Optimism destroyed the finances of folks in the aftermath of the LAST credit bubble blow-up (commonly referred to as "The Great Depression"). While it appears that TOTAL credit is indeed expanding, the total credit available to buy goods and services appears to be contracting.
What's that mean? That the value of the US$ against the goods and services it can buy in Topeka, Kansas will actually go UP, irrespective of how the US$ trades against the other major currencies (for a while, anyway). By extension, this also means that Oil will probably go down in price, the U.S. equity markets will fall, and even Gold and Silver will become cheaper in US$ terms. It hurts me to say this, but for Americans living and spending in America the US$ is probably a better place to be at this moment than the alternatives - Real Estate, precious metals, equities, corporate bonds, etc... (notice I left out Treasury paper).
Why? Because, the banks are in no position to lend, and people are in no condition to borrow. While the government is most certainly monetizing the debt, and this will certainly have an effect eventually, particularly when the baby boomers start to draw benefits, said monetization is definitely being overwhelmed by credit contraction in the commercial economy at this moment in time, and that will likely be the case for the next couple of years.
I reserve the right to change my views if something changes in the data, but what I am getting at is that there will be a double dip recession in a quarter or 2, a nasty double dip at that, with all its concomitant effects on employment, housing prices, energy consumption, stock prices, bond defaults, etc...
How much worse could it get? A great deal worse, I am starting to believe. I read with interest the government's GDP report. I must say that I am in agreement with Mike Shedlock on this issue: that the government stimulus programs only succeeded in moving demand UP BY A QUARTER OR TWO. So when we get out to the time that the government borrowed the demand FROM, it won't be there. Now, multiply that by the FACT that the commercial Real Estate mortgage default wave has not hit yet, and the FACT that the banks have not cleaned up ANY of the toxic loans on their books (that the TARP was originally intended for), and the FACT that consumers are going to continue to de-leverage (pay off debt and/or save money), and I cannot be convinced that things are not going to get a whole lot worse for the markets and the employment prospects of people not currently employed by the government.
And, no, I have not changed my mind on the long term for Gold and Silver... but I have been at this for a long time. People sell what they have to sell, or what's left that has any value, in order to raise cash to pay bills, margin calls, etc... I am going to hold my bullion, but I am not going to buy paper Gold or Gold shares until they get beat up. As the Mad Scientist likes to say, "when you should be buying you won't want to", because you will be too afraid. My bet is people are going to be so scared they are going to "soil their boots" as it runs down their legs.
Look, I could be wrong. Maybe the assets on the bank's balance sheets aren't drek. Maybe the consumer will come out swinging this holiday shopping season. Maybe employment will pick up with the next new new technology. But I doubt it. And don't go by the U.S. equity market. The market can go higher from here before it sh*t's the bed. They don't ring a bell at the top or the bottom.
If you have money, this is no time to part with it. There is no house you have to buy, no investment you just have to make. The time will come, because the U.S. administration seems intent on spending/devaluing us into prosperity - even though it has been tried dozens of times and failed each attempt. This ain't the moment for heros. It is time to survive.
This is coming from a long time US$ bear. This does not mean that the US$ cannot continue to fall against the Dollar Index - it could, but as I have said a zillion times before: Markets zig and zag, they don't zig and zig. Nothing moves in only one direction, and the US$ has been moving in only one direction for some time. Given the above scenario, I think the asset prices I mentioned are going to decline against the US$, and that is the only ratio that really matters.
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If you buy my argument, then housing has not bottomed yet. In fact, it would mean that it has a ways to go - particularly in California, Florida, and Metropolitan New York. This is no time to be buying in one of these tax starved locals. Also, if you buy my argument, paying private college prices to wind up under or un-employed is about as appealing as the proverbial "turd in a punchbowl". Debt of ALL kinds, mortgage, auto, student, credit card... WHATEVER, is to be avoided at all costs, until the aggregate available collateral and earnings within the economy is sufficient to support the aggregate debt. When will that be? Years from now, as in 5 to 10 years. And by then we will be walking head first into the wipe out caused by the underfunded U.S. Something for Nothing programs - Medicare and Social Security.
The next 10 years you are likely to feel like you are riding a dragon, or you've got a tiger by the balls... and "anybody with fast hands can catch a tiger by the balls, but it takes a real hero to keep on squeezing". If you let go, you are going to lose everything anyway, so you might as well try to hold on, and figure it out.
Libertariananimal (at) gmail (dot) com
11 comments:
Now lets be even-handed ... earlier this year, you, me and everyone else would have said the same things you just mentioned, but somehow the little shrews that run this world's financial system pulled more rabbits out of hats, and the Earth was saved for another season. Yes, I know all the shenanigans Geithner and Bernanke birthed to bring the world economy back from the precipice. But who's to say the shylocks could not come up with another ruse to keep the plates spinning in the air. Bail out AIG CDOs at par like Geithner did? Recap the banks with lots of cheap money so the banks would plow into the stock market and Treasuries, like Bernanke did. Justify another massive stimulus like Obama will do soon? These guys are dumb but they aren't stupid. :) More phoney baloney "magic" may be in store.
Perhaps.
But I think the TIC data will convince them otherwise, and in any event the feed back loops you describe are self limiting.
Time will tell. In the mean time, getting 3% from 7 year Treasury paper beats the snot out of losing a great deal of money.
At some point, the US$ carry trade is going to be unwound... and that moment is going to be the moment, or at least A moment, of truth.
B,
I find my self leaning to your side today. I am sure I will disagree with you tomorrow though. ;) I beleive "THEY" will do any and all things possible to sustain the unsustainable. UNTIL the world, US pop., foreign creditors,etc says no more. How that is said / looks / done is any ones guess. Since the gov. is playing by the old rule book of how to get unscrewed I can only think of those promises and hopes sold to us last Fall, that are not really moving as planned. i.e. troops coming home.
Greg,
Have not seen any pics of the planting season! Hopefully yours was better then mine. To much rain and not enough sun, more disease then I ever would have imagined. And I thought the drought was a problem, however, tomatoes did great.
Peace
You're in a scatalogical mood!
I've thought that 'it' would have hit the fan about now, but I usually seem to underestimate the length of time these things take to pan out.
Bureaucrat may be right about MORE borrowing from the future to hold up the now, but at some point the RotW has to say 'no more', either directly by not buying the bonds anymore, or indirectly by trading oil in not-dollars and disposing of $ reserves.
I suppose the evil-sign will be when bond returns start rising fast?
Great, Greg.
In the end, as that obvious case of Asperber's Syndrome Karl Denninger likes to point out, all wealth comes from only 3 places: the sun (agriculture), the earth (mining, oil, etc.), or human industry (making something).
The real question is, how long can this economic hocus-pocus, this numerology done by the Fed and Treasury, keep Americans employed, fed, and housed?
You are a brilliant analyst, Greg. At some point, though, things move out of the realm of economics and into politics. When enough people are not fed, clothed, or housed, then the future becomes unpredictable, although there are various paths that history has shown us:
Violence - almost assured to go up, whether standard crime, or more politically motivated. In our neighborhood, for the first time that I've noticed, there's a band of young thugs mugging people at gunpoint, repeatedly. They are invading a wealthier 'hood in search of loot. This will become a huge problem everywhere. In my friend's 'hood in ?Austin, Texas, a white van pulled up to a neigbhor's house. The immediate neighbors assumed they were workmen, of course. The men broke into the house to rob it, and discovered the 20 year old daughter taking a nap inside. They took her hostage for a while, but let her go. Ugly.
**Dictatorship: a likely outcome, though it will not be called this. When the middle classes lose enough wealth and are threatened by criminals (see above), they will demand order. They will demand that a few token elites behind the mess get pilloried. They will demand security.
**Revolution: obviously a possibility if the injustices add up too much without any redress.
**"soft" fascism: kind of what we have now. A very modulated, controlled version of democracy. However, the management of public opinion by our awful MSM won't work when too many people are destitute.
Bureaucrat has a view from inside the government, obviously. Remember, however, that most of those inside the Soviet government had no idea that their edifice would soon come tumbling down.
The fact of peak oil and resource depletion in general, with a possible dose of food shortages due to an unforeseen event (disease, drought) [and neglecting the foreseen fact that the world's population is increasing far beyond the resource base], and you have some real ugly scenarios that are possible.
Possible.
However, when there are enough ugly possibilities,each with a small but finite chance of occurring, you can add up the statistical probabilities to get the likelihood of something majorly bad happening. I would say it's pretty darn high.
Since we don't know the specifics, all we can do is work on the basics of life. Family and community are essential forms of equity right now, and they are not traded on any electronic exchange.
My hunch on good investment opportunities: small-scale, local energy, food and machinery production.
Donal,
A great deal can be learned from scat. Its producer, diet, etc. The scat may be hitting the fan, we jsut need to ID as such.
Peace
Publius:
I feel very flattered having you call me a "brilliant analyst"... a good analyst knows his limitations, and while I feel I am as competent as anyone in economics, having worked in politics I know how hard it is to have good vision in that arena.
I do sincerely believe that some time in the next decade a political crisis will evolve in the U.S., and perhaps by the end of Obama's first term. What that will look like is a bit beyond my abilities.
Feel free to expound on your sense or vision of that possible outcome, and I will happily post it for discussion.
Donal:
I am not in a Scat mood at all. I have pretty good contacts in the commercial real estate leasing and brokerage business around the country, and my sense from what I gather from them is that the Commercial mortgage market is in deep doo-doo. Given that, and what I see as another round of mortgage defaults in the residential market and I get the idea that the banks are in for the mother of all write offs, something they have not done as yet.
Inventories have shot their wad, and consumers are going to deleverage for some time - so even if the banks COULD lend and increase aggregate debt their is no one on the other side of the trade.
And while it APPEARS that total credit is still expanding, if you look under the hood I believe that that is in accounting gimmick - if all of the balance sheet assets were marked to market this illusion would disappear rapidly, and be replaced by reality, that the economy cannot support this aggregate debt load and that these "asset" prices are fantasy.
Time will tell, and forewarned is forearmed. Believe me, I wish I had a better outlook. Nobody wants to do business with a bearish stock broker, and my brokerage business has gone down by 90%, soon to be 100%. If it were not for my funds I would be asking folks if they wanted ketchup with those fries.
Greg,
You need sponorship! Write a book, cd,dvd,or combo.
peace
Anon@ 9:10:
I was being dramatic. I won't miss any meals even if I continue to be an unrepentant bear.
And I am thankful for my good fortune.
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