Financial topics

[MarshAviator]

WASHINGTON (AP) - Defense Secretary Robert Gates on Monday recommended halting production of the F-22 fighter jet and scrapping a new helicopter for the president as he outlined deep cuts to many of the military's biggest weapons programs.

Gates said his $534 billion budget proposal represents a "fundamental overhaul" in defense acquisition and reflects a shift in priorities from fighting conventional wars to the newer threats U.S. forces face from insurgents in places such as Afghanistan.

If Richard Koo is correct about defense (military) spending, then the administration's approach is really ill advised.
Not only are we facing obvious military challenges at present, we are facing foreseeable conflicts where the F22 would be an asset,
then again a plan to reduce strategic nuclear weapons is quite ill advised.

A double whammy of mistakes.

The choices of cabinet members seems to lock the president into the wrong direction until some crisis wakes him up.
We are left to wonder if it will be too late to correct by the time things unfold.

I can't wait to see the latest earnings posted, should be a real nail biter.
Then again, maybe the market will gain 500 points too?

[John]

Regardless, I think we all owe you an enthusiastic thanks for your obsessive dedication over the years.

+1

Thanks, guys. I appreciate it.

"Obsessive" is the correct word. It's amazing how my life
has been taken over by this web site.

Sincerely,

John

[John]

> I can't wait to see the latest earnings posted, should be a real
> nail biter. Then again, maybe the market will gain 500 points
> too?

Check out the chart on the bottom of the home page of my web site:



I believe that this supports Freddy's claim that they've been using
Q3 2008 earnings for the computations up till now. Now that a new
quarter has begun, they're switching to Q4 2008 earnings, and those
are disastrous.

Sincerely,

John

[MisterB]

It is ill-advised to cut military hardware spending at this point in time. This is an ANTI-STIMULUS. The U.S. government will end up eliminating military hardware jobs.

I’ve been thinking about the Hitler/30’s depression post and didn’t know where to reply.

First, a “certain amount” of military spending is a true economic good. A country does need to defend itself. (BTW, it has been a good deal for the Canadians and most of the Europeans to have the U.S. pay for the majority of their protection.) We could also say that police are economic waste but the reality is that police are a needed economic good due to the inherent flaws in the human condition.

When one looks at the Hitler pre-war example (or the Stalin pre-war example also) there is a confusion between job creation and wealth creation for the citizens. If people are employed in producing military goods the standard of living for PEOPLE may be terrible even though people are employed. During WW II itself the Russians and Germans produced huge quantities of military goods while the populous was in starvation conditions. In the U.S. things weren’t as bad but pretty much every consumer good including meat was in short supply and was rationed. WW II in the U.S. did help the previously unemployed in that at least they had some income. People that were previously employed were worse off due to the shortages.

The Stimulus Bill It was extremely disappointing in that it was almost all welfare spending of one type or another and very, very little infrastructure spending. Building roads and bridges and even building sports stadiums does provide a long term economic benefit even if it is not economically efficient in the free market sense. Our state fair grounds still has many building still in use today that were WPA buildings. There’s a road near our cabin that is still labeled the “CCC” Road. These building and roads were never purely economically justified but that obviously did have economic value.

Excessive military spending just for the sake of employment only is a waste of recourses. A better method of putting people to work in a depressionary situation is to build physical infrastructure.

[JLak]

It is ill-advised to cut military hardware spending at this point in time. This is an ANTI-STIMULUS. The U.S. government will end up eliminating military hardware jobs.

"In fact, in any given year Lockheed Martin hires about one of every 20 engineering baccalaureates in the United States"
http://www.lockheedmartin.com/news/spee ... ryDef.html

I looked for better statistics, but I haven't found any yet in a simple form. I'd say that the total defense industry employment of US graduating engineers at the BS level is probably about 50% if you take out civil engineers. Finance-related careers probably took about 25% and the rest in private manufacturing industry. Engineering job openings will be quite rare. Because engineering recruitment is generally at the top of the heap, I think this means even less incentive to go to college and we'll see enrollments crash despite all the efforts to make college "accessible". Then again, civil is still looking good and all engineers know that's a little more "accessible".

[freddyv]

Are we making progress?

I am a firm believer in Generational Dynamics, even over all the other pattern theories out there. However I am a little (okay,a lot) more dispassionate about it than John and I tend to give it a wide berth in how I expect these dynamics to play out; perhaps because I haven't done the in-depth research that John has, which I think may bias his outlook given the very bloody results of the past two crisis eras.

What I am seeing is that many of the voices that only a few years or even months ago were telling us what we needed to hear are now being listened to. No, not to the extent that they deserve but more than yesterday. Today's newsletter by John Mauldin, which features an article by John P. Hussman, brought this to my attention.

In that article John Hussman wrote,

The only way that stocks could be considered extremely undervalued here is if we assume that the record profit margins of 2007 (based on record corporate leverage) are the norm, and will be quickly recovered. While we never rule out the potential for surprising strength or weakness in the markets or the economy, the assumption that profit margins will permanently recover to 2007 levels is equivalent to assuming that the past 18 months simply did not happen.

This, even after the market has fallen by some 50%. More and more, people are listening and the perma-bulls are slowly beginning to fade away. With each bear market rally and subsequent decline we see just a little bit less patience with the "Fools of Wall Street", as I like to call them. You know, the ones who are always calling for a bull market.

Very smart people who are well respected have been warning about the issues we are now facing for a long time. Some are not so well known or even well respected but the chorus is growing ever louder and I know it will be loud enough the day I hear financial media outlets and bloggers begin to admit that earnings have collapsed and are not coming back anytime soon and that the P/E ratio of the S&P 500 really is well over 50 and will stay there for at least a half a year and that the market must decline to more reasonable levels before it is to recover.

But for right now, the Wall Street Journal and Bloomberg TV continue to report the P/E ratio of the S&P 500 at around 12 and the fools of Wall Street repeat the lie. But take a look: http://www2.standardandpoors.com/spf/xl ... EPSEST.XLS

Any day now Q4 earnings will be 100% complete and the new P/E ratio will be 60. They may continue to lie but the truth cannot be kept from investors forever. Over the next 6 months the P/E ratio is expected to rise to over 200, and that is if earnings meet analysts expectations.

I believe the crash is behind us and now we simply destroy much more wealth. My prediction is for Dow 5,000 this year and likely much lower in 2010.

--Fred

[aedens]

Larry Kantor, global head of research at Barclays Capital, also said in the bank's global outlook report that the "green shoots" of recovery have arrived. He said there were signs of a turnaround in parts of Asia and a bottoming out in the US economy.

Brian Lenihan, the finance minister, outlined a grim package of 1930s-style retrenchment, slashing child benefit and allowances for jobseekers. Road and railways projects will be frozen. There will be a cull of junior ministers save costs. Two-thirds of the belt-tightening will come from tax rises. A pension levy of 1pc – imposed in the face of bitter protests in January – will be doubled to 2pc.

"These measures will reduce all our living standards. I'm acutely aware of that," Mr Lehinan told the Dail. He said draconian measures were needed to stop the budget deficit spiralling to 13pc of GDP.

Remember this name above and I know, the only part of the world for which He holds me responsible is I and my use of the time given me.
Let us raise a standard to which the wise and honest can repair.

Meanwhile,
http://www.telegraph.co.uk/finance/fina ... rther.html

http://www.washingtonpost.com/wp-dyn/co ... 00104.html

Well arranged time is the surest mark of a well arranged mind.-PITMAN

A few of my inner regards are from Fr. Malachi Martin. In 1986 I read his work and waited for the time I see today.
The mind says its begun. My heart says where have we been.

Emptor

[JLak]

In the 1930s, the market dropped to 10% of it's value with a hard currency and a stalwart reserve. Now that we can inflate the currency very easily, maybe we can see the same pattern by adjusting for the monetary base.
Here's a simple chart I made in R. Data is from the Fed historical and yahoo finance

snp_adj.jpg (25.29 KiB) Viewed 6155 times

As you can see, we already experienced an 80% drop from the peak of the market, 75% from a recent peak. More importantly, however, we can see that we've already erased at least 5 decades of market value and I don't have data to go back that far, but I'd bet that this market level has not been seen since the great depression.

Also of note is that the monetary base increased approximately 1.5x on the way to that 10% level, which makes for something like a 93% drop in real terms, and then the base expanded to 5x with market peak of about 200 around 1945, which would mean that the base-adjusted level stuck around 10% of the market peak. (http://research.stlouisfed.org/publicat ... 9901ra.pdf)

Then from the end of WWII to the start of my data, there is only a 1.5x increase in monetary base and a 2.5x increase in market value.

Considering all this, as of February, the market was exactly back to the market/monetary base level that has held for 100 years. As of today, the market hasn't changed much, but the monetary base has increased another 1.5x with 2.5x promised from the treasury. That puts the market at it's lowest level EVER! Granted, the money hasn't come out of reserve yet, and may never if the banks pay back TARP, so this probably doesn't apply.

Obviously the current conditions are going to change things and the law of mean reversion applies, but the point is that the markets are actually a lot simpler than we make them out to be. They flutter around base inflation levels. The only 'fix' to the drop in the markets is an accounting trick to increase the monetary base and reap a lot of tax revenue in the process. Oh and by the way, if your salary hasn't increased by 250% in the last few months, you're getting screwed.

[StilesBC]

JLak,

Your whole last post doesn't make any sense whatsoever. The monetary base makes up for a tiny fraction of the overall market for money and credit. An increase in the monetary base of 250% is dwarfed by even a 10% decrease in the market value of all credit outstanding.

[StilesBC]

P/E Valuations Skyrocket; Market Shrugs