Saturday, October 12, 2013

Jim Rickards Discusses The New Fed Chair

Peter Schiff On The Debt Ceiling & Gold

The following comes from Peter Schiff at Euro Pacific Capital who provides a succinct overview of what is really taking place with the U.S. debt ceiling drama (emphasis and chart mine):
The popular take on the current debt ceiling stand-off is that the Tea Party wing of the Republican Party has a delusional belief that it can hit the brakes on new debt creation without bringing on an economic catastrophe. While Republicans are indeed kidding themselves if they believe that their actions will not unleash deep economic turmoil, there are much deeper and more significant delusions on the other side of the aisle. Democrats, and the President in particular, believe that continually taking on more debt to pay existing debt is a more responsible course of action. Even worse, they appear to believe that debt accumulation is the equivalent of economic growth.
If Republicans were to inexplicably prevail, and the federal government were to cut spending so that its expenditures matched its tax revenues (a truly radical idea) the country's financial mess would be laid bare. The government would have to weigh the relative costs and benefits of making interest payments on Treasury debt (primarily to foreign creditors) or to trim entitlements promised to U.S. citizens. But those are choices we will have to make sooner or later anyway. In fact we should have dealt with these issues years ago. But generations of mechanistic debt ceiling increases have allowed us to perpetually kick the can down the road. What could possibly be gained by doing it again, particularly if it is done with no commitment to change course?
The Democrats' argument that America needs to pay its bills is just hollow rhetoric. Paying off one's Visa bill with a new and bigger MasterCard bill can't be considered a legitimate payment of debt. At best it is a transfer. But in the government's case, it doesn't even qualify as that. Treasury debt is primarily bought by the Fed, foreign central banks, and major financial institutions. None of that will change with a debt ceiling increase. We will just go to the same people for greater quantities. So it's like paying off your Visa card with a bigger Visa card.
According to modern economists, an elimination of deficit spending will immediately cause a dollar for dollar decrease in GDP. For example, if the government stopped sending food stamp payments to poor people, then grocery stores would lose business, employees would be laid off, and the economy would contract. But this one dimensional view fails to appreciate that the purchasing power of the food stamps had to come from somewhere. The government can't create something from nothing. Taxation transfers purchasing power from people living in the present to other people living in the present. In contrast, borrowing transfers purchasing power from people living in the future to people living in the present. The good news for politicians is that future people don't vote in current elections (and current voters don't seem to appreciate the cost to their future selves of current policy).
The Obama Administration has congratulated itself for turning around the contracting economy that it inherited from President Bush. But even if you take the obscenely low official inflation statistics at face value, we only grew at an anemic 1.075% annual pace from 2009 to 2012 (far below the between 3% and 4% that the U.S. averaged post World War II). Sadly, this growth pales in comparison to the accumulation of new debt that we are borrowing from the future.
U.S. GDP is measured at roughly $15 trillion per year. 2% growth means that each year the GDP is approximately $300 billion larger than the prior year. But in the less than five years since Obama took office, the federal government has added, on average, about $1.3 trillion per year in new debt, a pace that is four times higher than the growth. If the deficit were subtracted from GDP, America would be shown to be stuck in a severe recession that Washington can't acknowledge. But such a reality is more consistent with the dismal job prospects and stagnant incomes experienced by most Americans.

The belief that deficits add to the economy, and that debt can be dealt with in an imaginary future (that never seems to arrive) is the foundation upon which the President can chastise the Republicans as irresponsible suicide bombers. Using this logic, he can argue (with a straight face) that borrowing is the equivalent of paying. That the President can make this delusional argument is not so surprising (no lie too great for the typical politician to attempt). What is alarming is that the media and the public have swallowed it so willingly. As they call for limitless increases in borrowing, Democrats have offered no plan to reduce the current debt and they are unwilling to negotiate with Republicans on that topic. Yet somehow they have been perceived as the party of fiscal responsibility.
While the Republicans have a dismal track record of their own when it comes to budgetary management, it can't be disputed that the minor dip in that rate of increase in spending that resulted from the recent Sequester, happened only because they dug in on the issue. Without the 2011 debt ceiling drama, there is no chance that any spending would have been touched.
Democrats had warned that the $85 billion in sequestration cuts slated for fiscal year 2013 (about 2% of the Federal budget) would be sufficient to bring on economic Armageddon. But guess what? We survived. Recently, Senate Majority Leader Harry Reid continued with such rhetoric by declaring that there are no more cuts to be found anywhere in the $3.8 Trillion dollar federal budget. (Apparently he missed last week's 60 Minutes piece on the spreading epidemic of federal disability fraud.)
We have to acknowledge what even the Republicans haven't fully grasped. We are in such a deep debt hole that there is no solution that does not involve serious economic pain. Tea Party Republicans rightly believe that government spending is a drag on economic growth. As a result, they conclude that immediate spending cuts will help with the "recovery". But they are confusing real economic growth with the delusional expansion created by deficit spending (which is actually damaging the real economy). If they cut the deficit, this phony economy may likely implode and cause widespread distress.
So even though a reduction in government borrowing and spending does help the economy, it won't feel very helpful tomorrow. The more we borrow and spend today, the more we will suffer tomorrow when the bills come due. Ironically, cutting government spending now helps the economy by allowing the economic adjustment to happen sooner rather than later. But this type of long-term thinking is very difficult for politicians to consider.
Unfortunately our debts don't leave us much in the way of choices. We can choose to pay now or try to pay later. But the longer we wait the steeper the bill.

Wednesday, October 9, 2013

Janet Yellen Is The Next Chair Of The Federal Reserve: Gold Owners Very Happy

Today's announcement from Obama that he will appoint Janet Yellen as the next chair of the Federal Reserve, taking the spot of Ben Bernanke early next year, was one of the most important moments for the economy this year.

Yellen is considered by many as the most dovish member of the current Federal Reserve staff (including Bernanke), which means that she believes in easy monetary policy.

Investors can now expect (much) more of the Federal Reserve's current prescription to "fix" the economy; more and more and more heroin pumped into the dying patient, desperate for detox.

This decision, along with the trillions in debt Obama has added to our economy with reckless spending programs, will be one of the defining moments of his 8 year presidency. History will look back on him years from now as one of, if not the, worst Presidents in American history.

During the first part of a stimulus everyone involved looks great and is considered a hero. The Fed chairman during 2000 - 2003 who lowered interest rates and pumped trillions into the economy was considered godlike and even donned the name "Maestro."

We know what happened soon after when the United States was introduced to the ending of the stimulus story in 2008; the hangover. Since then, Bernanke has provided the markets with an unprecedented amount of stimulus taking the place of "The Maestro" and becoming "The Hero."

A Hero receives that title because they have the courage to do the right thing even when it is a difficult choice in the short term. Bernanke has chosen to stimulate the markets and boost asset prices at every possible point during his tenure. He showed up to the party with a punch bowl and is now ordering new trucks of punch to be delivered every half hour. He has always taken the easy way out and now he is walking away just before the hangover arrives. History will write a much different story than the one you read about today regarding his Fed tenure, just as they have with Alan Greenspan.

This is a very sad day for those that wish for a better long term future for the United States, and it is a very good day for those holding precious metals as a long term investment.

Yellen will be with us for many years to come so there will be much more to be said here on this site regarding her decisions and their implications on the global economy and financial markets.

Tuesday, October 8, 2013

Disability USA

I have been writing about the growing disability issue in the United States for years, and the topic is finally beginning to get some national attention. The following 60 Minutes video reviews how big (and expensive) this problem has become. For much more see:

The New Early Retirement Program In America: Disability

Sunday, October 6, 2013

Focusing Attention Back To A Genuine Threat To The Economy

While Americans have been distracted by government shut down nonsense, a true threat to the economy landed last week with the arrival of Obamacare. This program will destroy jobs, send health care costs soaring and put the unpaid liability disaster much closer to detonation. See: Looking Ahead To 2014 The Coming Obamacare Nightmare

A Closer Look At The Residential Real Estate Market

The U.S. residential real estate market has been evolving over the past few months, which has gone almost unnoticed through the eyes of the mainstream media. This is due to the fact that real estate data, specifically price data, occurs on a 3 to 6 month lag. In addition, the prices are usually quoted on a year over year basis which skews the data even further. With home prices and interest rates now moving higher simultaneously, the rent/buy affordability factor has shifted back in favor of renting.

This will only shift more favorably toward renting if (when) mortgage rates move higher. This is one of the main reasons the Fed backed away from their tapering.

Inventory (supply) bottomed in 2012 and has been rising steadily through 2013.

While existing home sales have risen over the past few years due to strong investor demand, new homes sales have been grinding along the trough at depression levels. Why? Investors, that currently dominate the market, do not have the ability to purchase new homes at the steep discounts available in the existing home market. New home sales make up only 7% of all sales in the post real estate crash world.

Bidding wars on homes, which heated up during the early part of 2013, have cooled down.

With the tremendous momentum in place, prices will most likely continue to move higher over the next few weeks and possibly months. However, the underlying fundamentals do not justify the move and real estate prices will once again meet gravity.

h/t Mark Hanson, Dr. Housing Bubble, ZH

Subprime Student Loans: The Next Crisis

Long Term Stock Chart: The Parabolic Blast Is Back For The Grand Finale

Taking a long term view of the U.S. stock market we can see that for the third time in the last 15 years the market has blasted off in a parabolic burst of euphoria.

The question facing the market today is whether this is the beginning of a new secular bull market or whether we face one more correction before the secular bear market has ended. Readers know that I am in the second camp, and I believe that the further stocks move higher (without the earnings to justify that move) the more dangerous they become. 

The following shows the updated Shiller P/E chart, reminding us that based on a price to earnings ratio the stock market is currently at the point where previous bull markets have peaked. The highlighted section shows the madness of the 2000 bubble, which stock market bulls are counting on to repeat. We are back at the levels seen in late 2007 (the previous peak), when we were told that stocks were cheap.

One of the factors keeping stocks moving higher has been confidence that higher stock prices will lead to a greater wealth effect which will in turn lead to greater economic growth. If that sounds ridiculous it is because it is. As seen below, economic confidence has taken a sharp turn downward. 

This leaves only one engine in place to try and artificially move asset prices higher; the growth of the Federal Reserve's balance sheet through asset purchases. 

Secular stock markets tend to last on average for 17.6 years (the current secular bear market began in March of 2000) and end with the PE ratio under 10x. They end with everyone on the planet selling and shorting stocks. This was the environment in 1982, at a real stock market bottom. Did we reach that point in 2009? Based on a price to earnings metric stocks were just under fair valuation, far from the lows put in at previous secular bottoms.

Perhaps this time is different. Perhaps for the first time in history a central bank will have the ability to create true wealth in a country with a printing press. Every other time in history it has only caused greater pain (see 2000 and 2008 in America).

My money is bet against the Fed as I wait on the sidelines. I would rather purchase assets that everyone in the world hates, such as agriculture, than chase momentum in the one asset class on the planet that everyone considers a sure thing.

h/t Zero Hedge, OfTwoMinds