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  • Rock-a-Bye Baby

    Posted by David Foster on July 20th, 2013 (All posts by )

    Fund manager John Hussman applies this lullaby to the current state of the stock market.

     

    Be careful out there.

     

    8 Responses to “Rock-a-Bye Baby”

    1. Bill Brandt Says:

      Tell me about it. From the little I’ve read it is propped up by the actions of the Fed, made necessary because of the inaction of the govt.

    2. Subotai Bahadur Says:

      For the last several years, the valuation of the stock market has been disassociated from the underlying economy. It’s value is totally dependent on the whim of the regime. Thus, regime risk. If the Fed stops putting $85 billion a month that it creates out of nothing into the markets, things collapse. If the day comes when the Fed cannot or will not [for political reasons] maintain that level of pumping; the bottom falls out.

      The underlying economy is in horrible shape and in fact by the technical definitions I learned long ago in macroeconomics; we are in a depression. And have been for a while. The government figures have been “redefined” and even then are falsified. REAL U6 unemployment should be between 15% and 20%. Real, unfiddled with, GDP growth is negative. Real inflation is rising [it helps the scam that the government does not count food or energy costs properly]. Real family incomes are falling. We are told that we are having a housing boom; yet mortgage applications are plummeting, mortgage companies are laying off 25% of their staff, and sales of wood [needed to build homes] are plummeting. We are told that we are in a recovery; and that is belied by the increasing number of empty storefronts on every main street. We are told that things are getting better. If we are selling things overseas, they move by ship. The Baltic Dry Index measures the usage rates of world shipping. It is, and has been for years, falling. If we are making and selling things domestically, they move by rail. The railroad utilization rate is, and has been for years, falling.

      Whether you agree with the “Blue Model” of governance [unlimited taxing, spending, and regulation] or not, you have to agree that it depends on the existence of a healthy enough economy to be taxed to get at least a reasonable fraction of the revenue to do that. Detroit filed for bankruptcy. There are a couple of dozen cities and states [all Blue Model] that are on the edge of doing the same. The real, productive, job and wage [and tax] generating economy to support them are not there.

      Speaking purely ex cathedra from my navel; I believe that the times indicate that if you have a disposable income; it should be channeled to tangible goods for future usage, that can be defended you and yours. Paper and electrons have a habit of vanishing. YMMV.

      Subotai Bahadur

    3. David Foster Says:

      SB…lots of good points, and I agree with you about the importance of freight rail, but utilization statistics are actually more positive than you suggest. See this data from 1890 to 2009:

      https://www.aar.org/StatisticsAndPublications/Documents/AAR-Stats-2013-07-09.pdf

      …growth from 1.0 to 1.5 trillion ton-miles between 1990 and 2000, I think this largely reflects to railroad renaissance following the deregulation

      but pretty close to flat from 2000 to 2009, surely reflecting the impact of the recession

      but also growth from 1.5 to 1.7 trillion t-m between 2009 to 2011. The economics of rail shipment, for a wide variety of commodities, are quite compelling, and probably especially so in times of economic pain where every point of margin is difficult to get.

    4. David Foster Says:

      Sorry, left out the second link from the AAR:

      https://www.aar.org/StatisticsAndPublications/Documents/AAR-Stats-2013-01-10.pdf

    5. Grurray Says:

      Cullin Roche of pragcap.com does a great job of breaking down rail traffic.

      http://pragcap.com/rail-traffic-continues-to-muddle-along

      It’s scraping bottom as is the rest of the economy.

      If you want to understand what’s going on with the Baltic Dry Index, find a long term chart for the past decade or so. Then compare it to a chart of the Shanghai Composite from the past decade. As China goes so does ocean shipping.

      Another one to watch is the Harpex. While the Baltic Dry Index tracks shipment of raw materials, the Harpex tracks all shipping container rates, so it’s more comprehensive.

      http://www.investmentpostcards.com/2012/03/23/the-harpex-index-is-superior-to-the-baltic-dry-index/

    6. tomw Says:

      Maybe it’s me, but Hussman’s lullaby site forbids me from any access.

      Could someone with access post a precis?

      tom

    7. David Foster Says:

      Tomw…can’t imagine what’s going on…this isn’t a paid access or required registration site…maybe if you start at the top of the site:

      http://www.hussmanfunds.com

      …and look for the July 15 post, that will work.

      His argument is that the baby in the treetop may be secure for an indefinite period of time, but odds are that eventually the wind WILL cause the bough to break and the baby to fall. He argues that the “Wealth Effect” on which the Fed is counting is mythical, that there are already trillions of idle reserves in the banking system and creating more of them will do no good, and that the reason QE is driving stocks up is mainly that people BELIEVE it will drive stocks up.

    8. tomw Says:

      Well, I have no explanation. Yesterday it was Error 403, “You have no authorization to access blah blah”

      Today. The world.

      Wonders will never cease….

      tom