Saturday, December 31, 2011

Thank You And Happy New Year

Thank you to all the readers who continue to follow the site.  It has been exciting to watch my viewership grow from under 2,000 views my first year writing in 2008 to just under 50,000 views in 2011 (and close to 12,000 in the month of November during the peak of this year's European anxiety).  I look forward to another fun year of writing.

I will be releasing my complete 2012 Outlook during the next week.  For those that would like to review my 2011 Outlook you can do so by clicking here.  I was essentially correct on sovereign debt, housing, and stocks, but was wrong on the municipal bond market in the US. I was in the Meredith Whitney camp that there would be widespread defaults this year.  That has not come to pass, yet.

To end the year I will leave you with a piece from the godfather of investor newsletters, Richard Russell, who has been covering the markets for close to 50 years. 

“This year's close for gold marks the 11th year for higher year end gold closing.  To my knowledge this is the longest bull market of any kind in history in which each year's close was above the previous year.  This fabulous bull market will not end with a whisper and a fizzle.  I continue to believe that the upside gold crescendo of this bull market lies ahead.  We are watching market history.”

“I note the frustration and anger of the anti-gold crowd. To miss 12 years of rising prices is enough to make any investor furious with himself. I would guess that 99 percent of Americans have never participated in the gold bull market. Thus, sour grapes is the sentiment of the gold-haters. Happy to say my subscribers who listened to me in the early years of the gold bull market have enjoyed the riches bestowed upon them by the greatest bull market in history.

Below are the last day of the year quotes for gold.

2000 -- $273.60
2001 -- $279.00
2002 -- $348.20
2003 -- $416.10
2004 -- $438.40
2005 -- $518.90
2006 -- $638.00
2007 -- $838.00
2008 -- $889.00
2009 -- $1096.50
2010 -- $1421.40
2011 -- $1566.80

Gold pessimism grows. Market Vane's bullish consensus has plunged to a rare 56%, lowest percentage in recent years. Gold had been down six days in a row and is now heavily oversold. This may be the final much needed washout before the eventual blow-off.”

This bull market in gold has required tremendous patience as governments have constantly been active in a game of psychological warfare against the long-term gold holders. This latest correction has tested the nerves of even the staunchest bulls.

Friday, December 30, 2011

2011 Asset Returns

The following shows the annual asset returns for 2011.  The big winner? 10 year US treasuries at 16.7%, which are currently in the final stage of a bubble mania.  Gold finished up for the 11th year in a row at 8.9%.

Thursday, December 29, 2011

WSJ: 2011 Year In Review

Before we look ahead at what is in store for 2012, we need to take a look back at how much has transpired over the past 12 months.

Movie Sales Down 4.2% In 2011

Movie sales are down 4.2% this year.  I think this is a combination of more Americans waiting for movies to come out and watch on their big screens at home for $1 at the red box (I am in this category) and a lower quality of original new ideas for movies being released.  The graphic below shows the top 10 movies in 2011 in terms of ticket sales.  The top 7 are all sequels. Click for larger graphic:

Precious Metals Fear And Panic

The precious metals market is in a complete panic right now.  Pessimism in the market is unprecedented, nervous investors are dumping their positions, and the weak hands are liquidating everything they can get their hands on.

I have not been this bullish on gold and silver in 18 months.  I hate to buy investments when they are rising and while I enjoyed the run up over the past year and a half in my current holdings, I continued to raise cash all the way up, sadly watching prices runaway higher.  I recommended the same thing to long time readers of this site, week in and week out, by saying the following:

Hold your current positions and raise new cash for a coming buying opportunity.

As markets soared higher I received emails and phone calls from people upset that they were not buying silver at $27, then $35, then $40 as it ran toward $50. 

When the price of silver hit $30 a few weeks ago I made my first investment in the market in close to 2 years.  When it fell I bought more.  Yesterday it fell and I bought more.  Tomorrow, if we are fortunate to have the price go lower I will buy more.  If it continues to fall, god willing, I will buy much, much more.

The people that desperately wanted to purchase silver at $40 now email me in panic on whether they should dump everything at $26.  Could silver fall to $21?  $17?  Back to $8 like in 2008?  I have no idea.  I hope so.  It will be years before I sell my silver.

If my goal is to have X number of ounces when we reach the mania stage of our bull market, when the sovereign debt crisis reaches the shores of the United States, then can I not buy more silver ounces at $8 than at $50?  Doesn't a lower price help me obtain more?

Some investors want to know if I think prices are going lower, shouldn't they sell today and try and re-buy in the future?  My answer is no.  I have no idea where prices are going tomorrow.  I do know that when prices are lower and sentiment is at extreme lows I like to buy. 

I do not know if we will wake up tomorrow to a global central bank intervention like we did 3 weeks ago.  I do not know if the Fed will announce QE3 tomorrow, or the ECB will announce QE1, or China will announce a new stimulus program, or Japan will announce another round of QE.  I know all these things are coming, but I have no idea which night they will occur while I'm sleeping. 

Do not be shaken out of your position by someone on television that makes money selling stocks and bonds.  Do not be shaken out of your position by your real estate agent who says that the best store of value would be purchasing a home.  Take a moment and think about if anything has changed in the global banking system that would make precious metals a worse investment because they are on sale.

For 18 months I have been saying to hold your positions and raise cash.  Now I am saying that it is time to take that cash and begin making purchases.

I am not a financial advisor.  Please contact one before making any investment decisions.

Fed Official: Fed Is Bailing Out Europe

I will be writing much more on the two large announcements over the past month (the global swap lines opening for the Fed to supply money to European banks and the new ECB LTRO program).  In the meantime, a great interview with a former Fed official Gerald O'Driscoll who says the recent swap lines are a direct bailout from the Federal Reserve to Europe.

Wednesday, December 28, 2011

David Morgan: Gold Opportunity

David Morgan, probably the best analyst in the world on silver mining stocks, discusses the current gold "massacre" with Fox Business News.

Gold Vs. Total Money Supply Update

Another great video from Michael Maloney discussing where we are in the current gold bull market measured by the total outstanding credit and money supply.  In the early 1930's and in the late 1970's gold revalued itself to account for the total money supply.  Maloney believes this revaluation is coming again and describes where gold would have to move in order to back the outstanding money and credit.

Tuesday, December 27, 2011

Home Prices Falling: When Will They Bottom?

Lots of real estate data to cover this month so it is a good time to review where we stand in the short term.  The Case Shiller Index just announced that October prices were down 1.2% month over month.  The index is down 3.4% year to date and down 32.1% from the peak in 2006.

Earlier this month we received home price data from other sources:

FNC: down .6% month over month

Radar Logic: down 2% month over month and down 5.4% on the year

Core Logic: down 1.3% month over month and down 3.9% on the year

New home sales surprised to the upside this month rising to an annual rate of 315,000.  The majority of the construction is coming from the multi-family sector (apartments).  The graph below shows the starts going back to the 1960's and clearly shows that the industry remains in the trough of a depression.

Core Logic provided the important update on shadow inventor through October showing that there are currently 1.6 million homes over 90 days delinquent, in foreclosure, or Real Estate Owned (REO) that are not listed on the market (held on the banks books in the shadows).  The following graph shows this enormous mountain that is slowly working its way lower as banks finally begin to slowly put homes for sale.

Years ago when I was writing about the the housing market I felt that before the market had bottomed the stigma from being a renter would be removed and there would be a stigma around being a home owner.  The process has taken much longer than I expected and is still not complete, but I came across an article this morning titled "America Becoming a Nation of Renters."

The article states:

With U.S. unemployment at a lofty 8.6 percent, home foreclosures rising and property prices under pressure, more and more Americans have given up the dream of owning, opting instead to rent, a shift that is remaking the face of the U.S. housing industry.

I have said when we reach the point when Americans feel that "they never want to own a home again," a message that is strong within the under 30 group who have only known falling prices since leaving college, it will market the point when it is time to buy.

We are far closer to the bottom of the real estate market than the top.  As the last swell of inventory enters the market, interest rates begin to rise, and pessimism toward home ownership reaches a crescendo, prices will make their last major fall downward.  Then it will be time to enter the market and get your piece of the American dream.

h/t Calculated Risk

Sunday, December 25, 2011

Remembering What Is Important In Life

Merry Christmas and Happy Holidays to everyone.  I am at home this week with my family, which always makes me appreciate the important things in life; my friends, family, and loved ones.

Unfortunately, we are at a point in our current economic depression where things will be getting much worse for our country as a whole before they will be getting better.  The people in charge of economic policy and deficit spending will only make a difficult decision after we experience a major collapse, and a major collapse is what is coming.

Difficult times have a benefit in that more people will become closer to their family and friends.  My complete 2012 outlook will be released in the next two weeks.

Wednesday, December 21, 2011

John Talbott: "It Is Time To Buy A Home"

Back in 2004, as real estate prices were soaring higher by the hour and making millionaires out of everyday home owners, I began reading books on investing in real estate.  I remember going to the bookstore and there would be about 5 full sections in the business area dedicated to real estate.  They would put all "other" business/marketing/sales books into the last section.

On the shelf at the time there were only two books (out of about 700) that were warning about trouble coming for home owners.  They were:

1. "How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble" by John Rubino (2003) 

2. "The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment" by John Talbott (2003)

Both authors had a clear understanding of why home prices had risen to unsustainable levels (easy credit) and described ways to profit off the fall (shorting home builders and Fannie/Freddie).  It is worth noting that both authors were about 2 years early and were ridiculed at the time; similar to those warning about dot com stocks in 1998.

Talbott then wrote another book in 2006 titled "Sell Now! The End Of The Housing Bubble."

The reason why I am providing this brief history is that Talbott wrote an article in the Huffington Post this week titled "Homes - Buy Now." I was shocked when I read it.

He begins the article by stating:

"I have been waiting for more than five years to offer this advice. It is now time in most cities across the country to buy a new home or refinance your existing home with thirty-year fixed rate mortgage debt."

He then goes on to provide his reasons why this is the time to buy.

As I discussed yesterday looking at where we are in the market cycle, I believe that we are far closer to the end of the bear market in real estate than the beginning.  However, for reasons I have reviewed in detail here on this site, I believe we have one final leg down before the all clear flag to purchase is waived.  I emailed Talbott this morning to discuss his green light to buy.  I said:

I recently read your article in the Huffington Post; "Homes - Buy Now!", and I had a very quick question for you. I agree with everything you said in your article, and your outlook on inflation and the dollar, but if inflation begins to rise taking all interest rates higher with it (mortgage yields will track higher with treasury yields) will that not impact the purchasing power of potential home buyers and subsequently impact the price they can afford to pay?

John's Response:

Yes, very astute comment, but, academics have found that home prices are one of the few assets that do well in an inflation.  Imagine not a lot of new buyers, but the $30 trillion of stock in existing homes that should adjust upward if inflation is caused by printing new money.

I wanted to provide this as an alternative view from someone out there who had the courage to shout danger when others were buying like lemmings.

I disagree, and I will discuss why in far greater detail in my 2012 outlook for the housing market released at the beginning of the year.  Stay tuned.

Monday, December 19, 2011

Sentiment During Market Cycles

The following flow chart provides a great visual on investor sentiment during the different stages of a market cycle.  From my perspective on where different investment class are today I would say that:

- Gold is in the optimism phase

- Housing is in the desperation phase

- US treasury bonds are in the euphoria stage (maximum danger - peak of bubble)

There is not a market today I feel is at the maximum level of pessimism (point of maximum financial opportunity), such as stocks were in 1981, real estate in 1991, or gold in 2001.  While we still have the final few innings of the gold bull market, including the final euphoria parabolic move higher (point of maximum financial risk), I think real estate is the closest market to being the next great undervalued buying opportunity after we experience the final leg of price declines.

New Requests For Santa

New Housing Strategy: Home Demolition

Good segment last night on 60 minutes discussing the housing market, and a new strategy in Cleveland for abandoned homes: demolition.  As homes go into foreclosure the bank does not take the time or money to board up the homes, allowing vandals to enter and strip everything of value.

It interviews many of the residents in the area that continue to pay the monthly mortgage on the homes that are drastically underwater.  There are 11 million of these unfortunate Americans who now only send the payments in due to principle.  Hopefully no one tells them that they can now live payment free in their home for close to 2 full years if they stop sending the monthly mortgage payment to our too big to fail banks.

Sunday, December 18, 2011

Ron Paul With Jay Leno

The last glimmer of hope for the few Americans (ironically the youth which he discusses) who understand there is continuous harm being inflicted to their country under the surface, those that can see the termites eating away at the foundation, spoke with Jay Leno this week.

Thursday, December 15, 2011

The Sentiment Toward Gold Today

Back in August when gold crossed over $1,900 an ounce, optimism in the gold market had reached a fever pitch.  The daily sentiment index clocked in at 98% gold bullish, a new all time record, as investors across the board were absolutely positive that gold was headed higher.  Here is what I wrote back in August when gold crossed $1,900.

Here is the consensus view of gold today streaming across the financial news wires:
Gold was a safe haven, a hedge and a speculative trade all at the same time,” said Michael Murphy, CEO of Rosecliff Capital, a hedge fund. “Long gold has been a winning trade for years. We expect the selloff in gold to gain momentum into 2012. Traders are finding better hedges, better safe havens, and better speculative commodity plays than long gold.

CNBC: Gold Sheds "Can't Lose Status": No One Wants It

Gold, in the 11th year of its longest winning streak in at least nine decades, is poised to enter a bear market, according to Dennis Gartman.  He sold the last of his gold yesterday.

Bloomberg: Death Of Gold Bull Market Seen By Gartman

Gold bugs over the last two weeks have become even more discouraged than they were at the end of November. And that’s saying something, since they were already quite dejected. Consider the average recommended gold market exposure among a subset of the shortest-term gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). Two weeks ago, when I last wrote in this space about a contrarian analysis of gold sentiment, this average stood at 13.7%. Today it stands at 0.3%, which means that the average gold timer is essentially keeping all of his gold-oriented portfolio out of the market.

MarketWatch: The Gold Bugs Are Throwing In The Towel

Back in August at $1,900 investors could not get enough gold.  Today at $1,550 they are dumping it from their portfolio and have declared the bull market finished.  What has changed? 


The European Union, Japan, the UK, and the United States are bankrupt.  Their banking system is insolvent.  The entire world's debt to GDP has crossed over 330% and is rising by the hour.  Everything that made gold a strong buy back in August, the fundamentals, continue to improve by the day.  The only difference is that gold is now 20% cheaper.  It has gone on sale.

Now is the time to step in and begin accumulating a position.  Can gold fall further?  Yes.  You should buy more if it does.  We are in the early innings of a global sovereign debt crisis, currency wars, and when the game is over there will only be one currency standing.

Bearish Enough

My Mom and I when I go home for Christmas:

Wednesday, December 14, 2011

Howard Davidowitz: Retail Reality Check

Quick Bio for attorney Howard Davidowitz, one of the most respected names in retail consulting:

Davidowitz & Associates is one of the most successful firms in its niche providing consulting and investment banking services to the retail industry since 1981. Their focus is on strategic management, acquisitions and divestitures, restructuring and ownership transactions.  Howard Davidowitz, Chairman and sole stockholder, has extensive experience as a representative of buyers and sellers, and as a principal, in upper and middle market transactions.

Precious Metals Liquidation

The commodities markets have been hammered today due to a stronger dollar (weaker euro) and what I believe will soon emerge as liquidity problems and liquidations in the European banking system.

Precious metals in particular have been clobbered with gold trading close to $1550 and silver falling near $28.50 as of this writing.  As I try and do during every major sell off, I want to remind those holding the metals to take a deep breath and remember that we are in a secular bull market.  During a long term secular market you experience massive pull backs.  Nothing moves in a straight line and pull backs should be welcomed and embraced.

This is why you raise cash when prices run higher and invest funds when prices fall.  I made a purchase in the silver market today as prices fell below $29.

It is human nature to feel great about silver when it was priced at $43 just weeks ago and feel terrible about it today when it is priced at $28.50, but as an investor you must try and think the opposite.  For a review on the long term fundamentals of the silver market please see:

Silver Fundamentals In Review: Supply and Demand

Silver Supply: The Coming Squeeze

Kyle Bass: European Deposit Runs

The man who needs no introduction, as I have spent the past few months posting and talking about him endlessly (see Kyle Bass Discusses What Comes Next), spent some time speaking with David Faber today on CNBC.

Tuesday, December 13, 2011

Harry Dent: 2012 Outlook

Harry Dent, author of The Great Crash Ahead (one of the best books of 2011), discusses what he seeing coming in 2012.

His speciality is demographics and the importance of the peak spending years of the baby boomers (1990's - 2008) and the subsequent importance of their retirement years (2008 - 2022). 

92 million baby boomers are at the point where they want to pay down debt, save for retirement, and pull money from their 401k every month in order to finance their living costs.  What does pulling money from their 401k mean? 

Selling Stocks

Sunday, December 11, 2011

Silver Supply: The Coming Squeeze

Great video from the people over at Future Money Trends discussing the supply and demand components of the silver story.  They finish the dramatic video with the idea that silver could fall sharply due to a liquidity crisis stemming from the European debt crisis followed by a rush to physical silver that would dwarf the 2008 buying spree.  I agree completely. Keep some dry powder ready.

Saturday, December 10, 2011

MF Global Opens The Door To Systemic Collapse

A few weeks ago a clearing house named MF Global went bankrupt.  It was a large firm run by John Corzine, formally of Goldman Sacs and formally in charge of the state of New Jersey. 

We found out after the firm went down that Corzine and his traders had placed enormous bets on European debt with leverage and as European bonds imploded over the past few months they did not have enough capital to keep their doors open.

Financial institutions have failed on a regular basis for hundreds of years (up until 2008 when.....oh, don't get me started) so the bankruptcy was initially not seen as a major event.  However, after the bankruptcy news began to spread that some of the clients were unable to access their accounts and get their capital back.  It turns out that MF Global was betting on European bonds with clients money on deposit and now billions of dollars have gone "missing."  Corzine testified yesterday saying simply, "I do not know where the money is."

Many of these contracts were for commodities purchased through the CME.  It was always implied that in an event such as this the CME would immediately step in and make the accounts whole to keep trust in the system.  However, when it came time for the CME to step up they went silent and turned their back on the customers. 

For more information on these events I would strongly urge you listen to this interview with Gerald Celente, a client who lost a considerable amount of money, and this interview with Ann Barnhardt who has shut down her commodities firm because she can no longer trust the exchanges.  She does not feel comfortable investing her client's funds in the financial system and she is closing her doors.

I discuss this now not only because I feel bad for the customers that lost their funds but because we have an entire financial system that is based on trust.  Everything is interconnected like a massive spider web around the world and if one small portion of the web breaks or even if the other members believe a portion of the web cannot pay you have the possibility of "systemic risk."  This means the entire financial system can implode.

We are moving into a time where things are going to get worse in the short term.  It is important to understand that as an investor, employee, or business owner.  We have gone on a 40 year global credit binge in consumer, business, and government debt and now the bill is due. There is not enough capital on the planet to even come close to covering the bill.  It is similar to someone who runs a massive credit card balance for 40 years.  Now the bill is due and the credit is cut off.  In general do you think things will be better for that person in the short term or worse?

The question is how will this period play out?  There are endless discussions which I follow closely regarding an inflationary or deflationary outcome.  There are discussions that a global depression will lead us to war, as it has done every other time in history.  Now with the MF Global bankruptcy there is a third option back on the table, one that we have not seen since the week after Lehman Brothers failed and confidence left the financial system completely.

That is of the financial system itself imploding.  Global systemic risk as if the entire system had a heart attack.  Everyone is now looking over their shoulder wondering who may be the next MF Global.  Banks, hedge funds, pensions, insurance companies, governments, and sovereign wealth funds all have their money spread across multiple institutions.  They must all now worry that one could fail and an entity such as the CME may turn their back on the implicit guarantee on their funds. The scenario is similar to the concerns around the world that the United States would not step in and guarantee or nationalize the bonds of Fannie Mae and Freddie Mac during the summer of 2008.

Back in March of this year, when the tsunami hit Japan, the Japanese Yen (their currency) began moving violently higher in the FOREX (currency exchange) markets.  For reasons I don't have time to get into here this had the possibility of creating a meltdown in the derivatives market due to something called the "carry trade." 

That night on my way home from work I stopped at the grocery store and I bought water and enough food to last 3 to 4 weeks and I took some cash out of the bank.  I called my immediate family and a small handful of people that have a strong understanding of the financial markets and advised that they did the same.

Now, at this point in the conversation I probably will have lost credibility with 95% of readers and have become "one of those people."  However, at the time, while the world was casually going on with their business, we were hours away from a meltdown.  There was a global central bank intervention of massive proportion to get the situation under control.  Sound familiar?  I'll get to that in a second.

So what happened next?  Nothing.  I went back to the bank to deposit the cash, and I drank clean water and excellent food for the next 3 weeks. 

This past week many believe we were close to another one of those moments.  We had a global central bank intervention where the Chinese central bank and the European central bank both cut interest rates.  The Federal Reserve cut rates on their "swap lines" which means they will lend dollars overseas at a reduced rates to funnel liquidity into European banks.

With the MF Global situation handled the way it was, many of the most intelligent market participants who have a strong understanding of derivatives now have no idea what comes next.  The financial system shutting down is now back on the table.  If that happens, what does it mean?  It means for a period of time there will be civil unrest, little cash available at ATM's, empty grocery stores, and no gas at the stations. 

In terms of your savings and capital, I would review the following article which discusses how to protect yourself from waking up one morning with your money "gone" like the customers who worked with MF Global.  The article is titled The Logic and Logistics Of Market Flight and Repatriation.  The author discusses the article this week in an audio interview, which can be heard here.  Her segment begins 37:15 into the program.

I do not believe a systemic collapse is the most likely scenario or even a likely scenario, but with the option back on the table it would be wise to stay stocked up moving forward on food, water, and take some cash out of the ATM.  What happens if nothing happens?  Nothing.  You just have some extra food, water, and cash.

I spend most of my time discussing how this scenario is going to play out under the regular course of action (a deflationary deleveraging or an inflationary deleveraging) of the global debt bubble we now face.  I do my best to get your portfolio prepared for both scenarios and monitor the situation daily to determine which direction we are headed.  At this point it is still impossible to know because the direction of global markets are exclusively in the hands of our politicians and central banks.

A truly terrifying thought indeed.

Friday, December 9, 2011

ECRI's Achuthan: The Coming Recession

The market has moved violently up and down all year in a wide trading range, and today we sit today right about where we were when the year started.  During up swings in the market optimism turns up and "the recovery is back in place."  During down swings pessimism returns and we are "heading into a recession."

It is important to listen to economists and financial analysts who do not change their opinion based on a short term movement in the market.  One of those economists is Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute.

ECRI's leading economic indicators triggered their call on September 30th that the United States would re-enter a recession within 3 quarters (based on the classic definition of 2 quarters of negative GDP).  He has come back on Bloomberg television today to re-confirm that outlook. 

My personal outlook is that the United States entered a depression in December of 2007 and what we have seen since are smaller reflation/deflation cycles within the larger trend.  I believe we have one more major deflationary period ahead of us before the final reflation of the current depression.

Achuthan on the next leg down:

Thursday, December 8, 2011

Running Out Of Oil

For a longer and more descriptive outlook on what the future of energy looks like I would recommend watching Chris Martensen's Crash Course In Review, a speech he gave this fall on where we are today in the peak oil story.

Bob Prechter Discusses The Next Wave Down

One of my favorite market analysts, Bob Prechter, took some time to speak with Yahoo finance this week about the next leg down in the secular bear market, the correlations to the Great Depression, and how it all ties into the negative social mood.

Prechter's Elliot Wave Theory monthly newsletter is must reading for the serious investor.  I have been a dedicated reader since February 2009 (when they called the bottom in the stock market and said we were ready for a huge bear market rally).  Elliott Wave believes that the bear market rally is now reaching the finishing point and sees the next leg down as far worse than what we experienced in 2008.

"Who Is John Galt?" - Atlas Shrugged

I took some time last night after a long day of work to watch the recently released "Atlas Shrugged: Part 1" on DVD.  For those unfamiliar with the story, released in 1957 by Ayn Rand, it is a look into the future at what happens to a society when government begins to take over all aspects of life and the business people there begin to give up and just walk away.

The setting of the movie is 2016 and it opens showing the DOW Jones Industrial Average crossing under 4000 and oil prices at $137 a barrel due to problems in the Mid East.  The government begins imposing price controls and goes after the "wicked capitalists" who brought the country down.

The story is so similar to what is taking place today and what is ahead of us that it is almost eerie that it was written in the 1950's.

Occupy Wall Street has become the rallying cry around the outrage of today's class warfare.  Our country has experienced a massive shift where the wealthy (the 1%) such as doctors, lawyers, bankers, and business owners have become super rich.  The middle class has stayed stagnant in terms of wage growth and is now slowly fading away as jobs continue to disappear in America.

I am a believer in free market capitalism.  I am not a part of the Occupy Wall Street crowd, and I look up to and hope to one day be part of the 1% in America in terms of entrepreneurship and new business creation.  I want to be part of the group that creates jobs, not because I want to create jobs first, but because it will increase my business productivity, profitability, and simultaneously increases the country's.

Unfortunately, we no longer have capitalism in our country.  We have crony capitalism.  I saw nothing wrong with the greedy bankers who created enormous profit machines from 1980 up to 2008.  I did not have a problem with the massive bonuses for the CEO's, the traders, or the bond originators.  I saw nothing wrong with the large bonuses and reckless decisions made by GM or Fannie Mae.

My problem was with the government response when they failed.  My problem lies exclusively with the bailout and the continued backstop in place by our government as they move forward as zombie toxic balance sheets.

I have said over the past few years that when the public understands what they have done to our money and country the anger would be beyond belief.  The Occupy movement is the first manifestation of that anger which will continue to grow as our economy gets worse and the government continues to grow larger and more "involved" with all business.

I said repeatedly that it would get so bad that I even worried for the safety of the bankers who stole our money and then were bailed out by us to ensure their bonuses continued uninterrupted.  This statement seemed absurd at the time, even to me as I was writing it.

Yesterday, a package was sent to the CEO of Deutsche Bank, one of the largest banks in Europe, with a return address from the ECB (European Central Bank).  The box contained a bomb surrounded by shrapnel.  Fortunately, it was intercepted before getting to the CEO.

This is only the first step of what is to come.  I wish the people could see through the smoke and understand that it is not the banker's fault they were and continue to be bailed out, it is our government's fault for giving them the money.  They need to leave New York and march toward Washington.  That is the epicenter of this entire problem that is about to get much, much, worse.

For those that have not read the book or seen the movie Atlas Shrugged I would recommend both.  Ayn Rand was the teacher of our former Federal Reserve chairman Alan Greenspan before he entered Washington and was turned to the dark side. 

I believe that there is no stopping the train wreck ahead as we continue moving 175 miles per hour toward the cliff.  However, you personally and your family have the ability to get out of harms way (as much as possible) to get through the aftermath.

Tuesday, December 6, 2011

Update On A China Ghost Town: Ordos

The video below provides an update on one of China's now famous "ghost towns."  The biggest threat to China is not falling prices but the jobs lost related to the real estate sector.  Famous short seller Jim Chanos has commented that real estate and related development makes up close to 25% of their entire economy.  With prices now continuing to fall month over month, the shock waves will be felt around the world.

Thursday, December 1, 2011

New Record For Housing Market

The average number of days a borrower is delinquent before entering foreclose has now reached 631 days.  We are closing in on the next major milestone; a full 2 years homeowners get to live for free in their homes after they stop making payments.  What happens after these 2 years of prosperity?  They pack their bags and move into a rental where they get to live maintenance free. 

Remind me again why anyone would continue to make a payment once their home price fell below their mortgage amount and became under water?  There are now 30% of homes underwater (and rising as home prices keep falling) with most of those home owners still paying and holding out hope.  When these people make the logical decision to stop paying and live for free we will have the last leg down in the housing market.

At that point the losses will be socialized (seen in the rising price of gold and commodities) or prices will collapse and it will be buying time for the very patient investors that sit on the sideline.

Finance And Sports: An Enjoyable Obsession

I often explain my love for the markets to those that ask how I got so "into it" by comparing it to sports.  Growing up you begin to play sports, you learn the rules of the game, watch the games on TV, and slowly you start to develop a relationship with the characters and daily events that compile a season.

It was the same way for me in the markets.  I picked up a book one day, then read another, then made an investment, then began to track the daily movements, learn the characters, and it turned into a new type of "sports" that is constantly moving and changing globally 24 hours a day.

As with sports, there are certain characters within the arena that are more gifted than others.  In sports athletes were born with god given ability that is usually combined with endless practice to achieve greatness (see Malcolm Gladwell's 10,000 hours chapter in his book "Outliers").  In the financial world participants may be born with a certain level of financial intelligence (see the Theory of Multiple Intelligences) which is then combined with endless work and study to achieve greatness.

It is these people that I try to read, study, and learn from through every article, book, or interview they provide.  Just like when you hold your breath when a punt is kicked off to Devin Hester of the Bears, an interview or article with these market participants leave you in awe of their ability to take information and work it down to a logical outcome.

One of those names, who I apologize for gushing over continuously on this site, is Kyle Bass.  We had the fortune of receiving his most recent letter to clients (free of charge) which I have posted below.  It is an extremely simple conclusion of what is right ahead of us based on nothing more than logic, something most market participants have trouble putting together (due to psychological market factors that are beyond the scope of this discussion - see work of Daniel Kahneman or Dan Ariely). 

Okay, enough about love for the markets for those that just want to know what is coming next.  Here is the letter from the current take your breath away superstar of finance, Kyle Bass (Click "Full Screen").


Chris Martensen: Crash Course Review

An excellent presentation below from Chris Martensen discussing many of the topics in his now famous "Crash Course" and going into further detail on where we stand today in terms of energy needs. 

The combination of exponential growth in population size and money supply combined with the exponential decline in cheap natural resources will be the dominant story of this decade and the most important concept for an investor to understand.

Chris does a great job of explaining these concepts in simple language and charts.

Bernanke Eases: Stocks Soar

Yesterday the stock market soared 500 points higher after a coordinated global central bank easing move was announced.  The plan reduced "swap line" borrowing costs for US dollars in exchange for foreign currencies.  This opens a back door for the Fed to begin helping with the foreign sovereign debt bailouts as they face a liquidity crunch.

Bernanke has once again stepped in as the global printer of first and last resort.  The only question is, does he have the power to hold up the world as the deflationary deleveraging continues to cascade down around him?

Wednesday, November 30, 2011

Silver Fundamentals In Review: Supply and Demand

At the start of the last decade we entered a secular bear market for stocks and a secular bull market for commodities.  These secular cycles last 15 - 20 years with the previous bull market for stocks and bear market for commodities running from 1980 - 2000.  This cycle relationship ran all last century and continues today.

During a bull market you have steady growth over many years with sharp corrections along the way.  This was seen in the last bull market for stocks in 1987 when the market crashed 22% in a single day.  It was seen in silver in 2008 when prices plunged 60% in just a few months.  Silver prices just recently corrected 48% from their May 2011 highs.

Understanding that you are in a secular bull market means you should look forward to these pull backs and use them as opportunities to add to your positions when prices go on sale.  With major turmoil and liquidity constraints around the world, we may have another major buying opportunity ahead of us before we continue higher.

Before we get there it will be important to understand the fundamentals driving the bull market in silver.  Silver, unlike gold, is both an industrial and monetary investment.  An industrial investment means that it is used to produce goods such as electronics, solar panels, and biocide. The following chart shows the growth of silver demand in these three categories over the past decade:

Silver's industrial demand is combined with its monetary/investment demand to reach total demand.  The following chart shows silver's total demand and the annual production (supply).

Silver's total demand has been greater than total supply for 11 years meaning that total global silver supply is shrinking.  How much is left?  Analysts now estimate that at the current pace we will run out of above ground available silver in 9 years. 

Just like oil, there is plenty available silver in the earth's crust, but what is important is how much can come out of the ground under current production and at what cost.  It takes years to bring a silver mine into production.

More than 80% of the silver mined comes as a byproduct of mining for other metals such as copper.  This means if global growth slows (think China) and copper demand/pricing slows with it, silver supply will be cut tremendously even if the silver price is rising.

I will leave you with this simple thought experiment to help illustrate how much physical silver is available.

There is currently about 2 billion ounces of above ground gold available for investment.  Historically the silver supply has been 15 times greater than the gold supply.  There is about 15 times more silver in the earth's crust and the silver price historically has been 15 times less than gold due to this fundamental supply ratio.

So how much above ground silver is available today for investment?

Less than 1 billion ounces.  There is currently less than half the amount of above ground silver available compared to gold.  Silver is currently 55 times less expensive than gold, but based on the current supply ratio it should be at least twice gold's price.

To summarize: Global growth slowing means less silver produced due to its byproduct nature discussed above.  Central banks will respond will an increase in the money supply to counter the slowdown.  Global quantitative easing. 

Investors will rush to silver to protect their purchasing power and when they do they will find out that there is no physical silver available.  At that point a process called "price discovery" will take place when the paper price of silver will adjust to the correct supply and demand value.

Look forward to corrections as an opportunity to add to your positions.  I am often asked the best way to begin to purchasing gold and silver.  The company I recommend using is Goldmoney. I have purchased precious metals with Goldmoney for over 6 years, and members of my family use their services as well.  Even if you do not plan on purchasing today it is a good idea to take a few moments of your time and open an account and have it ready so you have the ability to buy when the time is right.  They are one of the most respected organizations in the industry, and I have provided a link here:

GoldMoney. The best way to buy gold & silver

"Gold was the investment of the last decade.  Silver will be the investment of this decade."

                                         - Billionaire Eric Sprott

h/t Wealth Wire, Casey Research

Top Four Lobbying Organizations In America

The top 4 lobbying organizations in America.  2011 is through the first 3 quarters.  See if you can spot the trend....

1. American Bankers Association
•2010: $6,040,000
•2011: $6,690,000

2. Wells Fargo & Co.
•2010: $3,260,000
•2011: $5,890,000

3. JPMorgan Chase & Co.
•2010: $5,770,000
•2011: $5,800,000

4. Citigroup Inc.
•2010: $4,120,000
•2011: $3,800,000

America's favorite bank, closing in on their next bail out as the stock continues to plunge, came in at number 7:

7. Bank of America Corp.
•2010: $2,720,000
•2011: $2,210,000

Those frustrated with our current political/banking relationship need to understand that nothing will change under the current structure.  Politicians are purchased by the banks.  Things will only change when we reach the point of complete collapse in our debt markets.  Those excited for this new America fortunately will not have to wait long.

h/t Barry Ritholtz

Monday, November 28, 2011

Apartment Prices Ready To Collapse

Last week I was watching CNBC interview Richard LeFrak, one of the largest holders of apartment buildings in the United States.  He shocked me when he casually mentioned that investors are now paying equal or greater prices for apartment buildings as they were during the peak of the bubble in 2007.

He then said it was an excellent time to invest due to strong fundamentals.  In 2009 and 2010, when prices were significantly lower, he was on CNBC saying that he was on the sidelines.  What could have changed?, one of the major publications for commercial real estate news, released an article today titled "Survey: Apartment Cap Rates Get Lower".

They go on to say that investors are now paying 4% cap rates and lower for properties in major cities and there is a bidding war for these properties.  From the article:

“There’s so much capital chasing too few deals—we call it “homeless capital,” said Bill Montgomery, President, Acquisitions & Investment, Sares-Regis. “REITs have been buying all the core properties and pension funds have had a hard time competing. We’re seeing money flowing into value add and development projects.”

To quickly review, a cap rate is the return on investment an investor pays for purchasing a property.  If the property was purchased for $1 million and the annual income (after operating expenses are paid - not including financing costs such as the monthly mortgage) was $100,000, then the cap rate is 10%. 

$100,000 / $1,000,000 = 10%

A investor's decision on the return he needs to purchase a property is weighed against the return he could receive by purchasing a competing asset (the opportunity cost).  A 10 year government bond today pays only 1.97% pushing investors further out the risk curve in order to obtain yield just as they did in 2005 - 2008 leading into the financial crisis.

More from the article:

While development isn't coming back in a lot of real estate sectors, it is happening in multifamily, Montgomery contends. But that comes with increased costs. About 63% of respondents say construction costs increased by 5% over the last year.

However, that bet might be worth it, according to Tom Toomey, President and CEO of UDR, Inc. “We expect to see six million new renters over the next three or four year period," he said. "So why wouldn’t you want to invest more, build more, redevelop more—just seems like a great time and the numbers are stacked up in our favor.”

Let's look at a broad, easy, "answer" to this six million renter shortfall:

In the third quarter there were 6.1 million empty homes that were for sale or rent, according to the Census Bureau, or 4.6% of all U.S. homes.

If you were a renter, would you rather live in a small apartment with neighbors on every wall or would you rather live in a large home?

The reason this inventory is not being soaked up by new renters is because it is being held off the market by banks as shadow inventory.  This is creating the mis-perception by developers that there is a shortage of inventory.

Let's look at a specific, real life example to illustrate this point.  I live in downtown Charlotte, NC.  The downtown area is small relative to the rest of Charlotte, and it is surrounded by a highway called 277.

Rents in this 277 ring have risen steadily over the last two years with high rental demand and low inventory available.  The largest condo high rise in the city was completed in 2010 with luxurious new finishes and incredible amenities.  Why does this matter if the units are currently for sale and not for rent?

The building now sits almost completely vacant. 

The developer is in a battle with owners who signed contracts and refuse to close, and he refuses to drop prices.  This is shadow inventory in downtown Charlotte.  If the market continues to fall he may relent and give the property to the bank.  The bank could then sell the property to an investor who could turn it into a rental property flooding the city with new apartments. (This has already happened in other buildings)

This covers the development portion of the apartment mania, but what about the cap rates?  What about the prices investors are paying for existing buildings?

I have covered this topic more extensively in the past but I will review it again briefly.

When our treasury bond (government debt) bubble begins to deflate interest rates will rise.  Interest rates on a 10 year treasury bond may cross above 4.....6......8......% and maybe keep rising (think Greece, Portugal, Ireland, Spain, Italy, and soon Japan, the UK, and the United States)

An investor will have the ability to decide on a risk free government return at 8% (or higher) or a risky asset such as an apartment building at 4%.  Cap rates on apartments will rise in tandem with government bonds creating a collapse in prices on these buildings. 

In addition, the great majority of the apartments today are being financed through Fannie Mae and Freddie Mac; the American tax payer. This will end when Americans realize that they have all the real estate they need with the shadow inventory.

Investors purchasing today will face significant losses, unable to see the future atmosphere of interest rate pricing.  This will provide an extremely attractive entry point for investors who have capital (and courage) to make purchases.

Steve Keen On BBC HARDTalk

An excellent discussion with Steve Keen, one of the few who got it right and continues to have a clear understanding of where we are headed, on Hard Talk. 

Friday, November 25, 2011

Happy Black Friday

A large portion of the global economy since the late 1960's has been built on foreign countries producing goods for Americans to purchase.  Over time those purchases have been financed more and more heavily with debt provided by.....foreign countries reinvesting their trade surplus back into America.  Historians will look back at the time as an economic model based on lunacy.  With 30% of mortgage holders no longer making payments on their mortgage and living payment free it has created a temporary surge (or last gasp) of buying and borrowing power. The following video sums up the insatiable buying hunger of the American consumer in 38 seconds.....

Dr. Burzynski vs. The FDA

The following incredible documentary discusses the long running attacks of the FDA against Dr. Burzynski and his successful medical research breakthroughs in the development of cancer treatment.  Because my personal opinion of big government is well known for readers of this site, I will let the documentary speak for itself. 

Thursday, November 24, 2011

Happy Thanksgiving

Happy Thanksgiving to you and your family.

A couple of charts to get your day started before the football kicks off.  The first is the current federal revenue vs. spending on a historical scale.

The second shows our current deficit in comparison to those throughout American history.

With gold up 19.3% and stocks down 7.5% through Thanksgiving this year, the next chart shows a recent Gallup poll asking Americans what they thought was the best long term investment.  Gold moved into its optimism phase of the secular bull market when it crossed over $1,000.  It is now the leader on the board, although most Americans still put less than 1% of their portfolio into gold related investments.  That will change. 

The final phase, the mania, will follow when investors rush in full speed knowing that they "can't lose" with gold.  This is when you want to be selling and purchasing other assets in the valley of their bear markets: real estate and stocks. 

I anticipate one more massive sell off in precious metals before the mania stage begins.  Make sure to have some cash available to take advantage of this opportunity.

Wednesday, November 23, 2011

Oliver Sarkozy On Europe Bailout Size

Great discussion this morning on CNBC regarding the size of the bail out needed to stabilize the markets with Oliver Sarkozy of the Carlyle Group.  The staggering quote from the interview which comes at 4:30 into the video.

"The math I'm working with is very simple. In the US banking sector, we had 3 trillion of wholesale funding that needed to be stabilized, got stabilized by the implementation of TARP which saw the US treasury buy $212 billion worth of preferred in the banking sector to stabilize that $3 trillion, give our banks the time to work through hair problem their problem assets. In Europe, that $3 trillion is $30 trillion. So if you multiply the $212 by 10, you get the $2.12 trillion. In my view, the issues on the European banks are bigger than the issues on the books of the US Banks. So if you want to stabilize that $30 trillion and in my view it's not that you want to, it's that you have to, you do not have a choice, you're going to have to be at least at 2.1 trillion and i suspect it may need to be more."

h/t Zero Hedge

Jim Chanos On Chinese Banking System

Jim Chanos speaks with Bloomberg regarding China and their banking system.  He sees their financial markets as "fragile" and "built on quicksand." He has short positions placed against Chinese real estate.

Monday, November 21, 2011

Completing The Global Web

Last Friday I posted some pretty pictures of what each insolvent country owes to the other in Global Sovereign Web Of Toxic Debt.

Today we have another pretty picture which puts them all together.  It summarizes perfectly what will be taking place over the next 4 years as the current financial system implodes.

The size of the arrows show the size of the debt burdens, and the colors show which countries have already reached their debt crisis moment (the bond markets have turned against them and their bond yields are rising).  The countries in grey will get their turn as they wait in line.

This weekends announcement of no progress from the debt "supercommittee" shows that there is no political will to cut spending and our crisis moment continues to approach by the hour.  After crossing $15 trillion in federal debt last week, it is any one's guess what trillion dollar milestone will trigger the bond market to offload our toxic treasuries.

Kyle Bass sat down for another excellent interview this week discussing why he believes Japan is up next:

A Look Back In Time: 2001 - 2002

For those that enjoy financial history, we start the week with two videos from the beginning of the last decade.  One is the now famous home ownership program speech from George Bush.  He lays out the plan to push mortgages on people who could not afford them at a time when home prices were already entering bubble pricing.  Bush, along with most democrats and republicans at the time, was taking in millions of dollars in campaign contributions from the GSE's and the Wall Street banks who were packaging these toxic mortgages (and making billions$ in profits).

The next video, which receives far less attention today, is from 2001.  This other politician explains how money was leaving the bursting stock market bubble and entering the real estate market due to the Federal Reserve slashing interest rates down to dangerous levels and Fannie Mae and Freddie Mac (the GSE's) reducing their standards on who they lend to.  Endless books have now been written discussing how these events created the financial crisis of 2008, but only a handful of economists (and one politician) understood exactly what was happening as it was taking place. 

Ten years later, as the politicians continue to take millions of dollars in campaign contributions from the Wall Street banks, and the Federal Reserve has interest rates at 0% along with quantitative easing programs, he continues to speak about the coming crisis that once again falls on deaf ears.  It is impossible to know the date when a bubble will burst.  A famous saying in the financial world is that markets have the ability to stay irrational longer than an investor can stay solvent (betting on the correct outcome).  Many astute investors can see today that we have a government bond market bubble in our country, but the ability to stay the course and not get caught up with the herd is almost impossible due to the way we are wired psychologically.

Friday, November 18, 2011

Global Sovereign Web Of Toxic Debt

The BBC put together an excellent interactive tool this week showing how much sovereign debt the major insolvent countries owe to each other.  It creates an excellent view of the web of toxic debt.  The countries they used in their circle of death:

Greece, Ireland, Portugal, Italy, Spain, France, Japan, UK, United States.

All of these countries will face a government debt crisis this decade so it is important to understand how each default will impact the others in the web.

We will come back to these pictures many times but today we can look at the two major countries infected first to see who will be hurt most by losses on their bonds:

First up is Italy where you can see the brunt of the pain is directed at France (France purchased a tremendous amount of toxic Italian debt).  This is the reason why the major French banks, as well as the credibility of French government debt itself, are both plunging.

Next up we have Spain who is rapidly approaching their "Greek" moment right behind Italy.  Their debt is spread out more evenly around the world providing the opportunity for all countries in the web of toxic debt to experience massive pain together.

While they are not on the radar just yet, I want to take a quick look at two upcoming blockbuster sovereign credit disasters (kind of like previews for the new Harry Potter or Twilight movies)  The first is Japan.  Their story is interesting because at first glimpse it appears that their debt problem may only be as large as an Italy or Spain.  Why?  The Japanese people own the majority of the Japanese government debt.  The nuclear sovereign debt bomb is actually sitting in their own country, which you cannot see on this graph.

Finally, we have the United States, which almost makes you laugh when looking at it because it is so terrifying.  The United States is in the exact opposite situation as Japan.  They are in just as much (far worse) trouble in terms of the size of their sovereign debt crisis only the majority of Americans do not own the debt; it has been purchased by other countries both in the web of death and in other areas around the world (you cannot see poor China on this picture - they own the majority of the toxic bonds).  When our toxic debt begins to implode it will not only ignite a financial explosion in our own country like Japan, it will also create a global financial nuclear holocaust around the world.

There is some great news behind all this coming destruction.  When the dust has settled, and it will only take a few more years, it will be the greatest buying opportunity for assets that the world has every seen.  Those who have portfolios still standing after the coming winter storm will have the opportunity to buy stocks and real estate at once in a life time bargain values.

You can see the complete interactive graph here: Eurozone Web Debt

Thursday, November 17, 2011

15,000,000,000,000 Crossed

What if the interest payments on $15 trillion began to rise?

Gold's Coming Revaluation

Great chart below showing gold as a percent of total global financial assets from 1968 through today.  Even with a 5 fold rise in the gold price from the year 2000, its percentage of total assets has remained less than 1%!  Why? 

The amount of paper assets flooding the system has dwarfed the size of gold's price rise so far. 

I believe gold will make up a larger percentage of global assets moving forward but it will not be because of a large increase in gold supply.  It will be the paper value of gold re-valuing itself higher to account for the increase in global paper assets.

Then we have the percentage gold or gold mining stocks in a typical pension fund, which is the only picture you need to show anyone who tells you that gold is in a bubble.

Kyle Bass Discusses What Comes Next

Overnight the Spanish government bond auction was a complete disaster sending their rates rocketing up to 6.6% and closing in on Italian bonds which were 7% overnight.  The European Central Bank (Their Federal Reserve) stepped in with force this morning to purchase bonds in both countries to try and stop the bleeding.  Unfortunately, right next door France is collapsing as well.

We have a clear understanding now that the European Union is finished.  This is the here and now and you can find the headlines on every paper or article around the world.  With the EU burning, we can now take a moment and try to determine what (or who) comes next.  In order to do that it is always helpful to look to someone who both predicted the current crisis and also has an opinion on what is coming in the future.

Fortunately, we have that in Kyle Bass.  When the story of this global credit crisis is complete years from now, Kyle's name will be one of the very small group that saw the complete picture (and profited massively every step of the way).

To re-cap briefly, Kyle was one of the handful of investors that saw the housing crisis coming and purchased insurance against the debt (CDS).  In 2008 when everyone rushed to purchase CDS contracts on US mortgages, he sold his contracts and purchased insurance on a country called Greece.  During that time, Greece's debt essentially traded for the same price as Germany's - risk free, just as subprime debt traded at risk free prices in 2006.

Fast forward 3 years later and Kyle has sold his Greece insurance to investors rushing in to buy.  In Michael Lewis' book Boomerange he described the payout back in 2008 if he was correct about Greece: every $1,000 invested would turn out to be $700,000 in profit.  The question is where is he looking now?  The answer?


Japan's debt currently trades at risk free prices.  Their bonds are at close to all time record lows.  Kyle feels that Japan's government balance sheet is the most toxic in the world. (They have a debt to GDP ratio of over 220%)  They have a declining population, which Bass refers to as "the trigger to end the ponzi scheme."  A staggering statistic from Bass:

Half of Japan's annual debt payment goes exclusively toward interest payments.  If their bond yields were to rise only 2%, they could not even cover the annual interest payments on their debt.

This week, Kyle Bass provided the investment world with a must watch 24 minute interview with the BBC.

Wednesday, November 16, 2011

Mr. 999 Talks Libya With Jon Stewart

Yesterday I posted the full, gut wrenching video clip of Herman Cain's Libya debacle in Say Goodbye To Herman Cain.

Tonight we can say goodbye to the 999 in a more humorous front with Jon Stewart who is giddy over the endless stream of Republican shame.

French German Spreads Explode: US On Deck

The chart of the day today is once again dominated by the news out of France.

For the past 14 years, every trading day, French government bonds have traded alongside German bonds under the same status: risk free.

Then something changed this week.  The bond market woke up and decided this was no longer the case causing yields to diverge dramatically.  Contagion has now crossed the French borders, and it appears to be unrelenting as Bloomberg described the European government bond market as "frozen."

I have continuously discussed for years that when the debt markets move against you it happens in the blink of an eye, like a light switch being turned off.  Then the world you lived in the day before is gone.

This is coming for Japan, the UK, and the United States.  Every night Americans go to sleep not protected means they run the risk of waking up the next morning with a significant portion of your wealth gone (when bond yields rise bonds lose principal value).  This happened three weeks ago in Italy.  It happened this week in France.

As middle class America has spent 4 long years transferring their 401k's out of the stock market and into the "safety" of the bond market, which can be tracked every month through tic flows, they are now perfectly positioned to be destroyed by the bursting of the current bubble in bonds.

The herd will once again be slaughtered.

Tuesday, November 15, 2011

European Debt To GDP Map: French Contagion

The contagion is spreading so rapidly through Europe now that is is almost impossible to keep up with.  Rates are now rising across the board in Portugal, Italy, and Spain.  In addition, the markets have now turned on France, one of the few remaining AAA rated nations that currently backstop the European bailout.  France is now seeing interest rates and their CDS (cost to insure the debt) rise simultaneously.

The chart below from the Economist provides a great visual for those more color coordinated on who is in the most danger by looking at debt to GDP (the total size on an economy which is used to determine the ability to pay off the debt).

As you can see, France is already in a danger bracket in terms of debt to GDP, and the market has taken action with punishment.  The world now waits for the ECB to decide if they will step in and monetize (print money to purchase) the debt, or let the house of cards collapse Lehman style. 

My money is on coordinated action from the ECB, the Fed, and a new participant (the IMF) to backstop the financial system; after an initial major deflationary downdraft.  Every day the ECB waits to step in, however, makes it more likely they will lose control of the contagion spreading through the financial system.

This morning CNBC interviewed Blackrock's CEO Larry Fink, who said liquidity is vanishing everywhere in Europe.  He sees a major crisis erupting in the markets in the next two weeks if major action if major action is not taken.