Monday, September 6, 2010

Tectonic Plates Shifting

I heard a great analogy this weekend listening to an interview with financial analyst Jim Rickards.  In the interview he mentioned that the current financial environment is similar to walking on along the surface in California.

To the everyday person things may feel very calm during their afternoon walk.  However, if you were walking with a geologist, he may be able to determine that the plates under the surface were very unstable and that there was the potential for a tremendous earthquake at any moment.

He could not tell the exact moment it would occur, but he knew based on the tectonic plate movement that disaster was almost inevitable.

I imagine this is how astute financial investors felt between 2005 and 2008 as we led up to the credit crisis.  You could use tools, data, and common sense to view that under the surface there was significant pressure building, however, to the average American everything felt normal with no danger in sight.

I feel the same way about the current financial environment we live in today.  Under the surface on a daily basis I see indicators that show a troublesome culmination of pressure building.

As was the case before, these indicators are not visible to the untrained eye.

One of these indicators is the continued credit problems in Europe, something that has essentially been forgotten by the mainstream media.  The spread or "cost" to purchase Greek debt is now back close to the all time highs of just a few months ago.

July data released this weekend shows Greek residents and businesses continue to pull their money out of the country and deposit it into accounts in Switzerland.  (Assuming that is the location based on the recent strength of the Swiss franc)  The same pressures are building in countries like Spain and Portugal.

The investment community, even with the trillion euro lifeline by the IMF, does not believe that the problem is solved.  They are still betting their money that Greece will ultimately default.

This past week, in a very quiet move, the IMF announced the formerly capped lifeline to European countries as now being unlimited.  They see very big trouble on the horizon.  The IMF is the equivalent of America's Federal Reserve, except it is the world's central bank.  By unlimited support, they mean unlimited printed dollars.

On our side of the ocean the danger can be seen in our economic data deteriorating across the board.  This has made the ongoing depression that we entered in December 2007 once again visible to those making investment and hiring decisions.

The major reason that things appear so calm on our surface is the unprecedented level of government support to keep the economy artificially propped up.  Americans can now receive unemployment checks for a total of 99 weeks because of the recently reinstated Emergency Unemployment Claims.

This has been a tremendous boost to the economy as the effects of unemployment have yet to truly be felt.  In addition to this boost we now have close to 20% of American mortgage holders not paying their mortgage.  This former cost now goes directly into their pockets or to the store to purchase a new ipad.

The government has just announced another $50 billion spending bill designed for roads, rails, and runways.  This will be another effort to create additional government jobs.  The government now supports the housing market, too big too fail banks, auto companies, the military, medicare, social security, its army of Federal workers, and sends checks every week to the unemployed.

This is all financed through the issuance of debt every month, and this debt is now in large part purchased by the Federal Reserve.  This scenario, also known as a ponzi scheme, cannot last.

However, on the surface today everything appears calm.  It takes the financial form of a geologist to be able to peer under the surface and view the troubling tectonic movements.

The time to prepare for an earthquake is before it comes, and there is definitely one on its way.

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