Caveat Emptor

It's easy to be cynical these days despite the fact that many mutual funds have added about 40% recently. No one has a crystal ball, but I think most people haven't a clue about the extent of what has happened with the financial collapse. These days the economists remind me of astrologers. They say a lot and it sounds as if they really, really know what they're talking about but...

Laurence Meyer, a former Governor of the Federal Reserve told Bloomberg News he expects unemployment to remain at around 10% through 2010 and come down to 8.5% in 2011. More bad news in that the country will not return to full employment (5% unemployed) until 2015. Credit spreads will be higher for a "long time" which is not good news for the market. He says that a serious question is about whether the savings rate will stabilize at 4% or go dramatically higher causing a delayed recovery. Nuriel Roubini may be sounding more optimistic these days but obviously other economists have their doubts. Gary Shilling, author of Deflation, says that we are in deflation and that it will be chronic. The destruction of the economies: derivatives declined by $90 trillion, money supply declined by $25 trillion. $20 per barrel oil has been predicted by the end of the year. Shilling takes a middle ground in regard to economic growth. He sees a volatile pattern as the recession lasts into next year. He makes a distinction between good and bad deflation. Good deflation results when technology brings falling prices. Bad deflation results with a lack of demand in the economy. Shilling predicts chronic declines of overall price indices; 2 or 3 points per year.

Consumers have cut back in spending and we don't know how long that will last. Post war babies need to save and people have run out of borrowing ability. For twenty five years their spending exceeded their income growth and fueled a world wide bull market. That demand is history. Shillings says consumers are saving like no time since the Great Depression. An April spike in savings rate to 104% was due to a big tax cut, May's savings rate fell back to 90%. These rates have not been seen since the Great Depression. This lack of demand in the economy means a ten year workout similar to the Japanese situation due to what Keynes called "the paradox of thrift" Shilling predicts that a graph of the economy for the next ten years will look like a declining saw-tooth pattern.

So what do we do? I guess the prudent course of action is to take your losses and sell out now. Get liquid. Be careful and watch what you buy. Caveat Emptor. Wait for really good bargains. Gasoline could be in the $1.5 per gallon by autumn. But I could be wrong. On the other hand, if you sell your funds on upswing market, you could lose out on....Oh, what the hell, DO NOT listen to me.

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Life feels a little surreal these days. It's as if every day, a man comes round yelling, "Bring out your dead, bring out your dead." Which reminds me, just what we need right now is another 1918 style flu pandemic.