July 22, 2011 – Los Angeles Strategy Luncheon Review

Featured Trades: (LOS ANGELES STRATEGY LUNCH REVIEW)



1) Los Angeles Strategy Luncheon Review. I am writing this letter at a table at Zeppy’s Pizza Shack in Hermosa Beach, just across the street from Yer Cheat’n Heart Tattoo. The flotsam and jetsam of humanity are gliding past me on bicycles, roller blades, and skateboards, clad in tank tops and bikinis. A homeless man, clearly schizophrenic and having a heated conversation with himself, was sifting through a trash can, hunting for empty cans and bottles.

To get here, I had to negotiate the notorious Los Angeles freeway system, where traffic frequently backs up because of drivers found dead the wheel, the victims of daily road rage incidents. You never use your turn signal here. It only encourages people to speed up to take your space.

The freeways here are more a state of mind that a transportation system, and it brings out the full range of human emotion.  Drive the Pasadena Freeway and you are experiencing the full force of an action video game set in the 1930′s. Make the turn from the 101 to the 110 and you are plunged into a hopeless maze where only the most aggressive and predatory rat escapes alive. But turn off from the 10 over the magnificent elliptical overpass to the 405 and you are soaring with the eagles.

The lunch at the Los Angeles Athletic Club was well attended, and professionally served, with many last minute sign ups. I guess those LA guys spend more time at the beach than I thought. There was much discussion about the longer term outlook for the financial markets, which I viewed with modestly positive for the rest of the year, but then turn hugely negative farther out. The remnants of QE2 will provide enough liquidity for the S&P 500 to claw its way up to 1,400 by year end. After that, the longer term structural problems facing the country will drag us back into another recession and trigger a second financial crisis. There will be no QE3.

The banks will become the major victims of the next melt down, as they have yet to amortize the losses of the last crash, and house prices are still falling. The only distinction is that there will be no TARP, no bail outs, and no stimulus package. A gridlocked congress offers no safety net. Then the chips really will fall where they may. Residential real estate may fall another 25% and then bump along the bottom for another decade.

At the moment, it looks like Obama can win another election, especially if the large numbers of minorities and young people return to the polls after going missing in action in 2010. Campaigning for his own job will make a huge difference. He should have a win in Libya in his back pocket, and his successful hit against Osama bin Laden has certainly reinforced his anti-terrorism credentials.

Demographic and immigration factors could deliver him up to 4 million new voters. The House is really up in the air. If the economy can continue to eke out a 2% growth rate for another year, he might just make it.

The spanner in the works will be unemployment. With every level of government cutting staff to staunch deficits, and with large companies keeping a death grip on their cash hoards, I don’t expect any improvement here. The structural headwinds are so severe, that I doubt we can make it to the 7% handle for the jobless rate. The 25 million jobs we shipped to China are never coming back. There is nothing Obama or anyone else can do about this, no matter what they say.

I am planning a rather ambitious lunch schedule for the rest of the year, which I will post in my store in the next few weeks. I look forward to seeing the rest of you then.

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