Saturday, August 24, 2013

Gallup Poll Shows Unemployment Super Spike Over Last 20 Days

The Gallup unemployment poll is showing something very troubling over the last 20 days. The unemployment rate has risen from 7.9% to 8.9% in a very short period of time. The trend has been a steady rise, day by day, during their polling.

•7.9% August 1-2
•8.0% August 3-6
•8.1% August 8-8
•8.2% August 9-11
•8.3% August 12
•8.4% August 13-16
•8.6% August 17-18
•8.8% August 19
•8.9% August 20

MISH over at the Global Economic Analysis website did some excellent research on the August data over the past three years showing that this is not a recurring seasonal issue. This data is an anomaly in the set. Should this translate into a much larger than expected jump in unemployment when the government announces the BLS report on the first Friday of September it would open all sorts of questions around the Fed's anticipated tapering. 

The Fed's initial "hints" at tapering were due to froth in higher yielding markets as well as the reduction of available securities to purchase because of the lower than expected U.S. annual deficit this year. However, the main reason they have given the markets for the tapering is the improvement in employment. The jobs number released in a few weeks will be one of the most important in a long time. Get your popcorn ready.

Clark & Dawe Review The Taper

Friday, August 23, 2013

$12,000 For Retirement - How Many Months Can you Live?

A stunning graphic below from the National Institute on Retirement Security finds that the median American household aged 55 to 64 has $12,000 in savings. That means that half of the households in America in that age group have less than $12,000 in savings.

Every one of these families is counting on both social security and medicare to support them through the remainder of their life. For a country that has already crossed above 100% debt to GDP, a reasonable question can be asked regarding where this money may come from? Click for larger image:

The Insatiable Accumulation Of Physical Gold On The Shanghai Gold Exchange

I showed this chart a few months back, but it is a good time to update it. The yellow bars show world mining production and the red bars show the ounces delivered on the Shanghai Gold Exchange. Just a small dislocation in the paper market is going to cause tremendous problems on the (U.S.) COMEX exchange, which will lead to Shanghai becoming the center of global gold trading. Physical prices will move violently to the upside during this chaotic period.

Gold $1,400 - Silver $24 - Moving To The Sideline

During the last 60% plus decline in silver, which occurred during the fall of 2008, I was fortunate enough to move 100% long the metal at the $8 range. I promised myself at the time that if a decline of that size were to ever occur again during the secular bull market that I would push beyond 100% long and use leverage. This is something I would never, ever recommend anyone else do. I help some close friends and family I know with their investments and the maximum level I would ever let them purchase metals is up to 25% of their total portfolio, and that is only in rare cases.

During the most recent decline I pushed through 100% and used leverage when silver hit the $18 - $19 range a few weeks ago. Silver had fallen close to 64% from its high. The sentiment levels were lower than any point I had experienced during my 9 years as a precious metals investor. The majority of silver mines around the world cannot produce silver profitably below $20.

I say this now because as silver has risen almost 30% off the lows I have completely removed my leverage and I am selling into the market. Not because I am any less bullish on the long term potential in the metal (see The Coming Silver Price Surge Will Shock The World), only that even I like to keep a portfolio that is somewhat balanced and cash healthy for other opportunities. Optimism is now returning back into the market. I will wait on the sidelines again until we get the next waterfall decline and pessimism returns, which will hopefully be soon.

I do not recommend anything that I am discussing here, I just know that readers like to know where my head is at in terms of the metals. I also don't want it to sound as if I have any ability to "time" this market. I would have loved to tell everyone (and myself) to sell out of silver a few weeks ago at $30 and re-buy with all their money at $18. I only look to enter markets in general ranges when prices experience significant declines and pessimism is rank. Sometimes that period can last a lot longer than anyone expects, which is excellent if you are looking to steadily accumulate.

The following shows the recent draw down in gold shorts as they have scrambled to cover (to cover a short you must buy it back in the market - this can create what is known as a "short squeeze"). I showed this chart at its peak and discussed the coming short squeeze back in July when gold was under $1,200 in As Paper Gold Shorts Push All In China Buying Goes Parabolic. The scary part is that at this level we are still sitting at close to all time record short positions. It will be interesting to see how it plays out in the weeks ahead.

Thursday, August 22, 2013

Stocks & Bonds Continue To Tremor

The following shows the returns of stock markets around the world post financial crisis. China (my favorite market to buy stocks during big sell offs) has not enjoyed the returns experienced by other major markets. While China's market is going to experience tremendous turbulence over the years ahead, if I were a 20 year old putting money away to retire 30 years from now it would be almost exclusively focused in that region.

The fixed income markets year to date have seen bloodshed, something they are certainly not accustomed to. A recent poll conducted by Edward Jones found that 63% of average Americans who invest in the market (mostly through their 401ks) have no understanding how bond prices work or that they can fall in value. When they open their quarterly statements in the mail for quarters two and three it will be a very unwelcome surprise.

The following shows the largest bond corrections during the 30 year secular bull market (which may be over as I type this). The current 14.8% sell off has always been a buying opportunity during the past three decades. Is this time different?

Morally Wrong: How Those That Choose Not To Work Have Won

Yesterday we reviewed why many Americans that did the "morally" wrong thing, not making payments on their home, have seen their financial situation improve because of it. Today we will layer that concept with government welfare programs to show how life has become better for those that have decided not to get a job.

Imagine you are Suzanne Jones, the mother of a similar family in the housing story yesterday. Suzanne was able to collect $300,000 in home equity withdrawals during the bubble years and then live in her home payment free for 3 years after she stopped making payments.

Suzanne lost her job in 2008 and went on unemployment which lasted for two years. She is a single mother with 2 children. During this time, because she did not have to make monthly living payments, the unemployment checks were more than enough for her to take two years off and just spend time with her children.

When the unemployment was coming to an end in 2010 she had an option. She could have tried to go out in the workforce and find a minimum wage job, which is all she would have qualified for based on the availability of jobs in her area, or should could have pursued the option of welfare.

In 33 states in America, a single mother with 2 children can bundle programs together and receive the equivalent of more than $8 an hour at a full time job. Actually going to work for 40 hours a week would only pay her $7.25 an hour. 12 of these states (including the District of Columbia) bundle programs that pay the equivalent of $15 an hour at a full time job. 

If she lives in one of these states her decision is easy. If she were to go to work she would have to pay for someone to take care of her children while she is there. Collecting welfare and staying at home takes away this expense.

The immediate answer to this problem from Congress is always to force the "greedy" corporations to pay higher minimum wages. I have discussed many times how this would provide a net negative impact on the lives of residents living in that area. To understand why click here.

This mother is not a temporary welfare recipient. She is permanent. This is why the number of welfare recipients is ballooning. Is Suzanne Jones wrong for choosing this option? Many would say it is morally wrong to collect welfare if a job is available. Suzanne would say that that she has had 5 great years of spending time at home with her children collecting more money than she would have earned at a job.

Wednesday, August 21, 2013

Morally Wrong: How Those That Walked Away From Their Homes Won

I worked on the residential side of the real estate industry for many years before switching to the commercial side in 2009. Being in the industry, you tend to talk to a lot of people about real estate. I remember having countless conversations about how I felt those that would end up "winning" over the long run would be those that cashed out as much equity as possible on the way up and then stopped making payments as soon as prices began to decline.

Back in 2008 this concept was still considered pure lunacy. There were two main arguments against a home owner making this move. The first was that it was morally wrong. 99% of the people in the country have no understanding of modern money mechanics or where the money that the bank lends to purchase homes comes from. I would recommend clicking here if you would like a primer on this subject, but the short answer is that it is created out of thin air. Beyond explaining that concept there is no argument against the moral decision as it belongs to everyone individually.

The second and even more common response against walking away from a mortgage was that it would hurt your credit and you would not be able to purchase a home in the future. My response, which sounded even more fringe back in 2008, was that due to the sheer number of people that would eventually stop paying the rules would be changed to allow those people a "pardon."

After 5 long years that fringe idea has finally become a reality. The FHA government housing program (the new subprime housing program backed by tax payers) released the following this week:

As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:
  • certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • the borrower has demonstrated full recovery from the event; and,
  • the borrower has completed housing counseling.
If a bankruptcy occurred more than a year ago, meaning an American walked away from their mortgage and then wiped away all their remaining debt through bankruptcy, then the government will now lend them money to re-buy a home.

Let's now walk through the discussion again to see how a typical American family "won" during this process.

Imagine the Jones family purchased a home in a major market in early 2000 at $200,000 and it rose in price to $500,000 at the peak of the market in 2006. They decided at every $100,000 increase in price that they would "cash out" and put the home equity into their pocket. In early 2006, the Jones have a $500,000 mortgage, a $500,000 home, and $300,000 in cash in their pocket.

Following the time line on the chart above, they take my "insane" advice back in 2008 and stop making payments on their home. The Jones soon realize that due to the number of people not making payments and banks not wanting to take losses on their real estate portfolio, owners have the ability to live in their homes for 2 to 5 years before the foreclosure process begins. Their former monthly payments of $3,500 now go into their bank account every month.

When the bank finally comes to the door of the Jones house to begin the foreclosure process in 2011, they move out and begin renting a home across the street. They have regular jobs and $300,000 in cash in the bank (plus their windfall money from living rent free for 3 years) so they do not miss a payment on their auto loans or a rent payment from 2011 onward. Their credit is slowly beginning to rebuild as they rent and continue to watch home prices fall every month around them.

It is now late 2013 and the FHA announces this week that they are giving away not only 3% down payment loans, but they are now offering loans to those with subprime credit and even bankruptcy (see above). The price of homes in their old neighborhood fell from $500,000 to $200,000 in early 2012. Since then, they have risen from  $200,000 to $250,000 where they stand today. They can now re-buy their original home for 50% less than the loan value they walked away at in 2008. They still have $300,000 in their pocket.

This is the perfect example of someone who "won" during the housing collapse. They did it by doing what most would consider the most morally wrong thing during every step of the process. The U.S. government has awarded these people every step of the way and the new FHA program is the final icing on the cake. Everyone who "lost" are those that decided to continue making payments; the people that did the right thing morally. 

Tuesday, August 20, 2013

10 Year Treasury Approaches Upper End Of 30 Year Channel

We are approaching a monumental moment when the bursting of the U.S. treasury bond market bubble will have finally arrived. The implications for this could fill tomes on a bookshelf, and I spent the entire 2013 Outlook and 2013 Second Half Outlook discussing some of the fall out that will occur when this bubble deflates. The 10 year treasury, the fulcrum that all rates are based on around the world, has been in a steady declining channel for over thirty years (secular bull market). Should this channel be broken, it will mark a monumental technical change in the charts that will symbolize the beginning of a new era. I will obviously continue to watch and update the following chart on a regular basis as we move forward.