Friday, July 27, 2012

US Cities: The Bankruptcies Begin

As the spotlight stays on Spain with their regions going bankrupt, quietly the mother of all sovereign debt crisis' continues to build in the United States. Cities are finding that it is much easier to deal with pension negotiations by throwing up the middle finger and telling the other side of the table they will get nothing through bankruptcy. This is a slow stream that will soon turn in to a flood.

Wednesday, July 25, 2012

Stephen Roach: Expect QE3 Next Week

Stephen Roach, the Yale professor and long time bear who worked with Morgan Stanley in years past out of Asia, spoke with Bloomberg on the economy and the Fed's next move.

He sees discouraging economic data everywhere and the Fed announcing additional stimulus next week. He feels that the market has priced in easing, and the Fed "will not disappoint."

Spain Implodes - Government Bonds In Freefall - Regions & Banks Bankrupt

Readers of this site were aware this was coming 18 months ago, but the Spanish economy is now in complete collapse. The 2 year government bond has crossed 7%, the 5 year is at 7.7%, and the 10 year is at 7.6%. The government cannot continue to fund itself at these interest rates and will only survive with another bailout.


The regional governments within Spain (think of the member states for those that live in the US) are now lining up one after another to request a lifeline from the Spanish government. They have a massive amount of debt that will not be able to rollover/refinance without help from the government.

The banking system within Spain is also on life support through the government and the ECB. They are insolvent to the tune of hundreds of billions of euros and would cease to exist immediately if the life support was removed. A modern day bank run has spread across the country:


Again, we have discussed this moment arriving in great detail explaining the national government, the regional government, and the banking system's insolvency for close to two years and now it is here. For those that prefer a visual over data and charts, the following video quickly summarizes the current state of the Spanish economy.



We will continue to look forward in the weeks and months ahead here on the site to who is up next in the sovereign debt crisis and who is not yet on the radar. (hint: France and Japan)

Stay tuned & stay in safe investments.

h/t Bianco Research

Tuesday, July 24, 2012

Real US Unemployment At 22.9%: Closing In On Great Depression Levels

The chart below shows the two government released unemployment numbers: U3 (red line) and U6 (grey line). The U6 number counts people that have given up looking for work, but not the "long term" discouraged. The SGS number (blue line) from shadowstats includes these long term discouraged. It represents how the unemployment rate was calculated before 1994 when political "adjustments" were made.


John Williams of Shadowstats explains in this Fox News interview:

The Daily Show Correspondents: Recessions & Depressions

US Housing: Visible, Shadow, & Ghost Supply

The following chart from Mark Hanson is one of the most bearish on the housing market I have seen. It begins with the left column (green) showing current demand which is running at 4.6 million homes per year.

The remaining columns moving from left to right show the scope and size of both the visible inventory, shadow inventory, and ghost inventory.

The first grouping is the visible inventory meaning when you drive down the street you can see a For Sale sign on the front yard. It is composed of the NAR (National Association of Realtors) listings and REO (bank owned) listings. You can see why based on current supply/demand dynamics of 4.6 million homes chasing 2.89 million listed for sale that in many areas prices are once again rising.


The next grouping is the shadow inventory showing distressed loans (delinquent) and the number of homes that are being sold through the short sale process (banks negotiate a deal with a buyer at below the total mortgage to avoid having to go through the process of foreclosure and selling through an REO listing).

Most analysts argue that that there is far less shadow supply available because of the number of homes moving through the short sale process. You can see that at only 600,000 homes, it makes up a very small piece of the pie.

Next up there are modifications or workouts which fail 75% of the time. So while this chart estimates this number at 6 million, it can really be estimated at 4.5 million homes that will ultimately move back into the shadow inventory.

The author then takes it into the "ghost" inventory which shows the number of homes with "effective" negative equity meaning they cannot sell their home and pay a Realtor without pulling cash out of their pocket. This total is a staggering 24,990,000 homes that are ready to enter the shadow inventory pipeline.

Let's hope Bernanke and the federal government can force mortgage rates down below 1%, which will help buyers bid up (overpay) for homes and get some of those 25 million homes back above water. This will force the maximum level of losses back on the tax payer and allow the monthly cost of living to stay as high as possible, something every American seems to think is very important.

For more on housing inventory see US Real Estate: Where Is The Inventory?

h/t The Big Picture

Monday, July 23, 2012

Richard Duncan On Glenn Beck Show

Excellent interview with one of my favorite economists.


Thinking About Money: Psychology & Investing

One of my favorite topics to study on the financial markets is the psychology of the masses and the psychology of the individual trader/investor. When it comes to money and investing it fascinates me how people can make (irrational) decisions that they would never make in another area of their life.

For example, people often ask me what they should do with X amount of dollars they have received for a tax return, bonus, etc. They will tell me that they can pay down their credit card debt, which they are currently paying 21% per year on, or they could put it into an investment such as a CD or bond fund that yields 3%. Or they ask an even easier question such as should they pay down the credit card or should they pay off their car loan (6%).

The answer to these questions are probably very obvious to almost everyone who is reading this, but it amazes me how often a questions like this comes up.

(The answer briefly to question one would be to pay down the credit debt. Not paying 21% per year is much better than receiving 3%. You get a total positive expectation of 18% by paying off the card. In the second example again you would pay down the credit card debt vs. the car debt receiving a positive expectation of 15%.)

It is certainly not that the people asking these questions are unintelligent. It is just that most people think irrationally about money. Most investors do not think of their portfolio as one large investment (both on the debt and investment side).

Another example is someone that has $300,000 in available cash. They would like to purchase a home and are deciding on whether or not to pay cash. The monthly mortgage rate is currently 3.5% for 30 years. Their financial advisor has a laddered bond portfolio they can invest in with rolling safe short term bonds that would pay them 5% annually. What should they do?

Almost everyone I speak with automatically would prefer to pay cash for the home. I ask them how much of a return on their money they will receive by paying cash? Or how much of a return on their money they will receive on the money they use as a down payment? The answer is nothing. They receive a savings of 3.5% interest.

If they decided to invest $200,000 after putting a $100,000 down payment they would receive a positive expectation of 1.5% (5% bond fund payment - 3.5% they pay on the mortgage) annually. That is an extra $3,000 per year they could use to go on a vacation.

Now, some will argue that the bonds could go down in value or they have a risk of defaulting. This is true, and it needs to be weighed against the decision. An argument against that is that a home could go down in value. Many have found out over the past few years that their $300,000 "investment" into a home is now worth only $225,000.

In a final example, I have given advice to some people recently on how I would recommend structuring their portfolio, or a portion of their portfolio.

Based on current the current market environment, their investment goals, and their complete financial picture, I recommended putting a small percentage of their portfolio into precious metals and natural resources, a small percentage into a fund that shorts the market, and a very large percentage into safe cash. I told them that we are hoping for all assets to sell off because it will increase the value of their cash, usually coinciding with a strengthening of the US dollar. This will allow them to purchase more assets than they could yesterday. In other words their largest investment, cash, would be going up in value.

Then the market sells off (just as we wanted) and their small portion of the fund in precious metals and natural resources fall in value and they get upset. Why? They are not looking at their portfolio as one large investment. The majority of their total asset pool went up in value (cash and short fund) but they only see the red in the other investments.

In the following video Daniel Kahneman, one of my favorite authors, discusses some of these topics on behavioral psychology and investing.



I am not a financial advisor and do not recommend any of the strategies discussed here. They are strictly to provide examples on the psychology that goes behind making investment decisions.

Sunday, July 22, 2012

Economic Collapse For Dummies

The guys over at Future Money Trends have released another entertaining video on the future of our economy. After touting a hyperinflationary scenario first for the past few years they have now moved toward a deflationary collapse followed by a currency crisis. This has been my stance for well over two years running so I am now finally in agreement with their outlook.

Those following this strategy over the past few years of holding current positions and raising "safe" cash with new income have suffered watching the stock market move from over valued to very over valued and watching long term bonds move from very over valued into their blow off mania stage. I discussed this "suffering" in detail in the introduction of the Global Market Forecast back in March. However, I believe those that have been patient and remained on the sidelines are very close to their reward. As difficult as it has been to remain out of risk assets during this artificial move up, it will be even more difficult to put that cash to work when fear enters and markets begin to sell off significantly.

This is not a recommendation of Future Money Trends' site or their services; please do your own homework. That being said, they put together tremendously entertaining videos that contain a lot of excellent information. Particularly important during this most recent release is their focus on the impact of demographics. I have discussed this in detail in the past and have recommended reading Harry Dent's most recent book The Great Crash Ahead. Dent is a specialist on demographics and the impact retiring baby boomers will have on the economy.