"The number one problem in today's generation and economy is the lack of financial literacy." - Alan Greenspan
"We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and become financially literate." - Robert Kiyosaki
I find it very amusing that the first quote was from one of the all time economic monkeys Alan Greenspan. He will however be outdone by the 800 pound Gorilla that is Ben Bernanke but that will be left to history to tablet. These two so called financial experts are driving the economy to the brink of failure and so how is it possible for the average Joe to understand the financial landscape? Well I do not plan to answer that question today (other than to advise you to keep reading my blog) but what I do want to bring to the forefront is that getting to grips with financial literacy is critical to your future.
In the good old days (and I mean old as it was even before my time) people would go to work and stay put for decades. The result of this loyalty was that a defined benefit pension plan was provided. A defined benefit pension plan is one where the company shoulders the responsibility of ensuring that your retirement proceeds do not run out prior to your life. They pay a set amount to you every month and often linked this to a measure of inflation so that once you leave the company you are set. Over time these have been eliminated and in fact many were cut completely during bankruptcy proceedings, so if you are still on one of these I advise you to plan for the worst as I would imagine that this will be cut at some point in the very near future.
At present the only places that these antiquated systems can be found are governments and educational facilities. These places continue to offer these perks in order to attract talent and because they are able to fund the obligations with other people's money - namely yours and mine! The problem with these plans is that life expectancy is increasing at a rapid clip and these plans are going to sink governments the world over so it is just a matter of time before all of these plans have to change. Once again I am not going to delve any deeper into this topic but suffice it to say that for the majority of us we will retire with no benefit other than our savings and the reminder may find that their retirement plans are suddenly thrown into turmoil at a time when they can least afford it.
Our savings is the modern retirement plan, termed the defined contribution plan. In these plans you contribute to your retirement and if you are lucky your company adds to that amount. When you retire, whatever the balance in that plan plus your other assets outside of the plan less any debt is what you have to live on for the remainder of your life. Some people rely on another government program, social security, but this is also a form of defined benefit that will also have to be trimmed in the very near future if the solvency of the United States is to be taken seriously so I do not expect much from this either.
So as the burden of retirement falls squarely on your shoulders if you are not financially literate then you are in trouble. Now for this blog financial literacy does not mean that you need to understand every trading option or new derivative technique developed yesterday by some MIT hotshot, what it means is that you have to have the wherewithal to be able to make investment decisions that will define your retirement.
In most cases you will rely on the input from a financial planner or some other form of financial expert but they can only take you to the water trough. The decision to drink will always be left up to you as you are the only person that can truly evaluate whether the investment being presented fits within your risk tolerance and meets your retirement objectives. Furthermore, while some financial experts know a lot about finance I can assure you that they do not know everything. Take me for an example, I have traded pretty much everything over 30 years and have studied all kinds of markets and private equity my entire life but I am no expert in tax or annuities to name a few areas of weakness. What I do know however is how to determine when to make changes to my portfolio and evaluate what is presented so that I can ensure it works for me and this is the skill that you need to develop.
Studies have shown that the elderly and females have the lowest levels of financial literacy but this is not to say that high net worth males get off as financially literate. I have met many a high net worth individual who believes that they understand finance when in truth they are just too afraid to admit that they have no clue. Often times these people pile all their eggs into one basket (as this is the only one that they understand) and when it works they believe that they are now set however they are only one bump in the road away from ruin. Rather take the honest route and begin to work on your weakness than dig a hole in the sand and stick your head in it as I for one do not like the view that would present and neither should you.
With so much on the line and in such a rough investment environment as the one in which we now live it is critical to do your homework. Find a number of trusted advisers that have your best interest in mind but always remember that the final decision is yours and yours alone. Turning your financial future over to someone with the thought that they will look after it like you will is not an option and will more than likely result in financial despair right at the time you need to rely on your finances most.
Wednesday, June 26, 2013
Friday, June 21, 2013
How Quickly Things Change
"My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and - and in short you are forever floored. As I am!" - An excerpt from Charles Dickens' David Copperfield
It seems like an eternity ago that the bulls were pushing the markets to record highs. Three days later and everyone is wondering if this is the beginning of the end. All of this over the most recent federal reserve comments that they would begin to reel in their massive quantitative easing program. Note that they did not say that they would stop and also note that they did not say that they would slow down today, all they said was that it would be appropriate to moderate the pace of asset purchases later this year if incoming data supported the Fed's projections for continued improvement in the economy. Bernanke also said, that it was possible the program could come to an end by the middle of 2014 if substantial improvement in the labor market (viewed as a 7.0% unemployment rate, surprising how quickly this number has moved higher) has been achieved. Should the data show poor economic prospects then the Fed will continue to print.
So let's see, if the economy is weak then they will continue to support and market's can go back to new highs. If the data is good, then they will remove their support and the market tanks! I could not make that up if I tried. If that makes no sense to you then at least you are thinking rationally.
Taking a look at the market reaction it is clear that it needs the support to operate. Yields on the 10-year note spiked to just below 2.5% taking the builders down with its rise. The housing market is still tentative and this small rate increase was enough to spook the market and demolish building stocks. Think about that, rates move to 2.5% and this move took building stocks down 12% in three days! If you want another analogy I received some research the other day that showed that in 2006 when the Japanese central bank tapered their quantitative easing program and rates in Japan moved from 1.5% to 2.5% their market fell over 20%. If rates here reach anywhere near to 3.00% I would imagine that the same thing would be felt here.
It will be very interesting to see what the Federal Reserve does now as it is clear that their support is what is keeping the market buoyant. Already a statement has come from has come from the St. Louis Fed President James Bullard saying that the committee's authorization allowing the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The question is when is the appropriate time? As the markets are so tethered to the Fed any reduction in their support will result in a nosedive no matter when it is announced. If they truly think that they can time it so that the market is perfectly priced based on economic outlook and that they can slip out of the back door without the market noticing then they are smoking something really strong that is certainly considered illegal in California.
As I have mentioned before and I will mention it again, the market is being manipulated by the Federal Reserve, they have a history of thinking that their policies are helping when all they are doing is creating a larger problem, increasing debt levels has never resulted in economic prosperity and they will never have the ability to exit the market without there being carnage. You have seen some of it this week and while I am not ready to call the recent highs a top, it certainly smells like one. Best stick with the advice of Mr. Micawber.
It seems like an eternity ago that the bulls were pushing the markets to record highs. Three days later and everyone is wondering if this is the beginning of the end. All of this over the most recent federal reserve comments that they would begin to reel in their massive quantitative easing program. Note that they did not say that they would stop and also note that they did not say that they would slow down today, all they said was that it would be appropriate to moderate the pace of asset purchases later this year if incoming data supported the Fed's projections for continued improvement in the economy. Bernanke also said, that it was possible the program could come to an end by the middle of 2014 if substantial improvement in the labor market (viewed as a 7.0% unemployment rate, surprising how quickly this number has moved higher) has been achieved. Should the data show poor economic prospects then the Fed will continue to print.
So let's see, if the economy is weak then they will continue to support and market's can go back to new highs. If the data is good, then they will remove their support and the market tanks! I could not make that up if I tried. If that makes no sense to you then at least you are thinking rationally.
Taking a look at the market reaction it is clear that it needs the support to operate. Yields on the 10-year note spiked to just below 2.5% taking the builders down with its rise. The housing market is still tentative and this small rate increase was enough to spook the market and demolish building stocks. Think about that, rates move to 2.5% and this move took building stocks down 12% in three days! If you want another analogy I received some research the other day that showed that in 2006 when the Japanese central bank tapered their quantitative easing program and rates in Japan moved from 1.5% to 2.5% their market fell over 20%. If rates here reach anywhere near to 3.00% I would imagine that the same thing would be felt here.
It will be very interesting to see what the Federal Reserve does now as it is clear that their support is what is keeping the market buoyant. Already a statement has come from has come from the St. Louis Fed President James Bullard saying that the committee's authorization allowing the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The question is when is the appropriate time? As the markets are so tethered to the Fed any reduction in their support will result in a nosedive no matter when it is announced. If they truly think that they can time it so that the market is perfectly priced based on economic outlook and that they can slip out of the back door without the market noticing then they are smoking something really strong that is certainly considered illegal in California.
As I have mentioned before and I will mention it again, the market is being manipulated by the Federal Reserve, they have a history of thinking that their policies are helping when all they are doing is creating a larger problem, increasing debt levels has never resulted in economic prosperity and they will never have the ability to exit the market without there being carnage. You have seen some of it this week and while I am not ready to call the recent highs a top, it certainly smells like one. Best stick with the advice of Mr. Micawber.
Friday, June 14, 2013
Tax OR Print
"Did you ever notice that when you put the words "The" and "IRS" together, it spells "THEIRS?" ~Author Unknown
"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." ~Arthur Godfrey
"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?" ~Peg Bracken
It is a well known fact that governments around the world are printing money in various forms and that the increase in the liability associated with this stimulus is a major cause for concern. The reason for the printing is two fold; stimulate the economy and finance the massive government deficits. If governments balanced their budgets then a large portion of the money printing would not be required. Further still, there is a good probability that these austere governments would be rewarded with AAA credit rating and a burgeoning economy. Due to the complex nature of including this side of the equation today's blog will look at the funding side of the equation. Besides it appears slowing spending is a moot point as austerity (particularly in the US, Britain and Japan) is not going to happen any time soon, if ever.
So turning my attention to the income side of the equation governments have two options; print money or raise taxes until they balance the budget. Each has its pitfalls and benefits so let's look at these in turn. When considering the printing option the first thing to assess is does the government have the economic strength to support printing? The ability to print is obviously available to every country, all you need is paper and a printing press, but the economic strength is not. Take as an example Zimbabwe or Germany in the 30's, neither of these countries had the economic strength to print money but they had the ability to print and they did. The result was massive inflation and a currency that cratered causing massive unemployment and a crippled economy.
Currently the US, Britain and Japan have the economic strength to print but at some point when the debt level exceeds that economic strength, more printing results in the same parabolic nose dive. The question is when is the tipping point reached and the answer is that nobody knows. Studies have been done showing that at levels of debt above 100% of GDP there is a drag on the economy (termed crowding out), but Japan's debt is north of 200% and climbing and still investors believe in their ability to manage the debt.
So how do investors monitor this ability to manage the debt? It is dependent on their confidence in the economic benefit of the stimulus. If the money being printed is used in a responsible manner and in a way that leads to economic growth then in reality you could keep printing way beyond 200% of GDP. Think of it as a growth stock. You are prepared to pay far more for a company that is growing quickly versus one that is stagnant for the simple reason that the outlook is favorable and earnings will catch up to the valuation. In the same way investors will continue to loan money to governments that show the ability to use that money with good effect.
If on the other hand the money is wasted then watch out below as the result will be a weak currency, high interest rates and massive inflation. In all honesty it is looking more and more like Japan has run out of time as while investors have bought into the "new" strategy it does not appear that there is the subsequent improvement in the economy. Remember that investors will require the benefit to be felt in a fairly short period of time before their faith will wane creating the pain described above. Once again back to the growth stock analysis. A high flying stock with a high price to earnings ratio will lose value quickly if it misses earnings as not only is the outlook mired but the earnings ratio will shrink to a more "normal" level, a double hit to the stock price.
So if money printing has a finite life governments will have to turn to taxation. Taxation shifts the burden of the deficit from bond investors to local earners. The decision right now is clear, do not tax the earners as the level of pain that will be inflicted onto them is so great that when elections come around the incumbents will be booted. The benefit to this strategy though is that while there is short term pain it is expected to be relatively short and in the long run far less painful. The reason for the shorter duration and lower long term pain is that if for example the tax rate was raised say to 75% it would not take long for earners to force the government to become more frugal. While this could take a few years, government spending would be brought very quickly under control or a new government would be elected that would bring spending under control. Furthermore a balanced budget would attract investment and strengthen the currency and economy which would result in a reduction in the rate of tax. The downside is that raising taxes at the present time is not only political suicide but would drive the economy into a recession and this is something that no politician or central banker wants to consider.
So while it continues to function (I was going to say work but it never has, never will and is not working right now) we are stuck financing the deficit by printing money but the risks are huge as once investors lose their patience and shun the investment there will be no way out other than serious pain. Is that tipping point coming soon or never? If you believe the bulls then it is never coming but in all reality when was the last time that a group of politicians steered us in the right direction, so putting your faith in them seems destined for failure.
"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." ~Arthur Godfrey
"Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?" ~Peg Bracken
It is a well known fact that governments around the world are printing money in various forms and that the increase in the liability associated with this stimulus is a major cause for concern. The reason for the printing is two fold; stimulate the economy and finance the massive government deficits. If governments balanced their budgets then a large portion of the money printing would not be required. Further still, there is a good probability that these austere governments would be rewarded with AAA credit rating and a burgeoning economy. Due to the complex nature of including this side of the equation today's blog will look at the funding side of the equation. Besides it appears slowing spending is a moot point as austerity (particularly in the US, Britain and Japan) is not going to happen any time soon, if ever.
So turning my attention to the income side of the equation governments have two options; print money or raise taxes until they balance the budget. Each has its pitfalls and benefits so let's look at these in turn. When considering the printing option the first thing to assess is does the government have the economic strength to support printing? The ability to print is obviously available to every country, all you need is paper and a printing press, but the economic strength is not. Take as an example Zimbabwe or Germany in the 30's, neither of these countries had the economic strength to print money but they had the ability to print and they did. The result was massive inflation and a currency that cratered causing massive unemployment and a crippled economy.
Currently the US, Britain and Japan have the economic strength to print but at some point when the debt level exceeds that economic strength, more printing results in the same parabolic nose dive. The question is when is the tipping point reached and the answer is that nobody knows. Studies have been done showing that at levels of debt above 100% of GDP there is a drag on the economy (termed crowding out), but Japan's debt is north of 200% and climbing and still investors believe in their ability to manage the debt.
So how do investors monitor this ability to manage the debt? It is dependent on their confidence in the economic benefit of the stimulus. If the money being printed is used in a responsible manner and in a way that leads to economic growth then in reality you could keep printing way beyond 200% of GDP. Think of it as a growth stock. You are prepared to pay far more for a company that is growing quickly versus one that is stagnant for the simple reason that the outlook is favorable and earnings will catch up to the valuation. In the same way investors will continue to loan money to governments that show the ability to use that money with good effect.
If on the other hand the money is wasted then watch out below as the result will be a weak currency, high interest rates and massive inflation. In all honesty it is looking more and more like Japan has run out of time as while investors have bought into the "new" strategy it does not appear that there is the subsequent improvement in the economy. Remember that investors will require the benefit to be felt in a fairly short period of time before their faith will wane creating the pain described above. Once again back to the growth stock analysis. A high flying stock with a high price to earnings ratio will lose value quickly if it misses earnings as not only is the outlook mired but the earnings ratio will shrink to a more "normal" level, a double hit to the stock price.
So if money printing has a finite life governments will have to turn to taxation. Taxation shifts the burden of the deficit from bond investors to local earners. The decision right now is clear, do not tax the earners as the level of pain that will be inflicted onto them is so great that when elections come around the incumbents will be booted. The benefit to this strategy though is that while there is short term pain it is expected to be relatively short and in the long run far less painful. The reason for the shorter duration and lower long term pain is that if for example the tax rate was raised say to 75% it would not take long for earners to force the government to become more frugal. While this could take a few years, government spending would be brought very quickly under control or a new government would be elected that would bring spending under control. Furthermore a balanced budget would attract investment and strengthen the currency and economy which would result in a reduction in the rate of tax. The downside is that raising taxes at the present time is not only political suicide but would drive the economy into a recession and this is something that no politician or central banker wants to consider.
So while it continues to function (I was going to say work but it never has, never will and is not working right now) we are stuck financing the deficit by printing money but the risks are huge as once investors lose their patience and shun the investment there will be no way out other than serious pain. Is that tipping point coming soon or never? If you believe the bulls then it is never coming but in all reality when was the last time that a group of politicians steered us in the right direction, so putting your faith in them seems destined for failure.
Friday, June 7, 2013
Don't Fight The Fed
"Never underestimate how wrong the consensus crowd can be." - Wall Street Adage
There is an old saying on Wall Street that you should never fight the Federal Reserve. They are just too powerful and have too many tricks to bet against. For this reason as the Federal Reserve wants the stock market to rip higher it will so you might as well jump on the bandwagon and run with the bulls. Having lived this for decades it was very interesting to me to read and article published by John Hussman showing that the largest financial melt downs occur when the Fed is tinkering with the market and trying to manipulate prices.
It turns out that during these times stock prices have had a maximum of a 55% draw down while the worst draw down during non accommodative Fed policies was only 33%. Hussman goes on to explain that the turn down occurs when the Federal Reserve accommodative policies can no longer provide benefit in the form of lowering interest rates further. It turns out that while the Federal Reserve is lowering rates that the market performs at an average rate of return of 13.5% versus 8.8% when monetary policy is not favorable. So there is a benefit but the problem is that the benefit disappears quickly once the effect of the stimulus wears off.
The next thing to mention on this is that while the stock market has appreciated dramatically over the past number of years only 10% of the citizens of the United States have benefited. Taking a look at the total worth of the United States it has finally exceeded the previous high. This is due largely to the stock market move but while the net worth is higher in total the majority of the citizens have a net worth that is less than 70% of what is was prior to the Great Recession. This means that the wealthy have made a boatload while the less privileged continue to struggle.
With this in mind it is clear that while the wealthy have benefited the Federal Reserve policies are flawed. Furthermore the benefit seen in the unemployment numbers recently are skewed as while it was reported that 165,000 new jobs were created, 228,000 of them were part time, meaning that full time workers lost 63,000 jobs! That is not success and this is starting to show up in the poor numbers being published by the tech and retail companies. Meanwhile the banks are making more money than they know what to do with as they are being given the golden hand shake by the Fed.
These are numbers to follow closely as it certainly appears that the power of the Fed to manipulate interest rates is waning and with it the market appears to be teetering on the edge of a significant pullback. As with today though there will be a push to save the one metric that is working so I would not be surprised to see a follow through rally coming next week but do not get too over zealous as another Wall Street adage says; "What the wise do in the beginning, the fools do in the end."
There is an old saying on Wall Street that you should never fight the Federal Reserve. They are just too powerful and have too many tricks to bet against. For this reason as the Federal Reserve wants the stock market to rip higher it will so you might as well jump on the bandwagon and run with the bulls. Having lived this for decades it was very interesting to me to read and article published by John Hussman showing that the largest financial melt downs occur when the Fed is tinkering with the market and trying to manipulate prices.
It turns out that during these times stock prices have had a maximum of a 55% draw down while the worst draw down during non accommodative Fed policies was only 33%. Hussman goes on to explain that the turn down occurs when the Federal Reserve accommodative policies can no longer provide benefit in the form of lowering interest rates further. It turns out that while the Federal Reserve is lowering rates that the market performs at an average rate of return of 13.5% versus 8.8% when monetary policy is not favorable. So there is a benefit but the problem is that the benefit disappears quickly once the effect of the stimulus wears off.
The next thing to mention on this is that while the stock market has appreciated dramatically over the past number of years only 10% of the citizens of the United States have benefited. Taking a look at the total worth of the United States it has finally exceeded the previous high. This is due largely to the stock market move but while the net worth is higher in total the majority of the citizens have a net worth that is less than 70% of what is was prior to the Great Recession. This means that the wealthy have made a boatload while the less privileged continue to struggle.
With this in mind it is clear that while the wealthy have benefited the Federal Reserve policies are flawed. Furthermore the benefit seen in the unemployment numbers recently are skewed as while it was reported that 165,000 new jobs were created, 228,000 of them were part time, meaning that full time workers lost 63,000 jobs! That is not success and this is starting to show up in the poor numbers being published by the tech and retail companies. Meanwhile the banks are making more money than they know what to do with as they are being given the golden hand shake by the Fed.
These are numbers to follow closely as it certainly appears that the power of the Fed to manipulate interest rates is waning and with it the market appears to be teetering on the edge of a significant pullback. As with today though there will be a push to save the one metric that is working so I would not be surprised to see a follow through rally coming next week but do not get too over zealous as another Wall Street adage says; "What the wise do in the beginning, the fools do in the end."
Friday, May 31, 2013
Gold Makes A Bottom
"We need only take our heads out of the sand to see clearly that interventionism not only has failed to provide the promised something-for-nothing, but has led to all sorts of undesirable consequences. Indeed, many are just beginning to realize that we are moving towards disaster even though we have been on a wrong heading for decades." - Leonard Read
The speculator attack on gold that was endured over the last few months was tried again recently but the successes were limited and the result was that the gold price did not test the previous lows. Since then gold has consolidated and has been slowly rising from the dead. The massive short positions held by speculators will need to be unwound and this should result in another positive move for gold but outside of the trade why should gold go higher?
With the continued money printing from America, Britain and Japan not working it is clear that investors are turning once again to the metal as a store of value. It is also a sign of fear. As was seen last week with the sudden drop in the Nikkei, money printing can only hold a market up for so long and when the bottom drops it will be fierce. This fear of market manipulation and the expectation for inflation is showing up in physical demand for gold and this is putting the brakes on any speculator lead attack. Furthermore, as I have mentioned, speculators have a very short timeline and once that timeline draws to an end they need to close out their positions. Now if they do a good job and manage to create a market panic then investors start to dump their positions right at the time the speculators are buying theirs back. As the speculator is buying back their position into a weak market they make a small fortune on the trade. Alternatively, if the market does not panic they are forced to buy into a strong market causing a massive spike in the price. As investors did not panic and are buying physical gold in ever larger quantities I am expecting the latter to play out relatively soon.
One trader that I follow closely is Peter Brandt, a commodity trader who has successfully traded all commodities for years. He has his hand on the pulse of the commodity markets and made a good amount of money betting on gold's decline. I was therefore very interested to note that the other day he tweeted that he felt that the next major market bull move would take gold to $17,000 an ounce! Now I am not sure how he came up with that number and I cannot fathom gold that high, but I do expect a massive run in the price of gold and advise you to take advantage of this move.
If you do some research you will find that gold stocks have been pummeled a lot harder than the drop in the gold price so I would start your research with them as to me they have hidden value that is greater than buying the physical commodity. One thing to be warned of is that while gold is a very volatile commodity, these stocks are even more wild so if you do invest make sure that you do not get shaken out as you will then end up being speculator lunch!
The speculator attack on gold that was endured over the last few months was tried again recently but the successes were limited and the result was that the gold price did not test the previous lows. Since then gold has consolidated and has been slowly rising from the dead. The massive short positions held by speculators will need to be unwound and this should result in another positive move for gold but outside of the trade why should gold go higher?
With the continued money printing from America, Britain and Japan not working it is clear that investors are turning once again to the metal as a store of value. It is also a sign of fear. As was seen last week with the sudden drop in the Nikkei, money printing can only hold a market up for so long and when the bottom drops it will be fierce. This fear of market manipulation and the expectation for inflation is showing up in physical demand for gold and this is putting the brakes on any speculator lead attack. Furthermore, as I have mentioned, speculators have a very short timeline and once that timeline draws to an end they need to close out their positions. Now if they do a good job and manage to create a market panic then investors start to dump their positions right at the time the speculators are buying theirs back. As the speculator is buying back their position into a weak market they make a small fortune on the trade. Alternatively, if the market does not panic they are forced to buy into a strong market causing a massive spike in the price. As investors did not panic and are buying physical gold in ever larger quantities I am expecting the latter to play out relatively soon.
One trader that I follow closely is Peter Brandt, a commodity trader who has successfully traded all commodities for years. He has his hand on the pulse of the commodity markets and made a good amount of money betting on gold's decline. I was therefore very interested to note that the other day he tweeted that he felt that the next major market bull move would take gold to $17,000 an ounce! Now I am not sure how he came up with that number and I cannot fathom gold that high, but I do expect a massive run in the price of gold and advise you to take advantage of this move.
If you do some research you will find that gold stocks have been pummeled a lot harder than the drop in the gold price so I would start your research with them as to me they have hidden value that is greater than buying the physical commodity. One thing to be warned of is that while gold is a very volatile commodity, these stocks are even more wild so if you do invest make sure that you do not get shaken out as you will then end up being speculator lunch!
Friday, May 24, 2013
Japan's House of Cards is Toppled
"The difference between playing the stock market and the horses is that one of the horses must win." - Joey Adams
On Thursday this week the Nikkei, Japan's main stock market index, tumbled 7.3% in one day. It was the biggest one day decline since March, 2011, when the Tsunami hit Japan's coast. Up to that point Japan's market had been on a one way tear higher, up over 45% year to date and 70% since November. The reason for the massive stock appreciation was due to the enormous money printing efforts of Japan's central bank (sound familiar). On Thursday however weak economic news out of China which imports a lot of Japan's products spooked investors and set off a spiral down. Friday saw a slight recovery of 3% but during the day the enthusiasm waned and the market ended essentially flat.
For me this week turned out to be a pretty good one due to my shorts on the Japanese stock market. I had placed these shorts a month ago expecting some form of a significant draw down in the market and was rewarded for my investment. That said I have reduced the short as I have no doubt that all hands will be on deck next week to try to rally the troops and take the Nikkei back higher. Once again, as with the United States, the success of all the government intervention has been essentially limited to a rallying market and so with this one trophy in their cabinet, there is no way that they are going to let one poor day spoil the party.
Whether they will be able to drive the market higher or not is irrelevant because what is abundantly clear is that the market is teetering on the edge of a very sharp blade. One slight gust of wind will be enough to send it into a tailspin. The sell off certainly spooked global markets but for the time being it appears that the issue has been contained however if there is another one it could topple the house of cards. As we witnessed it will not take a lot for investors to run for the exits and right now the only thing preventing this is more money being thrown at the problem by central bankers.
This contraction gave a clear indication that when the confidence in the reserve bankers of the world wanes, the sell off will be sharp and ruthless. There will not be many stocks left standing as speculators rush for the exit. The problem is that there is only one exit and with everyone trying to squeeze out of the door at the same time the last person will take the brunt of the hit. Do not let this person be you. See the warning signs and make sure that you are already out of the door safely before the alarm bells start to ring. You have seen the smoke now don't wait for the fire to appear.
On Thursday this week the Nikkei, Japan's main stock market index, tumbled 7.3% in one day. It was the biggest one day decline since March, 2011, when the Tsunami hit Japan's coast. Up to that point Japan's market had been on a one way tear higher, up over 45% year to date and 70% since November. The reason for the massive stock appreciation was due to the enormous money printing efforts of Japan's central bank (sound familiar). On Thursday however weak economic news out of China which imports a lot of Japan's products spooked investors and set off a spiral down. Friday saw a slight recovery of 3% but during the day the enthusiasm waned and the market ended essentially flat.
For me this week turned out to be a pretty good one due to my shorts on the Japanese stock market. I had placed these shorts a month ago expecting some form of a significant draw down in the market and was rewarded for my investment. That said I have reduced the short as I have no doubt that all hands will be on deck next week to try to rally the troops and take the Nikkei back higher. Once again, as with the United States, the success of all the government intervention has been essentially limited to a rallying market and so with this one trophy in their cabinet, there is no way that they are going to let one poor day spoil the party.
Whether they will be able to drive the market higher or not is irrelevant because what is abundantly clear is that the market is teetering on the edge of a very sharp blade. One slight gust of wind will be enough to send it into a tailspin. The sell off certainly spooked global markets but for the time being it appears that the issue has been contained however if there is another one it could topple the house of cards. As we witnessed it will not take a lot for investors to run for the exits and right now the only thing preventing this is more money being thrown at the problem by central bankers.
This contraction gave a clear indication that when the confidence in the reserve bankers of the world wanes, the sell off will be sharp and ruthless. There will not be many stocks left standing as speculators rush for the exit. The problem is that there is only one exit and with everyone trying to squeeze out of the door at the same time the last person will take the brunt of the hit. Do not let this person be you. See the warning signs and make sure that you are already out of the door safely before the alarm bells start to ring. You have seen the smoke now don't wait for the fire to appear.
Wednesday, May 15, 2013
OIl - Could It Be The Game Changer?
"Let me tell you something that we Israelis have against Moses. He took us 40 years through the desert in order to bring us to the one spot in the Middle East that has no oil!" - Golda Meir
The Platts Annual Crude Oil Summit was held in London recently and the projections from the conference are incredibly interesting in particular as it relates to global growth and the outlook for the United States' global military footprint. The expected trend in oil production could have a significant impact on how the world models itself in the coming decade and it gives the United States a wonderful chance to get its finances in order. The question is will the opportunity be taken or lost?
The most amazing chart to me is the one below showing the expected flow of oil exports and imports. In years past the heavy blue line would have been pointed directly at the United States but now that the oil found in the shale estimated to be a whopping 7.4 billion barrels, by 2018 it is expected that the United States will only be importing 3 million barrels a day. This is down from a peak of 10 million barrels a day in 2005.
So most of the global oil production and particularly Middle Eastern production will be moving to China and this will change the global landscape tremendously. First of all the United States will be less concerned with protecting its oil supply in the Middle East. The United States has already limited their import to just a hand full of countries and this will more than likely shrink over time. At present over 70% is imported from Canada, Saudi Arabia, Iraq, Venezuela, Mexico and Nigeria and this number should fall further allowing the United States the opportunity to pull back from its overextended military presence in the rest of the world. At present the US spends $680 billion a year on its military (this does not include war expenditure and assisting veterans which takes the number a lot higher) and this number could be slashed closing the budget gap.
Second with more and more oil being sent to China it will become more common for payments to be made in Renminbi rather than dollars. This will create the platform necessary to turn China's currency into a major global currency and will begin the demise of the dollar as the globe's de facto standard. While this will be welcome in certain parts of the world it will have an impact on the United States' ability to finance their large budget deficits. The simple reason is that if China is seen as being a global heavy weight then safety may be found outside of the US reducing foreign capital to finance budget deficits.
Third there is a chance that the oil market itself will become more regional much like the natural gas market. So for example oil produced in the United States and used in the United States will command a different price from Middle East crude shipped to China. As one of the main drivers of inflation is from oil inputs, if the United States can supply much of its own demand then inflationary shocks from limited oil supplies outside of its borders will have minimal impact on inflation. This insulation would allow for a more stable inflationary platform from which to grow an economy.
Fourth is that the trade deficit will shrink and could even move to a positive number. A trade surplus would be very welcome and would allow the country to reduce its reliance on foreign investment to finance deficits. This is one of the reasons that Japan has managed to continue to raise its level of debt while remaining solvent (a situation that will more than likely reverse with the final push by the government to spend more than they should on wasted projects).
Fifth is that the wealth that will be created in the build out of mining operations and the subsequent revenues generated from operations will provide a nice boost to GDP. On the back of this will come some much needed tax revenues which should help to shrink the budget deficit further.
All of this is positive news and gives the politicians another chance at repairing the economic damage but the main question remains, will they take the opportunity presented or once again squander it? I am hopeful that the size of the opportunity is so large that even our lost leaders will not be able to destroy this opportunity. If in fact they continue down the path toward fiscal austerity then this economic boost will be felt and could once again put the United States back in the pound seat in terms of an economic super power. Furthermore as the country becomes more and more insulated the pressure will finally be off to police the rest of the world and that should help with national security which would be worth its weight in gold!
The Platts Annual Crude Oil Summit was held in London recently and the projections from the conference are incredibly interesting in particular as it relates to global growth and the outlook for the United States' global military footprint. The expected trend in oil production could have a significant impact on how the world models itself in the coming decade and it gives the United States a wonderful chance to get its finances in order. The question is will the opportunity be taken or lost?
The most amazing chart to me is the one below showing the expected flow of oil exports and imports. In years past the heavy blue line would have been pointed directly at the United States but now that the oil found in the shale estimated to be a whopping 7.4 billion barrels, by 2018 it is expected that the United States will only be importing 3 million barrels a day. This is down from a peak of 10 million barrels a day in 2005.
So most of the global oil production and particularly Middle Eastern production will be moving to China and this will change the global landscape tremendously. First of all the United States will be less concerned with protecting its oil supply in the Middle East. The United States has already limited their import to just a hand full of countries and this will more than likely shrink over time. At present over 70% is imported from Canada, Saudi Arabia, Iraq, Venezuela, Mexico and Nigeria and this number should fall further allowing the United States the opportunity to pull back from its overextended military presence in the rest of the world. At present the US spends $680 billion a year on its military (this does not include war expenditure and assisting veterans which takes the number a lot higher) and this number could be slashed closing the budget gap.
Second with more and more oil being sent to China it will become more common for payments to be made in Renminbi rather than dollars. This will create the platform necessary to turn China's currency into a major global currency and will begin the demise of the dollar as the globe's de facto standard. While this will be welcome in certain parts of the world it will have an impact on the United States' ability to finance their large budget deficits. The simple reason is that if China is seen as being a global heavy weight then safety may be found outside of the US reducing foreign capital to finance budget deficits.
Third there is a chance that the oil market itself will become more regional much like the natural gas market. So for example oil produced in the United States and used in the United States will command a different price from Middle East crude shipped to China. As one of the main drivers of inflation is from oil inputs, if the United States can supply much of its own demand then inflationary shocks from limited oil supplies outside of its borders will have minimal impact on inflation. This insulation would allow for a more stable inflationary platform from which to grow an economy.
Fourth is that the trade deficit will shrink and could even move to a positive number. A trade surplus would be very welcome and would allow the country to reduce its reliance on foreign investment to finance deficits. This is one of the reasons that Japan has managed to continue to raise its level of debt while remaining solvent (a situation that will more than likely reverse with the final push by the government to spend more than they should on wasted projects).
Fifth is that the wealth that will be created in the build out of mining operations and the subsequent revenues generated from operations will provide a nice boost to GDP. On the back of this will come some much needed tax revenues which should help to shrink the budget deficit further.
All of this is positive news and gives the politicians another chance at repairing the economic damage but the main question remains, will they take the opportunity presented or once again squander it? I am hopeful that the size of the opportunity is so large that even our lost leaders will not be able to destroy this opportunity. If in fact they continue down the path toward fiscal austerity then this economic boost will be felt and could once again put the United States back in the pound seat in terms of an economic super power. Furthermore as the country becomes more and more insulated the pressure will finally be off to police the rest of the world and that should help with national security which would be worth its weight in gold!
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