitor looked at how prepared the baby boomer crowd is for retirement in this story and came away unconvinced that the "golden years" will be very pleasant for many.

The leading edge of the baby boomers – the postwar generation that led the way on everything from war protests to yuppiedom and two-income families – is about to experience another first: postcrash retirement.

With the first wave of boomers turning 64 this year, they have little time to make up their losses from the recent debacle of stocks and housing. Not since the late 1930s have workers on the cusp of retirement faced such a big one-two punch.

So how are they handling it? Not well. It's almost become a cliché to say most boomers haven't saved enough for retirement. Nearly a quarter of those who turn 50 this year say they haven't even started saving, according to a poll in January. Here's the surprising part: According to some experts, even those who have managed to stash away some savings must be careful not to invest the money too cautiously.

With life spans increasing – and many boomers dreaming of active retirements, among other factors – some advisers suggest that near-retirees keep a sizable holding in stocks. The old adage – subtracting one's age from 100 to get the proper stock allocation – just doesn't apply anymore, this camp believes.

I don't know about you, but this whole "double-down" thinking by investment advisors seems fraught with risk. Sure, doubling down last spring would have been a great idea, but there are probably a lot more investors like Martin Blank in that first story above than there are those who have the stomach to "buy when there's blood in the streets".

Even Jason Zweig in this piece from the weekend issue of the Wall Street Journal seems a little down on the whole idea of people navigating the years ahead using what has passed for conventional wisdom when it comes to investing.

For many investors, the market's turbulence hasn't just destroyed wealth. It has shattered their faith in the financial system itself.

Consider Philip Eberlin, 56 years old, who runs a woodwork-restoration business in Chicago Heights, Ill. Trading hot stocks a decade ago, Mr. Eberlin got burned on picks like Krispy Kreme and Tyco. In 2007 he got back into stocks, only to take another hit.

"Having been burned twice in 10 years," says Mr. Eberlin, he now has about 80% of his family's assets "protected from the market" in certificates of deposit and fixed annuities. "I don't have trust in Wall Street to help the small investor in any way, shape or form."

Mr. Eberlin isn't alone. Late last year, Decision Research of Eugene, Ore., asked Americans how much they trusted bankers and other Wall Street leaders "to reduce the risk of the financial challenges the country is facing now." On a scale of 1 to 5, with 1 meaning no trust at all, the rating averaged a paltry 1.7.

Where do you go from here?

On the one hand, it's great that people have the amount of control that they have over their own retirement planning but, on the other hand, retirement dreams are now fading fast for millions of Americans and we've probably got at least a few more years before this secular bull market in stocks is over.

If only more people had sold their stocks ten years ago and bought gold, there would be far more happy retirement stories today.

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Dow 200 point up/down days

You never know what's going to happen in the next two hours but, right now, it appears as though the Dow Jones Industrial Average will have its first 200 point down day of the month on the fourth trading day of the month, setting the stage for what could be an interesting few weeks ahead, especially if the trade weighted U.S. dollar continues its ascent.
As compared to 2008 and early-2009, equity markets have been relatively calm over the last nine months but, somehow, that doesn't look like it's going to last. After net outflows from stock mutual funds last year by Mom and Pop investors, the early part of 2010 has seen that trend reverse a bit, however, with heightened volatility, don't be surprised if that flow of new money is short lived.

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What investment advisers won't tell you

In his weekly commentary, John Hussman explains something that few investment advisers seem to understand and even fewer would share if they did - that much of what passes as conventional wisdom in valuing stocks is nonsense.

Over the years, I have frequently emphasized that stocks are not a claim on "forward operating earnings." They are not even a claim on reported net earnings (and should not be valued as a blind multiple to a single year's results in any event). They are a claim on a very long-term stream of future cash flows that will actually be delivered to investors as dividends, or retained on their behalf as an increment to the book value of the company.
Importantly, the ability of companies to increase book value over time has been a critical determinant of long-term earnings growth, and is likely to be even more important in an economy where debt financing is increasingly constrained.

Go read the whole thing if you've ever wondered why no one seems to care about dividends anymore. One shouldn't have to think too hard about why, over the last 20 years or so, Graham/Buffett style analysis of stocks has been usurped by more "contemporary" valuation techniques showing that stocks are not overvalued.

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A few thoughts on the Great Depression

In the weeks ahead, there should be at least another item or two here on the subject of the Great Depression as I've taken to re-reading a couple of very important books on the topic after not having touched them for years.

Today, it seemed like a good idea to share a few thoughts.

Anyone with a similar interest is encouraged to have a look at these two works as they seem to cover all the essentials - the 1920s run-up to the late-1929 stock market crash and then the Great Depression in the 1930s.

Both were written decades ago, having been updated a number of times since, and there appear to be a slew of more recent offering on the subject over at Amazon, though I've not looked into any of the newer ones. Some time ago, I selected these two as being the best of the bunch:

Murray Rothbard - The Great Depression
Robert McElvaine - The Great Depression: America 1929-1941

(Note: You can read Rothbard's book online at Mises here(.pdf).)

Anyone who may also happen to crack these two open would be well advised to repeat the process that I'm about two-thirds of the way through now - start with McElvaine's book and read until you reach 1931, then switch to Rothbard's that covers the period from the early 1920s up until 1931, then switch back to McElvaine for the years after 1931.

Since McElvaine's account is more focused on the political and social details it provides a good setup for Rothbard's book that deals more with financial markets and monetary policy. In this way, you'll get the full treatment in what is mostly chronological order.

Anyway, a few thoughts that are worth sharing at this juncture:

1. The 1920s and the last 15-20 years have some shocking similarities

In reading about the 1920s, there are striking similarities between that period and the last 15 or 20 years regarding productivity gains, credit expansion, and the rise of the consumer culture - what should be looked back upon now as seminal developments that were predecessors to both the 1929 crash and the one in 2008.

Back in the 1920s, it was advances in electricity, automobiles, home appliances, and farming equipment that produced radical changes in the economy, changes that were misconstrued by the central bank as being a "green light" to err on the side of monetary policy that was "too easy".

The rapid expansion in consumer credit was another attribute that the two periods shared as the 1920s marked the first decade in which advertising became commonplace in American culture. Consumers were prodded to "buy now and pay later" for any number of new products that came with the technological advances of the time such as radios, refrigerators, washing machines, and - most importantly - automobiles.

In many ways, the changes that resulted from the widespread use of autos in the 1920s were like the changes that came from the widespread use of computers in recent decades.

This was the first economy-wide instance of credit-enabled pulling of consumer demand forward, a case of creating (what was believed to be at the time) a new era of prosperity that ultimately proved to be fleeting, as appears to be the case today.

2. The Fed's role in sowing the seeds of destruction is under-appreciated

While the Federal Reserve isn't credited with doing all that much from the time that it was founded in 1913 until after World War I, that changed in a big way in the 1920s. As recounted in great detail by Rothbard, continuous "inflationary" policies by Chairman Benjamin Strong from the early-1920s up until about 1928 played a key role in the crash.

Money and credit were simply allowed to expand too quickly - faster than ever before with the exception of periods when the nation was at war - and, when masked by productivity gains that kept consumer prices from rising, this "stimulated" other parts of the economy to inflate asset bubbles of one sort or another, like real estate in Florida or stocks in New York. Another major reason for the inflationary policies of the U.S. central bank in the 1920s was that it was helping Great Britain to get back onto the gold standard in the aftermath of the first world war.

It shouldn't come as too big of a surprise that a focus on stable consumer prices rather than the growth of money supply and credit first became popular amongst economists during this decade. Of course, to anyone looking back at the era now, the results are seen to be both unsurprising and disastrous, but, what is even more astonishing today is that most economists still view the Great Depression as almost materializing out of thin air with the October 1929 stock market crash. You'll hear a few comment on ill-advised tightening by the Fed in 1928 and early-1929, but it was the expansion that ran from 1923 to 1927 that did the real damage.

3. The role of Roosevelt continues to be misunderstood

In the nation's collective conscience, Herbert Hoover continues to be the primary culprit for the severity of the depression from 1929 to 1932 and Franklin Delano Roosevelt is often times seen as a White Knight who came in to save the day in 1933. In reading the history as told by both McElvaine and Rothbard, with few exceptions, FDR policies were simply a continuation of those that were put into place by Hoover, however, the results were much better from 1933 on for a number of reasons, the most important being that the depression had already had three years to "run its course".

It was Herbert Hoover, not FDR, that broke the mold of what had been a Laissez-fare approach by government in regards to the economy, a dramatic change from the Coolidge years when the president is said to have made little use of his office yet, to this day, is credited with fostering "Coolidge Prosperity" for most the decade.

The combination of central bank policies in the 1920s and an over-active engineer in Herbert Hoover were what fostered and prolonged, respectively, the worst economic period in American history and, while Roosevelt was much more effective in restoring confidence than his predecessor, the most important part of history was made before his arrival.

To this day, it striking to me that perhaps the greatest lessons of the Great Depression have still not yet been learned.

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Prechter calls for a crash ... again

Elliott Wave theorist Robert Prechter is back in the news today via this report by Peter Brimelow at MarketWatch in which he is once again calling for equity markets to crash. At the moment, that looks to be a pretty astute call.

Crash of 2008 winner says bear market is back
Proponents of a weird investment theory say another crash is coming. Even weirder: they were right last time.
...
EWFF was one of the first letters to call for a stock market rebound. (See March 4, 2009 column.) In mid-summer, it argued that the Dow could reach 10,000 -- but that the bear market would then resume, ending in devastating deflation. (See June 29, 2009 column.)

Well, the Dow did reach 10,000. What now?
...
It says: "2010 is the year when the bear market in stocks returns in full force." It compares the situation to the short-lived rebound after the initial break in 1929, and says that "a meaningful close" below 10,489 should see a similar collapse to new bear market lows.

EWFF also expects the spread between high and low-grade bonds to experience "a record widening" and thinks gold will fall "below $680."

As this is written, the Dow Jones Industrial Average stands at 10,398 - Yikes!

If not for his prediction years ago that gold would never top $400 and for what Brimelow calls Elliott Wave's "complex cycle theory -- which, however, is subject to readjustments and reinterpretation", it would be a lot easier to put some money where Bob's mouth is.

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More from Charles Biderman

It's nice to see that TrimTab's CEO Charles Biderman is getting lots of air time to talk about how the company that specializes in tracking investment money flows can't figure out whose been buying enough stocks to keep the price moving higher for almost a year.

Of course, few people seem to be complaining about the miraculous rise in share prices as it has cured many problems in financial markets such as bank solvency and the like. If the Federal Reserve really has been propping up the stock market, do we really want to know?

A better (but not embeddable) version of this clip is available here from Bloomberg.

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Hopefully, asset prices won't collapse

The interactive graphic from which the image below was obtained comes from the World Economic Forum's new Global Risk Report 2010 where (surprise!) an asset price collapse is viewed as not only the most severe, but the most likely global risk.
That little red dot in the chart directly above and to the left along with the high reading for "connection strength" mean that we'll be in a world of hurt if the price of stocks, commodities, housing, and other assets head south, but, of course, you already knew that.

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Predictions for 2010

This year's prognostications come a bit later than usual - about two weeks - however, don't think for a second that the delay was used to "game the system" by allowing time to review what other seers think 2010 will bring.

After having read a few of these, it quickly became more confusing than when the process first began a couple weeks back and I now regret having opted to nurse a slight hangover and watch football on January 1st rather than knocking this out as has been the routine in recent years.

Even without a plethora of other opinions, seeing into 2010 has proven to be much more difficult than looking ahead into 2009 a year ago, simply because, after the events of late-2008, conditions couldn't get much worse - they had to get better.

This is clear to see in the Predictions for 2009 made 54 weeks ago and then discussed in last week's follow-up A Review of 2009 Predictions where a rebound from the dismal 2008 results occurred for the economy, financial markets, and my own forecasting performance.

As for the new year, some things seem certain, others not so much.

Off we go...

1. Maybe the Last Really Bad Year for Housing

It's hard to understand how anyone can really think that the nation's housing market managed to "stabilize" in 2009 when prices continued to decline on a year-over-year basis even after government support to this sector on a scale never before seen by Mankind.

Homebuyer tax credits, central bank purchases of mortgage-backed-securities, a sharp increase in FHA lending, and a host of other factors have merely "kicked the can down the road" and that road will be "uphill" in 2010. Mounting foreclosures, loan resets, and an increasing number of homeowners who simply "walk away" from underwater mortgages will cause a relapse in housing this year and month-to-month gains will turn back to losses.

As measured by the 20-city S&P Case-Shiller Home Price Index for October 2010 (to be released in late-December), home values will decline by another 8 percent. The U.S. government will extend the homebuyer tax credit again in the summer and late-2010 will be a good time to start looking to buy property in most parts of the country.

2. The Dollar Will Continue its Descent

The dollar fell modestly last year after a surprisingly strong 2008 and it will continue that slow, steady decline in 2010 after a surge of safe-haven buying in the spring after equity markets have another little hiccup, temporarily boosting the greenback's appeal.

The trade weighted dollar ended 2009 at about 78 but will end 2010 at 72 after briefly dipping into the 60s and scaring the bejeezus out of the entire world as the long-anticipated "global currency crisis" once again looks like it is at the world's doorstep.

The dollar weakness will be driven primarily by concerns about funding the U.S. budget deficit as traditional buyers become more scarce and the entire world begins to realize that the economic recovery in the U.S. will be very long and very slow.

3. Stocks Will End the Year Lower

Broad equity markets in the U.S. will advance early in the year and then, peering into the future of the domestic economy and not liking what they see, have a relapse right along with the housing market.

Retail investors will continue to pull money out of stocks, in the process muttering Will Rogers' famous words about the relative concern for the words "of" and "on" when they are placed between the words "return" and "principle". Whatever or whoever drove stocks higher in 2009 will have much less success doing so in 2010, however, it won't be a complete washout as the Dow will lose 10 percent and the Nasdaq 15 percent.

Stocks in China will get about half-way back to their 2007 highs before reversing and ending the year only modestly higher. Gold and silver mining stocks will fall in sympathy with other equity markets but will rebound faster and end higher than most other sectors.

4. Short-Term Interest Rates Will Stay at Zero ... Again

Like last year, short-term interest rates in the U.S. will end where they began - at zero - but the central bank will tack another $1 trillion onto its balance sheet.

Chairman Ben Bernanke will be re-confirmed for another four-year term as Fed chief but will receive the highest number of 'No' votes in history and many elected officials voting 'Yes' will regret their decision by summer as the economy sours and the mid-term election nears.

The Fed will stop buying mortgage backed securities in March and the housing market swoon will intensify. Bernanke and crew will then resume their purchases in May because no one else was willing to buy at anywhere near what the central bank was paying.

5. Energy Prices Will Go Up and Then Down

After rising to $95 a barrel during the spring, the price of crude oil will dip to as low as $45 and then end the year at $65 a barrel. Peak oil will have to wait until global growth begins to post much bigger numbers and that won't happen this year.

The price at the pump will rise from their current $2.70 a gallon to more than $3 a gallon early in the year and then retreat back to the low $2 range. Gasoline was one of best commodity investments last year, this year it will be one of the worst.

None of the green energy job initiatives will amount to anything and that's just sad.

6. Gold and Silver Will Soar ... Again

The end of 2010 will mark ten straight years that gold bullion has ended higher than it began and most Americans still won't own it, continuing to put their trust in the mainstream financial media that, for the most part, still doesn't understand it or recommend it.

The yellow metal will make new all-time highs at just over $1,400 an ounce in March and then begin its every-other-year 18 month consolidation, ending 2010 at $1,300 an ounce. Silver will rise to $24 an ounce in the spring and end the year at $21 an ounce.

An increasing number of retail investors will eschew the advice of Money Magazine and buy gold and silver anyway, but a good number of them will sell it over the summer when metal prices correct. They'll be back in 2011.

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 will Barely Avoid a Double-Dip

Economic growth will stall by the second quarter as Congress finds it politically difficult to make additional stimulus funds available during an election year. Following an impressive growth rate during the fourth quarter of 2009, the first two quarters of the year will see rates of between zero and one percent with the economy posting a small negative number in the third quarter.

The overriding theme in the economy during 2010 will be the continuing revival of a more frugal lifestyle following the credit and consumption binge of recent decades and the savings rate will continue to rise, from about 4 percent in 2009 to 7 percent by year-end, still well below the pre-Reagan administration average of about 10 percent.

8. Inflation will Surprise to the Upside

Consumer prices will rise much more than most economists expect early in the year driven higher by continuing unfavorable year-over-year energy price comparisons and the government's "official" annual inflation rate will reach a peak at over three percent as the grass starts turning green.

Then commodity prices will plunge and we'll start hearing about de-flation again.

9. Only a Few Jobs will be Created

Next month's benchmark revisions to the Labor Department nonfarm payrolls data will show an additional loss of 1.2 million jobs during the early-2008 to early-2009 period (greater than the currently estimated 840,000 loss) and there will be only modest net job growth in 2010 of about 500,000 jobs, all of it in health care.

The unemployment rate will reach a peak at 11 percent early in the year and remain above the 10 percent mark during all of 2010, save for a two-month dip in late-summer as millions of jobless become discouraged and stop looking for work.

10. The 2010 Elections will Be Shocking

As the economy turns from weak to bad again over the summer, there will be some surprising developments leading up to the fall elections as young and old alike express their displeasure with the status quo, namely, the cozy relationship between elected officials and the leaders of the FIRE (Finance, Insurance, and Real Estate) economy.

A record number of independents will run for and be elected to office and Washington will start to get the message, but Wall Street won't.

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Charles Biderman on CNBC

Late yesterday, Charles Biderman of TrimTabs appeared on CNBC to talk about what factors could have caused stock prices to rise last year, given that the usual ones were absent.

Since the case for government intervention in equity markets as suggested by Biderman is circumstantial, many will dismiss out-of-hand the idea that the Fed was a big, regular buyer in after-hours futures markets last year to the tune of hundreds of billions of dollars (after leverage), an effort that would surely make any market go in the desired direction.

That certainly would be a much easier approach to take for long-time investment professionals who would undoubtedly rather go on believing that stocks remain about the only "untainted" and "free" market after more than two years of Wall Street turmoil where shattered confidence and tumbling stock prices were a major factor, resulting in massive government intervention nearly everywhere else.

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"The only logical buyer is the government"

From last Friday on BNN, Charles Biderman of TrimTabs talks about the odd goings on in U.S. equity markets last year where low volume and the lack of identifiable buyers have caused more than a few people to suspect that things are not as they appear.

Biderman says that in after-hours S&P500 futures markets, as little as $5 to $10 billion a month in buying could be responsible for a large part of last year's gains and, when you think about it, $5 to $10 billion a month for the U.S. government in 2009 was "chump change".

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TrimTabs and the Plunge Protection Team

We haven't heard too much about the Plunge Protection Team lately, that is, until the folks at TrimTabs talked to the folks at Marketwatch yesterday and this report was filed:

The unusual circumstances that led the U.S. market to rally powerfully in 2009 might be explained by secret government moves to buy stocks, according to Charles Biderman, the founder and chief executive of TrimTabs, a research firm that tracks liquidity flows in the market.

"We cannot identify the source of the new money that pushed stock prices up so far so fast," Biderman said in a statement Tuesday.

The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.

"We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?"

The Federal Reserve or the Treasury, Biderman said, could have easily manipulated the stock market by purchasing $60 to $70 billion worth of futures of the S&P 500 on a monthly basis.

There were net outflows from U.S. stock funds since March of last year as investors plowed hundreds of billions of dollars into bond funds, one of the many troubling aspects of the recent stellar performance of equity markets that becomes all the more puzzling after former Fed chief Alan Greenspan recently cited the rise in stock market capitalization as one of the major factors in the nascent economic "recovery".

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A review of 2009 predictions

It's that time of the year again - time to look back at the first of the year to see how yours truly did with his Predictions for 2009 and see if there was any improvement over the previous year, a feat that shouldn't be too hard to accomplish given the year that 2008 was.

Here's a recap of the last three years of annual prediction reviews:

• A review of 2006 predictions
• A review of 2007 predictions
• A review of 2008 predictions

Some of these are pretty interesting to look back at now, a few years later.

For example, a high of $650 an ounce for gold in 2006 and ending the year just below that mark would have sounded like bold calls at the time since the yellow metal had just broken through the $500 an ounce mark for the first time in 20 years. As it turned out, the high was about $75 short of the mark but the year-end price was spot on. But, today, those calls seem so ... 2006.

The self-grading system that has been in place here for the last few years (not to be confused with our self-regulating financial markets) has produced the following results:

• 2006: 6-As, 2-Bs, 1-C, 1-N/A
• 2007: 7-As, 2-Bs, 1-F
• 2008: 4-As, 3-Bs, 2-C, 1-D

I think I took it a little easy on myself last year, for obvious reasons, but I'm looking to improve upon those results now.

Let's see how things turned out for the 2009 predictions...

As always, let's begin with housing.

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.

Grade: A

Last week's S&P Case Shiller Home 20-City Home Price Index showed a year-over-year decline of 7.3 percent, not far from the nice round number of minus 10 percent that was predicted. Also, while new home sales remain in a funk, the much larger existing home sales clearly made a bottom early in 2009 and, with a steady supply of low-priced foreclosed properties continuing to come on the market and housing incentive money gushing from Washington, that bottom should last.

For these reasons, an A is awarded, making this the latest in a series of very good predictions for housing, highlighted by 2006's The housing bubble will not pop and 2007's The housing bubble will pop.

Yes, this year is the year to start looking to buy property, but probably not until the second half of the year since the low interest rate/homebuyer tax credit programs seem to have pushed things back a bit. My wife and I plan to buy property in late-2010.

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.

Grade: C+

The big negative GDP numbers and the big job losses for the U.S. came in the first half of the year, but economies around the world saw even sharper declines. Nonetheless, the dollar did go down in 2009, the U.S. Dollar Index rising from 82 to 89 early-on and then tumbling all the way to 74 before rebounding to end the year at 78.

The overall direction was right, but the magnitude was off by enough that this will be considered a slightly above average forecast.

There certainly weren't a lack of buyers for Treasuries last year in one of the more interesting developments that the folks in Washington are probably figuring will extend indefinitely into the future. They're probably wrong about that.

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.

Grade: B

The broad U.S. stock indexes rose about double the predicted 10 percent and emerging market stocks were up even more, some of them shockingly so. It's a good thing none of them are bubbles, because we've had enough bubbles in the last decade that we don't want to go into the next decade with large bubbles already forming.

We'll see how that works out...

Once again, the direction was good, but the magnitude was off and mining stocks did quite well last year - up around 40 percent - but emerging market stocks did even better.

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.

Grade: B+

Predicting the Fed funds rate has become way too easy, at least for me. Looking back over the last few years, this has been one of the most accurate groups of predictions and that's not likely to change in the period ahead. In fact, I can tell you right now that a year from now, short-term rates will still be zero.

As for the Fed's balance sheet, despite many calls for a much higher total, it ended the year about where it began - at $2.2 trillion and that's why the grade is a 'B' instead of an 'A'. Maybe next year, I'll stick with just the Fed funds rate call to increase my chances of getting an 'A'.

What's interesting when looking back over the last year is that, while the Fed's balance sheet total has not really changed, the composition has changed dramatically - instead of short-term loans for distressed assets, the Fed has been gobbling up mortgage backed securities helping to make all the other distressed assets in the world look a lot less distressed.

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.

Grade: A-

The spot price of crude oil dipped well below $40 a barrel, but not below $30, and the rebound did come, though it never reached the century mark. Nonetheless, the year-end price of $79.36 a barrel was close enough to the predicted $85 price that this probably merits a grade of excellent.

Gasoline prices never made it back to $3 a gallon, but given that they were about a dollar higher at the end of the year than at the beginning (about $2.60 vs. $1.60), a lot of people are probably scratching their heads about how the oil bubble burst, yet they're still paying about 50 percent more at the pump than they did just a few years ago.

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).

Grade: A

The silver price almost doubled - from $11 an ounce to $19 an ounce late in the year - and it ended at about $17 while gold did again charge through the $1,000 an ounce mark in September to end at around $1,090 an ounce.

Both of these were deemed good enough that another 'A' is being awarded.

The inventory at the world's largest gold ETF rose from 780 tonnes at the beginning of the year to over 1,134 tonnes in June and ended the year at just a hair below that mark. However, the volatile silver ETF inventory fell short of the 10,000 tonne mark at about 9,500.

I don't think 2009 was the year that people started "talking about junior mining stocks at cocktail parties just like internet stocks in 1997", but 2010 might be.

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.

Grade: A

Savings rate - check. Layaway programs - check. GDP in Q1 and Q2 negative - check. Anemic growth in Q3 - check. Money gushing from Washington and the central bank - check.

As for a regaining their spendthrift ways before Christmas, that appeared to be limited to those items that were accompanied by a government stimulus check.

It looks like the 2009 holiday shopping season will be an improvement over the 2008 period, but not a spectacular one and an unexpected resurgence in the American consumers' spendthrift ways is one of the more frequently heard "outlier" predictions for 2010.

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.

Grade: A

Deflation arrived in the consumer price index but it didn't amount to much - about -2 percent on a year-over-year basis at its worst, almost completely due to the comparisons against mid-2008 gasoline prices of over $4 gasoline.

The latest reading on inflation from the Labor Department was +1.9 percent and this is likely to go higher in a couple weeks when today's $2.60 a gallon gasoline is compared to last year's $1.60 a gallon fuel and, of course, the economists will say to ignore the influence of volatile energy prices even though, technically, the real Fed funds rate will be about -2 percent.

Predicting inflation is going to get very interesting in the next few years...

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.

Grade: A+

Wow. Including the early-2009 benchmark revisions, the latest Labor Department data says that 4.1 million jobs were lost during the first 11 months of the year and Friday's monthly report is expected to be flat.

That looks like it deserves an 'A', particularly since the education and health care category was the only category to add jobs during the year.

That last paragraph about teenagers was pretty funny - just don't tell it to a teenager.

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.

Grade: C

There was some progress here, but not nearly enough.

Summary

Overall, this was quite an improvement over last year and ranks right up there with 2006 and 2007 - I gave myself a 'C' on that last one just so it wouldn't look like an 'A' grade was automatic, but that was quite a roll towards the end there.

For the record, it will go down as 6-As, 2-Bs, and 2-Cs, though others might not have been so lenient in some areas.

Predictions for 2010 are in progress...

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What was hot and what was not in 2009

It's always nice when the last day of the year is on or near the weekend because it's much easier to make year-over-year comparisons without having to subtract out the daily price moves from the prior week that occurred in the new year.

Such is the case with the current edition of the Wall Street Journal's What's Hot -and Not that, in the right-most column below, shows just what kind of a year it was in 2009.
A look back to last year at this time shows a very different picture as captured here and reproduced below - look at all those big negative numbers on the right.

In a reminder of how wacky oil markets were a year ago, that 22.9 percent weekly gain atop the table below must have been one of those weird contango events on an expiring oil futures contract where the price would plunge about $10 during the last few days of trading.
In 2008, the dollar and gold were the only two items in the list that gained (though Treasuries had a good year in '08 and, for completeness, should have been included) while the first table above shows that the U.S. dollar was the only item in the list that declined in 2009.

Who knows what's in store for 2010 - maybe a year when nothing moves very far at all would be a nice change of pace after a tumultuous last few years of the "Awful Aughts".

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The BBC 2009 global financial quiz

Here's a fun little quiz from the BBC about financial market events and economic developments around the world that probably wouldn't be mentioned here if I hadn't just gotten 10 out of 10. I suppose you could go back and fix your answers (like on some DMV tests) in order to get a perfect score, but that's not what was done to generate this congratulatory message:
It's a good thing question #11 wasn't, "Who's Robert Preston?" because I haven't a clue.

The ten multiple choice questions are as follows:

1. Which country introduced a car scrappage scheme in January that went on to become the biggest scheme in the world?
2. The price of US light crude oil hit its lowest level of the year on 12 February, but what was the price?
3. Which UK company, which ran some of the best-known fashion retailers on the High Street, went into administration in March?
4. Which country unveiled in April its third major economic stimulus package since the onset of the financial crisis worth $150bn (£94bn)?
5. Which two well-known European carmakers announced in May they had agreed to merge?
6. Which US carmaking giant filed for bankruptcy on 1 June?
7. Eurozone unemployment hit a 10-year high in July, but which country had the highest unemployment rate?
8. Figures released in August showed that which two major economies exited recession between April and June?
9. Which country passed a provisional banking code in September that limits bonuses to no more than 100% of a banker's annual salary?
10. In October, which country became the first G20 nation to raise its interest rates since the onset of the financial crisis?
11. Which US food giant made a hostile bid of $16.4bn (£9.8bn) for UK confectioner Cadbury in November?
12. The price of gold hit its highest level on record in December, but what was the price?

I think I guessed at one or two but, nonetheless, perfect is always good.

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UPDATE - 12/31/09 9:45 AM PST

Uh... There are 12 questions, not 10. Nevermind that stuff above about perfection...

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A decade of asset bubbles

It's virtually impossible to look back at the decade about to conclude and not see former Fed chief Alan Greenspan's fingerprints all over it. Though current Fed chief Ben Bernanke may outdo his predecessor by blowing even bigger bubbles, their size and destructiveness will not be seen until the 10's, a decade that, as far as bubbles are concerned, will be all his.

As for the 00s, the Associated Press files this report on the many Greenspan bubbles.

A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different.
...
A mix of investor hubris, ignorance and piles of easy money created the bubbles. New ideas about where to invest seemed foolproof and greed crowded out doubts. Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.

Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.

"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston.

Despite the claims of many in Washington and on Wall Street, they'll never be able to do much about either investor ignorance or hubris, so the only way to prevent more bubbles is to stop the easy money policies, but, given where we are today, that seems to be out of the question.

There's lots more in this story - from the Nasdaq bubble all the way through the housing bubble along with a little gold-bashing and a reminder that Ben Bernanke doesn't see any signs of a bubble at the moment.

Read more...