Many of you may have probably been questioning my sanity as I rant and rave that the stock market is rigged and the last six months rally in all asset classes has been manipulated and purposefully created. While I don't believe I've found the smoking gun, we can piece together clues that suggest that the FED and other central banks have printed excess money and provided it at zero or low cost loans to ailing financial institutions. Because these banks have not loaned money to borrowers, the banks deposited their excess reserves directly into the commodity and stock markets.
I've mused several times that the FED, US Treasury, and Obama administration (and former Bush administration) desires nothing more than to have the spending habits of consumers return like the good old days of 2003 to 2007. During those times, you were prodded to use your home like an ATM machine and spend, spend, spend! What consumers didn't realize was that credit cards and home equity loans must be repaid and therefore reduce future earnings and limit lifestyle growth. We happily bought into the notion that instant gratification was our right and that the discomfort of tight budgets didn't matter. I can't tell you how many people told me they "needed" a house or new car when their current situation was absolutely fine.
Since the government’s plan is that you to return to those habits, your leadership’s response to this crisis was to immediately begin driving interest rates to artificial lows. They encouraged you to buy houses with tax credits, cars with cash incentives; tempted you to refinance your mortgage, and President Obama even suggested it was a great time to buy stocks! Ultimately Ben Bernanke and the financial elite want you to continue your path into financial bondage and reduce your savings. You are told when you spend, you rescue US firms from the economic slowdown and that will save US jobs. This financial crisis driven by a loss of jobs and a collapse of the real estate bubble has shaken the very principles of that false paradigm.
By pouring liquidity into banks that are insolvent and indirectly juicing the market, our leadership has opted to restore "confidence" in our economy by pumping stock markets. They are attempting to inflate another bubble. Previously I wrote in an article titled SUMMER & FALL OUTLOOK, "If the US federal government can guide us out of the deflationary cycle, we will be fortunate to enter a period of much greater inflation. In fact, this is the direction that the FED prefers now and is attempting with all of their might. Again, if the FED can break the deflationary cycle by prolific "electronic printing of dollars", deficit spending, and debt issuance it will lead to a significant devaluation of the US dollar. A decline of the dollar will usher in increased commodity prices, and future asset bubbles in other sectors.
In the article below, we have an interview with the Chairman of the China Investment Fund, Lou Jiwei.
http://www.reuters.com/article/ousiv/idUSTRE57S0D420090829?sp=true
Mr. Jiwei is charged with investing excess cash for China's sovereign wealth fund. A sovereign wealth fund is essentially a state owned hedge fund. They buy all types of assets including metals, real estate, and stocks. As the interview proceeds, Mr. Jiwei states plainly what I have been saying;
"It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose," he said.
The one thing we know about bubbles is that they are formed on the backs of herds of investors rushing to buy assets that are overpriced. In addition, bubbles burst leaving accounts and lives wrecked. Unfortunately, the damage doesn't affect those that choose to risk their capital; it entangles folks that seem to have nothing to do with investing at all. Just look at the crisis on Wall Street and see how it has caused layoffs in Middle America. Families suffer when asset bubbles collapse. The concerning thing for me is that these bubbles seem to be increasing in frequency and magnitude. My feeling is that our government leadership should be slowing down these investor led destructive manias rather than supporting and participating in them.
I also highlight Mr. Jiwei's statement that "We can't lose". The arrogance displayed in this statement is exactly what will lead to a "black swan" event that triggers another global financial meltdown. How many Wall Street traders and executives used those very words before this crisis? Think back to the Enron days, do you think that statement would fit well in that environment? Many friends of mine used those words in the late 90's investing in the internet craze. None of them escaped the market's powerful correction.
While it is so tempting to be a buyer in a market that goes up every day, we must remain prudent and watchful for signs that the markets asset bubble is beginning to burst.
Monday, August 31, 2009
Saturday, August 29, 2009
Are we more like Japan than we think?
A recent Bloomberg article shows us where we might be in relation to Japan's Nikkei history in chart form. If the analysis proves right, this next year could be one that is full of positive surprises to many. I'm not sure I agree with the thesis behind the article, but I have been beginning reviewing month end data that continues to show that our economy is improving.No matter how the short run looks for the market, we don't want anything to do the dramatic decline that will follow if the chart is predictive. As we've discussed previously, deflation is really bad for ALL assets. Although you may have growth in some years, the clutches of deflation are difficult to escape.At the top left of the Bloomberg story you will see a tab that says "GRAPHIC", this is the chart.
At the top left of the Bloomberg story you will see a tab that says "GRAPHIC", this is the chart.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKzgH4hvhh.g
At the top left of the Bloomberg story you will see a tab that says "GRAPHIC", this is the chart.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKzgH4hvhh.g
Friday, August 14, 2009
Summer & Fall Outlook – 7-27-2009
August
In the short run, we will continue to see risk appetites increase and opportunities over the next month or so will be in US equities, commodities, and overseas holdings. The reason for this upward continuation is the belief that things are getting better, despite my view that all the good news has already been priced in.
We’re Not Finished Deflating
As we wind down the summer months, we will witness more asset deflation (contraction of available credit and decline in asset prices). Equity markets could retest recent lows as market participants realize that “green shoots” are not the indication of an end to a recession, but evidence of unparalleled governmental interference and manipulation. Residential foreclosures and falling commercial real estate prices will continue to drag on the ability of banks to recover. Corporate defaults will continue to rise and a consumer led recovery will fail as the market adjusts to the new normal of consumer spending. Interest rates will remain in a trading range in the next year or so and corporate bonds will be a place to obtain opportunistic yields of 4% to 6%. Individual name selection will be tremendously important in this asset class because lower consumer activity will be the death blow to under capitalized firms. In addition, sectors like REITS and financials with commercial real estate exposure will be areas to avoid. We will want to try to keep the maturity of the bonds as short as possible, but take advantage of the return of fear that will push yields back up to extreme levels.
If the US federal government can guide us out of the deflationary cycle, we will be fortunate to enter a period of much greater inflation. In fact, this is the direction that the FED prefers now and is attempting with all of their might. Again, if the FED can break the deflationary cycle by prolific "electronic printing of dollars", deficit spending, and debt issuance it will lead to a significant devaluation of the US dollar. A decline of the dollar will usher in increased commodity prices, and future asset bubbles in other sectors. Investments to consider putting on eighteen to twenty-four months from now will be those that bet the on a US dollar decline; ETFs (exchange traded funds) that invest in the currencies of Canada, Australia, China, and Brazil, investments in food or agricultural production, natural resource companies and commodities, and treasury inflation protection securities. Domestic equity markets in general may go up, but will actually under perform on a relative basis those assets in commodities.
Everyone Sees Inflation - Everyone is usually wrong.
We remain watchful as the results play out in front of us. Although the inflation trade seems logical, we have an current example of deflation in our midst. Japan has existed for almost two decades in a deflationary environment. Interest rates have been at near zero, growth has been absent, and the equity markets languished at points as low at 75% below the market highs. Interest rates have remained low because a large supply of currency has been stuck in banks despite the desire to give money away. Further contributing to this is the "carry trade" where very low interest rates create demand for the YEN. Hedge funds and other Investors then take the borrowed YEN and buy other investments. These investors look to borrow cheaply and profit from the low cost money. The increased value of the YEN creates a difficult operating environment for exporters as their goods and services are priced abnormally high due to demand from speculators. If the deflation trade comes to the US, we can look forward to the carry trade trapping us as well.
While there are many differences between our economies, it is wise to consider that we may be doomed to the same fate. If the inflationist's consensus is wrong, we will have a strong dollar, lower equity markets, commodities will be depressed (more driven by over supply and low demand), and overseas investing will present better growth opportunities. Even though faster growing countries present better prospects for capital appreciation, currency risk will be significant.
In the short run, we will continue to see risk appetites increase and opportunities over the next month or so will be in US equities, commodities, and overseas holdings. The reason for this upward continuation is the belief that things are getting better, despite my view that all the good news has already been priced in.
We’re Not Finished Deflating
As we wind down the summer months, we will witness more asset deflation (contraction of available credit and decline in asset prices). Equity markets could retest recent lows as market participants realize that “green shoots” are not the indication of an end to a recession, but evidence of unparalleled governmental interference and manipulation. Residential foreclosures and falling commercial real estate prices will continue to drag on the ability of banks to recover. Corporate defaults will continue to rise and a consumer led recovery will fail as the market adjusts to the new normal of consumer spending. Interest rates will remain in a trading range in the next year or so and corporate bonds will be a place to obtain opportunistic yields of 4% to 6%. Individual name selection will be tremendously important in this asset class because lower consumer activity will be the death blow to under capitalized firms. In addition, sectors like REITS and financials with commercial real estate exposure will be areas to avoid. We will want to try to keep the maturity of the bonds as short as possible, but take advantage of the return of fear that will push yields back up to extreme levels.
If the US federal government can guide us out of the deflationary cycle, we will be fortunate to enter a period of much greater inflation. In fact, this is the direction that the FED prefers now and is attempting with all of their might. Again, if the FED can break the deflationary cycle by prolific "electronic printing of dollars", deficit spending, and debt issuance it will lead to a significant devaluation of the US dollar. A decline of the dollar will usher in increased commodity prices, and future asset bubbles in other sectors. Investments to consider putting on eighteen to twenty-four months from now will be those that bet the on a US dollar decline; ETFs (exchange traded funds) that invest in the currencies of Canada, Australia, China, and Brazil, investments in food or agricultural production, natural resource companies and commodities, and treasury inflation protection securities. Domestic equity markets in general may go up, but will actually under perform on a relative basis those assets in commodities.
Everyone Sees Inflation - Everyone is usually wrong.
We remain watchful as the results play out in front of us. Although the inflation trade seems logical, we have an current example of deflation in our midst. Japan has existed for almost two decades in a deflationary environment. Interest rates have been at near zero, growth has been absent, and the equity markets languished at points as low at 75% below the market highs. Interest rates have remained low because a large supply of currency has been stuck in banks despite the desire to give money away. Further contributing to this is the "carry trade" where very low interest rates create demand for the YEN. Hedge funds and other Investors then take the borrowed YEN and buy other investments. These investors look to borrow cheaply and profit from the low cost money. The increased value of the YEN creates a difficult operating environment for exporters as their goods and services are priced abnormally high due to demand from speculators. If the deflation trade comes to the US, we can look forward to the carry trade trapping us as well.
While there are many differences between our economies, it is wise to consider that we may be doomed to the same fate. If the inflationist's consensus is wrong, we will have a strong dollar, lower equity markets, commodities will be depressed (more driven by over supply and low demand), and overseas investing will present better growth opportunities. Even though faster growing countries present better prospects for capital appreciation, currency risk will be significant.
Labels:
bonds,
commodities,
deflation,
inflation,
rally,
stock market lows
Initial Blog - Thanks for visiting
My goal in blogging is to create a forum to post my ideas that is easily accessible to friends and family. As many of you know, I watch the commodity, equity, and bond markets daily and actually write up an analysis monthly for my benefit. I actually take the steps to complete a written one page summary to hold myself accountable and to create a track record for myself. It is often easy to recall all of the great calls you make, but we never seem to remember the missteps. Oddly enough in life, we often learn most from our mistakes. The monthly posts will be an easy way for me to compile my analysis and draw longer term conclusions from historical log they create.
My hope is that you will read my comments and analysis and you will avoid loss, make great profit, and constantly learn. Futher, I hope that you can read deeper into the writings and find out who I am and how much I care for you and your family (even if I have never met you). Ultimately, you need to know that I believe that I am called by the Lord, Jesus to act to warn those around me of the dangers in which we live. Many would be shocked to know that our economic system was extremely close to collapsing in 2008 and early 2009. I helped many avoid significant losses during those times and continue to warn that our economic trouble is not over.
My hope is that you will read my comments and analysis and you will avoid loss, make great profit, and constantly learn. Futher, I hope that you can read deeper into the writings and find out who I am and how much I care for you and your family (even if I have never met you). Ultimately, you need to know that I believe that I am called by the Lord, Jesus to act to warn those around me of the dangers in which we live. Many would be shocked to know that our economic system was extremely close to collapsing in 2008 and early 2009. I helped many avoid significant losses during those times and continue to warn that our economic trouble is not over.
Labels:
analysis,
deflation,
economic outlook,
inflation,
Jesus,
stock market
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