Judges @ Work …

May 27, 2010 · Posted in Government · Comment

Thanks for my good friend “G” from Chicago for sending me this …

Tags: judges

Australia’s Coming Housing & Credit Bust

May 22, 2010 · Posted in Global Economics · Comment

The other day I pointed out that Australia, among other countries, has a big housing bust on her doorsteps.

This week I found some more info on it on Mish’s blog here and here.

Well worth a read, especially if you live in Down Under! :)

Tags: australia, housing, housing bubble

Prechter: “We Are On Schedule for a Very, Very Long Bear Market”

May 20, 2010 · Posted in Investing · 2 Comments

Prechter on yahoo finance today:

The global selloff in stocks accelerated Thursday, sending the Dow down 3.6% to 10,068 while the S&P 500 lost 3.9% to 1,071.59 and the Nasdaq shed 4.1% to 2,204.

All major U.S. averages are now down for the year and at least 10% below their 2010 highs, meaning the downturn has officially entered “correction” territory.

Unfortunately (for bulls), there’s much more selling ahead, according to Robert Prechter, president of Elliott Wave International and author of Conquer the Crash.

“We should be in for [another] week or two of pretty serious selling,” Prechter says. “They’ll be bounces along the way…but I think this should last a long time. We should be on schedule for a very, very long bear market period.”

In the near-term, the veteran market watcher predicts a “dramatic increase in volatility,” beyond what’s already occurred. The CBOE Volatility Index (VIX) rose another 30% today and is now up about 180% from its late April lows.

Notably, today’s selling occurred despite a rally in the euro amid reports of central bank intervention. Joe Brusuelas of Brusuelas Analytics says, “The capitulation in today’s market has more to do with the unwinding of the easy money [carry] trade on commodities,” which fell again today, with notable weakness in energy and palladium.

Meanwhile, Treasury prices continued to benefit from the “risk aversion” trade with the yield on the benchmark 10-year note falling to 3.21%.

Broken Record or Market Sage?

Other than to say “a long way down,” Prechter wouldn’t say how much further he thinks the market will fall, suggesting a repeat of the 1930-32 scenario when “extremely sharp rallies” kept investors interested and “feeling like a bottom [was] forming.”

Anyone familiar with Prechter knows he’s been predicting doom for a long time so it’s tempting to dismiss his latest warning – a veritable repeat of what he said here in February. But he’s not a perma-bear and did turn bullish ahead of the bottom in March 2009.

More dramatically, in 1978 he co-authored Elliott Wave Principle – Key To Market Behavior, which predicted a great bull market similar to the 1942-1966 rally. By his own admission, Prechter underestimated the extent of that historic rally, which ran from 1982-2000 and saw the Dow rise 1,500% from 777 to 11,723.

Prechter says the market has spent the past 10 years building a “major head and shoulders” top from those 2000 highs, even though they were exceeded in 2007. Ultimately, he expects a “corrective mode that’s going to retrace virtually the entire” 1982-2000 bull market.

“The best place for most people to be is in cash” and equivalents, he says. “You want maximum liquidity until this thing blows over.”

A long term outlook I posted a while back:

I have often compared the current situation in the US to Japan in the 90s. Indeed, a lot of the characteristics of the current contraction match what went on in Japan back then.

Since 1989, the Nikkei index has dropped from just below 40000 to now around 9000. It is conceivable that US stocks will see similar declines over the next decades, along with spectacular counter trend rallies from time to time.

Below I put together a chart that shows how the Nikkei has fared since the bust of the Japanese credit bubble in 89 vs. the development of equities in the US (S&P 500) since the bust of the US credit bubble in 2007:

As you can see, since the crash, both charts have behaved rather similar. Immediately after the crash, the Nikkei, too, staged a phenomenal 35% rally from around 20000 to around 27000. If US equities continue mimic the events two decades ago in Japan, it is indeed conceivable that we may see an S&P 500 in the 200s or 300s in ten years or so.

Obviously that bear rally went on for a lot longer than I expected in my chart above. But such differences won’t matter in the long run. What is important to grasp is that the days of long term rising stocks with the occasional and severe dips are over. We are now on the other side of the peak: A long term declining stock market, with the occasional and severe rallies in-between from time to time.

What I appreciate a lot about Prechter is his unusually long term look back and outlook on the market, and his in depth incorporation of social moods and their swings when it comes to understanding economic phenomena.

Tags: bear market, robert prechter

Chinese Inflation Spirals Out of Control

May 19, 2010 · Posted in Global Economics · Comment

CNN Money accurately makes the obvious observation that Chinese inflation might be out of control:

One of the most popular debates in global macro circles currently relates to China and whether its economy is in a bubble. On the side of the bubble callers is one of the more successful short sellers of our generation, James Chanos. Admittedly, Chanos is usually on the right side of these big calls and, for the time being, I’m not going to debate him. Great Chinese bubble debate aside for now, how does Chanos’s theory hold up in light of the data we’ve been reviewing?

Data from various sources within China that we’ve seen over the past few weeks has pointed us directly toward one simple conclusion: China is experiencing serious inflation. Some of the keys for us include:

* Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;
* Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;
* Chinese money supply growth was up 21.5% year-over-year in April;
* Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and
* Chinese industrial production was up 17.9% on a year-over-year basis in April.

While economists in the United States continue to argue over whether the U.S. is experiencing meaningful inflation, there’s little room for debate when it comes to China.

The direction in China: up

Prices for consumers and producers are up, real estate prices are up double digits, and money supply is accelerating in a big way. The key factor is money supply. If it continues to grow, inflation will continue to accelerate.

The beauty of the Chinese system, being a command economy, is that the leadership of the country can make real time economic decisions to adjust to the data they’re getting. And we are already seeing Chinese leadership implement policies in the hopes of tempering these inflationary tailwinds.

On the real estate front, the government has ordered 78 state-controlled companies to exit the real estate sector, banks are newly requiring a 50% down payment on second homes, and the Chinese government mandates 20% cash down at land auctions. Collectively, these actions should help slow the white-hot Chinese real estate market.

The other key policy that Chinese government is implementing relates to bank loans. After a period in 1998 where the Chinese banking system was in effect insolvent, Chinese officials are rightfully cautious about rampant loan growth, for more than inflationary reasons. To combat bad loans and hopefully stymie inflation, reserve requirement have been raised three times for Chinese banks. Currently they’re at 17% for large banks and 15% for smaller banks — just under the all time high for reserves. In effect the government is forcing banks to park some money, making loans for the booming property market harder to come by.

At risk of actually creating a bubble, Chinese officials cannot allow these inflationary factors to pick up speed. Therefore Chinese officials will likely continue to take policy actions to slow growth and cool inflation. These policies will have some predictable effects. But the most direct and knowable effect relate to commodities.

Chinese citizens have negative incentive to save: sound familiar?

China is the world’s largest producer of steel, and also consumes almost one-third of all global steel. As construction slows in China, the demand for steel and specific commodities related to construction, copper in particular, will slow on the margin. Any slowdown in Chinese demand will create a negative headwind for the prices of many of the commodities related to construction, but will also affect other commodities, like oil.

As of now, the Chinese economy is signaling the need for more aggressive tightening based on the points above. But there is also the reality of negative real interest rates. Currently, the consumer price index is outpacing the one-year interest rate on savings of 2.25%, meaning the Chinese have no incentive to save any money. The two policies needed to offset inflation are an increase in interest rates and an upward revaluation of the Yuan. Both actions would help slow Chinese growth and commodity demand further in the coming months.

What worries Chinese economic planners considering these fixes is that rather than just slow down and control growth, they have the potential of “popping” the bubble, making Jim Chanos a happy man but also causing serious damage to China’s export heavy economy. China would like to have it both ways right now: rapid growth and wealth creation, but also the safety of a properly valued, non-inflationary economy. That’s a tough task: nearly every time we’ve seen this movie before, the ending is the same.

Over the past 4 years the Chinese money supply has risen by more than 100%. Meanwhile, in the US the true money supply has merely increased by 22% in that same period.

In the US credit has been contracting heavily for the past 2 years. In China it has been continuing to overheat during that time.

Flashback July 2009:

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar …

You see now what I was talking about? That upwards valuation of the Yuan that US exporters, the US government, and hyperinflationis keep on dreaming of is most likely not going to happen!

Tags: china, dollar, yuan

To Serve and Protect …

May 19, 2010 · Posted in Government · Comment

Some more police brutality, this time these heroic guys beat helpless women and teenagers into submission:

Tags: police

Money & Credit Supply – April 2010

May 18, 2010 · Posted in Monetary Economics · Comment

In April of 2010 the annual growth rate of the true money supply has dropped to 3.68%.

The total true money supply at this point is $2,214 billion:

The money supply growth rate continues to move sideways and even appears to be on the verge of falling once again. One thing’s for sure: There is no extraordinary growth happening in the money supply, regardless how how many nonsensical purchase programs the Fed has started and how much “quantitative easing” it is trying to shove down people’s throats.

Consumer credit credit continues to contract steadily, ever since I called the peak in 2008:

This is part of what I meant when I called for a long lasting End of Consumerism:

The end of consumerism really means the end of capital consumption. It means that people realize that they need to save more and consume less, so as to provide for economic progress and more efficiency in the future, and to restore balance to the economy as a whole. It means that people have understood that too much of the existing capital stock has been consumed and has deteriorated.

This is the causality that the majority of pundits and economics professors that one can hear talk every evening on the news simply don’t understand. All their theories and policies are ignoring this one crucial fact: That Americans are done consuming for the foreseeable future. The end of consumerism isn’t just a temporary ditch. It is here and now and it won’t go a way for a long long time. It is a once in a lifetime occurrence. This is why it is so hard to grasp and to accept. But it is very simple to understand when one approaches it with sane common sense. How many more Starbucks branches do we need in the streets of New York? How many more gas guzzling cars should each family posess? Three, four, ten …? How many more different brands of detergents, shampoos, toothpastes, and consumer electronics products do we really need?

In particular have a look at the ride that securitized consumer loans have been taking since the beginning of the year!

Securitized consumer loans are more likely to be marked to market I think. This may be why we are getting a much clearer picture of the real extent to which credit is contracting here, but this is just speculation on my part.

After the mirage bump which was supposedly due to a regulatory adjustment of certain loans, total credit and loans continue to contract steadily:

Credit:

Loans:

Deflation is alive and well indeed!

Tags: april 2010, true money supply

Police State Fascism on the March – Texas Police Secretly Deploy Spy Drones

May 16, 2010 · Posted in Government · Comment

Keep this in mind. Whenever the government deploys new methods as a result of more expansive powers granted, like in this case the Patriot Act of 2001, their creativity and rigor in finding other applications in the service of advancing their power and diminishing your privacy and freedoms, will know awfully few boundaries.

Don’t ever give credence to the specific reasons stated at the moment a law is passed. Those are nothing but expedient excuses to help corrupt people push the enactment of exploitative and abusive powers past the finish line. Once this is done it’ll be too late.

Think of the long term opportunities that any new law opens up to people who are behind the trigger of an unbelievably massive force of arms and guns pointing at you, and you will get a much clearer picture of what it going on around you and what will happen in the long run.

Tags: police, police state, spy drones, surveillance

James Galbraith’s “Wisdom” on the Deficit

May 16, 2010 · Posted in Government · Comment

If your head doesn’t explode when exposed to the brain-numbing, foggy, clouded, boring, repetitive, and useless droning of mainstream economists, then you might find this post entertaining.

Otherwise, I recommend you don’t read on.

Here is a comment that James Galbraith made in a recent interview:

EK: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators.

JG: No, I think the danger is zero. It’s not overstated. It’s completely misstated.

EK: Why?

JG: What is the nature of the danger? The only possible answer is that this larger deficit would cause a rise in the interest rate.

My comment: Wow, that’s pretty amazing indeed. If this is “the only possible answer” he can come up with, then of course it makes perfect sense for him to hold such beliefs. But in that case he might be well advised to take his half baked thoughts back into the kitchen and stick them in the oven once more.

The nature of the problems with deficits is unfortunately a fundamentally different one, and it has nothing at all to do with potentially rising interest rates. At the root of the problem with deficits is the misdirection of resources toward bureaucratic waste and corruption, away from demanded productive factors and voluntary choices, which ultimately all has to be borne by the taxpayer in the form of higher taxes. As I explained before in great detail:

The burden of restricted consumption is thus shifted over time from the investor over to the taxpayer. However, the investor made the choice voluntarily, along with all the risk of default which comes with the contract. (In fact, a complete debt default is precisely what the investor would suffer for funding a comparable project on the market, ensuring corresponding and healthy incentives moving forward.) The investor’s time preference and value preference is at no point being acted against. Nothing is violently taken away from him or anybody else. He willingly participates in the transaction.

The taxpayer, however, never had any choice. He doesn’t necessarily realize that what the government consumes now will be funded by his restricted consumption in the future. Money that would usually have been used to fund the purchases and thus spur production of capital goods (whose employment would increase the production of consumer goods in the future), is now employed in fundamentally consumptive government activities which necessitates that the debts be paid off through the restriction of future consumption lest a default occur.

But the crucial point with the budget deficit is that, from the consumers’ (= the majority’s) point of view, the effects of deficit financing don’t show up until a later point in time. In the meantime it all appears to be taking its normal course as things would on the market. But when the debts need to be paid off, the expectation that the borrowed funds were used to obtain capital goods which would enable repayment through the production of more consumer goods with less labor input than before, turns out to be a completely false one. No new capital was generated from the projects in question and upkeep of existing capital was, as a tendency, being neglected. Capital consumption inevitably ensues.

Thus, with a budget deficit, and more broadly with the public debt, the fundamental damage occurs at the point where money is taken away from the taxpayer to pay off the investors who voluntarily funded unproductive and ultimately coerced projects in the past.

Now, if anybody thinks he brings something new to the table by objecting with the argument “but the government does invest in demanded productive factors”, I would kindly ask that person to show me the prevailing and abounding examples of government projects that were so productive that the debts which funded them could be paid off out of the proceeds from the sale of the plentiful output of demanded consumer goods generated via the “investments” made, so that taxes were not needed to pay off the debts. To make it easy, I would even, just for starters, be happy with one single example! Not that that would rest the case, but if would show some foundations to the objection, rather than just mindless trash pulled out of nowhere.

Anyway, Mr. G. rambles on:

Well, if the markets thought that was a serious risk, the rate on 20-year treasury bonds wouldn’t be 4 percent and change now. If the markets thought that the interest rate would be forced up by funding difficulties 10 year from now, it would show up in the 20-year rate. That rate has actually been coming down in the wake of the European crisis.

My comment: You see how he misses the fundamental point? He thinks that the concern over the deficit is driven by concerns over the government’s ability to fund the deficit. I have little doubt, and have always said so, that for now and probably for quite a while longer the US government will be able to honor its public debts. But what I have also said is that it will do so by taxing and looting us to the hill! Galbraith doesn’t give a damn about this problem. To him, as long as the government can pay off its debts, there are no problems.

From his point of view it makes perfect sense. He has been a public servant for pretty much all of his professional career, and probably depends, directly or indirectly, on government grants, subsidies, and positions/fellowships in his job. He has never had to sell any products and services on the market, deal with consumer feedback, or fundamentally understand the incentives provided by competition and the vices of bureaucracy. He will pay lip service to some of these ideas where it’s absolutely necessary. But he will never understand what it means to be in the shoes of someone who is not in government.

He sees no need in delving into such mundane subjects as entrepreneurship, profit and loss, factors of production, the problems with bureaucracy, the problems with letting concepts overshadow empirical reality.

So there are two possibilities here. One is the theory is wrong. The other is that the market isn’t rational. And if the market isn’t rational, there’s no point in designing policy to accommodate the markets because you can’t accommodate an irrational entity.

My comment: Isn’t it amazing how he talks in absolutes all the time? Again and again he says things like “there is only one possible answer” or “there are only two choices”. But saying so doesn’t make it true, Mr. Galbraith. You do need to provide some reasoning if you don’t want to appear like a complete clown.

Let’s assume for a moment (yes, I am making it as easy as possible for him) that he is right about the idea that the only problem one could possibly think of when talking about the deficit is that they push up interest rates. Fine. In that case you can’t just look at the nominal interest rate that currently prevails on the market! You have to look at the difference between the rate that would have prevailed, had the government balanced its budgets from now through the next decade, versus the rate that prevails now based on trillions upon trillions in deficits.

I would humbly submit that the prevailing rate would now be much lower than it currently is, had the government balanced the budget. This is not to say I know this for an absolute fact, nor does Mr. Galbraith or anybody on this planet. But evidence and logic leads me to believe that this would be the case. And I do think I might have at least a little bit of credibility based on my past predictions in the Treasury market. So even when I accept and apply his completely false premise, I still end up unsatisfied and utterly unimpressed with his “logic”.

I hope you can understand that if his fundamental knowledge and theories about the government deficit are based on such rampant nonsense, there is really no point in listening to or dealing with anything that follows from it.

Thus I won’t delve into the remainder of his ramblings because it quite honestly makes me angry. I have nothing but sincere disdain for pompous intellectuals who carelessly advance such dangerous theories that are bound to hurt millions of people in the long run.

The blood and sweat of generations is on the hands of the mystics and apologists of the powers that be. They are the ones who make suffering and corruption possible, and they are the ones we have to defeat once and for all in the battle of ideas.

Tags: deficit, deficit spending, james galbraith

The Road to Socialism – Venezuelan Government Seizes Iron-Makers

May 16, 2010 · Posted in Global Economics · Comment

What happened in the US to numerous banks, insurers, and car companies, is and has been going on in Venezuela in other fields:

President Hugo Chavez announced Saturday the expropriation of a group of iron, aluminum and transportation companies in Venezuela’s mining region.

Among the expropriated companies is Materiales Siderurgicos, or Matesi, which is the Venezuelan subsidiary of Luxembourg-based steel maker Tenaris SA.

Venezuela’s socialist president said in a televised that his government was going to take over Matesi because “we couldn’t reach an amicable and reasonable settlement with the owners.”

Chavez said production at the company has been paralyzed since midway through last year, when Venezuela’s president announced plans to nationalize it.

Chavez said he was also going to expropriate Venezuelan-owned Orinoco Iron and aluminum-maker Norpro de Venezuela C.A., which is an affiliate of the U.S. company Norpro in association with France’s Saint Gobain, among other companies.

As well, Venezuela will take over transport companies that ship raw materials in areas southeast of Caracas. He did not name the companies.

Since coming to power more than a decade ago, Chavez has nationalized major companies in the electricity, oil, steel and coffee sectors, as well as other private businesses.

This intelligent reader commented on reddit as follows:

Step 1: Nationalize businesses to take their profits, use money to buy public favor

Step 2: Run said business into the ground

Step 3: Call ensuing economic downturn a “crisis” and a “failure of capitalism” which requires even more nationalization/reform

Step 4: Go to 1

Well said, my friend! :)

Venezuela is in for some massive shortages in all those sectors that have been nationalized, along with price inflation and a currency crisis.

Tags: hugo chavez, venezuela

Housing Bubbles Around the World; Severe Corrections Still to Come in Canada, Australia, China, Sweden & Belgium

May 16, 2010 · Posted in Global Economics · Comment

The Economist has a great interactive chart with home prices around the world.

A comparison of home prices to average income over the past 35 years in different countries:

Another chart gives us information about a few other countries, but data only goes back to 2001 for this comparison:

One thing I noticed in the chart was that Germany and Switzerland are the only countries where absolute home prices AND home prices in relation to average incomes have been declining constantly, at least for as long as data is available:

For Switzerland the available data actually goes back as far as 1991, with prices having constantly declined in relation to average incomes since then. For Germany data goes back to 2004 only. It seems like a bubble never really developed in these countries. Thus Germany and Switzerland may be interesting markets for global property investors at this point.

In Spain, Britain, Ireland, and South Arfica home prices still have a very long way to come down.

Other countries haven’t even yet begun to see the beginning of any meaningful correction in home prices, most notably Canada, Australia, China, Belgium, and Sweden.

People in those countries won’t be immune to the problems associated with building more houses than needed and/or can be afforded. Thus, expect significant corrections to begin soon in cities like Sydney, Melbourne, Vancouver, Toronto, Montreal, Stockholm, Shanghai, Beijing, Brussels, and the like.

The recent plunge in Beijing property prices may be a wake-up call for global property markets.

Tags: global real estate, home prices, housing