Economist vs. Historian

I came across an interesting article this week that acknowledged that economists always think the future is bleak, and the past is always worse than they thought it would be. (So you shouldn't spend all your time listening to them.) However, this article stated that maybe we should read less about economics, and more about history.

"Historically, once a country uses the printing press to pay for its stated goals and ongoing obligations, there is not one instance in human history where those debts and obligations are ever being paid off. These actions always have resulted in the destruction of the currency. The unique aspect of today’s monetary inflation is that it is not limited to one country, but a host of countries are all inflating together."

Source: http://www.financialsense.com/fsu/editorials/degraaf/2009/0619.html

The Next Canary in the Coal Mine - California

The phrase "canary in a coal mine" is frequently used to refer to a person or thing which serves as an early warning of a coming crisis.

In 2007, the canary in the coal mine was the collapse of a Bear Stearns hedge fund with mortgage backed securities. It was largely ignored at the time as an isolated incident. By reading the opinions of some experts (and conspiracists alike), I now believe that the "canary in the coal mine for 2009" is the imminent bankruptcy of California.

Starting July 29, California won't have enough cash to pay its bills, state Controller John Chiang told the governor and legislative leaders today. The state will be in the red by $317.1 million that day, Chiang wrote them in a three-page letter. "Two days later, on July 31, our cash deficit increases to a negative $1.02 billion," he added.

Source: Chiang warns state leaders on cash crunch

Just like in 2007, this news is going largely ignored because it is commonly believed that the Fed will bail out California, as it is "too large to fail". It also comes off the heels of a GM bankruptcy and a bank TARP repayment. Unfortunately, what most people are ignoring is the fact that "if California were a separate country, it would rank among the ten largest economies in the world, with a GDP similar to that of Italy, and it would be 35th among the most populous countries." (Source: Wikipedia)

Everyone in the United States of America cannot fathom this great country going bankrupt... but I believe it's already happened. We've bailed out the banks, GM and soon it will be states. What is left?

And who will stand by to bail our government out?

I'm standing by my belief that "something bad is still coming" at the end of 2009, maybe early 2010. Possibly a deflation to hyperinflation trap that will reset the wealth food chain in a very big way. This is no time to be complacent with your investments!

See my previous post regarding Investing in Deflation vs. Inflation and place your bets.

Barack Says We're Broke

Sorry for the lack of posts, but I've been working on another project recently.

According to the United States Congressional Budget Office, if Barack Obama would have changed nothing after coming into office, by 2019, the US debt obligation would have amounted to 42% of annual GDP. How much is 42% of annual GDP? Roughly 5,991.13 Billion dollars, this (shockingly) is in-line with historic norms. However, the CBO goes on to say that after the past 6 months of spending, and the inclusion of Barack Obama's proposed budget, by 2019 the US will need roughly 82% of GDP to service its debt load.

Just a quick reality check... doesn't a bank want a buyer to have a below 40% debt load in order to qualify for a mortgage?

The only reason we can get away with this is because of the US Dollar's position as the world reserve currency. However, China's talking about replacing the USD as the world reserve currency. Common sense says that something has to give.

Source: http://www.financialsense.com/fsu/editorials/cnc/2009/0605.html

GLD Watch - 04/19/2009

A gold correction is currently underway. I think GLD will fill the bottom end of the Bollinger Band, which is currently at around 80. Not surprisingly, GLD's fall comes with a rise in the stock market and the lowest VIX (fear) reading in a while.

High VIX = High Volatility, which typically means High Fear. Relatively speaking, it's still high. But there are definitely a lot of people talking about a bottom lately. I find myself pulled to bottom pick the S&P500 here, but my instincts tell me that we are nowhere out of the woods yet. Comparing the economic environment to the last recession, it feels like 2001 because people are still talking about bottom picking (internet) stocks on the way down.

I'm staying cash and sticking to my plan of buying Gold on the weekly technical bottoms in 2009-2010 until the next "game changing" event like the fall of Lehman. The only clear trade/trend that I see is all currencies are becoming devalued, which only means good things for gold.

If you've been waiting to buy gold, your opportunity is coming soon! Watch the action for the next few days and weeks. I'm targetting a 1/10 position buy between 80-85. So that means if I have $10,000 to invest, I'm going to buy $1000 between 80 and 85.

If it blows past 80, be careful and slow down the buying.

The Intelligent Investor - Tips #2

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

While continuing my reading, I stumbled on some nuggets of wisdom that I thought I'd share.

1) Past performance does not indicate future success.

2) Be careful with high growth stocks. They have huge growth expectations which they WILL FAIL to meet at some time.

Some quotes from the book/commentary:

"Great expectations lead to great disappointment if they are not met; a failure to meed moderate expectations leads to a much milder reaction. Thus, one of the biggest risks in owning growth stocks is not that their growth will stop, but merely that it will slow down. And in the long run, that is not merely a risk, but a virtual certainty."

...
"Most investors simply buy a fund that has been going up fast, on the assumption that it will keep on going. And why not? Psychologists have shown that humans have an inborn tendency to believe that the long run can be predicted from even a short series of outcomes. What's more, we know from our own experience that some plumbers are far better than others, that some baseball players are much more likely to hit home runs, that our favorite restaurant serves consistently superior food, and that smart kids get consistently good grades. Skill and brains and hard work are recognized, rewarded- and consistently repeated- all around us. So, if a fund beats the market, our intuition tells us to expect it to keep right on outperforming.

Unfortunately, in the financial markets, luck is more important than skill. If a manager happens to be in the right corner of the market at the just the right time, he will look brillant-but all too often, what was hot suddenly goes cold and the manager's IQ seems to shrivel by 50 points."

....

"You can get ripped off easier by a dude with a pen than you can by a dude with a gun. -Bo Diddley"

Link to the book on amazon.com:
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

Sweet Justice? House Votes To Recoup Bonuses

WOAH more big news today as the U.S. House of representatives passed a bill to recoup bonuses paid to AIG. Due to the public outrage that AIG paid $165M in bonuses for certain executives, the Obama administration and Democratic congress moved quickly to do something about it.

The House proposal's hefty tax provision would apply to executives with incomes over $250,000 who work for companies that get at least $5 billion in federal aid. That could include others besides AIG, such as mortgage financing company Fannie Mae.

"The whole idea that they should be rewarded millions of dollars is repugnant to everything that decent people believe in," said Representative Charlie Rangel, the Democratic chairman of the tax-writing Ways and Means Committee.

In a measure of the widespread outrage over bonuses, small crowds of protesters marched in cities across the United States to denounce the idea that AIG employees who helped push the insurer to the brink of collapse should be rewarded for it.

Sound like sweet justice? Not really. If you dig deeper:

1) A lot of firms were forced to take money from the Fed, even though they didn't want it. In fact, some are publicly saying they want to give the money back. Some of these same firms also came clean and did not give their executives ridiculous bonuses. But the Fed wants to have authority to look around their books to see what the companies are doing. Sounds awfully fishy to me. Why would the Fed want its fingers in so many pies?

2) The taxes apply to any family earning over 250k working at a bailed out firm. So if you worked hard in college, maybe even got an MBA and earned a job at a top wall street firm or any other top bailed out company, you've been forced to endure layoffs, endure even longer hours and now significantly less pay to boot. This was meant to punish the greedy executives, not necessarily all the smart hard working wall street kids just following orders and doing their jobs.

Who do you really think this hits harder:
The executive who already made millions the past few years
OR
The dual income middle management family who works hard and makes $251k a year?

I guess we found our scapegoats... everyone at the bailed out firms and guys like Madoff. I guess the people who passed the laws who got us here and the Fed whose balance sheet has increased by TRILLIONS are innocent bystanders.

People Who Live In Glass Houses Should Not Throw Stones

Source: http://news.yahoo.com/s/nm/20090320/bs_nm/us_financial_aig_17

Is a Housing Bottom in Sight?

Wow. Big news today. Bernake is living up to his "Helicopter Ben" nickname by vowing to pump another $1 TRILLION into the U.S economy, partly by buying government bonds for the first time since the 1960's. What does this mean for you and I?

"The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. ... In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year."David Greenlaw, Morgan Stanley, WSJ Real Time Economics March 18, 2009

This could be really good news in pretty dark times. Combined with data showing some life in new housing starts, this is the first sign of life for a housing bottom. This is why we need to be a contrarian, because in the darkest of times, sometime always seems to pop up that changes everything.

BUT WAIT. Don't go rushing in to buy everything just yet. I did a little more digging. Calculated Risk puts it very succinctly:

"But some readers are confusing a bottom in housing starts with a bottom in pricing. It doesn't works that way! There will be two distinct bottoms for housing:

1) First single-family housing starts and new home sales will bottom

2) Then some time later, prices for existing homes will bottom

Just about every housing bust follows this pattern. The bottom in prices could be a year, or two, or more away. It is way too early to try to call the bottom in prices. House prices will almost certainly fall all year and probably next year too. Prices will continue to fall. Prices are not at the bottom."

OK SO NOW WHAT?

It's tough to say. If I had to guess, I'd say that:

1) We'll at least get a stock market rally for the short term. I think it will be short lived as reality will catch up with optimism, but we gotta start somewhere!

2) You should run, not walk, to see if you can refinance your mortgage near or below 4.5%. There WILL be renewed interest in housing this summer, coinciding with the school year. Hopefully they help out those in jumbo mortgages!

3) The gold trade is still very much in tact. In fact, this bodes VERY badly for my "wait" approach and others are clearly wise to the theory and jumped in and bought gold on the news.

Source: http://www.calculatedriskblog.com/ and WSJ