Stream Of Financialness
I'm going to start something new this weekend called the Stream Of Financialness (based off the stream of consciousness concept) where I'm going to touch briefly on a large variety of topics in the financial world. This will allow a look at some of the non-mainstream media news you may not have read or heard about without the full scale discussion on each topic. If it works well, I will continue it moving forward on a weekly or bi-weekly basis.
Let's get rolling.....
How does the European financial crisis affect American money markets?
At some point in your life you have probably opened a money market account. It is something sold by banks as being “safe as cash” only with a higher interest rate.
If you deposit money in a bank account it is FDIC insured. That means if the bank fails, the government will reimburse you up to $250,000 of money you held in the account. That is “safe as cash.”
Money markets have no such FDIC insurance. When you invest your cash into a money market they take your money and invest it in all sorts of assets. Their goal is to put the money into places that are extremely safe, but still return higher than your bank. But what if something went wrong? Ah, let’s dig a little deeper.
The top 5 money markets in our country hold an average of 41% of their assets in short term commercial paper in European banks.
Commercial paper means the money rolls over every night. It is what major corporations use to fund their day to day operations and is considered close to risk free.
That is unless there is a problem with the bank. Perhaps you may have heard of the problems Greece, Portugal, and Ireland are having paying their bills. The banks in Europe have lent these countries billions. If the countries are unable to pay the banks, the banks will be forced to close their doors and will be unable to roll their overnight commercial loans.
This would trigger a panic around the world from investors who are locked into these accounts (such as the 41% of assets at the top 5 American money market accounts).
You could wake up one morning if Greece were to default to find out that the $100,000 you had in your “risk free” money market account was only worth $75,000.
This happened in 2008 when Lehman brothers failed. The government and Federal Reserve were forced to step in and guarantee 100% of all money market accounts. Will they do it again? Do you want to risk it?
What happened to oil this week?
Oil was hit with a multi-punch take down. On Wednesday Bernanke hinted that the economy was progressing at a much slower pace than he anticipated. (a slower economy uses less oil than a stronger economy; less demand) This statement also created a rally in the dollar because a slow down in the global economy in today's world means a rush to safety in the form of US treasuries. (a higher dollar means that oil is cheaper to import)
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Jumping on the back of this weakness on Thursday, the Obama administration announced that it would open up the use of our Strategic Petroleum Reserves. This would create a burst of new supply sold into the marketplace over a short period of time. It was sold as a strategy to replace Libyan output but in reality it was a well timed oil smash. The government knows that a lower cost of oil is a direct boost to the economy as consumers have additional money to spend on other goods.
This changes nothing for the long term supply and demand outlook for oil, only allowing investors to purchase assets at a cheaper price. While I believe oil could fall further in the short term, this will only help set up a tremendous buying opportunity in the near future.
Russia's Holdings Of US Treasuries
One of our largest suppliers of credit is slowly moving to the exits. Asia is close behind, with the Federal Reserve picking up the difference.
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Largest State Budget Shortfalls
A look at the deficits our state and local governments face compared with the 2000 - 2003 recession. Our states face the same dilemma seen today in Europe, only they are getting a bridge loan from the federal government. (they owe hundreds of billions for unemployment insurance payments)
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Where does gold go from here?
Gold appears to be at the upper end of its long term chart channel. It could fall substantially from here without violating its long term bullish pattern. The fall could be as large as 20%. This could come at any moment during the sovereign debt crisis.
When investors become over leveraged (they borrow money to buy stocks, bonds, commodities) because they are bullish (believe prices are going higher) they can get into trouble if prices reverse unexpectedly.
In this scenario, investors have to sell everything to raise cash to cover their margin calls. Even if they understand gold’s long term value they may be forced to sell in the short term. This is what happened in the fall of 2008. As an investor you want to be prepared for a time like this when investors become trapped. You need to keep gun powder (cash) prepared and make sure you never purchase paper assets (stocks, bonds, commodities) with borrowed money. This will allow you to ride out the pull backs when you do not want to sell your strong assets and provides you the opportunity to take advantage of the sales with additional purchases.
New Home Sales And Long Term Housing View
The following shows this month's new home sales number placed on a historical chart. The sales continue to move along the bottom of a canyon. The rebound in this market is years away.
![]()
The following provides an update to the famous long term home price chart. You can see the 2000 to 2005 bubble blow off and how far we have come back to the average price growth. The red line shows where we need to fall to be back on the historical price growth trend. Bubbles usually have a tendency to overshoot to the downside after they collapse so the red line may be an optimistic projection.
![]()
Big Picture Technical Analysis
One of the most famous tools used by market technicians is called a head and shoulders pattern. This pattern is crystal clear when looking at our stock market over the previous 15 years. You can see the run up in the market with the technology bubble and collapse when it burst. Then we had another run up with the global housing/credit bubble and the collapse when it burst. This has been followed by the run up of the global sovereign debt bubble created by massive government spending in response to the previous bubble's burst. This sovereign debt bubble is now in the process of bursting with Greece as the opening act.
The follwing graph shows the head and shoulders pattern, (see the left shoulder, larger head in middle, and the newly formed right shoulder?) which helps investors understand how the story will end.
The creator of this graph was kind enough to use an additional metaphor to help illustrate the point: Sh*t hitting the fan.
![]()
Let's get rolling.....
How does the European financial crisis affect American money markets?
At some point in your life you have probably opened a money market account. It is something sold by banks as being “safe as cash” only with a higher interest rate.
If you deposit money in a bank account it is FDIC insured. That means if the bank fails, the government will reimburse you up to $250,000 of money you held in the account. That is “safe as cash.”
Money markets have no such FDIC insurance. When you invest your cash into a money market they take your money and invest it in all sorts of assets. Their goal is to put the money into places that are extremely safe, but still return higher than your bank. But what if something went wrong? Ah, let’s dig a little deeper.
The top 5 money markets in our country hold an average of 41% of their assets in short term commercial paper in European banks.
Commercial paper means the money rolls over every night. It is what major corporations use to fund their day to day operations and is considered close to risk free.
That is unless there is a problem with the bank. Perhaps you may have heard of the problems Greece, Portugal, and Ireland are having paying their bills. The banks in Europe have lent these countries billions. If the countries are unable to pay the banks, the banks will be forced to close their doors and will be unable to roll their overnight commercial loans.
This would trigger a panic around the world from investors who are locked into these accounts (such as the 41% of assets at the top 5 American money market accounts).
You could wake up one morning if Greece were to default to find out that the $100,000 you had in your “risk free” money market account was only worth $75,000.
This happened in 2008 when Lehman brothers failed. The government and Federal Reserve were forced to step in and guarantee 100% of all money market accounts. Will they do it again? Do you want to risk it?
What happened to oil this week?
Oil was hit with a multi-punch take down. On Wednesday Bernanke hinted that the economy was progressing at a much slower pace than he anticipated. (a slower economy uses less oil than a stronger economy; less demand) This statement also created a rally in the dollar because a slow down in the global economy in today's world means a rush to safety in the form of US treasuries. (a higher dollar means that oil is cheaper to import)
This changes nothing for the long term supply and demand outlook for oil, only allowing investors to purchase assets at a cheaper price. While I believe oil could fall further in the short term, this will only help set up a tremendous buying opportunity in the near future.
Russia's Holdings Of US Treasuries
One of our largest suppliers of credit is slowly moving to the exits. Asia is close behind, with the Federal Reserve picking up the difference.
Largest State Budget Shortfalls
A look at the deficits our state and local governments face compared with the 2000 - 2003 recession. Our states face the same dilemma seen today in Europe, only they are getting a bridge loan from the federal government. (they owe hundreds of billions for unemployment insurance payments)
Where does gold go from here?
Gold appears to be at the upper end of its long term chart channel. It could fall substantially from here without violating its long term bullish pattern. The fall could be as large as 20%. This could come at any moment during the sovereign debt crisis.
When investors become over leveraged (they borrow money to buy stocks, bonds, commodities) because they are bullish (believe prices are going higher) they can get into trouble if prices reverse unexpectedly.
In this scenario, investors have to sell everything to raise cash to cover their margin calls. Even if they understand gold’s long term value they may be forced to sell in the short term. This is what happened in the fall of 2008. As an investor you want to be prepared for a time like this when investors become trapped. You need to keep gun powder (cash) prepared and make sure you never purchase paper assets (stocks, bonds, commodities) with borrowed money. This will allow you to ride out the pull backs when you do not want to sell your strong assets and provides you the opportunity to take advantage of the sales with additional purchases.
New Home Sales And Long Term Housing View
The following shows this month's new home sales number placed on a historical chart. The sales continue to move along the bottom of a canyon. The rebound in this market is years away.
The following provides an update to the famous long term home price chart. You can see the 2000 to 2005 bubble blow off and how far we have come back to the average price growth. The red line shows where we need to fall to be back on the historical price growth trend. Bubbles usually have a tendency to overshoot to the downside after they collapse so the red line may be an optimistic projection.
Big Picture Technical Analysis
One of the most famous tools used by market technicians is called a head and shoulders pattern. This pattern is crystal clear when looking at our stock market over the previous 15 years. You can see the run up in the market with the technology bubble and collapse when it burst. Then we had another run up with the global housing/credit bubble and the collapse when it burst. This has been followed by the run up of the global sovereign debt bubble created by massive government spending in response to the previous bubble's burst. This sovereign debt bubble is now in the process of bursting with Greece as the opening act.
The follwing graph shows the head and shoulders pattern, (see the left shoulder, larger head in middle, and the newly formed right shoulder?) which helps investors understand how the story will end.
The creator of this graph was kind enough to use an additional metaphor to help illustrate the point: Sh*t hitting the fan.
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