CREF stock, 5 years ending 19Sep2005
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In the aftermath of Katrina, the stock market.... went up??? Certainly capital (real estate) was destroyed, and economic activity was interrupted, and 300,000 or more people were suddenly out of work, but no problem.... just put it on the tab. The Fed's (which is to say, your) contribution is currently pegged at $62 billion, and may well rise to double that amount. That money must either be raised in taxes, or borrowed, or printed. The latter two are more likely, but at least in the short term it probably will be borrowed. Put it on the tab.
Private insurance covers much of the destruction of individual homes and businesses. Though estimates of the total cost of destruction of private property are just beginning to come in, $200 billion is not an unreasonable guess.
Since insurance companies can't print money, they must either liquidate some of their reserves to pay out claims.... or borrow money, and repay the loans later through increased insurance premiums. Put it on the tab.
In some ways the stock market is heartless because, except for the hurricane-caused interruption in refined petroleum supplies, it recognizes that economic activity merely shifts - from people comfortably going about their affairs in dry New Orleans, to drying out, rebuilding and relocating people in a soggy New Orleans and in crushed Gulf shore cities.
The market is measuring only money flow and economic activity. It is not measuring values that are not strictly economic.... such as the almost half million people who have had their lives uprooted to some extent, and the 100,000-plus who lost virtually everything.... pets, photos, heirlooms, homes, transportation, even papers proving who they are.
It also does not reflect the real drawdown of savings that occurs when we rebuild after a major disaster. Well, why should it? All we have to do is put it on the tab. Worries about depletion of savings died with hard money.
Eventually, though, the tab must be paid, and we will pay it.... through higher taxes, or interest rates, or consumer price inflation, or some combination thereof.
I sometimes wonder just how much disaster our
debt-ridden economy can absorb without choking.
As long as the disasters are few and far between (as
is usually the case with major hurricanes) and
sufficient time elapses to recoup and to slowly
absorb the costs, we're probably OK. But with
today's dissaving (even before disasters strike), two
or three of these things back-to-back could be
enough to tip the economy over the edge, into
recession or depression.
As many of you know, I recently relocated back to my home outside of Austin, Texas. Austin is now the host city to more than 5,000 refugees. Texas is home to over 100,000 refugees and the number is growing daily. I know you must be reading this and saying, "Yes, I know... I see it on the TV and it's awful". Well, honestly, it's beyond awful. I spent this weekend volunteering in Austin. My assigned "group" of refugees consisted of just "normal" folks, some very poor, some working class and some folks just like you and me. Of the 18 folks in my group, 8 were children. Of the 8 children, 3 were without parents. They were completely devastated and shell-shocked.
As I welcomed these children into the convention center it became very clear to me that I had not emotionally prepared myself to deal with the situation. One of the little boys that was parentless approached me wearing a T-shirt covered in mud and only a handkerchief tied around his waist (he is maybe 18 months old). He cried uncontrollably for hours and hours and had been vomiting the entire day.
As I approached and tried to console the other two parentless children, my heart just broke. Here I sit in my clean clothes, I had just had lunch at Whole Foods and was very "okay" to go put in my "time" at the convention center. What I didn't anticipate is the extent of the situation and that of the hell that these people had been through. The other two children are a brother and sister, ages 3 and 5. As night approached the volunteers made "beds" out of pieces of paper on the floor (We didn't have enough cots for everyone, so we wrote the children's names on the pieces of papers lined up on the floor.). As the night went on, the stress in the children became very, very apparent.
As I began to read a good night story to the parentless brother and sister, they stopped me and asked me "Where is your bed? Where are you going to sleep tonight? Are you going to leave us alone?" ...My heart just broke. I have a son and am a single mother. I had to go home to him and couldn't take them with me to sleep in one of the many empty beds in our home. What an awful feeling. I continued to read and comfort the children until they fell asleep.
The other child who is without a parent still lay there crying uncontrollably. I picked him up and rocked him in my arms until exhaustion overcame his tears. I laid him on his makeshift bed, tucked him into his "bed" and reluctantly walk to my car. Tears overwhelmed me as I drove myself to my home and my own son.
I spent most of the day today going through my belongings (most of which are still in boxes from my recent move), gathering anything that I really didn't need. I then went to Wal-Mart earlier today and bought every baby bottle and pacifier on the shelf. (I hate Wal-Mart and refer to it as "Wally He@#". I absolutely refuse to shop there, but it's cheap and I made an exception today.)
Our youth group also gathered $1000 worth of school supplies and backpacks from donations from our church. My son and I spent this evening with many other folks from our church stuffing backpacks with school supplies and sorting mounds of clothing and other donated items.
....I just wanted to try to convey to those of you who may be watching this situation unfold on TV with a sense of reality... reality sucks and it's a really awful situation. I literally went through my closet and every box I could this morning and came up with a "if you haven't touched it in 6 months, then give it away rule".... I'm close to the situation and can donate anything that I am able to gather....
I'd like to leave you with one parting thought (I'm not trying to "tug at your heart strings", but am just trying to convey what is hard to convey via the TV).
As I left the convention center in tears last night,
seven more buses pulled up from the Austin
International Airport. I learned that on one of the
buses 70 refugees waited to disembark and join the
others in the convention center. Of the 70 people on
that one bus, 30 were children without parents.
That's 30 parentless children, on that one bus
alone... this is truly a dire situation. As dire as this
situation is, these children are lucky because they are
blessed with their lives and with a second chance at
life. These children were rescued from an area of
New Orleans where 32 other children where tied and
toggled together to trees and street signs in what
appeared to be a desperate attempt by adults to
"chain children together" to save them. Unfortunately those children did not survive, but the 30+
children on the bus in Austin, Texas did.... Please
think of those children when you tuck in your kids
tonight.
Point blank, there is no economic justification for rebuilding a city on a flood plain subject to not only river flooding but hurricane flooding. Furthermore, prevention of the former is at the expense of more damage down the road from the latter. The proper solution, that undoubtedly will not be taken since it makes economic as opposed to sentimental sense, is to keep New Orleans a port subject to periodic flooding by the river, remove the levees and let the river return the silt marshes that protect the city from hurricanes at the expense of more periodic river flooding. Only those structures that are safe from periodic flooding should be allowed to stay. Perhaps portions of New Orleans can be saved but anything that was 50% destroyed or more should be abandoned to nature. I say let's rebuild, but do it somewhere else. Remember this was a category 4 storm when it hit, not a category 5 storm. To attempt to rebuild New Orleans when it is sinking every year in such conditions is foolhardy. Like it or not, it's time to cut our losses and move on. - Mike Shedlock [Nick's comment: Will never happen]
The displacement of the population is the crisis New Orleans faces. It is also a national crisis, because the largest port in the United States cannot function without a city around it. The physical and business processes cannot occur in a ghost town, and right now, that is what New Orleans is. It is not about facilities, and it is not about the oil. It is about the loss of a city's population and the paralysis of the largest port in the United States... the United States has lost not only its biggest port complex, but also the utility of its river transportation system - the foundation of the entire American transport system. There are some substitutes, but none with sufficient capacity to solve the problem. - George Friedman
There seems to be a lot of yammering about low inflation but it is starting to sound a bit silly. The U.S. government is going to be handing out $2,000 to all flood victims and that money will likely be spent very quickly. There is also going to be tens of billions spent on the recovery and rebuilding of the region. If anyone can't see that there is going to be massive graft and pork barreling then they have a lot more faith than I do. If this poses no problem then, like I said before, the government should make it a point to destroy a major city every now and then. - Marc Sexton
The production of capital assets entails the postponement of current consumption. So, some people are going to have to defer current consumption so that finite resources can be used to reproduce capital assets. If hurricanes or other natural disasters contained economic silver linings, we wouldn't have to wait for Mother Nature's serendipities. We could create man-made ones. Short of wars, which destroy not only physical capital but human capital, too, we could blow-up neighborhoods after giving residents a "heads up" to gather their mementos and vacate their homes. Wow! Think of all the economic activity we could generate. This concept of man-made disasters as good for the economy sounds silly, doesn't it? No sillier than the analysts who will declare that there is an economic silver lining in Hurricane Katrina. - Paul Kasriel
There are still economic illiterates out there who think that a catastrophe is good for business. After all, it will lead to increased employment in the construction industry. But this analysis ignores the fact that nobody was ready to spend this kind of money voluntarily prior to the hurricane. There are winners, but there are far more losers. - Gary North
....after having my butt handed to me in a large number of option trades that went bad due to what I perceived at the time as obvious intervention/manipulation, I made the strategic decision to move 100% of my personal financial resources out of the markets. Whether you want to call it "intervention" is a matter of choice. What I do see is that when in the market today, I am not "eye-to-eye" with other traders - the formerly Invisible Hand has become quite visible. Ask yourself "Why would the stock market climb with a million people in the dark, gasoline production endangered, and a hugely expensive relocation program underway?" The answer is simple: A free market would have tanked (just as it did after 9/11). So I took all of my money and left that particular casino, taking a few dollars and a hell of a tax-loss carry forward with me. - George Ure
In essence, passive indexing is the equivalent of a dog chasing its own tail. Selected companies grow larger as sums of indexed money robotically swell their market caps. As valuations rise, the indexers are encouraged by the boost. The process repeats in round robin fashion, with little thought for the objective worth of the companies receiving these blind inflows. Few question this puzzling lack of logic, thanks to a triumph of circular reasoning: The Efficient Market Hypothesis assumes that all valuations are intrinsically self-justified. This academic diktat reinforces the torrent of not just dumb, but brain-dead money. Most of us know the crucial economic benefit of a stock exchange is rational and efficient capital allocation, but we forget that rationality presupposes intelligent thought. As passive indexing gains in popularity, the principle of rational capital allocation is turned on its head and thrown out the window. - Justice Litle
Investing in America now is no longer a low-risk proposition. Now it is a high-risk proposition. Its stocks are expensive. Its factories are old. Its real estate is in a bubble. Its workers are overpaid, compared to Asian competitors. Its bonds are denominated in a currency with no backing - other than the full faith and credit of the world's biggest debtor. - Addison Wiggin
The trend among nations has for years been to collect dollars as reserves. But now there are questions about the U.S. finances, and as a result central banks are starting to diversify to other currencies. The key, the absolute KEY to U.S. prosperity is the continued willingness of other nations to accept dollars. The test of the dollar is the number of dollars it takes to buy a euro or a yen or an ounce of gold. This is the great drama that lies ahead. How long will the rest of the world continue to accept a reserve currency, the dollar, a dollar that is backed by the world's greatest debtor nation? It's almost crazy that a nation that is running massive deficits should possess the world's reserve currency. And I'm wondering how much longer this incredible situation will last. - Richard Russell
When an economy is periodically "reset" by a major depression, the debt load begins to build up again in its aftermath. This debt load has a theoretical maximal value of 83.5 years before the economy has to crash again due to the magic of compounding. There's nothing to keep it from crashing beforehand, though. Thus, if we take the high of 1929 (September) and add 83.5 years, it means the absolute peak of this economic cycle can happen not later than 2012. Personally, I believe there's a good chance that it has already peaked.... what we're seeing now is an economy more limited long-term by a combination of compound interest limits (83.5 years) and average length of life, which has extended dramatically during this century. - George Ure
I also have to wonder how many overstretched homebuyers understand the financial risk they are taking. Most, I presume, think they can simply walk away from an underwater mortgage if the housing market crashes. Walk away -yes, without cost -no. If a bank or mortgage lender is forced to repossess your home, and resell it at a lower cost, they are required by the IRS to issue a 1099C for the amount of mortgage debt that was forgiven. And that is taxable to the former homeowner as ordinary income - at full Federal and state income tax rates. Just imagine losing your home, and then receiving a tax notice from Uncle Sam that you owe taxes on $50,000 in income that you never received! - Jim Stack
....the collapse in the real estate market will be apparent over the next six months. - Howard Ruff
End of the bubble is nigh. Get rid of stocks, real estate, corporate and junk bonds. - Bill Gross
In a country with virtually zero savings like the United States, any liquidity essentially arises from debt creation. This is really fake liquidity depending on permanent, prodigious borrowing facilities, presently the housing bubble. Once this bubble evaporates or bursts, the U.S. economy loses its chief liquidity source - with disastrous effects on asset prices. The crucial question concerning the U.S. economy is whether it is slowing or accelerating.... we see a lot of fudge in the recent economic data. Our main critical consideration is that a self-sustaining recovery would absolutely require a strong rebound in business investment. But that is not in sight. On the other hand, the turnaround in the housing bubble is only a question of time. A fairly short time, we think. The consensus expects that the U.S. economy has the "soft spot" behind it and will surprise positively. We expect shocking economic weakness. All asset prices, depending on carry trade, are in danger, including bonds. - Kurt Richebächer
Regardless of how personal saving is defined, unless house prices leap forever, or the stock bubble revives, most Americans' assets are totally inadequate to support them in retirement. And, the almost nonexistent saving from current income means that those net assets are being augmented year by year at trivial rates. A recent study of Federal Reserve data found that the households headed by baby boomers had median financial assets of $50,700. With a 5% annual withdrawal rate, that would generate only $2,535 annual retirement income. - Gary Shilling
If there is one thing that I want you to remember, it is that there is no acceptable level of price inflation above zero. Zero is the upper bound on acceptable inflation. And if you think otherwise, like the horrid Ben Bernanke and a lot of other morons who ought to have their faces slapped, then show me one other time in all of history when a "little" inflation was a good thing. - Richard Daughty
What I see is an America where the middle class is slowing becoming an endangered species. An America that is slowing becoming a country of haves and have-nots. Long-term, that wide disparity of income is a destructive force. I see it every day in the beautiful, western Montana resort town that I live in. My children go to class with children who parents live in 10,000 square foot log-home mansions, have closets filled with designer clothes, and travel to warm, exotic spots every Christmas vacation. My children also go to class with kids who wear the same clothes to school day after day, live in ramshackle trailer homes, and look forward to the free, hot lunch they get at school because it is the best meal they'll get that day. Sadly, the two groups look at each other with contempt. Worse yet, I fear that same dynamic is playing itself out all across America and that is a very troublesome, long-term economic millstone that will ultimately drag our economy down. - Tony Sagami
It was the US consumer that led the bull market and now the consumer is running out of gas. He has run out of savings. He is running out of available credit. He is running out of confidence. In the aggregate, practically all he has left is his "home equity" which is probably at risk. You cannot rule out that for the US stock market, the sky may be falling. - Martin Goldberg
As of 2005, about 86% of household cash flow is sourced through debt. This annual new debt accounts for nearly $1 of $8 spent in the economy. - Stephen Church
Rather than curtailing consumption, Americans have merely responded to higher gas prices by borrowing more money. Therefore, the immediate damage isn't reduced consumption but increased debt. As a result, the actual damage is only being postponed, but with even greater consequences for future consumption, as not only will Americans be required to pay more for energy tomorrow, they will have to pay interest and principal associated with today's purchases as well. What America has succeeded in creating is not an economy impervious to "shocks", but merely one which enables their consequences to be postponed to a later date. Unfortunately, that date may have finally arrived. - Peter Schiff
Unlike other moments in history, there is no safety net this time around. The average American hasn't saved, is deeply in debt, his wages are declining in real terms, and won't be able to stand the pressure. He'll give the keys to his house and SUV back to the bank and go rent a smaller house or apartment and use mass transit. Unfortunately, bankruptcies will skyrocket and unemployment will rise dramatically. I see a depression with one big difference when compared to 1930. In 1930, the bankers jumped out of windows of their own free will. This time around, I suspect that disgruntled Americans will be helping them out. That translates to social unrest and should lead to serious and much needed reforms on all level. - Enrico Orlandini
When we look at the long term labor underutilization in the U.S. we note that although the rate appears to be coming down, it's a function of people falling out of the count because their benefits have run out. We believe the actual unemployment rate in America is closer to 12% than the government figures alleging 4.9%. - George Ure
The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch, Congress spending more than it can tax or borrow and the Fed printing money to make up the difference, that threatens to impoverish us by further destroying the value of our dollars. - Ron Paul
America obviously has no intention of ever paying off the national debt since the debt is so large that it is no longer even freaking possible to pay off the national debt. But we still have to make interest payments on all of it, which, in case you ain't heard, already consumes over $320 billion freaking dollars a year. This comes out to over a thousand dollars for every man, woman and child in the whole damned country every freaking year! Or, in terms of workers, just paying the annual interest on the national debt takes $2,300 per worker in the country. - Richard Daughty
To continue on the road we Americans have traveled for the past century is ultimately to deliver ourselves completely into the hands of an unlimited government. We can have a free society or a welfare state. We cannot have both. - Robert Higgs
I believe the country faces a critical crossroad and that the decisions that are made - or not made - within the
next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day. - David Walker [U.S.
comptroller general]
CREF stock, 5 years ending 19Sep2005
CREF Equity Index, 5 years ending 19Sep2005
CREF Growth, 5 years ending 19Sep2005
As you can see, the real appreciation during these rolling 5-year periods has been in bonds and real estate, though I don't expect the real-estate gains to continue as the housing bubble pops:
CREF Inflation-Indexed Bond, 5 yrs ending
19Sep2005
TIAA Real Estate, 5 years ending 19Sep2005
The really ugly period I expected for stocks in
September and October appears to be just getting
underway now. Since it is likely the "Plunge
Protection Team" and the hedge funds keep stocks
afloat with index derivatives purchases, this in effect
will reflect at least a partial loss of control by the
manipulators, as economic reality starts to overwhelm them. "Cash" really looks pretty good right
now, especially as the Fed's pushing up of short
term interest rates increases its yield.
A. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $18,738.16
Increase: $ 8,039.16 [+75.14%]
COMMENT on "PIG": There is no change from the last issue.
TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)
Values, 21Sep2005: stock, 198.22; equity-index, 79.59; MM, 22.44; bond, 76.40; inflation-indexed bond, 46.57; real estate, 229.50; TIAA current yield
in SRA, about 5.2%. Current money-market yield is 3.29%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993:
3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%;
2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.
(Please note that I have not had the time to calculate my rate of return beyond March 2002, and
may not get the time until 2005)
Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of
return of 11.46%.
COMMENT on NYSE "Timer's Trend": We are currently on a SELL signal of September 19, 2005.
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal given September 13, 2005.
NEXT ISSUE - will appear near the end of October.