Saturday, August 25, 2012

An Economic Growth Mirage: Income Levels Fall As The Cost Of Living Rises

Over the past 12 years the Federal Reserve has responded to two major market dislocations. The first was in March of 2000 when the stock market bubble peaked and subsequently crashed over the following two years. Interest rates were brought to "extraordinarily" low levels and held there for years in order to stimulate borrowing and spending as well as raise asset prices.

It worked. Not only did the stock market recover and move on to new record highs, but it took the real estate market with it. The Fed was praised as the savior of the economy and Alan Greenspan was known throughout the financial world as "The Maestro."

Then the impact of the Fed's loose monetary policy was felt in 2008 when we experienced a financial crisis where both stocks and real estate prices crashed simultaneously. The Fed, once again, has brought interest rates and monetary policy to "extraordinary" new levels.

We are now back in the eye of the storm. The period where the Fed is continuously praised for saving the global economy and Ben Bernanke has been honored as Time magazine's man of the year and dubbed "The Hero."

While the impact of the popping of the Fed's new bubbles will be felt soon, there is another problem that grows under the surface through this easy money policy. A large portion of the working middle class and poor do not own a home and own very little in stocks. Their level of financial health is determined almost exclusively by the wages they earn vs. their cost of living.


The Fed creates no real wealth with a printing press, only a mirage of higher asset prices that make some consumers feel more wealthy and more likely to buy, which is turn artificially and temporarily stimulates the economy.

The fact that real growth is non-existent can be seen by tracking wages. The median household income was $55,470 in January 2000. In June of this year, over 11 years later, it had fallen to $50,964.


The next chart shows that while income has tracked sideways and fallen the monthly cost of living has continued to rise steadily.


The Fed's goal of raising the "paper" wealth of the economy worked marvelously from 1983, where the median net worth was $91,056, through 2007, where the median net worth reached $152,950. Since that point, due mainly to the collapsing value of real estate, it has fallen all the way back down to $93,150, just about where it started 30 years ago.


This past week the average price of gasoline reached the highest ever price point for that week of the year, topping even the gas spike of the summer of 2008. While there was outrage during 2008, there is hardly a mention of the rising costs today. People have just grown numb to the rising bills monthly, not understanding how printing press impacts their monthly bottom line.


The price of agriculture, specifically corn, has surged over the past few months due to the terrible drought that has impacted crop growth. This is slowly working its way through the line of production and will be felt at the grocery store over the last few months of the year.

This process has created two economies. The wealthy that already own assets such as real estate and stocks benefit from the Fed's artificial stimulus that temporarily juices the number seen on their monthly bottom line. The second economy, the working middle class and the younger generation, feel no benefit from artificial stock price increases. They do not yet own a significant amount of assets in their portfolio and have a tougher and tougher time accumulating them as wages fall and the cost of living rises every month.


As I discussed earlier in the weak, this foundation of the economy, the working middle class, is cracking and breaking down setting the stage for a large scale collapse. While the process cannot be seen on a day to day basis with the untrained eye, over a long period of time the impact is clear. The United States is just a shadow of its former self in the 1950's when it was a manufacturing powerhouse with real wage growth and a strong savings rate.

The percentage of the middle class who say it is more difficult to maintain their standard of living today than 10 years ago has risen to 85%.


Fortunately, the invisible hand always finds a way to correct imbalance. As the US slowly disintegrates with the currency behind it, asset prices such as stocks, real estate, and even the beloved bonds will enter a period of "repricing." A lower currency will help America boost exports and collapsing asset prices will set the stage for what hopefully will be the next period of rebuilding and real economic growth.

h/t Washington Post, Pew Research Center, Zero Hedge

Friday, August 24, 2012

The Best Business Major For 2013

If I had a child attending college this fall, what would I recommend they study?

Agriculture. Learning the business of farming and food. I would also recommend they take a course in mandarin, the dominant language spoken in Asia.

My guess is that is the last topic of study discussed at the dinner table for 99% of families. Agriculture and farming will be one of the most lucrative business opportunities this decade. (Un)fortunately, as the opportunity presents itself to the mainstream we will be churning out another batch of service professionals and finance majors dedicated to forming the next "crop" of Wall Street traders who push paper back and forth in a market just waiting to collapse. Click for larger image.


Silver Supply & Demand: Industrial Demand

Silver Supply & Demand: Investment Demand

Thursday, August 23, 2012

Inside The Mind Of A Tuna: How I Invest & Why

Let me first begin by saying that I am a terrible trader. I don't purchase an investment in the morning hoping to sell at a profit later that afternoon (or even the next few days). If someone listens to what I am saying or happens to do something I am doing it is very likely that they will lose money in the short term.

My goal in making investments is to purchase assets that I believe are in long term secular bull markets when they sell off in price and when sentiment becomes very pessimistic toward those assets. I put short positions in place on asset classes I believe are in long term secular bear markets when prices rise significantly and sentiment becomes very optimistic in that asset class. For a simple discussion on why sentiment is important when making investment decisions see 2012 Real Estate Outlook: The Fall (2006 - 2011).

Here is a sampling list of some specific investments I believe are in long term secular bull markets:

Gold, Silver
Precious Metals Mining Shares
Oil, Agriculture, Water, Rare Earths
Specific Stocks Purchased Through These Currencies
Australian Dollar, Canadian Dollar, New Zealand Dollar
Brazilian Real, Asian Currencies

Here is a sampling list of some specific investments I believe are in long term secular bear markets:

Long term bonds
Most Stocks
US Dollar
Most Real Estate

I track the price of these items on a daily basis and then I read a tremendous amount of information to get a gauge on the sentiment level in each asset class.

That being said, let me walk you a simple step by step on how this year has played out looking through each one of my outlooks during the year. During each outlook I went through a long process of discussing my thoughts on the world and then provided a brief segment at the end of each talking about how I was personally investing.

January 3, 2012 - 2012 Outlook: How To Invest

On the sidelines raising safe cash

March 18, 2012 - Global Market Forecast: Conclusion

-Raising safe cash
-Began accumulating short position in market

June 2, 2012 - Second Half Outlook: Policy Response & How To Invest

-Closed short position on stocks
-Began purchasing silver and specific gold mining shares
-Raising safe cash

August 10, 2012 - Second Half Outlook Update

- Steadily accumulating precious metals, mining shares, rare earth stocks
- Preparing to begin accumulating short position on stocks if market continued to rise
- (Market continued to rise and short position was put on shortly after)

You can see, based on what I just discussed above, why I was making the decision on each of these investments. If stocks go up in price and everyone gets excited, not only do I run the other way but I put on a short position. If precious metals fall and everyone gets very pessimistic on the sector then I accumulate as much as possible (I was close to adding positions in agriculture and energy in June but prices and sentiment did not fall enough to trigger a purchase).

I don't look at technical patterns on charts. I have nowhere near a large enough ego to think I can beat a high frequency trading operation day trading in the market. If fact, I am positive that no human investor on earth can beat the machines on a minute to minute basis. This is why you do not hear about the long term success of the individual trader any more. They have a far, far, better chance making money out in Vegas.

I began purchasing precious metals again in June (after taking almost 2 full years off buying other than a very brief period in December of last year). During the last few months precious metals continued to fall, meaning my investments almost always lost money that day, the next day, and the next week. The prices kept falling, sentiment continued to worsen, the "bubble" calls were back in every segment of the mainstream media, and I kept buying. As I said, I am a terrible short term trader.

As I layered in my short positions into the stock market back in late March (and recently during the early part of August), the stock market continued to rise. My investment was down the next, day, the next week, and so on. I continued to purchase additional shorts.

Now the market has reversed. Stocks have fallen throughout the week and precious metals have rocket launched. Silver is up close to 10% on the week and the gold mining index, the GDX, is up close to 20% since mid July.

This does not mean that I get excited about purchasing more. I have stopped buying. Now that the stock market has fallen I have stopped purchasing additional shorts.

Can you understand how the psychology of that decision making is put into effect? As I stated, and I will state again, I am a terrible trader. However, looking at my portfolio over the course of the year it looks fantastic.

Does this mean it will look this way next week? Who knows. Precious metals may resume their downtrend, pessimism may enter back into the market, and stocks may begin their climb higher. What will I do? Buy more precious metals and continue to accumulate a short position on stocks.

The psychology is the exact opposite of the natural human instinct when making an investment decision. This is why most investors always buy high and sell low. Someone I have been helping with their portfolio over the last few years, after years of arguments and struggling with this concept, called me a few weeks ago and said he thought it may be a good time to short the market because of all the reasons I just described. I couldn't have been more excited. It finally "clicked."

Purchasing an investment should feel like the worst possible thing you should be doing when you make the purchase because of the psychological reinforcements you subconsciously receive on a daily basis through the media, friends, family, and the world around you. 

So what am I purchasing today?

Actually, just one thing. The Brazilian Real. One of the most hated currencies on the planet right now. It is down very close to the lows put in during the financial crisis of 2008. Where will its price be tomorrow or next week? Probably lower.

And I will buy more.

I am not a financial advisor. Please speak with one before making any investment decisions.

American Winter: Understanding Natural Financial Cycles

People have called it many things. The fourth turning. The winter of the Kondratiev cycle. A depression occurs on average throughout history every 75 to 80 years. The last one began in 1929. The current one began in December 2007.


This one, of course, looks far different than the last. One the surface everything appears much better as the facade over the economy has been painted with a beautiful portrait of debt, stimulus, and QE. This has kept the zombie banking system lurching forward and pushed the stock market artificially upward with trillions in credit and currency pumped into the system.


In the real world things are only getting much worse. This is the consequence of a paper money system that is now coming to the end of its global experiment. On average throughout history, a new currency system is created about every 40 years. The current system began in August of 1971.


The last part of this experiment, the part that will finally bring change and ultimately cleanse the financial system, will be the most difficult. 95% of the pain that must be felt due to borrowed money and printed currency will be felt during the last 5% of the real life time period.


The current monetary system has created a world that separates the 1% from the rest, almost like gravity pulling apart the society at the seams. This is what throughout history has always led to the fall of an empire.


The following documentary, which hopefully will be posted in full upon its release, looks at what the real world looks like in America today as the cost of living rises and incomes stagnate, fall, or disappear. This is the true foundation of the country that is being eroded daily, like termites eating quietly away at a home. Nothing changes without collapse and change is coming.


Wednesday, August 22, 2012

The New Depression: Potential Solutions To Wean Off A Credit Based Economy

Richard Duncan spoke with Squawk Box this week on CNBC. It is no secret here that he is one of my favorite economists, not necessarily because I agree with all his ideas on how to help the economy, but because he has a true understanding of how the global economy works and can provide an intelligent discussion on the issue.

After understanding how the United States economy reached this critical point (growing debt from $1 trillion in 1971 to over $50 trillion in 2008), you can begin to get a firm understanding of where the economy will go from here. As I have stated numerous times in the past, there is not going to be an easy way to fix the current problem. The past four decades have borrowed prosperity from the future and now the bill is here waiting.

The following is Duncan's strategy for growth and how we can wean off this current government/credit addiction. The problem, which is not discussed, is that true long term growth strategies will never be discussed ahead of short term stimulus and transfer payments that purchase short term votes. But that is another topic for another day.


Visit NBCNews.com for breaking news, world news, and news about the economy

Tuesday, August 21, 2012

The Apple Chart Enters The South Seas

I've been picking on Apple all year so why stop now. America's darling stock, owned by every hedge fund, mutual fund, small investor, and even household pets on the planet has once again moved back into its parabolic trajectory beyond the Earth's atmosphere.

The following is a great chart from The Slope Of Hope website. See if you can spot the bubble:


Earlier in the year I compared the chart to the NASDAQ's parabolic move (and collapse) from 1998 - 2002, and Google's move from 2004 - 2009. Today we'll line it up against one of the original mania's back in 1700's: the South Sea Bubble. With older charts we have the benefit of seeing the second half of the chart pattern (the collapse). With the Apple chart we'll have the pleasure of watching it occur in real time. Next stop Apple 1000?

First Cut: Lord Of The Flies


Monday, August 20, 2012

US Bridges & Roads Now Built By Chinese Firms

Chinese workers are receiving the contracts to complete infrastructure projects on American soil. After analyzing competing bids cities find that the Chinese firms do the work better, faster, and at a lower price.

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