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16Aug

Konnichiwa! Welcome to Japan 2.0

Alex Bonds, Economy 0 comment

The 30 year US Treasury bond is below 4%, the 10 year US Treasury bond is below 3% and the 5 year US treasury bond is below 2%.  All incredibly low yields that are indicative of a major flight to safe haven assets (along with gold’s continued move upwards), no confidence in equities and lower interest rates across the board for savers.

This is a clear indication of deflation taking hold and it is a very dangerous sign for other asset classes, such as stocks, real estate, commodities and junk bonds.

The present situation is quite familiar.  Just look East to Japan and you’ll find the same deflationary winds have been blowing for close to 20 years now.  Easy money zero interest rate policy, a habit of hiding bad bank assets and an economy in decline after a massive real estate implosion all facilitated incredibly low bond yields.  Japan’s debt to GDP ratio is now 200%, and as the US ramps up its debt in response to our ailing economy the question becomes, “Why are we embarking down the same path of self-destruction?”

We are becoming Japan 2.0.  A once prosperous industrial economy that is attempting to stave off depression with shortsighted economic policy that amounts to nothing more than “kicking the can down the road” or pushing off our problems in to the future and by doing so making the problems we face larger and more threatening.  The only way out is to stop hiding our bad debt, start forcing insolvent institutions to close and let free market capitalism work (that is to say, let the bankrupt go bankrupt rather than having the tax payers’ foot the bill for their mistakes).

Otherwise we face many lost decades as a result of our policy makers’ reckless disregard for the future.

01Aug

China growth continues to slow

Alex Business, Economy 0 comment

This is a good trend for the environment and a bad one for the global economy. China is showing signs that world consumption is easing and as such their manufacturing sector is feeling the blow.

On top of that when one examines the Chinese GDP, construction is over half of the entire domestic economy and the government is funding construction projects for vast cities that have no occupants.

By next year the Chinese debt will be 96% of their GDP. Something tells me Jim Chanos was right when he said China is a much worse bubble than Dubai

28Jul

Wall Street “reform” blocks SEC FoIA requests

Alex Economy, Legislation, Stocks 0 comment

Not only is this beyond ridiculous pandering to Wall Street, but it illustrates to whom our government serves. No Freedom of Information Act disclosures from the SEC after the new “reform” law. No press coverage of future scandals with what should be public information. We fund these entities continued existence through the public’s money and yet we have no right to see what they have done wrong?

26Jul

Geithner continues to deny economic reality

Alex Economy 0 comment

US Treasury Secretary Timothy Geithner dismissed fears of a double dip recession in an interview aired Sunday, but warned of a slow US recovery with the economy only gradually gaining strength.

Geithner was asked on NBC’s “Meet the Press” whether he thought the economy would dip back into recession before things got better.

“No, I don’t,” he answered.

What our Treasury Secretary is truly rejecting is reality. The economy has never been more fragile than it is today. All of the risk that existed in the private sector has been effectively transferred to the balance sheet of the US Treasury, Federal Reserve, Fannie Mae and Freddie Mac without fixing any of the underlying structural economic imbalances. Not only is a double dip likely, but at this stage it seems unavoidable.

Whether or not our leadership and central bankers publicly acknowledge this fact is irrelevant. The math speaks for itself. Near 10% U3 unemployment (close to 20% U6), deflationary pressures on credit markets, a tremendous overhang of real estate as defaults and foreclosures increase and a lack of any economic catalyst to revitalize our economy. This doesn’t even begin to mention the tremendous amount of debt the US government has taken on in order to facilitate the latest disastrous spending binge of stimulus, tax cuts and other measures that have proven costly and for the most part ineffective.

Running the US economy as though it were an enormous Ponzi scheme, much how George W. Bush ran it and Barack H. Obama continues to run it is not sustainable. Kicking the can down the road with band aid fixes on what has now become an ax wound is no longer effective. Domestic consumers account for 70% of US GDP and they simply don’t have the money to spend to keep it afloat.

04Jul

There is no economic recovery

Alex Economy, Finance, Stocks 0 comment

The economy has not been saved from disaster with zero percent interest rates, bank bailouts, stimulus or tax breaks.  In fact, some economists and market speculators have argued that these measures made the economic crisis much costlier and protracted its eventual resolution.  We are experiencing major asset deflation.  It’s spreading across just about every investment class, from real estate to stocks, higher yielding currencies, riskier bonds and most commodities.

Don’t believe the hype

The degree of naivety necessary for our policy makers at the Fed at at the congress to believe that creating more debt to solve a debt-based crisis is only exceeded by that which we as a population are engaged in to believe that BP is actually capable of cleaning up this spill or at this point even addressing the leaking well.

It’s necessary to look beyond the nonsense being reported through the mainstream news outlets and see the situation for what it really is:

  1. We have a tremendous amount of debt, close to 100% of GDP if you aren’t counting the outstanding liabilities of Fannie and Freddie, yet we’re continuing to spend more money borrowing against the future earnings of people who have not been born.
  2. Our banking system is grossly insolvent.  These companies have so many illiquid, worthless assets that are leveraged to the hilt that if they ever had to mark to any reasonable market valuation they would implode and bring down their counterparties.
  3. Unemployment is extremely high and the statistic is flawed because after someone stops receiving unemployment or if they are no longer looking for a job they are not counted.
  4. A lot of risk from the private sector has been transferred to our government and yet the private sector is still in terrible shape.
  5. The US has transformed from a industrial superpower to a consumption-oriented debt monster, which has, out of necessity transferred most of our industry overseas where cheaper labor, lower (if any) environmental standards and a dire lack of human rights prevail allowing products to be produced at an extreme discount.
  6. Our real estate market, about $20 trillion dollars in size, is continuing to experience a massive contraction.  The real loss of wealth has already been trillions and as that continues it will create significant losses in consumer spending, which accounts for 70% of the US economy.
  7. Housing numbers continue to disappoint, with May’s report being the worst in the statistic’s history.
  8. Small businesses, the largest engine of growth and hiring in the US have been largely ignored by the tax breaks and stimulus programs, causing massive layoffs and many companies shutting their doors.
  9. Let’s not forget that even FEMA acknowledges the BP disaster will cost trillions of dollars.  BP does not have trillions of dollars, so obviously that leaves us holding the bag.

The false recovery is over

After spending tens of trillions of dollars to save banks from themselves, record Wall Street bonuses, mergers that made banks a bigger risk than they ever were before and an incredible lobbying campaign to neuter Washington’s efforts to reign in the tail that wags the dog, we are seeing fractures in the supposed green shoots that were supposed to lead the way to a V-shaped recovery.

As we see deflationary pressures begin to take control of the markets once again, a new credit contraction looms.  One that again begins to wipe away asset value as a flight to safety resumes.  We’ve seen increasing strength in gold, US dollars and treasury bonds at the same time as an indication that a new panic is setting in.  Two year US treasury bonds set a new record low yield recently.

Derivatives are a ticking time bomb

The worldwide financial derivatives market is estimated at 600 trillion dollars, a mind boggling number (about ten times the world’s GDP). This should serve as a reminder of the funds required to keep this financial fraud going, a fraud that only sees the underlying real asset representing a fraction of this amount. What would the banksters in this derivatives game use to pay off their bets if things went sour?

If you guessed your hard earned money, then you are correct!  We’ve already seen it happen in the last few years and it’s prone to happen again.  If one were to attempt to coin a term for this it would be something along the lines of reverse Robin Hoodism, that is to say robbing from the poor to give to the rich.

Look towards Japan and Greece for answers

Japan is embroiled in a deflationary downward spiral triggered by a real estate crisis that occurred back in the 90s.  They never recovered because instead of acknowledging the problem and moving forward, their government and central bank did the opposite, allowing insolvent zombie banks to continue their existence, lowering interest rates and trying to outprint the amount of debt imploding.  Deja Vu?

Greece attempted to conceal a large amount of debt with the help of a familiar friend (or fiend if you prefer), Goldman Sachs.  It even worked long enough to get them in to the EU, but now that the problem has been exposed they have lost the confidence of their creditors.  Funny how creditors are the new masters and citizens are the new servants with governments merely acting as a proxy.  Debt peonage anyone?

U-turn necessary to avert cliff on the horizon

We must reverse course immediately before we drive in to disaster.  Reckless spending, corporate welfare, ineffective  stimulus and impotent economic policy are all forcing a void in our country’s future.  We are wasting time with measures that not only are completely ineffective, but they are creating a massive problem for all of us.

There is still time for us all to stand up and demand a fundamental change in direction.  Rather than spending, saving.  Instead of exporting jobs, keeping them at home.  Cut the demand for petroleum-based fuel by focusing more effort on domestic alternative energy sources.  Focus on restoring our natural resources and improving the environment rather than destroying it.  Stopping the de-industrialization of America and starting to compete again as a manufacturing superpower using renewable resources.  What we need is a vibrant, but sustainable economy that doesn’t experience the violent boom and bust cycles that promote poverty and currency value destruction.  It’s time to bring America back in to our hands.

17Jun

BP’s oil disaster and what’s next

Alex Economy, Energy, Stocks 1 comment

British Petroleum is in hot water, but it’s nothing like what they’ve done to our now 40% oil slicked Gulf.  Tony Hayward’s company has lost about 50% of its market capitalization or roughly $90 billion since the rig exploded and the violent gusher of a spill began.

Investors and money managers don’t even want to touch BP’s stock, unless it’s the sell (or short) button.  Adding to that the US government has negotiated with BP to limit their liability to $20 billion in an escrow fund apparently designated to help with spill clean-up efforts.

Rumor has it that BP’s own engineers as well as third party firms, such as Schlumberger, knew of the danger and warned the company’s executives only to be repeatedly shot down.  Schlumberger apparently even helo’d out its own engineers just prior to the explosion after they were convinced the rig and well were unsafe.

In other disasters like this in the past, such as the Gulf of Mexico spill in 1979, the only “fix” that worked to stop the gushing was to drill at least one relief well.  All of the other attempts to cap the well have not only been ineffective, but in some situations, such as the Top Kill attempt, have made the spill worse by widening the tear.

Currently BP is attempting to siphon off tens of thousands of barrels a day so they can burn the oil at sea in an attempt to buy time and slow criticism before they can get in to drill a relief well.   The irony is that the amount of oil that is being acknowledged as having spilled on a daily basis is increasing at what seems a parabolic rate and BP is not even preventing as much oil from spilling as they were claiming was first leaking.

The relief well is months away and it may or may not be an effective long term solution.  The first problem is that there is a risk that drilling the relief well could damage the well site further, creating a massive breach and significantly increasing the oil spill’s flow rate.  The second problem is that the relief well’s rig could also explode or the well itself could collapse at any time.

There is also a high likelihood that BP will not be BP in the next year or so.  That is to say that the firm has hired the likes of Goldman Sachs, Blackstone and Credit Suisse to explore the “options” it has moving forward.  Maybe they’ll give their assets to the US government for the clean-up effort that is expected to cost in upwards of a trillion dollars.  After all, Hayward claimed he does care about the “small people of the world” in another foot in mouth media gaffe.

In the future, should there be one for US offshore drilling, there should be significant safety precautions for all rigs, such as having backup rigs and relief well plans in advance of drilling the initial well.  This seems to be the only way to deal with the chance of another disaster expediently.

In summary, it looks like BP’s reckless disregard for safety and lust for easy profits has not only sewn the seeds for a horrifying environmental disaster, but the potential destruction of their company and many British pension funds.

19May

Mortgage delinquencies and foreclosures surge

Alex Business, Economy 0 comment

More bad news for the housing market as mortgage delinquencies and foreclosures surge to record levels of close to 15%.  This means that just about one out of every six home owners in America are in serious financial distress.

Danger! Danger!

This should be a wake up call.  There is not a recovery happening.  Jobs are not being created in large enough numbers to bring down unemployment and many people can no longer afford their homes.

The notion of solving a debt crisis with more debt will not work.  Giving the majority of the support to the bankers and big businesses in the form of corporate welfare is causing more problems than it is fixing.

Reflation nation

With all of the bailout money that’s been spent so far, what do we have to show for it?  A stock market rally alone does not signify a healthy economy.

It’s time to start looking beneath the surface here, because it’s apparent that the only groups that are benefiting from the government’s bailouts and stimulus are the very wealthy.  Meanwhile the middle class and working class are getting eviscerated by this economic crisis.

The answer

Small businesses, the most significant generator of jobs and the true engine of American growth, are largely being ignored by the government programs and tax breaks.

The only way to get back to prosperity is to engender an environment that allows entrepreneurs to start companies that create jobs and real wealth.  It’s time that America goes back to its roots!

09May

European Union losing strength

Alex Bonds, Business, Economy, Energy 0 comment

Update: The Fed is moving in to further appease Europe’s ailing banks by restarting the US dollar currency swap program they used during the last financial crisis.

As the EU moves to establish a 750 billion Euro bailout slush fund, political opposition in Germany and the UK is growing and the problems within the EU may be getting more serious.

Hiding the truth

EU politicians claim the fund is being created to defend against the “wolf pack” of banks betting against the Euro and EU sovereign debt.  They say they will defend the Euro at “any cost”.

The reality is that Greece misrepresented its debt, hiding it with the help of Goldman Sachs.  This fraud triggered the downfall of Greece’s bonds once it was discovered.  Other EU countries are now struggling to get their house (of cards) in order.

The contagion could spread

Greece is struggling, if not failing, and with it may come a domino effect. The other “PIIGS” (Portugal, Ireland, Italy and Spain) may also begin their descent on debt woes and poor economic performance.

Even the UK is not immune to these problems as its economy is in bad shape and the debt keeps mounting.  The UK government is facing uncertainty as recent elections delivered a hung parliament, the first such event since 1974.

Germany’s Merkel has potentially exhausted all her political favors as she offered the German taxpayers’ money to Greece in the form of a debt bailout.  Her party has suffered significant losses in recent elections as a result.

Anger grows

Meanwhile, in Greece, where severe austerity measures are being forced on to a weary population, the result has been much civil unrest and violence in the streets.

There have been several deaths, property has been destroyed and no compromise has been reached to temper the rage of the population.

No end in sight

The EU is in a panicked state.  There isn’t any meaningful resolution within reach as they frantically create more debt in a naive attempt to solve a debt crisis.  When other member countries begin to falter the volatility of their bonds, stock markets and currencies may increase dramatically.

Such a significant disruption will spread beyond the EU to the US and Asia.  These headwinds are blowing strong now and could jeopardize the very fragile global economic recovery.

That is, if you believe there was a recovery in the first place.  So much for the Euro being the next world reserve currency.

09May

Brian Williams on David Letterman

Alex Business, Economy, Finance, Stocks 0 comment



08May

It’s time for a new and improved uptick rule

Alex Economy, Finance, Forex, Futures, Options, Stocks 0 comment

Since the SEC eliminated the uptick rule on July 6th, 2007 there has been a marked increase in volatility.  Of course other factors significantly contributed, but in all likelihood with the uptick rule in place, selling would have been more controlled and orderly.

Another Black Thursday

After the most recent Black Thursday on May 6th the market dipped almost 1,000 points because of what the exchanges claim were computer errors (and probably the bid disappearing because market makers were running scared), it’s time to look at reinstating the uptick rule.

Black Thursday resulted in many investors losing money, including retirements and pensions. Whether it was a computer event, human error or some combination of both the fact remains that a rule to prevent short selling without first an uptick in prices would have curbed losses.

History of the rule

The uptick rule was originally enacted in 1938 as a response to concentrated short selling.  It forbid short selling a stock unless there was first a positive tick in prices.

Short sellers today claim that the rule was largely symbolic and only affected a few exchanges.  They’re right, it was not broad enough and regulation did not keep up with the way markets changed.

A better rule needed

The new uptick rule should affect all US stock, options, forex and futures exchanges to ban short selling except on an uptick in prices.  This would, in effect, buffer investors and exchanges from the cataclysmic stock market losses that we saw on Black Thursday.

Another benefit is it would force the computerized programs to, by law, have protection mechanisms built in to prevent endless selling.

Regulators must regulate

Now that the carnage that’s only possible without more balance in the market has been witnessed, it’s time for regulators, like the SEC and CFTC, to stand up and enforce existing regulations more stringently and insist on new regulations, such as a new and improved uptick rule.