August 4th Client Letter: It’s Ugly Out There
[The following is excerpted from a letter emailed to SCM clients after the market's close on Thursday 8/4/2011.]
…Stock markets and other risky assets had their worst day since 2008. The Dow was down over 4%, the Nasdaq down over 5%, the S&P 500 down nearly 5%, and crude oil fell by well over 6%.[1]…[M]any market participants were not prepared, and it seems apparent to us that economists and policymakers are dead set on continuing the same errors that have gotten us to this point.
It’s not unusual in investing to feel elation and depression at the same moment, and that’s the case with me today. On the one hand, I’m elated that we were able to see trouble brewing before many of our competitors did…But I’m also extremely concerned about the economic implications of today’s developments, which have worsened our already pessimistic view of the global economy. I don’t know whether a recession is already underway, and official pronouncements are not made until well after the fact. But my guess, based on how close we are coming when I work June’s data into our models, is that a recession might have started in July and could easily start later in 2011. Whatever the case, I am all the more certain today that a recession will have started by 2012 at the very latest. We are praying that none of our clients will be directly impacted, but please proceed with care…Please also keep in mind that we are more than willing to speak, free of charge, with anyone who has left a position (voluntarily or not) and is wondering what they can or should do with their retirement account.
Unfortunately, there’s not a ray of sunshine in my current forecast. I wish there were. But if history is any guide, things will probably have to get worse, perhaps significantly worse, before anyone in power is willing to reconsider the flawed economic and policy paradigms they are presently operating under. Meanwhile, unemployment in the U.S. is still stuck at twice its historic level, and worse, the typical length of unemployment is three times the level that prevailed up until 2008.[2] We know from empirical research what that does to individuals, families, communities, and economies, and it’s overwhelmingly bad. And despite what Bill Clinton’s old economic advisors or the Tea Party or anyone else says, the lack of hiring does not have a damn thing to do with the employers’ or markets’ concerns over the U.S. government ‘getting its fiscal house in order’. That’s a tired, threadbare meme, an utter fantasy, and completely irrelevant to solving the problems at hand. It also ensures that our children and grandchildren will be worse off than they would otherwise be, exactly opposite to the plaintive assertions of deficit-phobes (there’s not enough space here to fully explain this, beyond pointing out that every Treasury security is typically purchased with a dollar that the government has already spent into existence; but the upshot is that there is no federal “debt” for our children and grandchildren to “pay off”; it sounds logical, but operationally, it’s utter nonsense). And yet Robert Rubin, who in my opinion ought to be locked up in the Tower of London or banished to the Antarctic until GDP reaches at least 4%, was repeating this nonsense ad nauseum to Charlie Rose[3] as recently as this Tuesday. It made me wonder why economists aren’t more exposed to professional liability and malpractice claims. Almost every other profession is, and for good reason. If you hold yourself out as knowing what is good for people—in the case of [Rubin] and his peers, for millions and even billions of people—then you ought to be held responsible when your errors, however well-intentioned, cause harm. I suspect that the damages caused by the economics profession would be absolutely staggering if you were to add them all up.
Getting back to the current meltdown, Europe is now in the driver’s seat of the panic as we expected, and what’s worrisome is that its institutions and policymakers are even more backwards than our own. Although they have the ability, via the European Central Bank (ECB), to do whatever needs to be done to resolve their ongoing crisis, investors cannot count on them to do it, at least not in the near-term. The institutions and facilities of the European Union (EU) and European Monetary Union (EMU) are bureaucratic bog lands where very little can be done in expeditious fashion. And given the serious flaws in their macro paradigm (on top of the flaws in their political and operating arrangements), they remain loathe to do anything that would actually be constructive. Until there’s a serious shift in their thinking, the eurozone will continue to melt down. And our Federal Reserve is likely to come to the world’s rescue yet again, in spite of the constant din of dollar and deficit bashing that sometimes seems to emanate from all corners of the globe.
And speaking of the world’s various corners, emerging markets stocks, the investment darlings of the past decade, have been under severe pressure, with some stock markets now officially in bear market territory. We haven’t been surprised by this development, and we believe there could be nasty surprises from some key emerging markets as their financial excesses of recent years, combined with the flawed western policy paradigms they have come to embrace, begin to take their toll, eventually leading to the threat of systemic breakdown. On a related [note], if China is as fragile as we fear it might be, the currency wars will get particularly interesting (and unsettling) in the years ahead.
Helmets strapped, seat belts fastened, eyes ahead. It’s going to be bumpy…
IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania-registered investment advisor. The foregoing is for educational purposes only. It is not an offer to sell or a solicitation to buy securities, nor is it a recommendation to engage in any investment strategy. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
[1] Based on the Chicago Board Options Exchange (CBOE) Oil Index
[2] Saint Louis Federal Reserve Bank, U.S. Department of Labor
News and Views | art August 5, 2011
