Thursday, December 30, 2010

Rising Rates: Simple Economics

The following chart shows the recent rise in mortgage rates.

This spells disaster for housing which was recently described by Robert Shiller as a market "where optimism is fading fast."

The time to purchase a home is when interest rates are high.  (If you are interested in making money on your home.)  The reason is because as interest rates fall it lowers monthly payments and allows new buyers into the market or current buyers to purchase at higher prices with their current income level.

Higher demand (more buyers) = higher prices if supply stayes equal.

The exact opposite is true for purchasing when interest rates are low.  (Unless you are interested in losing money on the home you purchase) 

Lower demand (less buyers) = lower prices if supply stayes equal.

The most recent rise in mortgage rates that can be viewed in the chart above pushed the monthly cost of a $300,000 mortgage from $1,462 to $1,585 per month.

This discussion does not look at the other side of the equation, supply, which as I've discussed previously is rising rapidly due to the shadow inventory of foreclosures beginning to enter the market.  Here is the full economic model for 2011 completed:

Lower demand (less buyers due to mortgage qualifications and unemployment) +

Supply growth (new inventory and months supply growing throughout 2011) =

Prices Falling

I only wanted to review this discussion because a realtor mentioned to my parents over Christmas break that they had buyers rushing into the market because interest rates were rising and they wanted to lock in at low rates.  This is the exact opposite way potential home buyers should be making a buying decision.

Wednesday, December 29, 2010

Jim Rickards On CNBC

Jim Rickards, who is fast becoming one of my favorite people in the financial world, spent some time with CNBC this morning to discuss the currency wars involving the US, China, and Europe.

If you want more Rickards, please visit the King World News link below where you can hear lengthy in depth interviews on the global economic and financial outlook:

King World News Interviews: Jim Rickards

Tuesday, December 28, 2010

Wealth Effect Meets Double Dip

While the developing economies around the world base their economic growth on savings and production, the American economy for decades has been based on borrowing and spending.

The key determinant to this ponzi scheme is the so called "wealth effect," which means that if Americans feel good they will be more likely to go out and spend.

After a massive rally in the stock market this year combined with an equally massive media campaign that the economic trouble is behind us, Americans went out this holiday season and spent a tremendous amount of money they should have been saving.

The wealth effect is improved in a more psychological fashion with a rising stock market, but is given larger substance with the increase in real estate prices because real estate makes up a far larger portion of the average Americans percentage of assets.  (The vast majority of stocks are held by the wealthy top 10 percent, and even more so by the top 1 percent)

For this reason, I find it fascinating that the current double dip in housing prices is receiving far less attention from market analysts in determining their 2011 forecast.

Case Shiller released their home price index this morning for the month of October. (An average of August, September, and October pricing)

The data showed the fourth consecutive month of falling prices, and a non-seasonally adjusted month over month drop of -1.32%. 

Many cities have now fallen to new lows from the peak in 2006 - 2007 (cities that saw an artificial bounce from the home buyer tax credit last spring) such as Atlanta, Charlotte, Miami, Portland, Seattle, and Tampa.  The rest of the cities will be joining them shortly.

These price declines come in the face of all time record low mortgage rates (which have just begun to rise) and a foreclosure moratorium which kept many additional homes off the market (which are now slowly being put back on.)

Rising mortgage rates, tighter lending restrictions, continued structurally high unemployment, and the onslaught of coming shadow inventory paint an ominous picture for the housing market entering 2011.

Let's hope everyone that believed the media that the housing market bottomed and spent an enormous amount of money this holiday shopping season, will brush off the coming loss in home equity as part of their "wealth effect" mindset.

Look for major trouble coming in 2011.

Friday, December 24, 2010

Who Is Buying Stocks?

First Pension Bomb Detonates

When a public employee of the state retires, such as a police officer or teacher, they receive a pension.  This means the government sends them a retirement check every month to pay for their living costs.

This past week a town in Alabama made major news when they announced they will no longer be sending the payments.  They were forced to decide whether to stop paying the current policemen, or to stop paying the retired policemen.  They chose the latter.

This has been a coming concern discussed for many years (relentlessly on this site), which has been dubbed "unfunded pension liabilities."  People disregard concerns until the day they arrive, and that day is here. 

There is currently an estimated $3,000,000,000,000 (trillion) in unfunded pension liability across the country  The following provides an interactive chart to show how bankrupt your area's pension fund is:

This is different than the muni-bond crisis, which is happening simultaneously.  The muni-bond crisis means that if states cannot raise new capital in the debt market, then the active police officers, teachers, fire fighters, and state workers will not get their pay checks.

Most state governments are currently bankrupt even without factoring in the pension time bomb.

Most assume that our Federal government will step in to fund the difference in muni-bond and pension shortfall.  This will add trillions to the deficit of the federal government, which also happens to be bankrupt.

Now that Americans can see retired workers in Alabama not receiving a pay check, it may be easier for them to understand the term "unfunded liabilities" for our federal deficit. This number includes social security and medicare and is currently at $75 trillion.  Once the debt catches up to reality, which like gravity it always does, it means there will be no social security and medicare checks coming in the mail.

We will most likely never get to that point, unfortunately.  Our Federal Reserve will most likely step in as early as this coming year to announce that QE3 will be focused on purchasing municipal bonds (state government debt) which will cover current debt and unfunded liabilities.

With this market back under control they can then continue to focus on our purchasing our $100 trillion in Federal government debt, including the unfunded liabilities.

It is not possible to put an upside target this decade for the price of gold with the blizzard of printed currency on the way.

h/t MISH

Thursday, December 23, 2010

Defense Spending 2011

Some highlights from the 2011 Defense Budget. (Without my personal commentary on the issue)

On December 22 both houses of the U.S. Congress unanimously passed a bill authorizing $725 billion for next year’s Defense Department budget.

The proposed figure for the Pentagon’s 2011 war chest includes, in addition to the base budget, $158.7 billion for what are now euphemistically referred to as overseas contingency operations: The military occupation of Iraq and the war in Afghanistan.

The $725 billion figure, although $17 billion more than the White House had requested, is not the final word on the subject, however, as supplements could be demanded as early as the beginning of next year, especially in regard to the Afghan war that will then be in its eleventh calendar year.

Last year’s Pentagon budget, by way of comparison, was $680 billion, a base budget of $533.8 billion and the remainder for operations in Afghanistan and Iraq. In July of this year Congress approved the 2010 Supplemental Appropriations Act which contained an additional $37 billion for the wars in Afghanistan and Iraq.

With 2.25 million full-time civilian and military personnel, excluding part-time National Guard and Reserve members, the Defense Department is the U.S.’s largest employer, outstripping Walmart with 1.4 million employees and the U.S Post Office with 599,000.

“Add in what Homeland Security, Veterans Affairs, and the Energy departments spend on defense and total US military spending will reach $861 billion in fiscal 2011, exceeding that of all other nations combined,” according to Todd Harrison, senior fellow for Defense Budget Studies at the Center for Strategic and Budgetary Assessments.

New Homes Sales Continue Cliff Dive

New home sales for the month of November came in at 290,000 annually.  The number was up 5.5% from the all time record low 275,000 from the previous month, which the media spun as extremely positive.  There is no precident in history for these monthly sales as can be seen with the cliff diving in the long term chart below.

Tuesday, December 21, 2010

Lehman Levels Return

The stock market has now breached the level seen 27 months ago during the week of the Lehman Brothers bankruptcy and AIG bail out.

I will have a detailed analysis coming by year end on whether I believe this is the launching ground for higher stock prices, or if this is a dangerous time to enter.  (Hint: don't buy until you read the analysis)

Monday, December 20, 2010

2015 Federal Deficit: $24 Trillion

Since the inception of this website I have routinely kept a link on the page to the now popular US Debt Clock counter. 

It is currently at the very bottom of the page titled: The Ticking Time Bomb

The site added a new feature this week which is what the debt will look like in 2015 based on current rates of growth.  The total national debt, which is currently at just over $14 trillion (see red box below), will have grown to $24 trillion at our current pace by 2015.  Click here for the 2015 outlook.

This is based on the assumption our interest rates on the debt will stay at all time historical lows. If rates were to rise (they will), then the deficit will be far higher.

This also does not include the explosion coming in unfunded liabilities such as social security and medicare.  The total deficit with these items included is estimated at $144 trillion.

It will not be possible for the United States to finance this deficit, and your investment strategy should be focused on how you believe they will default:

1. Informal Default:  The Federal Reserve prints money to purchase bonds (monetises the deficit)

2.  Formal Default: The US declares bankruptcy

Peter Schiff On CNBC

Peter Schiff takes some time to speak with the Bubbleheads on CNBC regarding housing and the artificial government support. Mark Haines refers to the now famous interview with Peter back in 2005 when gold was under $500 and Haines says "Who cares about the price of gold?" Quick refresher below:

And flash forward back to the interview today:

60 Minutes: The Day Of Reckoning

Wednesday, December 15, 2010

Nice Afternoon In Greece

The following is a brief glimpse at this afternoon's events on the streets of Greece.  It shows what happens when a government runs a massive deficit that it cannot pay, and is then forced to make drastic cuts in spending when there is a run on the government debt in the financial markets.

In other news, the Senate is pushing through Obama's tax bill extension this afternoon with no additional cuts to spending in other areas of the budget.

Today our debt is the darling of the world just as subprime was back in 2007. 

After a run on subprime we had a housing meltdown and financial collapse.

After the we get the run on our subprime government debt? 

Please see video above.

30 Year Mortgage Rate Chart

A look at the 30 year mortgage rates over the past month paints a frightening picture.  If the artificially suppressed rates were to continue to rise off the historically all time record lows you can quickly do the math on the effect to home prices.

Higher rates = Higher payments = Less Purchasing Power = Lower Prices

That is unless of course employment wages begin to rise along with the cost to purchase. (Sorry, had to throw a joke in there to keep everyone in good spirits)

The Federal Reserve may soon have to step in and announce the purchase of every mortgage in existence to keep rates low.  (About $14 trillion worth)

Ben Bernanke's worst nightmare:

Spain: Downgrade Coming

Spanish government bonds hit a record high this morning on Moody's warning of a coming downgrade on their debt.  The implications of this coming debt default are like a meteor ascending on the financial markets.  Here is the chart showing the interest rate charged to purchase debt.  The higher the rate, the lower the price of the bonds:

Mark Zuckerberg: Person Of The Year

TIME Magazine honored Mark Zuckerberg as person of the year this week.  The founder of facebook is well deserving of the award as he has revolutionized the world of social networking with the creation of Facebook.

"The Social Network" was this year's second best film, (behind "Inception" of course) and I would recommend going to see it in the theatres before it is gone.

I am not a participant in the Facebook network, but I absolutely love entrepreneurs who capitalize on a great idea, create billions of dollars in real wealth, and hire Americans to grow the economy in the process.

It is the absolute exact opposite of how I feel about government bail outs and socialism, which suck the life out of a free market capitalistic economy.

Here's to a successful (and very strange) entrepreneur.  We need more people like him.

Tuesday, December 14, 2010

David Stockman With Dylan Ratigan

Visit for breaking news, world news, and news about the economy

Muni Bond Massacre Begins

A couple of fun charts below showing the massacre currently taking place in the municipal (state debt) bond funds across the financial landscape.  These time bombs are currently exploding (unnoticed) in 401k, pension, and insurance funds as we speak. 

As I've discussed all year, the public has pulled what is left of their life savings out of the stock market and put it into bond funds around the world in search of higher rates and perceived safety.  They have done this at the very peak of the greatest bond bubble the world has seen.

This will be the major story in 2011, and the current proposal in place to not extend the Build America Bond program will be the death knell for state governments on the verge of bankruptcy.  (BAB program was put in place to subsidise state debt with federal tax payer money.  I will discuss its importance in the future when the final decision is made on their existence under the current tax proposal)

In the meantime, enjoy the fireworks as the United States of Greece begins to self implode:

NPI Nuveen Premium Income Municipal Fund

NPP Nuveen Perform Plus Municipal Fund

NPP Nuveen Municipal Advantage Fund

NPP Nuveen Municipal Market Opportunity Fund

h/t MISH

Sunday, December 12, 2010

Jim Chanos: The Next Big Short

The following is an incredible interview with Jim Chanos, who moved his name into the legendary status of hedge fund managers back in 2001 when he took a look at the balance sheet of a company called Enron and decided to short the stock all the way to zero. (The company was the darling of the world at the time)

Since then investors around the world have held on to his every word as he looks for the next big shorting opportunity. (He was all over the real estate credit bubble)

Today he has his sights set on a new opportunity: Chinese Real Estate

He explains why below with some staggering statistics:

The Next Round Of Resets

Back in 2004-2007 a tremendous share of the mortgages purchased during the height of the real estate bubble were 3 year adjustable rate subprime mortgages.

I remember tracking charts back then and imagining how the world would change as the rates reset higher.  Everyone knows how the story ended.  Homeowners could not afford the mortgages at the higher rates, they could not refinance because they were upside down, and the destruction of the subprime market brought the credit crisis during the fall of 2008.

Today we have a new chart.  This one is far more sad because it deals with human lives.  (Someone who loses their home can just rent since we have an endless supply of housing, something our leaders have not yet put together)

The following highlights the peak point of job losses since our depression started in 2007.  These unemployed Americans are now about to become part of the "99ers", which means their 99 weeks of unemployment benefits will expire and they will no longer receive government support.

The current tax bill moving through Congress has no additional weeks of unemployment insurance, even though it extends the already ridiculous 99 weeks currently in place.

If the government decided to artificially support the mortgage market by providing or guaranteeing over 90% of new loans issued (which it currently is today), then they will certainly create a program to deal with this oncoming issue. 

Otherwise there are going to be some very hungry people as we move forward.

The current deficit projection for 2011 with the Bush tax cut extension and additional tax cuts (Obama's sleight of hand stimulus) is at $1,500,000,000,000. ($1.5 trillion)

This does not include the massive "off" balance sheet debt that will need to be financed.

Bernanke has already volunteered to pay for $900 billion of the $1.5 trillion with the printing press, and I fully expect him to pick up the rest of the tab during the second half of the year, especially with interest rates currently rising in the government debt markets. (He certainly does not want foreign investors to see the smoke)

This will take care of the current unemployment problem in America, until the checks coming in the mail for the 99ers or soon to be 299ers, have no value and cannot purchase goods at the store.

Or we could cut some of the other absolutely ridiculous government waste and spending now.  But that is too silly to talk about today, it is far more exciting to wait for a currency crisis and food shortages before cutting a government worker's pay from $175,000 down to.....$135,000?

Friday, December 10, 2010

Headlines: December 10th

Federal government today announces a $150 billion deficit for the month of November.

Federal Reserve today announces $105 billion in government debt purchases in January.

On pace for Federal Reserve to soon begin purchasing all of deficit with printing press.

US currency on pace for complete annihilation.

Leaders cut no spending. 

Only press harder on the gas.

For an excellent discussion of this topic and the recent tax cuts I discussed briefly yesterday, you can read economist Peter Schiff's recent article:


Thursday, December 9, 2010

The Future Interview

As I wrote about a weeks ago, before the Ireland bail out was confirmed, there would be no rioting from the citizens of their country until AFTER the government decided to save the banks, I mean, "people of Ireland."  And sure enough, since the announcement the people have taken to the streets to riot to show their appreciation of the government's "generosity."

Now they are strapped with years and years of additional debt and interest payments that will be paid for by newly imposed austerity packages from the ECB and IMF. (Global private central banks)

The sacrifices of the every day worker in Ireland will go toward another year of record bonuses paid out to the banks who will take no losses on the sovereign debt they purchased.

In the meantime, the United States has announced tax cuts across the board for the coming fiscal year in order to support growth.  I commend this strategy as an effective tool to promote business hiring and growth. 

I was then excited to look down the budget line items to find the spending cuts they will make in the other areas of our enormous and grotesquely bloated budget.  And I found......


No spending cuts will be made to offset the tax cuts. 

Our deficit will continue to be paid for by Ben Bernanke who has already announced his plan to finance 75% of our spending through the first half of the year with QE 2.  QE 3 will follow soon after during the second half and will probably finance 100% of the remaining deficit.

Americans sit passively by as the country is brought closer to complete ruin and collapse.  I am paying close attention to the actions overseas by both politicians and the citizens as it provides a sneak preview of what is soon in store for America.

For a glimpse into this future, the following is an interview with a common Irish citizen who fully understands what is taking place before him.... (warning: explicit)

Wednesday, December 8, 2010

The Big Bank Theory

The Daily Show With Jon StewartMon - Thurs 11p / 10c
The Big Bank Theory
Daily Show Full EpisodesPolitical HumorThe Daily Show on Facebook

Secular Bear Market Update

The following graph shows that after some ups and downs the S&P 500 (American stock market) is exactly where it was on December 31, 1998.  12 years ago.

An investor who has patiently put money into this market over this period has earned exactly zero on stock appreciation.

It shows the importance of understanding long term cycles in markets.  We are currently in a long term bear market in stocks and a long term bull market in commodities.  Both cycles, which began in the year 2000, are secular and tend to last 15 - 20 years historically.

Stock price increases are good opportunities to sell (or go short) and commodity pull backs are good opportunities to purchase.

Tuesday, December 7, 2010

YTD Performance: All Assets

Year to date performance update through December 7th:

Is It Finally Time To Buy?

As we approach the end of the year it is time once again time to reflect on where we are currently, and where we are headed moving forward.

I will go into a very lengthy detailed discussion on the state of the markets in my 1st Quarter Outlook for 2011, which I will release as we move closer to the end of the month.

I will also be providing the 2011 update to the FT Capital page which will discuss how the 2010 recommendations finished the year as well as my investment recommendations based on the outlook for the year ahead.

Today I just want to briefly remind investors that my outlook from the second half of this year to today has not changed.  To briefly summarize:

Hold all current positions bought during first half of year, continue to add safe cash and wait for buying opportunities.

This now in hind sight was far too precautious as the markets have been on a tear during the second half of the year.  While the original assets purchased have been exploding in value, (see FT Capital) the new cash has been sad to watch the markets rise higher and higher.

The catalyst for this move, of course, was the surprise announcement from the Fed in August for Quantitative Easing II. 

So after months of investors blindly rushing into risky assets and moving every asset upward, where do I now stand?

I am far more precautious than I was at the end of the 2nd quarter as well as the 3rd.  The reason is that while the injected liquidity from the Fed, like a shot of heroin, makes everyone temporarily feel amazing, it has blinded the market that under the surface the fundamentals have become far more negative.

A $30 silver price or $90 barrel of oil does not make me want to purchase the assets more than when they were 30% cheaper.  While the natural human instinct is to feel that way, you have to continue to focus as an investor to think the opposite.

While I certainly will not be selling any silver or oil at these prices, I will not be purchasing additional amounts either. 

I continue to recommend the safest possible forms of cash.  Holding a high yielding money market account, 30 year treasuries, or other "can't lose" bond options are not safe cash. 

As I said, I will be going into this topic in far greater detail over the next few weeks, but I wanted to provide an interim update that high prices and a euphoric market (sentiment indicators are currently at record high across the board) have not in any way made me feel better about our economy or risk assets; they have done the exact opposite.

Monday, December 6, 2010

David Einhorn On The Next Crisis

David Einhorn, who I could lavish over for hours because he is essentially the person I want to be, spent some time with CNBC this morning to discuss the financial markets.

He went from being a very popular name to a global icon back in early 2008 when he became the leading voice against Lehman Brothers and their balance sheet.

The two had a vicious public battle where Lehman accused Einhorn of trying to talk down their stock in order to profit from his short position.  Einhorn did not back down and continued to stay on record that the company was worth zero.

We all know how the story ended; a few months later the Lehman stock went to zero, and Einhorn has been enshrined into the "legendary" camp of investors.

His largest position today? 


Fun With Silver

As we wake up this morning to 30 year highs in the silver market, which is moving toward $30, I thought I would share an interesting video I came across this weekend discussing the JP Morgan silver price manipulation.

I have discussed this topic on numerous occasions over the past few years (one of my posts reached a semi-mainstream news site), and the topic is slowly becoming a serious discussion in financial groups around the world.

The video (which is explicit) has been sensationalized but explains the core issue in that JP Morgan has sold short years of mining production in paper silver contracts.

The site the cartoon recommends (which I am not endorsing here) sold out of precious metals in hours this past weekend when the video went viral.

Enjoy the ride up, because the day JP Morgan has to cover their short position will be a day the market will remember for many years.

Thursday, December 2, 2010

Senator Bernie Sanders

Great speech.  Don't agree with all of it, but I agree with most.  Wish there was more passion coming from our leaders as our country sits on the precipice of economic disaster.

Tuesday, November 30, 2010

Case Shiller Home Prices

The Case Shiller Home Price Index was released this morning for the month of September, which is a 3 month average for July, August, and September.

The index showed a broad base decline across the board, confirming every piece of data recently released that the decline in housing has resumed and it is accelerating.

The only city to show a price increase was Washington DC, America's last bubble city funded by massive federal employment checks, and the rise was minimal.

The following chart shows prices rolling back over and preparing for full collapse as the growing shadow inventory begins to enter the market:

Sunday, November 28, 2010

What Would A Tuna Do?

Instead of just complaining about how bad things are, as I was this morning in What If The Banks Failed, I will take a moment to be constructive and answer the question: "Okay, Mr. negative talk, how would you do things differently?"  Here is what I would do:

The top 4 Too Big Too Fail banks have a stranglehold on our economy.  They are insolvent and they are sitting on cash waiting to take losses, but they are not forced to take their losses because of the new accounting changes.  Therefore we have an economy that is artificially held up and cannot recover.   Real estate; commercial and residential, stock prices, and corporate debt are artificially too high which will not allow the system to cleanse and recovery to begin.

So here is what I would do:

The President announces a comprehensive plan alongside the Federal Reserve detailing all steps that will be put in place in order to stem any panic before the program begins:

1.  All checking and savings deposits around the country are 100% backed by the Federal Reserve and Treasury.  If your money is at a bank that fails, your account will be government owned until a new bank takes over your deposits.  (This already happens every week and is run by the FDIC)

2.  All money markets and CD's at banks will be 100% backed by the Federal Reserve and Treasury.  The money markets must have been created before this announcement is made.

3.  The mark to market rule goes back into effect immediately.  Banks must be forced to write down losses and if they do not have the cash to cover then they must enter bankruptcy.  The bad debt for the largest banks will be handled by the government and FDIC in the Resolution Trust Corporation II (the first was in the early 90's) where the assets are sold into the market place at free market prices.

4.  Fannie Mae and Freddi Mac enter bankruptcy.  Their portfolio is liquidated as part of the Resolution Trust Corporation II.

5.  A new budget program is announced slashing the major entitlement programs, military spending, and creating a real solution to future debt repayment.

6.  $500 billion in a new stimulus package will be given to a group of the next 30 largest banks that are healthy.  They did not participate in the subprime debacle, and they have a clean balance sheet.

What would happen?

Many bankers, stock brokers, traders, mortgage lenders, and employees at the Too Big Too Fails would lose their jobs.  Where would they work?  At another healthy bank.

The stock market would most likely fall sharply finding a free market price and presenting a strong buying opportunity.

Residential real estate and commercial real estate prices would fall sharply as the supply was allowed to enter the system finding a free market price and presenting a strong buying opportunity.

Our currency would fall sharply on the news but find a bottom as foreign leaders understand that we are taking steps to begin recovery.  There would be outrage from foreign countries over the losses taken on Fannie/Freddie debt.  People say they will respond by dumping treasury debt.  I say, no they won't, it is more likely they become a buyer of our newer stronger debt.  Our weaker currency would help balance the global market place as we can once again focus on exports and being competitive.

The loss of Fannie and Freddie would cause mortgage rates to rise sharply.  Buyers would also be forced to put down a large down payment to purchase.  Loans would come from the $500 billion in cash sitting on the balance sheets of the new banks.  No homeowners would live on the streets.  They would rent in the 40 month supply of homes that would be purchased by investors and business people who have real capital available to purchase assets.

The $500 billion in stimulus money would not sit on the new bank's balance sheets to cover future losses.  It would be lent out into the market to investors who want to purchase the correctly priced assets.  It would be lent to business people who want to start a business and create jobs.  It would be lent to companies focused on developing new technology and health care research so America can once again have value with our trading partners.

This is how America was designed when we arrived on these shores, and it is sad that it is no longer the free market capitalist country that created more prosperity and wealth than any other country in history.

This solution will never be discussed in a serious way by our leaders.  Both the democrats and republicans receive MASSIVE checks every year from the too big too fail banks and those checks determine the decisions our leaders make.

Where is free market capitalism seen today in the world?  Ironically, it is now practiced most commonly in communist China. 

If your children have the opportunity to learn the mandarin language in school I would push them hard to take the courses.  They are growing up on a sinking ship, and the opportunities this century to prosper in China will be limitless.

What If The Banks Failed?

As the IMF prepares to send in the Trojan Horse this evening to "save" Ireland banks, people are starting to wonder what would happen if some banks around the world were actually forced to take some losses and not give out record tax payer paid bonuses this year?

That answer can be clearly seen in the example of Iceland, a country whose debts overwhelmed them during the financial crisis but decided not to bail out their banks.

In a Bloomberg interview this week their president discussed some of the "horror" of life in his country where his people do not send their hard earned taxes to banks to pay out record bonuses.  Brace yourself:

Iceland’s President Olafur Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued.

“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

Iceland’s banks, which still owe creditors about $85 billion, were split to create domestic units needed to keep the financial system running, while foreign liabilities remained within the failed lenders.

As a consequence, “Iceland is faring much better than anybody expected,” Grimsson said.

“How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks,” said Grimsson

Wait a minute?  I don't understand?

Iceland let their banks take losses?  They split their banking units and allowed the bad debt to be liquidated?  And......

There is still a country there?  It did not explode as we have been told will happen here in America? 

How unfortunate for their people that they are not taxed to pay for a Goldman Sacs and Bank Of America to give out exorbitant pay. 

Fortunately, there will be no more Iceland "tragedies" moving forward as the IMF (a group of bankers) is sending in the Trojan Horse to Ireland (to save the bankers) as we speak.

Saturday, November 27, 2010

Spain Too Big Too Bail: ECB Ready

The following is a helpful visual to show the bail out needs to fund the upcoming bankrupcy of Ireland, Portugal, and Spain, which I discussed in detail on Wednesday.

Under the current size of the EFSF (which is the European bail out fund, similar to the TARP bail out fund created in America) they have 565 billion euros still available.

After an estimated 85 billion for Ireland, 50 billion for Portugal, and 449 billion needed for Spain, they would be short 19 billion euros:

After realizing that the market would put together this simple math, the second in command at the European Central Bank (The equivalent to our Federal Reserve) Axel Weber had this to say:

"It should be easy to convince markets with the EFSF backstop that speculation against governments will not be successful.  The facility provides for up to E440 billion in government-guaranteed loans, which is in addition to a pre-existing E60 billion EU emergency fund. The IMF has also pledged up to E250 billion, bringing the total pot to E750 billion. Weber said he was convinced that if the E750 billion is not enough, Europe's political leaders "will do more."

Translation:  If the European leaders do not have the political will to bail out everyone, or if it is just simply not possible with the funds available, the European Central Bank stands ready to print.

(Not to get too far ahead, but next up on the bail out list would be Italy.  Then it would move over to either the UK or Japan, and it will finish with the United States.  All will need a fresh ocean of printed bills to cover the tab)

Gold continues to peer on at these events with a watchful eye.

Thursday, November 25, 2010

Nigel Farage

In a sea of chaos that is the current global political environment, every once in a while you can hear a voice of reason from within the pure madness that now governs our world.  One of those voices was heard this week at the European Parliament. 

Wednesday, November 24, 2010

The Day The Dollar Died

The following video provides a terrific account on how the end of the dollar will occur.  My view since the inception of this site is that the pressure within the markets will build and build, and the collapse will come suddenly. It is possible this could occur in the span of one trading day, and the video below explains how this can/will happen.

It is important to note that the creators of this video have left nothing out in terms of how America could respond to this crisis and stop the dollar from falling.  The government will be completely helpless.  The only solution they will have to try and stop the run on the dollar will be for the Federal Reserve to print additional money which is the equivalent of dumping gasoline on the fire.

Happy Thanksgiving to you and your family.  Let's hope that and I am wrong and this is not the outcome for the financial markets.

Up Next: Portugal And Spain

The focus of this site is to study the past in great detail, observe what is taking place around us in real time, then process that information to get an understanding and form a discussion about what is coming in the future.  To stay focused on the future tense.

With Greece and Ireland now taking home their cozy bail out money for the holidays, the focus will be on the next two dominoes in line:  Portugal and Spain.

Before we get there let's take a look at the size and scope of the Greek and Irish bail out to get an idea of the current blueprint being used.

In 2009 the GDP (Gross Domestic Product, which is the measure of the total size of an economy) for Greece was $331 billion.  Ireland was $221 billion.

All these countries we are discussing run an annual deficit, which means they have to borrow from the market in order for their government to pay their bills every year.  Their income (taxes) are less than their expenses.

It appears the blueprint for the EU bailout committee has been to provide the countries with 3 times their annual deficit.  This means they will give them enough money to cover their annual shortfall for the next 3 years.  Their hope is that this will calm the market and give them time to put together some sort of strategy to fix the problem. (Which they won't, but that is for another discussion)

Using this strategy, the final total for the Greek and Irish bailouts have come in at 90 billion euros, or $122 billion.

With this blueprint in mind we can now focus on the coming cost to bail out Portugal and Spain.

Portugal is anticipated to run very similar in size to Greece and Ireland; their GDP is close in size at $233 billion.  Their bailout will follow Greece's model, however, because it will be needed for their collapsing economy and unemployment.  Ireland's was needed to cover bank losses.

Everything good so far.  Just another speed bump along the way, right?  Right, but here is where it gets interesting:

Spain is not similar in size to these 3 countries: it is a MONSTER.  Its GDP is $1.468 trillion, twice the size of the other 3 combined.

In order to cover their annual deficit for the next 3 years and follow the current blueprint the total cost will be:  450 billion euros or $600 billion!

This will take an enormous amount of political will to force a bail out of this size through using the current process in place.  (Remember, other countries in the EU have to band together to pay the bill, along with the IMF which is composed of funds from many countries outside the EU such as the United States)

This is why these events are so important to be thinking about now, and you have to track the political atmosphere daily to determine how your portfolio will be affected from either outcome.

Stay tuned, I will be tracking these events in real time as we progress forward.

h/t Gonzalo Lira

Tuesday, November 23, 2010

Stocks Vs. Starvation

The Fed minutes were released today from their policy meeting when they made the Quantitative Easing 2 announcement.

From the minutes:

"Most participants judged that a program of purchasing additional longer-term securities would put downward pressure on longer-term interest rates and boost asset prices; some observed that it could also lead to a reduction in the foreign exchange value of the dollar. Most expected these changes in financial conditions to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate."

The Fed is now openly announcing that their new mandate is to promote higher asset prices (the stock market) by reducing the value of the dollar.

Unfortunately for the Fed, stocks are not the only asset investors can purchase with their newly printed dollars.  There is also an asset called agriculture.  The following chart shows the world food price index over the last few years.  As the Fed continues to pour new money in, the cost of food moves up and people begin to starve around the world.

The circle to the left highlights the level food prices needed to reach to create riots around the world back in the summer of 2008.  It also shows that prices have now once again reached that price point.  Moving forward the Fed will need to decide between global starvation or allowing the stock market to fall to its free market level. 

Monday, November 22, 2010

Irish Bail Out Confirmed

Legendary investor Jim Rogers took some time to speak with RT news with his thoughts on the Ireland bail out last night. (video below)

To understand the situation in simple terms: 

The Irish banks owed a tremendous amount of money which they did not have the ability to pay back.

If the banks could not pay back these loans there would have been major losses on the balance sheets of other banks around the world including the United States who lent the Irish banks this money.

Ireland accepted a bail out from the EU and IMF by borrowing additional money to pay off these loans.  The banks still have the original debt, plus the country now has the new debt which will need to be paid for by their citizens.

Pay close attention as the European debt crisis will emerge on our shores very soon in places you may heard of such as: California and Illinois.

Fortunately Americans will have to make no sacrifice similar to the Irish who will now see budget cuts for public workers and tax increases as part of the bail out.

We have a savior named Ben Bernanke who will simply purchase the toxic debt from California and Illinois. 

In other news today Coin Updates News is reporting massive silver shortages in the physical market as it become tougher and tougher for investors to acquire the actual metal.

The game of musical chairs has begun.

Sunday, November 21, 2010

The Last Bubble City

I'm up in DC this weekend visiting some friends and watching a lot of football.  I enjoy coming up here when possible because it is like taking a trip to another country.

Everywhere you go, every restaurant and bar is packed and people are throwing around money like it's 2007.  This city has not skipped a beat during the entire recession and many of my friends up here do not believe me when I tell them what it is like in places in America outside the beltway.

DC is the last great bubble in America.  It is the visual representation of our government's ridiculous spending.  The Federal government continues to hire workers at a reckless pace and pay them extravagant sums of money with only the promise for pay increases in the future.

They do this as our country is already bankrupt on paper and now only waits for the markets to remove confidence in our debt and end the absurdity. (Just as the market recently did with Greece and Ireland, and they will do to Portugal next)

The market is taking down the smaller weak countries first and they will move to the United States last.  After ending Portugal's government spending spree, the market will move on to Spain and then either the UK or Japan.

The United States will most likely be the last government debt bubble to collapse and when when it goes it will explode in spectacular fashion as this is the largest debt bubble the world has ever seen.

In the meantime our country is held together by two components:

1.  The food stamp program which is growing at an exponential pace

2.  Emergency federal unemployment insurance.  This program is set to expire on December 1st and would leave 2 million Americans broke and starving.  There would be 6 million uninsured by the first quarter of 2011.  Look for this program to be extended soon by Congress.

The following video provides a visual on the growth of the food stamp program from the start of our current depression in 2007 through today.  Once the US government debt bubble explodes and they are no longer able to support America through food stamps and unemployment checks, America's true economic power will be revealed.  It will be crystal clear that the emperor has no clothes.

In the meantime I will enjoy the rest of the afternoon up here in the bubble, and hope that my friends appreciate the artificial wealth around them before it disappears for good.

Thursday, November 18, 2010

The SeeSaw

The markets have begun to move in a seesaw like fashion that essentially hinges on the current direction of the US dollar and the Euro.  Or it can be classified as:

US dollar weakness and Euro strength = Risk On

US dollar strength and Euro weakness = Risk Off

Since the Jackson Hole speech Bernanke gave at the end of August when he signaled to the market his intentions for Quantitative Easing II, it has been continuous dollar weakness and risk on.  In this environment essentially every asset rose across the board, and some exploded to the upside. (commodities)

Since the day QE II was announced and leading into the early part of this week with the Ireland default concerns, we have seen the opposite side of the seesaw move;  The euro weakened, risk came off, and assets fell across the board.

This morning we received word that the "bailout crew" (The IMF and ECB: the banks that can print money) had arrived in Ireland, and the market became hopeful that an agreement would take place.  This eased rates on Irish bonds, the Euro rose, risk came off, and every asset rose while some exploded to the upside. (commodities)  I wrote in detail about the Ireland bail out earlier this week.

So what does this all mean? 

It means you have to pay close attention to events taking place now around the world and events that will take place that are unseen under the surface.

The unseen events are:

The next Euro defaults: Portugal and Spain

The next American defaults: California and Illinois

The strategy to employ as an investor is to understand what investments will perform well in the final endgame and plan on purchasing them when the seesaw moves in the right direction.  For example, if and when the euro weakens again because of problems with the Ireland bail out or concerns over the next default then these assets will most likely fall AND will perform well in the final endgame.  This should be regarded as an opportunity to add to current positions:

Gold, Silver, Oil, Agriculture, Canadian dollar, Australian dollar, Asian currencies and stocks

Then there are assets that will most likely fall, but should not be purchased:

American stocks, American muni bonds, corporate bonds, long term treasury bonds, junk bonds

Then there are assets that will continue to fall in either seesaw movement, and should not be purchased:

American residential real estate, American commercial real estate

I will discuss how the final endgame will play out in the future, but this should provide a view of how and why the markets will perform over the next few months.

Uh Oh

It is fairly obvious the direction home prices will soon be taking with 40 months of shadow inventory ready to enter the supply stream, unemployment continuing to surge, and our depression moving into the next leg down.

But what if the artificially government suppressed mortgage rates were to actually start rising?

The chart below shows this past week's move in rates.

Uh oh.....

Wednesday, November 17, 2010

Euro Zone Big Picture

The following pie graph provides an excellent visual on the size of the PIGS (Portugal, Ireland, Greece, Spain) debt in relation to the entire Eurozone.

Ireland (1.7%), Portugal (1.8%), and Greece (4%) are small potatoes and can easily be contained.  However, if interest rates begin to rise in Spain (9%) and then move to Italy (23%), the contagion will be uncontrollable at that point.

This is the reason the European leaders are trying to put out the Irish fire as soon as possible.  While they could care less about Ireland, they need to keep the flames away from these other countries.

The pie graph is on the left and the interest rate spreads are the right.  The higher the rate, the more the market is pricing in default. (And the more it costs these countries to purchase additional debt)

Clock Ticking On Ireland

If you'd turned on the news or scanned through some financial headlines over the past few days you have seen that Ireland has now become the new problem in the European Union.

While all the PIGS (Portugal, Ireland, Greece, Spain) are moving toward insolvency/crisis, they have come in stages up till now.

The breaking point is determined by the market when there is a run on the debt.  This causes the interest rates on their bonds to rise significantly and causes the cost to insure the debt (CDS) to rise along with it.

This happened to Greece last spring, and it has finally reached the next chapter in the form of Ireland when last week their bond market began to implode.

The Irish story is far different than the Greek one told last spring.  The Greek crisis was focused on their government debt, meaning they were closing in on the moment when they would be unable to make current payments, and their ability to borrow new money had dried up.

It is the equivalent of living on credit cards and continuing to open up new cards every year to pay for last year's spending.  It is also known as a ponzi scheme.

If the Greeks defaulted on their debt, they would have had to work out a deal with the people who lent them the money.  For example, they may only pay 10% of their "credit card" bill, and they would start over fresh.

This is the way free market capitalism works, and it is the way it should have happened.  The problem with this situation is that the other banks throughout the European Union in other countries that lent Greece money would take major losses on their balance sheet if they were to default.  This would create what they call "contagion" as these losses would lead to bank failures and additional losses.

So instead of allowing that to happen they created their form of the TARP program, which they called the ESFS.  Greece received a $120 billion loan and a formal program for bailing out countries was now in place.

Six months later: enter Ireland.  Only this story has a slightly different twist.

The Irish crisis is not in their government debt, they have enough cash to fund themselves to July 2011 and possibly longer, it is within their banking system.

Back in September 2008 during the height of the financial crisis, Ireland decided to fully backstop their entire banking system moving forward.  That move then has led to this crisis today as their banks are closing in on the "Lehman" moment.

The markets have been shaken over the past few days because Ireland has not been fully open and excited about receiving the EFSF bailout.  (The bailout comes with strict restrictions on how your country is run moving forward)

You probably remember the Greek riots last spring, but on the news today there are no riots in the streets of Ireland.  This is because the problems are all with the banks.

What is fascinating is that if Ireland takes the bailout, they will be forced to enter into a massive austerity (spending cut) program which will then bring the Greek lifestyle to the Irish people.  Then you will see the rioting.

The bail out is not for Ireland, it is for the $650 billion in bank exposure in other countries around the world.  However, the Irish people would be the ones paying for this bail out.

Stay tuned, this story is changing every hour.  The implications of how this is handled will be massive for the currency markets, which now have a major impact on stocks, bonds, and commodity prices.

I will comment much more on that topic as the final bailout decision and outcome become clear.

Monday, November 15, 2010

Keeping The Party Going

As our country moves every day toward its own Greek/Irish insolvency crisis, it is always helpful to look at the drastic steps our leaders are taking toward keeping costs in line.

This week USA Today took a look at one budget component: federal employee pay.  They found out that:

"The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office"

The numbers are stunning: those earning over $150,000 in the past five years have grown from 7,420 to 82,034, a 1,006% increase. More shockingly, those earning over $180,000 has surged from just 805 in 2005, to 16,912 in 2010: a 2,001% increase.

In response to this runaway reckless spending, Congress has decided to clamp down and only give the 2.1 million Federal workers a 1.4% raise this year across the board.

That was not a typo.  The salaries are increasing.

I have friends who work for the federal government or work for a company that does work for the federal government. They make an exorbitant amount of money.

And you know what?  They are doing the right thing.  Why not continue to cash out while the money is good?

As long as they continue to funnel their massive paychecks into non-dollar based investments (which many of them are), and they keep their passport ready to exit America once this party is over, then god bless them.

We will leave the baby boomers here with their $100 trillion credit card tab.  And please don't worry, I am positive you'll find someone else who is more than willing to pick up the bill.

h/t Tyler Durden

Saturday, November 13, 2010

Saturday Morning Cartoon

Very simple and straight forward explanation of Quantitative Easing.

Friday, November 12, 2010

Nassim Taleb: Bloomberg Interview

Going Full Circle: Looking Forward

The following graphic provides an excellent visual as to how the crisis will unfold over the next few years.  It will come in staggered stages, like continuous endless punches to the stomach, as our government will never allow insolvent or inefficient banks or companies to re-structure themselves into profitably and economically viable entities. 

The expense will continue to mount on the backs of the blind public until we reach the final currency crisis, which is pegged below in 2013 as Bretton Woods II.  (Bretton Woods I was when the US defaulted on its debt in 1971, and took the world off the gold standard.  Since that point we have had the first global fiat currency structure, meaning no currency around the world is backed by anything of value, and Central Banks have the ability to print endlessly.  This structure has brought a never ending stream of bubbles/crisis which will culminate in "the big one" sometime around 2013.The big one will materialize as the complete collapse of the dollar)

I agree with the chart and its timeline completely.  I see the commercial real estate collapse coming around 2012, just as the currency crisis is entering its final stage.  The goal at that point will be to begin selling your gold and silver to purchase commercial real estate assets.

I will be able to help readers and investors with the second portion of that process when the time comes.  I am working extremely hard today to prepare for that future tomorrow.  Until then, continue to accumulate precious metals and enjoy the show.

Californians Drinking Irish Beer

Most financial advisors today are telling their clients to invest in bonds because they are safe and that way they will not lose money in the "dangerous" stock market.

Most Americans think bonds are a risk free asset that just pays them a monthly interest payment.

The following chart shows the PIMCO Municipal Income Fund II.  Municipal bonds are state debt.  Most states are currently bankrupt and most bonds will go to zero if a bail out does not come soon.

The cliff dive to the left of the chart shows investors getting slaughtered in this fund.  Losing money.  Losing their retirement.  Enjoying the "safety."

The next chart shows PIMCO's California Municipal Income Fund II.  The slaughtering is a little more extreme. 

Much more pain ahead for the investors currently sitting in their "safe" bond funds.  Currently sitting in the greatest asset bubble ever seen, soon to explode around the world.

Stay tuned.

h/t Barry Ritholtz