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
1. People are stupid - they believe they are (or will be) richer than they really are, and therefore don't need to save for the proverbial rainy day.
2. People are much worse off than we've been led to believe, and must draw on their savings to survive.
I have a problem with thesis #1. Individuals can be savings-averse, but collectively people tend to do what's needed to insure their long-term survival.
So what is causing people to dissave? A look at a few graphs is enlightening. The first, above, shows individuals' savings rate declining from the area of about 10% of income in the 1970s and early 1980s to the below-zero rate of the past two years.
What was different about the 1970s? First, it was a period of a generally sick stock market (1969 to 1982), so investing in stocks was not thought of as a good way to accumulate money. Second, while it was a period of high inflation, real interest rates for most of the period (except, perhaps, for the late 1970s) were positive.... and especially so in the early 1980s. Third, the 1970s were a period of interest-rate deregulation.... money-market funds sprang up to compete with the capped yields of banks, which ceilings were eventually abolished, and people responded by taking advantage of the higher rates.
The savings rate remained relatively high through the 1980s, even during the general disinflationary tenor of the times, because real interest rates remained strongly positive in spite of the decline of nominal rates. This was also (since August 1982) the time the stock market reawakened and began to attract the savings dollar.
About 1993 (in my opinion) stocks entered their period of persistent overvaluation which has continued to this day. Also about 1993, the savings rate dipped below 5%, plunging toward and into negative territory as serial bubble blower Alan Greenspan first fed the 1995-2000 stock bubble, then the 2001-2006 housing bubble. On the face of it, people might not feel the need to save more if the government is going to puff up the value of assets (stocks and houses) they already own, and if they have good reason to believe the government will strive to keep those values puffed up. This is a variation of thesis #1 - people aren't exactly stupid, but thanks to government intervention they have definitely lost respect for risk.... linear projection at work, they think the future will bring exactly the same results we've seen for the past twenty years.
As tempting as this variation of thesis #1 can be, I don't think it tells the full story. Take a look at the chart below, from John Williams' "Shadow Government Statistics":
The top (blue, if you're viewing this in color) line in the graph shows what the cost of living would be if it were measured more reliably, following the methods the Bureau of Labor Statistics econometricians used back in the 1980s, before the bureaucrats began to introduce their little hedonic statistical lies in the CPI during the Clinton administration.
As you can see, the "real" cost of living for the current decade has consistently been about 3% higher than the government's official CPI lie. This about matches my "gut feel" for the true annual increases in the cost of living, and no doubt many other people (if not most others) have the same gut feeling.
Don't forget that the government has an enormous incentive to understate the true cost of living, because tax brackets and benefits are indexed to what it claims inflation to be. The more it collects in taxes, and the fewer dollars it pays in benefits, the more money is available with which to buy votes or to misspend on useless projects.
My wife recently received a "cost of living" increase for her state teacher's pension. Well, that's what the politicians call it; in reality, it is an increase set by the Massachusetts legislature, and indexed to nothing, on the first $15,000 of a pensioner's income, in years when the wind is blowing in the right direction and the legislators are all in a jolly good mood. The increase in the health insurance premium cut in at the same time, so in reality my wife's monthly check actually went down.
What an insult. When the cost of a single necessary expense eats up a so-called "cost-of-living" increase, leaving nothing for the increased costs of eating, driving, heating or cooling the home, taxes or the other things the government apparently feels we can live without.... "CPI" is clearly a misnomer. It should be called the MFP Index, meaning "middle finger from politicians".
OK, returning to the subject.... if the true annual cost of living for this decade is indeed 3% higher than the officially-published figures, it follows that since about mid-2000 real interest rates have been negative, and were grossly negative in mid-2003 when the Fed forced short-term rates well below 2%. Might this explain the savings-rate plunge about the same time? I would think so. People don't want to lose real money in supposedly "safe" investments; they naturally will seek out positive rates of return (even if only from asset price appreciation).
It also becomes clear that the decade's low rates of return and disguised real cost of living have actually subsidized the housing bubble. Borrow essentially "free" money, then put it into a home where its worth increases (one hopes) well above the true increase in the cost of living. Why not?
Returning to thesis #1, we can see that (collectively) people are not stupid.... they are behaving as rational economic beings and (for those that have it) putting their money.... "saving" it, if you will.... in places where it is not measured by the government's definition of saving but where it might be better protected against the misdeeds of the ruling elite - however, as I mentioned earlier, at an increased risk which they don't perceive.
Even though thesis #1 may be mostly right, I still don't think we have the full story here.... we need to look at thesis #2, which is that people are becoming progressively worse off.
Returning to shadow government statistics, it follows that if the CPI ....er, sorry, MFP.... understates the real cost of living by 3%, then the gross domestic product is consequently overstated by about 3%. Indeed, John Williams has a chart (shown below) which illustrates this exactly:
As you can see from the chart, in reality the economy went into recession in mid-2000 and, except for a brief reprieve in the first half of 2004, has been there since. If you think, as I do, that this corresponds more closely to what you feel in your gut.... that 2000 was a watershed year, and the times have been getting progressively tougher since.... then of course you recognize that the government's "official" figures of economic growth are just so much re-election propaganda. (The supposed 0.6% GDP growth for the first quarter of 2007, a figure just barely above recession levels, is in fact a 2.4% GDP decline in an ongoing seven-year recession.)
The corollary to this negative growth is, of course, the decline in personal incomes. Wage growth after inflation adjustment has supposedly been flat for the past decade; in reality, people are becoming 3% poorer every year; and stock-market investors [thinking now, primarily, of people in index funds in their IRAs, 401(k)s and 403(b)s] who believe they finally broke even this spring after seven long years have, in reality, lost a third of their capital. Individuals may not notice this poverty effect in wages as they are promoted, or in assets as they systematically add to their retirement kitties; but on an "average" basis for the entire US population, the poverty overhang is there.
In 1989, after Japanese government officials deliberately popped that country's stock and debt bubbles, a period of "price destruction" (gentle deflation) ensued. Our Fed has been more successful in fighting the demons of deflation (a psychological phenomenon), but something had to give; in our case, we have wage destruction afflicting us. (Asset deflation still lies mostly ahead of us.)
So, why is it that people don't save? Answer: They can't afford it. I postulated two (supposedly conflicting) theses for this dissaving. If you're in the financial services industries and you're first in line to receive the newly-minted Fed money and to skim off your vigorish as it's passed down the line, then thesis #1 applies to you.... you put your savings, as best you can, out of reach of the true rate of inflation. If you're further down the line and receiving only the leftover crumbs of money, then thesis #2 applies to you.... you are becoming progressively poorer.
Two theses, and both are (mostly) correct. How
depressing.... especially for the future of our country,
and for future generations.
A friend of mine in the finance industry claimed that credit derivatives have been instrumental in avoiding a bigger collapse in the recent subprime loan crisis. This may be true but they probably helped create it in the first place. A bank loan officer is likely to exercise less than due diligence in assessing a borrower's capacity to repay when he is not bearing the risk. But the problem with credit derivatives is more than just moral hazard.
Bearing in mind that a credit derivative is essentially a default insurance policy, I was reminded of the reinsurance spiral of the late 80s/early 90s which nearly brought down Lloyd's of London. In that curious incident a group of reinsurance consortiums tried to spread their risks by trading them on the London excess of loss (LMX) reinsurance market. What they didn't realize was that through cyclic deals they were buying back their own risks at a premium. When a few disasters hit (Piper Alpha oil platform fire, Exxon Valdez) and Lloyd's turned to their reinsurers they found their claims looping back to them without any real reserves backing them. Instead of spreading the risks they were concentrating and amplifying them.
Could this be happening today in the credit derivatives market? With a market full of big opaque hedge funds (and hedge funds of funds) there is no way to tell who is really holding which risks, whether such loops exist and to what extent. And remember that the LMX reinsurance spiral was not geared at high leverage ratios. The same thing might be happening in the weather derivatives market. Corporations could be indirectly investing in the catastrophe bonds backing the insurance of their own assets, leading to uncovered true risk. The very word "derivative" should remind us that this is not a statistically independent risk - it is derived from something else.
How many holders of these instruments realize they are playing at being an insurance company? How many of them fully understand the implications?
Exactly so.... as I have pointed out before, it's mathematically impossible to reduce overall risk with derivatives, so to the extent that risks undertaken by individual entities are reduced, overall systemic risk increases. Because the derivatives markets are so complex and nobody really knows who has promised what to whom (it's all buried somewhere in their computers), it's possible for looping-back to occur. (A single organization's computer systems can be programmed to detect such recursion, but generally it can't be detected in more complex structures where multiple organizations' computers talk to each other.)
The majority of derivatives entered into today are essentially interest-rate bets.... or perhaps more accurately, attempts to insure against undesired shifts in interest rates. It's entirely possible that banks and hedge funds have circular derivatives and have made the same mistake that Lloyd's did in the previous decade in attempting to diffuse risk. In a crisis they may find that they have only insured themselves, with no independent backing for the assets they attempted to insure, while having paid a considerable premium for this "privilege" all the way down the derivatives food chain.
We may well find out the next time one of these
creatures blows up.
People talk incessantly about the success of their manufacturing sector, but don't often focus on the fact that the vast majority of Chinese businesses are very unprofitable, and are held up by rolled-over bad loans. Also, even the profitable manufacturing businesses are facing cutthroat competition between each other. In spite of the fact that China has an exploding manufacturing boom, profit margins are extremely slim. - Christopher Laird
China had a.... first-hand experience with hyperinflation in 1949; more than anything else, it brought the present (Communist) government into power. With that heritage, China is going to err on the side of tightness. In fact, the country is using all three major monetary tools, open market operations, raising discount rates, and raising reserve requirements in a concerted effort to cool down its economy. Such a confluence of policies is seldom seen in the western world.... I believe that China is setting a massive tightening of the global money supply in progress, and that this tightening could soon be followed by a global depression. Either event may happen or ultimately fail to happen. But in either case, it is basically out of America's control. Like a lot of other goods that Americans now import, the modern 1929 (or a somewhat better outcome) will have been "Made in China." - Thomas P. Au
Obviously the revelry cannot continue forever, even if we lack the imagination to see when and how it might end. We are witnessing nothing less than Tulipmania on a global scale, and trying to reckon the looming catastrophe in dollar terms requires visualizing a string of zeros that stretches beyond human understanding and experience. But even if we cannot know what the future holds, we sense deeply in our bones that this epochal swelling of folly and greed cannot end other than badly. - Rick Ackerman The market is living in a low-probability world that assumes a benign soft landing in the economy, a stimulative second-half Fed rate cut and continued economic strength from the rest of the globe. While possible, we think the odds of this favorable outcome are low. First, if history is any guide a hard landing or recession is highly probable. In the past recessions have occurred under the following circumstances: 1) Whenever GDP growth was below 3% annualized for 5 consecutive quarters; 2) When the Fed tightened monetary policy (8 of the last 10 times); 3) When the yield curve was inverted (6 of the last 7 times); 4) When the Conference Board Leading Indicators were 0.5% or more below a year earlier (9 of the last 10 times); 5) When new building permits were 25% or more below a year earlier (7 of the last 9 times); 6) Whenever payroll employment growth dropped to 1.4% over a year earlier. All of the above has now occurred. On the other hand the consensus of economists has never predicted a recession in advance - NEVER. Although anything can happen in the world of economics and financial markets, we would rather go along with a group of indicators with a high probability of being correct than with a group that has never gotten it right. - Charlie Minter
I cannot shake this nagging feeling that the most important idea for folks to consider before the coming dislocation hits, whenever it hits, is that it will be necessary to have some liquidity, even if that liquidity is held in a crummy currency like the dollar. I am more convinced than ever that the amount of leverage being held at the institutional, hedge-fund, individual and corporate levels is, while not directly ascertainable, extremely high. In fact, I think the overall financial risks are far higher than I ever imagined they could be. Consequently, I no longer believe it's possible to determine in advance just what asset classes might be safe in a financial dislocation, as so many of them have become so intertwined, while at the same time we can't know how leveraged any of the underlying positions may be. Thus, when liquidation occurs one of these days, absurd developments may unfold that you might like to take advantage of. But one must have some flexibility -- liquidity -- to do that. - Bill Fleckenstein
Some economic historians blame rising interest rates into 1929 for the crash that ensued. Those who do must acknowledge that the Fed's interest rate today is at almost exactly the same level it was then, having risen steadily - and in fact way more in percentage terms - since 2003. So even on this score the setup is the same as it was 1929. Remember also that in 1926 the Florida land boom collapsed. In the current cycle, house prices nationwide topped out in 2005, two years ago. So maybe it's 1928 now instead of 1929. But that's a small quibble compared to the erroneous idea that we are enjoying a perpetually inflationary goldilocks economy with perpetually rising investment prices.... I see no way out of the current extreme in credit issuance aside from the classic way: a debt implosion. Nevertheless, we must also recognize the fact that the market is a dynamic system.... Optimism and pessimism are not bounded. So hedge funds could go to 3x leverage, or 5x, or 100x. Total dollar-denominated debt could go to $50t., or $60t., or $400t. And the Dow could go to 20,000. But further credit expansion would merely mean postponement of the implosion, not negation. The size of the bubble will simply relate to the size of the collapse. - Bob Prechter
The financial markets that we have constructed are now so complex, and the speed of transactions so fast that apparently isolated actions and even minor events can have catastrophic consequences.... The odds are pretty high that we'll see other dislocations that match the type of turmoil we saw with the crash in 1987 and with the LTCM crisis. Any one derivative, with some exceptions, may be easy to track. But by the time you layer a lot of them one on top of the other, it becomes increasingly complex, so a small, unexpected event can propagate in surprising and nonlinear ways -- and there's no way to anticipate all these possible events. - Richard Bookstaber [author, A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation]
The trouble with pyramid schemes is that they're not designed to go in reverse. Eventually, the number of willing dupes is exhausted. The same people who panicked late to get into the game are just as likely to panic when the music stops. The longer the music plays, the more leveraged and unstable the inverted credit pyramid becomes. - Kevin Duffy
There has been a large disconnect between the financial markets - buoyed by the money flows and merger activity - and the "real" economy, hurt by slowing real estate and higher energy/food prices. The common belief is that the markets will eventually reflect the poor economy and begin going down. However, we believe that the markets will actually continue their rise until "something financial" disturbs the markets enough to react.... The danger in the markets is not that the economy slows - it already is (and many argue already in recession), but the risks are that the hiding place will be short-term money - so the great sucking sound investors are likely to hear will be the liquidation of investments ACROSS asset classes. - Paul Nolte
This is a speculative credit bubble right from the history books. As real estate investors have recently found out, when credit disappears so do price gains. Hedge funds will also find that leverage works just as well in reverse. Much like investors who bought stocks at speculative tops in 1929, 1966, and 2000, inflation adjusted value will not be recovered for at least 20 years. - Paul Lamont
Let's get one thing straight -- the banks as businesses are about to fall off of the proverbial cliff. - Brian Pretti
The supplies of most of the world's fiat currencies are now growing rapidly (the supplies of US dollars, euros, Australian dollars, Canadian dollars and British Pounds have expanded by 11%-14% over the past 12 months). Trying to pick the strongest of this group of currencies is therefore like trying to pick the smartest of a bunch of village idiots. - Steve Saville
REAL interest rates are nowhere near tight; in fact in REAL terms they are still quite NEGATIVE. The banks are still paying you to continue to borrow. They can't withdraw the stimulus of money and credit creation EVER. They can raise rates, but real rates will ALWAYS be below neutral, or they risk the implosion of the fiat monetary and credit systems they have implemented. Asset-backed wealth creation is here to stay. The reason the US and European yield curves are flat is because their economies have been STRUCTURALLY crippled in a process lasting over the last 50 years as creeping socialism and the welfare state have slowly but surely destroyed the capitalism and wealth creation that were once the bedrocks of these once great economic powers. The public servants and financial authorities have substituted money and credit creation for growth policies. - Ty Andros
Clearly, from a stock market point of view, there is nothing to be worried about. What slowdown? Recession? I spit on your recession! ....There has never been a recession without an accompanying serious bear market. It is tough to be sanguine about the near-term prospects for the stock market if you see a recession in the future. Stock market investors clearly must believe either that there will not be a recession or that for the first time the market will continue to rise. - John Mauldin
For those, like us, who "can't see the collective wisdom of the market," who think that things like debt, sharply falling retail sales, sharply falling housing sales, and wars with no end matter, we need to get over our worries and realize that the Dow is going up and that nothing else matters but... price. After all, the Dow is hitting all time highs, and if we missed out on its 13 percent, 1600 point rise over the last ten weeks, we must be fools. There's no time to ask questions - just fire the trader, manager, or newsletter that does not "get it," and move on. As in all credit-induced manias, at the end of the day the only thing that matters is recent - and I do mean recent - performance. - Doug Wakefield
If the assumption is correct that global liquidity is tightening - at least relatively - the asset markets that benefitted the most from surplus liquidity should come under some pressure. I am thinking here in particular of the extended emerging stock markets, which in this scenario could be vulnerable to corrections of between 20% and 40%. Tread lightly. - Marc Faber
I have suspected for a long time that government "intervention" or "participation" (or whatever you want to call it) in private asset markets is as high as it has ever been. The markets are just not acting "naturally" to me. They seem orchestrated in many ways. Why? With the levels of debt in the system (we have no historical reference), central banks must keep asset prices rising so that the debt doesn't look so bad on balance sheets. To keep the public and corporate sectors borrowing, they have to have rising collateral. Governments are becoming a larger part of the real economy with their debt creation. Free money means lower returns for everyone. One piece of evidence is something strange going on in option pricing. If governments are buying risky assets like stocks, they wouldn't buy individual stocks, they would buy indexes. Any rally in stock markets would be led by index buying, not from the bottom up where investors buy individual stocks because they see fundamentals improving. Option prices are saying that is exactly what is happening. - John Succo
The housing market is still slowing. Consumer spending is slowing. Overall inflation seems to be rising, which will make it difficult for the Fed to cut rates in what seems to be an ever-closer recession. Call me old fashioned, but this is not the environment that has been positive for the stock market in the past. Maybe things are different, and I am just missing it. And as for a recession, are we there yet? Maybe, or at least close enough that we should fasten our seatbelts in preparation for a landing. - John Mauldin
So even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized simply because the rating agencies have not changed their ratings.... Accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices. Actual prices where traders can really buy and sell is substantially lower than where investors are marking their positions. The levels at which investors are carrying the paper is not reflecting underlying reality as the holders simply hold their collective breath and the rating agencies ignore a worsening environment. I asked.... what would force the rating agencies to change their ratings and the response was "it's just a matter of time if the market continues to deteriorate, for the agencies at some point will be forced by the cumulative losses to acquiesce." Because these losses have been compressed, any re-adjusting of ratings by these agencies is likely to result in a massive repricing of risk. - John Succo
Fifty years ago, keeping your head above water meant saving a dollar.... But there's a new American generation... an entitlement class of children playing children's games... a generation weaned on the bottle of instant gratification. They've been told to expect more for less... they've been assured that it's OK to spend more than they make... because in the end, the government will be there to brace their fall. Unfortunately, mommy and daddy are broke. And so is Uncle Sam. But the American family keeps spending despite that the consumer savings rate for all of 2006 remained a negative 1%. The 2006 figure proudly surpassed the negative 0.4% savings rate in 2005. These two years produced the most reckless lack of savings since the negative 1.5% savings rate in 1933, during the Great Depression. So while most Americans woefully stare at double-digit APRs as they cut another check for the minimum monthly payment, the debt continues to rise. It won't be long before the notion of keeping your financial head above water will require more effort than signing your name on the back of yet another new credit card. - Christopher Hancock
It is estimated that every family in the United States has OVER $500,000 of obligations which they do not know they are on the hook for. These funded and unfunded government spending obligations now total over 70 trillion dollars, equivalent to five years of GDP, which currently is approximately 13 trillion dollars a year. Obviously these bills are unpayable; these obligations will have to be printed away, robbing the beneficiaries of these obligations of their value. - Ty Andros
The officially reported governmental statistics fail to note that a very high percentage of new jobs created in the past few years were commission-only jobs, or jobs with independent contractor status. Workers categorized as independent contractors are not eligible for unemployment benefits. This means all of the real estate agents who haven't made a sale, along with the mortgage bankers who no longer have a company to bring their loans to, will not be filing for unemployment, even though they haven't made a dime. The Department of Labor Statistics, however, continues to view these unemployed and vastly under-employed workers as holding full- time jobs. - Richard Benson
The deteriorating economy is a process that has a long way to go, even though Wall Street tries to throw a party every day that bad news does not absolutely pummel it into submission. No amount of hedge-fund and LBO speculation is going to make the average consumer whole again. Thus, I continue to see no way forward other than a recession and, at some point, a dislocation in the stock market. Until the transient success of speculation comes to an end, I encourage folks to think about that ultimate unraveling -- making sure they can either explain to themselves why it is not very likely or, if they expect events to unfold as I do, have a plan for preparing and/or reacting. Finally, although it's impossible to predict the timing, I am certain of one thing: When this unsustainable environment finally ends in tears, people will ask, "How could we have known?" -- when all that would have been required was a little understanding of financial history. - Bill Fleckenstein
A few pessimistic economists are convinced that a devastating economic cataclysm lies ahead. They usually point to three threats that may have a serious impact on the American economy. There is the burgeoning tower of public and private debt resting on a foundation of greed and overindulgence. There are a multimillion dollar list of promises to a retirement system and a vast building of government guarantees and promises that are bound to be unkept. There even is a world of complex derivatives, the value of which depends on something else, such as stocks, bonds, futures, options, loans, and even promises. They all, according to these economists, will be the victims of the coming cataclysm. This economist, who has observed central bank policies since the 1950s, is in basic accord and feels sympathy for these pessimists.... But these pessimists tend to ignore the countless ruses, devices, and stratagems used by government officials and central bankers to hide the consequences of their policies. Long before there will be a financial Armageddon, there will be a myriad of government regulations, controls, edicts, and rulings that hide the consequences of monetary policies.... Given the public confusion and unfamiliarity with monetary policies and their consequences, a large majority of the public is likely to accept official explanations and welcome the regulators and controllers. - Hans Sennholz
Not many people noticed, but on May 17 the folks in Washington upped the country's national debt limit to $9.815 trillion. That's a whopping $1.635 trillion increase in less than three years. The U.S. was broke when the debt ceiling hit $7 trillion... it was broke when the limit was raised to $8.18 trillion... and things just keep getting worse. I've said it before and I'll say it again: As long as there is no gold standard - nothing and no one to hold back politicians from spending money and creating debt at will - then the value of the U.S. dollar will keep plummeting and inflation will keep rising. It doesn't matter who is in the White House. It doesn't matter who controls Congress. It doesn't even matter whether the economy is contracting or expanding. Those factors will only determine the degree, not the direction. - Larry Edelson
World wealth isn't growing, world DEBTS are growing and the place they are growing the fastest is the US which is the sole terminus of world trade at this point. The biggest growth industry today is selling debt instruments. The entire existence of hedge funds, for example, is to funnel profits from uneven trade with the US back into the US via dumping debts onto the backs of any corporations that can run up more debts! - Elaine Supkis
In fact, no one in Washington is even talking about renovating America's battered manufacturing sector. What do they care if we turn into a nation of busboys and bed-pan cleaners? ....The United States is handing over 1.5% of its national wealth every year to foreign investors while the American public continues to snooze away. We're having a giant garage sale and everything must go - roads, water, mineral rights, natural gas, etc. We're getting "picked clean" and no one seems to care. The boys in Washington and Wall Street don't work for you and me. They're destroying the currency and selling everything that isn't bolted to the floor. - Mike Whitney
Increasingly feisty, if not hostile, sheiks in the hotbed of the Middle East have become the last remaining pillar of USDollar support. If any prominent economist thirty years ago had taken the podium at a professional conference or political assembly and put forth a plan for the US economy to rest upon two pillars of credit supply, one being a printing press, that person would be condemned as a charlatan, a quack, a lunatic, a bird brain, an incompetent counselor hellbent on destroying the financial structure of the land where the beacon of freedom used to shine. Well, that is exactly what has happened, except this time, the process of flooding the system with phony fiat false money is hailed as a boon to investors, a solution to home foreclosures, and a source of tremendous profit for US corporations. - Jim Willie
Greenspan is a man who was wrong at every major turn. History will not treat him kindly. - Mike Shedlock
We are witnessing a generational bull market in gold and the end is nowhere in sight. Please remember that bull markets like these tend to end in euphoria/mania and needless to say we are far away from sentiment like that yet! The last time the gold market was hit by euphoria/mania was in 1980 when people were queuing in lines for the banks in Toronto in order to buy gold. It was during that time that 5% of all invested money was in gold and gold shares (versus less than 0.5% these days). Now that was mania, and we are nowhere near such sentiment these days. - Eric Hommelberg
The last time in history when huge quantities of gold were going into hiding occurred during the twilight of the Roman Empire. It was an ominous portent of bad tidings.... People were withdrawing gold coins from circulation. They declined to spend them hoping that saner and safer times would come.... these ancient hoards were forgotten and remained buried in the ground throughout the Dark Ages. Present day archaeologists still keep finding them fifteen hundred years later.... The fortunes of empires tend to be predicated by the fortunes of their currencies. - Antal Fekete
....the average American is spending over $8,000 per year or more on gasoline alone. If you do the math you will find that comes to almost one-fourth of the average yearly income of a single adult. This amounts to highway robbery on the grandest scale imaginable. The government constantly warns us of the so-called terrorist threat, yet the only place one ever sees hostages being taken is at the pumps.... the Bush regime is obviously obtaining massive funds for waging the Iraqi war from the major oil companies. In turn, the oil companies are extracting money from the retail end-user, namely you and me, to provide short-term servicing of this war debt. On top of that, the oil conglomerates will reap the further benefits of Middle East colonization as the rich plum of Iraq's oil falls into their collective lap. - Clif Droke [Nick's comment: Clif's been smokin' again. It may be obvious to him that the major oil companies are funding the Iraq war, but it's not obvious to me. Perhaps some reader can enlighten me on how this is being done.... I thought the war was being financed via the printing press.]
Mexico City's El Universal newspaper reported more than 1,000 people have been killed by organized crime
in the first five months of 2007.... Mexico has lost the drug war. Our neighbor to the south is officially a
narco-economy now. The gangsters and murderers wield more power than the federal government. They
operate with impunity. And they are taking this war across the border expanding their base of operations
and extending their killing fields. Where are the debates in our country about the instability of our Mexican
neighbor and what it portends for us? - Joseph Farah
Because everything financial is hedged and leveraged up the wazoo, when the herd groupthink shifts these adjustments can appear without warning and transpire very rapidly. I still think that there is likely to be a softening of interest rates generally in a "flight to safety" as the economy deteriorates.... but that doesn't mean we can't have these sudden and unexpected adjustments in the meantime.
Because it's summertime I don't expect much change in the stock market.... by late August, I anticipate stock prices will be about where they are right now. Meantime, at some point during the summer we will have a mild selloff (maybe another mini-failure) followed by the statistically-meaningless "summer rally". However, in the fall I expect a major stock selloff (except in natural resources) as the impact of the sinking economy really begins to bite.
With interest rates rising worldwide the risk of
systemic failure has increased slightly, to about 70%
odds.
A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:
SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $117,069.61 (see below)
Increase: $17,069.61 [+17.07%]
COMMENT on "Inheritance": As I mentioned in the May issue, on May 18 sold 50 shares of Maine and Maritimes, recapturing most of my original investment, and I am letting the profit ride as the remaining 50 shares. This speculation took about a year to work out; a management change, a refocusing of the company as a traditional utility (transmission of electricity), and the likely future resumption of dividends as the considerable cash flow is returned to shareholders, has caused the recent runup in the stock. Very interesting, as a year ago virtually everybody who followed this little company had given it up for dead.
Also, I have increased my holdings of the QQQ ultrashort ETF to 100 shares (in two separate transactions) in anticipation of the return of the bear and for some downside protection to the portfolio; and I also brought my holdings of the Gold Miners ETF up to 100 shares.
New to the portfolio this month are 50 shares of gold-miner Newmont Mining. This is not a tytpical purchase for me, as Newmont Mining is very blue chippy, 77% owned by institutions, and widely followed by analysts.... whereas I usually buy into dinky little outfits nobody ever heard of. So why, you may ask, did I buy some Newmont?
First, of course, was my interest in adding more gold exposure to my portfolio, and a large gold-mining company with assets spread around the world is less subject to political risk (as opposed to, say, EGI, whose prospects ride pretty much on a single Mongolian gold mine). Then somewhere I saw a writeup of Newmont with a really sick-looking chart showing the stock price headed right for the cellar. Of course, that dreadful chart immediately perked up my interest.
As a mature gold miner, Newmont must struggle to replace high-quality reserves. It also does not hedge its output, so the price of the stock is very dependent on the current price of gold. Earnings are off this year as the price of gold stagnates. Of course, everybody "knows" that the price of gold does not behave well during the warm months (in the northern hemisphere), so consequently this "knowledge" is also priced into the stock.
For the gazillion analysts who follow Newmont, the best rating I could find was "hold". Most have an outright "sell" on the stock - a rarity for the Street. Now, analysts can be right.... for awhile.... and they have been right about Newmont for the past six months to a year; it's been a real dog. But it seems to me most everybody's leaning toward one side of the boat here.... projecting the past linearly into the future usually does not work for any length of time, especially if it includes linearly projecting the price of gold to go nowhere for the indefinite future.
Because Newmont is in the S&P 500 index, a good part of the "float" is held by index funds which cannot sell (unless the stock is dropped from the index), leaving a much smaller supply to be chased after should the price of gold really take off. With the Federal Reserve (and the rest of the world's central banks) printing money with gay abandon, I expect the dollar price of gold to rise.... maybe not next week or month, but eventually.... and therefore the price of Newmont Mining shares to rise.... eventually, within a meaningful timeframe for me (like, before the Grim Reaper comes to collect me).
The portfolio cost (normalized) is $109,610.56 with $42,784.04 currently in cash or near-cash.
B. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $21,757.88
Increase: $11,058.88 [+103.36%]
COMMENT on "PIG": I continue to "roll over" 3-monthT-bills, one per month (except when I forget).
C. Roth IRAs - real portfolio:
SUMMARY - Roth IRAs:
Original cost: $30,046.19
Present value: $38,410.66
Increase: $ 8,364.47 [+28.84%]
COMMENT on Roth IRAs: As I mentioned in the last issue, on May 18 I bought 150 shares of Prospect Capital. A week later I added 55 more shares of PSEC, for a total of 205 shares. The stock has had a bit of a runup since; if it settles back I may add to the position.
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, 75.35%; T-bills and money-markets, 3.86%; TIAA-CREF inflation-indexed bonds (retirement), 16.39%; TIAA real estate, 2.02%; MLPs, 2.34%; TIAA CREF High-Yield II, 0.04%. As a matter of record, in my Fidelty non-Roth IRA I have added 50 shares to my position in Chenière Energy Partners.
TIAA-CREF values, 15Jun2007: stock, 267.45; equity-index, 103.79; MM, 24.26; bond, 79.61; inflation-indexed bond, 46.59; real estate, 290.80; TIAA current yield in SRA, about 4.82%. COMMENT on NYSE "Timer's Trend": We are currently on a BUY signal of June 15, 2007.
COMMENT on NASDAQ "Timer's Trend": We're on a BUY signal of June 15, 2007.
NEXT ISSUE - will likely appear in July 2007.