In my first blog entry http://ponziworld.blogspot.com/2006/12/it-was-good-for-some-while-it-lasted.html, I made the case that the world economy has become one giant Ponzi Scheme (pyramid scheme) in which a fortunate few at the top are reaping the vast majority of the rewards while those further down the pyramid are left to eat the bread crumbs falling off the table. Like all Ponzi schemes however, this one will eventually collapse, and I now believe that we are at or very near the breaking point.
With this post, I will now delve more deeply into what I see as the greatest risk factors facing the U.S. economy (and by extension world economy), and also explain why these risk factors, many of which are well publicized (not well understood), are highly correlated and likely to cause a chain reaction economic collapse of historic proportions.
1) Unprecedented Debt: Much has been posted about the debt problem, but few know the total magnitude of private and public debt outstanding. Current estimates put this total at $48 trillion, or 460% of U.S. GDP. By any measure, absolute or relative, the current level of debt is unprecedented. Yet, the vast majority of economists, politicians and financial "experts" are sanguine about debt levels, rationalizing these high levels of debt as sustainable and even desirable. Likewise, most observers see the current melt-down in the sub-prime lending market as an isolated event, not acknowledging the reality that the same foolish lending practices now causing the unravelling of the the sub-prime market ("no doc loans", zero down payments, optional payments/non-amortizing loans etc.) were also commonly employed throughout the "higher quality" segments of the mortgage market as well. In hindsight, we will come to realize that the sub-prime debacle is only the canary in the coal mine, and that the problems related to lax lending standards will eventually move up the food chain to the "Alt-A" (medium risk) and finally the prime quality segment. In the government and corporate sectors, thanks to similarly lax lending policies, we will see a concomitant avalanche of escalating defaults there as well. In addition, consider that for the first time since the 1930s (The Great Depression), the U.S. savings rate has gone negative - for several years in a row (i.e. in aggregate we now spend more than we earn). However, unlike during the 1930s, today's savings deficit is occurring while the economy is actually in expansion! Therefore, the economic "growth" of the past four years was an enormous (well orchestrated) illusion, propagated with massive amounts of debt. Which also tells us that long-term we cannot maintain anywhere near our current standard of living because THE U.S. ECONOMY IS NO LONGER SELF-SUSTAINING. Once this current business cycle stalls and we are unable to support additional debt, the economy will collapse like a cheap tent.
2) Real Estate Melt-down: The problem with real estate is directly related to the consumer debt issue. Housing is the consumer's primary collateralized asset. When housing prices go up, more debt can be assumed by the borrower; however, when housing prices go down, the process goes in reverse, and the borrower faces fewer financing options. This is what is happening now to those consumers who used their homes as virtual ATM machines - using cash out refis and home equity lines of credit to liquidate their home equity. Today, these same consumers face lower home prices (less collateral), higher interest rates, tighter lending standards and high levels of long-term debt. The other negative impact of the housing downturn is via the construction industry, which had been a major driver of economic growth in recent years, but is now starting to cause a drag on the economy as new housing starts collapse. So far, the decline in home prices has been contained, as the economy has been growing. Again, one can only imagine the negative chain reaction via debt and housing that will occur once the economy really starts to tank.
3) China Trade Policy: The Chinese government is pursuing an aggressive classic mercantilist ("beggar thy neighbour") policy. They are actively subsidizing and promoting export-based industries in order to shift manufacturing employment and production from the U.S. to China. This orchestrated, massive trade imbalance between China and the U.S. is being abetted by the Chinese using their balance of payments surpluses to bid up the dollar (vis-a-vis the Yuan), thus keeping the terms of trade in their favor. Ultimately, this policy has caused a massive shift of R&D and manufacturing investment from the U.S. to China and a corresponding dependence on China as a sole manufacturer of consumer products to the U.S. (i.e. risky from a national security standpoint). Ultimately, this strategy will end badly for all parties, including the Chinese. For the U.S., the downside is obvious: lost manufacturing capability, lost jobs, massive foreign debt, and a debt-inflated economy that will ultimately prove ephemeral. For their part, the Chinese will come to realize it's not a good long-term business strategy to first bankroll and then bankrupt your largest customer, as having thousands of (idle) factories will be a hollow consolation. Furthermore, all of the Chinese' U.S. dollar holdings will likely end up being massively devalued when the Fed panics and gets the dollar printing press cranking.
4) Energy Crisis: The world's fossil fuel supply is massively depleted and at risk of major disruption. Apologists for the oil industry continue to pump time and effort into the disinformation campaign against peak oil theory, despite the facts, history, and common sense that all indicate we will soon, if we haven't already, reach the point of maximum daily oil production. In addition, once peak oil production is reached, no one knows for sure how quickly the remaining supply of economically attainable oil will be depleted. Considering the decades of exploration that have already taken place and the relative old age of the largest producing fields, it's more than likely that total world oil output will drop precipitously after the peak is reached. Therefore, past the peak, expect the remaining supply of oil to be vastly more expensive, thus placing the supply/demand balance squarely in favor of the suppliers. Which brings us to the next point. Currently, ranking among the top 15 world producers of oil are: Saudi Arabia, Iran, Iraq, Venezuela, Nigeria, Mexico and Russia. This list is the who's who of totalitarian, corrupt and unstable regimes, to say nothing of being overtly or subversively hostile to the United States. Even the most optimistic among us has to wonder how dependable and affordable will our energy supply be over the next couple of decades.
5) Financial Derivatives Risk: The past several years has seen an explosion of new financial products and derivatives become available to both institutional and retail investors. We've been told not to be concerned by this vast array of new "products", as these devices will have the overall effect of spreading risk more broadly in the markets. In reality, no one knows for sure what the net sum impact of all these new derivatives will be and/or how they will perform under adverse market conditions. What we do know is that the decoupling of risk that has taken place in the mortgage underwriting process via mortgage securitization (packaging and selling of loans), has had the unintended consequence of actually increasing risk. What happened is that local banks quickly morphed into origination factories, more concerned with quantity of loans originated than with the quality of loans originated - go figure. The potential risks around derivatives also ties into a broader issue around "liquidity". Excess global liquidity, has been the primary driver behind the relentless levitation of world financial markets over the past several years, as market after market has become seemingly decoupled from the underlying economic fundamentals. Unfortunately, history has proven that liquidity is just a proxy for confidence and willingness to take risk, which means that trading vehicles that work great in a highly liquid bull market, will likely not trade quite as orderly or predictably when everyone is panicking out the same door at the same time.
6) Hedge Fund Mania: The topic of hedge funds is very much related to the topic around financial derivates. The past several years has seen a coincident proliferation of hedge funds, which are also unproven under adverse market conditions. No one knows what net sum impact all of these new hedge funds will have in a down market. What we do know, is that the collapse of just one major hedge fund in 1998 (Long Term Capital Management) almost triggered a worldwide financial meltdown. In that situation, the Federal Reserve had to step in and arrange a private bail-out for the fund AND aggressively lower interest rates to support the market. One can only wonder what tools the Fed would require in the event of having dozens of LTCM-like funds all blowing up simultaneously. Compounding the risk is the complacency resulting from the past 4 years having been one of the least volatile market periods in market history -not one 10% correction in any of the senior indices. This means that for a long time (long by market standards) we've been in an environment that has disproportionally rewarded the dumbest and most aggressive ideas, giving rise to the oft-quoted phrase "the dumber the money, the bigger the return". Another risk derives from the way that hedge fund managers' bonuses are calculated - based entirely on one year performance, making no adjustment for portfolio risk or even intra-year volatility. As a result, as many in the industry have admitted, hedge fund managers as a whole have been trending towards ever-riskier, more leveraged strategies in order to maximize their short-term returns (and bonuses). After all, if they don't take enough risk and garner enough return, they could lose their jobs anyway. On the other hand, if they take too much risk and blow up, they can just walk away, leaving their investors holding the bag. Another way of looking at it, is that many hedge funds have basically become big call options on the U.S. economy - the liquidation of which could have substantial negative impact on the markets.
7) Fiscal and Monetary Policy Fiasco: After 9/11, the Bush Administration took the opportunity to bulldoze it's campaign-promised high income tax cut through Congress under the auspices of patriotic "fiscal stimulus". Had they really been concerned about the economy and/or the majority of Americans, they would have passed a tax cut that primarily benefited the middle-class and working poor. But in the event, the tax cut that was passed provided only moderate fiscal stimulus - however it did manage to provide a very healthy boost to already ultra-wealthy bank accounts. This tax cut was not only a failure in how it was targeted, but worse yet, it was a failure in the fact that the country was already running a massive spending deficit. Basically, it was one generation saying to another, we are not only going to spend your inheritance, but we are also going to run up a ton of debt, and let you young folk deal with the consequences. On the monetary side of the house, owing to the punk tax cut, (punk in terms of fiscal stimulus, not in terms of deficit impact), it was left to the Federal Reserve to do the heavy lifting and ensure that the American consumer was duly resuscitated. The Fed did its part and eventually lowered interest rates to 1%, setting loose a massive borrowing spree which re-inflated the economy - via the housing ATM effect described above. Around that same time, with rates at multi-generational lows, Federal Reserve Chairman Alan Greenspan went off the reservation and publicly endorsed all of the new and exotic financial "products" coming to market. He was especially enamored of subprime loan vehicles, which he reasoned would spread debt accumulation opportunities heretofore not afforded to the working poor and financially unstable. Heretofore not offered for good reason, no? Basically he was saying, let's give a blind man a horse, a rope and a tree, and marvel at the possibilities. Worse yet, with interest rates at generational lows, he also publicly advocated Adjustable Rate Mortgages as the superior alternative over fixed rate mortgages. Of course, no sooner had he uttered such ludicrous advice, that he then proceeded to embark on a multi-year, non-stop rate hiking campaign, increasing rates no less than 17 times, and financially decimating anyone who had been trusting enough to have taken his mind-bogglingly bad advice. How the leader of the largest central bank in the world could have endorsed using a short-term loan to finance a long-term asset, when interest rates were at generation lows, is beyond all comprehension.
8) Complacency and Mass Delusion ("How did we not see this coming...?"): There is an extremely dangerous belief among the financial community that the more people know about a particular problem ahead of time, the less effect there will be on the market when the problem/crisis actual occurs. This belief derives from the Efficient Market Hypothesis which in its strictest form states that all information is already priced into the market. Unfortunately, in reality there are two major issues preventing the real-world realization of Efficient Markets: 1) Greed and 2) Fear. The major side effect of greed is that it leads to a biased form of judgement known as "wishful thinking" - or on Wall Street they refer to it as "Talking your own book". Conversely, extreme fear leads to negative extrapolation, which is another mental bias limiting one's willingness to accept risk. Looking back at past market manias that rose vertically and then collapsed vertically (Nasdaq, Nikkei, Nifty Fifty, 192os etc.), we see that these were not driven by a radical change in the underlying fundamentals, instead these were driven by the sheer power of the prevailing mass psychology - greed or fear. This untimely decoupling of rational pricing from fundamentals inevitably has catastrophic consequences. In other words, most people either load up on risk and/or sell risk at exactly the wrong possible moments. Right now we find ourselves precisely in one of these historically critical, greed-fogged moments, where the prevailing major risks are in fact NOT discounted in the market and where virtually every piece of bad news is quickly rationalized away. Therefore, the market will soon be in the relatively rare and yet uniquely devastating position of following the fundamentals lower, rather than leading the fundamentals lower. As I have also made clear, the ensuing unwinding of exotic derivatives and leveraged positions will cause a relentless bear market and economic collapse, the severity and duration of which will catch almost everyone by surprise.
Economic Depression
Ponzi Scheme
Economic Collapse
Economic Armageddon
Housing Collapse
Tuesday, May 22, 2007
Friday, May 18, 2007
Humpty Dumpty
A seven year round-trip!
All it took was $48 trillion in total debt (460% of national income).
"Just a wafer-thin mint, Sir..."
Thursday, May 3, 2007
What a Top Looks Like
Well it's official, I am definitely the last "bear" standing and the only person left who thinks that this insanity will end soon (and badly). Recently, even the Elliot Wave perma-bears (bearish since 1998) have turned bullish with their claim that this bull market could last at least another year (See their April issue of Elliot Wave Theorist). Talk about throwing in the towel in the last round...
Meanwhile, ironically, the two articles I clipped below both appeared in today's WSJ, which to me about sums it all up. The first article indicates that recently issued mortgage bonds are being downgraded at a faster rate than expected. It appears that the rating agencies (S&P/Moody's) who helped rate and price these deals, have been aggressively downgrading the very same bond products that they recently helped bring to market. This reminds me of the GO GO .dot com days when newly issued IPOs were downgraded soon after the first day of trading, by the same brokerage firms that brought them public.
The second article indicates that the big banks are now looking for new customers by offering mortgages to illegal immigrants - I kid you not. It makes me wonder how many nanoseconds will pass before these new "Illegal Alien Mortgage Bonds" are downgraded...
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Bond Investors' Lament
Fallout as Moody's, S&P Cut Ratings on IssuesTied to Subprime Loans
By SERENA NG May 3, 2007; Page C1
More challenges are hitting bond investors who own securities backed by risky mortgages.
Over the past two weeks, Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of "subprime" mortgages, home loans made to consumers with troubled or sketchy credit histories. The downgrades came as more borrowers defaulted on their mortgages and caused losses to spike among the pools.
...
"It's embarrassing for a ratings company to downgrade bonds so quickly" after the bonds were issued, said Paul Ullman, chief executive of HFH Group, a New York hedge fund active in the mortgage market. "It reflects poorly on all parties in the underwriting process and their judgment of the credit-worthiness of the bonds."
...
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Big Banks' Loan Push: Illegal Immigrants
Mortgages Get PitchedTo Underserved Market;Critics Find Some Risks
By ROBIN SIDELMay 3, 2007; Page C1
The nation's big banks, scrambling for customers, are pitching mortgages to illegal immigrants.
...
"Whoever hits the street first with these loans will be the winner," says Timothy Sandos, president of the National Association of Hispanic Real Estate Professionals"
[My Comment: Winner of what? The dumbest idea in history award?]
...
In Maricopa County, which includes the city of Phoenix, the sheriff, whose office has arrested hundreds of illegal immigrants, said banks providing these loans are taking on a risky proposition.
"If I catch these people, they are going back to Mexico and the banks will have a tough time collecting on their loans," said Sheriff Joseph Arpaio.
[My Comment: I am sure the Mexican Government will help get the lenders' money back]
...
Meanwhile, ironically, the two articles I clipped below both appeared in today's WSJ, which to me about sums it all up. The first article indicates that recently issued mortgage bonds are being downgraded at a faster rate than expected. It appears that the rating agencies (S&P/Moody's) who helped rate and price these deals, have been aggressively downgrading the very same bond products that they recently helped bring to market. This reminds me of the GO GO .dot com days when newly issued IPOs were downgraded soon after the first day of trading, by the same brokerage firms that brought them public.
The second article indicates that the big banks are now looking for new customers by offering mortgages to illegal immigrants - I kid you not. It makes me wonder how many nanoseconds will pass before these new "Illegal Alien Mortgage Bonds" are downgraded...
--------------------------------------------------------------------------------------
Bond Investors' Lament
Fallout as Moody's, S&P Cut Ratings on IssuesTied to Subprime Loans
By SERENA NG May 3, 2007; Page C1
More challenges are hitting bond investors who own securities backed by risky mortgages.
Over the past two weeks, Moody's Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of "subprime" mortgages, home loans made to consumers with troubled or sketchy credit histories. The downgrades came as more borrowers defaulted on their mortgages and caused losses to spike among the pools.
...
"It's embarrassing for a ratings company to downgrade bonds so quickly" after the bonds were issued, said Paul Ullman, chief executive of HFH Group, a New York hedge fund active in the mortgage market. "It reflects poorly on all parties in the underwriting process and their judgment of the credit-worthiness of the bonds."
...
-----------------------------------------------------------------------------------------
Big Banks' Loan Push: Illegal Immigrants
Mortgages Get PitchedTo Underserved Market;Critics Find Some Risks
By ROBIN SIDELMay 3, 2007; Page C1
The nation's big banks, scrambling for customers, are pitching mortgages to illegal immigrants.
...
"Whoever hits the street first with these loans will be the winner," says Timothy Sandos, president of the National Association of Hispanic Real Estate Professionals"
[My Comment: Winner of what? The dumbest idea in history award?]
...
In Maricopa County, which includes the city of Phoenix, the sheriff, whose office has arrested hundreds of illegal immigrants, said banks providing these loans are taking on a risky proposition.
"If I catch these people, they are going back to Mexico and the banks will have a tough time collecting on their loans," said Sheriff Joseph Arpaio.
[My Comment: I am sure the Mexican Government will help get the lenders' money back]
Monday, February 19, 2007
Wednesday, December 13, 2006
Fox News Bulletin: Average American is Insanely Rich
World wealth gap
If only $2,200 makes you 'rich,' imagine the plight of the poor
Thomas Kostigen, MarketWatch
Last Update: 7:28 PM ET Dec 12, 2006
SANTA MONICA, Calif. (MarketWatch) -- The richest two percent of the world's population owns more than half of the world's household wealth.
Although you may believe you've heard this statistic before, you haven't: For the first time, personal wealth, not income, has been measured around the world. And the findings are surprising. For what makes people "wealthy" across the world spectrum is a relatively low bar.
The research finds that assets of just $2,200 per adult placed a household in the top half of the world's wealthiest. To be among the richest 10% of adults in the world just $61,000 in assets is needed. If you have more than $500,000, you're part of the richest 1%, the United Nations study found. Indeed, 37 million people now belong in that category.
Sure you can now be proud that you're rich. But take a moment to think about it and you'll probably come to realize the meaning behind these numbers is harrowing. For if it takes just a couple of thousand dollars to qualify as rich in this world, imagine what it means to be poor.
Half the world -- nearly three billion people -- live on less than two dollars a day. The three richest people in the world have more money than the poorest 48 nations -- combined.
Even relatively developed nations have low thresholds of per-person capital. For example, people in India have per capita assets of $1,100, and in Indonesia capital amounts to $1,400 per capita.
The study's authors defined net worth as the value of people's physical and financial assets, less debts. "In this respect, wealth represents the ownership of capital. Although capital is only one part of personal resources, it is widely believed to have a disproportionate impact on household well-being and economic success, and more broadly on economic development and growth," they say.
That said, it's interesting to take a look at how different economic levels manage their capital.
Property, particularly land and farm assets, are more important in less developed countries because of the greater importance of agriculture and because financial institutions are immature.
The study also reveals the differences in the types of financial assets owned. Savings accounts are strongly featured in transition economies and in some rich Asian countries, while stock and other types of financial products are more commonplace in Western nations. The authors say there is a stronger preference for saving and liquidity in Asian countries because of lack of confidence in financial markets. That isn't so much the case in the U.S. and the United Kingdom, which have private pensions and more developed financial markets, they say.
Debt doesn't weigh
Surprisingly, household debt is relatively unimportant in poor countries because, the study says, "While many poor people in poor countries are in debt, their debts are relatively small in total. This is mainly due to the absence of financial institutions that allow households to incur large mortgage and consumer debts, as is increasingly the situation in rich countries"
Meanwhile, "many people in high-income countries have negative net worth and -- somewhat paradoxically -- are among the poorest people in the world in terms of household wealth."
But let's not feel too bad about ourselves, even if we do have a negative savings rate. The average wealth is the U.S. is $144,000 per person. In Japan, it's $181,000. Overall, wealth is mostly concentrated in North America, Europe and high income Asia-Pacific countries. People in these countries collectively hold almost 90% of total world wealth.
The world's total wealth is valuated at $125 trillion. And although North America has only 6% of the world adult population, it accounts for 34% of household wealth.
So be grateful for where you live in the world; it directly correlates to how much you have. But don't bask in superiority: The fastest-growing population of wealthy people is in China.
Look out when they transition from saving to spending. It's going to change the composition of the world economy dramatically, and it may just help prevent the world from becoming more of an aristocracy than it already is.
If only $2,200 makes you 'rich,' imagine the plight of the poor
Thomas Kostigen, MarketWatch
Last Update: 7:28 PM ET Dec 12, 2006
SANTA MONICA, Calif. (MarketWatch) -- The richest two percent of the world's population owns more than half of the world's household wealth.
Although you may believe you've heard this statistic before, you haven't: For the first time, personal wealth, not income, has been measured around the world. And the findings are surprising. For what makes people "wealthy" across the world spectrum is a relatively low bar.
The research finds that assets of just $2,200 per adult placed a household in the top half of the world's wealthiest. To be among the richest 10% of adults in the world just $61,000 in assets is needed. If you have more than $500,000, you're part of the richest 1%, the United Nations study found. Indeed, 37 million people now belong in that category.
Sure you can now be proud that you're rich. But take a moment to think about it and you'll probably come to realize the meaning behind these numbers is harrowing. For if it takes just a couple of thousand dollars to qualify as rich in this world, imagine what it means to be poor.
Half the world -- nearly three billion people -- live on less than two dollars a day. The three richest people in the world have more money than the poorest 48 nations -- combined.
Even relatively developed nations have low thresholds of per-person capital. For example, people in India have per capita assets of $1,100, and in Indonesia capital amounts to $1,400 per capita.
The study's authors defined net worth as the value of people's physical and financial assets, less debts. "In this respect, wealth represents the ownership of capital. Although capital is only one part of personal resources, it is widely believed to have a disproportionate impact on household well-being and economic success, and more broadly on economic development and growth," they say.
That said, it's interesting to take a look at how different economic levels manage their capital.
Property, particularly land and farm assets, are more important in less developed countries because of the greater importance of agriculture and because financial institutions are immature.
The study also reveals the differences in the types of financial assets owned. Savings accounts are strongly featured in transition economies and in some rich Asian countries, while stock and other types of financial products are more commonplace in Western nations. The authors say there is a stronger preference for saving and liquidity in Asian countries because of lack of confidence in financial markets. That isn't so much the case in the U.S. and the United Kingdom, which have private pensions and more developed financial markets, they say.
Debt doesn't weigh
Surprisingly, household debt is relatively unimportant in poor countries because, the study says, "While many poor people in poor countries are in debt, their debts are relatively small in total. This is mainly due to the absence of financial institutions that allow households to incur large mortgage and consumer debts, as is increasingly the situation in rich countries"
Meanwhile, "many people in high-income countries have negative net worth and -- somewhat paradoxically -- are among the poorest people in the world in terms of household wealth."
But let's not feel too bad about ourselves, even if we do have a negative savings rate. The average wealth is the U.S. is $144,000 per person. In Japan, it's $181,000. Overall, wealth is mostly concentrated in North America, Europe and high income Asia-Pacific countries. People in these countries collectively hold almost 90% of total world wealth.
The world's total wealth is valuated at $125 trillion. And although North America has only 6% of the world adult population, it accounts for 34% of household wealth.
So be grateful for where you live in the world; it directly correlates to how much you have. But don't bask in superiority: The fastest-growing population of wealthy people is in China.
Look out when they transition from saving to spending. It's going to change the composition of the world economy dramatically, and it may just help prevent the world from becoming more of an aristocracy than it already is.
Sunday, December 10, 2006
It was good (for some) while it lasted
The global Ponzi Scheme is on the verge of coming unravelled. The first leg down was from 2000-2002, but that was just a minor taste of what is yet to come. I am compelled to write now to describe the coming phase for two reasons: 1) because I think the pieces are now in place for an imminent decline 2) In case there is anyone, even one person, who reads this and benefits from the conclusions.
Today is December 10, 2006. The latest issue of Barrons indicates that all 9 financial commentators in their "big money" poll are currently bullish on the outlook for stocks for 2007. The stock market has been rallying strongly and unrelentingly since mid-July and all major indexes (except Transports) are at or near multi-year highs. For someone who is net short like me (albeit with a couple of long-side hedges: BUD, SUNW), it has not been an easy 4 months; however, I am maintaining my perspective that history is replete with examples where the indexes spike to new highs just before turning down. Look at a chart of the early 1970s DJIA to see what I am talking about.
The housing market is in decline, as widely reported, however the vast majority of people believe that the worst is over and the "bottom is in". This is wishful thinking of the highest order and completely ignores the history of the housing market. Housing prices move relatively slower than stock prices and take much longer to work through their corrective cycle. Since this housing cycle took prices farther out of their historical range than any of the past housing cycles (except one in the early 1960s of similar magnitude), one should expect that we are in the earliest phases of this down cycle.
Read in a vacuum, the above scenario doesn't really sound that bad. However, it is merely context for my major assertion:
The U.S. economy peaked in the late 1960s and early 1970s in terms of industrial output (manufacturing), real median wages, and innovation. This trend was very apparent during the 1970s, but since the early '80s has been obscured by the massive "blowoff top" the Elliot Wave folks call a fifth wave. Unable to rely upon innovation and manufacturing capability, starting with Reagan, the U.S. has been financing the last 25 years' prosperity with debt. Debt at all levels (personal/household, local government, federal government), relative to income levels, is at the highest levels in recorded history.
The party looked to be stalling out in 2000-2001, but the Fed engineered another "recovery" by taking interest rates down to 1% (lowest level in history) and encouraging consumers to borrow yet more money to finance the current pseudo-recovery. The current 4 year expansion is a pseudo-recovery, because it is not self-sustaining. How else to explain that in the 4th year of an economic expansion, all economic constituents from households to government are still incurring debt? All of this debt, used to finance consumption and the Bush tax cut, will severely limit the Fed's ability to stimulate the economy during the next economic downturn. Apparently very few economists, let alone people, comprehend how debt shifts consumption from the future to the present. Only debt that is spent to build/buy productive assets will enhance the growth of the economy. Debt spent to finance consumption is a burden on the future economy.
Meanwhile, the global 'economy' resembles a classic Ponzi (pyramid) scheme, in that a lucky few at the top are prospering at the expense of the majority at the bottom. In order to continue however, a Ponzi pyramid requires unrelenting growth. Meanwhile, the short-sighted wealthy sponsors of this Ponzi scheme are eagerly commoditizing every factor of production and job function so that they can package and sell the income streams and move the money to offshore cash accounts. This 'cashing in' on the world economy is in top gear as new derivatives and financial instruments are being invented to capitalize income streams. This year, even as the minimum wage stands at a mere $5.15/hr and is lower (inflation adjusted) than it was in 1973, Wall Street is taking home a record $40 billion in bonuses. The average Wall Street bonus is $398,000 and the average total pay is over $600,000. Meanwhile the jobs of the majority at the bottom are being commoditized and rationalized, both through outsourcing and automation. Land fills are topping up with cheap junk and destroying the physical environment, while developing nations are competing to see who can offer the lowest wages and worst working conditions, in their bid to get a ticket to this insane lottery. Don't get me wrong, I understand that economic rationalization is a crucial part of capitalism, and I am not against private enterprise, however all levels of government have been induced to look the other way to ensure high returns on capital at the expense of returns on labor. This is classic 'Supply Side' economics aka. 'favor the employer over the wage earner'.
All of the above last point is moot, however, because all Ponzi schemes eventually fail. They fail because there are diminishing marginal returns to growth. Also, the scheme requires ever-increasing numbers of low income workers to expand the bottom of the pyramid. This constant flow of low wage workers into the world economy has increased profit margins to the highest levels in history, as high income workers in developed countries are swapped out for low income workers in developing countries. Beleaguered American workers, in a bid to maintain their lifestyles, have turned to debt in all forms. It's becoming ever more apparent that this strategy has now reached its predictable bad ending, as the decline in real estate prices takes its toll on the consumer's primary collateralized asset - the family home. Once we fall off that cliff into the next recession, Dr. Bernanke won't have the tools to rescuscitate the patient. The American consumer will be dead on arrival.
Here is what happens next:
The stock market (S&P 500) has been in a bearish rising wedge since early 2003, characterized by a large rise in 2003, followed by a slow grind higher with no significant pullbacks in 4 years. This is a dangerous market, because volatility is at historical lows and most investors are lulled into a false sense of security. Once the move to the downside begins, it will go far lower, far faster than the vast majority predict. My ability to time the market leaves something to be desired, but I honestly believe this major reversal could occur within a matter of days or weeks.
Once the stock market tanks, the economy will stall out and fall into severe recession, accompanied with massive layoffs. Initially the Fed will be slow to react, which will cause prices to fall, including commodities and precious metals. The Fed will eventually panic and begin to rapidly lower interest rates, which will have no effect (as indicated above) since consumers will be unable to borrow and lenders will be unwilling to lend. The Fed will finally resort to 'printing money' and governments worldwide will engage in competitive debasing of their currencies. Near or at that point, I will be looking to be a buyer of gold and silver (via CEF - Central fund of Canada).
Looking out further, people will lose their homes and jobs en masse and discontent will rise to levels last seen in the Great Depression. The major difference however, is that Depression-era people were hardy folk with useful manual labor skills. Also there were still a large proportion of family farms and farm jobs that were largely self-sustaining. Today's population of software developers (Me), accountants and Starbucks baristas won't have any useful skills to fall back on in a basic survival-based economy. Therefore, crime and violence will sky-rocket and personal security will become a high priority for everyone.
Looking out a few years:
1) The U.S. will abandon Iraq and Afghanistan to the terrorists
2) The Middle-East will descend into chaos beyond anything heretofore imagined
My strategy:
1) Avoid/and or short the stock market
2) Look for a large pullback in gold/silver and then start averaging in to CEF
3) Invest in personal security
Have a great 2007 !
Today is December 10, 2006. The latest issue of Barrons indicates that all 9 financial commentators in their "big money" poll are currently bullish on the outlook for stocks for 2007. The stock market has been rallying strongly and unrelentingly since mid-July and all major indexes (except Transports) are at or near multi-year highs. For someone who is net short like me (albeit with a couple of long-side hedges: BUD, SUNW), it has not been an easy 4 months; however, I am maintaining my perspective that history is replete with examples where the indexes spike to new highs just before turning down. Look at a chart of the early 1970s DJIA to see what I am talking about.
The housing market is in decline, as widely reported, however the vast majority of people believe that the worst is over and the "bottom is in". This is wishful thinking of the highest order and completely ignores the history of the housing market. Housing prices move relatively slower than stock prices and take much longer to work through their corrective cycle. Since this housing cycle took prices farther out of their historical range than any of the past housing cycles (except one in the early 1960s of similar magnitude), one should expect that we are in the earliest phases of this down cycle.
Read in a vacuum, the above scenario doesn't really sound that bad. However, it is merely context for my major assertion:
The U.S. economy peaked in the late 1960s and early 1970s in terms of industrial output (manufacturing), real median wages, and innovation. This trend was very apparent during the 1970s, but since the early '80s has been obscured by the massive "blowoff top" the Elliot Wave folks call a fifth wave. Unable to rely upon innovation and manufacturing capability, starting with Reagan, the U.S. has been financing the last 25 years' prosperity with debt. Debt at all levels (personal/household, local government, federal government), relative to income levels, is at the highest levels in recorded history.
The party looked to be stalling out in 2000-2001, but the Fed engineered another "recovery" by taking interest rates down to 1% (lowest level in history) and encouraging consumers to borrow yet more money to finance the current pseudo-recovery. The current 4 year expansion is a pseudo-recovery, because it is not self-sustaining. How else to explain that in the 4th year of an economic expansion, all economic constituents from households to government are still incurring debt? All of this debt, used to finance consumption and the Bush tax cut, will severely limit the Fed's ability to stimulate the economy during the next economic downturn. Apparently very few economists, let alone people, comprehend how debt shifts consumption from the future to the present. Only debt that is spent to build/buy productive assets will enhance the growth of the economy. Debt spent to finance consumption is a burden on the future economy.
Meanwhile, the global 'economy' resembles a classic Ponzi (pyramid) scheme, in that a lucky few at the top are prospering at the expense of the majority at the bottom. In order to continue however, a Ponzi pyramid requires unrelenting growth. Meanwhile, the short-sighted wealthy sponsors of this Ponzi scheme are eagerly commoditizing every factor of production and job function so that they can package and sell the income streams and move the money to offshore cash accounts. This 'cashing in' on the world economy is in top gear as new derivatives and financial instruments are being invented to capitalize income streams. This year, even as the minimum wage stands at a mere $5.15/hr and is lower (inflation adjusted) than it was in 1973, Wall Street is taking home a record $40 billion in bonuses. The average Wall Street bonus is $398,000 and the average total pay is over $600,000. Meanwhile the jobs of the majority at the bottom are being commoditized and rationalized, both through outsourcing and automation. Land fills are topping up with cheap junk and destroying the physical environment, while developing nations are competing to see who can offer the lowest wages and worst working conditions, in their bid to get a ticket to this insane lottery. Don't get me wrong, I understand that economic rationalization is a crucial part of capitalism, and I am not against private enterprise, however all levels of government have been induced to look the other way to ensure high returns on capital at the expense of returns on labor. This is classic 'Supply Side' economics aka. 'favor the employer over the wage earner'.
All of the above last point is moot, however, because all Ponzi schemes eventually fail. They fail because there are diminishing marginal returns to growth. Also, the scheme requires ever-increasing numbers of low income workers to expand the bottom of the pyramid. This constant flow of low wage workers into the world economy has increased profit margins to the highest levels in history, as high income workers in developed countries are swapped out for low income workers in developing countries. Beleaguered American workers, in a bid to maintain their lifestyles, have turned to debt in all forms. It's becoming ever more apparent that this strategy has now reached its predictable bad ending, as the decline in real estate prices takes its toll on the consumer's primary collateralized asset - the family home. Once we fall off that cliff into the next recession, Dr. Bernanke won't have the tools to rescuscitate the patient. The American consumer will be dead on arrival.
Here is what happens next:
The stock market (S&P 500) has been in a bearish rising wedge since early 2003, characterized by a large rise in 2003, followed by a slow grind higher with no significant pullbacks in 4 years. This is a dangerous market, because volatility is at historical lows and most investors are lulled into a false sense of security. Once the move to the downside begins, it will go far lower, far faster than the vast majority predict. My ability to time the market leaves something to be desired, but I honestly believe this major reversal could occur within a matter of days or weeks.
Once the stock market tanks, the economy will stall out and fall into severe recession, accompanied with massive layoffs. Initially the Fed will be slow to react, which will cause prices to fall, including commodities and precious metals. The Fed will eventually panic and begin to rapidly lower interest rates, which will have no effect (as indicated above) since consumers will be unable to borrow and lenders will be unwilling to lend. The Fed will finally resort to 'printing money' and governments worldwide will engage in competitive debasing of their currencies. Near or at that point, I will be looking to be a buyer of gold and silver (via CEF - Central fund of Canada).
Looking out further, people will lose their homes and jobs en masse and discontent will rise to levels last seen in the Great Depression. The major difference however, is that Depression-era people were hardy folk with useful manual labor skills. Also there were still a large proportion of family farms and farm jobs that were largely self-sustaining. Today's population of software developers (Me), accountants and Starbucks baristas won't have any useful skills to fall back on in a basic survival-based economy. Therefore, crime and violence will sky-rocket and personal security will become a high priority for everyone.
Looking out a few years:
1) The U.S. will abandon Iraq and Afghanistan to the terrorists
2) The Middle-East will descend into chaos beyond anything heretofore imagined
My strategy:
1) Avoid/and or short the stock market
2) Look for a large pullback in gold/silver and then start averaging in to CEF
3) Invest in personal security
Have a great 2007 !
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