Saturday, March 24, 2012

Robert Prechter On Coming Deflation

Robert Prechter spoke with Fox Business News this week on the threat of deflation to the economy.  I have been a reader of Elliott Wave's subscription newsletter for the past three years and their work is phenomenal.

For more with Robert you can listen to a longer audio interview he gave this week with Jim Puplava by clicking here.

Friday, March 23, 2012

What If Interest Rates Moved Higher?

Yesterday in Kondratiev Wave Cycle Coming To An End, I briefly discussed the catastrophic consequences that would occur should interest rates rise just a little off their all time record bubble lows seen today.  The following video from Professor Antony Davies provides an excellent visual demonstration of these consequences.

It is important to remember the interest charges he discusses are on top of the trillion plus annual deficit spending that is already baked into the cake.  The interest represents the cost to carry the previous debt incurred, just as if you had a credit card balance.  All future projections on the US deficit have these bubble low yields priced in forever.

This simple walk through shows why the Federal Reserve has boxed itself into a corner in terms of future quantitative easing programs.  If the market gets spooked on the inflationary consequences of owning US government debt denominated in US currency they will sell government bonds causing interest rates to rise (creating the scenario below).  The Fed's only response will be to print more currency and purchase more bonds to push yields lower, the equivalent of throwing gasoline on a fire.

Right now US treasury bonds are the risk free darling of the global financial community, just as Greek government bonds were 3 years ago and Italian bonds were 2 years ago.  Money has the ability to move at the speed of light in today's interconnected global world, seen in the ability of Greece's government bond yields to rocket launch higher almost over night.  For those living in Spain, Italy, the UK, Japan, the United States or invested in those countries that believe "it could never happen here," please read the recently posted Global Market Forecast, which provides the update on sovereign debt around the world including the United States.

Thursday, March 22, 2012

Debt Ceiling Question For Treasury Secretary Tim Geithner

Q: "If this were the last debt ceiling increase you could ask for, the final one, and you had to make it large enough for all current and future obligations, what would the request need to be?" 

A: “It would be a lot." “It would make you uncomfortable."

Kondratiev Interest Rate Wave Cycle Coming To An End

Excellent CNBC discussion with Chris Watling of Long View Economics regarding the 30 year Kondratiev interest rate cycle.  Our most recent cycle began in 1981 and Chris believes that the lows in interest rates reached this past winter have put the bottom in for the current cycle.  This is obviously a problem for the United States, which has financed its deficit with one enormous adjustable rate mortgage.  If yields were to rise just a tick off their ridiculously low levels it would add hundreds of billions every year to our multi-trillion annual deficits.  If yields were to rise to levels that reflect the true value of American government subprime debt, as they are across Europe, then it is game over.  This is coming.

Wednesday, March 21, 2012

David Tice Interview

David Tice, the original creator of the Prudent Bear Fund (short stocks, long commodities), spoke with Fox Business News today regarding his outlook on the markets.  His prediction:

Gold $2,500 in the next two to three years and S&P 1000 in the next 18 months.

"We feel just like we did in 1999 and 2007," said Tice  "[During] both of those periods, people were positive about credit being created, the central banks were easy, everybody was complacent, and we ended up having a big accident. You also see emerging market stocks start to underperform.  You see Europe slowing down dramatically.  China is now slowing down.  Oil prices are up.  This is indicative of the slower economy in the U.S." 

Military Budgets Around The World In 2012

The sheer magnitude in visual form of the ridiculous US military spending. Click here for larger image.

Will The Real Mitt Romney Please Stand Up

As much time as we spend here on this site focusing on the damage the Obama administration is inflicting on the long term health of our economy, we can take a moment and look at the man hoping to step in and fill his shoes, who by all accounts looks ready to do just as much damage if not more over the next four years if given the opportunity.

Tuesday, March 20, 2012

Apple Goes Parabolic

The front page of the Wall Street Journal this morning has the following headline:

"Apple Pads Investor Wallets"

To the side of the article they show the chart on Apple's stock running through yesterday, when it crossed above 600 for the first time after announcing a dividend payment and share buyback program.

You can see Apple's steady and orderly rise from early 2009 to late 2011.  Then over the past 3 months the chart has gone parabolic, surging from under 400 to over 600.

Has this ever happened before with a tech giant?  Yes, the following chart provides the track that Google followed during its multi-year run up to November 2007 against Apple's current move.  Their paths are almost identical.

Google also experienced a "blow off top" during the final stages of its run.  It is during this type of move that you want to have your pen and paper ready to write down quotes coming from the media and Wall Street analysts on where the stock is going.

I remember Jim Cramer discussing Google 800....900.....1,000?.....during the run in late 2007.  The analysts are falling all over themselves to top estimates on where Apple's price could be heading.

Apple, in terms of company size (due to the surge in the share price), is now larger than the entire retail sector - every company!

Apple is a great company and so is Google.  These are not companies with no earnings from back in the early 2000's.  Can Apple run to 800......900.......1000? investors believe who are pouring the stock into their portfolio?  Sure it can.

I was playing a poker tournament last night (for charity of course) and my table began discussing Apple stock during one of the breaks.  "How many shares of Apple traded and where did it end the day?"  Then they moved on to Bank of America (I live in Charlotte, home to Bank of America), and one player said he could see the stock falling back to 9 (it has recently doubled from 5 to 10) but sees that as the absolute low.  One said he heard that guy from Texas (Warren Buffet who is from Omaha, Nebraska) was buying so it had to be strong.

I had no comment on the matter. I preferred to listen and learn about the mood of the average investor thinking about and discussing their portfolios.  As I discussed in detail over the weekend in the Global Market Forecast, sentiment is current running at extreme highs.

How do the charts for Apple and Bank of America look to me?  Extremely dangerous.

h/t Wall Street Journal, Zero Hedge, The Big Picture

Sunday, March 18, 2012

Global Market Forecast: The United States Economy & Stock Market

Global Market Forecast: Introduction
Global Market Forecast: Sovereign Debt Review
Global Market Forecast: United States Economy & Stock Market
Global Market Forecast: Conclusion

Right now, do stocks represent a good entry point for new capital looking for a home?

We are going to look at that question from multiple angles. Markets move throughout secular bull and bear markets. Since 2000, we've been in a secular bear market in stocks.

Secular markets, which usually last between 15 - 20 years, have smaller periods of expansion and contraction within the larger trend.  This can be seen by reviewing charts of the two most recent bear markets for stocks.

The first was during the great depression: 1928-1949.  As you can see in the chart below, during the depression the market experienced two significant market crashes.  However, it also experienced periods of expansion, noted with the green arrows.

The next secular bear market for stocks occurred between 1965-1982.  This was seen as a "sideways" market that saw a recurring boom bust cycle ending with the market right back where it started almost twenty years after the bear market began.  Investors in the stock market were crushed after inflation was factored into their returns.

The final chart shows the boom bust cycle for our current secular bear market.  We have seen two significant downturns in stocks and two significant up trends.  The market has now rallied over 100% off the bottom of 2009.

After reviewing history, the important question is, "What comes next?"  Many market participants believe we are following a cycle seen during the Great Depression, only in reverse, meaning we experienced the 50% correction first (2008 - 2009), and we will finish with a larger crash, similar to what was seen in 1929.

Others believe we are in a sideways market more along the lines of the 1970's.  We may experience corrections, but overall the market will trend sideways until it finds the footing to begin the next secular bull market.

Since the crash of 2008, retail investors (regular Americans making investment decisions through 401k's and IRA's) have moved their money out of stock funds and put them into bond funds.  This can be tracked through TIC data that is released every month.  

This can be viewed as a positive, as it means there is "money on the sidelines" available to come back into the market.  Or, it can viewed negatively since the most recent market rally has been driven exclusively from hedge funds and commercial banks that have invested a portion of the liquidity the Fed injected into the financial system through QE programs.

In a normal cycle, after the market has risen for an extended period, the retail investors once again feel confident to enter back into the market.  The institutional investors can then hand the baton to them to push the market higher.  This was seen during the bull market of 1982-2000, when investors (who wanted nothing to do with stocks in the early 80's) began to slowly build confidence in the market as they watched prices move higher and higher.

But what if the retail investors do not return and pick up the baton from here?  After experiencing a market crash in 2000, another crash in 2008, and a flash crash in 2010, the baby boomer generation is now terrified of watching their retirement capital evaporate in another leg down in the market.

The retail investor not returning to the market and/or beginning to sell their stocks to live on during retirement, creates the possibility of another Great Depression like crash.  With stocks now in the hands of banks, hedge funds, and high frequency trading machines, we know and have seen how quickly the market can free fall when the bids are removed.

Even if that type of scenario does not occur, you can see in the charts above that we are currently resting on the upper end of a major market rally during a secular bear market.  Based on historical trends this has been the most dangerous time to enter the market.  The following graph shows the psychological cycle investors experience during these sideways bear markets:

In order to invest money today, you must believe that stocks, currently sitting at high extremely high valuations and extremely high sentiment levels, will see these valuations balanced out through extensive economic growth.  Or, you must believe that overpriced stocks will become more overpriced.  Both scenarios are possible.

During the late 1800's through the 1950's, America built an economy around manufacturing and savings.  We produced goods and exported them to the world.  We were one of the world's largest oil exporters.  The 1950's was the peak of America's true economic dominance.  The UK followed a similar path to become the world's most dominant economy during the 1800's before America took over the throne.

During this process of growth, America found itself with the privilege of becoming home to the world's reserve currency.  This means that most transactions around the world are conducted through American dollars creating an increased demand for our currency. You can see the most recent holders of this title in the graph below.

Having the world's reserve currency gave America the ability to run large trade and government deficits. From its peak in the 1950's & 1960's, America began to slowly transform from a manufacturing economy to one based on services and consumption.

We had a chance to correct this imbalance in the early 1980's when interest rates were raised close to 20% to slow down inflation.  A deep recession at that time could have cleansed the built up mal-investments and turned us back toward the path that made America an economic power.  Our leaders decided instead to boost the economy through deficit spending.  By choosing this path, they found the secret political stimulus/drug that has been the backbone of our economy ever since.

After that period, any downturn in the economy was met with an increase in government spending and a lowering of interest rates.  Lower interest rates allowed consumers to borrow more when shopping for cars and visiting the mall and new government loan programs were created for housing and student loans.

America became a nation of borrowing and spending, and they paid off this interest with more and more income derived from service jobs.  The manufacturing base continued to deteriorate and savings declined.  The following graphic visually demonstrates the major shift in the United States economy after 1980:

Now America, similar to many of the countries described in Global Market Forecast: Sovereign Debt Review, is faced with a bloated balance sheet for the private sector (corporate and consumers) and the public sector (government debt) Our government debt to GDP is now over 100%.  Our private debt to GDP, shown in the graph below, touched 300% before beginning to contract in 2008.  

The total debt to GDP (including the government) is close to 360%; worse than Greece.

Remember that payments on government debt have to come from the businesses and consumers that make up that nation.  If the private sector is already burdened with their own mountain of debt payments, it makes the repayment of government debt as well almost impossible.

This does not even factor in the state and local government debts, which are a nightmare.  We are beginning to see large cities and counties begin the process of bankruptcy.  This problem will continue to grow as taxes received from real estate continue to fall along with falling property prices.  A reduction in spending at the state and local level reduces the size of their local economy as government workers face pay cuts or lay offs.

This is also seen in many areas of the bubble economy heavily dependent on debt growth, such as real estate and finance.  Real estate created jobs in the form of construction, sales, and mortgage financing.  The decline in the economy has been felt in the financial sector as many of the largest banks and insurance companies continue to lay off workers, reduce pay, or cut back on bonuses.

The unemployment rate, tracking down with real estate, continues to hover above 8%.  Some market observers, like this website, believe that the unemployment situation is far worse than the official numbers reported by the government when you factor in those that have taken part time jobs and those that have given up looking for work.

In order to deal with the most recent downturn, the United States is following the same blueprint that was created back in 1980: deficit spending and lowering interest rates.  Only this time the magnitude of these programs are enormous. The Obama administration has run trillion plus deficits for four years running, and not only has the Federal Reserve lowered and kept interest rates at 0%, but they have begun printing money to purchase government bonds and mortgage securities.

The goal is to get both consumers and businesses once again borrowing and spending.  America is desperate not to get caught up in the death spiral that countries in the European Union face where reduced spending reduces GDP, which makes the debt already incurred more difficult to manage.

The Fed is trying to artificially keep rates lower than the rate of inflation, a process known as financial repression which I discussed in great detail in What Is Financial Repression?.  This has been successful in driving money out further into risk/higher yielding assets.

The Fed knows that they must increase credit in order to grow the economy.  If people are borrowing and spending, it keeps the machine functioning.  The only problem is that Americans, just discussed in terms of their 260% debt to GDP, are now tapped out.  The income they are taking in, which has either been reduced or cut completely during the most recent depression, is not enough to cover the debt already incurred, never mind new private debt & government debt (which must be paid through taxation or inflation).

Gas prices are 7% away from their all time record high back in July 2008.  The cost of food, insurance, medical payments, gasoline, and rent is rising.  While the Fed had the green light for QE2 when oil prices were at $75, they are going to think much longer about embarking on QE3 with oil prices approaching $110.

Where will the growth come from that will balance the current overvaluation in stocks?  Can the government and the Fed get everyone to buy back into one more credit bubble?  Maybe.

Betting on this outcome was far safer when the stock market was 40% to 50% lower and the sentiment toward the market was at multi-decade lows.  At these levels, based on the coming slowdown in the global economy due to the massive debt overhang, and the continued stagnant (or reduced) growth in the United States, the risk/reward level of entering the market appears extremely high.

Let's review that risk/reward ratio now.

Up Next: Global Market Forecast: Conclusion

h/t Jim Puplava, John Williams, Zero Hedge

Global Market Forecast: Conclusion

Global Market Forecast: Introduction
Global Market Forecast: Sovereign Debt Review
Global Market Forecast: United States Economy & Stock Market
Global Market Forecast: Conclusion

The goal of this forecast was to provide broad look at the stock market in terms of whether an investor should enter the market today by reviewing the growth outlook of the global economy as well as the strength of the US economic engine.

After the extensive review of both public and private balance sheets for the largest countries around the world it becomes clear that the global economy is in the early stages of deleveraging.

Paying down debt and reducing credit is inherently a (short term) drag on an economy as the benefit of the debt incurred in the past must now be matched with a sacrifice today.  Future economic growth was pulled forward over the past three decades and the bill for this continuous boost to the global economy is now here.

If the stock market was touching new lows and sentiment was at extreme lows as seen during the March 2009 bottom (when there were only 2% bulls on the daily sentiment index) the market would look much more attractive even in the face of slower economic growth.

However, with all these headwinds and hurtles to cross as the world continues this enormous deleveraging process, the market is now closing in on all time record highs and sentiment is at multi-year highs.

This should throw up a cautionary flag for new investors looking to put money to work in the market.  Can the market run from overpriced to extremely overpriced?  Absolutely.  It has happened time after time throughout history.  To begin 2007, it became very clear how much of an impact the subprime mortgage crisis was going to have on the economy yet the market rose for almost another full year before topping out.  It ran from overpriced to extremely overpriced.

Do I want to put money to risk in that sort of an environment?

No.  In fact, I would prefer to begin buying options (called puts) which are extremely low in price when the market sentiment and prices are high.

The following is this week's cover in Barron's magazine.  For a complete analysis on the future direction of real estate prices please see 2012 Outlook: Residential Real Estate.