Searching for Absolute Returns, Part I
Long-term bear market lies ahead.
In chess, the endgame refers to the stage of playing when there are few pieces left on the board. The line between middlegame and endgame is often not clear, and may occur gradually or with the quick exchange of a few pairs of pieces. The endgame, however, tends to have unique characteristics, and the players have correspondingly different strategic concerns. In the current economic endgame, your strategy needs to consist of more than hope for a renewed bull market.
Rather than looking at just 1 year, in this week's letter we take the really long view and consider what the endgame will look like. I see 3 possible scenarios (and multiple combinations), and we'll explore each. There's 1 prediction that will be absolutely correct: Whatever I lay out here, events and time will change what actually happens - but this should give you useful insight into my longer-term biases.
Employment Numbers Are Worse Than Posted
First, I have to address some more government data that can be misleading. We were told Thursday that initial unemployment claims were only 524,000. The talking heads immediately said that was proof the economy is simply bad, not falling off a cliff.
Again, like last week, that seasonally adjusted number masks the real number, which was 952,151. That's not a typo. There were almost 1 million newly unemployed people last week! This is up over 400,000 from the same week in 2008, while the seasonally adjusted number was up only 200,000. Last week, the real number was 726,000, so this is a material rise of over 225,000. Yet, the seasonally adjusted number suggests a rise of only 57,000 from last week.
The continuing-claims data leaped over 500,000 to 5,832,746 - again, not a typo. The length of time people are staying unemployed is also rising rapidly. We're up almost 1.5 million new continuing claims in just the last 5 weeks. That's a stunning rise of over 30% in unemployment claims in just over a month. The data is truly ugly.
When you're in period, as we are now, where there are deep outliers to the data because of very real turning points in the economy, the seasonally adjusted numbers can mask the real underlying trends, both up and down.
Let me repeat a point I made last week, which is important and necessary for us to grasp if we're to understand where we're headed: We're in completely uncharted territory in terms of the economic landscape. We have no maps - only theories.
It's not a question of whether or not there will be massive stimulus. The question is simply this: How much, and for how long? My wager, outlined below, is that it will be far larger than anyone would want to admit today.
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