The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Former paid subscribers to the printed version are now receiving LIFETIME subscriptions, and subscriptions to the printed version are no longer being accepted. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
I had great fun reprinting quotes about software disasters, particularly from Gary North and Cory Hamasaki, though I myself doubted that civilization would grind to a halt as we slipped into the year before the new millennium. (Year-numbering begins with 1. The new millennium began in 2001. Thus, 2000 was the last year of the old millennium. If you doubt me, check with your local librarian.) It was hard to get a reading on the problem, because private industry would be the source of most Y2K failures, and businesses are prone to not air their dirty laundry in public. Regardless, as the fateful day approached I concluded that the problem had mostly been fixed, with ultimate success dependent on whether or not the lights stayed on.... and it seemed to me that power generation was not particularly Y2K-susceptible.
However, I did think there would be enough Y2K failures to throw the economy into recession, particularly considering the Internet- and tech-bubble craziness going on in the stock market in 1999. In fairness to my readers, I felt I should outline to you what might happen if I should be wrong about this.... if we should sail into 2000 with no noticeable Y2K failures. My conclusion was that the extra money poured into computer upgrades would actually provide a modest boost to the economy for awhile, followed by a year or two of subpar spending on computer gear until technological improvements would impel companies to upgrade again. That was more or less what happened, although the stock markets crashed anyway after the Fed withdrew the extra money with which it had goosed the system to slide us past the Y2K boundary.
Today we face a similar situation with systemic risk. I currently rate systemic risk as high, and have for several months except during the recent holiday period. It just appears to me that the financial system is badly strung out on debt and derivatives, and a small surprise dislocation somewhere could rapidly propagate through the system (like an avalanche) until it overwhelms all attempts by the world's central banks and governments to tame it.
Though the mainstream financial press, and all of Wall Street, it seems, are oblivious to the dangers, I have plenty of worrywart company in independent commentators, some of whose quotes I have been printing. Some expect the deflating housing bubble to be the trigger. Others think it will be rising interest rates and the disappearance of the yen-carry trade. Still others point the finger at a possible hedge-fund or derivatives failure ("Financial weapons of mass destruction", Warren Buffett has called derivatives). Still others think it might be a geopolitical event which would cut off mideast oil supplies. Let's face it, there are plenty of candidates as potential triggers for disaster.
But, you might ask, why should there be any systemic risk at all? After all, there really hasn't been a worldwide systemic failure for almost 80 years, since the Great Depression, and we've been through one major and four secondary wars, a cold war, two oil crises, a bank crisis and four stock-market crashes (1970, 1973, 1987, techs in 2000).The "system" survived all of these just fine.
The reason there is high systemic risk, as I see it, is that risk, or more accurately the perception of risk, is a psychological phenomenon. The longer "the system" grinds on without failures or corrections, the more people perceive the chance that anything might ever go wrong as minimal and, hence, the more risk (higher levels of risk) they are willing to assume. We can see measures of this willingness to assume more risk in the stock and bond markets. Stocks have been persistently overvalued for more than a decade, since about 1993..... the longest period of overvaluation I can ever remember.... as you can tell from dividend yields, in the 1% to 2% range instead of 4% to 5% of years ago. Similarly, long-term bond yields have been below their historical midpoint (6% to 8%) for more than a decade, and in no way compensate for the true increase in the cost of living (as opposed to the government's CPI lie). Yes, you can attribute this to the "bond carry trade", but that hedge would not exist if it were not perceived as virtually risk-free, so everybody piles in.
Unfortunately, the explosion in derivatives adds to the perception that risk is minimal, because derivatives distribute the risk in a position that's been assumed to more players. To some extent this is a legitimate strategy, similar to reinsurance in the insurance industry which prevents a single insurance company from going under if its policyholders are hit by a major natural disaster. However, the great majority of today's derivatives attempt to spread the risks of bets made on the future direction of interest rates. My scientific and mathematical background tells me that it is impossible to reduce overall risk this way; to the extent that the risks of individual bets are reduced by dispersion, systemic risk rises so that overall risk remains the same. Indeed, since the perception of risk is reduced to the players because their individual speculations appear to be less risky, they are willing to make riskier bets and thus overall risk (and therefore systemic risk) are increased.
An additional danger with derivatives is that they have no reserve requirements, as do bank loans, so they can in theory expand indefinitely, essentially creating liquidity from nothing (and away from the control of central banks). The only limiting factor is the perception of risk (that is, the willingness to enter into derivatives contracts); as time grinds on and nothing goes wrong, perceived risk declines and the total notional value of the world's derivatives contracts grows like a weed.
Thus we have: A strung-out financial system with many potential points for failure, and only a handful of people with the clout to (try to) arrest and reverse a systemic failure - specifically, the governors who run the world's central banks, who must quickly reach mutual agreement and act in concert to avert a financial meltdown. A lot rides on their getting it right if (when) disaster strikes; people's perception of risk is currently factoring in the assumption that the central banks will always be able to fix whatever goes wrong.
The problem with financial accidents is that you can never predict when they will occur, because.... well, they're accidents. That hasn't kept people from trying. I have an extensive collection of stock-market literature going back to the 1930s, much of which, over the past two decades, was devoted to the subject of why financial Armageddon was just around the corner. Kondratyev winter, debt collapse, real-estate busts, hyperinflation, banks going belly-up, mutual fund failures, Elliott-wave arcana, you name it..... some of it actually did happen on a relatively small scale.... but the system kept grinding on. They were wrong, all wrong, at least in terms of a failure big enough to bring down the system.
My own expectation is that things will grind along more or less as they are now, with systemic stresses and small failures popping up from time, until THE BIG ONE hits. When, oh when, Nick?, you ask. Beats me.... "accident", remember?.... but my sense is that it will be within only a few years, rather than decades from now. After all, the Fed almost failed to reverse the deflationary tide in 2002. It took a monster Fed-created housing bubble to compensate for the trillions of paper profits lost in the crash of the techs and to generate a weak economic recovery.
Now, returning to the title of this essay, suppose I'm wrong about my guesstimate on the timing and there is no systemic failure over a reasonable investing timeframe - say, the next decade - or there is a systemic failure but the central banks ("they") overcome it, as the Fed did in 2002 and 2003? What then?
Here is a case where linear projection works well. I would expect stocks to slowly grind upward over the long term, with an occasional mild bear market from time to time. New highs will be reached in nominal terms, but stocks will lose value in terms of their purchasing power (and in relation to gold, silver and energy). Stock dividends and bond yields will remain depressed.
The economic core of the nation will continue to be hollowed out, as consumers continue to borrow their way to prosperity and foreigners acquire this debt.... and, as now, nobody will perceive this to be a problem.
The real standard of living will continue to decline as it has been doing for the past two decades. Americans will compensate by working longer, working more jobs or going deeper into debt.
The U.S. government will continue to print way too many dollars, with the printing presses running at super speed whenever the economy is in recession, or when a bubble deflates and another one is needed to take its place.
Derivatives will multiply unchecked. People will continue to be amazed but, mathematically, with no reserve requirements infinity is the limit.
Real return on investment (after adjusting for the cost of living) will become even more pathetic, because perceived risk will continue to decline. (No risk=no reward; you might as well be in "risk-free" T-bills.)
Now we come to the question: How do you invest when you expect THE BIG ONE to come at any time.... but it may not for awhile, and might never? ("Never" being within my remaining lifespan.) I face this problem with my "Inheritance" portfolio, which is invested for current income to support retirement.
Perhaps the best strategy is to approach this investing conundrum as a continuum of shorter time spans, keeping aside a good-sized chunk of cash to invest shortly after something (smaller than THE BIG ONE) does go wrong. Over the near term, I foresee the Fed forcing short-term interest rates lower, and keeping the liquidity gusher coming, to ameliorate the popping housing bubble. That means one should cut back on money-market funds (no more 5% yields!) and move possibly into long-term bonds or into high yielding stocks in out-of-favor industries.
Last year about this time, in my search for high yielding, out-of-favor stocks I stumbled across the rural telecoms, and bought a few. That worked out pretty well. This year, my search has turned up energy trusts, particularly Canadian income trusts, which were flying high last year on $80 oil. First they were whacked by the decline in oil prices, then pummeled by the politicians, then finally mauled by the springlike winter (so far) in the eastern U.S. and Canada. Last year everybody wanted them; this year, in spite of gushers of liquidity driving up paper asset prices everywhere, liquidity isn't gushing into these; they are unloved. So I bought some.
I look at the Inheritance portfolio and see how
unbalanced it is, being primarily in cash-equivalents
and energy trusts. But, when I look at how our
government is determined to trash the dollar in it
attempts to keep THE BIG ONE from ever darkening
our skies, it seems to me that having my investments
in real assets - gold and oil/gas - is currently a timely
strategy for the preservation of capital and purchasing
power.
Since the Federal Reserve has failed to reliquefy consumers during 2006, we would not be surprised by an extraordinarily aggressive Federal Reserve in 2007. Very few economists.... foresee the Federal Reserve lowering interest rates to the 3% level. IF they follow the 2001 model for reliquefying the consumer, the Federal Reserve may need to go below 2% on the Federal Funds rate. Until the last 3 weeks, new mortgage rates remained close to existing rates in spite of the Federal Reserve's aggressive monetary expansion. Even though 30-year mortgage rates have fallen as much as the reduction that occurred from December, 2000 to March, 2001, the relationship between new and existing rates has prevented a significant increase in refinancing levels. The evidence of the last three weeks indicates that consumers are responding to the extra rate reduction on the home purchase side but not on the refinancing side. The Federal Reserve may need to push 10-year Treasury rates as low as 4% to 4.25% in order to reliquefy households. - Stephen J. Church
In my opinion the next major move in interest rates will be down. In fact this seems to be a pretty easy call. Why? It's real simple. The reason there is a record number of houses for sale is because the people who were sucked into buying these homes at record high prices financed with two year adjustable rate mortgages and interest only mortgages are now faced with the reality of paying for these homes with monthly payments that are simply unaffordable for their budgets. After spending two years raising interest rates, from levels they should never have fallen too in the first place, the Fed will be forced to lower rates in what will turn out to be an unsuccessful attempt to bail these "lost souls" out of a bad situation that can only get worse. The lowering of interest rates will resemble giving a heroin addict a fix. A short term fix is not a long term solution.... There is no question that the Fed will select hyper-inflation over deflation every time when faced with this choice. - Mike Hoy
Here we sit with a Fed that certainly has an interest in keeping things afloat and quite honestly has done a very good job of it. We also have a public with virtually no fear or worry whatsoever. As the market was deflating into 2001 and 2002 the Fed began to flood the system with liquidity. In doing so, they ignited the housing boom, saved the stock market from what began as the initial leg down of a much nastier bear market and instilled a complete sense of complacency onto the public. As a result, everything floated higher on the back of the excessive liquidity that was pumped into the system and now here we sit fat, dumb and happy.... Personally, I have my doubts about the "powers that be" being able to pump the economy enough to save it again. After all, we are still seeing the deflating of the bubbles in housing and commodities from the last, or really the ongoing, reinflation effort. All the while, the stock market is still hanging on from these reinflation efforts but is increasingly moving onto thinner and thinner ice. I believe that the housing and commodity markets were the first dominos to topple and that the stock market will likely be the next. - Tim W. Wood
Stock sales by America's corporate chieftains exceeded purchases last month [November 2006] by the widest margin since 1987, suggesting they don't share the confidence of investors who sent the Standard & Poor's 500 Index to a six-year high. - Daniel Hauck
On a major trend basis, I track several long-term momentum gauges which for the S&P have soared back up to the high end of their historical range. This tells me that the market is clearly no longer on the first floor of risk, but currently resides closer to the technical penthouse, where any downside reversal could represent quite the hard fall. In fact, rarely in stock market history has a market been this overbought, this over extended, and displayed this type of uniformly one-sided sentiment - all hallmarks of an ultra-high-risk environment. - Frank Barbera
Believe it or not, there once was a time when fund managers could exercise discretion over their customers' assets and on occasion, they might attempt to sidestep a suspected correction or bear market by holding a larger cash component. Those times are gone. A huge part of the change in attitude can be traced to indexing, which by definition comprises an investment of 100% stock and zero percent cash. The tremendous growth of ETFs has added additional impetus to the need for active managers to expose assets to risk, rather than take any steps whatsoever to protect assets. The ability to sidestep an overvalued or risky stock market via a large cash component no longer exists. - Alan M. Newman
A man has to make the most of what he's got. A handsome man looks for mirrors. A well-bred man thinks that it is class that counts, while a rich one measures himself in dollars or pounds. But a man who has just lived through a 20-year bear market sees humility as a vital asset; it is all he has left. He comes to see that the proud investor is the one who will take the biggest losses...and comes to believe that the meek will really inherit the world; they just have to wait for those arrogant SOB's to drop dead. - Bill Bonner
This is the ugly secret about B rated bonds: If monetary conditions remain easy, then increased investor appetite allows potential defaulters to refinance instead of defaulting, which in turn keeps default rates low and increases investor appetite. This has particularly been the case in the last few years, when hedge funds have been able to raise almost unlimited capital from foolish institutional investors, leverage themselves to the hilt, possibly in yen, from foolish banks and then invest the gigantic proceeds in junk bonds, for their modest additional yield above U.S. Treasuries. Provided the junk bond market doesn't crash, so refinancing of all but the worst rubbish is still readily available, hedge funds can in any given year achieve with almost complete certainty a satisfactory return, at least 20% of which will flow to the hedge fund managers personally. Thus the normal corrective mechanism of rising default rates ceases to work, and the market spirals towards bond-market nirvana. Essentially the safety valve on the engine of speculative financing has been jammed shut. - Martin Hutchinson
Hedge funds and private equity plays: They are loaded with loans to the privatized industries on a forced basis and analysis of such portfolios would require membership in the Regime inner circles and still might not be possible. To think outside buyers have a clue is clueless. - Edmund M. McCarthy [President and CEO, Financial Risk Management Advisors Company]
For one person to have money in a bank account requires someone else to owe a similar sized debt to a bank somewhere else. But if all money is loaned into existence, with interest, how does the interest get paid? Where does the money for that come from? If you guessed "from additional loans" you are a winner! Said another way, for interest to be paid, the money supply must expand. Which means that next year there's going to be more money in circulation requiring a larger set of loans to pay off a larger set of interest charges and so on, etc., etc., etc. With every passing year the money supply must expand by an amount at least equal to the interest charges due on all the past money that was borrowed (into existence) or else severe stress will show up within our banking system. In other words, our monetary system is a textbook example of a compounding (or exponential) function. - Chris Martenson
The extension of credit is essentially psychological at its core. Credit represents in its essence the willingness of one person to borrow money and the willingness of another person to lend money. All of our measurements of credit and credit growth are actually measurements of this "willingness", if you will. The less fear that people feel, the more willing they are to borrow (and vice-versa). And likewise this is the same for the lender. If some type of economic dislocation were to occur, this could potentially result in a tremendous increase in the "level of fear", which in turn will be reflected in a plunge in credit creation. - Bernard Ber
Sooner or later, the system becomes totally unbalanced and entirely dependent on further asset inflation to sustain the imbalances. It is at that point that even a minor event can act as a catalyst to bring down asset prices and produce either "total", or at least "relative", illiquidity in the system, because a large number of assets whose value has declined no longer cover the loans against which they were acquired. "Total illiquidity" occurs when the central bank, faced with declining asset prices, doesn't take extraordinary measures to support asset prices. "Relative illiquidity" follows when the central bank implements, in concert with the Treasury, extraordinary monetary and fiscal policies (cutting short-term interest rates to zero, and the aggressive purchase of bonds and stocks) in a desperate effort to support asset prices. In both cases, a degree of illiquidity occurs and depresses asset prices, but in different ways. In the case of "total illiquidity" (1929-1932 and Japan in the 1990s), asset prices tumble across the board in nominal and real terms with the exception of the highest-quality bonds and, possibly, precious metals (flight to safety). - Marc Faber
The middle class still thinks it is the middle class. It owns one or two or three automobiles. It has children in college... a house with air-conditioning... maybe some mutual funds. But it is living on borrowed time and borrowed money... in a borrowed house. Even though house prices were rising, owners' equity as a percentage of household real estate actually fell from 58% to 54%. In other words, people 'took out' so much wealth from their houses that they ended up with a lower percentage of ownership than they had had before - even at today's high prices. As prices go down, their 'equity' will fall even further. For many homeowners, it will disappear altogether.... Someday, perhaps soon, many middle class Americans are going to begin to realize that something has gone wrong. Their houses will be falling in price - while their debts are greater than ever. They will realize that they have been bamboozled. And someday, a politician will begin to speak for these people. He will not tell them that they have been fools. Instead, he'll explain that they have been betrayed by their leaders... swindled by Wall Street... conned by corporate CEO's and flim-flammed by Republicans and Democrats. - Bill Bonner
Americans keep refinancing and re-mortgaging. Why? There really is only one answer: Desperation. Freddie Mac informs all those who dare to look that 90% of its refinanced loans resulted in new balances at least 5% higher than the previous loan. - Max Fraad Wolff
Housing is not the only area of heavy risk-taking. It just appears to be the most vulnerable. A Great Disconnect between the real economy and the speculative financial world has existed since the late 1990s. It's been fed by mountains of liquidity sloshing around the world, expectations of and demands for oversized investment returns, and low volatility, all of which have encouraged risk taking. Anticipated stock volatility remains at rock bottom. Spreads between yields on junk bonds and Treasurys are tiny as ample financing and loose lending keep corporate defaults at record lows. The huge gap between speculative financial markets and economic reality has persisted for a decade. It will probably be closed with many tears in the next recession, only adding to its depth. - Gary Shilling
As the housing market recovers from its correction, existing home sales should be rising gradually during 2007 - it looks like we may have reached the low point for the current cycle in September. We've entered a more sustainable period of home sales now, and we expect greater support for prices over time as inventory levels are eventually drawn down. - David Lereah [Chief Economist, National Association of Realtors. Nick's comment: Not likely. Classic case of: Don't dis your employer.]
Basically, zero-down, non-recourse mortgages give borrowers a free put option should real estate prices decline. The bigger the drop, the more incentive there is to exercise. Rather than throwing good money after bad, borrowers could simply return their overpriced houses back to their lenders and buy one of their neighbors' deeply-discounted foreclosures instead. - Peter Schiff
If the housing market continues to slump, as I expect it to, there's a decent chance the Fed will panic. Remember, these guys are the worldwide champions of easy money - they throw cash at any financial problem that comes along. I don't expect things to be any different in the New Year. - Mike Larson
With a lot of talk in press releases about homebuilders scraping along the bottom, investors would be well advised to emulate the sector's corporate insiders and stay away. Indeed while key homebuilders have rallied since mid-July, corporate insiders have purchased but 100 shares, total. The insider selling, while not overwhelming, has been significant in some cases. The rally has been fueled by institutional purchases netting almost 18 million shares using other people's money, and in many cases this buying has resulted in significant increases in institutional holdings of individual homebuilder stocks. - Martin Goldberg
Attitudes can only go so far before they reverse course. When consumers were camping out overnight to buy condos and knocking on strangers' doors and getting into bidding wars to buy houses, that trend was bound to reverse. With negative savings rates for 18 consecutive months that trend is bound to reverse. The belief that nothing can shatter US consumer spending habits will be the next bubble to burst. Given that consumer spending is 75% of the economy, a massive reversal in consumer and lending psychology spells trouble for the economy regardless of what the Fed does. That reversal is at hand. - Mike Shedlock
In one sense.... the Federal Reserve's money printing press is greased and oiled to ward off a collapse in prices today. Yet, to save the housing market by inflating credit is a remedy for a specific problem that would cause a general epidemic. The Fed has no control over the direction of credit flows. Should the current rate of credit growth spill into consumer prices, $50 hamburgers will create a bull market in Ramen Pride. It is doubtful the unnerving private equity flows today would exist if not for current Fed efforts to resurrect the moribund housing market. If the authorities accelerate this vain effort, the credit inflation will chase things and Spam will be served for Thanksgiving dinner. - Frederick J. Sheehan
Look, folks, there's no inflation! Can you believe it? What's even better is that the cost of energy went down 3.8% in the past 12 months! Now we can really tool around in our gas guzzlers.... By the way, if you can access the table in the BLS report, you can see just how much the cost of fuel has (supposedly) gone down in the last 3 months (-7.2% in September, -7.0% in October and -0.2% in November). Now, let me see... gasoline cost about $2.35 per gallon in August, so if we use the BLS calculations, we should be paying less than $2.00 a gallon now. Hmmm. The price of gasoline next door is, umm, err, ...drumroll, please...$2.35 a gallon. - Tony Cherniawski
Anyone who believes anything the government says about inflation is a fool. - Tim Iacono
How can inflation sometimes affect financial assets and other times mostly consumer prices? The particulars depend on where and how the new money enters the system, and most importantly, what the initial recipients spend it on. As the initial recipients (the banks, the creators of new "out of thin air" money, the big brokers and hedge funds) find themselves with a surplus of cash relative to their needs and since they don't consume, they will bid for financial assets (bonds) which, the sellers of those assets, the government, will supply as much of as is wanted. In this way, monetary expansion will affect some prices more than others. For example, during inflation, the relative price of apples in terms of oranges might no longer be 1:2, the apple might now cost $2 and the orange $6, a ratio of 1:3. Price ratios are not stable under inflation. However, suppose that instead of comparing apples to oranges, we compare apples to the DJII. If apples cost $1 and the DJII is 5,000, and then money is created and used by the initial recipients to buy stocks, the apple may still cost $1, while the DJII becomes 10,000. That is a financial disaster just waiting to explode. - Aubie Baltin
Alan Greenspan has always been wrong when it mattered. - Frederick J. Sheehan
To be a policymaker today you don't have to know anything. All it takes is a teary-eyed concern for a suffering planet and sacrificial victims like rich folk or Jews to placate an angry Gaia. Placebos are preferred to real solutions, since the political climber imagines that an ongoing crisis will clear his way to Olympus. Let's see how high the budget deficits will go. The sky is the limit, until the sky begins to fall. And let's see which political party is eager to commit suicide by taking away all the entitlements and benefits with the suggestion that "the people" take responsibility for themselves. To say there is a solution for a system so predicated would be, in plain truth, to utter an imbecility. We live well today, for the moment, because centuries of freedom are propelling us from behind. So what is the solution for the young idealist sent to Congress by an electoral fluke? Like any condemned man there is only the option of a blindfold.... Things are going to get very nasty before they get better. And don't expect a political leader to say anything truthful about the situation until our illusions are thoroughly extinguished. - Jeffrey R. Nyquist
American Empire (and economy) is already bankrupt. The only thing is few (so far) know it. - Carmelo Amenta
HMOs and managed care were doomed to fail. When "for-profit" corporations offer potentially unlimited services for a flat fee (plus the usual co-pays) they reach a point where the only way they can make money is to withhold care. Managed care, in our opinion, was and is a cruel experiment on America's patients which provided Wall Street opportunists and non-medically-trained corporate presidents and officers with immoral obscene profits while the sick, elderly, disabled and mentally ill suffered. Ironically, corporate-run managed care has been around just long enough for its lethal genes to rise up and destroy itself. We should never again allow such a deadly experiment with patients as guinea pigs. - Michael Arnold Glueck III, M.D.
Western Europe is now subservient to Russia on a scale unimaginable in the days of the cold war. Even Tony Blair, toughest of the tough, bravest of the brave, cannot bring himself to confront Russia seriously about the murder of a political refugee with official refugee status on British soil by Russian secret police. The UK needs Russian gas too much to openly fight with Russia about this grave insult to British dignity and law. If Tony Blair can't stand up to Putin, no one in Europe can. Russia now calls the shots from Warsaw to Madrid. Everyone is worrying like mad about the Moslems taking over Europe. It may well be that Russia has beaten them to the punch. Europe is now in chains of oil and gas, marked "Made in Putin's Russia." NATO is meaningless. The pride of France and Germany and Italy is in vain. Energy trumps all else, and Putin sure looks like he has won a very, very big prize. Someone, please tell me I am wrong. I don't even dare to want to be right about this. - Ben Stein
In case you haven't guessed, I have never made it any secret that I despise the Supreme Court, in that they are the arrogant idiots that, to this day, persist in saying that the Constitution does not say that our money has to be silver and gold, as it clearly does, which we can prove because we know WHY such a requirement was put in there in the first place; to prevent the inflation that we now have, so that it wouldn't kill the economy and the country, which it now has: The economic movement you are seeing is only the death-throes of a cancerous, bloated, dysfunctional and idiotic economy. So, the Supreme Court killed America. It's as simple as that. - Richard Daughty
The fact of the matter though is that unlike the Wall Street big-shot, the average Joe is not in good shape. He
is already loaded down with debt, has little or no savings, and is utilizing all of his available labor. Unlike the
'70s, there is no house wife or house dad to send off to work to pick up the slack for rising expenses. That is
the reality and there is a massive disconnect between how Wall Street perceives this reality and how Main
Street is living it. - Andy Sutton
Systemic risk is back as ugly as ever, with about 2-in
3 odds that a systemic failure can occur at any
time.Up to the time a systemic failure occurs (if it
does), with the collapsing housing bubble really
beginning to "bite" and impacting corporate
earnings, I see a return of the bear market, beginning
any time now, with a long-term top in place about
now. Then I see stocks drifting lower into the spring,
with a secondary (likely lower, but could be a shade
higher) top in March to May (March most likely).
Thereafter, I still expect this to be followed by a more
substantial decline in the summer and fall.
A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $108,946.83 (see below)
Increase: $8,946.83 [+8.95%]
COMMENT on "Inheritance": In anticipation of the Federal Reserve's lowering of short-term interest rates to offset the deflating housing bubble, and in search of higher yields or yields I expect to remain stable as short-term interest rates decline, I have committed more of the portfolio's cash hoard to energy stocks, and particularly to additional Canadian income trusts.
Enerplus is a well-run Canadian trust with an energy portfolio about equally balanced between oil and natural gas. Tortoise North American is essentially a closed-end fund of royalty trusts, both Canadian and U.S. It has the advantage of being able to invest in privately-held energy master limited partnerships and convert their income stream to qualified dividends. This (hopefully) justifies their 1% management fee.
Precision Drilling is perhaps the riskiest of my new investments, as it is more closely tied to the economic cycle. Should a severe recession arrive, energy use will decline some, but the search for new energy sources might decline precipitously, and the number of oil- and gas-drilling rigs in use (Precision's business) might plunge. But so far (in my opinion) we've been in a mild recession for awhile, and there's no sign that the demand for Canadian drilling rigs will sink substantially. Precision is a well-run company in a highly-competitive environment, and its cash flow generously covers the monthly distributions.
I also took advantage of a softening in the price of gold to add a few more shares of Gold Miners ETF.
My search for income-producing stocks has turned up many companies in areas other than energy, but they would (will) all be severely impacted by the popping of the housing bubble. No thanks.
The portfolio cost (normalized) is $108,800.96 with $54,424.61 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $20,210.86
Increase: $9,511.86 [+88.90%]
COMMENT on "PIG": I continue to "roll over" 3-month T-bills, one per month.
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $28,776.19
Present value: $35,454.91
Increase: $ 6,678.72 [+23.21%]
COMMENT on Roth IRAs: There is no change from the last issue.
D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity non-individual-stocks retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 55.56%; T-bills and money-markets, 23.90%; TIAA-CREF inflation-indexed bonds (retirement), 16.23%; TIAA real estate, 4.28%; TIAA-CREF High-Yield II, 0.03%
TIAA-CREF values, 17Jan2007: stock, 244.14; equity-index, 96.29; MM, 23.79; bond, 79.48; inflation-indexed bond, 46.08; real estate, 275.11; TIAA current yield in SRA, about 4.82%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of July 25, 2006.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal given January 12, 2007 (but the more sensitive 10% exponential is a SELL, so caution is warranted).
NEXT ISSUE - will appear around the end of February 2007.