I highly recommend the article penned by Machinehead that was posted at http://www.chrismartenson.com/ earlier this week. You can find the post here. DEFLATION DEMON. As many of you read this article it may be easy to understand, others may be challenged with these concepts. Please stay with the article and don't quit reading!
As I wrote last year, we are and have been in the grips of deflation and it is that very economic condition that is the bane of all central bankers. Without inflation you have a grinding atrophy of financial muscle that leads to stagnation and joblessness. In a way, think of deflation as the mechanism that destroyed Madoff's ponzi scheme. In that example, deflation is the continuous calls for redemptions that are unmatched by new capital inflows (suckers). As the deficit between outflows and new inflows become significant enough, the house of cards falls apart. Likewise, in an economy when deflation sets in, new growth stops and leverage is destroyed along with all the bets and hopes for new economic opportunity.
WHAT DOES DEFLATION LOOK LIKE - JAPAN & GREECE
If you are left wondering what deflation looks like, we have the Japanese example, which seems mild in comparison to the collapse we are seeing in Greece. In the US, we can only hope that we receive the measure that Japan has. Although it has lasted over a decade, the story has not fully been written and as Kyle Bass speculated in the videos we posted, we might see much worse to come (Kyle Bass Part I and Kyle Bass Part II -) I think Kyle is suggesting that the future collapse of Japan and the US may look more like what is pictured in Der Spiegel in an article titled (Tensions Rise As Austerity Measures Backfire) .
Anyway, the article written by Machinehead is quite good and when you read the speech from 2002 given by Bernanke and also my post from last year titled PUBLIC ENEMY #1 Deflation you get the entire picture of what is to come. I think this will also solidify in your mind why I am so convinced that the only real step left is a concerted attempt to devalue the US dollar in an attempt to break loose from the deflation that is attacking our economy.
ARTICLE CONCLUSIONS - DEVALUE BABY!
Machinehead ties up his thoughts nicely and concludes with the thoughts that the next steps ahead are to drive the value of the dollar lower by several key ways. Specifically he is advocating the outright purchases of other foreign currencies. We've discussed this option several times and I've felt strongly that this would of course be one plan that would be implemented. Machinehead goes further though and suggests that the FED and Treasury would take additional steps concerning gold. First, the author suggests that the US would write up the gold assets we own which are currently held on our US balance sheet at a price of $42 or so. While this is only an accounting trick, it would essentially value our US assets at a greater level. Further, he states that the US should state that we'll actually be looking to purchase more gold. The announcement that our government would buy gold would actually depress the dollar. Of course, this would also send gold much higher too. All of these attempts are intended to break the back of deflation and kindle an inflationary fire that gets asset levels higher. And of course, their hope is that when you have inflation you will get growth.
Once again, read the article, I think it is absolutely nailing the course we will take as we race to devalue our currency. If only the other countries would sit idly by and let us unilaterally save ourselves by harming them. The problem with working on our own is that all of the other countries in the world have significant interest in lowering the value of their own currencies.
TRADING UPDATE
From a trading perspective, Machineheads conclusions reinforce the soundness of the strategy for investment I laid out in the August update titled (Throwing Down The Gauntlet) where I advocated getting out of the US and into emerging markets. In that strategy if the Fed is effective in devaluing the dollar you will win due to currency gains, but also because many of these emerging market targets are natural resource rich and will benefit from the resulting inflation. The only two questions that remains are whether the emerging markets can decouple from the slow growth or deflationary pressures that grip the US economy and if the Fed can actually be effective at all. We'll see how this plays out, we'll probably need a few bags of popcorn to see it all unfold.
Monday, August 30, 2010
Sunday, August 29, 2010
ROBERT SCHILLER DISCUSSES THE DOUBLE DIP POTENTIAL
Robert Schiller speaks about the possibility of a double dip recession. I'm not sure if I can agree with any of his prescriptions for "New Deal" type plans to foster growth since it clearly requires more misguided government intervention. Haven't they done enough? About when did they become the solution for anything. Perhaps Robert should read my take on the government myth here - GOVERNMENT MYTH
I get the sense that like most economists Schiller really doesn't know how to answer the question, "How would you fix it?" because his comment is prefaced with"it is really complicated". The first suggestion he makes is to spur hiring by the state and local governments with a thought to hire millions of teacher's aides and get them in the classroom. Interesting idea, but not realistic and not gonna happen. Also, creating more government agencies to waste money is not the trick.
I think it would be almost cleaner and simpler if all businesses were awarded 100% tax credits for all expenses related to new employees for a year or two. First, it would not involve a new or another government agency. Second, it would get businesses focused more on growing and utilizing a "no cost" employee.
Second, I'd keep all the Bush tax cuts in place for at least 2 more years. This would give us a few more years before uncertainty comes back into play.
Finally, I'd halt the Health Care Reform Act measures. Just to make things realistic and doable, I'd keep all items that have come gone live already, but would kill the rest of the bill making the 2014 date a non-event.
If a company would be in a position to hire today, they would have no reason to not hire based on uncertain economic times.
At around 8:33 in the video, Schiller discusses an uncertainty with CEOs and he says that they really can't describe why they aren't ready to move forward with growth plans. Normally I like Schiller, but it seems as though he doesn't want to state the obvious which is the Obama Administration's policies are damaging to business.
We should be worried about Schiller's thoughts on housing prices as he says that there is a real concern that prices could go down for the next 5 years based on the pricing curve that was in place over the last decade. It seems as though he doesn't agree with forecasters in his Case Schiller Market Survey. (15:45 in the video).
Finally, Schiller discusses Japanese style deflation around 17:25. My read on his comments here is that he thinks we are repeating the Japanese outcome (he didn't say it, I'm simply trying to discern what he is not saying). Also, this fits too with his statements about a bond bubble in his closing remarks in 17:40 where he tends to agree that there is not a classic bubble where folks are excited about the potential returns for an investment. He does seem a bit conflicted here because he does back off from that statement at the end.
There are some good tidbits in the interview overall, I like his analysis, but don't like his "solutions". I think they involve more of the same that you get from economics professors and Utopians rather than pragmatic business leaders. Jobs are the key to solving the problem, but government is not the mechanism for the implementation of creation with the exception of the tax legislation to get it going.
Enjoy - If the video has trouble loading simply click on this link to go directly to the hosted site (ROBERT SCHILLER WSJ)
I get the sense that like most economists Schiller really doesn't know how to answer the question, "How would you fix it?" because his comment is prefaced with"it is really complicated". The first suggestion he makes is to spur hiring by the state and local governments with a thought to hire millions of teacher's aides and get them in the classroom. Interesting idea, but not realistic and not gonna happen. Also, creating more government agencies to waste money is not the trick.
I think it would be almost cleaner and simpler if all businesses were awarded 100% tax credits for all expenses related to new employees for a year or two. First, it would not involve a new or another government agency. Second, it would get businesses focused more on growing and utilizing a "no cost" employee.
Second, I'd keep all the Bush tax cuts in place for at least 2 more years. This would give us a few more years before uncertainty comes back into play.
Finally, I'd halt the Health Care Reform Act measures. Just to make things realistic and doable, I'd keep all items that have come gone live already, but would kill the rest of the bill making the 2014 date a non-event.
If a company would be in a position to hire today, they would have no reason to not hire based on uncertain economic times.
At around 8:33 in the video, Schiller discusses an uncertainty with CEOs and he says that they really can't describe why they aren't ready to move forward with growth plans. Normally I like Schiller, but it seems as though he doesn't want to state the obvious which is the Obama Administration's policies are damaging to business.
We should be worried about Schiller's thoughts on housing prices as he says that there is a real concern that prices could go down for the next 5 years based on the pricing curve that was in place over the last decade. It seems as though he doesn't agree with forecasters in his Case Schiller Market Survey. (15:45 in the video).
Finally, Schiller discusses Japanese style deflation around 17:25. My read on his comments here is that he thinks we are repeating the Japanese outcome (he didn't say it, I'm simply trying to discern what he is not saying). Also, this fits too with his statements about a bond bubble in his closing remarks in 17:40 where he tends to agree that there is not a classic bubble where folks are excited about the potential returns for an investment. He does seem a bit conflicted here because he does back off from that statement at the end.
There are some good tidbits in the interview overall, I like his analysis, but don't like his "solutions". I think they involve more of the same that you get from economics professors and Utopians rather than pragmatic business leaders. Jobs are the key to solving the problem, but government is not the mechanism for the implementation of creation with the exception of the tax legislation to get it going.
Enjoy - If the video has trouble loading simply click on this link to go directly to the hosted site (ROBERT SCHILLER WSJ)
GOATMUG
Friday, August 27, 2010
New Trading Tools - Thanks to Iggy I've found more charts to occupy my time
Here is what I'm working on to identify very short term trades (meaning 30 minutes or less). I've officially dubbed it the Baconator after Iggy's other true love (other than Mrs. Iggy of course). If you want to check it out, you can go to http://www.freestockcharts.com/ and create your own charts and indicators. (No, I have no affiliation with them!)
5MIN VIEW
5MIN VIEW
1 MIN VIEW
GOATMUG
Thursday, August 26, 2010
GOOOOOOD MORNING GDP!
Just wanted to make a quick post reminding everyone that tomorrow morning we'll have a release by the government stating the second quarter's revised GDP report. As you can tell by how the market has been trading, there are now lowered expectations for growth. In the last month expectations have dropped from 2.5% to now somewhere around 1.4%. So needless to say, the market has a lot of emphasis put on this one information release.
A print of greater than expectations would probably goose the market higher right at the open while a print in the low 1.0% area will all but deliver a final body blow to those that have been suggesting that we are not going to double dip. Don't you recall back in April when you were hearing people say that there was no chance of a double dip? I sure do, I got a few emails stating that I was always emphasizing negative data and we weren't going to have another peek at recession.
As I mentioned to them, they were probably correct, but only because it was evident that we didn't ever come out of one.
Anyway, since the expectations in the market have been so managed and the tone in the market is pretty negative it may pay to at least think through the contrarian view. I almost expect to see any large gap down met with buying if the number is nasty (1% ish..). If the number comes in above the managed expectations, we may see a jump, but I think we'll sell off after the fact as people will realize that the market is bouncing because it is happy about a less bad horrible scenario. The only thing that holds me back here from getting long if we have some upward momentum is that we did close under 10,000 again, we still have really negative technicals, we are entering the September and October period which is usually more horrible than other months. In addition, we closed very poorly as folks crowed out to get out of the way of the GDP report. This clearly wasn't an end today with positive conviction.
Finally, if GDP announcements weren't enough, the Fed's round table meeting in Jackon Hole, Wyoming will wrap up and if the GDP number is very negative, expect our Fed Chairman to come out with unusual and extraordinary doses of financial shock and awe! I'm guessing that he'll admit things are slowing and suggest that the Fed has lots of ammunition to deal with the decline in growth. Of course all the measures won't really be effective and will not really produce any meaningful improvement long term. The issues are still cemented in place and we won't see any REAL improvement until they are attacked. Just so we have a handy list, here they are;
1) People don't have jobs
2) Because people don't have jobs and they've been without one for a long period, they are losing their homes to foreclosure...
3) Because people don't have jobs, they can't buy these foreclosure homes left by their neighbors.
4) If people have a job and still have a decent credit score, they might be able to refinance, but if they do refinance, they are using that to pay down debt, not spend more. (The Fed has wanted more spending not paying down debt).
5) Having said that, most people with jobs don't have a decent credit score, and therefore cannot refinance their mortgage.
6) Many others not buy houses either because they don't have 10% or 20% to put toward a down payment.
7) Without buyers, housing won't be fixed and banks have begun actually enforcing and processing foreclosures which will add more inventory to the huge backlog of unsold homes.
8) Against this backdrop, Mom and Pop have stopped spending and are now believers in paying down debt and bragging about how little they paid for clothes at Target and Wal-Mart.
9) Businesses cannot sell products to people that don't have jobs, don't have large houses they never really couldn't afford in the first place, and sell fewer products to people that are bragging about how little they spend now.
10) Businesses now face a working environment where they do not have certainty about their future sales, tax, and regulatory environments. In other words, they are pretty sure that their sales are stagnating, taxes are going higher, and they will be forced to pay more for health benefits for their staff and any new people that might be added. Since they have convinced themselves that this is highly likely they are not attempting to add staff (expenses) when their sales are flat to declining.
11) Because business profits are declining, tax revenues for cities, states, and the federal government are horrible.
12) Because cities, states, and the federal government have become accustom to ever increasing taxes they have been devastated for their long term mismanagement of our dollars. They have overspent on useless projects, promised free benefits to everyone, and richly compensated themselves with healthcare and pension plans that are without match in the private sector. These shortfalls of revenues for the second year will add to layoffs of government workers and reductions in benefits (if we tax payers are lucky).
And to fix all of these problems our Administrations, Congress, Treasury Department, and the Federal Reserve have attempted to rescue us by issuing more debt and even gone so far as to buy more of our debt with our own money.
My guess is that Ben Bernanke will tell us tomorrow that he's got it all covered. He'll stimulate the economy, get jobs growing, get banks lending, and do it all through the power of financial engineering and monetary policy. Call it QE (Quantitative Easing), call it debasing the dollar, call it outright purchases of stocks and bonds, no matter what he calls it, it will be an attempt to cover up the core problems and its real impact will be to destroy the value of our currency and further drive us into an oblivion of unpayable debt.
Cross your fingers, tomorrow will be interesting.
A print of greater than expectations would probably goose the market higher right at the open while a print in the low 1.0% area will all but deliver a final body blow to those that have been suggesting that we are not going to double dip. Don't you recall back in April when you were hearing people say that there was no chance of a double dip? I sure do, I got a few emails stating that I was always emphasizing negative data and we weren't going to have another peek at recession.
As I mentioned to them, they were probably correct, but only because it was evident that we didn't ever come out of one.
Anyway, since the expectations in the market have been so managed and the tone in the market is pretty negative it may pay to at least think through the contrarian view. I almost expect to see any large gap down met with buying if the number is nasty (1% ish..). If the number comes in above the managed expectations, we may see a jump, but I think we'll sell off after the fact as people will realize that the market is bouncing because it is happy about a less bad horrible scenario. The only thing that holds me back here from getting long if we have some upward momentum is that we did close under 10,000 again, we still have really negative technicals, we are entering the September and October period which is usually more horrible than other months. In addition, we closed very poorly as folks crowed out to get out of the way of the GDP report. This clearly wasn't an end today with positive conviction.
Finally, if GDP announcements weren't enough, the Fed's round table meeting in Jackon Hole, Wyoming will wrap up and if the GDP number is very negative, expect our Fed Chairman to come out with unusual and extraordinary doses of financial shock and awe! I'm guessing that he'll admit things are slowing and suggest that the Fed has lots of ammunition to deal with the decline in growth. Of course all the measures won't really be effective and will not really produce any meaningful improvement long term. The issues are still cemented in place and we won't see any REAL improvement until they are attacked. Just so we have a handy list, here they are;
1) People don't have jobs
2) Because people don't have jobs and they've been without one for a long period, they are losing their homes to foreclosure...
3) Because people don't have jobs, they can't buy these foreclosure homes left by their neighbors.
4) If people have a job and still have a decent credit score, they might be able to refinance, but if they do refinance, they are using that to pay down debt, not spend more. (The Fed has wanted more spending not paying down debt).
5) Having said that, most people with jobs don't have a decent credit score, and therefore cannot refinance their mortgage.
6) Many others not buy houses either because they don't have 10% or 20% to put toward a down payment.
7) Without buyers, housing won't be fixed and banks have begun actually enforcing and processing foreclosures which will add more inventory to the huge backlog of unsold homes.
8) Against this backdrop, Mom and Pop have stopped spending and are now believers in paying down debt and bragging about how little they paid for clothes at Target and Wal-Mart.
9) Businesses cannot sell products to people that don't have jobs, don't have large houses they never really couldn't afford in the first place, and sell fewer products to people that are bragging about how little they spend now.
10) Businesses now face a working environment where they do not have certainty about their future sales, tax, and regulatory environments. In other words, they are pretty sure that their sales are stagnating, taxes are going higher, and they will be forced to pay more for health benefits for their staff and any new people that might be added. Since they have convinced themselves that this is highly likely they are not attempting to add staff (expenses) when their sales are flat to declining.
11) Because business profits are declining, tax revenues for cities, states, and the federal government are horrible.
12) Because cities, states, and the federal government have become accustom to ever increasing taxes they have been devastated for their long term mismanagement of our dollars. They have overspent on useless projects, promised free benefits to everyone, and richly compensated themselves with healthcare and pension plans that are without match in the private sector. These shortfalls of revenues for the second year will add to layoffs of government workers and reductions in benefits (if we tax payers are lucky).
And to fix all of these problems our Administrations, Congress, Treasury Department, and the Federal Reserve have attempted to rescue us by issuing more debt and even gone so far as to buy more of our debt with our own money.
My guess is that Ben Bernanke will tell us tomorrow that he's got it all covered. He'll stimulate the economy, get jobs growing, get banks lending, and do it all through the power of financial engineering and monetary policy. Call it QE (Quantitative Easing), call it debasing the dollar, call it outright purchases of stocks and bonds, no matter what he calls it, it will be an attempt to cover up the core problems and its real impact will be to destroy the value of our currency and further drive us into an oblivion of unpayable debt.
Cross your fingers, tomorrow will be interesting.
GOATMUG
Tuesday, August 24, 2010
CROSS OF 15 DAY EMA UNDER 40 DAY EMA - LONG TERM SHORT SIGNAL
Here is something to look at from a longer term perspective. In this weekly view of the S&P 500 we are specifically examining the exponential moving average of the index. We chart the 15 day EMA and the 40 Day EMA. The cross of the shorter EMA below the longer EMA tells us that prices are falling, but this also is an indication that a new and significant trend may be in place.
In fact, when we see this signal, it tells us that we should consider looking to short the market and go long treasuries (not sure if I'd do the treasury part).
I have found an article by one of my favorite bloggers on the subject (way at the bottom where Chris Puplava discussed the cross). Please find a more in depth view in this link. - Chris Puplava Article
Here is a direct quote of his material from his 2/10/2010 article. In the article he is highlighting the cross and also the need for the RSI to be below 50 for a confirmation of a sell signal.
"Cyclical Bull/Bear Market Signals
To finish off today’s article, a quick peak at some indicators that have helped identify turning points between bull and bear cyclical markets to see if any signals have been given after the swoon to last week’s lows in the market. Looking at the S&P 500 15/40 weekly EMA signal system as well as the stock/bond ratio 15/40 weekly EMA signal system shows that no sell signals have been given and the trend remains bullish until proven otherwise. Additionally, bear markets are often associated with the 14 week RSI dipping into bear territory below 50 (red boxes below), and last week’s lows never saw the 14-week RSI on the S&P 500 dip below 50, with the 50 mark acting as support. The January 2010 top may in fact prove to be THE top for the March 2009 cyclical bull market, but it is perhaps wise to wait for confirmation before ringing any bear market alarm bells. A break of the 15 week EMA below the 40 week EMA for the S&P 500 and the stock/bond ratio, along with a decline below 50 on the 14-week RSI would provide solid corroborating evidence that the present cyclical bull market is over. However, if these indicators hold in bullish territory the bulls have the upper hand and the recent correction would prove to be a buying opportunity rather than the start of a new bear market. "
Current numbers as of 8/24/2010 - 9AM CST
15 Day EMA - 1089.38
40 Day EMA - 1090.40
RSI - 43.60 (Below 50)
This would show a confirmation of a sell signal.
In fact, when we see this signal, it tells us that we should consider looking to short the market and go long treasuries (not sure if I'd do the treasury part).
I have found an article by one of my favorite bloggers on the subject (way at the bottom where Chris Puplava discussed the cross). Please find a more in depth view in this link. - Chris Puplava Article
"Cyclical Bull/Bear Market Signals
To finish off today’s article, a quick peak at some indicators that have helped identify turning points between bull and bear cyclical markets to see if any signals have been given after the swoon to last week’s lows in the market. Looking at the S&P 500 15/40 weekly EMA signal system as well as the stock/bond ratio 15/40 weekly EMA signal system shows that no sell signals have been given and the trend remains bullish until proven otherwise. Additionally, bear markets are often associated with the 14 week RSI dipping into bear territory below 50 (red boxes below), and last week’s lows never saw the 14-week RSI on the S&P 500 dip below 50, with the 50 mark acting as support. The January 2010 top may in fact prove to be THE top for the March 2009 cyclical bull market, but it is perhaps wise to wait for confirmation before ringing any bear market alarm bells. A break of the 15 week EMA below the 40 week EMA for the S&P 500 and the stock/bond ratio, along with a decline below 50 on the 14-week RSI would provide solid corroborating evidence that the present cyclical bull market is over. However, if these indicators hold in bullish territory the bulls have the upper hand and the recent correction would prove to be a buying opportunity rather than the start of a new bear market. "
Current numbers as of 8/24/2010 - 9AM CST
15 Day EMA - 1089.38
40 Day EMA - 1090.40
RSI - 43.60 (Below 50)
This would show a confirmation of a sell signal.
GOATMUG
Monday, August 23, 2010
HOUSE OF CARDS
I wanted to provide a link to the House of Cards video that CNBC and David Faber put together. Just the other night this was on and I watched a few minutes of it again since I had posted the interviews with Kyle Bass. Kyle is featured in this video and it is truly amazing how he rejected and told he was crazy for suggesting that the mortgage industry and CDO's were doomed.
As usual, conventional wisdom gets you blown up.
I want to put together a larger post about how troublesome the whole situation is regarding bubbles. So many people in the House of Cards videos stated that they knew something was wrong, but they felt like they had to participate because they were going to be left out. Others I think felt like they would be able to exit in time because they were fast or just smarter than the rest of the market participants. I think the smartest guy in the room was Kyle Bass.
I normally would embed this video, but it is almost 2 hours long. Here is the link at CNBC.
HOUSE OF CARDS VIDEO - CNBC
Enjoy.
As usual, conventional wisdom gets you blown up.
I want to put together a larger post about how troublesome the whole situation is regarding bubbles. So many people in the House of Cards videos stated that they knew something was wrong, but they felt like they had to participate because they were going to be left out. Others I think felt like they would be able to exit in time because they were fast or just smarter than the rest of the market participants. I think the smartest guy in the room was Kyle Bass.
I normally would embed this video, but it is almost 2 hours long. Here is the link at CNBC.
HOUSE OF CARDS VIDEO - CNBC
Enjoy.
GOATMUG
Sunday, August 22, 2010
PERSIAN AMBITION CHANGES THE WORLD
IRAN GOES NUCLEAR
I've been wondering if I should post about this topic, and this morning I felt strongly that I needed to make a few statements regarding Iran's nuclear achievement this week. Allowing Iran to obtain this milestone is a mistake for the region and the world.
I feel as though I am witnessing another episode of the North Korean debacle where appeasement and simple stupidity allowed an unstable leader to obtain weapons that could destroy life as we know it.
First, without question, Iran does not have a "right" to have a nuclear program.
Second, all countries (with the exception of Syria) are concerned about the arming and equipping of Iran with this power.
Third, Iran's leadership has simply stated that their intent is to destroy Israel. When I hear people defend Iran and suggest that they are just like any other country that is peaceful, I have to question their sanity. No other current day nation other than perhaps China has declared that another nation must be conquered or destroyed (Taiwan / Israel). Frankly, that isn't good company to be in.
Fourth, Russian involvement in this process is obviously not new, however it is a reminder that the while the Soviet Union broke up and the Cold War ended (perhaps in the minds of the West) , Communism never died and in fact became more dangerous because Americans in their arrogance felt that their enemy was destroyed and without influence. Our approach has allowed the Russians to project power in Eastern Europe through control over energy and natural resources and reconstitute its influence in the Balkans. (Remember Georgia). Further, Russian has cemented relations in the Middle East with Iran. The finalization of the fuel supply agreement last week where Russians provided nuclear fuel for the reactor is simply unacceptable, however this works in favor of the Russians as they obtain revenue for supplying the fuel, but more strategically, they keep the West and Israel focused on the Iranian enemy rather than the Russian menace.
Fifth, Israeli leadership has totally failed its chief duty if they allow Iran to obtain nuclear weapons. No matter what our government would tell you, the only function that a national government should have is to protect its citizens (no not providing Cash for Clunkers or funding for ACORN). Since Iran has clearly stated that they will destroy Israel they must take this threat seriously. Even if the enriched uranium Iran is producing is used for the creation of a dirty bomb, the impact would be disastrous.
Alright, I'll wrap up here. This event is not some isolated news item that will not have any impact. As I suggested on 1/3/2010 I expected an Israeli attack on Iran sometime this year. The switch flipped to go live on the reactor is not the end of the problems, it is only the beginning.
Please join me in praying for God's intervention into this situation and for His people.
I've been wondering if I should post about this topic, and this morning I felt strongly that I needed to make a few statements regarding Iran's nuclear achievement this week. Allowing Iran to obtain this milestone is a mistake for the region and the world.
I feel as though I am witnessing another episode of the North Korean debacle where appeasement and simple stupidity allowed an unstable leader to obtain weapons that could destroy life as we know it.
First, without question, Iran does not have a "right" to have a nuclear program.
Second, all countries (with the exception of Syria) are concerned about the arming and equipping of Iran with this power.
Third, Iran's leadership has simply stated that their intent is to destroy Israel. When I hear people defend Iran and suggest that they are just like any other country that is peaceful, I have to question their sanity. No other current day nation other than perhaps China has declared that another nation must be conquered or destroyed (Taiwan / Israel). Frankly, that isn't good company to be in.
Fourth, Russian involvement in this process is obviously not new, however it is a reminder that the while the Soviet Union broke up and the Cold War ended (perhaps in the minds of the West) , Communism never died and in fact became more dangerous because Americans in their arrogance felt that their enemy was destroyed and without influence. Our approach has allowed the Russians to project power in Eastern Europe through control over energy and natural resources and reconstitute its influence in the Balkans. (Remember Georgia). Further, Russian has cemented relations in the Middle East with Iran. The finalization of the fuel supply agreement last week where Russians provided nuclear fuel for the reactor is simply unacceptable, however this works in favor of the Russians as they obtain revenue for supplying the fuel, but more strategically, they keep the West and Israel focused on the Iranian enemy rather than the Russian menace.
Fifth, Israeli leadership has totally failed its chief duty if they allow Iran to obtain nuclear weapons. No matter what our government would tell you, the only function that a national government should have is to protect its citizens (no not providing Cash for Clunkers or funding for ACORN). Since Iran has clearly stated that they will destroy Israel they must take this threat seriously. Even if the enriched uranium Iran is producing is used for the creation of a dirty bomb, the impact would be disastrous.
Alright, I'll wrap up here. This event is not some isolated news item that will not have any impact. As I suggested on 1/3/2010 I expected an Israeli attack on Iran sometime this year. The switch flipped to go live on the reactor is not the end of the problems, it is only the beginning.
Please join me in praying for God's intervention into this situation and for His people.
"It is not our part to master all the tides of the world, but to do what is in us for the succour of those years wherein we are set, uprooting the evil in the fields that we know, so that those who live after may have clean earth to till. What weather they shall have is not ours to rule." (J. R. R. Tolkien - Return of the King)
GOATMUG
Wednesday, August 18, 2010
THIRD TIME IS A CHARM? VIETNAM TRIES DEVALUATION AGAIN!
When the idea of having a healthy economy with low debt and low expenses is out of reach, what else can a country do? Devalue your currency of course!
VIETNAM DEVALUES ITS CURRENCY FOR THE THIRD TIME THIS YEAR
The wiggle room for global governments is quickly disappearing and these countries are competitively attempting to make their currencies worthless. (These meaning all countries - don't think the US isn't really doing this.)
Since January 1st, Vietnam has devalued two other times and Venezuela has also devalued. What does this mean to their citizens? Basically any good that they bought from outside the country is immediately more expensive. Think paying 10% or 20% more for gas or imported goods overnight.
WHY DEVALUE?
Governments want to devalue the currency because it provides them two benefits. Primarily, these exporting nations devalue to make their goods cheaper on the global market. Since Vietnam makes cheap plastic stuff when they devalue, a foreign countries buyers can buy more cheap plastic junk. Take comfort in the fact that the $1.00 store in your neighborhood can buy more crap for less dollars and sell it to you! A second reason that governments might devalue is to cheapen the value of the debt that they owe to foreigners if they are able to repay in their own sovereign currency. Clearly they would not want to devalue if they had to pay back creditors in a foreign currency. Many countries must weigh the benefits between cheapening their exports and the added cost of borrowing if the debt is priced in another currency.
ANYONE ELSE IN THE RACE?
Look for other nations to follow suit as the race to zero heats up. We will begin seeing talk of Japan trying to intervene in its currency, (although I don't expect them to do an outright devaluation yet - give it 2 years tops), and they will begin by selling yen to attempt to reduce the value of their currency. As an example of why Japan must consider this - Toyota's have become more expensive in the world as people outside Japan must pay for cars with more of their currency. This is exactly why Toyota makes cars in the US because it is attempting to regulate the impact of the currency differential as the yen can goes higher versus the US dollar.
TRADING IMPACT
The risk of holding an ETF that focuses on these emerging countries like Vietnam is that you deal with market, political, interest rate, economic, and currency risks. Today's action by Vietnam brings the last risk into focus. When the government devalues the currency there should be an immediate decline in the value of the stocks in the stock market relative to the US dollar ETF. As I look at the etf for Vietnam (VNM) it is down about 2% today. Year to date the etf is down around 7%. You must keep these risks in mind when investing in any foreign investment. Speaking specifically to the strategies I've discussed where we would invest outside of the US due to a low growth rate and poor political policies, we must endure these risks, but ultimately the growth potential outside the US is much greater and we obtain more potential for compensation for the risk taken than focusing in our domestic investments.
GOATMUG
VIETNAM DEVALUES ITS CURRENCY FOR THE THIRD TIME THIS YEAR
The wiggle room for global governments is quickly disappearing and these countries are competitively attempting to make their currencies worthless. (These meaning all countries - don't think the US isn't really doing this.)
Since January 1st, Vietnam has devalued two other times and Venezuela has also devalued. What does this mean to their citizens? Basically any good that they bought from outside the country is immediately more expensive. Think paying 10% or 20% more for gas or imported goods overnight.
WHY DEVALUE?
Governments want to devalue the currency because it provides them two benefits. Primarily, these exporting nations devalue to make their goods cheaper on the global market. Since Vietnam makes cheap plastic stuff when they devalue, a foreign countries buyers can buy more cheap plastic junk. Take comfort in the fact that the $1.00 store in your neighborhood can buy more crap for less dollars and sell it to you! A second reason that governments might devalue is to cheapen the value of the debt that they owe to foreigners if they are able to repay in their own sovereign currency. Clearly they would not want to devalue if they had to pay back creditors in a foreign currency. Many countries must weigh the benefits between cheapening their exports and the added cost of borrowing if the debt is priced in another currency.
ANYONE ELSE IN THE RACE?
Look for other nations to follow suit as the race to zero heats up. We will begin seeing talk of Japan trying to intervene in its currency, (although I don't expect them to do an outright devaluation yet - give it 2 years tops), and they will begin by selling yen to attempt to reduce the value of their currency. As an example of why Japan must consider this - Toyota's have become more expensive in the world as people outside Japan must pay for cars with more of their currency. This is exactly why Toyota makes cars in the US because it is attempting to regulate the impact of the currency differential as the yen can goes higher versus the US dollar.
TRADING IMPACT
The risk of holding an ETF that focuses on these emerging countries like Vietnam is that you deal with market, political, interest rate, economic, and currency risks. Today's action by Vietnam brings the last risk into focus. When the government devalues the currency there should be an immediate decline in the value of the stocks in the stock market relative to the US dollar ETF. As I look at the etf for Vietnam (VNM) it is down about 2% today. Year to date the etf is down around 7%. You must keep these risks in mind when investing in any foreign investment. Speaking specifically to the strategies I've discussed where we would invest outside of the US due to a low growth rate and poor political policies, we must endure these risks, but ultimately the growth potential outside the US is much greater and we obtain more potential for compensation for the risk taken than focusing in our domestic investments.
GOATMUG
Tuesday, August 17, 2010
KYLE BASS PART I - WHY THE FED IS TRAPPED
I want to provide videos of Kyle Bass that are simply well spoken and scary. Kyle was the Hedge Fund Manager in 2007 that made billions on his investments to short subprime debt. Kyle is different than most because he is analytical and has a willingness to use his analysis to make real trades that take time to unfold. In this world no one has patience to see a strategy play out over 3 months, much less 3 years. Kyle and his team are different.
The CNBC special "House of Cards" highlighted Kyle and his work and if you haven't seen it, you should because it shows how much group think permeates wall street and for that matter main street. When everyone believes that housing values never go down or treasuries are the best investment ever, then you know that disaster is right around the corner.
Each video is 8 minutes long. If you can't watch both, watch Part 2. This is the truth without a bunch of spin, and it is scary stuff. Most of Wall Street and Main Street make bets assuming that they will be smart enough and fast enough to exit before everyone else does. Kyle doesn't mess around with that and he makes large bets early and then simply shares the awful reality. If you haven't guessed yet, I like him!
GOATMUG
The CNBC special "House of Cards" highlighted Kyle and his work and if you haven't seen it, you should because it shows how much group think permeates wall street and for that matter main street. When everyone believes that housing values never go down or treasuries are the best investment ever, then you know that disaster is right around the corner.
Each video is 8 minutes long. If you can't watch both, watch Part 2. This is the truth without a bunch of spin, and it is scary stuff. Most of Wall Street and Main Street make bets assuming that they will be smart enough and fast enough to exit before everyone else does. Kyle doesn't mess around with that and he makes large bets early and then simply shares the awful reality. If you haven't guessed yet, I like him!
GOATMUG
KYLE BASS PART II - WHAT THE FUTURE LOOKS LIKE
Kyle Bass Part II
I hope you enjoyed this. This is a rare example of a really smart guy serving you "no spin" and telling you how bad it is. If I drank all I'd have do to sober up would be to watch Kyle a few times and I'd be ready!
GOATMUG
I hope you enjoyed this. This is a rare example of a really smart guy serving you "no spin" and telling you how bad it is. If I drank all I'd have do to sober up would be to watch Kyle a few times and I'd be ready!
GOATMUG
Monday, August 16, 2010
TREASURY RATES SPIKING - FRONTRUNNING OR MELTDOWN COMING?
Below is a picture of TLT, the exchange traded fund that measures the long dated treasuries in the market (20 year plus). As I've posted before, TLT's breakouts in August of 2008 were a lead indicator for the stress in the equity markets and economy as investors fled to the "safety" of US government treasuries.
As we see in the chart below, I warned a month or so ago that the push up in prices (yields going down) was a warning of bad things to come. Well, once I posted that we had a nice recovery in July and the price on TLT dipped back below the 100.15 level which I highlighted as the warning line.
Last week, the Fed announced that they would begin re-buying treasuries when some of the mortgage debt they owned rolled off. In essence, they wouldn't allow their asset holdings to go away, they would simply find a new home for any money that was repaid. (I think of it this way - that the Fed is not going to give our money back, we gave it to them (taxpayer guarantee of printed money) and instead of returning it once the stated use of the dollars is complete, they are going to recycle it into purchasing treasuries.
Well, because the Fed told the world they'd buy treasuries and even highlighted which ones they'd buy, the market, (investment houses and brokers), has done what any group of smart investors would do. They have rushed in and purchased these securities ahead of our government! Yeah! Isn't it neat to know that our government is so generous and willing to buy over-priced treasuries from these savvy traders?
So, does the move in TLT signal that the market is melting down, or does it signal that the FED is just stupid (or manipulative) and created a rush into that market? The answer is probably mostly the second and a little of the first. Here's what I mean. By telegraphing its intentions to purchase new securities with the roll off and then describing which ones it might buy, the Fed has really begun to achieve its goals. (They are not stupid, they are being manipulative).
First, the headlong rush into treasuries from other participants has further lowered interest rates to all time lows and this allows the government to fund our crushing debt at a much lower cost. The by-product of announcing this is that there are some hedge funds and investors that are simply gun slingers that are looking to make some quick bucks front-running the FED. The recent action in TLT especially today is probably mostly attributed to these fine fellows.
But, there are some folks that simply are so afraid of a collapse in markets that they are a new class of buyers of treasuries that have never done so. Think people in 401Ks and retirees. These people have lost 40% or 50% of their portfolios since March of 2000 and have endured this terrible market. They are vowing not to get crushed again. (They might get crushed again if interest rates rise). The surge in TLT starting in June can be largely attributed to a large amount of folks retreating from the markets entirely, shunning equities and desiring the safety (hopefully) of fixed income. This is why corporate bonds as well as treasuries are at extreme lows in yields.
So, whats next? Well, as we've said many times, the Fed wants low rates to get the economy going (even though it has not worked). They are so fearful of deflation that they are doing anything and everything to try to stimulate the economy. Is the run in treasuries over? No yet in my opinion. As I've said, we will see 3.0% 30 year mortgages in the next year or so. Rates for treasuries will need to go even lower than the current historic lows to get us that gift (if you can qualify for a loan that is).
In the longer term, will buyers of treasuries get hurt? Heck yes!
Will the move in treasuries lead to a move down in the market? Possibly. I'm not 100% convinced. The argument to support the decline would be any move down that gets going could be met with an absence of buyers as they'll have committed resources to easier leveraged trades in treasuries. In addition, if you think about it, a strong move down would actually make these buyers of treasuries even more money as a drop in markets have have others coming into treasuries looking for a safe haven. Wouldn't it make sense to create a market sell off if you had the capability to move the markets?
Why am I not 100% convinced? Last month, I suggested that the Fed would do some type of stimulus and therefore if effective they would attempt to juice the market via use of extra dollars sloshing around to purchase equities and other assets, or effectively the devaluation of the dollar. This is why I said that purchases should be made overseas and in commodities like gold and not in US markets. I'm still in the camp for the month of August that this should be my approach.
No matter what, the take away here is just another demonstration of how inefficient government is. When the Fed purchases these bonds, they will be buying at higher prices than 1 week ago due to their prior-signaling of their intended course of action. Of course this is purposeful and their attempts are made to manipulate the market and keep rates artificially low anyway, so what's wrong with overpaying for $200 Billion in bonds between friends anyway?
GOATMUG
As we see in the chart below, I warned a month or so ago that the push up in prices (yields going down) was a warning of bad things to come. Well, once I posted that we had a nice recovery in July and the price on TLT dipped back below the 100.15 level which I highlighted as the warning line.
Last week, the Fed announced that they would begin re-buying treasuries when some of the mortgage debt they owned rolled off. In essence, they wouldn't allow their asset holdings to go away, they would simply find a new home for any money that was repaid. (I think of it this way - that the Fed is not going to give our money back, we gave it to them (taxpayer guarantee of printed money) and instead of returning it once the stated use of the dollars is complete, they are going to recycle it into purchasing treasuries.
Well, because the Fed told the world they'd buy treasuries and even highlighted which ones they'd buy, the market, (investment houses and brokers), has done what any group of smart investors would do. They have rushed in and purchased these securities ahead of our government! Yeah! Isn't it neat to know that our government is so generous and willing to buy over-priced treasuries from these savvy traders?
So, does the move in TLT signal that the market is melting down, or does it signal that the FED is just stupid (or manipulative) and created a rush into that market? The answer is probably mostly the second and a little of the first. Here's what I mean. By telegraphing its intentions to purchase new securities with the roll off and then describing which ones it might buy, the Fed has really begun to achieve its goals. (They are not stupid, they are being manipulative).
First, the headlong rush into treasuries from other participants has further lowered interest rates to all time lows and this allows the government to fund our crushing debt at a much lower cost. The by-product of announcing this is that there are some hedge funds and investors that are simply gun slingers that are looking to make some quick bucks front-running the FED. The recent action in TLT especially today is probably mostly attributed to these fine fellows.
But, there are some folks that simply are so afraid of a collapse in markets that they are a new class of buyers of treasuries that have never done so. Think people in 401Ks and retirees. These people have lost 40% or 50% of their portfolios since March of 2000 and have endured this terrible market. They are vowing not to get crushed again. (They might get crushed again if interest rates rise). The surge in TLT starting in June can be largely attributed to a large amount of folks retreating from the markets entirely, shunning equities and desiring the safety (hopefully) of fixed income. This is why corporate bonds as well as treasuries are at extreme lows in yields.
So, whats next? Well, as we've said many times, the Fed wants low rates to get the economy going (even though it has not worked). They are so fearful of deflation that they are doing anything and everything to try to stimulate the economy. Is the run in treasuries over? No yet in my opinion. As I've said, we will see 3.0% 30 year mortgages in the next year or so. Rates for treasuries will need to go even lower than the current historic lows to get us that gift (if you can qualify for a loan that is).
In the longer term, will buyers of treasuries get hurt? Heck yes!
Will the move in treasuries lead to a move down in the market? Possibly. I'm not 100% convinced. The argument to support the decline would be any move down that gets going could be met with an absence of buyers as they'll have committed resources to easier leveraged trades in treasuries. In addition, if you think about it, a strong move down would actually make these buyers of treasuries even more money as a drop in markets have have others coming into treasuries looking for a safe haven. Wouldn't it make sense to create a market sell off if you had the capability to move the markets?
Why am I not 100% convinced? Last month, I suggested that the Fed would do some type of stimulus and therefore if effective they would attempt to juice the market via use of extra dollars sloshing around to purchase equities and other assets, or effectively the devaluation of the dollar. This is why I said that purchases should be made overseas and in commodities like gold and not in US markets. I'm still in the camp for the month of August that this should be my approach.
No matter what, the take away here is just another demonstration of how inefficient government is. When the Fed purchases these bonds, they will be buying at higher prices than 1 week ago due to their prior-signaling of their intended course of action. Of course this is purposeful and their attempts are made to manipulate the market and keep rates artificially low anyway, so what's wrong with overpaying for $200 Billion in bonds between friends anyway?
GOATMUG
Friday, August 13, 2010
WHAT'S UP WITH EURO - LIBOR 2 MONTH RATES?
Just scanning some of my normal indicators and found something odd in 2 month Euro-Libor rates. While everything in banking land looks and feels great (RIGHT!!!) and all rates have been coming down for at least 5 to 6 weeks, the 2 month Euro-Libor rate has started to move higher on 8/5/2010.
All other time periods continue to show funding rate improvement, so I don't want to over do the alarm here, but this kind of nugget would help us identify trouble in Europe if on the odd chance that perhaps the bank stress tests over there didn't really clear up anything. I mean, can you imagine a stress test where regulators didn't actually stress anything but the market just rallied because someone told them things were better? No, I can imagine anything like that either!
Here is the data summary so you can see the trend in rates by day.
08-12-2010 0.67313 %
08-11-2010 0.67313 %
08-10-2010 0.67063 %
08-09-2010 0.67063 %
08-06-2010 0.67063 %
08-05-2010 0.66938 %
08-04-2010 0.66750 %
08-03-2010 0.66875 %
08-02-2010 0.66875 %
07-30-2010 0.66750 %
I'll keep watching this as an indicator that banks begin to not trust each other. As concerns re-emerge about the health of sovereign country debt in Europe we'll see pressure on European banks too.
GOATMUG
All other time periods continue to show funding rate improvement, so I don't want to over do the alarm here, but this kind of nugget would help us identify trouble in Europe if on the odd chance that perhaps the bank stress tests over there didn't really clear up anything. I mean, can you imagine a stress test where regulators didn't actually stress anything but the market just rallied because someone told them things were better? No, I can imagine anything like that either!
08-12-2010 0.67313 %
08-11-2010 0.67313 %
08-10-2010 0.67063 %
08-09-2010 0.67063 %
08-06-2010 0.67063 %
08-05-2010 0.66938 %
08-04-2010 0.66750 %
08-03-2010 0.66875 %
08-02-2010 0.66875 %
07-30-2010 0.66750 %
I'll keep watching this as an indicator that banks begin to not trust each other. As concerns re-emerge about the health of sovereign country debt in Europe we'll see pressure on European banks too.
GOATMUG
Tuesday, August 10, 2010
THE US IS BROKE - Bloomberg Opinion - Can I Get An Amen?
Normally, I'd write a long blog post here and tell you why I believe the US is on its way down the path of destruction by promising too many benefits, collecting too few taxes, and allowing too many thieves to hold political office.
Today, I will defer to another and allow him to persuade you with his gifted rant. Professor Laurence Kotlikoff of Boston University just hits you with many of the facts and a heck of a lot less angry finger pointing at the political class than you'd get from me.
Enjoy.
Bloomberg Opinion - US IS BROKE
GOATMUG
Today, I will defer to another and allow him to persuade you with his gifted rant. Professor Laurence Kotlikoff of Boston University just hits you with many of the facts and a heck of a lot less angry finger pointing at the political class than you'd get from me.
Enjoy.
Bloomberg Opinion - US IS BROKE
GOATMUG
Friday, August 6, 2010
BROTHER CAN YOU SPARE SOME CHEESE?
Well once again we are provided another slug of data from our friends in the food stamps program. All the recovery our President is telling us we are seeing obviously hasn't dribbled down to those that require assistance for food and diapers and other necessities. Of course this data comes from May, but weren't we told to expect a turnaround somewhere? Perhaps it will come next month......(holding breath now).
As you have already read the weekly jobless claims were remarkably worse than expected and didn't produce the number of new jobs we were anticipating. I guess we need more folks our there caulking homes and weatherizing them so we can get our houses all green and stuff.
While we wait for next month's improvement here is a nice little chart which shows how much better things are getting.
May 2010 Highlights
40,800,000 people participating
18.9 million households
$5.45 Billion in annual costs
$289 cost per household
As you have already read the weekly jobless claims were remarkably worse than expected and didn't produce the number of new jobs we were anticipating. I guess we need more folks our there caulking homes and weatherizing them so we can get our houses all green and stuff.
While we wait for next month's improvement here is a nice little chart which shows how much better things are getting.
May 2010 Highlights
40,800,000 people participating
18.9 million households
$5.45 Billion in annual costs
$289 cost per household
GOATMUG
Wednesday, August 4, 2010
THROWING DOWN THE GAUNTLET - AUGUST MACRO REVIEW
RAILS - http://railfax.transmatch.com/
We begin this month's review looking at rail traffic. Rail traffic in general continues to improve over 2009 levels. Because there are some seasonal issues going on around this time, I don't want to over-hype the small draw down that we are seeing here. Seasonally adjusted we are only down around 1.3% in total tonnage from last month. Having said that, every report I read is simply talking up how great the shipping tonnage rates are. In an attempt to examine this, we can simply note that tonnage compared to 2009 is about 20% greater yet it is still around 10% lower than 2008. In addition, we need to keep in mind that the best years on record for intermodal rail shipping were 2006 and 2007 so it is a bit more sobering to think that we are recovering, but not near peak levels.
GDP adjustments really reinforce this as last weeks revisions to GDP showed that growth in GDP was slowing well before 2008.
RECESSION INDICATORS ON RAILS -
Motor Vehicle rail cargo and waste and scrap metal materials shipping is tailing down in recent months. The autos shipping and sales data is absolutely seasonal so I don't want to highlight that much given that it may mean nothing, however the drop in scrap metal and waste movement is something to keep an eye on as these are inputs into the manufacturing process. Later we'll look at scrap metal pricing.
ECRI / WEEKLY LEADING INDICATORS and ECRI GROWTH RATES - http://www.businesscycle.com/resources/
ECRI continues to release data showing that the weekly leading indicators are falling. Last week's -10.7% growth rate provides ammo to those that are arguing that we are headed for slow down, if not another recession. Again, the slowing data here is in contradiction to the ever-ramping stock market.
Housing drops and consumers reducing their purchases is driving the drop in growth rates.
ST LOUIS FED PRESIDENT BULLARD THROWS DOWN THE GAUNTLET -
As the flood of disappointing news rolls in about a slowing economy, St. Louis Fed President James Bullard moved from his centrist position to one of outright advocacy for the spawning of the Son of Stimulus just like we've been warning for at least a month. Bullard's discussion warned of the specter of a Japanese style deflation, exactly what they want to avoid at all costs. Bullard's comments make it all the more likely that the Fed will actually move to invoke more stimulus in the form of buying treasuries, buying more agency backed mortgages, and maintaining a near zero rate (no hikes).
Bullard's comments probably are part of an orchestrated effort to convey the Fed's future policy. We cannot forget that no matter how ineffective Fed policies have been in creating a real recovery in the economy, this is really about creating a rebound in market or asset values. Like we've stated above, Good Time Al believes the market IS the economy. Check back to the post we made last year regarding Bernanke's 2002 deflation speech. There is no ambiguity there. He is positively stating that the Fed can and must win against the deflation enemy. Despite the fact that jobs have not returned and the housing market is still floundering, we will see a new round of QE that looks to further juice the market. I would guess that this will have a smaller effect in terms of the magnitude of a move on the market and the impact will have less of a lasting effect in terms of time than last time, but if we get confirmation from the Fed that they will provide liquidity, we will see a move up.
This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011. Isn't it funny how despite their efforts we continue to spiral the way of Japan. Want to get an idea for what it might look like right now? You can buy a Japanese 10 Year note and receive 1% on your money! Hello deflation! PUBLIC ENEMY # 1 - DEFLATION
I'll remind you the futility of the game that the Fed is playing - FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:
"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”
30 DAY TRADING OUTLOOK- Ok, so the Fed is beating the drum that they will do anything to stop deflation and they will continue to buy treasuries, what is the play for the month? It is exactly the same strategy that I outlined on July 3rd in the Mid Year Review. We should continue to invest in emerging market issues focused in countries like Brazil, China, India, Indonesia, Malaysia, Chile, and Taiwan.
All of these etfs have broken out, and even the S&P 500 extended its gains over the 1120 level I highlighted last week. While macro indicators confirm the slowing, we cannot deny the short run impact of a committed Fed. Bullard essentially has thrown down the gauntlet and stated that the Fed will use all of its ammo to fight deflation. Once again, the Fed playbook is opened and I suggest you read our post on deflation to remind yourself of the commitment to defeat that enemy at any cost. The hawkish tones of Bullard emphasize what is at stake and the intensity of the desire to prevail.
While I've been bearish on gold lately expecting a pullback to the $1040 area, I am tempering this because of the expected Fed devaluation. CPI data will probably come in lower, yet this will only fuel the Fed's aggressive response.
GOATMUG
We begin this month's review looking at rail traffic. Rail traffic in general continues to improve over 2009 levels. Because there are some seasonal issues going on around this time, I don't want to over-hype the small draw down that we are seeing here. Seasonally adjusted we are only down around 1.3% in total tonnage from last month. Having said that, every report I read is simply talking up how great the shipping tonnage rates are. In an attempt to examine this, we can simply note that tonnage compared to 2009 is about 20% greater yet it is still around 10% lower than 2008. In addition, we need to keep in mind that the best years on record for intermodal rail shipping were 2006 and 2007 so it is a bit more sobering to think that we are recovering, but not near peak levels.
GDP adjustments really reinforce this as last weeks revisions to GDP showed that growth in GDP was slowing well before 2008.
Motor Vehicle rail cargo and waste and scrap metal materials shipping is tailing down in recent months. The autos shipping and sales data is absolutely seasonal so I don't want to highlight that much given that it may mean nothing, however the drop in scrap metal and waste movement is something to keep an eye on as these are inputs into the manufacturing process. Later we'll look at scrap metal pricing.
THE WEAKEST SHIPPING TONNAGE - KSU
As I mentioned last month KSU and KSU Mexico continue their slide in tonnage. I put this up because we need to continue watching these rails and their cargo shipping. Specifically for them, they are encountering a crossover from levels from last year in this quarter and this may be a concerning development to monitor. Last month I mentioned CNI and showed their chart as the best performer. I also suggested passing on their stock simply to wait for a retest below support. That didn't work out well as the stock is now trading almost $6.00 or 11% higher. (I wouldn't chase it here).
I wanted to include some data related to jobs. Below is the information for the Monster.com Employment Index. This data shows a summary of online recruiting efforts and job availability. This data highlights information from June, but I will begin updating it monthly in my chart form. In that time period, Monster suggests that in 13 of the 20 major employment areas in the country, there were additional listings on job boards and company websites. The biggest gains were made in hospitality and food services industries. Examining the most recent unemployment report confirms these trends are continuing as well.
ECRI / WEEKLY LEADING INDICATORS and ECRI GROWTH RATES - http://www.businesscycle.com/resources/
ECRI continues to release data showing that the weekly leading indicators are falling. Last week's -10.7% growth rate provides ammo to those that are arguing that we are headed for slow down, if not another recession. Again, the slowing data here is in contradiction to the ever-ramping stock market.
Housing drops and consumers reducing their purchases is driving the drop in growth rates.
MOODY'S / MIT COMMERCIAL PRICE INDEX - http://web.mit.edu/cre/research/credl/rca.html
The most recent Moody's / MIT Commercial Price Index Data shows that commercial real estate prices in the index increased 3.6% for the month of May. Again, this data is lagging here, and isn't showing that pricing has leveled off yet.
FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
Equity market gains and other financial market rebounds have fueled the recovery in the Bloomberg Financial Conditions Index. A level above 0 would indicate that the recession is over, numbers below show a contraction. We have not pushed through zero yet, but a significant equity market explosion higher in August could at least give us a second attempt at moving into an expansionary number.
SCRAP METAL - GOOD TIME AL'S FAVORITE INDICATOR - Alan Greenspan often said that he watched the price of scrap metal to determine the health of the economy. Below is a scrap metal chart for the last two years. Just like every 2 year chart it shows the same shape moving up and to the right, but it is interesting to point out that this index bottomed out in January of 2009. This would have been a good indicator to use to portend the market's recovery in 2009. We see that we've endured a drop in scrap pricing in late June and July, only to see a move up in the last week or so.
The USD's dramatic decline seems to have washed away all fear of European collapse or should I say the lack of fear of the European collapse has begun to wash away the value of the dollar! Those stress tests sure did the trick didn't they? The decline of the dollar has certainly also ushered in a revival of the stock markets. Funny, we are now hearing that folks are concerned about the downward direction of the dollar. The truth is simply this in my opinion. We will have little upward momentum in the markets without a destruction of the value of the dollar. Having said that, Alan Greenspan this weekend put into words what the FED is really thinking. Greenspan simply stated that the market is the economy! So, we must be on alert that since the "Economy is the Market" we are being reminded that asset values are the only concern of the Fed and the only hope to return things back to the good old days. Understanding this means we remind ourselves that they seek a return to inflation, easy money and credit, and if it takes it, a decline in the purchasing power of the dollar. Here me loud and clear. There may be ups and downs in the value of the dollar, but if the FED has anything to do with it, there will be an ultimate walking down of the value of the currency. This is the only way to survive and extend with the looming debt issues we have.
BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The BDI has made a significant drop since May and June and is attempting a bottom here. As commodity demand increases we should see a move higher in the cost of spot shipping, however the drop in the BDI is a reflection of the over supply of ships that stand ready to carry freight. Still, if you are an owner of those ships that don't have long term contracts at a fixed price, you are probably hurting very badly at these rates.
TRADING UPDATE -
I like the simple chart provided by the guys at Growthstock Advantage. Based on their indicator that examines the number of stocks trading above their 40 day moving average, the market is NOT overbought yet. As stocks get extended it is sometimes helpful to see when everyone loves the market. Typically you might consider scaling out of positions or shorting at that time. At this point the indicator is NEUTRAL.
C
COPPOCK TURN INDICATOR - I showed this chart last month and it is simply a 14 month moving average of the Dow. When the average turns and heads south like it did last month at the end of July, it is an indicator that the market may be headed the other direction. The COPPOCK is one of those indicators that confirms a move rather than one that is predictive. Having said that, even with July's monstrous performance, the COPPOCK is suggesting that we are still going to go lower and therefore it is BEARISH.
US Libor continues to improve and so do all other denominated Libor measures. I made a comment right after the European financial stress test result release that I'd be watching these levels to get a confirmation that the banks actually were believing what was being served up. Because we are seeing a drop in these rates we can confirm that stress is abating. So while the contraction in rates is only a few basis points since last week, it is a 10% reduction in 1 week funding rates, which is significant.
ST LOUIS FED PRESIDENT BULLARD THROWS DOWN THE GAUNTLET -
As the flood of disappointing news rolls in about a slowing economy, St. Louis Fed President James Bullard moved from his centrist position to one of outright advocacy for the spawning of the Son of Stimulus just like we've been warning for at least a month. Bullard's discussion warned of the specter of a Japanese style deflation, exactly what they want to avoid at all costs. Bullard's comments make it all the more likely that the Fed will actually move to invoke more stimulus in the form of buying treasuries, buying more agency backed mortgages, and maintaining a near zero rate (no hikes).
Bullard's comments probably are part of an orchestrated effort to convey the Fed's future policy. We cannot forget that no matter how ineffective Fed policies have been in creating a real recovery in the economy, this is really about creating a rebound in market or asset values. Like we've stated above, Good Time Al believes the market IS the economy. Check back to the post we made last year regarding Bernanke's 2002 deflation speech. There is no ambiguity there. He is positively stating that the Fed can and must win against the deflation enemy. Despite the fact that jobs have not returned and the housing market is still floundering, we will see a new round of QE that looks to further juice the market. I would guess that this will have a smaller effect in terms of the magnitude of a move on the market and the impact will have less of a lasting effect in terms of time than last time, but if we get confirmation from the Fed that they will provide liquidity, we will see a move up.
This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011. Isn't it funny how despite their efforts we continue to spiral the way of Japan. Want to get an idea for what it might look like right now? You can buy a Japanese 10 Year note and receive 1% on your money! Hello deflation! PUBLIC ENEMY # 1 - DEFLATION
I'll remind you the futility of the game that the Fed is playing - FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:
"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”
30 DAY TRADING OUTLOOK- Ok, so the Fed is beating the drum that they will do anything to stop deflation and they will continue to buy treasuries, what is the play for the month? It is exactly the same strategy that I outlined on July 3rd in the Mid Year Review. We should continue to invest in emerging market issues focused in countries like Brazil, China, India, Indonesia, Malaysia, Chile, and Taiwan.
All of these etfs have broken out, and even the S&P 500 extended its gains over the 1120 level I highlighted last week. While macro indicators confirm the slowing, we cannot deny the short run impact of a committed Fed. Bullard essentially has thrown down the gauntlet and stated that the Fed will use all of its ammo to fight deflation. Once again, the Fed playbook is opened and I suggest you read our post on deflation to remind yourself of the commitment to defeat that enemy at any cost. The hawkish tones of Bullard emphasize what is at stake and the intensity of the desire to prevail.
While I've been bearish on gold lately expecting a pullback to the $1040 area, I am tempering this because of the expected Fed devaluation. CPI data will probably come in lower, yet this will only fuel the Fed's aggressive response.
GOATMUG
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