The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions are currently not being accepted (current paid subscribers will continue to receive their paper issues). Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
On reading this, my reaction was: OK, what are they hiding? Included in M3 but not in the other Ms are repurchase agreements (RPs), the primary tool with which the Fed injects money into the stock and bond markets.
In the distance one can hear the helicopter engines revving up.... there could be only one valid reason for discontinuing the M3 figure, which is to be able to print money more or less undetected (until it shows up in the inflation statistics). But the question is, why? What does the Fed see ahead of us that we don't?
Again, there seems to be only one valid answer, which is: The Fed sees increased systemic risk (a subject I've been harping on for awhile) and wants to be able to deal with any systemic failure (by injecting liquidity) without spooking investors who would be able to detect the manipulation from the published M3 number.
And what is this systemic risk? Given Ben 'Helicopter' Bernanke's fear of deflation (born of his extensive study of the failure of government to bring an end to the Great Depression of the 1930s), it is most likely the fear of sudden asset deflation.
The likely candidates? First, there is the decline of the dollar.... because if the dollar sinks, foreign governments are not as likely to continue buying our massive government debt, which is all that's keeping our consumer-purchasing bubble afloat. (Dollars.... our most profitable export.) The favorable tax treatment for the repatriation of dollars earned overseas by U.S.-based corporations ends in 2005, so the foreign-exchange value of the dollar is likely to come under sudden pressure early in 2006.
Second is the possibility of a sudden reversal in the stock market. But let's be honest here: From the Fed's point of view, they probably feel they have the market under control. Their intervention in 1987 stopped the Crash; in 1998, they kept the Long Term Capital Management derivatives failure from spreading, and in 1997 they weathered the Asian currency crisis. Since 2000 (and in spite of 9-11) their market manipulations have kept stocks more or less on an even keel in overpriced territory. So the Fed probably expects to be able to handle in stride any stock market problems and/or derivatives failures.
The third and most likely, in my opinion, is that the Fed fears a sudden popping of the worldwide housing bubble. They have extensively studied the Japanese post-1990 "price destruction", and certainly have seen that Japan's recessionary slump began not with the popping of its stock bubble in 1990, but four years later when real-estate prices tumbled and real-estate loans turned sour. Ben 'Helicopter' Bernanke is on record stating that the Fed can always print enough money to generate positive inflation.... that is, to prevent asset prices, as well as prices of consumer goods, from tumbling. Since rising house prices are key to keeping consumers spending beyond their means, the Fed has almost certainly concluded that it is of primary importance not to let house prices collapse, and preferably not to let them go down at all.
Finally, in addition to systemic risk there is the fact that the published M3 figure is just a plain embarassment. Currently M2 is rising at about a 5.6% rate, while the rise in M3 is about 7.6% annually, about two percent higher. The discrepancy indicates that money.... or more accurately, credit.... is being created outside the control of the central bank, probably overseas or in the derivatives markets, where there are no reserve requirements. Should M3 (in relation to M2) start to go parabolic, it would be a clear indicator of loss of control over the money supply by the Fed.... but now, we'll never know.
Transparency in government, ya gotta love it.
A small part of my retirement is in TIAA Traditional which cannot be switched (left over from the early days, before switching was permitted). I set up monthly interest-only payments to be rolled into a traditional IRA until I'm 70-1/2, after which I must annuitize the contract. These monthly interest payments occur on the first of the month, and December's occurred on schedule. But it is now the end of the month, and the money has yet to show up in the designated IRA. It appears to be in limbo.
Since this transfer is not part of my current income, it's not a critical problem, but it sure is aggravating. Furthermore, the money doesn't show up in the total value of my retirement funds, so when I log in I no longer get an accurate accounting of my assets, and that really is irritating.
An Internet reader, Peet Hickman, tells me he has also had his problems with TIAA-CREF, duly noted in his blog (at http://www.lehigh.edu/~aph2/aph2.html, reprinted here with permission):
What's the matter with financial giant TIAA-CREF? I've had problems with an account transfer during the past few weeks, and from what I've learned, I'm not alone.
I sent in the paperwork to transfer assets from a 403(b) (tax-deferred) account at TIAA-CREF (TC for short) to a traditional IRA, also at TC. That's a routine transaction. It's allowed because I contributed to these accounts while working for a previous employer. I did the same thing at Vanguard a couple of years ago. At Vanguard, the mutual funds disappeared from the first account one day and showed up in a new IRA the next day. TC has been working on this transfer for three weeks and still hasn't finished. The money is in limbo. It has left the first account but has not arrived in the IRA.
I've called TC several times and sent one fax, but it doesn't seem to help. The reps agree how slow it is and offer to "escalate" me to another level, whatever that means. Sometimes they tell me that a member of the "team" will call me. I've told them more than once that I don't need telephone calls from the team; I need for them to get the job done.
TC seems to be noticing that I complain a lot. Someone named Susan Jenkins called me on Dec. 21. She told me that thousands of people were having similar problems, and that TC had a special team working on their problems. Unfortunately, nobody on the team had fixed my problem yet, and Susan wasn't able to give me any estimate of when they might. On the bright side, Susan was well trained to handle irate clients. No matter what I said, she just replied, "Oh, that's too bad. I'm so sorry."
Susan did tell me something useful. She said that an online magazine had carried stories about TC's problems. I went to eweek.com, searched the site for "TIAA-CREF", and got more information. TC has had problems upgrading their computer systems, and lots of accounts are messed up. The problems started in mid-November. Despite assurances from company spinmeisters, the problems have not been solved. Many people have not gotten scheduled minimum distribution checks from their IRAs. Some people got checks that were 100 times too large ($60,000 instead of $600.00).
How can a big, reputable company screw up so much with other people's money? What can be done? My only answer is to try to drum up as much bad press as possible. Folks considering where to save their retirement dollars should know how poor TC's service has been. I saw one article in which TC CEO Herbert Allison bragged in October, 2005 that TC had upgraded their computer systems in two years, whereas outside experts had predicted it would take three or four. Too bad they didn't take more time and get it right.
Nick's additional comment: It's clear that TIAA-CREF's computer systems upgrade is not going
smoothly. My experience with upgrades that are this
badly messed up is that they take about a year to 18
months to get completely straightened out. If you are
approaching retirement, have funds with TIAA-CREF and have the option to move them elsewhere,
you should consider it. If you're in TIAA-CREF and
two or more years from retirement, I'd just hang in
there; they'll get it straightened out eventually. In the
meantime, make sure all of your and your institution's contributions are properly credited.
This is likely to make it more difficult for me to produce The Contrarian's View on a monthly (11 issues per year) schedule, particularly if a trip tears me away from my computer and the Internet. For example, in December we were in or in transit to/from Florida for almost two weeks for a wedding and baby shower, and we had a friend visiting us for the last week, and it was difficult to produce a competent monthly issue in the limited remaining time.
So here's what I'm planning to do: Most paid subscribers' paper subscriptions expire at about the end of 2006. At that time I will convert all of you who have been subscribers for three years or more to lifetime subscriptions at no additional cost. By "lifetime" I mean your life, or my life, or until I reach the point where I am physically unable to produce The Contrarian's View, whichever comes first. If you are a shorter-term subscriber, you will be given the opportunity to "buy up" to the three-year level to be eligible for the lifetime subscription.
This is my way of thanking you, my paying subscribers, for being so loyal for so many years. Most of you have been subscribers for a decade or more, and a few of you have been with me since almost the beginning (July 1986).
Once we are in lifetime mode you will receive your
paper issues without further cost to you.... my
treat.... and I will attempt to adhere to the 11-issues
per-year schedule, but it is not guaranteed. New
subscribers are not currently being accepted.... if
you're not already on board, you lost out.
Let's see... No Osama, not end of Iraq, no manufacturing jobs left, $4.7 trillion in federal debt versus $11.7 trillion in GDP, leaky borders, terrorist threats, corporate corruption, global warming, GM on the verge, pensions being destroyed, earth changes, resource depletion, the housing bubble softening, and Bernanke coming to the Fed. Yeah, tis the season to be jolly, alright... - George Ure
Bernanke will probably ensure the demise of the Federal Reserve. It won't be completely his fault - Greenspan has laid the foundations - but the problem is that Bernanke doesn't understand currency markets... He is the guy who said we control the printing presses and we will run them as fast as we have to. He's the guy who says it doesn't matter if the United States has the biggest trade deficit ever.... Bernanke.... thinks there isn't a problem. You know we've had two Central Banks in the United States before, they both failed and this one looks like it's going to fail too. - Jim Rogers
I'll tell you what is really crazy. Everybody says that the U.S. economy is the most flexible in the world. They must be dreaming. The U.S. economy is completely inflexible. It suffers from huge problems that are obvious to any serious economist, mainly the lack of savings and the current account deficit. But the economy is so inflexible, it can't do anything about them. And, even worse, no one can even talk about them. Well, I shouldn't say no one. There are a few of us. But we are outsiders. We are marginal. The people on the inside do not even seem to recognize that there is a problem.... And you know why profits are up in the United States? It has nothing to do with healthy, growing businesses. Just the opposite. These businesses have stopped investing in new plant and equipment. So they have much less capital equipment to depreciate. As depreciation collapses, profitability goes up - especially when they're making money from financing activities. But this can't last. It's unbelievable.... the whole thing is a monumental fraud. And Mr. Alan Greenspan is merely an extraordinary criminal. - Kurt Richebächer
The U.S. has ended up consuming its once massive manufacturing machine. - Bill Buckler
Stagflationary dynamics occur when a growth recession - or worse - occurs alongside upward price pressure, inflation. Policy makers face unique challenges and enhanced prospects of failure in such an environment. Given the normally poor record of policy makers, this is scary. As price pressures persist alongside rising trade and federal spending imbalances into 2006, stagflation lurks. Keep your eyes out for data that suggests cooling growth and rising prices. When it rains it pours. - Max Fraad Wolff
As the U.S. enters into recession, tax revenues will decline and government spending will increase as a result of rising entitlements. Deficits will get bigger and the U.S. will have to borrow and monetize more of its debt. War, entitlements, and lack of fiscal restraint mean more debt, more borrowing and debt monetization. Eventually the dollar is going to collapse through the weight of the twin deficits. Inflation - not deflation - will be the result. - Jim Puplava
The U.S. has no other option but to print money. Otherwise their illusionary wealth collapses and drags down the economy in a deflationary apocalypse. So, Mr. Bernanke will print money.... at latest by the middle of next year, I would expect the Bernanke money printing press to shift into high gear. This should lead to more consumer price inflation, a weakening U.S. dollar and tumbling bond prices. From a longer term perspective, I expect Mr. Bernanke will be the greatest disaster that has ever hit the U.S. bond market in the 200 years of capitalistic history. - Marc Faber
I don't know how it is around where you live, but around here [St. Petersburg, FL] the pensions of the city employees, invested in the stock market, are guaranteed to go up by 9% a year! And if the pension fund manager fails to do that, then they get to raise my property taxes to make up the difference! What a scam! - Richard Daughty
The fundamental question is whether a central bank can manage the supply of money and credit better than the free market otherwise would. We shouldn't kid ourselves about the true nature of the Fed, which is inherently incompatible with real free market capitalism. Centralized planning of the money supply is a form of economic control that significantly affects prices, wages, and production levels. Remember how market economists once criticized central planning of prices, wages, and production levels in the former Soviet Union? - Ron Paul (R-TX)
Pax Americana makes the world a better place.... Someone has to order the world and make people and countries play nice. If there is a real problem, who you gonna call? The French? Get real. - John Mauldin
Of one thing we are certain: current trends are not sustainable. The imbalances are now enormous, far more glaring than at any point in the past. Furthermore, the linkages of the parts are so tightly knit into the whole that reducing any one imbalance to zero, or even compressing them all to a more manageable level, appears to be impossible without a major upheaval. A hitch here or a tuck there has little chance of success. When it hits, and whichever sector takes the first blows, the restoration of balance will be a compelling force roaring through the entire economy - globally in all likelihood. The breeze will not be gentle. Hurricane may be the more appropriate metaphor. - Peter Bernstein
The world economy today depends upon the American consumer being willing to not save and to borrow if necessary to support their spending habits. It is a burden for which we seem genetically designed and one at which we clearly excel. We spend, they produce. They send us all manner of goods and we send them electronic dollars, which in a twist of irony they have lent to us. It is sort of the ultimate in vendor financing. This is a remarkably tenuous set of circumstances. - John Mauldin
When, not if, we see the next economic slowdown, we will see another drop in the stock market. If we get a full blown recession, the average drop is 43%. I think boomers will begin to slowly panic as they watch their retirement dreams drop faster then the NASDAQ 100. It will be the usual process. Denial, anger, despair and finally reality hits and they re-set expectations and start a new plan which will mean more saving and less spending. - John Mauldin
Simple economics would hold that when everyone wants to pull money out at retirement at about the same
time, we expect the markets will (to put this gently) implode in horrific fashion. You think the 20-30 year olds
who are stuck at $13 an hour are going to step in and buy houses, and salt money in mutual funds to keep
prices up? You been through drug testing lately? The future of the US economy rests squarely on the
shoulders (or should we say backs) of young people. Talk to people 20-30 and see what their feelings are
and how their disposable income is looking. - George Ure
So, here's what I see as likely. First and foremost, for as long as the Fed is "in control", when it is raising short-term interest rates (whether gradually and telegraphed or not) this is not bullish for either stocks or bonds. Raising rates does not immediately guarantee the death of the bull, but does guarantee it is living on borrowed time.
Second, the real-estate "leading indicators" tell us that residential real estate will be in a decisive slump by summer 2005. Because the health of real estate is today so closely tied to the overall health of the economy, that means it's likely the economy will be in recession by year-end 2005, thus tipping into recession in the fall.
Since stocks typically lead the economy by six to nine months, that means a peak in the current bullish jag between January and May 2005. I am leaning toward a peak in mid- to late January, followed by a secondary peak, at lower levels, in late April to mid May. But I'm not dogmatic about that.... let's just say the overall trend is, on balance, neutral into and through the spring. Then I see another vicious downleg to this long-term bear market taking us to new lows in 2006, likely summer or fall 2006. Then, looking way out, I think we'll have another bullish phase into 2008, at which point the leading edge of retiring baby-boomers selling paper assets to pay for their living expenses will exert downward pressure on stock prices for many years.
Overall, not too bad. Bull living on borrowed time? Yes. Decisive slump in real estate by summer? Yes. Recession by year-end 2005? No. Hasn't happened yet. We got at least an extra six months of "neutral" in the stock market.
Events are unfolding more slowly than I expected. (Never underestimate the power of the Federal Reserve to keep the shell game going by printing gobs of money.) The scenario I saw happening for the latter half of 2005 I now see as more likely happening in 2006, maybe even as late as the second half.
But stocks are clearly entering their roll-over phase, though very slowly, and the current interest-rate inversion, though marginal, is typical for an economy toying with incipient recession. So the forward-looking signs are not good for the bulls. I do expect the Fed to print as much money as it deems necessary to keep house prices from going into a nosedive, and this may keep stocks afloat, in neutral, for even longer than I now anticipate. But not indefinitely.... this is not a new bull market. Any major failure by the Fed, or financial accident, will quickly bring on a crushing bear market.
The risk of systemic failure is currently about 20%,
where it will likely remain until spring 2006.
A. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $19,814.33
Increase: $ 9,115.33 [+85.20%]
COMMENT on "PIG": Having more than doubled their money in Evergreen Solar, the PIGs directed me to sell half to recoup the original investment, and let the other half ride in case ESLR should become a "ten-bagger". If it doesn't, and instead withers on the vine, we're still ahead. At my suggestion the PIGs are also investing surplus cash in staggered 3-month T-bills. The PIGs also got nervous about BP, which has done well with the gasoline price-spike, so I have entered a 9% trailing stop-loss (which is close to being triggered, currently at $63.02). The Prudent funds are shown pre-year-end distributions. Another 3-month T-bill will be bought on January 3, 2006.
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!)
A portion of my TIAA-CREF funds are currently in the process of being transferred to Fidelity Investments.
Values, 30Dec2005: stock, 206.53; equity-index, 82.63; MM, 22.66; bond, 76.38; inflation-indexed bond, 46.44; real estate, 239.95; TIAA current yield
in SRA, about 4.92%. Current money-market yield is 3.94%.
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 2006)
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 BUY signal of November 18, 2005.
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal given December 15, 2005.
NEXT ISSUE - will appear near the end of January 2006.