"Prediction is very difficult, especially about the future." - Niels Bohr
It seems relatively clear to me that we are now entering another recession. I have named it Recession Deux as I believe it to be a double dip recession rather than a new recession altogether. We never truly recovered from the recession of 2008 and all indicators are pointing to us falling into part two of the Great Recession as some people have named it.
A recession does not normally end without some form of stability or growth in the housing market. Most of the population in the United States relies on housing as their main investment and retirement fund. In fact according to the federal government 50 percent of typical home-owning family wealth is tied to their real estate investments. As a market housing was valued at over $18 trillion as of the first quarter of 2011. However this does not tell the whole story. Housing as an industry accounts for about 27 percent of investment spending and 5 percent of overall economic activity in the United States annually.
Looking at housing data points to continued economic weakness. New home sales decreased for the third consecutive month. Furthermore existing home sales fell to 4.67 million homes in July. This is the second straight month of sales declines and the National Association of Realtors blamed the number of contracts that were cancelled as the source of the weakness. Sales cancellations point to a couple of areas of weakness: it is still difficult to find a lender willing to lend against housing; appraisals are coming in lower than the negotiated price of the house sale creating an additional problem with financing; and, with housing prices continuing to fall buyers are reconsidering buying. Until the inventory of distressed housing is cleared continued economic weakness will ensue. Considering that the lack of sales has pushed inventory levels to 9.4 months of supply the highest point since November 2010, it is unlikely that there is any economic recovery in the works.
In fact when you consider that the Federal Reserve has pushed over $3 trillion of stimulus into the economy and there is little to show for their actions it is easy to see why the weak recovery is turning to Recession Deux.
Wednesday, August 24, 2011
Tuesday, August 16, 2011
A Loss of Confidence
"What we anticipate seldom occurs; what we least expect generally happens." - Benjamin Disraeli
Economists are at a loss as to what causes a loss of confidence. One minute everyone is happy with the status quo and the next people turn tail and run for the hills. This is of particular concern given the precipice on which the global economy is balanced. Confidence is fickle and right now it hangs in the balance. This is of great concern when governments and companies need to roll over large amounts of short-term debt which is precisely what is required at present. As an example of the size of short-term debt that needs to be rolled over, the recent stress tests performed on 90 European banks showed that EU 5.4 trillion of debt needs to be rolled in the next 24 months.
While the number is huge, in good economic times this would not be a problem. The issue is that unless there is the confidence that this amount will be repaid the market for these securities disappears. To attract buyers for this debt there needs to be the confidence that the debt will be repaid in a timely manner otherwise the interest rate needs to reflect the risk associated with non-repayment. A lack of confidence therefore leads to a spike in the interest rate right at the time when companies and governments can ill afford it. If confidence collapses, lenders disappear and a crisis ensues.
So what makes up confidence? Well unless you are an accountant you base your outlook on the current business environment and your expectation of future events. People typically follow the consensus of opinion (that is why it is the consensus) so when things are good, everyone seems to expect the goods times to continue to roll (this is why economies overheat and bubbles are created). The same is true when things turn bad; people generally take a bleak look at the future (this is why it is so hard to turn an economy around during a downturn). The issue is how to determine the inflection point, the point at which people or businesses decide that enough is enough.
Certainly at present there is an air of despair. In poor economic times people rely on their leaders to step up to the plate. Governments and central bankers are paid to take steam out of the economy when it is overheated and apply the accelerator during economic hard times. A look over the last millennium shows that there have been some success, but overall the timing of the government intervention, the amount of the intervention and the direction of that intervention is questionable. Looking back just a decade brings into question why so much support was given to the technology front by Mr. Greenspan and then why so much attention was placed on supporting the stock market collapse. This support in turn lead to the housing bubble and on and on it goes. Certainly it is very questionable as to the effectiveness of our leaders ability to support and control economic activity and it is doubtful that the current policies will be effective in solving the problems that we now face.
That aside the issue right now is one of a deteriorating level of confidence in our current administration and the governments of most of the first world economies. Given that the population of the globe is reliant on them to return the global economy to a more normal state it is very concerning to see their floundering in the eye of the storm. To the average man on the street the lack of quantifiable benefits from all of the trillions of dollars spent around the globe is feeding into their outlook. Unfortunately it is up to the politicians to correct this and looking at the lack of leaders prepared to do anything of substance (which may jeopardize their political careers) is sickening.
The downgrade of America's sovereign debt in and of itself is of little consequence, but it could be the tipping point that pushes the first domino leading to another major crisis. Only time will tell, but the lack of consumer and business confidence around the world comes at a very inopportune time and points at best towards another recession in the making and at worst a global crisis that few have ever witnessed.
Economists are at a loss as to what causes a loss of confidence. One minute everyone is happy with the status quo and the next people turn tail and run for the hills. This is of particular concern given the precipice on which the global economy is balanced. Confidence is fickle and right now it hangs in the balance. This is of great concern when governments and companies need to roll over large amounts of short-term debt which is precisely what is required at present. As an example of the size of short-term debt that needs to be rolled over, the recent stress tests performed on 90 European banks showed that EU 5.4 trillion of debt needs to be rolled in the next 24 months.
While the number is huge, in good economic times this would not be a problem. The issue is that unless there is the confidence that this amount will be repaid the market for these securities disappears. To attract buyers for this debt there needs to be the confidence that the debt will be repaid in a timely manner otherwise the interest rate needs to reflect the risk associated with non-repayment. A lack of confidence therefore leads to a spike in the interest rate right at the time when companies and governments can ill afford it. If confidence collapses, lenders disappear and a crisis ensues.
So what makes up confidence? Well unless you are an accountant you base your outlook on the current business environment and your expectation of future events. People typically follow the consensus of opinion (that is why it is the consensus) so when things are good, everyone seems to expect the goods times to continue to roll (this is why economies overheat and bubbles are created). The same is true when things turn bad; people generally take a bleak look at the future (this is why it is so hard to turn an economy around during a downturn). The issue is how to determine the inflection point, the point at which people or businesses decide that enough is enough.
Certainly at present there is an air of despair. In poor economic times people rely on their leaders to step up to the plate. Governments and central bankers are paid to take steam out of the economy when it is overheated and apply the accelerator during economic hard times. A look over the last millennium shows that there have been some success, but overall the timing of the government intervention, the amount of the intervention and the direction of that intervention is questionable. Looking back just a decade brings into question why so much support was given to the technology front by Mr. Greenspan and then why so much attention was placed on supporting the stock market collapse. This support in turn lead to the housing bubble and on and on it goes. Certainly it is very questionable as to the effectiveness of our leaders ability to support and control economic activity and it is doubtful that the current policies will be effective in solving the problems that we now face.
That aside the issue right now is one of a deteriorating level of confidence in our current administration and the governments of most of the first world economies. Given that the population of the globe is reliant on them to return the global economy to a more normal state it is very concerning to see their floundering in the eye of the storm. To the average man on the street the lack of quantifiable benefits from all of the trillions of dollars spent around the globe is feeding into their outlook. Unfortunately it is up to the politicians to correct this and looking at the lack of leaders prepared to do anything of substance (which may jeopardize their political careers) is sickening.
The downgrade of America's sovereign debt in and of itself is of little consequence, but it could be the tipping point that pushes the first domino leading to another major crisis. Only time will tell, but the lack of consumer and business confidence around the world comes at a very inopportune time and points at best towards another recession in the making and at worst a global crisis that few have ever witnessed.
Monday, August 8, 2011
Buy the Dip?
"Wise men don't need advice. Fools won't take it." - Benjamin Franklin
After this last week and particularly after today there have been a number of people commenting that you should buy this "pullback". The reasons I have heard range from the educated traders who know that in the next few days that there should be a bounce as the market is really oversold and always bounces at some point; to the completely naive who have been trained by the pigs of Wall Street to believe that stocks are always a good place to be and that a "pullback" such as this offers a great buying opportunity. "After all (as one person I spoke to this weekend said) the United States is such a great nation that everyone has to invest in the United States stock markets." How ignorant can you be?
My view is that you should remain well away from the market. Sure there may be another attempt by the Federal Reserve to bolster stocks and sure with the White House up for grabs next year there will be a lot of time and effort spent trying to make something rally, the reality is that the global economy stinks and is continuing to rot from the inside out. Until this rotting is reversed and the corpse called the global economy can be brought back to life there is no reason to try to time the market for a short-term bounce.
The S&P downgrade of the United States credit rating is just the tip of the iceberg. Look at the remaining countries with AAA credit rating and you will see that they all could very easily be stripped of that rating in very short order. France and Germany have the burden of the rest of the Euro zone on their shoulders, the United Kingdom is struggling to contain its debt loads, Australia and New Zealand will be hit hard by the slowdown in China, Canada is linked by the hip to the United States and to be honest all of the remaining 10 nations are too small to make any difference to the global economy. A contagion of downgrades will lead to another round of stock market pullbacks. As debt becomes harder and more expensive to find earnings and growth around the world will suffer and the market will tank. It is not a hard equation to work out, but for some reason people still think that they should own stocks.
Cash is an investment, and while cash may not earn you anything at present it is better to hold onto what you have than to give away 20 percent or more of your portfolio specifically if the upside is only 10 percent and is marred with risk. If you are still adamant to be in the market as it is for the "long haul" then look to high yielding solid dividend plays, but to be honest the "long haul" may just be too long for most to bear.
A look at the Japanese market will give you an understanding that the market does not have to recover any time soon. The Nikkei index reached around 40,000 in December 1989. Subsequent to that it fell, bounced, fell, bounced and now 22 years later it is still below 10,000. Yes that is not a mistake, it is still down 75% from its high. Could the United States markets be in the throws of such a secular bear market? I believe that this is the case. Will there be bounces in the market? Yes but unless you are very nimble and trade the markets daily you will find better value in other asset classes. Even if I am wrong and somehow the economy changes and we go back to a solid economic footing, there will still be plenty of time to buy stocks and make money in the market during the next bull market. The problem is that bull market appears to be a long way off.
After this last week and particularly after today there have been a number of people commenting that you should buy this "pullback". The reasons I have heard range from the educated traders who know that in the next few days that there should be a bounce as the market is really oversold and always bounces at some point; to the completely naive who have been trained by the pigs of Wall Street to believe that stocks are always a good place to be and that a "pullback" such as this offers a great buying opportunity. "After all (as one person I spoke to this weekend said) the United States is such a great nation that everyone has to invest in the United States stock markets." How ignorant can you be?
My view is that you should remain well away from the market. Sure there may be another attempt by the Federal Reserve to bolster stocks and sure with the White House up for grabs next year there will be a lot of time and effort spent trying to make something rally, the reality is that the global economy stinks and is continuing to rot from the inside out. Until this rotting is reversed and the corpse called the global economy can be brought back to life there is no reason to try to time the market for a short-term bounce.
The S&P downgrade of the United States credit rating is just the tip of the iceberg. Look at the remaining countries with AAA credit rating and you will see that they all could very easily be stripped of that rating in very short order. France and Germany have the burden of the rest of the Euro zone on their shoulders, the United Kingdom is struggling to contain its debt loads, Australia and New Zealand will be hit hard by the slowdown in China, Canada is linked by the hip to the United States and to be honest all of the remaining 10 nations are too small to make any difference to the global economy. A contagion of downgrades will lead to another round of stock market pullbacks. As debt becomes harder and more expensive to find earnings and growth around the world will suffer and the market will tank. It is not a hard equation to work out, but for some reason people still think that they should own stocks.
Cash is an investment, and while cash may not earn you anything at present it is better to hold onto what you have than to give away 20 percent or more of your portfolio specifically if the upside is only 10 percent and is marred with risk. If you are still adamant to be in the market as it is for the "long haul" then look to high yielding solid dividend plays, but to be honest the "long haul" may just be too long for most to bear.
A look at the Japanese market will give you an understanding that the market does not have to recover any time soon. The Nikkei index reached around 40,000 in December 1989. Subsequent to that it fell, bounced, fell, bounced and now 22 years later it is still below 10,000. Yes that is not a mistake, it is still down 75% from its high. Could the United States markets be in the throws of such a secular bear market? I believe that this is the case. Will there be bounces in the market? Yes but unless you are very nimble and trade the markets daily you will find better value in other asset classes. Even if I am wrong and somehow the economy changes and we go back to a solid economic footing, there will still be plenty of time to buy stocks and make money in the market during the next bull market. The problem is that bull market appears to be a long way off.
Thursday, August 4, 2011
Images of Debt
"Calamity n. A more than commonly plain and unmistakable reminder that the affairs of this life are not of our own ordering." - Ambrose Bierce
Now I normally do not use other people's work or images to make my point but these are so powerful that I thought you would enjoy seeing them. Below each is a brief commentary. The point of the matter is that until this mountain of debt starts to shrink there is trouble ahead. Combine this with the massive load of sovereign debt in Europe and other parts of the world and you can understand why the chances of a global soft landing are minimal. Remember that these debt levels continue to rise each and every day. You can learn more about how and why this happened by reading Ellen Brown's "THE WEB OF DEBT".
One Hundred Dollars - $100
The most counterfeited money denomination in the world. Keeps the world moving.
Ten Thousand Dollars - $10,000
One Hundred Million Dollars - $100,000,000
Plenty to go around for everyone. Fits nicely on a standard sized pallet.
If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now...but ~$700 billion - same amount the banks got during bailout.
Comparison of $1,000,000,000,000 dollars to a standard-sized American Football field and European Football field. Say hello to the Boeing 747-400 transcontinental airliner that's hiding on the right. This was until recently the biggest passenger plane in the world.
15 Trillion Dollars - 15,000,000,000,000
Unless the U.S. government fixes the budget, US national debt (credit bill) will top 15 trillion by Christmas 2011. The Statue of Liberty seems rather worried as United States national debt passes 20% of the entire world's combined GDP (Gross Domestic Product). In 2011 the National Debt will exceed 100% of GDP, and venture into the 100%+ debt-to-GDP ratio that the European PIIGS have (bankrupting nations).
114.5 Trillion Dollars - 114,500,000,000,000
This is the total US unfunded liabilities. To the right you can see the pillar of cold hard $100 bills that dwarfs the WTC & Empire State Building - both at one point world's tallest buildings. If you look carefully you can see the Statue of Liberty.
The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government knows it does not have to fully fund the Medicare, Medicare Prescription Drug Programme, Social Security, Military and civil servant pensions. It is the money USA knows it will not have to pay all its bills.
The unfunded liability is calculated on current tax and funding inputs, and future demographic shifts in US Population.
With the market cratering around the world today it should be enough of an alert that you should be in cash or gold. Once again to protect your wealth for the next few years look to http://www.fixedratedeposits.com/ as a source of excellent rates on your short term cash investments.
Now I normally do not use other people's work or images to make my point but these are so powerful that I thought you would enjoy seeing them. Below each is a brief commentary. The point of the matter is that until this mountain of debt starts to shrink there is trouble ahead. Combine this with the massive load of sovereign debt in Europe and other parts of the world and you can understand why the chances of a global soft landing are minimal. Remember that these debt levels continue to rise each and every day. You can learn more about how and why this happened by reading Ellen Brown's "THE WEB OF DEBT".
One Hundred Dollars - $100
Ten Thousand Dollars - $10,000
Enough for a great vacation or to buy a used car. Approximately one year of work for the average human on earth.
One Million Dollars - $1,000,000
Not as big of a pile as you thought, huh? Still this is 92 years of work for the average human on earth.
One Billion Dollars $1,000,000,000
You will need some help when robbing the bank. Now we are getting serious!
One Trillion Dollars - $1,000,000,000,000
When the U.S government speaks about a 1.7 trillion deficit - this is the volumes of cash the U.S. Government borrowed in 2010 to run itself. Keep in mind it is double stacked pallets of $100 million dollars each, full of $100 dollar bills. You are going to need a lot of trucks to freight this around.
If you spent $1 million a day since Jesus was born, you would have not spent $1 trillion by now...but ~$700 billion - same amount the banks got during bailout.
15 Trillion Dollars - 15,000,000,000,000
114.5 Trillion Dollars - 114,500,000,000,000
The 114.5 Trillion dollar super-skyscraper is the amount of money the U.S. Government knows it does not have to fully fund the Medicare, Medicare Prescription Drug Programme, Social Security, Military and civil servant pensions. It is the money USA knows it will not have to pay all its bills.
If you live in USA this is also your personal credit card bill; you are responsible along with everyone else to pay this back. The citizens of USA created the U.S. Government to serve them, this is what the U.S. Government has done while serving The People.
The unfunded liability is calculated on current tax and funding inputs, and future demographic shifts in US Population.
Note: On the above 114.5T image the size of the base of the money pile is half a trillion, not 1T as on 15T image. The height is double. This was done to reflect the base of Empire State and WTC more closely.
Source: Federal Reserve & www.USdebtclock.org - visit it to see the debt in real time and get a better grasp of this amazing number.
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