Personal Finance
Good morning. Here’s what you need to know.
- Asian markets were mixed in overnight trading with the Bombay Stock Exchange down 1.15 percent to a seven-month low. The BSE surged almost 128 points, before tumbling 211 points. Europe is rallying and U.S. futures are modestly higher.
……read the rest HERE
This week, while economists should have been closely considering the implications of the actual bankruptcy of Stockton, California, they instead heaped scorn on the perceived ideological bankruptcy of David Stockman. In other words, Stockman trumped Stockton.
Ronald Reagan’s former Budget Director contributed “Sundown in America” a multi-page opinion piece to the Sunday New York Times which loudly and eloquently described the illusions of our current economic system. While I don’t agree with everything Stockman believes, I think he is showing great wisdom and courage in making dire predictions and calling for extreme changes in our policy and politics.
What was perhaps more surprising than the Times’ uncharacteristic decision to run the piece in the first place was the vitriolic and largely ad hominem backlash against Stockman that quickly emerged from across the political spectrum. The attacks have focused primarily on his history and personality, and not on his arguments. One would be hard pressed to find any journalistic reaction that did not use the words “screed” “rant” or “unhinged.” I believe these responses reveal an acute sensitivity from mainstream economists that arises from defending contorted Keynesian logic.
It can’t be easy to take the position that debt doesn’t matter and that spending creates economic growth. To do so with any hope of success requires team unity, and Stockman has never really been a team player. His reputation as an apostate and a naysayer has made him an easy target.
Famously, Stockman left the Reagan White House in protest over the Gipper’s half-finished mandate. Yes, Reagan had cut taxes, but he never really cut spending. Stockman never bought into the easy idea, championed by Jack Kemp and Dick Cheney, that deficits don’t matter and that tax cuts pay for themselves. And although the Reagan revolution did clear the way for a return to better growth in the 80’s and 90’s, Stockman knew that the piper would call someday to collect the debt. Despite his foresight on that topic, his criticism of the Reagan legacy has earned him the derision of the Republican establishment for whom that particular hero worship is sacred.
This may have informed the attack issued by neo-conservative apologist and Iraq war cheerleader, David Frum, who offered a solely psychological assessment: “Stockman provides an insight into the gloomy mindset that overtakes us in older age, it’s a valuable warning to those of still middle-aged that once we lose our faith in the future, it’s time to stop talking about politics in public.” So much for respecting our elders.
Bloomberg’s Jeff Kearns, whose support of Fed policy has earned him regular taps at Ben Bernanke’s televised press conferences, provided the most common mainstream dismissal of Stockman: “His warning that the Federal Reserve’s quantitative easing is steering the world’s largest economy toward a crash is at odds with nine quarters of job growth, record stock prices and unprecedented corporate earnings.” This “he must be wrong because things look good now” position supposes that economics can’t be understood or predicted, only observed. I received very similar treatment back in 2006 and 2007 when I tried to tell the mainstream that the real estate market was a house of cards. How could it be bad, they said, if it goes up every year?
Despite his misalignment with the Republican hierarchy, the Left has an even greater revulsion for Stockman. Since the crisis, he has become perhaps the most respected figure (with the possible exception of Alan Meltzer) to take the position that a system based on fiat currency is doomed. Those who most visibly argue these points, like Ron and Rand Paul, and myself, come from the libertarian movement. As a result, we can be easily dismissed as cranks. However, Stockman was once a card-carrying member of the power elite. His embrace of these principles is taken more seriously and is thus ripe for instant attack from liberal economists.
While the usual suspects of Jared Bernstein and Joe Wiesenthal weighed in with heaps of invective, the loudest heckles have come from, whom else, Paul Krugman. He began his multi-post campaign by questioning the “mystery” of why the New York Times would sully Krugman’s own gravitas by forcing him to share column inches with someone as “non serious” as Stockman. He then offers the back of his hand:
“I thought Stockman would offer some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff.” For the record, Stockman is only 66.
In actuality, Stockman’s NYT piece offers a litany of objectively dismal facts and cogent explanations of how we got here. While most are celebrating the nominal high of U.S. stocks (see my recent analysis of the current rally), he points out that in the five and half years it has taken for the S&P 500 to set a new high, “Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the ‘bottom’ 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled to 59 million, about one in five Americans.” But Krugman fails to find the currency of his stock and trade, the macro-economic statistical models that attempt to describe how an economy works. In truth, those academic ordeals only matter in getting tenure and impressing the global elite. The real economy is much easier to understand.
Case in point: Stockton, California, which on Monday became the largest U.S. city to file for bankruptcy protection. Stockton, a city of 300,000 and two hours from San Francisco, is following the path blazed by many smaller California municipalities that have been unable to support lavish spending, salary and pension guarantees. And although Stockton has tightened its belt over the last few years (unlike similarly bankrupt San Bernadino, which is not even trying), it lacks the capacity to close the gap. Despite its enormous advantages in geography, infrastructure and location, the city is too bloated with government and clogged with taxes and regulation to allow for robust growth. As a result, Stockton is looking to pin the losses on its creditors.
As Stockman makes clear, the United States has been plagued by the same problems that doomed Stockton. His critics argue that the Federal Reserve’s printing press provides a foolproof immunity to such pedestrian problems. But in the end, these paper protections will only exist on paper. We’re all Stocktonians now.
To order your copy of Peter Schiff’s latest book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, click here.
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On Friday, the Bank of Japan hit the markets with a zany announcement. It said it was going to double the country’s monetary base! From Reuters:
The Bank of Japan unleashed the world’s most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.
New Governor Haruhiko Kuroda committed the BoJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.
The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the US Federal Reserve’s own quantitative easing program.
Will it work? Will it put some life into the Japanese economy?
Nomura Research Institute chief economist and expert on Japan’s “balance sheet recession” Richard Koo says no.
Koo says this kind of monetary stimulus won’t do the trick. Because businesses and households are still rebuilding their balance sheets and paying down debt. The Japanese feds may make more money and credit available, but the real economy won’t take it. Instead, the money will just pour into the (speculative) stock market.
The yen fell on the announcement. And Japanese stocks shot up. But the US stock market was unimpressed. The Dow fell 40 points on Friday.
Desperation and Lunacy
What to make of it? The world’s third largest economy. A jolt of money printing unprecedented in world history. And the Fed, BoE and ECB all following along.
The BoJ says it just wants to get inflation to 2%. It says it will buy bonds with fiat money that didn’t exist previously… and keep buying… until inflation reaches 2%.
Then what? Well, we guess it will stop.
And then what?
Then it will have an economy that has come to expect 70 billion yen in new money every month. And an economy with a monetary base (the “stock” from which the “soup” of money supply is made) maybe twice what it is today.
We don’t know what that will mean for Japan. Will the asset prices collapse again when the money printing stops?
Will the economy pick up… the banks begin to lend again… and consumers go on a spending binge?
Or will investors all over the world dump their yen, eager to get out of the Japanese paper money before inflation levels get out of control?
We don’t know. But neither do the Japanese feds. As Reuters describes it above, it is a “radical gamble.”
People make radical gambles now and then. Businessmen might take a chance now and then. Gamblers might go for long odds. Lovers might hope to get lucky.
Traditionally, central banks do not make “radical gambles.” They tend to eschew gambles of any kind, even of the most respectable and bourgeois sort.
Central banks are meant to be stolid and boring. Spiders should be able to weave their webs in front of their vaults and remain unmolested. Central bankers are not supposed to call press conferences. (They not supposed to have anything to say in the first place.) And all requests — whether for bailouts, interviews or lunch — should be answered with an unyielding “no.”
For a central bank to make a “radical gamble” bespeaks desperation and lunacy.
How this gamble will pay off, we don’t know. We simply note most of the world’s major central bankers are putting their money on the same color… and as the wheel spins… we urge dear readers to leave the casino.
Neither in yen, euros, pounds nor in dollars should we be. For when the dust finally settles on this wild riot of radical gambles by central bankers, gold will be the “last man standing.”
Regards,
Bill
Why Obama’s Liberal Agenda Could Lead to Civil War
Sometime in the next 12 months, President Obama will weigh in on an issue that could destroy the future prosperity of the United States in order to please his radical liberal supporters.
He has the power to issue an executive order that could cripple an industry of critical importance to national security and prosperity.
His supporters will cheer him. He might even win another Nobel Prize.
If the situation plays out as I expect, one specific part of the country will not stand for it… and it could take up arms and fight back against the federal government.
That’s right… I believe a Civil War is coming to the United States, sometime in the next 12 months.
Don’t believe me?
Watch this video presentation and learn the truth about this shocking situation.
As I was researching, and writing, this past weekend’s weekly newsletter entitled “The Bernanke Factor” what really struck me was the universal belief by the majority of analysts, economists and commentators, that there is currently “no evidence” of an asset bubble. This idea was further confirmed by Bernanke’s testimony last week where he explicitly stated:
I don’t see much evidence of an equity bubble.
His prepared statement also touched on the same:
Another potential cost that the Committee takes very seriously is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may ‘reach for yield’ by taking on more credit risk, duration risk, or leverage…Although a long period of low rates could encourage excessive risk-taking, and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation.
The common theme between Bernanke’s comments, and the majority of analysts and economists, is corporate profitability. As Neil Irwin recently penned:
But there’s good evidence pointing to this [an equity bubble] not being the case. The key thing to know is that American businesses have spent the last four years becoming much more profitable.
However, looking at corporate profitability in a vacuum can be a bit misleading. Today, there are contributing factors to corporate profitability that did not exist previously, such as the change to FASB Rule 157, which changed mark-to-market accounting, the excessive use of loan-loss reserves and other accounting gimmickry. Regardless, what is more important than the level of profits is the relative growth trend of those profits. The chart below shows top line sales versus reported and operating earnings. The last two major market peaks have coincided with earnings topping, and beginning to weaken, much like we are seeing currently.
While the level of corporate profitability is certainly important – corporate profits are more of a reflection of the issues that have historically led to asset bubbles. Increases in leverage, speculative investing and the push for yield, as identified in Bernanke’s testimony, are more attributable to historic asset bubbles from the peak in 1929, the technology bubble in 2000 or the housing bubble in 2008. For example, the housing bubble that started in 2003, which was built around excess credit and leverage as homes were turned into ATM’s – led to a surge in corporate profitability and economic growth. However, the growth of corporate profitability did little to deter what happened next.
Following The Sign Posts
So, instead of corporate profitability, which is already showing signs of stress, we should be focusing on the areas identified by Mr. Bernanke in his recent testimony: leverage, speculative risk taking, and the reach for yield. These data points could provide much needed clues as to where, as investors, we are in the current cycle and what the potential risks are that lie ahead.
Sign Post #1 – Leverage
The downfall of all investors is ultimately “greed.” Greed can be measured not only emotionally by looking at bullish versus bearish sentiment indexes but, more importantly, how much leverage investors are taking on. The chart below is the amount of margin debt by investors overlaid against their relative positive or negative net credit balances.
With both margin debt and negative net credit balances reaching levels not seen since the peak of the last cyclical bull market cycle it should raise some concerns about sustainability currently. It is the unwinding of this leverage that is critically dangerous in the market as the acceleration of “margin calls” lead to a vicious downward spiral. While this chart does not mean that a massive market correction is imminent – it does suggest that leverage, and speculative risk taking, are likely much further along than currently recognized.
Sign Post #2 – High Yield Chase
When investors have little, or no, fear of losing money in the market they begin to seek the things with the greatest returns. Over the last few years the chase for yield, due to Bernanke’s consistent push to suppress interest rates, has driven investors into taking on additional credit risk to increase incomes. The chart below is the BofA Merrill High Yield (aka Junk Bond) Index.
The chart shows that, as opposed to Bernanke’s statement, investors are rapidly taking on excessive credit risk, which is driving down yields. With those yields now at historic lows there is little margin for error either in the credit markets or the economy.
Sign Post #3 – Reduced Translation Into Economic Growth
While Bernanke is hoping for stronger economic growth in the near future his real concern has been the effect of diminishing returns on each monetary program.
Since Q4 of 2008, the real economy has grown from $12,883.5 billion to $13,656.8 billion as of Q4 2012. This is a total of $773.3 billion in growth over the last four years or $193 billion per year or roughly about a 1.5% growth rate. During this same period, the Fed has injected roughly $5 for each dollar’s worth of economic growth. This could hardly be considered a great return on investment.
As opposed to Bernanke’s statement that increased risk-taking are okay as long as such risks are outweighed by “the benefits of promoting a stronger economic recovery and more-rapid job creation,” it appears that such a progression is not the case. As we have seen with virtually every indicator – economic activity peaked in 2010. Since then, even with the input of global stimulus, the rate of economic growth has weakened, as shown in the chart below.
Risks Of Recession Have Increased
With Q4-2012 GDP running at statistically zero – the impact of the payroll tax hike (effectively about a $125 billion hit to consumers), higher gasoline and energy costs, and the impact of further cuts to government spending due to the sequester, put an already weakening economic growth trend at further risk.
Don’t misunderstand me. As I wrote at the end of February in “Get Ready For A Run To All-Time Highs”– it is certainly conceivable that the S&P 500 (SPY) could attain all-time highs by this summer. The speculative appetite combined with the Fed’s liquidity is a powerful combination in the short term. However, the increase in speculative risks combined with excess leverage leave the markets vulnerable to a sizable correction at some point in the future.
The only missing ingredient for such a correction currently is simply a catalyst to put “fear” into an overly complacent marketplace. There is currently no shortage of catalysts to pick from whether it is further fiscal policy missteps stemming from the upcoming “Debt Ceiling”debate, a resurgence of the eurozone crisis, or an unexpected shock from an area yet to be on our radar.
In the long term, it will ultimately be the fundamentals that drive the markets. Currently, the deterioration in the growth rate of earnings, and economic strength, are not supportive of the speculative rise in asset prices or leverage. The idea of whether, or not, the Federal Reserve- along with virtually every other central bank in the world- are inflating the next asset bubble is of significant importance to investors who can ill afford to once again lose a large chunk of their net worth.
It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now famous words: “Stocks have now reached a permanently high plateau.” The clamoring of voices that the bull market is just beginning is telling much the same story. History is replete with market crashes that occurred just as the mainstream belief made heretics out of anyone who dared to contradict the bullish bias.
Does an asset bubble currently exist? Ask anyone and they will tell you“NO.” However, maybe it is exactly that tacit denial which might just be an indication of its existence.
- Company: Streettalk Advisors
- Blog: The Daily X-Change
Last week, I told you about the hundreds, if not thousands of readers that wanted my head for remaining bearish on gold and silver.
Well, gold and silver have taken the shirts off the backs of loads of investors and analysts who refused to listen to me!
Gold has now cracked major support at the $1,583 and $1,554 levels. And silver has now sliced right through key support at $27.58.
What’s more, it is now confirmed: Gold should head much lower, first to the $1,480 level, then even lower to below $1,400. Silver should plunge as low as $20 in the weeks ahead.
Why are traditional safe-haven assets plunging when there are so many problems in the world?
In a nutshell, it’s because they’re not safe-haven assets right now.
I can already hear my email inbox beeping like crazy over that statement. I’ll be accused of treason.
But the simple fact of the matter is that for a variety of reasons, other asset markets have now become safe havens. Namely, the dollar and U.S. equities.
And that’s because right now, there are other overriding concerns on investors’ minds.
First off, there are the new and justifiable fears of confiscation, set off by the Cyprus event. If your deposits in a bank aren’t safe, then how safe could gold be? After all, it was confiscated once before by Roosevelt.
Second, almost the entire world already knows that the sovereign bond markets of Europe and the United States are just about the worst investment one can make.
Stop there. Money deposited in a bank is not safe. Money invested in a European or U.S. sovereign bond is not safe, and no yield to speak of either.
Third, is there safety to be found investing in the euro? Hardly!
Is there safety to be found in the Japanese yen, which is actively and aggressively being devalued? Hardly!
Is there safety to be found in the Chinese yuan, which just hit a 19-year high against the U.S. dollar? Perhaps there is longer-term. But right now the yuan is not international enough and not liquid enough to handle the amounts of capital that are on the move.
So then, what and where is the best place to put your money today? It has to be an investment that is …
1. Extremely liquid and can handle huge amounts of investment.
2. Largely safe from government confiscation.
3. Offering at least some sort of chance to generate a decent income.
4. Denominated in a currency that is being, at least right now, less actively devalued than the Japanese yen and at risk of outright failure like the euro.
If you follow the above thought process through logically and unemotionally, you can now see why millions of investors, corporate fund managers and even corporate treasuries are opting to put their money into the U.S. dollar and the U.S. equity markets rather than just about anything else right now.
Of course, the above is an oversimplified explanation of the actual process underway now in the markets and the forces that are at work.
But it is precisely what’s happening.
Look, I love gold as much as any of you. Over the long-term there is no better store of value.
But gold (and silver) is a commodity just like any other. At times, its safe-haven aspect will shine, while at other times, other asset markets will perform that role.
And right now, the dollar and U.S. equities have moved to the forefront. That will change, and commodities will move back to the forefront with gold leading the way higher …
But it’s not likely to happen until investors fully realize that Washington is just as broke as Cyprus, Italy, Spain, Greece, France, and others. And that’s a ways off.
So Here’s What I Recommend …
FIRST, do NOT look to gold and silver for safety right now. Their interim bear markets are not over, not by a long shot. Ditto for mining shares.
While there are going to be the inevitable short-covering rallies and bounces, gold, silver, platinum, palladium, and mining shares are all headed lower.
SECOND, if you are loaded up with gold and silver and mining shares from much, much lower prices and you decide to hold through thick and thin to capture their long-term potential, then at least consider hedging.
As I mentioned in my special Money and Markets alert on April 3, the best way to do so in my opinion is by purchasing shares in ProShares UltraShort Gold ETF (GLL)and ProShares UltraShort Silver ETF (ZSL).For mining shares, consider theDirexion Daily Gold Miners Bear 3x Shares (DUST).
THIRD, do not expect other commodities to rally right now either.
Copper is getting killed. Oil is now rolling over to the downside and has the potential to fall substantially. Grain markets are getting slaughtered. Soft commodities, such as coffee, sugar, and cocoa are also on the cusp of sharp declines.
FOURTH, stay in the dollar now. The dollar is in an interim bull market. One good way to play it is via the PowerShares DB US Dollar Index Bullish Fund (UUP).
FIFTH, start deploying money into cream-of-the-crop U.S. equities. Buy on pullbacks. But only buy great U.S.-based multi-national companies that offer you a decent dividend.
Right now, the U.S. stock markets are due for a pullback. But the Dow Industrials gave me a very powerful long-term buy signal at the end of March. After the pullback passes, I expect the Dow to work its way up to near, or slightly above the 18,000 level ? possibly by early summer.
SIXTH, start making U.S. real estate investments. Most think I’m nuts on this one too. But U.S. real estate is dirt-cheap on an international basis and is becoming a safe-haven investment for capital that’s on the move.
Consider well-capitalized real estate investment trusts and the like that spin off income.
And if you’re in the market for your first home, or a second home, now is a great time to buy and finance it at historically low mortgage rates, but do not finance with anything other than a fixed-rate mortgage.
If you’re super wealthy, look at some other asset markets too ? such as diamonds, art work, and numismatic coins. I am not an expert in any of them, but from a broad macro trend point of view, they are likely to skyrocket higher as safe havens for the super wealthy.
Best wishes, as always …
Larry
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