Thursday, July 5, 2012

Europe's Virus Is Now Global Contagion

During the outlook to begin the year I wrote a segment titled Global Butterfly Effect where I tried to explain the importance of the interconnected nature of the global economy.

The following graphic, which I have shown in the past, helps provide a visual on global trade and shows that over 50 percent of the goods traded in the world move through Europe.

My thesis for the year was that the contraction that had begun in the European economy would intensify as the year moved on and drag down the global economy like an anchor dragging along the ocean floor.

The following shows the most recent data for the Eurozone manufacturing PMI data in June. In has now fallen for 11 consecutive months. Any number below 50 in the index means contraction and the index now sits at 45.1.

This, along with massive austerity throughout Europe, has sent unemployment spiking. The unemployment, continued austerity, further manufacturing slowdown, greater unemployment, continued austerity..........has created a viscous downward cycle dragging Europe toward a massive depression.

Europe's slowdown has now begun to drag down the manufacturing indexes for the other major economies around the world. Every major tick downward has been a "surprise" to economists not understanding how this slowdown could be occurring. The United States ISM for June moved into contraction territory at 49.7 for the first time since July of 2007.

In China the manufacturing index has now crossed down to 48.2, signaling the 8th consecutive month of weakening data.

With the United States, China, and Europe leading the way, manufacturing is beginning to slow down everywhere around the world. The following shows JP Morgan's global manufacturing PMI moving heavily into contraction territory in June.

80% of the world is now contracting, seen the following graph.

This is the butterfly effect in action now beginning to metamorphisize into the actual data. Those that could not see it coming are only now beginning to make investment preparations with today's data. As I have discussed in the past, this is the equivalent to driving down the road using the rear view mirror.

Spanish bond yields crossed back above 6.8% this week after the announcement of the most recent Eurozone bailout plan only a few days ago. The market has once again digested the bailout and come to the conclusion that it is not enough.

It is going to take shock and awe from central banks around the world to keep the artificial bond and equity prices floating in bubble territory. If they hesitate, then gravity will immediately return and you will see prices resume their plunge downward.

Liquid cash and precious metals remain king as we wait very patiently for the buying opportunity.

Wednesday, July 4, 2012

Nigel Farage Tears Into European Leaders

No comment needed. Just another great rant from Nigel telling the world what it does not want to hear: the truth.

Monday, July 2, 2012

The Evolution Of An American Society Through Psychology

The following video provides the story of Edmund Bernays, the nephew and student of Sigmund Freud, who created a new way to market products to the masses beginning in the 1920's. Through his study of human psychology he found it was far more powerful to sell a product based on primal human desires vs. actual needs.

His breakthroughs were the foundation of an entirely new American society that still exists today, which is focused on self and consumerism. The fascinating documentary is worth an hour of time for anyone involved in the sales/marketing field as well as anyone who wishes to understand how and why our society has become what we see and live in today.


Sunday, July 1, 2012

Obamacare: Facing An Unsolvable Dilemma

There are two conversations/arguments regarding the Obamacare health insurance discussion. The first is whether the program will lead to medical care costing more in the United States. For this portion of the conversation there is no argument. Costs are going to skyrocket. How soon the program will lead to rationing depends on your confidence in the ability of the United States to sell debt moving forward in the future. If you do not understand why it will lead to higher prices then I would recommend a basic review of economics through the book Economics In One Easy Lesson.

The second portion of the argument is whether or not the program is the right decision for Americans based on morality. The program will allow people will pre-existing conditions the ability to receive health care that otherwise would not based on the sick nature of our current insurance structure in America. This will lead to many lives being saved that otherwise would not.

This scope of the conversation looking at this side of the argument moves into the same realm of whether you believe in food stamps, unemployment payments, and helping those that have fallen into troubled times during our current depression. I would say that I obviously wish to help every person possible in our country. I would never want someone to be sick that could be cared for.

The reality of the situation is that we live in a world today where we do not have to make choices on where we spend money and how much we spend in those areas. We have an unlimited amount of money that the US can sell into the debt market. Our treasury bonds yield 0.0% on the short end of  the curve and yields are at all time record lows on the long end. There is currently an unlimited, insatiable, demand for any amount of money that the government is willing to borrow and spend.

I believe that some time over the next 3 to 5 years, and maybe much sooner, this will no longer be the case. I believe that after Europe, the major developed countries (Japan, the UK, and the United States) are going to face a "Greece-like" moment. I try and push myself forward into that world and imagine how decisions will be made when sacrifices will actually have to be made.

For example, a portion of the real estate discussion I have been making for close to four years (a topic that you will not find in any real estate outlook) is that at some point in future the government will not purchase and insure every mortgage in America (as they are today) when that money could be used on health care for a retiring baby boomer population. I believe that people would rather live than have their mortgage rates lower on a new home.

The same goes for student loans, which are almost exclusively funded through the government today. If a portion of that money must be redirected to social security, Obamacare, unemployment payments, or food stamps it will have the exact opposite effect on the education industry as the free money has had on the way up.

Again, if you do not believe the United States will ever have to slow spending then this portion of the conversation does not apply to a real estate decision today. The goal of this site is to project forward into the future based on a likely outcome due to rational economics (such as a 3 minute overview of the balance sheet of the US government).

In the short term the Obamacare program will save lives. In the longer term, if we are unable to finance its massive cost then there will be rationing and it may end up costing lives. There is no good answer to how to deal with the medical issues in America because the country is bankrupt. It is going to be somewhere between bad and very bad in the years ahead.

The following video helps walk through the financial portion of the Obamacare program. It does not focus on the morality portion of saving lives in the short term, which I hope I have emphasized here is equally important.


European Bailout: Show Me The Money

Friday we ended the last trading day of June with a massive risk on rally in almost every asset class, specifically oil which launched almost $8, due to the news on the European bailout. I posted comments from Jim Rogers and Nigel Farage on what the bailout means for the markets in the longer term (beyond one day), and the following is a simple to understand walk through from Bloomberg on what actually took place. The host then also discusses what sort of problems may be ahead for Europe (beyond one day).