"It isn't so much that hard times are coming; the change observed is mostly soft times going." - Groucho Marx
All eyes are on the United States debt ceiling debate. This is just smoke and mirrors. If anyone out there really thinks that the United States will not raise the debt ceiling in time to stave off a default then they must be from another planet. No United States congressman or senator would throw their political career in the toilet by forcing a default. It is not going to happen. Not yet anyway. Whether the compromise will be enough to calm the jitters of the market is another debate entirely but for now all this smoke is covering up the real problems scattered around the globe.
I have discussed Europe in my previous blogs, but it is becoming abundantly clear that the only way forward in Europe is a dramatic write-down of sovereign debt. This will cripple the German, French and Swiss banks and could set off another round of financial contagion. To be honest I do not see any other way out and the longer that the European leaders dither about the solution the more pronounced the fallout. To me this is a time bomb that will explode at the worst possible moment.
The next major issue is China. Growth there is slowing at an alarming pace and it appears that the real estate bubble in China has finally burst. Banks are now scrambling to remain solvent and this is feeding into the economy in general. There are reports that manufacturers are unable to fill orders as they cannot access the money previously promised from bank lines of credit. As China is or was the only bastion of hope in the globe this is big news. Watch out if it gets worse as those sovereign Chinese investments will need to be repatriated to help offset some of the problems on mainland China.
The United States stock market appears to be overvalued. I know that based on historic levels of price to earnings ratios it is low, but when you compare the current price to earnings ratio in a low interest rate environment, the valuation metric is actually high. A "normalizing" of the price to earnings ratio extrapolates to roughly 20 from the benign level being reported of 13 and this is worrisome. Particularly when you match this against the high levels of earnings.
Company earnings are extremely high. This is a factor of many things but two major causes of this are the unlocking of working capital as a result of slower growth and the low interest rate environment which is throwing billions of dollars down to company bottom lines. This is not sustainable and therefore I expect that going forward company earnings will slow dramatically. This will have the negative effect of increasing the current price to earnings ratio further and will show that the market is overvalued and due for a correction.
Another signal is that company insiders are selling stock of their own companies at an alarming rate. The latest report is that sellers outnumber buyers by 7,900 to one. Not surprisingly this is an all time high and does not bode well for the future. If anyone knows about the future of a company earnings and its prospects it is the insider.
The final issue for the market is that it is now being almost exclusively driven by the high frequency traders. These companies buy and sell millions of shares so fast that they are occurring our in cyberspace. Stocks cross so fast that the computers running the markets are unable to capture these trades which are therefore occurring unregistered in cyberspace. If and when all of these traders head in one direction watch out below. Combine this with weak underlying fundamentals as described above and you have a situation that could make the flash crash seem mild.
Economic weakness persists in the United States. It was recently reported that temporary employees are now at a higher percentage of total workers than during the great depression. A lot of this could be attributable to a change in the style of work but certainly not a statistic that points to strong consumer spending in the near term. Housing is stuck in the doldrums and recent changes to the laws have increased the number of strategic walkouts. These are people that decide not to keep the extra house or the investment property because it is a drain on cash flows so they just walk from the property and stop paying the bills even if they can manage to afford it. This strategy is effective in wiping out debt to the homeowner but will keep the price of properties depressed for years to come.
I am afraid that I do not see any silver lining at present and as such I cannot recommend investing anywhere else other than in cash or if you have the stomach for volatility then you can try gold or silver. Once in cash research my company on http://www.fixedratedeposits.com/ and earn a decent return on that cash while waiting for something to change for the better.
Wednesday, July 27, 2011
Thursday, July 14, 2011
Greece and the United States
It is my last day in London and then I am back to the sunny shores of San Diego. It has been a marvelous trip and I must say that my son now has the same love for London that I do. One day I look forward to bringing him back here to share in a few pints at my favorite pubs but for now I am just enjoying showing him all the magnificent historical sites that London has to offer.
It is looking as though another historical cultural country Greece is under severe pressure. The problem for the Greeks is that they really have no way out other than to cut their spending to the bone and hope that the rest of the Euro zone allows them the time to implement the necessary austerity. Without the ability to let their currency debase the only remaining option is to cut spending in order to repay their debts.
Today Moody’s issued a warning to the United States that unless they can raise their debt ceiling before the August deadline that they would cut the coveted AAA rating for the country. This seems ironic to me. If the United States votes to increase the amount that they can owe to their creditors then they will retain their rating while the Greeks have no ability to borrow more and are forced to start to repay their debts. In the interim the Greeks have had their rating cut to junk while the United States continues their day in the sun.
In the long run the Greeks will be far better off than their American counterparts but for now they are feeling the pain well in advance of the United States. A look at the nations’ debt to GDP levels shows that the Greeks are in worse shape than the United States as they owe 144% of their GDP while the US owes around 100%. So we are in effect better off, but not by much. Consider that the United Kingdom at 75% debt to GDP is already implementing austerity measures and you can see why I am amused that Moody’s would cut the rating if we do not increase the debt level. How much more debt do we have to issue to keep our rating? Should we go to 200% of debt to GDP and would that give us a AAAA rating? Obviously this is all tongue in cheek but it does make a point.
Not that there really is much choice at this stage. If the government does not come to a compromise before the deadline and the debt ceiling cannot be raised then certainly there will be mass panic around the globe. The United States has convinced the world that more money printing is needed so while the rest of the world sorts their debt problems out the United States continues to be the lender of last resort to the world. Once the Europeans have sorted their debt problems out the world will turn its attention to the United States. This is not a good situation and one that no country in the history of global economics has worked through successfully without pain.
So while the powers that be fight back and forth in political posturing it is certain that a compromise will be met prior to the deadline. The question is why are we not looking at repairing the problems rather than pushing the inevitable down the road for a little while longer? The answer is that with a presidency at stake politicians will play the game as long as it does not endanger their own ambitions. The result will be a lot of pain to the people that they represent. My only hope is that somehow we can find a leader that will lead us out of it but for now there seem to be none worthy of the task.
Certainly in this environment there is no incentive to remain in the market. Take your final profits off the table and wait out the storm. It will require patience and resolve but in the words of Winston Churchill, “We will never surrender.” With your cash look to www.fixedratedeposits.com for an excellent rate of return on your hard fought cash deposits.
It is looking as though another historical cultural country Greece is under severe pressure. The problem for the Greeks is that they really have no way out other than to cut their spending to the bone and hope that the rest of the Euro zone allows them the time to implement the necessary austerity. Without the ability to let their currency debase the only remaining option is to cut spending in order to repay their debts.
Today Moody’s issued a warning to the United States that unless they can raise their debt ceiling before the August deadline that they would cut the coveted AAA rating for the country. This seems ironic to me. If the United States votes to increase the amount that they can owe to their creditors then they will retain their rating while the Greeks have no ability to borrow more and are forced to start to repay their debts. In the interim the Greeks have had their rating cut to junk while the United States continues their day in the sun.
In the long run the Greeks will be far better off than their American counterparts but for now they are feeling the pain well in advance of the United States. A look at the nations’ debt to GDP levels shows that the Greeks are in worse shape than the United States as they owe 144% of their GDP while the US owes around 100%. So we are in effect better off, but not by much. Consider that the United Kingdom at 75% debt to GDP is already implementing austerity measures and you can see why I am amused that Moody’s would cut the rating if we do not increase the debt level. How much more debt do we have to issue to keep our rating? Should we go to 200% of debt to GDP and would that give us a AAAA rating? Obviously this is all tongue in cheek but it does make a point.
Not that there really is much choice at this stage. If the government does not come to a compromise before the deadline and the debt ceiling cannot be raised then certainly there will be mass panic around the globe. The United States has convinced the world that more money printing is needed so while the rest of the world sorts their debt problems out the United States continues to be the lender of last resort to the world. Once the Europeans have sorted their debt problems out the world will turn its attention to the United States. This is not a good situation and one that no country in the history of global economics has worked through successfully without pain.
So while the powers that be fight back and forth in political posturing it is certain that a compromise will be met prior to the deadline. The question is why are we not looking at repairing the problems rather than pushing the inevitable down the road for a little while longer? The answer is that with a presidency at stake politicians will play the game as long as it does not endanger their own ambitions. The result will be a lot of pain to the people that they represent. My only hope is that somehow we can find a leader that will lead us out of it but for now there seem to be none worthy of the task.
Certainly in this environment there is no incentive to remain in the market. Take your final profits off the table and wait out the storm. It will require patience and resolve but in the words of Winston Churchill, “We will never surrender.” With your cash look to www.fixedratedeposits.com for an excellent rate of return on your hard fought cash deposits.
Sunday, July 3, 2011
The United Kingdom
I have recently arrived for in London for a couple of weeks’ vacation with my family. It feels good to be back in the city again. I revel in its noises, smells and vibrancy. It is a city that plays home to every culture under the sun and somehow manages to impose the British culture on everyone. Along with the culture and the history is innovation and geographical positioning that has provided the country with prosperity long after its empire ended. Both of these benefits are also present in the United States but right now the two countries could not be headed down a more different path if they tried.
Currently the economy in the UK is struggling at least as much as the United States. A wander down Oxford Street and other high streets in London reveal dozens of shops offering 50% discounts or who have signs out signaling an end to business. This will result in continued commercial property woes and more banking problems. Lloyds the massive insurance and banking company recently issued a statement saying that they would lay off another 15,000 workers bringing their total to 45,000 lost jobs. Even so the government continues to cut expenditure and is set on being more austere. In response to the latest government cuts in spending there are numerous strikes happening. People do not like change particularly when it means a cut to their pay and benefits.
At present the government is trying to increase the pension age for the employees at the Public and Commercial Services. The age will be raised to 66 from 60. Furthermore to pay for the benefits and to balance this expenditure against income the government is increasing the amount that employees have to pay in to the system by roughly 3%. To me this seems reasonable. People are living far longer than they previously did so raising the age at which they will receive benefits makes sense plus the increase in the amount paid to receive the benefits is minimal.
Consider this. In the United States when the social security benefits age was set at 60 most people did not live to see 70, in fact the average life expectancy was around 65. So people on average worked the majority of their life and enjoyed five years of retirement. The program was introduced in 1935 but 75 years later the retirement age has barely moved. The early retirement age is 62 with full benefits by 67 (for most of us) but now life expectancy in the United States is hovering around 80. People are now spending more than 20% of their life expectancy retired. If we went back to the original system then the age at which people can receive retirement benefits would be raised to 73. This would repair the massive deficit in the social security budget in one easy move. It would however be political suicide but as Mr. Cameron and his cabinet are proving, it can be done. While raising the age to 66 does not completely repair the UK system forever it is a good step in the right direction.
The fallout from this though is that the UK is now dealing with strikes and the people who voted the government in are now losing faith in them. This is also a shame as there really is no easy way out of this mess and the UK government seems to be on track to make some real changes that will benefit future generations more than the current generation is prepared to admit. Taking some pain now will result in prosperity quicker and with less cost and sacrifice than waiting. The UK government seems to be set on fixing the problems through cost cutting while the United States seems hell bent on going deeper into debt to provide a short term fix while creating a far larger problem.
Until the United States can look inward and start to repair problems at home by becoming more austere it is my contention that all we are doing is plugging holes in the dike with our fingers. Eventually the banks will burst and the American way of life as we know it will be over. Hopefully the Federal Reserve and the White house are watching with interest to see how the British experiment works. Assuming that it closes the United Kingdom’s deficit without too much pain it could show the United States an alternative to their current methodology.
If Obama and Bernanke choose to ignore what is happening across the Atlantic they are missing a great opportunity. Those of you who have followed this blog for the past year or so will know that I believe that printing more money is not the solution to our problems but rather is creating irreparable damage. The UK experiment may show the United States a way to solve their problems and balance the budget. If the United States chose this option I would think that the dollar strengthens and inflation is muted. Furthermore it could be achieved while keeping interest rates low alleviating worries about the housing recovery. Therefore I hope that their egos are in check and that they learn from their cousins.
It is definitely time to remain cautious as there is no indication that the United States has any stomach to take the painful steps needed to repair the damage. Until I see signs of this the market is just too risky to justify the investment. Stay on the sidelines and earn an excellent rate of return on your cash by contact me or visiting our website http://www.fixedratedeposits.com/.
Currently the economy in the UK is struggling at least as much as the United States. A wander down Oxford Street and other high streets in London reveal dozens of shops offering 50% discounts or who have signs out signaling an end to business. This will result in continued commercial property woes and more banking problems. Lloyds the massive insurance and banking company recently issued a statement saying that they would lay off another 15,000 workers bringing their total to 45,000 lost jobs. Even so the government continues to cut expenditure and is set on being more austere. In response to the latest government cuts in spending there are numerous strikes happening. People do not like change particularly when it means a cut to their pay and benefits.
At present the government is trying to increase the pension age for the employees at the Public and Commercial Services. The age will be raised to 66 from 60. Furthermore to pay for the benefits and to balance this expenditure against income the government is increasing the amount that employees have to pay in to the system by roughly 3%. To me this seems reasonable. People are living far longer than they previously did so raising the age at which they will receive benefits makes sense plus the increase in the amount paid to receive the benefits is minimal.
Consider this. In the United States when the social security benefits age was set at 60 most people did not live to see 70, in fact the average life expectancy was around 65. So people on average worked the majority of their life and enjoyed five years of retirement. The program was introduced in 1935 but 75 years later the retirement age has barely moved. The early retirement age is 62 with full benefits by 67 (for most of us) but now life expectancy in the United States is hovering around 80. People are now spending more than 20% of their life expectancy retired. If we went back to the original system then the age at which people can receive retirement benefits would be raised to 73. This would repair the massive deficit in the social security budget in one easy move. It would however be political suicide but as Mr. Cameron and his cabinet are proving, it can be done. While raising the age to 66 does not completely repair the UK system forever it is a good step in the right direction.
The fallout from this though is that the UK is now dealing with strikes and the people who voted the government in are now losing faith in them. This is also a shame as there really is no easy way out of this mess and the UK government seems to be on track to make some real changes that will benefit future generations more than the current generation is prepared to admit. Taking some pain now will result in prosperity quicker and with less cost and sacrifice than waiting. The UK government seems to be set on fixing the problems through cost cutting while the United States seems hell bent on going deeper into debt to provide a short term fix while creating a far larger problem.
Until the United States can look inward and start to repair problems at home by becoming more austere it is my contention that all we are doing is plugging holes in the dike with our fingers. Eventually the banks will burst and the American way of life as we know it will be over. Hopefully the Federal Reserve and the White house are watching with interest to see how the British experiment works. Assuming that it closes the United Kingdom’s deficit without too much pain it could show the United States an alternative to their current methodology.
If Obama and Bernanke choose to ignore what is happening across the Atlantic they are missing a great opportunity. Those of you who have followed this blog for the past year or so will know that I believe that printing more money is not the solution to our problems but rather is creating irreparable damage. The UK experiment may show the United States a way to solve their problems and balance the budget. If the United States chose this option I would think that the dollar strengthens and inflation is muted. Furthermore it could be achieved while keeping interest rates low alleviating worries about the housing recovery. Therefore I hope that their egos are in check and that they learn from their cousins.
It is definitely time to remain cautious as there is no indication that the United States has any stomach to take the painful steps needed to repair the damage. Until I see signs of this the market is just too risky to justify the investment. Stay on the sidelines and earn an excellent rate of return on your cash by contact me or visiting our website http://www.fixedratedeposits.com/.
Thursday, June 23, 2011
It May Be Worse Than You Think
Do not be fooled by what the government tells you, watch how they act. This is critical at this junction in the road. QE2 is basically over, the market is under serious threat and there is every chance that we could slip back into another recession. Looking at the facts it appears that things may be worse than you think.
As of today the unemployment rate is stuck well above 8% and may start to trend higher. The reason for this is that yesterday President Obama announced early withdrawal from Afghanistan. 10,000 troops will start to be pulled out of the country in the coming months. This was done to stave off the massive expenditure that the United States has in fighting all the wars around the world. This was never a war that was going to be won but it did cost the taxpayer over $1 trillion and is climbing by billions of dollars a month. In order to try to cut the current massive government deficit expenditure needs to be cut. Bringing the troops home will go a long way toward narrowing the deficit. The war was a failure other than more than $1 trillion later we caught and killed Osama. That has to go down as the costliest manhunt ever recorded.
Financial costs aside, the cost of human life was huge and, due to the superior air power, medical aid and communications, far more wounded soldiers were kept alive than ever before. This will have an immeasurable toll on American society for years to come as these young men and women will require (and deservedly so) our support. To those who fought on behalf of their country I salute you, but this war could never be won and now it is time to withdraw before more lives are lost.
I would anticipate that the withdrawal will also mean a reduction in military personnel required. This will feed into the unemployment rate as the government is the largest employer in the United States by far. The deficit is out of control and the government has now admitted that by pulling back from Afghanistan. It was expected but it was accelerated and this points to massive problems below the surface. I would expect more budget cuts and layoffs coming out of the government soon and these cannot be picked up by the private sector. There is trouble brewing in Washington.
After spending trillions of dollars fiscal responsibility is required. There has been no economic traction to date and all the bandages are starting to fester and reveal themselves. The unemployment rate is still high, the housing market continues to crater and inflation is crimping consumer spending. Banks are dealing with the housing melt down and are loathed to invest money and why would they when they can earn a spread by giving the free money straight back to the government? Across the Atlantic Greece's problems never went away they just festered. Without a currency that fluctuates there is no way out of their mess except a massive growth in GDP. This is not likely so their problems will continue to plague the European economy dragging down growth.
Bernanke just reduced his forecast for GDP growth by 10% from 3.1% to 2.7%. This is still too high and will be reduced further, but the magnitude of the decline is large by any measure. With growth this slow (and I question whether the real rate will be anywhere near to these levels) it means that housing and the economy will continue to struggle and unemployment will continue to remain elevated. The only part of the economy that has increased with all the stimulus money is the stock market and that is looking like it is on its last legs. I would once again advise you to take your profits off the table and hunker down for the foreseeable future as I believe that the future may be worse than any of us expected.
Those of you in cash visit my website www.fixedratedeposits.com to find out how you can earn a great rate of return while keeping your money safe, secure and liquid.
As of today the unemployment rate is stuck well above 8% and may start to trend higher. The reason for this is that yesterday President Obama announced early withdrawal from Afghanistan. 10,000 troops will start to be pulled out of the country in the coming months. This was done to stave off the massive expenditure that the United States has in fighting all the wars around the world. This was never a war that was going to be won but it did cost the taxpayer over $1 trillion and is climbing by billions of dollars a month. In order to try to cut the current massive government deficit expenditure needs to be cut. Bringing the troops home will go a long way toward narrowing the deficit. The war was a failure other than more than $1 trillion later we caught and killed Osama. That has to go down as the costliest manhunt ever recorded.
Financial costs aside, the cost of human life was huge and, due to the superior air power, medical aid and communications, far more wounded soldiers were kept alive than ever before. This will have an immeasurable toll on American society for years to come as these young men and women will require (and deservedly so) our support. To those who fought on behalf of their country I salute you, but this war could never be won and now it is time to withdraw before more lives are lost.
I would anticipate that the withdrawal will also mean a reduction in military personnel required. This will feed into the unemployment rate as the government is the largest employer in the United States by far. The deficit is out of control and the government has now admitted that by pulling back from Afghanistan. It was expected but it was accelerated and this points to massive problems below the surface. I would expect more budget cuts and layoffs coming out of the government soon and these cannot be picked up by the private sector. There is trouble brewing in Washington.
After spending trillions of dollars fiscal responsibility is required. There has been no economic traction to date and all the bandages are starting to fester and reveal themselves. The unemployment rate is still high, the housing market continues to crater and inflation is crimping consumer spending. Banks are dealing with the housing melt down and are loathed to invest money and why would they when they can earn a spread by giving the free money straight back to the government? Across the Atlantic Greece's problems never went away they just festered. Without a currency that fluctuates there is no way out of their mess except a massive growth in GDP. This is not likely so their problems will continue to plague the European economy dragging down growth.
Bernanke just reduced his forecast for GDP growth by 10% from 3.1% to 2.7%. This is still too high and will be reduced further, but the magnitude of the decline is large by any measure. With growth this slow (and I question whether the real rate will be anywhere near to these levels) it means that housing and the economy will continue to struggle and unemployment will continue to remain elevated. The only part of the economy that has increased with all the stimulus money is the stock market and that is looking like it is on its last legs. I would once again advise you to take your profits off the table and hunker down for the foreseeable future as I believe that the future may be worse than any of us expected.
Those of you in cash visit my website www.fixedratedeposits.com to find out how you can earn a great rate of return while keeping your money safe, secure and liquid.
Friday, June 17, 2011
QE3
Is it time for QE3 already? With a few more weeks of QE2 left things are not looking good for the equity markets. The S&P 500 is down almost 8% from its peak and this has happened in just over 5 weeks. The market is now pinned on the 200 day moving average, a very important level of support for all of you technical analysts, and the dollar index has turned around and looks like it is ready to continue its strength unless the dollar killer, Mr. Bernanke, steps in again and prints more money.
A stronger dollar is starting to improve things for the consumer. Oil prices have plunged as you can see by the chart at the following link http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=CLN11 and this is providing much needed relief at the pump. The ten year note continues its parabolic rise as the stock market craters and this will keep interest rates low for purchasers of housing http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=ZNU11. Furthermore wheat and other grain prices are starting to fall which should start to alleviate further stress on the consumer at the grocery store http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=ZWN11.
So why would Mr. Bernanke and his motley crew print more money when the effects of an end to QE2 are so evident? The main reason is that the stock market will collapse without its juice and this is the only success that the Federal Reserve has had after over $2 trillion of money printing. Our intrepid leader has stated that he will continue to print money until there are signs of an improvement and I for one believe that he will do just that. Make the bankers and their friends wealthy while destroying the credibility of the country. More printing will lead to another round of dollar weakness, more strength to the price of oil and grains and more pain for the consumer.
Recently Wal Mart stores reported weak numbers while Tiffanys reported excellent numbers. The divide between the haves and have not's is widening. Most people in the United States are not affected by movements in the stock market. What really affects them is the price of staple consumption items and housing. Printing more money is not helping either of these markets and is in fact hurting the consumer further. In the meantime the investment bankers and traders are getting fat on the profits from the gains in the stock markets.
The other issue is that while Mr. Bernanke can continue to print money at will for now at some point the excess cash will cause further problems. In the beginning you have bubbles and these burst. Normal market operations can clear out the weak and overpriced investments and clean the slate for a recovery. The money is then allocated to more sound investment ideas and the market once again flourishes on a more solid footing. This has not been allowed to happen in either of the previous two bubbles. In fact at the end of each bubble the Federal Reserve printed even more money than previously to "save" the economy. Essentially they saved themselves and their cohorts and have pushed the economy to the brink of collapse.
Continued money printing will eventually end in ruin. Hyperinflation is one outcome, loss of credibility in the financial strength of the United States is another and there are many more, but the point is that these outcomes will hurt far more people in far worse ways than letting the market take a hit and then recover on its own. Enough money has been printed with little result other than making stock market bulls richer. The general economy has not recovered and more printing will not improve it, but it will lead to a poor result.
So will the Federal Reserve print more money? I believe that they will and they will embark on a new strategy in the very near future. This may support the market once more but I believe that once again this support will prove fleeting and will result in a horrendous ending. Even if QE3 is announced and the market rallies once more, I would be very careful not to get sucked in as one day when everyone rushes for the exits and the next Black Swan day arrives, you will lose far more than by leaving some gains on the table.
Keep your powder dry and look to invest your cash in a safe, secure and liquid investment by visiting http://www.fixedratedeposits.com/.
A stronger dollar is starting to improve things for the consumer. Oil prices have plunged as you can see by the chart at the following link http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=CLN11 and this is providing much needed relief at the pump. The ten year note continues its parabolic rise as the stock market craters and this will keep interest rates low for purchasers of housing http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=ZNU11. Furthermore wheat and other grain prices are starting to fall which should start to alleviate further stress on the consumer at the grocery store http://www.danielstrading.com/resources/quotes-and-charts/quotes.php?page=chart&sym=ZWN11.
So why would Mr. Bernanke and his motley crew print more money when the effects of an end to QE2 are so evident? The main reason is that the stock market will collapse without its juice and this is the only success that the Federal Reserve has had after over $2 trillion of money printing. Our intrepid leader has stated that he will continue to print money until there are signs of an improvement and I for one believe that he will do just that. Make the bankers and their friends wealthy while destroying the credibility of the country. More printing will lead to another round of dollar weakness, more strength to the price of oil and grains and more pain for the consumer.
Recently Wal Mart stores reported weak numbers while Tiffanys reported excellent numbers. The divide between the haves and have not's is widening. Most people in the United States are not affected by movements in the stock market. What really affects them is the price of staple consumption items and housing. Printing more money is not helping either of these markets and is in fact hurting the consumer further. In the meantime the investment bankers and traders are getting fat on the profits from the gains in the stock markets.
The other issue is that while Mr. Bernanke can continue to print money at will for now at some point the excess cash will cause further problems. In the beginning you have bubbles and these burst. Normal market operations can clear out the weak and overpriced investments and clean the slate for a recovery. The money is then allocated to more sound investment ideas and the market once again flourishes on a more solid footing. This has not been allowed to happen in either of the previous two bubbles. In fact at the end of each bubble the Federal Reserve printed even more money than previously to "save" the economy. Essentially they saved themselves and their cohorts and have pushed the economy to the brink of collapse.
Continued money printing will eventually end in ruin. Hyperinflation is one outcome, loss of credibility in the financial strength of the United States is another and there are many more, but the point is that these outcomes will hurt far more people in far worse ways than letting the market take a hit and then recover on its own. Enough money has been printed with little result other than making stock market bulls richer. The general economy has not recovered and more printing will not improve it, but it will lead to a poor result.
So will the Federal Reserve print more money? I believe that they will and they will embark on a new strategy in the very near future. This may support the market once more but I believe that once again this support will prove fleeting and will result in a horrendous ending. Even if QE3 is announced and the market rallies once more, I would be very careful not to get sucked in as one day when everyone rushes for the exits and the next Black Swan day arrives, you will lose far more than by leaving some gains on the table.
Keep your powder dry and look to invest your cash in a safe, secure and liquid investment by visiting http://www.fixedratedeposits.com/.
Friday, June 10, 2011
Interest Rates
There is much talk among investors and financial experts alike that interest rates in the United States cannot fall any lower and therefore in the near term they must rise. I find this analysis flawed on many fronts and will dig into the theories below but there is a high probability, much higher than most people or experts realize, that the low interest environment could be here to stay for years to come.
The main comparison that is used is Japan. Japan has been dealing with low interest rates for decades and there is no sign that interest rates will rise any time soon. The country has been stuck in a deflationary spiral for decades with a brief respite from mid-2006 to the end of 2009 but deflation has once again reared its ugly head.
There have been plenty of theories revolving around why Japan could not exit this spiral. One issue was that monetary conditions were held too tight for too long. Once monetary conditions loosened the velocity of money was almost zero so no matter how much money was pumped into the economy the problems continued to persist.
Another issue was unfavorable demographics. Japan had and still has a very large aging population. Typically an aging population is offloading assets rather than purchasing more. This constant selling of assets particularly housing and investments can create a drag on these prices until the pendulum swings to a new generation that can absorb everything that the elder generation has to offload.
Additionally there were a couple of bubbles that burst almost simultaneously. The equity market collapsed dragging down the real estate market. Both of these occurred within years of each other mainly because the assets were intertwined as cross collateral. This deflationary pressure from asset prices collapsing formed the next issue which was weak and insolvent companies. A lot of these entities were propped up by the ability to raise additional cash from the equity and real estate markets. After the collapse they were kept afloat for a while by banks that had investments in these companies in the hopes that things would turn before they had to write the loans and investment off. Furthermore there was an inherent structural flaw in that a lot of the companies employed people for life meaning that no matter how much red ink the company bled, lay-offs were not on the table.
As the property market went so did the banks. Many were insolvent years before they were finally left to fail. This lead to an all out fear of investing in banks and undermined any confidence in the financial system. Savers moved their cash into government bonds and out of the banking system keeping government interest rates low.
Finally deflation was imported from the rest of the world. Countries such as India and China flooded the market with cheap goods fueling the inflationary spiral even further.
Turning to the United States today there are a number of parallels. The housing and labor markets continue to be weak. As much money as the Federal Reserve is pumping into the economy there has not been any significant benefit other than stock prices. Stop the printing and the market will roll over as we have seen recently.
In my view most US banks are insolvent and are only kept afloat by the accounting regulations that do not require the banks to mark their loan portfolios to market. The US demographics are skewed towards the aging baby boomer population and the overhang from the underfunded Medicare and social security programs will continue to drain government cash for decades to come.
So the question is why will the US be any different from Japan. There are a number of differences. The first one is that the United States still maintains its position as the reserve currency of the globe. While I see this changing in the future I do not see it happening any time soon. This status allows the United States more leeway in terms of money printing than any other country in the globe. This money is showing up in inflationary pressures around the globe and will ultimately pressure the inflation rate that the Federal Reserve follows. This could force the Federal Reserve to increase interest rates to stave off inflation.
The second difference is that Japan was and is a creditor nation. The United States is the debtor nation to the globe. At some point the United States will have to pay its debts back. Whether this is done in a controlled fashion or whether it is forced upon the Treasury is still in question. If it is forced on the Treasury you could see a massive spike in interest rates as they try to find enough buyers for the debt. In order to attract buyers in an uncontrolled environment interest rates have to rise and this could force the government's hand.
My assessment of the situation is that while consensus is that rates will have to rise soon I believe that there is more than a fair chance that low interest rates will be around for years to come. There may be the odd spike in interest rates, but with the level of skepticism that abounds and the fact that the baby boomer generation wants a safe return for what is left of their retirement, any spike in say the 10-year note will be met with ferocious buying that places a cap on just how high interest rates will go. So while there may be an argument for higher interest rates do not be surprised to see these levels remain in place for the foreseeable future.
On that score I have the antidote to these rates so visit http://www.fixedratedeposits.com/ to learn how you can earn a great rate of return on your short-term cash deposits.
The main comparison that is used is Japan. Japan has been dealing with low interest rates for decades and there is no sign that interest rates will rise any time soon. The country has been stuck in a deflationary spiral for decades with a brief respite from mid-2006 to the end of 2009 but deflation has once again reared its ugly head.
There have been plenty of theories revolving around why Japan could not exit this spiral. One issue was that monetary conditions were held too tight for too long. Once monetary conditions loosened the velocity of money was almost zero so no matter how much money was pumped into the economy the problems continued to persist.
Another issue was unfavorable demographics. Japan had and still has a very large aging population. Typically an aging population is offloading assets rather than purchasing more. This constant selling of assets particularly housing and investments can create a drag on these prices until the pendulum swings to a new generation that can absorb everything that the elder generation has to offload.
Additionally there were a couple of bubbles that burst almost simultaneously. The equity market collapsed dragging down the real estate market. Both of these occurred within years of each other mainly because the assets were intertwined as cross collateral. This deflationary pressure from asset prices collapsing formed the next issue which was weak and insolvent companies. A lot of these entities were propped up by the ability to raise additional cash from the equity and real estate markets. After the collapse they were kept afloat for a while by banks that had investments in these companies in the hopes that things would turn before they had to write the loans and investment off. Furthermore there was an inherent structural flaw in that a lot of the companies employed people for life meaning that no matter how much red ink the company bled, lay-offs were not on the table.
As the property market went so did the banks. Many were insolvent years before they were finally left to fail. This lead to an all out fear of investing in banks and undermined any confidence in the financial system. Savers moved their cash into government bonds and out of the banking system keeping government interest rates low.
Finally deflation was imported from the rest of the world. Countries such as India and China flooded the market with cheap goods fueling the inflationary spiral even further.
Turning to the United States today there are a number of parallels. The housing and labor markets continue to be weak. As much money as the Federal Reserve is pumping into the economy there has not been any significant benefit other than stock prices. Stop the printing and the market will roll over as we have seen recently.
In my view most US banks are insolvent and are only kept afloat by the accounting regulations that do not require the banks to mark their loan portfolios to market. The US demographics are skewed towards the aging baby boomer population and the overhang from the underfunded Medicare and social security programs will continue to drain government cash for decades to come.
So the question is why will the US be any different from Japan. There are a number of differences. The first one is that the United States still maintains its position as the reserve currency of the globe. While I see this changing in the future I do not see it happening any time soon. This status allows the United States more leeway in terms of money printing than any other country in the globe. This money is showing up in inflationary pressures around the globe and will ultimately pressure the inflation rate that the Federal Reserve follows. This could force the Federal Reserve to increase interest rates to stave off inflation.
The second difference is that Japan was and is a creditor nation. The United States is the debtor nation to the globe. At some point the United States will have to pay its debts back. Whether this is done in a controlled fashion or whether it is forced upon the Treasury is still in question. If it is forced on the Treasury you could see a massive spike in interest rates as they try to find enough buyers for the debt. In order to attract buyers in an uncontrolled environment interest rates have to rise and this could force the government's hand.
My assessment of the situation is that while consensus is that rates will have to rise soon I believe that there is more than a fair chance that low interest rates will be around for years to come. There may be the odd spike in interest rates, but with the level of skepticism that abounds and the fact that the baby boomer generation wants a safe return for what is left of their retirement, any spike in say the 10-year note will be met with ferocious buying that places a cap on just how high interest rates will go. So while there may be an argument for higher interest rates do not be surprised to see these levels remain in place for the foreseeable future.
On that score I have the antidote to these rates so visit http://www.fixedratedeposits.com/ to learn how you can earn a great rate of return on your short-term cash deposits.
Thursday, June 2, 2011
Toxicity
Over this long weekend I had a lot of time to think about things and one thing that sprung to the top of my list was toxicity or the degree to which a substance can damage an organism. To dig deeper into the definition for a moment an item that is non-toxic can cause toxicity. Consider water as an example. On its own it is non-toxic but consumed in mass quantities it can kill the plant, animal or thing that needed it in the first place. On the flip side low doses of poison in the form of say chemotherapy while completely toxic to the human body, in small enough doses have been shown to cure cancer while not killing the human. So in this instance while toxic it had a low level of toxicity.
The first place we can identify toxic materials is obvious, the garbage can. The environment is overburdened with waste and daily we spew pollutants into the environment. Now not all items in the garbage can are toxic, but combined into a sludge in our landfills the resulting gasses are certainly toxic. Fortunately our planet has a requirement for some of these gasses but overburdening the planet with too much carbon monoxide for an example is starting to create a strain on the environment for which we will pay the price at some stage in the future unless we can clean up our act. Hopefully over time we will but with the industrialization of the bulk of the earth's population in places like India and China leads me to believe that it will be many years before we can even think to get this under control. Will it be too late at that stage? I hope not but only time will tell.
The second place we find toxicity is within ourselves. We spend most of our lives harboring and building on toxic emotions. Thoughts that fester within ourselves. As we get older it seems that our minds become more and more toxic as the burdens of life cast their spell over us. How many times have you heard the phrase "crotchety old man"? This is a person who has let years of toxic thoughts take over his mind and he vents on anyone that he comes into contact with. Not a person that you would want to associate with and hence the reason that he becomes lonely and even more upset at society. The bestselling author Eckhart Tolle describes our egos as the source of our toxicity calling it the pain-body. He surmises that if we release our ego we will release the pain-body and be free from all the inner toxins. Easy to say but difficult to do.
Certainly all of us could use a good scrub of our own egos on a regular basis and I for one plan to scrub myself clean. It certainly feels good to release those past grievances and face the world through a set of rejuvenated egoless eyes. We will see how well I do with this but it is worth digging deep within our souls on a regular basis before our levels of internal toxicity overtake our being and turn us into someone that we do not wish to be. We work out furiously to keep in shape but we hardly ever work on our souls and I believe that the health of our mind is as important as the health of our body and to be honest the two go hand in hand. So do some soul searching and you will be surprised by the results. Suddenly things are put into perspective and you can think rationally and see everything clearly helping you at home and in business.
The final place where we find toxicity is in our portfolios. I would say that just about every portfolio has a number of toxic assets. Past investments that have been brushed under the rug or masked over by either throwing more cash at the problem or by hiding it from ourselves by not looking at it. Out of sight is out of mind or the denial syndrome. If I live to the age of Methuselah the asset will eventually recover and produce a profit. The head in the sand syndrome.
A far more constructive methodology is to remove the asset completely just like one would do with a cancerous cell in the body. Sell the asset and no matter how painful it is at first you will be far better off in the long-run by liquidating rather than leaving it to fester. First the money (no matter how little) can be re-invested and hopefully will produce a better rate of return. Second, once the tumor has been removed the burden of carrying the beast around on your back for years is gone and you can now focus on more positive things like making money. You are essentially scrubbing your portfolio clean and will now be able to concentrate more effectively on the remaining investments.
Every professional portfolio manager knows that it is only a matter of time before you end up with toxic assets in your portfolio and the sooner that you cut them the better your portfolio will perform. Too often the poor investment turns malignant and festers and clouds your judgment on your other investments while you spend the majority of your time "fixing" the problem. Cut those losers now and not only will your portfolio benefit but so will your mood. Make it a habit to review your overall investment portfolio with a knife ready to cut away any unneeded toxicity from your portfolio. Doing this regularly will allow you to achieve far higher results in the long-run and after a time you will wonder why you waited so long. Align yourself with a trusted money manager and create a game plan for the future but make sure that you review your portfolio on a regular basis to ensure that it is performing as required. If you need any help on this let me know and I would be happy to review your investment portfolio to make sure it is achieving what you expect it to achieve without taking on unnecessary risks.
Once these assets have been liquidated you also now know where you can find a great rate of return for your cash so explore our website at http://www.fixedratedeposits.com/ and learn more about why I believe that this is a fantastic place to put your cash.
The first place we can identify toxic materials is obvious, the garbage can. The environment is overburdened with waste and daily we spew pollutants into the environment. Now not all items in the garbage can are toxic, but combined into a sludge in our landfills the resulting gasses are certainly toxic. Fortunately our planet has a requirement for some of these gasses but overburdening the planet with too much carbon monoxide for an example is starting to create a strain on the environment for which we will pay the price at some stage in the future unless we can clean up our act. Hopefully over time we will but with the industrialization of the bulk of the earth's population in places like India and China leads me to believe that it will be many years before we can even think to get this under control. Will it be too late at that stage? I hope not but only time will tell.
The second place we find toxicity is within ourselves. We spend most of our lives harboring and building on toxic emotions. Thoughts that fester within ourselves. As we get older it seems that our minds become more and more toxic as the burdens of life cast their spell over us. How many times have you heard the phrase "crotchety old man"? This is a person who has let years of toxic thoughts take over his mind and he vents on anyone that he comes into contact with. Not a person that you would want to associate with and hence the reason that he becomes lonely and even more upset at society. The bestselling author Eckhart Tolle describes our egos as the source of our toxicity calling it the pain-body. He surmises that if we release our ego we will release the pain-body and be free from all the inner toxins. Easy to say but difficult to do.
Certainly all of us could use a good scrub of our own egos on a regular basis and I for one plan to scrub myself clean. It certainly feels good to release those past grievances and face the world through a set of rejuvenated egoless eyes. We will see how well I do with this but it is worth digging deep within our souls on a regular basis before our levels of internal toxicity overtake our being and turn us into someone that we do not wish to be. We work out furiously to keep in shape but we hardly ever work on our souls and I believe that the health of our mind is as important as the health of our body and to be honest the two go hand in hand. So do some soul searching and you will be surprised by the results. Suddenly things are put into perspective and you can think rationally and see everything clearly helping you at home and in business.
The final place where we find toxicity is in our portfolios. I would say that just about every portfolio has a number of toxic assets. Past investments that have been brushed under the rug or masked over by either throwing more cash at the problem or by hiding it from ourselves by not looking at it. Out of sight is out of mind or the denial syndrome. If I live to the age of Methuselah the asset will eventually recover and produce a profit. The head in the sand syndrome.
A far more constructive methodology is to remove the asset completely just like one would do with a cancerous cell in the body. Sell the asset and no matter how painful it is at first you will be far better off in the long-run by liquidating rather than leaving it to fester. First the money (no matter how little) can be re-invested and hopefully will produce a better rate of return. Second, once the tumor has been removed the burden of carrying the beast around on your back for years is gone and you can now focus on more positive things like making money. You are essentially scrubbing your portfolio clean and will now be able to concentrate more effectively on the remaining investments.
Every professional portfolio manager knows that it is only a matter of time before you end up with toxic assets in your portfolio and the sooner that you cut them the better your portfolio will perform. Too often the poor investment turns malignant and festers and clouds your judgment on your other investments while you spend the majority of your time "fixing" the problem. Cut those losers now and not only will your portfolio benefit but so will your mood. Make it a habit to review your overall investment portfolio with a knife ready to cut away any unneeded toxicity from your portfolio. Doing this regularly will allow you to achieve far higher results in the long-run and after a time you will wonder why you waited so long. Align yourself with a trusted money manager and create a game plan for the future but make sure that you review your portfolio on a regular basis to ensure that it is performing as required. If you need any help on this let me know and I would be happy to review your investment portfolio to make sure it is achieving what you expect it to achieve without taking on unnecessary risks.
Once these assets have been liquidated you also now know where you can find a great rate of return for your cash so explore our website at http://www.fixedratedeposits.com/ and learn more about why I believe that this is a fantastic place to put your cash.
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