March 13, 2008

Economy: Where We Go From Here

It's not good.

1.  I was wrong about the dollar, which continues to fall, but more important than laughing at me is understanding why I was wrong.  I could not believe that the Fed, the government, would allow bank closures, would allow the dollar to fall further by waiting too late to cut rates.  I was wrong.  I should have suspected, though, when in the summer the Fed unanimously agreed not to cut rates, seeing no danger to the economy-- they thought everything would be contained to subprime mortgages.

But any human on this planet knows there is nothing more recessionary than losing your house, except possibly losing your job and your house, or a government policy to kill off all daughters and losing your house.

So I made a bet in common sense, in pride.  Wrong.  No banks have failed yet, but it is generally assumed Bear Stearns is in real danger of evaporating.  You should probably hide your daughters.

2.  I was right about GOOG, 520 was the top.  Unfortunately, the PE is still 33, and has to fall to about 25 (see #5).  So another 20% drop in price is to be expected, though continued (but slower) growth will offset this.  See you at 400.

3.  Oil is too high.  It will fall fast and hard, by which I mean fast and hard.  Certainly there are long term demand concerns, which means we'll never see $50 again.  But when oil rises 20% but the refiners fall 20% (see VLO), that disconnect means that the oil price isn't related to use, but to speculation.  See you at $90.

4.  A good rule of thumb I just invented is that people will a spend little more for lattes than they will for gas.  I know Brazil is supposed to have a large and delicious crop in 2008, but I don't care.  I am drinking more coffee, and the Chinese are going to need more as well, if they're going to keep working to to put lead paint on all their exports.  Coffee is cyclical, so wait for a pullback, but see you at 175/lb (that's cents, yo.) 

5. You say, well, what about the $200 billion the Fed just lent out ?  Great.  Where was that money 6 months ago?  Here's how it plays out: you have $400B in bad loans.  Say that they end up being worth half, so $200B.  Banks leverage the money to loan, 5x or 10x, so that $200B loss translates to maybe a $1T that doesn't get lent out, that doesn't make it to the economy.  Experts have approximated this to be a fall in GDP of about 1.5% (pessimistically.)  Interestingly, as a bad as the housing market collapse is for some homeowners (Inland Empire), it is much worse for the banks/brokers, who (also) have to bear the burden of the losses.

See you June 2009.

(long GOOG call, refiners)