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.
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.
From various angles I have covered why I believe that all is NOT well, and that the worst is ahead, and not behind us, from the 2008 crisis.
The root causes of the 2008 have been completely ignored, as we move full steam ahead in an attempt to prop up balance sheets through "new accounting rules" that promote better earnings. All the trickery used gives the illusion that economically things are better, but valuations in stocks, interest rates, etc, do not indicate the component where rules have changed that drive those prices.
In effect, I believe The Federal Reserve Bank, and others are 100% responsible for the next crisis, due to their attempts to make things look better, in a vein attempt that my "making people feel better" they will purchase more, and we will enter into a wonderful new 40 year boom.
I am not a believer.
I ran across this video, "Are Humans Smarter than Yeast?", that does a fantastic job of explaining how exponential math works, and how all exponential system result in some sort of a wall, or failure.
The video is a little rough, the narrator voice isn't the best. Focus on the content, and understand, it is not possible to have exponential growth indefinitely.
Without knowing the details of every economic model, every facet of economic theory, this basic mathematical principle should give pause for thought.
However, this does not prove that our over-reach to perpetuate infinite exponential growth will fail tomorrow or in 2 years. The point is, the actions today are not focused on bringing economic systems back to reality, instead, the actions are focused on "extend and pretend" to continually show the same growth rate as before.
This goal is mathematically impossible. The result will either be a worse than 2008 (over time) collapse OR a collapse in the USD valuation, which will result in the same real term valuation being realized, by changing the valuation of the measuring stick, the dollar. For the underlying exponential growth cannot be sustained, and the laws of mathematics will force the reality upon us in some way.
I have added this to my "Financial Ground Zero" Series, as it does a good job of explaining how the insanity being pursued by the financial players will not end well.
For centuries money was based on gold, and some civilizations successfully used fiat currencies for a while. However each form of money has failed to serve man’s purpose over centuries. This is because each form has flaws, and each is not a pure form of money.
Please refer back to my post on “what is money” to understand my position of money in detail. In essence money represents a debt. For example, I give you a bushel of corn I grew; you give me an IOU, and may give back the IOU to make me shoes when I need them.
For sake of argument, there is no difference between a US dollar and “credit”. Both represent the same thing, a debt owed for work done.
The problem with fiat currencies is abuse of the system. It is easier to produce no work, and just create money to get work. This has been the downfall for all fiat currencies throughout time. I recommend you watch the video on my post “Niall Ferguson: Empires on the Edge of Chaos” on to how this manifests.
The problem with Gold is, it doesn’t represent work done and a debt owed. It represents a physical material that it has value as a material. Therefore new work done cannot be symbolized in the form of money, without waiting for some miner to dig it out of the ground, manufacture it, and distribute through the banking system to my account.
In essence, the society can be only as prosperous as the mining production to generate credits for “new work”. In some cases of work, such as I mow your lawn, then you shovel my driveway create a wash, but the gold coin still must pass along the economy, and is required to do another activity.
And at any point, since the gold does represent physical value for material in jewelry or other uses, people can simply melt coins to be used for their business and sell for a higher amount of gold coins in return. Or worse yet, the rich accumulate the coins, removing them from the system, creating money shortages for the less wealthy, causing severe depressions and economic hardships on the have-nots.
The whole idea of gold as money outrages me that people cannot think of money in its purest form. It is suppose to be a guaranteed bond, akin to signing a contract, which work performed can be used to get work in return. It is universal, meaning the person who gives you the currency doesn’t have to be the same person you give it back to.
The problem comes in that individuals, companies, states, or governments would rather just make new money than create work to back the new debt created. This perversion of not having money represent work done and work owed is what we are witnessing by the actions of the Federal Reserve Bank. Ben Bernanke, in effect, is trying to show the world, that US does not have to honor repayment with new work, it can repay with sleight of hand and new paper IOU that will never get repaid with work. It is a dangerous game, which has shown throughout history to typically end with the loss in faith in the currency and destruction of the government’s ability to operate. ** UPDATE ON THIS VIEW, "Bernanke Villain or Hero"
I am more concerned over Ben Bernanke than Osama bin Laden. Americans are aware of the dangers that the concept that Laden and others promote. To kill thy enemy at any cost, with most impact possible given the resources at hand. While Mr. Bernanke is put on the covers of magazines as man of the year and he himself takes credit for taking actions to “make people feel better so they spend more”. In that single statement, admitting, that he has not taken fundamental actions to make the situation improved. Unless you consider feelings as equal as a promise kept and law enforced.
Current Money Summary
Currently, there is two views of money, Fiat and gold based. Both also can have credit issues against them, generating their own form of new money. In both cases they have weaknesses. One for abuse and the other for holding back prosperity of the people. I recommend watching the video “Secret of Oz” for more on this background.
New money attributes
Once again, the problem is societies knee-jerk reaction is to answer with what you know. By choosing past money systems that have repeatedly failed in history, we guarantee the money system will fail again. What is needed is an improved form of currency. One that can do the following.
Enforces that work done is repaid with work done. If work isn’t repaid, that money is lost, and the impact is against the person or company that FAILED to repay the work. They take the hit.
New Money can be created literally out of thin air. All that is required is you perform work, and someone else receives the work. The one receiving the work now has a debt in life that must be repaid. This of course, is called credit. When you have no money, but need to create money out of thin air.
Amount of credit given to an individual is finite, determined by an open market competing for your business. For example, if GM needs more money, it can obtain credit from the market place (creditors) at a rate of interest determined by the market place. A free form of pure capitalism is required, and transparency into the applicant’s finances is crucial for this to work.
No one entity can create new money outside of the process. There is no grand puba called Federal Reserve Bank Chairman that can bequeath new money unto the minions of society. A fair system for all to ensure that work done will be paid back with work done.
Money can be freely transferable to anyone the possessor dictates. This transfer is automatically subject to taxation, with no exceptions. Perhaps a 1% flat tax across all of societies work effort. The tax is to ensure the business environment is concussive for work. This will provide incentive for governments to improve work conditions, as it will generate more tax through more business being done. The government carrot is in effect, like the profit of McDonald's. More business done = more income.
The system is secure, provides transparent accounting, and is governed by an open board. All work done by the board to propose changes to the system (refinement) must be done on a public web site, subject to public voting and public approval of EXACT changes being instituted. All new rules subject to 12 month revocation period by the same public voting system.
I have a slightly slanted vision, based on what I know, computer systems.
What I envision of course is a computerized marketplace where all money is stored electronically. It may in fact be a global currency. However, I am NOT in favor of a global currency, as such the risk of global failure due to corruption is too high. Instead I think what is required is to allow any company to create a system, using open review and process, to be a viable storage of wealth.
Electronic Money
For example, EBAY could create it’s own form of money, and then interface it’s money using a “currency exchange rate” to Amazon. Only in the spirit of private competition coupled with mandated open transparency can result in an evolving framework that will result in an optimal system. Over time, the currency systems that are found to be the most trustworthy will rise to the top.
Let the marketplace of ideas and private enterprise provides a solution. One of the solutions of course, I would expect would the equity exchanges, future markets, and other financial systems. The monetary rate of exchange between systems must be an open, market place where rates are found in a capitalistic fashion. No backroom deals to gain unfair market advantage.
Alternately, a single entity could be created by each country, separate from the government. But I suspect the same human tendencies to corrupt would creep into the system, as always happens with a monopoly.
You may be surprised to learn, that this is already occurring, in a form of new money through a web site called listia. They provide trading of goods without money. But they have a form of credits to help even out the valuation differences of exchanges. I think this system is just a small example of how this would work, but what is also needed is strong transparency, strict financial accounting, and public review of refinement to gain and maintain trust.
With such a system, the goal of allowing new money to come into the system can be accomplished with credit, objects, or services performed, allowing the economy to grow. It also enforces that no one entity can create money at will, that the same process is used for all. That governments or private banking cartels do not have a monopoly access to money creation. This practice is what introduces abuse, currency collapse, high inflation, or just plain old lawlessness and fraud. Unfortunately I doubt my vision will happen in my lifetime. People will try all they know to stick with “what they know” and not dive into “what they don’t know”. For now, it will be Fiat currencies and asset-backed money, both issuing pain upon mankind until demands for a new system emerges.
Such a system could be tested at first in different sites, organically growing as weaknesses are exposed, correct, improve, repeat until a tight, fraud resistant system is established.
Back to RealityI suspect if there is a US currency crisis, the solution will be a new global currency, ripe for same abuses. Or a basket of currencies that represents the single currency, gold, etc. There are multiple reasons, first, people answer crisis with what they know. Second, those who have control of money supply of course, want to keep that control. So the evolution into a new, better system is likely to be a pipe dream that may become a reality long after I am dead. In the mean time people can experience the error prone road of reverting to failed systems in an attempt to fix the prior broken system. And only after other refined broken models are proved flawed and discarded, with a new one be sought.
I have learned my lesson about shorting, its for truly brave, stupid, or lucky. When the world wants stocks to go up always, its tough to bet against the world.
One of the rare shorts I have left, and my biggest, (no not DECK!) is BWLD. Recently it has been giving me love, something I haven't gotten from a short in years!
But it is at an interesting chart support level. If it hits say...40 bucks a share, pretty good chance it will take the express to 35, if not lower.
See chart below. This is not a recommendation to buy or short, just a chart observation for the brave, stupid, or lucky. :)
I am not going to bother with the usual line up with charts. Frankly, not much has changed since last week.
I am however going to focus on the S&P 500. Specifically, the market looks to me overstretched on the up side, and pending for a pullback. Fat chance I get short anything, since shorting in this game is a fools hobby. Instead I am waiting for a pullback that is far enough to re-load on natural resources.
However, as reported by CNBC, the Federal Reserve Bank has sneaked in an important accounting rule change, that puts the taxpayer on the hook for all losses it incurs. In effect, the private (it is not a federal government agency) can no longer go bankrupt, and may spend money, make purchases, and back bank assets without fear.
As for this change being unconstitutional, well, the constitution only matters if the law is enforced. In this case, I doubt this will be challenged and the constitution upheld. For the Federal Reserve Bank is stepping into the marketplace to prop up the US financial situation.
This is a huge blow for those who point to the US dollar as being a world reserve currency, and therefore cannot implode. The keys for the currency valuation have been given to a private banking organization. Therefore, we are in new territory. Once cannot look at the history of American currency since 1913 as a guide.
For more commentary, I highly recommend everyone read other bloggers, more verbose and detailed than myself. I have provided links below.
This event goes into my Financial Ground Zero series, as I highlight events that will eventually likely result in USA financial collapse.
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.
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.
But in an economy that has 9.5% official unemployment, and 15%+ unofficial, having food prices rise is directly opposite of what classic deflation-ists say can happen.
Americas desire to avoid pain by printing trillions of dollars and flooding the world with US cash is a big contributor to accelerating food problems couple that with food production issues. Ben Bernanke, is in fact exporting death across the world. Luckily for me living in the USA, it has helped me maintain my lifestyle. But that isn't the point, this will not resolve well. We are going down a very nasty path, and its full steam ahead.
Marc Faber explains why as resource prices increase, western countries should fare better then developing nations. I think this spells disaster for international co-operation in the years to come.
On January 5th, I posted about the intent of the Futures Trading Commission to clamp down on large positions in futures. That event will take months to come into effect. I stated that any regression of commodities due to this action would be temporary, and that speculation is not the root of commodity price jumps over the long haul. Speculation price spikes can only happen in a market where the spread between production and demand is tight.
Recently commodity prices has been falling, and Thursday we know why. Comex today raised margins requirements for gold and silver by 6%, along with some other commodities. The recent price declines I suspect was big money with the inside scoop lightening positions to avoid the required sell off to meet margin requirements.
Of course, I am wrong, since that would be illegal for insider trading information on government regulation changes......
In any event it will be interesting to see what this, and future steps will do to commodity prices. But make no mistake we are in a commodity bubble run, being fueled by all the loose money finding a "home" in commodities.
I am basically waiting for Gary of the smart money tracker to give a green light for gold and silver for me to reload.
The World Economic Forum (WEF) is a Geneva-based non-profit foundation best known for its annual meeting in Davos, Switzerland, which brings together top business leaders, international political leaders, selected intellectuals and journalists to discuss the most pressing issues facing the world, including health and the environment. (quoted from Wikipedia)
I try not to dismiss any group that puts a large effort into "neutral" analysis. So the WEF releasing a report is worth looking at. I have included the most disturbing image in the report about the USA.
Please see their report embedded below the image.
One other disturbing message is "Global credit stock doubled from $57 trillion to $109 trillion in just 10 years (from 2000 to 2010), it will need to double again to an incredible $210 trillion by 2020 in order to provide the necessary credit-driven growth.".
Whoo-ha. Thats a nice trajectory. Even if that does happen, can it be sustained? Anyway, read more if you have the time.
China, as it has been well documented on this blog, has been hyper-inflating it's economy by plowing money into real estate development. The unbelievable bubble they are building has resulted in entire cities being built without anyone living in them.
China's own reports of economic data is alway suspect, and skewed to place it's financial situation in the best light possible. If China would only realize the best way to replace America as a world power ISN'T to act more reckless than the USA, but instead to act more trustworthy.
Alas, lucky for me as an American citizen, China is proving that they are less responsible.
But with China's great economic success, it is also accompanied by great excesses and mis-investment. One can only guess the spectacle that will start to unfold if China starts to realize 1.5 trillion in US dollar terms losses by local governments. Will China join in with the European Central bank in raw printing to fund local government losses?
And if it does, it will be one hell of a deflationary collapse, or a currency collapse, it remains to be seen how this unfolds. I don't know why people bother reading suspense novels, just reading the world economic news provides more intrigue than any novel.
The US dollar will keep enjoying some strength, as it proves itself to be not as bad as others. The Federal Reserve Bank has come close to raw printing of money. All money in the USA to-date has been created on the backs of selling US bonds. In effect, every dollar created has an interest rate attached to it, and therefore every dollar created creates a long term drag on US debt.
However, this arrangement is considered a sounder approach than just simply creating money, with no marketplace to counter such actions. The bond market in effect is the counter to the US over-doing money creation, as rates will rise if perception is the US shouldn't be creating more dollars.
For currency is based upon faith that the currency itself will retain value. By allowing Ireland to circumvent the established process of the European Union itself to create money, they are showing wrecklessness beyond America.
How far the Europeans have fallen, since 2008 when they criticized America for it's "quantitative easing" and other acts that are also a challenge to the US dollar valuation.
It looks like the European union has just lowered the bar to the next level. If the Euro can withstand continued raw printing of currency without a crisis in the years to come, I'd expect more countries to follow.
After all, raw printing of money vs money backed by bonds vs money back by gold vs money backed by sea-shells is all a construct. No one really knows the effect these actions will have on the Euro.
One thing is for sure, it is an indicator that a full out European crisis is a brewing to allow these actions.
I put this on my Financial Ground Zero events. Even if this isn't a direct American crisis act, it is an important moment in world currency.
Notice that this event will get zero press in the mass media. It is amazing how when governments publicly violate their own laws, it doesn't even get a mention.
I am back from a business trip. I had some time to make some seriously large posts, that I hope to publish this week. For now, lets look at the charts.
Really, the charts don't show any problems at all with the market, except that it is over-stretched up. In reality, all the problems that existed since 2008 are still present, just hidden from view.
However a closer look we find municipal bonds are tanking, just as the market his hitting new highs.
And for this reason, a severe decline from here is definitely in the cards. Various bloggers I follow give technical reasons why a fall is pending. Please put stop loss orders in at some level to protect position gains.
This week, I may not be able to post as frequently as I would like. If I can make time, I'll post "this week in charts".
By now, I have to sound like chicken little, with caution message. There are some interesting times in 2011 ahead. Some highlights that I see are big drivers.
Resource prices have run up in 2010, but retail prices have not. This will cause margin compression on companies, affecting their profit reports.
The government election will bring some significant postering changes. I expect some blow-hard politics in Washington, but my prediction is they do nothing of substance to change the basics. Financial accounting that is dishonest (as per rules existing from 1940s to 2008) avoiding mark to market accounting. Also I doubt they actually reform the financial sector. But the proposed changes may cause market volatility.
As I already posted, there are proposals to change the futures market in an attempt to pull in resource prices. Actual change in rules, which I do believe will occur, will result in market shifting. I expect in this case the "inside" will know before we do if the will of the government exists to implement change. They will front run the announcement.
Europe's problems may be good for US dollar valuation, but can't be good for economic outlooks. Dislocations in bond markets for various countries will cause ripple effects.
Various US states and cities are now talking bankruptcy in 2011. Any one of these if it gains steam can cause municipal bond issues, which will ripple.
The market has had a FANTASTIC run from 2009, from SPX 666 to a high of 1276.83, almost 92% market gain in 22 months. Pretty freaking great. We could see 150% gains from bottom to top. But it does smell toppish. However, I have sang this song before. :)
The US 30 year bond yield is dancing at the higher end, right now about 4.5%, a break above 5% would cause issues.
China is deliberately popping their own bubble, due to outrageous inflation issues. China now being the #2 economy in the world, deliberately slowing their economy is likely to have ripple effects.
The market could really go a bit higher before turning. I am done with trying to catch tops or bottoms. But it is safe to say, that banking on an extended market run higher, is getting a little long in the tooth.
I am net long in resources. In financial companies some very minor shorts, another great sign that a fall is approaching. :)
Paul Volcker is the last Federal Reserve Board Chairman I believe acted responsibly in his position. He has been a voice of reason in an insane financial world.
I hope he chooses to continue to voice his opinion publicly, and speaking out when appropriate. However I suspect we will hear less from Mr. Volcker now that he is leaving the white house, out of respect for the government.
The US is the world reserve currency, and therefore Mr. Volcker's departure is a loss not only for America, but for the world. Speculation of his replacement are Yale University's Richard Levin and Jim Owens, who retired in October as chairman of Caterpillar Inc..
With all due respect to both men, Volcker's proven banking leadership, breadth and depth of experience are a far cry from Mr. Volcker. I hope they can prove they are up to the task of filling his shoes.
What a way to start the year. Already sounding the alarm that food prices are rising, and will continue to rise. Looks like this 2011 prediction is already on track.
And what people are mis-understanding this isn't due to money printing, inflation, deflation, or speculators as the CTFC want you to believe.
The cause is what I predicted back in December of 2008, and we will see for the rest of our lives. Continued rise in food and energy costs as China and India economies grow. Click to read my December 2008 full article.
Once again, why I recommend food, energy, and resources as investments.
I strongly recommend a blog article I found that does a pretty darn good job summarizing the world financial mess the US is in. I am adding a link in my new readers area to this summary. I also added The Burning Platform blog on my list of blogs on the right.
Ben Bernanke’s quantitative easing (dropping dollars from helicopters) is riddled with Catch-22 implications. Bernanke revealed his plan in his 2002 speech about deflation:
“The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”
The expectations of most when reading Ben’s words were that his helicopters would drop the dollars across America. What he has done is load up his helicopters with trillions of dollars and circled above Wall Street for two years continuously dropping his load. Bernanke’s quantitative easing, which will triple the Fed’s balance sheet by June of 2011, began in earnest in early 2009. The price for a gallon on gasoline was $1.62. Today, it is $3.05, an 88% increase in two years. Gold was $814 an ounce. Today, it is $1,421 an ounce, a 61% increase in two years. In the last year, the prices for copper, silver, cotton, wheat, corn, coffee and other commodities have risen in price by 30% to 90%
Quantitative easing has been sold to the public as a way to avoid the terrible ravages of deflation. The fact is there are less jobs, lower wages, lower home prices, zero returns on bank deposits, higher fuel costs, higher food costs, higher real estate taxes, higher medical insurance premiums and huge jaw dropping bonuses for the bankers on Wall Street. Somehow the government has spun this toxic mix into a CPI which has resulted in fixed income senior citizens getting no increases in their pitiful Social Security payments for two years. You can judge where Ben’s Helicopters have dropped the $2 trillion. Quantitative easing has benefited only Wall Street bankers and the 1% wealthiest Americans. The $1.4 trillion of toxic mortgage backed securities on The Fed’s balance sheet are worth less than $700 billion. How will they unload this toxic waste? The Treasuries they have bought drop in value as interest rates rise. Quantitative easing’s Catch 22 is that it can never be unwound without destroying the Fed and the US economy.
The blog entry does read kinda like a rant, but the situation is complex, and does a good job of trying to touch base on the multiple moving areas.
The Commodity Futures Trading Commission has introduced a plan to limit the size of futures positions by individual institutions. The idea is, no one entity should have a undo influence on commodity pricing.
Changing rules would likely take more than 90 days, due to process of changing rules. So while this change will not directly change the pricing of commodities in the near future, the writing is on the wall for a temporary decline.
I say temporary, since speculators drive price up on commodities when there is tight supply. For example , if the supply of corn was at an all time high, speculators would fail to drive the price up at all, due to all the excess available.
This measure, once enacted will be called as the fix for the commodity bubble. In reality, it will be temporary relief. Every year it is my position commodities will get tighter due to China, India, and other developing nations require more resources. Once the supply gets slightly tighter, the excess speculation will not be needed, and prices will resume their march higher.
keep in mind, temporary relief could be upwards of a year as the excess supply is consumed.
Only then, there will be no more tricks to stop the march.
OK, this is quite an obscure extrapolated statistic. The VIX (Volatility index) measures implied volatility in pricing of options / cost of risk. The VIX index today traded around 17.75, not an historic low.
However, looking at the past 20 days, the vix has been very stable, and that hasn't happened to this degree in 39 years. I think part of it is an anomaly of the holidays, but considering how fragile the financial world is, it is pretty astonishing.
Pretty freaking amazing, it can't help me think that extreme volatility is around the corner.
Each year I do this, I am learning more about mankind. First, it is more apparent than ever to me that people in general always choose the way to avoid pain today, even if it means much worse pain tomorrow.
Unfortunately, my worst fears about this entire situation is coming to bear. The world is not taking effective, proactive steps to avoid an all out disaster in the world economy. Instead of dealing directly with the issues at hand, every step the short-cut to avoid pain today is taken.
In effect, we are kicking the can down the road, and making sure the fix will be much harder than if it was dealt with upfront.
Again, this isn't a dig on Obama, European union, China, or anyone. It is a lesson on humans. Finding true leadership to do the right thing seems impossible to find. Maybe revisionist history presents a false image, and such a thing doesn't exist until no other options are left.
There is a quote by Churchill that sums up my outlook on politics about America..
So with this in mind, my predictions are based upon my opinion that real change to improve the situation will NOT occur until crisis happens. The kick the can policy, started with Regan on China financial relations and the Federal Reserve Bank paper games will continue until it isn't possible. No matter how grim the situation looks, I have full faith for the wrong decisions to be made, if they are available and less painful than the right ones.
2011 Predictions
1) Entering 2012, the public won't look at state and township bonds the same as they do today. The State and City budget crises are here and now. We cannot get into 2012 without some precedents being set. Due to courts and the kick the can, we will have cities and states entering into bankruptcy-type scenarios but likely not resolved in 2011. The exact prediction is multiple cities and states will enter into financial heart-attack type crisis mode. The Municipal bonds will be in turmoil. Due to kick the can, I don't know if the federal government will step in and back everything or let this play out as it must. Because of these crisis, government unions will get attacked on multiple fronts.
2) European Union will enter into crisis mode in 2011. The world of international finance smells blood in the water, and they are biting at Ireland, Greece, and eventually Spain. The European union will have to face an all in by Germany and others to stop their collapse in 2011. This of course, will not work. But in 2011, we will have our answer if there is one more big kick the can attempt or not. I don't think the European union will fold in 2011. and the euro will stay in tact. The main reasoning is, there is plenty of options for more can kicking.
3) China will have some turmoil beyond what is expected. China's policy of currency manipulation and not allowing their fiat currency to float is already backfiring. This policy allows America to do whatever they want, and China has to buy US debt. The severe inflation pressures China is already facing is starting a put-out-the-fire game, where new fires pop up as the central China planners try to put out old ones. I don't think China will melt down in 2011.
Again, plenty of room to kick the can for them also. The stage will be set in 2011 for the main event in 2012-2013. Prediction: The world view of China as leader into the next decade will get tarnished in 2011 as their massive fraud creates havoc for their financial bubble.
4) Canada, Australia, and other countries that avoided a real estate blow out in 2008-2009 will now get their turn. The cracks are already forming. The world will learn that Canada is not different, and is more like other western countries for financial fraud and reckless loans. Australia and Canada will enter 2012 joining the western world financial turmoil, and lose their status as "better than the rest". At least one major bank in each country will have a crisis moment, resulting in their governments following America in socializing the private debt with public debt.
5) Gold, oil, and other resources will see unbelievable turmoil in prices in 2011. The price volatility will be amazing to look back this time next year. Individual commodities will get insane spikes as crisis occurs.
I actually have zero prediction if gold will end higher into 2012. By end of 2012, gold will be significantly higher. But since this is a 2011 prediction, I am going with higher, but I won't say 100% or 1%. The politics of 2011 will determine that.
6) Food riots in certain countries will occur in 2011. As resource prices destabilize, there will be civil unrest as the masses barely able to keep up with their bills have problems buying basic resources such as food and energy. Again, no global apocalyptic predictions. Just setting the stage for 2012-2013 with destabilization.
7) US bond rates stay within tolerance in 2011 as a guess, but if not all bets are off. If US bond rates break out of the range established since Volcker in the mid 80's all bets are off. Once the US government loses control of it's credit worthiness, the entire shebang is thrown in the air. Anyone who knows how the politics will play out is fooling themselves or you. 2011 will be defined by the ability for the US government to keep its debt rating in this channel. Click here to view. The optimism comes into play as other countries have issues, making the US situation look less-bad.
8) The best place to be, all things considered, will be commodity stocks or related investments for 2011. But I am not committing to a buy and hold until 2012. Just that as this unfolds, there will be spikes higher before the game changes. The percent gains from now until the "top" in 2011 will be best in commodities.
9) US Dollar and stock market pricing I can't make a prediction on this time. There is so much at stake, so much at risk, so much global tensions building. I can't even guess at how the dollar and the market fares. I can say both will see significant volatility, and the market won't march up back to old highs UNLESS it is accompanied by resource prices soaring. If the market makes new all-time highs, in nominal terms of living standard, it is really a new low. SPX won't go lower than 500, or higher than 2,000 in 2011. Best I'll do for a prediction. ;)
10) More countries will fail or enact protectionist measures, exasperating volatility.
Well, thats my top 10. Pretty freaking scary really. Notice in 2010 predictions some make a comeback for 2011. Mainly since things are playing out slower than I expected. I am still bullish on commodities, but recognize as the crisis unfolds, resources will be volatile.
2011 will be volatile, and it will set the stage for 2012-2013 when things will get ridiculous. So enjoy 2011! :)
I made quite a few very specific predictions last year. This year I want to try something different. That is, to make a few general broad statements of where I think the markets will be 1 year from today.
This serves two purposes. One to provide a clear, concise view with less confusion in the predictions. Two to mimic what most people are trying to do, and that is pick a place to put some savings into.
2010 will reach a crisis in the US bond market. Interest rates will (if not already) become a concern and will need to be put in check. Rates will over all drift higher, squeezing the life out of the US government and economy. Rising rates will apply downward pressure on housing. a) Disclaimer: US rates will NOT be a concern if the US stock markets collapses in 2010. We are talking down for the count collapse. >> Complete FAIL on this prediction
US stock market will be lower on 12/31/2010 than 12/31/2009. Guesstimate is a wide range, SPX 1,000 to as low as 500. Since that is pretty ridiculous range, I'll choose 750 >> Partial correct. the 2010 low was 1,010. I'll call that a hit, (I said 1,000 as top end). >> But the market ended higher. Started year about 1125, ended 1257, for a 11.8% gain.
Inflation, despite everyone's concerns will NOT manifest. However, Currency devaluation is possible, and that would be reflected in higher commodity prices. US Dollar gains strength first half of 2010 in general, and loses strength, in general towards end of 2010. US Dollar remains above the lower trend line, as depicted here (click) for 2010. >> Correct call. Dollar rallied, then pulled back hard. And it remained in the trend area.
Precious metals (gold) will have major valuation issues between Q1 and as late as Q3, but should firm up between Q2 and Q4. I am very sketchy on time line, since precious metals valuation turn around will depend on US dollar, interest rates, and stock market fear. >> Correct call. Gold firmed up in August, and has made a huge run up
With that said, Gold will end higher at the end of 2010 than current levels or at the very least rising rapidly to surpass current levels. (from it's low) >> Correct call, kinda duplicate to #4.
US economy will NOT rebound, and will be in a quagmire of problems straight through 2012 and beyond. >> I believe this is a correct call, despite the pundits. Official unemployment is about 10%, real is closer to 20%. The Federal Reserve bank has announced more fiscal recklessness of printing, banks still don't have honest accounting. Government is over-spending to hold things above water. This is hardly a rebound, more like a drug fix to give pain relief.
There will be major crisis in 2010, including, but not limited to: State(s) faulting on debt, counties failing (avoided in 2009), more countries failing, and in general, increasing unrest in the world (wars, terrorism, etc) >> Partial correct. We have seen Ireland, Greece under severe pressure. We have seen California and other states insolvent. Recently, we have seen states like Illinois call for bankruptcy of cities. However, we haven't seen a blow out like I expected. Band aides are holding back the dam from breaking. So no major crisis in 2010 per say.
Protectionism will continue to rise (tariffs, refuse to trade, etc) NOTE: This is one potential event to destroy stock market valuations. >> Partial correct call. For the most part, to my surprise, it is mostly China starting to do this. I did expect more countries. China is hitting with various quote limitations on exports of commodities, but mostly concentrated on rare earth minerals.
this list is pretty broad. But it covers 8 specific points that can be judged on. Items 7/8 are a little squishy, but I should be able to look back to judge.
Feel free to put in the comments your own 2 cents, and I'll try to add them to my end of 2010 summary.
