This blog entry will be updated as needed, to revise my view of the US economy and the world economy. You will see text colored (blue). Click on these words to see a blog post or other material to provide detail of the basis of my view. This blog entry will be linked at the top of my blog for future new readers. If you are new to my blog, this post will help get you up to speed to better follow my current entries.
Welcome to my blog, my name is Mike Murphy, a Computer Consultant/Programmer turned arm-chair financial blogger, with help from other bloggers and friends (John Chinnock). The goal of this blog is to serve two purposes, one is to help me continually focus and articulate current thoughts of the Financial Market & US economy for my own trading. A second is to hopefully help those who know me to safeguard their savings from buy and hold mentality in this historic economic problems the US faces.
Recommended Economic Primers
My View of Economic forces
I am writing a series of articles on Monetary and Economic terms and views, click here to read this series to gain my perspective of economic concepts, starting with "What is Money?".
Video of various economic forces the world faces
This video series gives a great synopsis of many global and US economic issues. It is a MUST for anyone new to this blog. This video was created by Chris Martenson, a pay-for-blogger. CLICK HERE TO WATCH THIS GREAT VIDEO SERIES.
Short take
The US Stock market and the US economy will see substantial pressure from a massive deflationary collapse that will not end until the US government enforces honest accounting and loses by US banks are realized. Current target for S&P500 and DJIA for a "bottom" is 550/5000 respectively or lower. The US economy will be in a recession/depression that will span 5 to 10 years from the initial downturn in Dec 2007.
During the economic turmoil storage of wealth in stocks, bonds, cash, real estate, or natural resources (gold) all involve risk. In my opinion, physical gold/silver or natural resource based companies such as gold/silver miners are "safer" investments than most others in the time frame between 2009-2012+. A MUST read for new users is this blog entry (click) on buy and hold as a bad strategy.
Therefore I strongly advise against keeping money in general stock funds, better off in US short term treasury notes (cash), and/or natural resource based investments. There will come a time where US cash will have turmoil (devaluation). However this is likely to happen after 2010, but it could be triggered at any moment due to US government actions. Please read the next section, my verbose view, to better support this view.
7/26/09 - Please read this entry from friend "John Chinnock"
Verbose View
My journey
In August 2006, while talking to a friend, John Chinnock (AKA Happy John), I came to realize the world was facing a financial collapse of historic proportions. At that time I bought 1 stock a year, and my 401K was in who the heck knows funds. I tried to warn others, and to personally get more involved in my own investing. In January 2008, and I emailed friends/family on a rather accurate long term market investment indicator that screamed "get out of the stock market". In August 2008, I started this blog to "shout from the rooftops" of what seemed to be a pending market collapse, using this blog for friends/family communication. Starting in November 2008, I shifted away from shorting financial companies into heavier concentration into natural resource companies, specifically gold/silver miners. My new goal is wealth preservation (gold/silver miner plays) with secondary investments in higher risk items, such as my series on stock plays, and lottery tickets. The primary (but not all) of my stock plays can be found by clicking on a link on the right WebSurfinMurfs Stock plays.
7/26/09 - Please read this entry from friend John Chinnock
Where US (and the world) went wrong
What we are witnessing unfold before our eyes is the deleveraging of INSANE amount of money/investment leverage that was allowed during the last 10+ years.
The leveraging was done at all levels, citizen, corporations, states, and the US with debt represented as an asset. (Click for good video on current leveraging as of 7/18/09)
Much of the over-leveraging was "pulling forward" demand (demand today, pay tomorrow) for profit taking today.
Over leveraging accelerated with the repeal of Glass-Steagall act from 1930, designed specifically to prevent banks from taking part in high risk investments. Unfortunately, America created a new "investment vehicle" called Mortgage Backed Securities. Normal investments are valued at what others pay for it, called Mark to Market accounting. For example, a 2 year old Honda Element car may be valued at $9,500 because that is what people will pay to purchase it. Mortgage Backed Securities are NOT valued by what they are worth on the open market. They are valued by a "computer model". Basically, the banks can state their worth without proving it. This worked until the MBS where losing money instead of gaining, uncovering the reality behind the curtain. To this day (7/18/09) the US and the world refuses to value MBS and other securities according to their true value.
This has created distrust and prevents normal lending. The problem ISN'T banks won't lend as much as they used to back in 2007. The problem is that banks can't tell WHO is fiscally sound to lend to or they actually now have some standards (where they didn't before). Politicians are trying to force the banks to lend, which will only repeat the act of debt faulting and causing more banks to fail. This fraudulent accounting was expanded, in April 2009 existing FASB rules on Mark to Market accounting where SUSPENDED, expanding the fiscal fantasy beyond MBS to the entire banking system, creating a second equity bubble starting immediately.
A secondary problem is "Credit Default Swaps". Credit Default swaps is basically Company A "insuring" Company B for potential risk (fiscal loss) for a premium. This is an INSURANCE POLICY. But banks have worked with politicians to classify CDS as NOT insurance polices. By doing so, CDS contracts can be written with NO regulation on risk taken, or even the ability to PAY if the policy becomes activated! This is what AIG faced, large losses from CDS contracts they wrote that required payment. Also, many companies still write HUGE CDS contracts "assuming" they won't fail, so they can take the premiums today as profit. If they are wrong, AIG is small time stuff compared to a CDS market collapse. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product!
Both the above issues, combine with the issue that the US does not follow international accounting standards and is falsely representing valuations of corporations by not valuing "debt" properly. (level 3 assets) Until the US achieves honest accounting and proper valuation for debt, and enforces CDS contracts to follow similar risk-management as insurance policies, the world economy cannot return to normalcy.
Is the US in a Depression?
Click here for detailed article, but in a nutshell, the US economy has been in a downturn since 2000.
Housing and Real Estate
The housing market was pumped up through outright fraud through bank lending practices. The hyper-lending atmosphere where someone could get a $600,000 no money down loan, WITHOUT proving employment fueled the bubble. Unfortunately, fraudulent lending of mortgages continues in 2009, preventing housing from attaining a normal value, and further perpetuating the financial problems. Unfortunately, the news focused on sub-prime, and stated it would be contained, but they lied. The next wave, prime mortgages, is shaping up to be worse than subprime starting in 2009. The housing market will continue to decline for years, and should flat line in 3 years or so from now.
US Banks
Many large US Banks are taking losses from MBS investments, CDS, residential, and soon commercial real estate investments. Hundreds of US banks will
fail in 2009/2010, as of 7/16/09, about 120 US banks have imploded since 2007. ONLY 22 banks failed between 2001-2006!
Unfortunately, the FDIC does not have the money to cover bank accounts. However I believe the US government will cover "at any expense" personal accounts, so I am not panicking about safety of US bank accounts (under 250K per couple per bank). Further, banks refuse to sell foreclosed houses, since the price they would get would trigger write-offs. Therefore many banks are solvent on paper, but insolvent based on true value of assets.
MORE to come
This entry will take me days/weeks to complete all my thoughts. Other topics I will cover:
China/US and long term view (10+ year)
Natural Resources as an investment (wait for lower prices)
Risk of US dollar collapsing, due to US government monetizing of debt.
Buy and hold for stock market investing does not work!
Unemployment is much worse than reported, over 10 million out of work.
Blogs to read, Overall large market view (50+ year)
Inflation in terms of gold valuation vs stock market
General advice where to invest and risks associated.
What blogs to read for your own opinions to form.
What needs to be done to rectify the US financial problems.
Explanation of links on my blog located at the right of the page.
And I am sure a few more topics. :)
NOTE: I will post on my blog when this entry post is "done", to allow regular readers to check back. Please feel free to add your own comments to help improve this page.
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