Karl Denninger is an extremely gifted investor, businessman and technologist. When he speaks about the economy I listen. His latest video issues a dire warning to Americans. I believe everything he has said is correct and aligns with projections I’ve made in the past. Please give his video a view and consider the implications of this irresponsible monetary policy.
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10Sep
Why are banks buying oil if they are not lending?
I would like to pose an important societal question to any banker that is willing to answer it:
Why are bankers increasingly hesitant to lend, even drawing back lines of credit, yet at the same time allocating a lot of funds in to commodities, especially oil?
Isn’t it true that oil and consumer consumption are closely correlated?
Are they seeing something that I am not or is this a bit of a logical paradox? How can the banks create the growth they need for their trade (or investment) to be profitable if they refuse to lend to those that would spend it on consumables?
There has to be more than just dollar weakness factored in to this equation.
09Sep
Credit problems linger in financial markets
There are no shortage of credit problems to navigate through with mortgages (both subprime and now prime), credit cards and commercial lending, potentially indicative of a deflationary credit squeeze for the everyday person who will no longer be able to borrow to buy everything based off their future earnings or assets. This contraction could also have very negative effects on small business growth and hiring, too.
It’s because consumers and small businesses account for the majority of the US economy that I think we are wise maintain a defensive posture as most of the multi-month rally’s asset allocation haven’t taken this matter in to focus yet. I believe we are well out of bounds of realistic equity valuations and the dollar is being sacrificed by the printing press of the Federal Reserve, Treasury and Congress to temporarily support financial markets.
Once this liquidity flood induced euphoria wears off there will be severe consequences to the US currency, bond and equity markets that most investors don’t seem to be aware of or have not positioned themselves for.
Sources:
http://market-ticker.denninger.net/uploads/KeyCharts/Credit-y-o-y-large.png
http://www.federalreserve.gov/releases/g19/Current/
http://econompicdata.blogspot.com/2009/09/consumer-credit-freefall.html
http://www.marketwatch.com/story/troubles-shift-to-prime-borrowers-wsj-2009-09-04
http://www.boston.com/realestate/news/blogs/renow/2009/09/mortgage_market.html
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0829660420090909
http://www.reuters.com/article/newsOne/idUSTRE58752720090908
01Sep
Where is the Japanese economy headed?
With deflation continuing despite long-term zero interest rate policy, how does the new Japanese government plan to expand its efforts to revive economic growth and lower unemployment?
Is this our future?
Japan paints a very sobering picture of what the future of the United States may be facing in the future should this loose monetary policy continue unabated. Zombie banks, real estate bubbles, deflation and stock market collapses are all themes very familiar to the Japanese economy in the 1990s.
Unfortunately the circumstances are all too similar here at home. Adding to that Japan also has a large aging population that will soon outnumber its workers, akin to the situation we face in the United States. All of these reasons and more are why it’s important to pay attention to where the Japanese economy is heading.
Severe economic routs have no easy cure
Every time a massive speculative bubble implodes it leaves behind a tremendous amount of credit destruction, which in turn absorbs liquidity and pressures equities, corporate bonds and derivatives like credit default swaps. All of these circumstances potentially create deflationary forces that can shrink the capital base of a country and even create a banking panic. After all, debt is money in many modern economies. As that monetary base shrinks each unit becomes more valuable.
Mitigating the risk of severe economic contraction requires an innovative and careful approach to the underlying cause with attention to stimulating the next catalyst. Green energy is one of many appropriate catalysts for a non-speculative sustainable global economic evolution. Others include technology, infrastructure, education and health system improvements.
Japan must lead or become obsolete
For many years Japan has enjoyed the status of second biggest economy in the world, but that status is quickly fading as Japan’s export-based economy contracts in the face of a global recession and slumping industrial production.
The new government in Japan has an opportunity to reverse policy mistakes of the previous ruling party and create a sustainable economic model that is more focused on durable growth rather than speculation. This would prove to be a model for the rest of Asia if Japan can take the lead.
If Japan’s economy can not evolve and take the next step forward, China and other neighbors will gobble up the industrial production for exports that was once taken for granted.
01Sep
Risk aversion increases in global markets
The Chinese sell-off seems to be spreading as US markets are experiencing profit taking bringing them below 1000 on the S&P 500 and leaving them oversold by many short term technical indicators.
What’s next?
My forecast isn’t too optimistic given the convergence of many different economic complications. I think that the risk remains very high that the market faces a significant correction given the irrationally optimistic rally we’ve experienced since the March apocalyptic head-fake.
Real world valuations simply don’t match stock prices and future profits are not going to come from anything more than further cost cutting. The picture being painted is anything but rosy.
Add to that a looming commercial real estate crisis, a bankrupt government and an FDIC that’s running out of insurance for depositors as banks continue to fail.
What happens when the next shoe drops?
Consider this: We’ve had a jobless recovery and everyone is optimistic. People feel like the worst is behind us, yet unemployment remains remarkably high. Then, the unexpected. Another economic meltdown.
If we were to go in to a downward economic cycle and reenter recession here after this artificially orchestrated ‘recovery’ the devastation would be deep and pronounced. Unemployment could rise exponentially as commercial real estate implodes, forcing malls to shutter and tens of millions of Americans out of work.
The materialism capital of the world
The United States has 600% more malls than any other country on Earth. Our economy is very consumer driven, yet right now the consumer is so leveraged in to debt they can’t afford to spend much. This is a broken and unsustainable model that will continue to eat away at our economic core until we see a more sustainable (and modest) implementation of capitalism.
Because the economy is consumer driven and because consumers can not spend we have a conundrum that bank bail outs can not solve. How do you engender an era of confident spending by selling off the average consumer’s future with gigantic amounts of debt that in no way benefits the debt holder? Certainly there has to be a better way.
The real crisis is coming
It is my opinion that we have yet to experience the true crisis that will manifest out of the past few decades of reckless unimaginable greed. No amount of reflationary policy can adequately combat the implosion of credit capital that has drained liquidity and forcibly deleveraged the global financial system.
The only success the government can claim here is that they have temporarily staved off this crisis by sacrificing the fiscal solvency of the Treasury. Ultimately the United States is the most indebted country across its respective private citizens, corporations and governments. This national debt costs the country $500,000,000 per day in interest.
The national debt is largely owned by foreign countries like China, Japan, UK, Russia, Saudi Arabia and others. Does this sound like a sustainable plan for the future of our country? Can we truly continue to borrow our way out of crises we’ve created by ignoring our looming debt and anything resembling fiscal responsibility?