Saturday, July 10, 2010

Dinner With A Friend

Last night I had the great pleasure of having dinner and drinks with a good friend of mine who I sold custom homes with in Charlotte a few years ago.

We started the evening at her home having some wine with her husband in their beautiful back yard.

They are phenomenal people who have raised three children who are now out in the world succeeding in various ways.  They also belong to the 1% club.

As most people know, the top 1% of Americans control 99% of the total wealth in the country.  Her husband is a lawyer who runs a national mortgage company and employs over 20% of all the brokers in the state of North Carolina.  He's a powerhouse.

I salivate at the opportunity to spend time with members of the 1% club as I am not part of it nor are the parents that raised me.  Far from it.

I had the chance to ask detailed questions on how he created his business and how he was able to stay successful and continue to grow over the years.

I also had the chance to tell him about my personal business goals and ask his advice on how he would proceed if he were in my shoes today.

The best part of the night was when we went to Providence Country Club for food and additional drinks.  They have been members of the club for many years and multiple people sat down at our table during the night to chat.

All guests we spoke to ran large businesses and were members of the 1% club.  It amazes me how much wealthy people enjoy talking about business, money, and of course; politics.

Most people we spoke with had a similar outlook on the future of American business.  As readers of this site are aware, Obama and his team of mass economic destruction have declared war on the 1% club.  He has tax increases coming next year that, along with Obamacare taxes, should annihilate any small business growth over the next five years thus destroying the foundation of economic and job growth.

The discussions about the national debt crisis were far more mixed.  American born people we spoke with felt we had about 5-10 more years of slowing growth before the country collapsed.  One man, however, who was born in the UK felt that Obama would bring the nation into bankruptcy before the next election.  He grew up in the UK during their debt crisis and can remember food shortages and economic disaster first hand.

Americans have experienced essentially uninterrupted prosperity for about 80 years.  (The 1% club admitted this during dinner and felt it had an impact on their outlook)

The food was fantastic and it was great to see my friend.  I work hard everyday in hopes that one day I'll be able to sit at the club with her and her husband, not as a guest, but a member of the 1% club myself.

Friday, July 9, 2010

Second Half Outlook 2010

I churn through just about every piece of economic data that is released on a daily basis.  Similar to watching the Red Sox scores at night, it helps me track where we are in respect to the direction of the global economy.

I pay less attention to the day to day movements of the markets, or the technical charts that the that traders love to follow. (Although this is still an important piece to the complete picture)

Looking ahead to the second half of this year there are three important questions: What is the picture that the data is painting, what will be the political and monetary response to that picture, and how will that affect the markets and different investments?  It is a series of causes and effects that the world economy continuously follows.

Let's begin with the picture itself.  The sky is darkening across the board for the economic recovery as just about every indicator is rolling over.

Today we received the weekly Leading Economic Indicator index which has now fallen to -8.3% from -7.6%.  I discussed this index in detail in The Stage Is Now Set.  As a reminder, when this index falls to -10%, it has forecasted a recession 100% of the time.  We are closing in fast.

A second indicator released daily is the Baltic Dry Index.  90 percent of the world's traded goods are shipped by sea, and this index tracks the cost  to ship dry commodities.  When the cost drops it means that global trade is slowing.  (To understand why imagine there are five ships on a dock.  If only four ships are needed then they all have to compete for that service and they will lower their prices to attract the customers.)

This index has now seen 31 consecutive drops and is back to the March 2009 lows.  It is not showing a slowdown in global trade, it is showing a depression.

For the 9th week in a row money has left equity (stock market) mutual funds and moved into bond funds.  The public continues to feel the slowdown and they are moving their money to protect themselves.  While they are probably making the right choice in the very short term, the bond market will be the next market to experience tremendous pain.  Most investors will not get out in time. (More on that to come in the future)

As I have discussed in detail in the past, our economy is fundamentally flawed in that it is based on borrowing and spending.  This structure is what created the credit bubbled that burst in 2008, and we have only just begun the deleveraging process. 

Over the past two months consumer credit has fallen by $24 billion, a remarkable plunge.  This means that Americans are paying down debts, specifically credit cards, instead of borrowing additional money to spend.

While we have experienced an "inventory re-stocking" since the March 2009 lows, many cautious observes have worried that there will not be final demand from the consumer for these goods.  During the financial crisis companies slashed inventories (smartly) as the demand fell rapidly.  They have now re-stocked their shelves, car lots, stores, etc, as consumer confidence has risen with the stock market and social mood.  This re-stocking improves the look of economic recovery and GDP as businesses are buying goods.

However, when the stores are re-stocked it is important that someone actually comes in to buy the goods.  Unfortunately, retail numbers and the consumer credit data are showing the exact opposite taking place.  Consumers are not borrowing to go out and spend; they are paying down existing debt and saving.

There is no final demand, and this is will bring our make believe fairy tale economy to its knees.

It appears that both residential real estate and the jobs market are poised to roll over during the second half of the year.  This will be another crushing blow to consumer confidence.

Our political leaders and Federal Reserve chairman, Ben Bernanke, understand that this is happening.  The second question now that we understand the economic outlook is how will they respond?

My guess is that you will see another round of Quantitative Easing, a fancy word for printing money and buying assets, from the Federal Reserve.  They may begin to buy municipal bonds, corporate bonds, additional mortgages, or treasury bonds.  Anything to free up cash for consumers and businesses to continue to spend.

The government will most likely step in with stimulus 7.0, or whatever number we are on now.  This will come in the form of unemployment benefits, help to local governments, or even sending checks to mail boxes in creative ways. 

Both these actions will be the most destructive possible for an economy that is desperately trying to heal and re-structure itself.  The heroine patient is lying comatose in the emergency room, and Bernanke and Obama will soon enter with enormous needles filled with more poison.

Now that we understand the economic picture and can see how our leaders will respond, the last question is how this all affects the markets and your investment strategy.

My view is that we will enter a period of disinflation over the second half of the year.  Assets across the board will fall in value and it would be wise to raise cash now, safe cash, to prepare for better opportunities.

I am not selling the investments I already own, but I am not putting new money to work in any markets at this point.  My hope is that the most desirable investments, such as precious metals, will fall in value with everything else, and investors will have one last opportunity to buy in at lower prices.

Enjoy this time in history, its going to be incredibly exciting.

Wednesday, July 7, 2010

Tracking The Bull

The following graph compares the current bull market in gold, now 9.5 years in duration, against two previous bull markets:

The Nasdaq (1988-2000) and Gold (1968 to 1980)

Both markets followed the historic pattern of secular bull markets moving slowly during the skepticism phase, then entering the optimism phase, followed by the mania phase where prices move upward in a parabolic manner.

Gold entered the optimism phase when it crossed $1,000 and will enter the mania phase sometime around 2012 if it follows the same timeline.

Tuesday, July 6, 2010

Niall Ferguson

Niall Ferguson discussing the approaching United States default.


Hope everyone had a great 4th of July weekend!

I had the opportunity to do some traveling this weekend.  I spent Saturday at Lake Anna with some old friends at an incredible lake house.  Sunday I spent the day with some college friends in DC, and on Monday I got to see my cousin who is living in Raleigh.

The weekend was a great time, and I also did a ton of driving.  During the drive I had the chance to listen to a book that I have been looking forward to: "Bounce; Mozart, Federer, Picasso, Beckam, and the Science of Success" by Matthew Syed.

The book was phenomenal and anyone who read and enjoyed Malcolm Gladwell's "Outliers; The Story of Success", you will love Bounce.

It takes some of the main concepts from Outliers, such as the 10,000 hour rule (my favorite chapter) and expands on the topics while adding additional insight, ideas, and real life examples.

It is a study of successful people in all types of fields (athletics, chess, business, etc) and how they are created both by their physical efforts as well as how they think; their mental toughness or beliefs.

I strongly recommend it for summer reading, and I will add it to the recommended reading list below.