Saturday, March 5, 2011

Social Mood Toward Banks

I enjoy tracking the social mood of people around me and the mainstream media.  Because we are entering the next wave down where our government will have to make decisions on who to save and who to let go, things are going to get dicey.

They have already saved the bankers who were first in line and the ones who created the financial crisis.  They have received record bonuses over the past two years and will sail off in the sunset unharmed.

Now that the money used to save the banks has bankrupted the country, we can begin trying to save the jobs for teachers, police officers, and firemen with whatever money (ability for our government to borrow) is left.  The clock is ticking.

The Daily Show looks at this issue in a more humorous way below.  It fascinates me that the media has already turned on our banks and we have not even begun the economic crisis that they created.  Things will get far uglier as we move forward.

Friday, March 4, 2011

Tuna March Jobs Report

Since we do this the first Friday of every month, we mine as well name it the Tuna jobs report.  Before we get started we'll look at the information you'll hear from the media:

192,000 jobs were created for the month of February, bringing the unemployment rate down to 8.9%.

This, as always, looks fantastic on the surface, but we'll dig a little deeper.

The most important detail for the monthly jobs report is how it is counted.  The government does not count people that have given up looking for jobs as unemployed. 

The following chart measures this showing the labor participation rate.  It is dropping precipitously, showing the number of people "giving up."

Another way to see this trend is the civilians not in the labor force chart shown below skyrocketing.

From October to February, 700,000 Americans have "left" the labor force.  If these Americans were factored back in, the unemployment rate would be at 12% today.

Then you have the average weekly earnings, which has once again begun a deceleration downward:

The following chart shows the number of unemployed for longer than 26 weeks, the point many begin to "give up" and help the government unemployment rate down to 8.9%.

Finally, you have where our "recovery" stands in relation to all others during the past century.

Stocks are getting hammered on the day, as precious metals are breaking out to all time records.

How Gas Prices Determined

Interesting graphic below that shows the components of how the price of gas is determined:

These percentages fluctuate based on the time of the year, and what is taking place in the global economy. Click for larger view:

I believe that over the next five years (with major pull backs along the way), oil and oil producing companies will be an essential portion of an investor's portfolio.

Thursday, March 3, 2011

Federal Reserve: Cause And Effect

The following chart shows that 14.3% of Americans are now on food stamps, a total tally of 44.1 million people, a new record.

These people receive a card that turns on at midnight the first day of the month.  Their only concern from that point forward is that the cost of food does not rise enough that they starve.  The following chart shows the U.N. Food and Agriculture price index, which has hit a new record high for the second month in a row.

Once the cost of food rises above the ability to pay with food stamp cards, America becomes a far more dangerous place to live.

Big Picture Outlook: Waves

I have stated over the years that the big picture economic crisis would come in multiple waves.

The first wave was the credit growth and bubble of the real estate markets around the world.  The bubble burst in the United States in 2007, bringing down our financial system and taking the rest of the world down with it.  This is due to the interconnected nature of financial markets around the world.

The second wave was the policy response from both governments and central banks to the crisis.  The steps taken to prevent re-structuring and postponing the true pain were remarkable:

1.  The federal reserve backstopped $22.5 trillion within the market.  They printed and purchased $1.25 trillion of mortgage bonds and $300 billion of treasury bonds in 2009. (QE1)  They are currently completing QE2; they will print and purchase $900 billion in additional treasury bonds through June 2011.

2. The federal government responded with massive stimulus policies and social safety nets.  Unemployment insurance was increased to 99 weeks.  Food stamps, social security, medicare, medicaid, and government insured mortgages (which now account for 95% of new loans) all put a safety net under our society.

Similar responses were seen around the world, where leaders decided to back their banks and create stimulus programs with tax payer money. (debt)

These measure have created a period of artificial prosperity where the free money and government spending have been injected like a dose of heroin into the economy.  Everyone is on a high, which can be seen by the sentiment levels in markets across the board that today clock in more positive than the all time highs seen back in 2007, just before the collapse.

The stock market is an obvious case, where dividend payments now average 1.5%.  Cash levels are back at historical lows at mutual fund companies (they are all invested in stocks) and leverage is back up to 2007 pre-crisis levels.  This means investors such as hedge funds are so confident the markets are going higher, that they are borrowing money to buy stocks.  This scenario created the cascading effect seen during the collapse in 2008.

The same can be seen in the real estate markets.  I read this week that "trophy" apartment communities in my Charlotte home town now have bidding wars.  Investors are paying lower cap rates (sub 5%) than they paid at the peak of the real estate bubble.  Another article I read said that Real Estate Investment Trusts (REITs) have so much capital pouring in that they are forced to enter these bidding wars.

The third wave of the crisis has just begun.  It is where governments around the world who backstopped the banks and poured money into the economy with the use of debt, now face their own debt crisis.

The warning shot was in Dubai during late 2009.  Then it moved to Greece and Ireland in 2010, and has found its way into the heart of Portugal and Spain as we move into 2011.  This process will start slow and then build speed as we move along, exactly as the real estate crisis did during 2006-2008.

The important question is:  What happens to markets during this next wave?

I believe that we will see one more deflationary scare with markets selling off across the board.  It is tough to pinpoint what will spark this next leg down but there are three catalysts I am tracking closely:

1.  The Irish people voted out the government that agreed to their bailout last week.  If the new government has the testicular fortitude to re-negotiate terms and ask banks to shoulder some of the losses, it will create a "Lehman Brothers" type domino effect within the financial markets.

2.  If Ireland cannot stomach the ability to renegotiate then eyes will move toward Portugal and Spain.  If a bail out cannot be created for either country (Spain is massive) then a similar Lehman type event will occur.

3. The Chinese property bubble in their coastal cities has now grown into dangerous territory.  Just as the Federal Reserve began raising rates in 2004-2006 to calm speculation in American real estate, the Chinese central banks have been raising rates relentlessly for about 9 months.  Chinese real estate increased at the slowest pace in 6 months this past month, and is close to the point of turning negative.

Countries such as Australia, Canada, and Brazil count on exports to China which has been driven in large part to this property bubble.  Over 25% of the Chinese economy is based on construction.  If it were to slow, then commodity and emerging market stock prices could be severely impacted.

The next wave down will subsequently bring the next round of government stimulus and central bank intervention.

This is why I believe that while certain assets will be impacted in the short term, it will provide a tremendous buying opportunity for investors that understand the big picture and final outcome of this wave structured environment.

This is the time to both determine which assets are in long term secular bull markets, and build a large amount of safe cash to have as ammo when these buying opportunities appear.

Wednesday, March 2, 2011

Obsessed With Facebook

The World Is Obsessed With Facebook from Alex Trimpe on Vimeo.

Who Will Buy Treasuries?

There are many things that I think about when I wake up in the morning, such as who won the Celtics game last night?  Or did I remember to buy coffee?

On many occasions though, I find myself lying in bed wondering, "who is going to buy US treasuries if the Fed stops?"

It made me feel a little less strange this morning when I found out that the man who runs the world's largest bond fund at PIMCO (over $1 trillion in size) decided to write his monthly newsletter on this exact topic.

He helped us visualize what was taking place in the market with three pie graphs. 

The first (who bought?) shows who owns what percentage of total treasury bonds today.

The second (who's buying now?) shows who is currently buying treasury bonds.

And the third (who will buy?) asks, who is going to replace the 70% of sales in the future that the Fed is purchasing today?

His response:

When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?

His answer:

I don't know

He then goes on to say that someone will purchase the treasuries, but it will be at a far higher interest rate.  But that is the key point.  If interest rates rise then the cost to finance the debt will grow enormously.

Over 50% of our federal debt needs to be rolled over ever 2 years.  It is the same exact scenario as a short term subprime mortgage with a "teaser" rate.

Our total deficit today stands at $14.195 trillion, $100 million away from the debt ceiling.

80% of our spending currently goes toward entitlements and debt service (interest payments).  This spending (social security, medicare, medicaid) will not be cut.

Entitlement spending is set to explode as the baby boomers retire.  If interest rates rise, the debt service will explode as well.

This is why Bernanke has painted himself into a corner.  There will be no end to Quantitative Easing on June 30, 2011 (which Gross compares to D-Day).  It will be extended.

The gold market, which launched to a new all time record high this afternoon, continues to do what it has over the last 5,000 years: Revalue itself to the underlying paper currency's true value.

And we haven't seen anything yet.

Tuesday, March 1, 2011

Robert Prechter: Yahoo Finance

Robert Prechter, whose work I follow closely, is the leading voice in the deflationary camp. He spoke with Yahoo Finance this week on his outlook for the markets.

Prechter's primary focus is on social mood, which he feels drives the ultimate direction for stock prices.

Jim Rogers On Bloomberg

The legend, Jim Rogers, takes some time to speak with Bloomberg regarding oil reserves, gold, silver, agriculture (he loves them all) and what he is short (emerging market and NASDAQ stocks).  Fantastic information from one of the greatest:

$130 Silver

CNBC decided to have its first segment on something readers of this site may have heard of:  Silver

The metal crossed over $34.40 this morning.

Sunday, February 27, 2011

Oscar Night: Best Picture

Release Date: June 2011
Estimated Gross Receipts: $600 Billion Printed