Schizophrenia, that sums up

Posted by Ray on January 6, 2011 under Main | Be the First to Comment

Here we are in a New Year and as is tradition we see countless forecasts for what will transpire this year. My personal feeling is that they are all worthless since no one knows what the Fed is going to do and there is no denying that the Fed and the Fed alone has total control over the markets. Without the Fed we would not have seen positive returns in 2010, IMHO, and we only got those returns because the central bank flooded the market with extraordinary liquidity, again. The irony is that everyone knows something isn’t quite right, but they seemingly cannot put their finger on what is not normal.

As the weekly headlines come and go they are almost humorous now and completely contradict previous headlines. It is this that is contributing to that unsettling feeling most people have but cannot identify right now. Any given day you read about the recovery, often from a heavily seasonally adjusted figure, which signals a recovery in the economy, even though the unseasonal adjusted figure shows the data is not so hot, and everyone is bullish again. The next week we get a data point that is horrible and the world is coming to an end. Perhaps this is what many economists mean when they say this is a ‘muddle through economy.’ Regardless, things are better there is little question about that, but I would say we have stabilized ourselves in a less bad environment versus a real economic recovery.

I had previously said stocks would move higher and they did, but that is only because of the liquidity the Fed bestowed upon us and not because of truly better data points. We have seen unprecedented stimulus over the past 3 years from the federal government and the Federal Reserve which explains pretty much any positive data point. When you examine the real economy, i.e. Walmart, it is a different story. Frankly, when Walmart which has the largest customer base in the US is struggling when so many are preaching the resilient consumer something isn’t right. I know the high end retailers are doing OK and that proves my point which I made about a year ago that the recovery, thanks to the bailouts, and I use that term loosely, was lopsided to only the wealthy and not to Joe Six Pack.

This is also reflected in the unemployment figures and pretty much anywhere else you want to look. The rich are doing just fine thank you very much, but if you are in the middle class or poor the SNAP program is this way. While this is not fair it simply is what it is and is not going to change anytime soon, sorry. Perhaps that is what scares me the most right now, the inequality of wealth in America, don’t get me wrong I am a capitalist through and through, but it doesn’t take a rocket scientist to read history and what happens when the wealth gap gets this wide. On top of the middle class and poor becoming poorer we are now seeing what I thought was going to happen, inflation without an increase in money velocity.

Those who thought it was impossible for a country to experience inflation without money being in the hands of the people, well, you were wrong. When the central bank plays games, untested games, like QE it hurts the currency which drives up currency sensitive items, food and energy. When prices rise and wages stay the same it will more than likely exacerbate the underlying problems we are suffering from and may lead to civil unrest. We have food prices at the highest level ever and oil about to burst through $100/barrel, where is the outrage from the media on this, and people already feel poor, not a good combination. Again, all of that without an increase in money velocity, go figure.

Now, there are other reasons for the rise in commodities, but they are irrelevant in my opinion since Joe Blow could care less about why prices are rising he just cares about being able to feed his family. What is frustrating to Joe is that he is being told how great things are when he feels poor, is probably going to lose his house, can barely afford food, gas or his power bill. Joe is wondering what planet the commentators on CNBC are from when it is plain as day that things are not right in the real world. What Joe doesn’t understand is that the ivory tower announcers and the Fed are looking at the core CPI which says everything is hunky dory. The question is, do you think Joe cares that deflation is occurring in LED TV’s as much as Ben Bernanke does? Of course not because Joe looks at food and energy, but all economists look at is core CPI which excludes food and energy. That is where the disconnect is coming from, partly.

The public is slowly starting to not believe what they are being told anymore and that is a good thing. Remember how we were told that retail sales were going to be fantastic? They did not look so hot today, except for some high end retailers I might add. What I am getting at is simple, the real economy is catching up with the market. The really sick part is that when the economy does improve the Fed will have to kill the liquidity which will crush stocks. Those that preach stocks are a win-win because the Fed will pump money when the data is bad which is good for stocks or when the economy improves stocks should go higher are wrong, pure and simple.

This is the largest liquidity driven rally in the history of mankind or what TVland would call a bubble. Stocks are expensive and only going higher because of the Fed. However, when the Fed stops feeding free money to the banks it will end, badly. You can disagree with me all you want, that is what makes a market, but you know it is true. This is not a win-win situation for stocks. How can it be when just 6 months ago when liquidity was drying up the market tanked? We only saw a rebound when Ben spoke at Jackson Hole and said he would print and then he followed through, that is not the sign of a healthy market.

What we have is still a whole lot of uncertainty going on in the whole world. Nothing is certain except that central banks will merely print us into oblivion. Europe is a mess, we have some countries wishing to slow down fund flows to them, Korea’s on the brink of war, again, China is not buying UST’s like they once did, the US is awash in debt, which will not be solved by the Republicans, rising prices for food and oil about to go ballistic again. All that stuff is off the top of my head and I know I left a ton of stuff out, but this is enough, hopefully, to make one stop and think.

I said before that stocks will move higher and I continue that thought until one of two things happen, either the data really does improve or until QE2 ends in 2Q11. Both items are basically indications that the punch bowl or liquidity will dry up. I also believe stocks will underperform commodities, specifically silver and copper, in 2011 simply because the Fed will never stop the printing presses, they cannot. We are in a very odd period of time and, frankly, these are scary times with so many unknowns out there and a public slowly waking up to the fact that things are not as they seem, but that is a good thing, IMHO.

2011 will be a rollercoaster year with the schizophrenia kicking into high gear as far as the media is concerned, the world will be growing or coming to an end every other day, which should add more volatility to stocks. I also think we will see some things come to the forefront of discussion this year. How it ends is anyone’s guess and I will not even venture agues at the results. What I do know is that it probably will not be good. Here are my issues I think will be front page news this year:

-          Food prices continue to rise to scary levels

-          Treasuries begin to see a steep selloff

-          The US’s national debt will be a hot issue with China downgrading us, rightfully so, to junk level

-          The US is put on negative ratings watch by Fitch, but who cares about Fitch… right?

-          The tax cut extensions will prove to be a horrible idea, they really were to begin with

-          The Social Security tax break everyone gets moves up the date of depletion of the trust fund to, “officially,” the 2020 decade

-          Oil breaks through $100 probably eclipsing 2008 record price

-          The dollar will rally hard before it falls

-          Food shortages around the world will be a major problem

-          The Fed looses massive amounts of money on their treasury holdings

-          China openly sells US treasuries

It finally happened

Posted by Ray on July 19, 2010 under Main | Be the First to Comment

Jim Cramer finally officially eliminated himself from any serious discussion about any economic issue, forever. I know, to many he eliminated himself a long time ago with his ludicrous housing is bottoming call a year ago, but for some reason he is still being hailed as some type of guru on CNBC. It is easy to do a hit piece on Cramer, I know, but this time he has gone a bit too far.

First, he claims he told people to sell last week before the big selloff on Friday, he did not on his Mad Money program. Second, he ran a piece tonight HERE, claiming he is giving you tomorrows headlines today, at 6 PM, what good is that, about the housing data tomorrow. Guess what he said? It is going to be bad. Really, no one had any idea since the data has been horrible for how long now? Not to mention everyone is expecting the data to be bad so even I am not convinced it will be the catalyst it should be. Regardless, the insanity doesn’t end there, it gets better.

He claims he gets his information from the home builders who sell thousands of homes and have been extremely negative on housing versus economists who own only one home. He goes on to say how overly optimistic economists are and so forth which is not shocking to anyone since they have all overestimated the economic data we have seen recently and, frankly, he had also overestimated the data as well. Basically, he is jumping on the bandwagon which means the data is probably going to be better than we all think to begin with because Cramer is the freaking kiss of death for everything, seriously, he is. But it gets even better!

Cramer goes on to say that the poor housing data doesn’t mean anything because it is such a small part of GDP. He said; “Housing, he added, is not a big percentage of the economy and said executives who have appeared on Mad Money have moved “well past” housing as the drivers of their earnings.” WHAT!? OK, housing is not a big part of the economy, sure, I guess that depends on exactly how you define housing. Sales or residential investment account for about 5% of GDP, but I would hardly call that inconsequential. However, it is the services that go into housing that is the driver of GDP growth, like appliances, materials, jobs, etc. which account for about 12-13% of total GDP. That is a combined total of 17 to 18% of GDP that is impacted by the housing market being in the tank, conservatively, according to the NAHB. That is not inconsequential to the economy and that is something that companies cannot just “move past” in their earnings cycle.

The reason housing is such a big deal is because it touches so many parts of the economy and when housing falters so does the broader economy, obviously. To discount weak housing data from the overall economy or to not know how big housing is within the overall economy is incredulous. This matters because this impacts people’s lives, especially when construction workers are one of the largest segment of the workforce unemployed right now, and shows that this person has no business talking about broader economic issues. I respect the fund manager and he has one hell of a track record, but as a macro guy or a guy putting the pieces together to figure out what the economy looks like he is officially, totally, disqualified now. His horrible housing call a year ago combined with not knowing how important or big housing is today proves it.

The Death of M3

Posted by Ray on July 15, 2010 under Economy, Main, The Federal Reserve | Be the First to Comment

All the talk of the town is deflation, disinflation or disinflationary trends, what does all of this mean, is it bad and more importantly, should the Federal Reserve try to stop it? First, deflation is negative price growth year-over-year, we are not there yet even though I often say we are in a deflationary period, because we will get there, in my opinion. Disinflation or disinflationary trends are signals that show prices are declining and is how many economists or snarky bloggers, like myself, describe the trend before we hit outright deflation. In a nutshell, deflation is demand destruction or no end demand which means companies must drop prices in order to attract business. The most commonly referenced period of deflation is the 1930’s where, sadly, food was cheap, but people starved, houses were cheap, but people went homeless. Deflation has been framed as ugly, horrible and something that must be avoided at all costs.

Deflation during the good times is fine and we all reap the rewards, such as cheaper technology, i.e. cell phones or computers, which become cheaper because of competition from outsourcing and technological advances. No one minds paying lower prices during these periods of times and the Fed even doesn’t mind deflation during these periods, but they like it to remain in check. Because lower prices do not mean people are not buying the products, the opposite is typically true. Plus, other indicators usually show that only certain items are prone to deflation under normal conditions, usually technology related items. The Fed would only be concerned if they saw other items start to lose pricing power and the money supply shrinking, people saving more money, basically.

When people save their money, in an economy such as the U.S., it is devastating because such a large portion of our domestic growth comes from spending money freely on stuff we really don’t need. When we save we stop that wasteful spending this grinds our economy to a halt. In order to get sales going again companies start to offer incentives to get shoppers in the door. This usually means lower prices through either temporary or permanent sales on the price of the products they sell. Since these products are not selling the stores are not ordering new products which mean the raw materials to make the clothes or whatever begin to decline. Even if the product begins to move at reduced prices the company selling to the end user begins to demand lower prices for the product and even if they don’t ask for it the orders are so much smaller prices would fall anyhow. Essentially it is a chain reaction, this is pretty common knowledge, but it comes from one simple thing happening, people saving their money.

The other part of the equation of people saving their money is that money is taken out of circulation. This sounds counterintuitive to those who rail against the fractional reserve banking system since this system allows for more loans to be made if the deposit base grows. However, if the economy is bad banks simply do not make loans because they fear not getting repaid. Therefore, a higher savings rate means lower monetary circulation, commonly referred to as M3, which the Fed no longer produces by the way. In order to boost the money supply the Fed will try to encourage banks to make riskier loans by lowering interest rates. By lowering interest rates banks make lower rates of returns for doing nothing with their money so by loaning out the money to borrowers banks can make higher interest rates. In turn the borrower will go out and spend that money which will ultimately boost the money supply and, hopefully, boost final demand.

That is how things work in normal business cycles, but that is not what we have now. We have a very abnormal business cycle that happens once every few generations where we go through this huge leveraging cycle and then have to live through a period when we deleverage all the debt. The last time we went through this was in the 1930’s and the time before that was about 60 years before the 1930’s so about every 60 to 80 years we go through a super cycle of debt leverage that blows up. During these super cycles the consumer has so much debt that they just try to pay it off and does not waste much money on other items. This is bad for our economy which is built on a consumption model to the tune of 70% of our GDP. This lack of demand or demand destruction means people just will not spend unless it makes absolute sense to them, i.e. a generous tax credit from Uncle Sam. This demand destruction leads to lower prices which starts out as disinflationary forces, moves to deflation when prices finally start dropping YoY, which will happen soon.

No matter what the central bank does, the Fed, it on its own cannot change this deflationary trend when it has spent all of its ammo. When interest rates hit zero there is nothing the Fed can do to spur demand from a monetary policy point of view. Remember, this is a very unusual situation because in these super cycles not only are consumers saddled with debt, but so are the banks and the banks are usually saddled with worthless debts which make them insolvent. That was true 80 years ago and the same thing is true today because banks are not making loans nor do they want to. So what can the Fed do? They have insolvent banks and consumers that don’t want to spend and are trying to shed their debt loads.

Some people say more quantitative easing will be helpful. I ask how? We already did how much QE? $2T+ that we know of and that did nothing. In fact, mortgage rates have dropped even more after QE stopped and we have falling demand for housing so what will another round of QE do? All it would do is cripple the dollar and trust me, the dollar is going to be in trouble soon enough anyhow because of the bloated balance sheet the Fed has and our national debt load. QE will not boost money velocity at all. It might give banks more money for their balance sheets, but other than that it will not boost the overall money supply so I am totally perplexed as to why anyone thinks QE will work. We have no problem selling our debt right now either, so it is a total waste of time and resources. The negatives far outweigh the positives.

What else can the Fed do? Nothing. They are done or have done everything they can do. Sure, they can roll out with TALF again, but the market has no problem placing junk paper right now so what would the point be? The problem is simple, the consumer does not want to spend. Businesses do not want to spend. Does anyone know why this is happening? I think it is pretty simple, no one knows what is going to happen. The President is keeping everyone in the dark about where taxes are going to go, heck, we are not even going to get a budget for 2010, unreal! We still have no idea how health care reform is really going to impact us yet, how much will it cost, etc. The business environment is weak at best and CEO’s are too afraid to admit it, look how they get treated by the administration, as traitors!

The consumer, well, I wonder why they aren’t spending. We have weekly initial unemployment claims coming in at well over 400K, 4 week average is 455K. We have more firings than hiring’s going on right now. The work week declined and so did wages. There are 6 people for every open job. It is taking 35 weeks to find a new job if you get fired. People were feeling more secure about their job, but when initial claims began to heat up again that confidence disappeared, even H-P started laying people off again and I bet Google will announce layoffs very soon. Their debt loads are through the roof and banks raised all their fees on the consumer so it is taking longer to pay down debt. Foreclosures, delinquencies and now a story broke tat home owner associations are foreclosing on homes for pennies on the dollar over the dues not being paid, come on. To top it all off the Senate is not extending unemployment benefits, but they can pass a 2,300 page Fin Reg bill with no problem, what is wrong with those people?

It is fair to say that there are plenty of reasons to not spend money from the consumer’s point of view. From corporate America’s point of view there is also little reason to spend money and even if they did it is so little of GDP it doesn’t even matter. The bottom line is how do we get M3 to increase? Can money velocity get positive again and should we even try? In my opinion, I do not believe we can get money velocity to get positive again without a drastic event such as WWII. These super cycles have to work themselves out and that takes time and the more tinkering we do the longer it takes. Look at housing, if we did not do the tax credit we might have bottomed in housing prices already, but we will never know now.

The Depression lasted as long as it did because of the tinkering and those who say we had a relapse because stimulus was removed in 1937-38 simply do not get it. If we cannot attract buyers to the housing market at 4.5% interest rates and prices significantly lower than the peak it just is not going to happen for some time to come. The market has to find its own bottom and it will be painful, but we cannot simply throw money at it and hope it works out. We could do that in the 1930’s because we had savings and we had manufacturing, we have neither now. We started out in a horrible position, greatly in debt, and to get ourselves out we are advocating going much deeper in debt. The problem is we cannot grow our way out of the debt we have, we cannot afford another New Deal. The most important thing to remember about the New Deal to begin with was that it did not work, it was a majorly failed policy.

As painful as it is going to be I say we have to let it be. No more QE and I hope we do not do another stimulus, but we will, look for a Bush style check coming right around October. Money velocity will sort itself out when the deleveraging is over and that could be as fast as next year or as long as 2015, no one knows except the collective minds of the consumers. The bottom line is we may come out, the consumer and corporate America, stronger than when we came into this thing with less debt and important lessons learned. Our government and the Fed, well, I do not believe they learned anything and look for QE and stimulus money just in time to buy your vote in November.

The employment report will be bad, worse than you think

Posted by Ray on July 1, 2010 under Economy, Markets | Be the First to Comment

Everyone is expecting a bad employment report, especially after the ADP report on Wednesday and the initial claims data this morning, but I think it will be worse than most people believe. Estimates are for modest private payroll growth, meaning poor of course, but given the weak data that came in waves this month it is bound to be less robust than we think. I am one of the few who believe there is a very strong possibility of private payroll losses tomorrow, not merely a weak report, but a disastrous report.  I am not referring to the census workers being laid off either.

I expect huge losses in construction jobs which will offset any manufacturing gains we have. The housing, initial claims and extended jobless benefit data points are what lead me to believe that we will see a train wreck tomorrow. It is clear that the economic indicators are rolling over, from the ISM to the ECRI all the way to housing, which should not shock anyone. What most people fail to realize, but not economists, is that housing represents some 20% of GDP and the data we saw is telling us that the construction industry must have been shedding jobs, in the residential market, like crazy. This is also why the home buyer tax credit is going to get extended as well, of, and it is also an election year.

Overall, I do not believe a bad employment report is priced into the market and that is certainly not good news for the bulls. I am also curious to see what the birth/death model adjustment is going to add to the mix, while many in bobble head says the B/D adjustment is not a big deal, well, they are wrong. As I have said many times, the B/D model underestimated unemployment by 880,000 jobs last year, that is a big deal so these adjustments do matter, sorry Mr. Liesman. I also believe we will see wages stagnate with the work week getting slightly longer, why hire more people when you can have existing employees work more hours? It is unclear whether or not the unemployment rate will increase, I suspect it will, because the unemployment benefits were not extended by the Senate leaving 1.7M unemployed without a check. In other words, 1.7M people might have all of a sudden decided to look for a job, any job, which will increase the unemployment rate. The rest of the report will reflect what we know, it will merely confirm it for us.

The $60,000 question is whether a really bad employment report is priced into the market or not. I am inclined to believe that nothing is really ever priced in especially if the report is worse than expected. The market is due for a bounce and I actually thought we would get it today, it looked like we were at some points throughout the afternoon, but it did not happen. The market is definitely oversold, but markets can remain oversold or overbought for long periods of time, heck we were overbought for how long and no one complained. The market is in bad shape from a technical perspective and there are enormous headwinds in front of us from a weakening economy to the troubles in Europe. The one thing I am confident about is my 900 price target for the S&P is intact and we are well on the way to that level or lower. One hedge fund manager I spoke to has a Dow target of 3,800 and thinks we will reach new lows on the S&P 500 so next to him I am a raging bull.

If the report is bad it is possible we will trade higher to retest that 1040 – 1048 level which would be an ideal level to consider looking at short positions, depending on conditions at that point and your investment objectives, there are never any sure things. The other unknown about tomorrow is the 3 day weekend that is in front of us. I am fairly confident few will want to be short into the long weekend, but I am equally as confident that few will want to be long either. Many traders may not be around which could mean a low volume indecisive day altogether. However, if I am right and it the report is a negative number I am fairly confident we trade lower, but this market is full of surprises, both up and down.

There is one item that makes me a bit more bearish than usual and that is the way AAPL has been trading. I realize it has been plagued with some rumors or truths, I do not own Apple products, happily, so I do not know what is true or not true, but it certainly has not been able to catch a break lately. This was supposed to be the ‘safe’ stock with $50 per share in cash and THE product to own and it has fallen sharply off of its highs. Everyone loves AAPL and everyone owns AAPL, I am using AAPL as most used GS at the beginning of the year, as the canary in the coal mine. What AAPL is saying is there is a gas leak as the stock has fallen 30 points from its all-time high and it cannot shake off bad news. The weakness in stocks like AAPL are telling me that investors are treading lightly in risk assets, not to mention that they were overvalued, oh the emails I will get for that comment.

The bottom line is that even if I am wrong and the employment report is ‘good’ with a +150K private employment print, unlikely in my opinion, it really isn’t good news, just less bad. With unemployment officially at about 10% and underemployment pushing 16% we have a real structural employment problem in America. It is so bad that Vice President Biden admitted that many of the 8M jobs lost will never come back, this is the same guy who said we would be swimming in hundreds of thousands of jobs every month ‘very soon’ a couple of months ago. This is deflationary and the fact that wages are basically stagnant is deflationary. The credit markets are telling us that deflation is the immediate risk at this point. Retail sales show that there is no end demand, running at a mere 1%, all of this mixed with high unemployment is if not actual deflation disinflation which is very bearish for stocks. We will continue to have a P/E multiple compressions because of this disinflationary force and earnings estimates will come down, a lot. In short, even if we have a good day tomorrow, unless we see some real inflation equity prices are heading lower.

Explaining Deflation vs. Deflation

Posted by Ray on May 16, 2010 under Main | Be the First to Comment

I was reading Zero Hedge yesterday, a post in regards to gold where Peter Schiff was part of the topic, and there were some interesting comments. One caught my attention as being somewhat ludicrous which is not unusual, but is was because the author is a contributor to the site. Unfortunately the comment was flagged as junk, I hate it when that happens because counterpoints are always good things to have and I do not mean to rip him apart, but rather correct years of misinformation he probably picked up from school or TV armchair economists.

One comment he made was:
“On gold to the moon: Peter you’ve been talking up your gold positions for years, but once calm is restored, you’re going to take a major haircut on gold.”
Another was:
“On the US economy “not growing”: Has he looked at the ISM, employment (not just payrolls but household survey), industrial production, and the leading indicators over the last ten months?”
And the other one was referencing that as soon as the trillions in bailouts the banks received hits the economy it will calm the economies or something to that effect. He also indicated that as long as confidence remains in the system everything will be fine, which is true, but how much will it take to keep that confidence or instill that confidence? Also, the more money we inject to create confidence the more confidence it actually erodes, it is a zero sum game in the end. Part of the comment was that the EU was trying to avoid a “deflationary death spiral” or something similar, this is why people should not flag things as junk because they are not junk, which is what really bothered me.

People are thoroughly confused by deflation and deflationary death spirals and what that means. Deflation is a problem, we have deflation now, but it is not a huge problem. However, a deflationary death spiral is what we had in the 1930’s and is what keeps Ben Bernanke up at night. We will not, I do not think, have that deflationary death spiral and I think we need to understand what that death spiral was, what caused it and why we will not have it. After that I want to address the rest of the comments he made above.

What we suffered fro in the 1930’s was horrible and something I hope we never see again. To understand more about what it was like in the Depression please Read The Depression: A Diary by Benjamin Roth and stay away from the academic stuff. However, during the depression dollars were scarce because fo the massive bank failures and deposits were frozen or simply lost when the bank closed down. On top of that the stock market wiped out millions of peoples savings which had a domino effect into the real estate market which is what caused the banking crisis, somewhat reversed from today’s crisis I might add.

What this did was literally wipe dollars out of existence, they just disappeared and were not transferred to anyone else. Today one persons loss is likely another’s gain through derivatives or other hedging instruments known as bailouts, but that was not the case in the 1930’s. Since these dollars were gone or frozen and the U.S. was on the gold standard we did not have a Helicopter Ben to get dollars into the system, at first the Fed tightened credit, who knows why, but they later tried to reverse that decision, but it was too little too late. What we had was complete demand destruction and people saving whatever dollars they had, which was strange because people would rather starve than spend their money.

In fact, while people were starving crops were on or at a record pace, prior to the dust bowl fiasco of course. It was a simple fact that the U.S. was tied to the gold standard and could not put more dollars into the system and people just did not want to spend what they had saved because who knew what tomorrow would bring. We also had no safety systems in place such as unemployment insurance, welfare or Social Security, until FDR was elected a few years into the Depression. By not having those safety nets in place it made things much, much worse and that is why we had such massive deflation.

This was not the run of the mill demand deflation, which is what we have now, this was the death spiral lack of dollars in circulation plus no demand deflation. So for people to draw a comparison to 1930’s deflation to todays is a bit ridiculous to say the least. We have those safety programs now so people will not starve instead of spending money, ironically our poor actually have cable TV, go figure, and we have other safety nets in place. This is why we will not see 1930’s deflation and this is also why we can hide the evidence of our current Depression, if we do not have to see the soup lines they are not there, right? Never mind the fact that 1 in 8 Americans receives some form of Food Stamp assistance, if that is not a Depression statistic I am not sure what is.

The banking system is still suffering from after shocks much like we saw in the 1930’s, closures did not stop for years after the crash of 1929 as real estate continued to decline in value, sound familiar? We are still suffering from similar bouts of bank closures today because of declining real estate prices and that is unlikely to change. Many of these banks were bailed out, funny how some “too big too fail” are now failing after they were bailed out. How can, as his comment claimed, the markets be calmed because of trillions in bailouts will build confidence when those banks who were bailed out are still failing? This is very similar to the 1930’s when many banks who received aid under the first Hoover plan still failed. The point being is that it will take a long time for the system to heal itself and with the government propping it up it will take much longer. The Depression lasted some 10 years, 7 with major government help, our current problem got help on day 1, how long will our recovery really take?
With the massive stimulus and government spending in the banking system it is nothing more than inflationary measures. The comment that “when the trillions making it into the economy will only build confidence,” is a bit absurd, in my opinion, as it points out that the issues were very bad for a very longtime. Also, when the trillions, a bigger and more accurate statement would had been if the trillions, make it into the economy it will create inflation, period. There is really no doubt that the measures taken by all the central banks were to stem the tide of the aforementioned deflationary spiral and it did work, but the central banks cannot stem the tide of the inflation that they created. After all, central banker’s primary mandate is to inflate the currency at about a 3% annual rate to begin with so they have no real mechanism to dis-inflate a currency anyhow. Sure, they can raise rates and do reverse repos, but serious, that will do little.

In fact, for all the money spent on bailouts and stimulus measures I would argue we have received a very poor return on our investment. We had a sharp mini-V of a +5% GDP print, but that appears to be it. We had spend far less in the past and had averaged far higher GDP prints, about a 7% print after major interventions, so, sure, you got a V, but it is one side of a W, sorry Charlie. People had been bragging about the ISM Survey’s for some time until the Ism survey’s failed to support their claims, but they fail to support my claims as well. In fact, they are neutral, but well below what we would call normal expansion averages. Not to mention, these are survey’s and should be calculated as survey’s, as in this is how people feel at this point in time, not as this is what will happen in the future.

My main point is that we do have growth and things are better, but no where near where the bulls think they are and we are not heading to where they think we are going. The comment also pointed to the leading economic indicators as a “bright spot.” Funny, Kudlow and company have not brought up the LEI for sometime now because, well, the number rolled over a couple months ago now and has been heading lower, funny what happens when Uncle Sam cuts off the money. So, I am not sure what LEI the commenter is looking at, but the one everyone else is looking at is pointing to the South, not the North, good luck if you think down is up and up is down because you got Vertigo my friend.

The global economy is about to end its amazing recovery, sorry folks. Europe is 20% of the global economy and they are instituting massive austerity measures right now and these are only the start, more is needed. If 20% of the world’s buyers have less money you will see economists start lowering forecasts very soon, trust me on that one. You know how the U.S. is pestering China to revalue its RMB? Well, it is pegged to the U.S. dollar, right? Do you know who China’s largest trading partner is? Hint, it is not the U.S., it is the EU. That means Chinas products are now more expensive in the EU than they were just 2 months ago. Wasn’t China credited for the global recovery? Isn’t China in the middle of a liquidity bubble? Won’t not selling products hurt their exports causing an artificial popping of their bubble which could cause more problems for the world than originally thought? I think so, but we are still pressuring them to revalue and spreading the falsehood that we are their largest trading partners, what baloney.

It is kind of funny to see people dismiss all this information and keep economic events locally when this is a global economy, I mean, there is a reason why when the U.S. market tanks foreign markets go down as well and why when we go into a recession so do other countries. Decoupling will happen, but not until the rest of Asia emerges like China did, but until that happens China is dependent upon the U.S. and the EU. However, let us mak sure we are clear, the EU is, for sure, China’s biggest trading partner and a falling Euro is a big problem for China as well. Keep an eye on that, I am.

On to the topic of the day, gold. Peter Schiff has been bullish on gold since, well, forever now and has taken much heat for it since it climbed from $250 to $1,240, yes, taking heat for something that quadrupled. The commenter stated that gold will take a haircut, a major one, when markets calm down, maybe he is right, but let’s take a look so far. Trillions have been spent on the banks, that has not calmed the markets and now you have governments in trouble, what is going to calm the markets even if small governments start defaulting? Even beyond that, look at 2003, 2004, 2005, 2006, 2006, 2007, 2008, 2009, 2010. During most of those years the markets were considered “calm” and in a “goldilocks” period upon a new wave of global liquidity never before seen, what happened to the price of gold? Oh, yeah, it quadrupled.

The one big down year gold had was in 2008, when it first hit $1,000 I might add, when everything was in liquidation because of a global margin call. If the Fed did not start dropping money from helicopters we would have had our 1930’s deflationary spiral on our hands, but that is not what happened. What happened was things were supported by the government and long before the markets shot back up 70% gold was on its way back up to it’s previous $1,000 high. So, Peter Schiff can hold on to his gold trade all he wants, it worked for him as he lost little during the collapse by holding it and it returned more than the S&P, from January 1, 2009 to December 31st, 2009, than the S&P 500 did without the volatility. Comments like the ones made by the person in question show that they do not look at the facts and simply do not like the asset class, or do not understand it, and end up looking silly at the end of the day.

Do I think gold will go down? Yes. Why wouldn’t it? Everything rises and falls, but I think it will be much high 10 years from now than today. We know that central banks inflate the currency, that is a fact. We know, especially right now, that sovereign default risk is real and confidence in currencies is really a fleeting thing, we have merely been lucky for 38 years since the gold standard was eliminated, we know that turmoil will always exist and we know gold, silver or other commodities are a finite resource that has much higher demand that supply could ever meet. In my opinion, only a fool would not want to own gold, just look at APMEX.com, all their smaller American Eagle coins are sold out for crying out loud, is that the confidence in the global system we are looking for? Is that the sign of a growing global economy? Nope.