Demographics is driver to economic growth

When reading this post please do not get discouraged about the negative view in the first part of the post, there is a positive ending. I encourage clicking on links to read up on details of other concepts already covered. Grab a coffee, throw some tunes on, and prepare for the rant of all rants , exploring the driving causes of the global crisis.

Demographics is the core issue to economic crisis.

Population demographics is key to promoting growth in all areas if human economic health. The US baby boomer generation is a classic case of how that demographic propelled US economic growth after world war 2. The baby boomer demographic effect was jumpstarted with the end of World War 2, and the US production capacity was in-tact, while Europe, Japan, and other countries involved in WW II production capacity was damaged. With the end of World War 2, America experienced economic growth at first due to the production differential, then extended through the life of the Baby Boomers.

I encourage readers to seek examples of this perspective if needed to understand how key demographics is to economic growth. I myself have posted a similar thought relating to asset price increases in my post “Pyramid Valuation scheme”.

More recently, Japan has been a text book example of the opposite effect of demographics promoting economic prosperity. Japan does not have significant immigration of newer, younger workers, while at the same time the demographic has aged. Japan’s population is entering retirement in significant numbers, resulting in the population skewing to cost vs income. Japan, unfortunately, is entering into this period after pursuing for years Keynesian economics of burning through the countries life savings in an attempt to promote economic growth. ( The US has always done the same, but has only entered into extreme spending since 2008. )

The result for Japan is as their population shift creates an economic imbalance that cannot be possibly be supported by the number of retirees vs number of remaining workers occurs. Japan’s debt to GDP is about 250%. Meaning, if Japan’s economy produces X, the deficit is 2.5X. As anyone who looks at their own personal finances, it doesn’t take a math degree to see this trajectory is headed for Japan failing as a nation. The “good” news is, if Japan’s government collapses, the event solves the economic problem. The “bad” news is, the retiree’s quality of life will be destroyed, and the transition for the Japanese may be a violent one, resulting in a government that may not be democratic.

At the heart of the world economic issues lies this demographic problem. The US and Europe have a similar demographic wave now approaching the same problem. The US is ramping up deficit spending AHEAD of the financial crisis of the boomer retirees. In effect spending the countries life savings to try to maintain quality of life. Similar to Japan’s approach, this is assuring that when the baby boomers need Social Security, Health care, and other services that US WILL NOT be able to able to provide these benefits. Alternatives can be to deny payment of services. However, my economic pessimism comes into play here, where I do not see the strength of leadership to pass legislation to slash benefits of pensions and government services to the aging generation AHEAD of a financial crisis for the US government.

Combine this baseline economic driver, with dependency on China, foreign energy, illegal accounting methods prior to 2008 causing massive mis-allocation of resources, a perfect storm is a brewing.

The good news for the US, if you can call it good news, is other countries have problems that may be worse than the US. Europe has more fundamentally economic issues than the US in some aspects, resulting in the current crisis-of-the-week for their country members. Canada and Australia in 2011 will enter into a real estate crisis, driving a similar banking crisis that America has already entered. Further, China has engage in practice of burying its financial problems by diving into country wide real estate ponzi schemes, producing entire cities built that no one lives in. What we have here is global economic hot potato, where each country tries to make sure they don’t lead the world into the financial abyss.

But I digress. Back to point of Demographics as the underlying issue.

The world is headed towards for the first time in human history, to be a race that is contracting in population rather than expanding. It is debatable when the peak of human population will occur, 2030-2060. Counting which year it occurs missed the point. Since the dawn of organized governments, a shift is near. This shift is driven by the westerners producing less than 3 offspring per couple on average. China has a law making it illegal to have more than 1 child per couple, assuring their own demographic crisis sooner than expected. Only India has a health demographic promoting endless next generations of people to promote economic demand.

This global demographic peak will cause catastrophic economic results under our current economic system. Just about all aspects of asset based resources has depended on a ponzi-type scheme where the next generation is larger, and can absorb the previous generations debts and create demand for assets. (This is focused on number of PRODUCTIVE people vs social recipients or retirees) The mere fact that humans have never experienced a global downward shift in population growth should send loud alarm bells off that society is not prepared for this event.

Now that the problem is well defined, lets explore government re-actions.

Government Actions to mitigate the pending crisis

A key point to understand about all humans is that they answer a problem with what they know. Very few but talented people are able to answer a problem with information they do not know. Let me give an example: Let’s say I ask you to create a filing system for a doctor’s office. How would you do this?

Most would likely answer with buy filing cabinets, and some sort of paper indexing system. I’d propose an electronic system where the office would be paperless, using computer software. Yet other people may have different answers. I could write for pages on ways to solve what up-front seemed like a simple problem with a different answers.

However, the key for this discussion isn’t what the BEST solution is. The key is to understand that the person responsible for solving the problem chooses a solution they think of. Also, out of the solutions thought of, which is economically viable. These two factors, able to even think of a solution, and able to fund the solution drives to what the solution selected becomes.

This is a true problem in society, where the best solution is often not chosen due to lack of knowledge or short term economic affordability over long term economics. I witness this daily in every problem I observe. Luckily I work with some key people that are well skilled in answering technical solutions with what they DON’T know. It’s difficult, made easier by Google, and it’s the right approach.

Ben Bernanke of the US Federal Reserve bank is viewing all problems through the lens of a banker. Ben’s has approached the issues he sees by responding to the problem that many banks are insolvent. By Mr. Bernanke by buying debts at prices inflated by 50 to 75%, printing money and give it to banks at near zero interest rates, paying banks interest on money they deposit to fed (and originally given through purchases!) he has responded to the current problem. There are many other examples of Bernanke’s attempts to prop up the financial system. The problem I have with Mr. Bernanke is his lack of imagination, and he answers with what he knows. But his role in life isn’t to be imaginative. His role is to do EXCACTLY what he is doing. To be a tool of the banking establishment, and answer problems the way a banker would answer them. For this, I give Ben an A+++, he has done a superb job of answering the financial crisis with steps to push out a global banking failure. A tip of the hat Ben, for a job well done to meet your goals.

But these actions do not attack the heart of the problems, which include demographics. Demographics isn’t the only problem, but it is by far the lion share driving the crisis to a head. It is a race against time, until the baby boomers tip the western countries into insolvency. No amount of financial banking ponzi schemes can avoid this crisis. Ben can react to crisis, he can kick the can, he can even inflate money supply in an attempt to make paper assets look great. But a quick fix often leads to a quick fall. It is not a solution, and Ben’s own words prove this. When you listen to Mr. Bernanke, he talks of “to induce consumer spending, the goal it so make the consumer feel confident to spend more”. How does this solve anything long term? Shouldn’t economics be based upon growth of industry? Growing economic fundamentals? Technological innovation to drive productivity? The answer is simple, that’s all Ben can do, he answers with what he knows and is allowed to do.

So the problem isn’t Ben Bernanke directly. Ben, unknowingly is driving the crisis to much worse levels, by delaying reality and allowing leaders to avoid dealing with core issues facing society. After all, drastic steps do not need to be taken, all is great! Just look at the stock market. Ignore 9.6% official unemployment, upwards 16% true unemployment, and skyrocketing debt. True growth, according to Ben’s own words, is making people feel good. And soon, we can expect this to solve the demographic driver?!?

Obama has done similar with what he knows. He tried to pass legislation to attack the health care benefit cost problem that the baby boomers are bringing. If he had succeeded, the government could have forced doctors into debt slavery, to have them bear the cost of funding retirees health care. That combined with Social Security being indexed against inflation EXCLUDING energy and food, two of the biggest monthly cost for retirees, would have kicked the can further for the crisis the baby boomers bring to the government balance sheet. The problem of course, all of this is a band-aide. Obama, who is not a visionary of change, answers with what he and his staff know, legislation to kick the can. Again, I am not condemning Obama, he just lacks the capability to answer with what he doesn’t know. In short, he is not a visionary. Him and majority of congress answer with what they know, legislation in can-kicking.

There are many other actions being taking by various governments. From what I have read, the common theme is answering a problem with what they know, None are answering with what they don’t know.

What we know

Let’s look at the “what we know” as answers that could solve the problem, but no one wants.

Possible “what we do know” solutions

• Cut benefits, those who retire can live by kindness of others or work under duress until you die.
  NOTE: Wages would drop to minimum wage for lion share of retirees, due to too much demand for a job to live.
• Have a global event where the aged are permanently retired, possibly through disease. (h1n1 event?)
• Force the younger generations into debt slavery, raise taxes to 50-75% of income.
• Encourage people to have kids en mass now, and prepare those children for the workforce by as soon as possible, time is of the essence to serve your elders!
• A complex mix of all of the above.

Throw in one or two others you can think of. Perpetually increasing population through births has problems that make it not a viable option. Society cost of investment into child rearing at a time of financial duress, natural resource shortages caused larger population, and society willingness to bear more children.

Point is, all are painful events no one wants. The problem is hard, and a solution must be either painful or NEW!

What we don’t know.

This brings us to where I have hope, answering what is a global human race problem, demographics shift. Such a problem deserves to be thought of as solvable ONLY with what we don’t know. After all, this is a new problem in human history! Those who think pulling paper levers, re-architecting social ponzi schemes, are not thinking at the correct view level. This problem must be attacked at it’s heart, how can the demographic issue be mitigated.

The answer therefore does not lie in money, or can kicking.

To arrive at what we don’t know as a solution, first, we need to analyze the issues derived from the demographics. They are:

• Ability to work is directly correlated to physical health. So able to be a productive worker can be linked to age-related health issues.
• Willingness to work is often related to perception of lifespan. People work their entire lives dreaming of the day they can “retire” and take it easy. Most cannot be inspired to work hard at age 75, when they believe they are about to permanently retire. Lifespan effects willingness to work.
• Cost of health care unto society skyrockets with age. (related to ability to work)
• More workers than retirees - In essence, further kick the can by having more people producing than living off workers. Or alternately if possible construct demographics to be perpetually structured this way.

You may think of other problems retiree’s bring society, but from a financial perspective, I believe this captures the heart of the big problems.

I ran across an alternate solution on a podcast on Futures in BioTech. What if, we could extend people’s life expectancy? What if, instead of average death at 80, average death is 100, or 120?

What if, the diseases that come with age, are equally pushed down the chain, by 20 to 40 years? (News 5-22-12)
And given technology, if we can push the demographics out the new time given to society will likely bring yet the next innovation to kick the can further. (I find it disturbing that I find myself proposing a can-kicking solution, but more time will allow for the next solution.)

Think about it, if you knew with relative certainty, your lifespan would be on AVERAGE 100 in relative good health, working until 90 is not that crazy. Lets look at the “burden” of cost for each person’s unproductive years. Currently in USA, using average life expectancy rates.

Age 0-21, and 65-78, 34 years requiring support, with 44 years work. 56% productive.
Age 0-21 and 87-100, 34 years requiring support with 66 years of work. 66% productive.
This produces about 17.9% gain in productivity! That is absolutely huge!

And of course, if life expectancy can be increased to 120 years on average, the gains are unbelievable.

Now, how realistic is this? The genes have already been found and current research is underway right now to show how to increase lifespan in mice. I doubt these early trials will yield a solution, with lack of funding, many years of testing lies ahead to find the right solution. But if society targeted areas of what we don’t know to solve for the demographics issue, the solution would be found sooner.

Such advancement would delay cases of age related diabetes, cancer, dementia, and other diseases. Each human would have a longer period of higher quality life, extending the quality of life we have accomplished in the last 100 years through physical environment improvements.

In this case, I would expect people gladly having their life expectancy extended to 100 years, in exchange for working until late 80’s. The ultimate “what we know” is we want to live.

The demographic crisis or other core society problems need more answers with what “what we don’t know”. More brain power is needed to creatively propose solutions on addressing the underlying problems society faces and less to dissecting the unfolding of the global financial crisis like critics of a bad movie. Extending people’s lives is by no means the only answer, or proven possible and affordable. I encourage others to propose a creative solution that is realistically supportable by the will of the people. The financial crisis is a reflection of the underlying society structural problems; it is not the root cause.

I am a little skittish about the presenters credentials, but good speech.

Interesting video about overpopulation not at root to poverty, just the opposite.

UN projections for population growth

Video on extending human life

Canary in the Coal Mine - Japan?

Japan is much further along with demographic issues, and sovereign debt problems. Their debt level is 200% of GDP. The ONLY country with worse debt to GDP is Zimbabwe. And their currency hyperinflation was at 6.5 quindecillion novemdecillion percent in 2008, when that government gave up on their own currency. So Japan is right around the corner to having a WORSE debt to GDP ratio than Zimbabwe. Good luck Japan!

As a plus, the majority of Japan's debt is owed to themselves. So if their country implodes, most of the losses will be their baby boomer generation, not the world.

However, since their issues are leading the western countries, they have been quoted as the one to watch for the coming sovereign debt crisis ahead. Today, we have our first small rumble.

Japan Credit Rating Cut on Absence of Strategy to Curb Debt Levels.

What does this mean? Well at some point, if their credit rating gets cut far enough, we may have yet another Greece on our hands. And unlike Greece, Japan isn't part of a group of countries committed to save it. Of course, I fully expect western countries to come in and push themselves more into debt to stabilize Japan if it starts to have a interest rate problems with issuing new debt.

The problem is Japan has spent their life savings, and in return, they have 20 years of a depressed economy. And now, as their baby boomers need cash, there will be no capacity to borrow more. I fully expect Japan to implode over the next 10 years. Either having their debt rating cut forcing rates up, or their currency to collapse.

The big question is, does America have enough clout to remain stable at the record debt creation level it is on? I am guessing yes. I believe all the smaller countries will be kicked to the door to give America a longer lifeline on its debt. In effect sucking the extra bond money out of the entire system as each smaller country destabilizes.

In any event, as yesterdays post shows, this game must end, one way or another. I believe in the law of math, the rule of science, and not in fables spun by politicians of faerie tales, unicorns, and a never ending boom just around the corner as the human race heads towards a demographic peak.

Canary in the Coal Mine - Japan

My friend John said years ago that Japan is the Canary in the Coal mine to watch.   Japan's demographics and extreme deficit spending makes it worth while to watch.  They are in effect ahead of the US trajectory.

Unfortunately, I believe if Japan enters currency crisis, a vortex over the year following will take with it other countries not too far behind it. I am not predicting that Japan enters a crisis, (2014-15?) merely stating that if Japan hits a currency crisis, this will be the beginning of what I feared all the way back in March 2009. (about the bottom of the market)

The decision to transfer all risk from private to public, put the public financial system at risk.  Since money IS about trust (work done today, will be paid back tomorrow), once trust in the system hits a tipping point, it will get ugly.

Japan recently announced basically an all out currency war, pledging to break the yen.  While the yen is not yet broken, it has had a nice decline rather rapidly.  It has lost valuation, wiping out 2.5 years of gains in months.   If Yen reaches below 0.0083, in my mind, its game on for currency crisis.




Safe havens for a possible currency crisis are going to get severely slapped around.  As tensions mount, I expect safe havens to fall, not rise at first.   Even once the worst has past, the safe-heavens should remain under brutal assault throughout the currency crisis.  There is no free lunch, and no easy way out.  A currency crisis will shake the very foundation of everything, and bring on an era not seen since the 1930's.

The last great depression got started the same way, loosely speaking.   A huge credit bubble, credit burst, currency war, then depression and world war 2.  I obviously hope we will avoid WW 3, and at this time don't expect it.

I do have optimism overall.  I believe we are seeing a massive redistribution of capability starting, preparing for the new economy after the worst has past.  I am re-iterating my doom and gloom call for USD until 2015-2017 time period, more likely in 2017.

Gary of the Smart Money Tracker has more to say on this topic, recommend subscribing to his service.

Canary in Coal Mine - Japan

I have posted before that when Japan's economy becomes unmanageable, it will be the canary in the coal mine for the USA.   Sure Greece, Ireland, Spain, Portugal, Iceland, and others can be viewed as warnings.  But most of those countries have centuries of history of periodic economic resets.  Japan however is a different story, it is regarded as a conservative society and as the picture of stability.

So if Japan goes south, America better hear that message.

Yesterday Japan's Sovereign debt was downgraded

Fitch Ratings cut Japan's long-term foreign currency rating by two levels from AA to A plus, the fifth highest investment grade. It cut the more important local currency rating by one notch from AA minus to A plus. Both were given a negative outlook. - Reuters

Japan faces what most western countries face and China faces, a demographic nightmare.  See my post "Demographics is driver for economic growth", where I have a couple of odd suggestions on solutions.

There is a strong possibility the deal with China made in 2011 to buy US bonds directly was partially done to prolong America's ability to avoid a bond run.  However, I also believe that corruption never wins, and will delay the eventual same result.

Interesting times.

Japan's economic wall is hit

If you don't know about Japan's financial problems it is well worth reading sources from the net. Basically, Japan entered into a period where it's demographics is aging, resulting in an imbalance in the work force. America is facing the same problem (Baby boomer).

However Japan has financed its reckless financial policies the last 20 years with their retirement savings. Net result? On paper you have trillions of dollars in retirement savings, and on the other side trillions of dollars in government debt. There is not a "net" asset position here as a nation.

Things are finally going to get interesting in Japan, as their pension funds become sellers, rather than buyers, of Japanese debt. Its just a start. My prediction for Japan: The last 20 years will now be looked at as good years compared to the next 20 years.

Americas choice, corruption or law

When reading the links below, there is a theme, everywhere there is the smell...the stench...of entrenched corruption, or just plain old incompetence. I am actually pleased to see all of this, since it is finally getting SOME public attention. I'll be mildly optimistic when the rule of law is enforced, corruption is chased out of the system (well, 70% of it). Talk is cheap, we need ACTION, need rule of law. The choice is ours.

For companies that report earnings WITHOUT taking into account billions of money given to them, is outright misrepresenting the health of their companies. All of these companies should report ZERO earnings, until the taxpayer is 100% paid back. It's a farce that a company can have a reported profit after given 87 billion dollars. Heck, I'll open a hot dog stand, give me 1 million, I'll show a profit.

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It is refreshing to hear a law enforcement official state the obvious, and that is the US government is not doing their job. Click for full video talking to Elliot Spitzer, quote:

Spitzer said "Instead of having lunch with investment bankers, the SEC should start investigating them. The SEC and other regulators should not be given new tools to make the markets safe, they should begin using the tools they have."

Maybe Goldman Sachs Really Is a Giant Vampire Squid (video click), basically Paulson looked for guidance from GS CEO during 2008 crisis. There is no conflict of interest, so stop investigating, trust them already!

Of course, Jim Cramer believes that the US government looking for guidance from Goldman Sachs is good for the western world. (video click)

Forbes story on "Why You Can't Trust Those Jobs Figures", my spin, FINALLY some media attention on the magic behind the numbers. It is easier to cheat than to work on fixing root cause.

AIG logs first quarterly profit since 2007 - My spin, keep in mind AIG owes the US taxpayer over 87 BILLION (and that isn't counting the paper the FED has as "collateral" for loans...I suspect the collateral may be overstated by a tiny bit)

Freddie Mac announces 11 cents a share loss - My spin - US government has already sank 50 billion into Freddie in direct losses, once again, not counting collateral for loans given by the fed on paper I suspect has values over stated. The US government has 150 billion more lined up.

The Senate Ethics Committee said Senate Banking Committee Chairman Chris Dodd of Connecticut and fellow Democrat Kent Conrad of North Dakota didn’t violate ethics rules in refinancing their home mortgages with Countrywide Financial Corp. - My Spin - having special considerations for loans while representing the taxpayer to me is a conflict of interests, but what do I know?

Nasdaq, Bats to Stop Allowing Flash Orders for Stocks Sept 1st - My spin - if Flash orders are bad (ILLEGAL!) why not stop immediately?

Judge weighs in on BOA settlement with SEC on Merrill Lynch bonuses
A federal judge criticized on Monday a proposed settlement between the U.S. Securities and Exchange Commission and Bank of America Corp (BAC.N) over the payment of bonuses to Merrill Lynch & Co executives.

The largest U.S. bank agreed on August 3 to pay $33 million to resolve an SEC civil lawsuit accusing it of misleading shareholders by not disclosing it authorized the payment of up to $5.8 billion of bonuses to Merrill employees. About $3.6 billion was ultimately awarded and the bank did not admit wrongdoing.

Judge Jed Rakoff of the federal court in Manhattan put the settlement on hold, wanting to determine if it was fair to the public. - My spin, I'd be shocked if anything comes of this.


Other (non corrupt) News
Bank of England warns UK may face lost decade, similar to Japan - My spin , if England is lucky!
Japan's Future: "It's Going to Be Scary" - My Spin - Japan has had 2 "lost decades" in their financial institutions and stock markets. Japan refused to write down losses, which the US is following in footsteps. It is a pretty interesting future for Japan.......

Unprecedented Market Rally in History of US Stock Market

Monday the US stock market is breaking records for highest percentage gain without a significant correction unseen since the 1930's. For those of you not familiar with history, 1929 marked the worst stock market crash in modern US history, followed by the largest percentage rally in US history, followed by the Great Depression.

The stock markets have climbed higher today, but on low volumes. Two of the services I subscribe to, which I highly recommend, is The Elliot Wave International Financial Forecast & Gary of the Smart Money Tracker. What I find fascinating is two different respected market technicians I follow, Elliot Wave and Gary of the Smart Money Tracker have significant contradictions on the next market move. Gary in a recent post pretty much called charting ignorable, since the market will follow it's own trajectory. EWI has quite a lot to say about the current market retrace using charts.

For me, charting isn't a predictor (aka Gary), but it does serve to illustrate extreme situations, which puts context in historical, and therefore probability. But for anyone who has been burned at the Casino knows, the most improbable can happen when least expected.

This months Elliot Wave International issue of the Financial Forecast (Jan 2010) has much to say, Two charts I asked for reprint permission for my blog, and are presented below. I do believe has impact as it tells a startling story. The first graph compared the start of the Great Depression where the US stock market retraced 52.3% before its multi-year decline. The US stock market is over 53% retraced, surpassing the Great Depression rebound. That alone should be a warning sign that things are not normal.

But as Mish's Global Economic Trend Analysis points out, the more recent event of Japan shows it's stock market retraced 140% from it's low before it resumed its 2 decade devaluation which continues even today. As Karl of the Market Ticker points out, Japan is considering such drastic measures as to put the currency at risk, and by the Japanese central bank continuing to promote its 2 decade failed (and wrong headed) battle to turn the economy around through fiscal games. If anything Japan illustrates what the US will probably do, repeat the wrong headed policies until the implosion of the US dollar. Hopefully Japan beats the US to it, and the US wises up from that event.

But I digress. The important point is even with a failed economic policy, counter rallies can extend farther than anyone would expect.

Another chart from Elliot Wave shows in context from the .com bubble and now, illustrating events that mark a likely market top. This includes glorifying the Fed chairmen who brought the US financial disasters to our doorstep in the first place, investor confidence at all-time highs, these are all typically contrarian indicators.

So while all indicators are pointing to a massively over-valued US market, Japan shows we could have a long ways to go, as per Gary. Elliot wave is trying to pick the top, which I have personally experienced is a fools hobby. In any event, all of this should tell you, we are in abnormal times, and ensure you pick your pain points to change investments.

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Powerful Earthquake devastates Japan, Hawaii evacuation ordered

Powerful earthquake hits Japan, Hawaii evacuation ordered, other countries being hit by effects.

I really have zero clue how the markets react, I doubt the US market soars to new highs based upon this devastation. Japan is one of the largest holders of US bonds, the effect I have to imagine will be massive spending by Japan to rebuild in the years to come. I hate to think in these terms, but for investing, the effects must be thought of.

Because of such uncertainty, I put stop loss orders on many positions, for only 1/2 the position. I want to keep 1/2 as my core position. My rationale is risk of markets going lower is greater than soaring. But anything is possible.

Videos below of Japan. Let's hope American TV treats Japan with respect in the weeks to come, and not turn this into a 3 ring media circus. They will need much help, at a time when the US has thrown away it's capacity to borrow.

As I say this, here I go posting images. Ugh. Some videos below, and click here for a link of pictures as google records them.

Japan, generation of nuclear radiation and USD nuclear bomb?

Back when the Japan tragedy occurred, I posted about the event with videos and pontificated, quote:

Japan is one of the largest holders of US bonds, the effect I have to imagine will be massive spending by Japan to rebuild in the years to come. I hate to think in these terms, but for investing, the effects must be thought of.

Well, here comes Karl of the Market Ticker calling for the same thing, but expanding it as possibly the trigger for massive sell off of USD in the future. Seems like great (or just paranoid) minds think alike, video below.

But I wonder if this does come to pass will EVERYTHING collapse across the board? All resources too? Such a deflationary collapse may be like air being sucked out of a building on fire. Dare I say, this time around big money may be ready to go to Gold as a safe haven, a temporary one. For gold is NOT MONEY (in my opinion), but it may be the last man standing in a collapse of such magnitude that it has never been experienced.

I hope, and think odds are against it happening, but something will happen once Japan sells, and China may, if so inclined, kick the USA while it's down.

Market Crash?

Today's market decline seemed anti-climatic to me. Frankly, I didn't even care. It is amazing to see how watching the market as close as I have since 2006 has abused me so much, I view today just an anomaly.

The market may have bottomed today, positioned for a snap back rally. The S&P 500 may hit 1300, maybe even a little bit higher. But you only have to look at three historical records to have your own answer for what is in store over the years to come in the markets.

1) Watch my GUIDE about timing the market for long term traders. I myself foolishly ignored this indicator back in 2009. I respect it. I advise you do too. History has shown it to be best market indicator to follow. It is positioned for a market sell signal. Also look at Monday's warning shot.

2) Look at Japan's market history. Their markets have not advanced in 20 years. If you put money in the market in Japan 20 years ago, your still waiting to get back all your money. Japan followed "Keynesian Economists" to use paper and political games to fix their economy. America's demographics and problems are following Japan, and as such, Japan is a good indicator of our future success.

3) The market WILL NOT BOTTOM until the US government follows the steps I have quoted many times before. This includes returning the accounting standards to 1941-2008 standards. Fictional accounting does not work, it may make it legal for insolvent companies to remain operating, but it fixes nothing with the sickness within. Also government must enforce the law and get it's own fiscal house in order. NONE of this will happen without a crisis that will make 2008 seem like fun, unfortunately.

I still maintain the best long term investment is a mixture of fixed income (US debt) and key resources (gold, energy, rare earth metals, food). This will protect your savings from a deflationary collapse OR a currency crisis. Read here for a full reasoning of mixed investments.

I will be quick to lighten up on Gold with weakness, which may have started today. Once a panic passes, Gold will correct before resuming it's multi-year climb.

NOTE: Shorting the market will be a fools game, the final end game may be beginning. There will only be house rules. In 2008 there was bans on shorting, changing of accounting rules, government taking over companies, all sorts of games. This time around, the gloves will come off and the free capital markets will no longer be capitalism based by the time this is done.

If you have not done so, visit my new reader page and read.

Whats next?

 When the FED started to raise rates in March 2022.  At that time the Fed said it takes time , over 12 months before the effect of raising rates can cool down the economy.  The Fed raised incrementally rates from March 2022 to July 2023.  The overnight rate went from 0.25 to 5.5%

Since July 2023 the stock market has reached new highs and bond rates have actually fallen.  

The stock market had issues at the same time Japan had issues last Friday into this past Monday.
Now the market is calling for the Fed to cut.  Does anyone doubt the fed will cut if unemployment rises or the stock market destabilizes?

While its possible they don't cut, even the Fed set expectations they will in September.  What is the rate we are talking about?  Its the rate the Fed will pay some financial institutions to deposit their cash with the fed at a set annual rate on a nightly basis. 

Notice, this is NOT the 1/2/3/5/7 year, 10 year, 20 year, or 30 year US bond rate.  It is not car loan, credit card, or mortgage rates.    So a rate cut of the fed rate doesn't automatically cut borrowing costs.

It took 2 years from March 2022 first cut to have material inflation decline about March 2024.  Why do people think reducing rates by 0.25 or .5 from 5.5 to 5.0 will positively impact the economy quickly?

It can't because what the Fed rate does is influence financial institutions to seek gains from different financial activity instead of parking cash at the Fed.  When banks and other institutions change their investment strategy it takes TIME.

Therefore it isn't possible for a fed rate cut to 'save the economy'.  There are potential other events that will give a really good boost for a bit even if unemployment continues to rise.  But barring dramatic events, the dice is cast, the market has peaked.

Could we see a new high in the next couple of months, of course.  But when the Fed does cut rates, its them saying "we see the economy has taken a turn for the worse", and their action will start to help the real economy, in a year or two.

Now for other potential bad events, last week the reason the US market tanked was Japan had material challenges in their economy, including their stock market falling over 10% in a day, and the Yen appreciating dramatically.  This hurt US financial institutions using Japan as a "safe place to borrow money cheaply and use it to invest in USA or world".  A shift of rate hikes, Yen appreciation, and Japan market decline basically forced financial institution borrowers  to liquidate assets to have enough cash to cover the shift.

This is NOT the last major event, it is the first.  Think January 2008 when US market dislocated on a Monday.  Its a warning shot.

What to do? Secure assets in financial institutions that explicitly state FDIC insured up to 100K, or buy TLT ETF.  

When the Fed cuts, beware of long duration bonds as I expect markets to have long term rates rise in anticipation this next round of Fed Rate cuts will be followed by even higher hikes to tame inflation again.

If you can remain financially well of, I do expect investments of a lifetime available in 2026-2030 that will be the rocket ride of a lifetime with AI bringing in profits.

Good luck!

Gold about to break up, india continues to lighten resitrctions

Gold is set to break out to the upside finally this week.
I can't tell right now if it has, but as of Sunday night gold is moving up.
Lets take a look at a longer term Gold chart.

This is good for gold bugs, and if I can ignore the global economy, it in itself is not bad.
It is simply one resource going up, about to possibly break up changing a down trend to an up trend.
Nothing spectacular, but a time to be on the right side of a trade, if it can break out upwards.

Lets look at some other assets, like Oil

Oil has outright flatlined, which is fantastic for every american, and the western world.
The vast majority of this is from fracking, which is an environmental disaster, but has catapulted USA production. Unfortunately the half life of fracking is crazy short compared to normal oil wells.  Which means when all the easy fracking is done, the pressure should shoot oil up, sealing the deal on the next leg down.  I cant tell if thats next month, or 5 years from now, but it will happen.  Anyway in near term, nothing to see here.

Lets take a look at overall S&P 500.

Holly heck batman, thats a great run up,  Lets project forward this run, and see where this goes.

Now here is the rub, there is absolutely no reason why we CANT have the nice multi year rally in stocks for next 3 years, resulting in a 35% gain from here, at about 10% per year.

Really, I mean that, there is no reason why this can't happen or do even better!
But here is the rub, we have a few facts that causes concern.

1) USA and global banks are based on a debt based system.  Japan is by far leading in this debt.  Until Japan falls, the thought is America is OK.  Japan  is the canary in the coal mine.  Again, America could run into troubles BEFORE Jaapan, just conventional wisdom says Japan is first on the critical list.

2) USA investors are at a 27 year high for bullish outlook.  Again, there is no reason why we can't get to 100 year bullish outlook among investors. But a 27 year high on bullish outlook is starting to stretch the statistical envelope.
3) Jobs just simply....suck.  This is a strange one. I think in 20 years there will be 50% unemployment.  Sure there maybe many considered employed reducing this number, but many will be jobs the government 'creates' through BS work.  Think of person a digging a ditch, person b filling in a ditch, alternating days.  While this may seem like work, its really just non-vent work.  In immediate future, there is no denying, new jobs blow for average pay and overall full time employment.
4) Federal reserve bank chair has changed to Yeltsin.  Make no mistake, I think the fed will always ease money constraints to promote growth.  But Yeltsin is new, before her decade reign can begin, she may need to 'show toughness'.  The parabolic growth in stocks probably needs a good punch in the gut to show she means business.  Not long after that happens and she is reamed through the press, she will step in line with bernanke and resume the growth.  Bottom line is we have no clue if/how the fed changes, but we do know there is a new sheriff in town.
5) USD may be in trouble...but not yet!
The doom of USD has been in the air since nixon pulled off gold standard.  Its pretty easy to say that doom of USD is over-hyped.  But that's not to say USD can't have trouble ahead.  While ther is no clear direciton, USD is looking like at a cross roads soon.

What I can tell from facts above is gold is POSSIBLY about to break up.  The overall market is looking toppish, both from graph and from a new sheriff in town, yeltsin.

India is lifting restrictions on gold, I think that will pop gold up.
http://www.israelidiamond.co.il/english/News.aspx?boneID=918&objID=13954

Anything in marijuana stocks may explode up as USA starts to legalize drugs.  The stocks rallied and since crashed, may be a good time to buy some lottery tickets.
GRNH
MDBX
MJNA
HEMP
CBIS
TRTC
PHOT

I REALLY Do not like stocks like Priceline, Amazon, and a bunch of other stocks with a 4 year drive straight up here.  Proceed with caution.

this is shaping up to be an interesting week. Good luck to you.

Investor Dinner

Monday night, I met with 1 hedge fund guy, 1 professional self employed day trader, 2 professional day traders, me and my bro (we are the pity invites).

Unfortunately, there was no "invest in plastics" moment like The Graduate. There where various opinions on

• if we would rally with Obama announcements
  > Split decision on 1 day, 1 week, 1 month, 1 year rally on announcements
  
• What is the best investment vehicle "all things considered" (wow, GDX, imagine that)
  > Pretty much no dissent on GDX as one of the safer plays in next year or two
  
• What countries will implode (CORRECTION on order)
  Eastern block sovs (lithuania, latvia, poland, estonia, hungary, bulgaria, etc) , Ireland, Britain, Japan and others)
  > Few of us had the insight to contribute, but Japan was the shocker for me. Apparently the Yen has rallied hard AND Japan has seen the worst decline ever of any industrialized nation in a decline in a short period of time. Plays discussed where short Yen vs Canada or Yen vs USD
  
• The long term view of USA banks
  > Majority will be owned by US government, either outright or through "backdoor games" creating zombie banks, like Japan
  
• Several of us had bad things to say on Wells Fargo (note to self, buy long term lottery ticket puts)
  > Previous post I states WFC was insolvent, I should have shorted it when it was 32 and rode it to zero, for that matter ALL of my plays came true and then some in 5 months!
  
• Pretty much no direction on the new world financial power that emerges AFTER this is over with. (China/USA/other was topic)
• Everyone agreed that OIL in "long term" is a no-brainer, but no one had a strong opinion of OIL hits a low of 35, 30, or 25, bucks a barrel and when it recovers.
• And finally, some very entertaining stories on multi-millionaire stories
  

For the last bullet I have asked for the stories in email form, and I'll publish each of them. I count myself as lucky to have heard over the past decade countless people who have multi-millions from trading only to go bankrupt, to help keep me grounded into reality.

I am more torn than ever if an Obama rally will happen or an Obama spike then a sh*t the bed happens. As one of the guys said, if you look historically, every great decline has had a short term rally before rolling over. One thing I can say about the last year, I am hard pressed to say this has been a direct repeat of history.

Lehman Bailout announced, WaMu Next.

The Government is "arranging" (aka, paying/incentive-fying) a bailout of Lehman through a consortium. Having companies bailing each other out is following the blueprint to repeat Japan's 10 year recession. In the end it may avoid a depression, although Jim Cramer now thinks we risk one. If USA can avoid a depression, with all these actions it's sure to have a longer recession, hopefully not as long as Japan's 10 year recession. In any event, why the heck is the government "arranging" bailing Lehman out, when Lehman bonuses for 2007 was almost 6 BILLION dollars? Those execs should be smart enough to handle their own business. Perhaps if Lehman had paid 10 billion in bonuses, maybe they would have better management.

Next bail out is lining up, as Moody's has cut Washington Mutual credit rating cut to junk. The picture reflects my opinion of WaMu Execs trying to get millions in April 2008 with losses mouting over 1 billion, resulting in only 5 months later near bankruptcy for the company. I am not surprised of WaMu's issues, but I am shocked that Moody's cuts a rating of a company to junk BEFORE it fails! In another two years, Moody's may start cutting ratings ahead of the internet, stock price, and general consensus.
Maybe the execs at Leh and WaMu can spin it to get what they deserve for such good work.


Next rumblings is insurance industry, and I hope I'm wrong. Looks like AIG is leading the pack with cost of insuring their debt jumping 30%.

The growth industry in the US is to take a good company, do money shell games (fraud), award Billions in bonuses, walk away and have taxpayer cover the losses. Freddie Mac, Fannie Mae, IndyMac, Bear Stearns, Countrywide, Lehman, and WaMu execs can start a how-to seminar tour. Unfortunately, a shrinking industry is trusting America's financial stability and debt, as Japan is slowly joining the ranks of China and Russia in avoiding USA debt.
UPDATE 9/22/08, Lehman is bankrupt, and execs get 2.5 billion in bonuses.

Bailout comments

Bailout Rant
Back in August 2007, Bush said there would be "no bailout for pinched homeowners". At that time I told a friend of mine, that means they already decided to bail everyone out. Bush through his entire administration has always told blatant lies upfront. At least Bush is consistent.

Today Bush has asked for 700 Billion more, and to raise once again, the national budget deficit to 11.3 Trillion dollars. NOTE: This does NOT count the 6+ trillion dollars of FRE/FNM, since that isn't on the books as debt since "it will be paid' in the future.

I have had people question why isn't this good? Well for one thing look at the history of countries, any government that engages in socialist bailouts has not had a good run afterward. Japan's bank bailout in 1990 resulted in a 10+ year recession. (9/21/08, article comparing US to Japan) Between Thursday and Friday, the 13 year treasury note's interest rate went up by 1000%. Yes, you read that right, interest rates spiked 1000%.
But in fairness, the treasury note was unusually low going into Thursday since the financial world was crumbling, and the flight to safety meant the treasury note didn't need to pay any interest, it was the place to be in the collapse that was occurring. This illustrate how close the US was to a great depression type crash. Unfortunately, we may have changed trajectory as the US prints money, as I feared (and I wish I believed then) Thursday AM.

Also gold reacted with a spike of about 15% in just two days.

News still coming in, will try to write Sunday. BTW, some banks failed announced on Friday, Ameribank is one, but don't worry, the US printing presses are in overdrive.

So what does this all mean?
If the US government goes through, and at this point, I suspect they will, to bail everyone out in sight, we will have sealed the fate of this country to enduring a long recession, and have inched closer to an all out depression. Why? Cause there is no "free" way of getting out of debt. If the financial market makers are bailed out, it WILL manifest elsewhere. Interest rates likely to start rising as the USA bonds likely become downgraded from AAA. Our national 11+ trillion dollars in debt will quickly escalate and strangle/tie the governments hands. Taxes will be raised, job loss increased, and yes, more home owners will lose their houses. But the "good news" is the banks will be able to unload those houses to the government.

The US must pay for the debt incurred, and someone has to take the hit.

THIS IS STILL NOT A good time to buy financial stocks, or for that matter much else. What is a good time to buy is tax free federal bonds. Why tax free? in the year to come, higher taxes are almost guaranteed. The big question for Gold/Oil is will we still deflate before inflate. Jury is out, but if we follow Japan, still deflate first, which means Gold will go down. Consider a buy under 650, and a definite good purchase at under 500.

Shorting Stocks
On a different note, to clear up the banning of short selling. In China it is illegal to short sell. Chinese Shanghai stock market plunged over 65% in less than a year. When you don't allow shorting, stocks go higher than they should. When stocks collapse, they gain speed quicker since there was no counter balance in the market. Bank stocks soared Friday. Are they REALLY that good of a buy? Wachovia as an example, fair to say a "troubled" bank, their stock went from 10 bucks to a high of 24 on Friday. If your 401K mutual fund is buying at this price, does that give you confidence that it is a good buy?

Also notice, no one complained when the stocks became over-valued by leveraged speculation, but a witch hunt ensues when stocks are re-valued lower by shorting. Kinda like bookies only taking bets on the Giants, in a Giants-Jet game. When everyone is cheering for the same team, it may seem like a good bet, but it's hard to judge how good of a bet it is without an opposing force to gauge by. And to further put salt in the wound, Market Makers can STILL SHORT stocks. Kinda like the bookies allowing to bet on Jets only, but no one else.
If this situation was described as happening "in country XYZ", most people would comment stay away from there. Slap the USA in front and somehow it become legitimate. Time will tell.

Japans Economic Outlook

I have posted on this blog before, that Japan's economy has had severe issues for 20 years. There are two parts to root cause in my opinion. First and foremost is demographics. Japan's demographics turned sooner than America's, and could be used as a lesson. As Japan doesn't have significant immigration, combined with couples having only one or two children, has produced an economic death spiral.

This is quite a fluffy video with no indepth coverage, but it does highlight the general outlook

S and P 500 new highs

Monday December 28th, the S&P 500 hit new highs, 1,130.38, as well as some other market indexes. What amazes me, that it wasn't significantly higher. On December 26th, the US government announced that all losses, no matter how big, are 100% backed by the US government from private institutions Freddie Mac and Fannie Mae. By inference, the market can assume that this isn't the last no-hold-bar, we got your back maneuver, and that there is more to follow.

With a one-sided bet, all upside, and no downside now in the pocket of private large financial institutions, I expected a much higher blow off. The last week in December is so far extremely light on volume. I would not be surprised to see the S&P 500 hit a new high of about 1155 before this market finally turns.

However, make no mistake, these actions are sealing the US fate, if not the world to a horrible multi-year economic downturn, similar to Japan's lost 20 years trying to cover their debts through government intervention. Japan was a CREDITOR nation, and that country took similar steps to prevent their companies from taking huge losses through government intervention. The result was that stock market fell from 40,000 down to 7,000 to 20,000 range for 20 years, currently at 10,800. The US is a DEBTOR nation, and if in the next 10 years the US can muster it's currency from collapse, and keep market valuations higher than here, then that is a great feat.

So, yes, the market made new highs. But nothing is fixed. All that has happened is transferring risk from the private sector to the US government, and by inference, the solvency of the nation. This fixed nothing, and is a direct repeat of history from Japan to the US's own great depression.

The wall that the world will hit, is the US bond rates. That is already happening as 30 year bond rates are creaping higher. There will come a point where mortgage rates will rise enough to further crush housing prices. And the government will have to choose, the stock market or the housing & debt market. To me the choice is clear, tank the stock market and save the debt market.

But one thing 2009 has taught me, stupidity runs no bounds, and the choice may be to crush the housing and debt market, and throw this country into a GREATER depression in an effort to keep the stock market valuations higher.

Happy Holidays, the multi-millionaires got their bonuses, and trillions in government handouts, what will be left for the pension funds, retirees is going to be coal in a few years.

Japan announces it is NOT dumping US Treasuries

There was a rumor flying around today after hours that Japan was going to start selling US treasuries. Of course, no one will get prosecuted for market manipulation, but that's a different post.

In any event Japan clears the air there is no plans to sell us treasuries.
This news should help support a stronger US dollar, which at end of day Thursday started to gain strength again.

The chart to watch is the long term bear trend line, which remains in-tact. I am out of gold miners (maybe 2% in), long nothing, short everything. But quick to cover if we break out above the line. See chart below. And good luck.

From WebSufinMurfs FinancialBlog2

USD Dollar heading lower?

My main concerns since 2008 hasn't been stock market valuations, but rather valuation of USD, interest rates for US long term bonds, and valuation of commodities relative to USD.

2011, we have seen several arab countries fall, and unrest increase in oil producers such as Iran and Saudi Arabia. Japan has been severely injured, calling into question their future GDP as a percent of global GDP, changing the economic landscape.
Japan has significant US Treasury holdings, and I am concerned as part of the rebuild in the years to come, they will accelerate their US Bond selling.

Today, the USD is at a crossroads, if it breaks down further, there is no chart resistance (historical level of valuation) except at the all time low set a couple years back at 74.

Once we break through 74, in my mind, the USD is NOT a good storage of wealth. I do have hope that the USD will break 74 and make a huge comeback. But as a friend once told me, best not put yourself in an investment position "hoping for a comeback".

Recently all commodity prices have come down. Gold did, but just barely, it is already firming up chart wise.

Here is the chart of USD valuation against a basket of other fiat currencies.
Notice, a breakdown from here will likely accelerate down to 74 quite quickly (chart wise). If we reach there, thats when I'll be panicking about USD, and holding tight my resource positions.

From WebSufinMurfs FinancialBlog2

Japanese Nuclear Reactor update via CNN

Click on link below to watch a video well worth watching to see how close Japan was to losing a large part of the nation.

Japan was very close to 3 Chernobyls.

Quote "Japanese children will be exposed to 20 times radiation than typical nuclear workers are exposed to."

Japanese PM's Assistant Quit Because He Didn't Want His Children Exposed To More Radiation

And worse yet, the reaction can re-escalate at any time!

This is a GREAT example of how the media hypes up news not worth the hype, and plays down news that deserve's higher critique and hype.

Thanks to Ryan for link.