Agora Financial’s Rude Awakening

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Laguna Beach, California

• Three terrifying (but cautionary) charts for your viewing displeasure,
• Buy the green shoots or sell the brown ones…what would Jesus do?
• Markets tank, gold barely budges and plenty more…

Eric Fry, reporting from Laguna Beach, California….

What have become of the promising “green shoots” of recovery?

Back on March 15, Federal Reserve Chairman, Ben Bernanke, remarked that the “green shoots” of recovery had become evident. Instantly, the phrase captured the hearts and imagination of the investing public. No matter how dismal the actual economic news, green shoots seemed to be spouting up everywhere.

Every economic data point, no matter how horrible, provided yet another opportunity to exclaim, “Aha!…Another green shoot!”

Sure, unemployment continued to soar, home prices continued to slide, and industrial production continued to contract, but things could have been much worse. And since the bad news has not been as awful as it could have been, the economy must be recovering, right?

Ummmm….not exactly. To gain a little insight on this curious case of “green shoots,” let’s consult a 2,000-year-old perspective.

“Listen!” Jesus declared in the Gospel of Mark, “A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants, so that they did not bear grain. Still other seed fell on good soil. It came up, grew and produced a crop, multiplying thirty, sixty, or even a hundred times.”

Although Jesus intended this parable to describe an individual’s receptivity to his message of hope and salvation, the metaphor of sowing seeds could also pertain to the character of economic recoveries. For example, what sorts of seeds are sprouting from the soil of the American economy?

The answer to this question may hold the key to stock market trends over the coming months.

Christ’s parable presents four possibilities:

1) Seeds that the birds consume;

2) Seeds that sprout in shallow soil, then quickly wither

3) Seeds that sprout among thorns, and cannot grow

4) Seeds that take root in fertile soil and flourish

So, to repeat the question, what sort of green shoots have been sprouting from the soil of the U.S. economy?

If you believe that #4 is the correct answer, you will want to be buying stocks tomorrow morning…and for several mornings thereafter. However, if you, like your California editor, believe that America’s green shoots more closely resemble the seeds that sprout among thorns and/or in shallow soil, you will want to hide out in the safest assets you can find.

Your editor would like to trust in the green shoots that so many folks claim to see. But he doesn’t. He can’t. “Less bad” is not good, and it never will be. “Less bad” might throw off a greenish hue for a short while, but it will never grow into an oak tree…or even a daffodil.

Green shoots need roots…and that’s what’s missing. The underlying American economy is still sick; it cannot provide very much nourishment to resurgent economic activity. Almost all essential “root systems” of economic activity remained impaired, diseased or compromised in some way.

Meanwhile, above ground, the economy continues to contract in every imaginable (and unimaginable) way.

Chris Mayer provides the details in a fascinating column below…

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Depression Then and Now
By Chris Mayer

This is an eye-opener. Whenever I talk about the Great Depression and compare it with what is going on today, I get a lot of skepticism. I hear a lot of people say, definitively, “This isn’t as bad as the Great Depression.”

What you have to remember, though, is the Great Depression unfolded like a train wreck in slow motion. It took awhile before it became the Great Depression. It wasn’t like someone flipped a switch and poof! — bread lines, Hoovervilles and hobos.

Another point to remember is that the Great Depression was a global economic event. It wasn’t just confined to the U.S. You have a take a wide-angle view of the global economy to get a better sense of the breadth of the slump. And so it is today.

Take a look at the next few charts, from economists Barry Eichengreen and Kevin O’Rourke. The first plots world industrial output from June 1929 against industrial output from April 2008:

We’re tracking that path pretty closely.

Then there are world stock markets:

We’re actually worse off right now.

Finally, take a look at the volume of world trade:

Again, here we’re actually ahead of the pace set in the Great Depression.

There are several other charts, but I think you get the point. Eichengreen and O’Rourke conclude:

“To summarize: The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the U.S. leads one to overlook how alarming the current situation is even in comparison with 1929-30.”

Even so, there are many differences between now and then. One big difference that doesn’t get much play is the fact that today we have large emerging economies such as China, India, Russia and Brazil.

Investment strategist Murray Stahl, in a recent letter, pointed out “the most important difference between that era and this era…is the robust economic development of China, India, Russia and Brazil. During the Great Depression, those nations were in the opposite condition.”

China was in the midst of a civil war and then had to fend off a Japanese invasion. India wasn’t even on the economic map as anything of any consequence. Russia was backward and militantly communist. And Brazil had all kinds of political problems, including trying to put down a communist movement.

Today, those four countries are in much better shape. They are much larger and are still growing.

There are many more differences, and I don’t expect what we’re going through to play out like the Great Depression, except maybe in some of the broadest outlines. This is, or will be, known as the greatest crisis the world has faced since the Great Depression.

How it is similar is also in some of the valuations in individual stocks and securities. As Stahl writes, we share with the Great Depression the “bizarre valuations on highly liquid securities in the world capital markets [such] that I have never before seen in my 30-plus years of investment practice.” In that, there is opportunity.

As I’ve written before, I think there is room for investing even in a weak economy. There are lessons we can learn from the Great Depression. Some stocks will do better than others. I expect the needed commodities that fuel those big emerging economies will be good places to be.

And these hard assets also provide some protection in a world where paper currencies are not likely to hold their value as cash-strapped governments around the world crank up the printing presses.

— Mayer’s Special Situations Resource Report —

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[Rude Endnote: Asian markets largely followed Wall Street’s lead overnight after the Dow and S&P 500 both fell another 2%.

Not wishing to be outdone, Japan’s Nikkei 225 shed 2.25% for the session while Hong Kong ended the day 0.8% lower. China’s CSI 300 actually managed a small gain of about one third of a percent while the Aussie measures braely budged.

Europe’s big three – London’s FTSE, Germany’s DAX and France’s CAC – were all within a 0.5% range last we checked.

Oil inched lower, possibly on recovery concerns, and now trades for about $62 per barrel. Gold, as we mentioned above, was conspicuously unresponsive to the whole fiasco. (It actually fell a few bucks.) An ounce of the shiny stuff fetches $921 as we write.

We’ll be back with more tomorrow.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com