Saturday, November 5, 2011

80 Year Depression Cycle

A historical review of the 80 year cycle of depressions, paradigm shifts, and revolutions.  We entered the last depression in 1929 and entered our most recent depression in December 2007, (which we are currently still in) 80 years later.  The brunt of the pain in our current depression will be felt at the back end, (2012 - 2015) where the value of many assets will collapse and create once in a lifetime investment opportunities.

Friday, November 4, 2011

Fall Of The House Of Money

Click full screen for a larger view.

Art Em is Capital CurrencyCSCM NOV2011 Final

The October Jobs Report

  • 80,000 new jobs created
  • 9.0% unemployment rate
  • 103,000 jobs created by "birth/death" model
  • 503,000 jobs in 2011 created by "birth/death" model (42%)
Summary: We entered a depression in December of 2007 which we have not left.  It has been papered over with $trillions in government spending and printed money.  The period of detoxing that our country desperately needed to begin 4 years ago was not taken.  Instead we injected larger doses of stimulus to try and mask the underlying problem.  Underneath the surface the fundamentals of the economy continue to deteriorate.

This can be seen most clearly through the never ending high unemployment and continuous fall in home prices, even as the government wastes $trillions to try and "stimulate" both.

The following chart shows how far we are away from full employment from when our depression began back in December 2007. (Red Line) It would take 262,000 new jobs every month from now until Obama's second term to bring the country back to full employment.

Then we have the chart, going back to 1969, of those unemployed for over 26 weeks.  Most of these jobs come from sectors such as the real estate industry (mortgage, construction, sales) that will not be coming back.

h/t Zero Hedge, Calculated Risk

Thursday, November 3, 2011

Currency Wars Continue: Enter The ECB

News headlines continue to be dominated by the events in Europe.  The United States (and the rest of the world) continues to slowly sink back into deep recession based on the stream of current and leading economic indicators week after week.

This development is occurring almost completely unnoticed due to the drama in Europe.  I will discuss these economic indicators in the future, but now let's get back to the very important news from Europe today and how it will impact the bigger picture moving forward.

Two days ago a new head of the European Central Bank began his term.  This would be the equivalent of someone new taking over the Federal Reserve with Bernanke stepping down.  The new head is Mario Draghi and he entered the spotlight by shocking the markets with an interest rate cut down to 1.25%.

Only 4 out of 55 of the major economists polled felt there was an interest rate cut coming.  All things being equal, this is bullish for the US dollar (and other currencies) and bearish for the Euro.  A lower interest rate means investors will now get a lower rate of return for holding their money in Euros.

This is just another case of Central Banks around the world doing their best to devalue their currency to ease the burden of debt that both their governments and citizens hold.  If the currency is worth less tomorrow, the debt you have incurred in that currency will be easier to pay back.

I want to take a moment and try and explain how all currencies are now interconnected and in a race to debase against each other.  This may be a bit confusing, but it is important to try and understand to see the big picture.

All things begin with the United States, the world's reserve currency, the world's largest economy, and the world's largest debtor.  The United States is currently employing a tactic called "financial repression," an extremely important topic that I will dedicate an entire column to in the future.  In simple terms, it means that they plan on keeping interest rates lower rate than the rate of inflation.  Bernanke has promised to keep interest rates at "extraordinary" low level for 2 more years (in his August speech) while he has targeted inflation between 2 - 4%.

If interest rates are at 2% and below, while inflation is running at 2% and above, this is slowing removing the size of the debt burden America faces.  Our economy will grow in nominal size due to inflation (GDP) but our debt burden will slowly diminish.  This tactic steals money slowly from tax payers, pension funds, insurance companies and foreign creditors by devaluing the debt the United States (and its citizens) owe.

This is America's strategy: a slow and steady devaluation. (I do not believe it will occur slow and steady but that is a conversation for another time)  Now let's tie in the next tentacle in the global interconnected web of currencies.

China has pegged their currency to the US dollar.  This means that when dollars wash onto their shore they must print an equal amount of currency to keep the peg in place.  This has caused tremendous inflation and asset bubbles (real estate) within China's borders.

Next up we have Japan who, like America, has embarked on a continuous program of Quantitative Easing (printing money) to try and keep their currency lower and stimulate exports.  In addition, the Bank of Japan enters the market on a regular basis to devalue the currency directly.  (They sell Japanese yen and purchase other currencies)

The UK has announced a similar program of Quantitative Easing and has recently upgraded its size.

Until recently, Australia, Canada, and Brazil have been a source of safety but their currencies have strengthened significantly as money has rushed into their countries from investors looking for higher returns. (These countries have higher interest rates compared to the rest of the developed world)

Real estate bubbles have formed in these developing countries and as these bubbles are beginning to deflate, their central banks are now lowering interest rates (just as Europe did today) to help ease the pain.  Lower interest rates = currency devaluation.

Switzerland has long been viewed as the only paper currency that was truly safe, until this summer, when they shocked the markets by announcing they were pegging their currency to the Euro, just as China has pegged their currency to ours.  They must now print and devalue down with Europe.

Now, taking a step back do you see how it is all tied together?  Many ships are going down for fundamental reasons and the ones that have the ability to stay strong have anchored themselves to another sinking ship.

Every country wants a cheap currency because it helps their exports and lowers the debt burden the country faces.  However, we live in a zero sum world and every currency cannot devalue against each other.  If the euro falls in trading this afternoon, then somewhere in the world an investor has sold euros and purchased another currency causing that currency purchased to rise in value.

There is one more currency I have not mentioned that is traded in the global forex markets. 

It is gold.

This currency has no central bank to try and make it devalue, it has no interest rate to been lowered, and it has no counter part risk.

Every currency in the world is slowly devaluing together against gold.  This has been happening since 2008 when the global debt crisis began, and it will continue until gold has revalued itself to account for all the paper money that has been created.

Wednesday, November 2, 2011

Growing Population: Investment Impact

The growth of the world's money supply is the driving factor behind my belief that we are in a long term secular bull market for commodities.  However, it is not the only reason commodities will be the performer of the decade. 

A growing demand for the word's supply of commodities is equally important.  This growth will come not only from the current global population wanting to live a better life and needing commodities and natural resources to due so, but it will also come from the growth of the population itself.  The following video discusses this important topic:

Shadow Inventory Update

LPS released their monthly mortgage monitor for the month of September.  Some of the headlines:
  • Almost 40 percent of loans in foreclosure have not made a payment in two years, and 72 percent have not made a payment in a year or more.
  • The time from last payment to foreclosure sale in judicial states is 761 days, which is six months longer than in non-judicial states.  (Judicial refers to how foreclosures are processed in different states)
  • 2.36 million loans less than 90 days delinquent.
  • 1.84 million loans 90+ days delinquent.
  • 2.17 million loans in foreclosure process
After these 3 stages homes move into the Real Estate Owned (REO) category for banks and the properties are put on the market.  This is when you see a for sale sign go up on your street.

Get ready for a lot more signs over the next few years as banks try to slowly flush through this inventory.  If there is only one home for sale on your street today, remember that 4 others could be hidden in the "shadows." 

The residential real estate market is set up perfect for one last major move downward.


Tuesday, November 1, 2011

Greece Announces Referendum

The markets were rocked overnight when news was released that Greek Prime Minister George Papandreou has announced a referendum on his country's latest bail out.

This means that in January Greece will decide if it wants to accept the European Union's bail out by putting it to a vote.

If they vote yes, then terms will continue as planned.  But if they vote no, which is a possibility with the continuous rioting taking place daily, then Greece will most likely have to leave the Eurozone.

At that point they will have a formal default, telling all their creditors that they will get (close to) nothing, and then they will issue their own currency called the Drachma.  This currency will be able to be printed at will and can be used to pay off the mountains of pension funds and government spending that the people in Greece so desperately want.

The catch?

The cost of living in Greece will skyrocket as the value of the Drachma will be many times lower than the Euro.  They will be, temporarily, shut out of the bond market.  (Like someone in America who declares bankruptcy) 

This is the correct things for Greece and the Eurozone to do.  It is also the correct thing for Portugal and Ireland to do, but we will come to that soon when the spotlight moves to those countries.

In the meantime all eyes are now on Italy and their 10 year bond which has once again crossed over the 6% line that the European Central Bank has promised to defend.

While Greece owes 350 billion euros in government debt, Italy has 2.6 trillion outstanding.  If their cost to borrow continues to rise alongside Portugal and Ireland, then things will escalate very rapidly.

It is widely considered that the 1 trillion euro leveraged bail out announced last week that I discussed in The European Bailout Part 1 is less than half of what will be needed under a best case scenario.

Keep your popcorn ready, the next 12 months should be very exciting.

Monday, October 31, 2011

United States Could Fall Like Rome

Lawrence Lessig, professor at Harvard Law and author of "Republic, Lost" discusses how Congress has been bought and paid for and how that correlates to Occupy Wall Street, discontent toward politicians today, and what it means for our country as a whole moving forward.