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adios
05-16-2003, 12:54 AM
Treasuries and Munis (http://bonds.yahoo.com/rates.html)

Quotes on various durations. The 30 year treasury is hitting record low yields (== record high prices) now. All the others are either at or close to multi-year lows. Yeah equities have taken a nose dive but look at what's happened to interest rates over the past 3 years. Arguably this is much more important and beneficial to USA citizens in the aggregate. Anyway I think that this record low yields across seemingly all of the debt markets is causing money to be put to work in stocks, thus the current stock market rally. In taxable accounts I think the muni closed end bond funds are even better investments than they were 6 weeks ago or so when I posted about them. Of the 27 I track, every single one is up on a capital appreciation basis (I'm not including the tax free yield) since the beginning of February. I think stock market is going higher across the board so maybe those index funds will work for awhile /forums/images/icons/smile.gif. Although I'd rather have something like Cornerstone Strategic Value Fund paying a 16% divi with monthly payouts and trading at a discount to NAV (Net Asset Value). I am long CLM btw:

Cornerstone Strategic Value Fund (CLM / AMEX) (http://www.cefa.com/scripts/fundstat.asp?id=CLM&d=1)

scalf
05-16-2003, 05:41 PM
/forums/images/icons/wink.gif big articles about deflation...and fed's opfficial position anti-deflation...hard for us who lived thru 16% mortgages to understand...but overall you are correct i think tom (not trying to jynx ya)...may be 3%mortgages...i never thought i'd see below 6%...no kidding..lol..gl /forums/images/icons/smile.gif /forums/images/icons/diamond.gif

Mark Heide
05-16-2003, 10:30 PM
scalf,

Hey! I remember when I purchased a car back in 1982 and paid 19.6% interest. Anyway, I think the bond market is safe for quite a while still. With the interest rate predicted to go lower this year, maybe even to 0.25%! But, the risk of deflation worries me a bit and I have stayed out of equities.

Good Luck

Mark

Wildbill
05-17-2003, 03:48 AM
Deflation is a big voodoo thing right now. If it were truly a worry that the market had to think about then stocks wouldn't just tumble, they would have already crashed! Money is being taken out or hedged out of the dollar markets so much right now that in normal circumstances this should have been a terrible equities week, but it wasn't. This tells me that the smart money, the institutions with billions on the line, aren't buying into the deflation theory and neither am I. I just look at all the data and don't understand it. Isn't it obvious that deflation is in no way taking any kind of hold of the economy right now??? A month of unwinding fuel costs or sluggish retail sales is a real sorry excuse to start thinking deflation.

The problem as I see it is that people are forgetting some basic economics here. BusinessWeek did an excellent, superb, and to the point article on this a week or two ago. They talked about where is this deflation that bankers worry about when it seems most things are getting more expensive and we have no more money in our pockets. Comes down to this buying things is getting cheaper, maintaining them isn't. And there is a simple explanation for this, purchases are of an increasing share imports and China and Japan, among others, are simply exporting their own deflation to us. I also like to note Germany as well is becoming something like Japan in a way that a lot of rather smart people are missing. People are focused on their structural woes and budget constraints, but I think we have to look beyond that. Germany had long been like the US in their economy in that they were "selling" strong rule of law and a strong currency because of it. Remember that in the US one of our best and most valuable assets is our balanced investment system backed by a respected currency and legal system that the world trust. The UK used to have the lock on this until WWII and then the US took over the role. Germany had a secondary role in this and benefitted from it for many years. With the Euro in effect, basically that role is gone, now all of the EU get that role. Without that strong point, Germany is essentially going back a few steps, to being this manufacturing driven economy with an emphasis on exportable goods and these strong labor unions with their man in power are not doing anything to change it. That is why its easy to see why there are problems in Germany right now and no doubt they will see deflation without major structural changes.

A basic understading of economics will tell you that no matter how much deflation is imported, its still not something that "sticks" in almost all cases. To understand why, think about how all the numbers are working in tandem here. Service costs are going up to support higher productivity. We are heavily a service economy and while people think of how competitive our economy is, they still overlook something simple. If I make something, say a widget and charge $10 for it, you might come in and figure out a way to charge $9, so we become competitors. Now say I am a good service participant and sell something for $10, say an analysis of your investments. You could come and try to do the same job, but notice your service and mine while competing for those dollars, are not really comparable services. If its me and Mark here, everyone in the world might know that Mark has been a bear for awhile and I have been fairly bullish. So what conclusions we come to are very different and the market should recognize that as such. That is the little known secret that you won't hear all that much. Its not the easiest concept to grasp, but its very very important to understand and accept. When you base your economy on your services, then you are getting people to pay for things that aren't so easy to compete with and therefore not so easy to get into pricing wars that lead to deflation. Note China and Japan are the two places with the worst deflation in the last 50 years and its precisely because they decided that their focus was the opposite, plain and simple exportable manufactured goods. They have tried to export their deflation to the rest of the world for many years now, both of them, but it doesn't stick in the places they send it. Why? Simply put service based economies can hold their pricing up because of comparative differences and the value that each individual adds. Two restaurants might both offer prime rib, but you choose one because they cook it the way you like and the staff is friendlier there. That is the service economy. If you were to say I want to cook prime rib and decide whether to go to one supermarket or another based on the price advertised in the newspaper, thats a China or Japan for you. Look at the difference, even if the other restaurant has a sign saying $6.95 prime rib, you still have your reasons to go to the restaurant you like. If the other supermarket has prime rib on special, you might be much more inclined to crossover and do some shopping there because all things being equal they aren't really serving you like a restaurant meal.

That is about as best as I can explain it. Its a bit of a leap of faith, but just remember as long as we don't become too beholden to our manufacturing and farming businesses and stick to what we do best and that is services and selling our intellectual abilities as a country, we have little to fear from deflation.

On the topic that started this, the bond market is going down on speculation right now. A lot of the longer issues are going down as well on the speculation that the Fed may start buying up longer dated issues to lower long-term rates, something that they normally have no control over. Short term rates are lowering due to the expectations of a cut. I don't even know if I am sold on the certainty of much of a cut. There is still some validity to the thought that they should first try their anti-deflation moves before worrying about a mostly symbolic rate cut. Lowering short-term rates by 50 points won't spark any new investment, but lowering 10 or 30 year rates just might do the trick.

adios
05-17-2003, 04:13 AM
Bond Quotes 5/16/03 (http://bonds.yahoo.com/rates.html)

Wowser!! I read the comments but it's in the wee hours in the morning so I'll get back to you all later as I think the Greenspan deflation comments are really worth discussing.

jerome baker
05-17-2003, 04:08 PM
isnt it possible that the price for services can go down? nevertheless, intersting point.

Wildbill
05-17-2003, 08:51 PM
Sure they could, but not as a natural extension of the economy. If you specialize only in a competing product you have to expect competition. Its fine for China to accept deflation because the growth in products sold far outpaces the losses due to competition. They are starting from so far behind the world in manufacturing that their competitiveness is devastating. Now if they saw deflation of 20% then it would be a problem, but if you are deflating 5%, but your growing 10% in volume, your economic growth is still positive 5%. Japan and Germany don't seem to accept this reality. When you are overpriced compared to the world market, you have no choice but to become a service based economy. You can only compete in products that the world truly can't compete with. People will still pay more for a Mercedes so that is fine, but Germany is a defender of one national industry after another. Farming is a really bad choice, yet all the G7 fight to defend their farmers. Remember its as simple as following your competitive advantages.

Services can and do at times go down in value, but the beauty of service work is how easy it is to change. If you build cars and in 5 years someone beats you, then you have a difficult time changing. You have millions or even billions sunk into capital and it all becomes near worthless if you give up the business. Service related stuff is much cheaper to change. You can go into another service or just exit the business and let someone else rent your space and try something different. Most services that do depreciate have done so because they have become fairly commoditized. Think of accounting, that is a terribly low margin business if it weren't for the cachet that your reputation gives you. Frankly the world doesn't care who your accountants are as long as they have the proper accredidation. In the end though an audit or an income statement are basically a similar product. Those are the types of services that do see price cuts and some deflation, but I think if you look at the things this country offers most of our service based experiences are more unique and more specialized. Obviously our biggest service industry on the world market is entertainment. Places around the world have tried to match or compete with our entertainment offerings and almost all fail. Most of the successes worldwide haven't been because of better product but because of national laws requiring domestic product.

Mark Heide
05-17-2003, 09:56 PM
WildBill,

I've been hearing arguments on both sides now concerning deflation, so show me the ones that say it's voodoo. Any links to article appriciated. If you put just this issue aside, and other short term issues, I don't like the rest of the economic picture. Hey! I've only been a bear since May 2002. /forums/images/icons/grin.gif

Mark

Wildbill
05-18-2003, 04:07 AM
Good luck finding alternative views on this Mark, the media gets on one side of the argument and you rarely will hear people talk to economists on their views anyways. The best I hear these days are soundbites from investment bank economists.

The thing is that there are two arguments here Mark. The economy isn't strong and certainly won't get too strong soon. That has its implications, but one of them is most certainly not a sure drop into deflation. That is a big mistake to think. Deflation has to be started by a shock of some sort. You don't fall into deflation unless you make it a foregone economic policy and back it up by your monetary actions. Deflation could come as a result of some very crippling terrorist attacks or something like SARS becoming a bigger problem to the magnitude of 10. Quite simply the world has to stop right now for deflation to have a chance. Do any of the arguments your read point this out? If they think people are going to be slowly brought into deflation they are taking a huge leap of faith. Even if the Fed used all its weapons and took rates down, that is not a sure sign of deflation coming. Deflation takes definitive steps and then a very recessionary run until you truly change the players of an economy into a deflationary mindset. We are in no way near that right now. Lower inflation and slow economic activity are far from deflation. Besides how is it that the economy is so bad when its been 6 quarters since we had a negative economic quarter?

I think this is more of the same media and market bias. Right now its quite clear that the media just don't want to do anything but focus on the bad in the economy. For whatever reason there is on that, you can see it in how you hear a story "oh gosh, we didn't even notice it but hey the market is actually up. Can you believe that?" Now they shouldn't be hyping it up too much, but the tone and the reports are clearly aimed at downplaying anything positive. There isn't a strong balance of positive things out there, but I find the outlook fairly balanced. Clearly its hard to see a 5% spurt, but then again I don't see any sustained periods under 1.5% either. Its very much a middling phase for the economy and I don't see news or expectations reflecting that.

If you really want to get on here and post articles, fine do what you'd like. Just remember every story has its bias and I have seen plenty of negative articles that seemed rather doom and gloom and a handful of positive articles that sounded straight out of the boom 90s. Maybe its that people can't stand the thought of sitting still. A middling run for the economy isn't exciting in either way and maybe people are hoping for definitive answers tomorrow, but that isn't going to happen. In any case I just don't see how deflation has become such a looming threat in what data is out there.

Mark Heide
05-18-2003, 05:12 PM
WildBill,

The mass media is very poor in the understanding of economics and this subject requires additional research.

But, the deflation fear and why I think it is even mentioned is that some signs of falling prices have occured and the mass media has already predicted doom prematurely.

My current view is uncertainty. Basically, if the economy continues at the current poor growth rate of the past year, deflation becomes a concern. The areas of interest that I watch closely is capital spending and hiring. Here's a link to a speech given by Bernanke of the Federal Reserve Board, it's a little long winded but explains the economic situation in better detail:

http://www.federalreserve.gov/boarddocs/speeches/2003/200304242/default.htm

If the Federal Reserve Board predictions are correct, then capital spending should pick up in the second half of the year, if not, then deflation may become a more substantial risk.

My predictions for the market in June, July, August, and September is for business sediment to be negative. This is based on past performance from previous years. Also, this is when most employees take vacations and projects get put on hold. Futhermore, consumer spending slows down during this period, which in turn may make some investors panic in light of recent short term news. Let me emphasize consumer spending because it has been keeping the economy afloat since the tech bubble burst.

But, I do predict that I will be back in equities by September, unless we experience any homeland terrorism catastrophies.

Good Luck

Mark

Wildbill
05-19-2003, 04:07 AM
Mark,

I suspect you mean you won't return to equities until October because that is when poor numbers for the summer will be reported.

I read the article and it does have some good points to consider. I think its a bit narrow focused because capital spending is only a small part of the equation. I think mostly it will be a future indicator for demand of employment and that seems to be most people's worry about the economy. I don't think it affects deflation that much because many of these products that are suffering due to weak business spending aren't items that are built and building up in inventory. Capital items are often time-delayed projects and very sensitive to demand. This is crucial for deflation because deflation results from too much inventory and subsequent price cutting to clear stock. If there is a lack of capital items then business responds to this by cutting back payroll and manufacturing runs, things that don't really add to deflationary woes.

As for falling prices, I think its important to note the scope of these areas because a lot of it seems to be energy related so far. Whether lower energy costs we are seeing coming right now leads to lower prices for finished goods in the coming quarters is uncertain, but the timing of the fall in the dollar seems to be very fortuitous. The fall of the dollar will allow for some pricing power and this should be very helpful to business which get a lower energy bill and less import competition/better competitive position overseas all at the same time. In fact it could be blockbuster earnings for those leveraged to these conditions and those are the businesses I think might lead the market at the end of this year.

As for people being uniformed about economics, lets face it there never is a better example than oil companies. People write letters to newspapers and government complaining about the "gouging" with gas prices while the companies are reporting record profits. Seems people feel they have the right to get a piece of these profits just because, well thats what is "fair". No major company has ever been proven to do this, it would quite clearly take some obvious collusion on their parts that would quickly be smelled out by the financial markets. Yet the people rail on about how they are being gouged. Its a clear and obvious case of the public never learning, nor caring, about simple economics. Gas, oil production, sales of oil itself, refineries, etc. are all distinct businesses. Just because a couple are doing well due to the market conditions doesn't mean the companies go off and make losses in others. No one in the media has ever even tried to express this, nor will they ever because they obviously love go after big oil themselves. And some people wonder why so many major oil producing countries have nationalized their oil business, in those countries they are the most political of all pawns, ignoring market conditions for everything from salaries to the price they sell gas to their citizens. One guy in the paper made a big deal about how Iraq sells gas for 3 cents a gallon, it made me laugh and say "hey maybe that guy should pack up his SUV and apply for Iraqi residency". The ignorance and outright hostility for rules of economics just has no end I think.

And if we aren't careful it will come up and bite us in deflation. That is why I am worried about it, it shouldn't even be a word that the media or the Fed should be adding to the vocabulary of the average American. If enough sources of information start telling people how much prices are going down without making it clear that oil prices are more than doing their part in that, then people truly will act as if deflation is already here. I mean talk about how deflation was present in the Depression and all the talk about how it ruins people with debt, well that stuff is not to be taken lightly. Its one thing to report on it when its here, but to overly speculate on it when even Fed governors suspect its a 2-3% shot at best is terribly irresponsible in my view. Ask any good economist right now and they will all say what I am saying, that barring a major catastrophe deflation is likely to remain an issue for countries that make policies that almost insure it happening, but this is one country that is far from that stage.

adios
05-19-2003, 06:41 AM
I'm only going to try and add to the points already made. There is a certain level of economic activity in the USA that is very, very strong i.e. the demand for certain products and services will remain perpetually strong. Many consmummer staples will be in demand through some very, very slow economic times for instance. In that sense I don't see a 1930's style depression repetition. The other thing is that Greenspan has reacted much differently and proactively to the economic downturn than the Japaneese did. Here are some links regarding deflation that you all might find interesting:

Are We Headed Towards Global Deflation? (http://pages.stern.nyu.edu/~nroubini/Deflation.html)

Greenspan's Deflation (http://listproc.ucdavis.edu/class/200210/are139-f02/0017.html)

Is Deflation a Threat? (http://info.nbfinancial.com/fbn/files/fbnfbnpdf/en/2/020927e.pdf)

FOMC Minutes Show Rising Concern About Deflation Danger (http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20030508/bs_dowjones/200305081512001162)

Federal Reserve News Stories (http://news.yahoo.com/fc?tmpl=fc&cid=34&in=business&cat=federal_reserve)

Mark Heide
05-19-2003, 08:49 PM
Wildbill,

My timing for estimating to return to equities is not based on fundamentals, but how the market has reacted to the consumer driven economy of the past two years. If you remember last year, I avoided getting into the market for the "Santa Claus" rally due to the uncertainty of war with Iraq.

I agree with the article and its conclusions. If you can find another economist with a differing viewpoint I'd be glad to read it--excluding Wall Street analysts that are paid by banks and insurance companies.

Here's an article from Reuters about Greenspans new PSA:

http://www.reuters.com/newsArticle.jhtml?type=reutersEdge&storyID=2772140

Good Luck

Mark

Mark Heide
05-19-2003, 09:04 PM
Tom,

I agree that this is not a 1930s type problem. The economic problem is due to certain sectors of the economy and like you said other sectors are doing well.

We still have overcapacity in the technology and airline industries. The technology problem is still due to the dot com bubble and the Y2K problem. The airlines had a major problem before 911 with overcapacity but did not adjust, and 911 just made it much worse. But, there are some airlines making profits, so I blame the airline problem on mismanagement.

The problem with technology was the internet boom. People would invest in a company if it sold sewage on the net. So, there was overinvestment in computers, routers, and telecommunications.

The problem I see with technology is still overcapacity due to improvments in infrastructure has far outpaced application development. We need a company to provide a killer app that every business wants and requires everyone to upgrade. /forums/images/icons/grin.gif

Mark

Wildbill
05-19-2003, 09:46 PM
Technology doesn't have a "problem", its been mind boggling what has been produced by the technology itself. If anything this technology was too good for the businesses it went into. The only thing that tech sellers could have done was to artificially hold back their development and sell an inferior product creating replacement needs soon after. Well competition is way too cutthroat for that in tech, its hard to hold back on that unless you are an Intel or a Microsoft. In the end it does mean excess capacity, but I don't think its a killer contributor to the economy itself because you must always remember the alternative and that would be inferior technology sitting in the market and holding back productivity and growth. On balance its far better to be in the situation we have now than we would have been to just put lousy product out there for similar prices.

I agree completely on the airlines, its a case of terrible management and greedy unions. Unions always try to make a "good business we all win, bad business you lose". They are finally accepting some pain right now, but its not like they are going into poverty. It amazes me how much they complain about how management made bad "decisions" when clearly the bad decision they made was to give into your demands! There is also a bad pricing model that was ripe for competition with the majors, but I don't think its as big a factor as many think. Bottom line is that the overcapacity isn't so much in too many planes, its in too many brands competing. They in themselves have created one existing deflationary spiral. As it is now a huge segment of the market is constantly looking for deals and expecting to see prices drop. Sure enough as airlines face empty planes they go out and lower prices. Where the demand seems to be badly matched is in off-peak flights. Go to the airport on Wednesday at noon and you won't recognize it from Monday morning or Friday night. Having the same schedule on almost all flights going seven days a week is insanity. However the structure of slotting that would mean an airline losing its ability to ever have that plane in the air at that time on that route means that the flights are required. If they changed that rule, which obviously would hit a big fat wall with the unions, then the airlines would be in far better condition. Another idea would be to do a demand based approach. Put up slots on a plane and say if its not more than X% full, then you have to go on the next flight of the day. Since on some days its quite clear that some flights would never get off the ground, the airlines could do a better job of managing planes in the air and labor needed. Once again the unions would have a fit, but then again this is the "better management" they claim the airlines should exhibit.

adios
05-19-2003, 10:27 PM
My brother-in-law is an IT manager and was in town visiting us this weekend. We talked some shop about IT and what he's seeing in the future. He stated that his opinion was that high software licensing costs were a big culprit in holding back spending. He did say hardware costs are going down but stated that software costs have risen a lot especially for multiprocessor,mission critical systems. He also stated that he doesn't endorse using Linux because of accountability i.e. who do you see if the product malfunctions. It was also interesting to hear how they've integrated wireless applications with their internet based servers and databases. He also stated that there is still a lot of incentive to increase productivity in many ways and that it is happening. He works for a county north of Seattle and stated that government is continuing to invest in the internet in a big way. Just thought I'd pass it along FWIW.

Mark Heide
05-21-2003, 02:08 AM
WildBill,

With the airlines it's more of a mismanagement problem that existed in the late '90s and 911 just happened to put the nail in the coffin for United. They were in trouble in the nineties and decided that the only way for them to survive was to become employee owned with pay freezes. United did not adjust their business model to the market. The same goes for American. I remember when I used to have to do a lot of business travel and both airlines would have flights to the same destinations within a half hour of each other. It didn't matter which one I flew on, because the planes were almost always half empty.

Mark