“Everything moves in cycles, so twice a century the ocean lets us know just how small we really are. A storm comes out of Antarctica, tearing up the Pacific, and it sends a huge swell north 2,000 miles. And when it hits Bells Beach it’ll turn into the biggest surf this planet has ever seen, and I will be there.”
–Bodhi (Patrick Swayze) in Point Break
Yeah, Bodhi dude — you were there, just a little too long.
Checking the latest economic headlines, we see news such as sales of previously owned homes in the U.S. retreating to the lowest levels since 2003; consumer confidence dropping; the U.S. economy expanding at the slowest pace in 4 years; the Dollar plummeting to an all-time low against the Euro; sub-prime bondholders potentially losing $75 billion; homebuilder confidence dropping as profits slide; first quarter foreclosures doubling from one year prior; a weaker economy as inflation picks up, etc., etc.
And therefore, quite logically – stocks continue to rise, with the Dow closing above 13,000 for the first time ever!
An objective observer would have to ask, “Are the financial markets going nuts?!” The rational answer would seem to be “yes” – and we’d be the first to tell you that markets cannot continue to go through the roof forever in the face of lousy economic news. However, there is a logical reason for all of this. You have to keep reminding yourself of one thing — that you are witnessing the powerful pricing effect of record levels of liquidity on everything, including the current financial markets. It’s nothing new. The stock bubble of the 1990’s, and the subsequent real estate bubble over the past several years were beneficiaries of the same massively expanding money supply. During the current market run-up, equities continue to surf the same liquidity wave. And right now, nobody is complaining
Recently we posted on global warming and the nuances and the appropriate role for man in response. We did so in response to the massive rush to legislate based on what we find to be suspect analysis of the problem, and even dicier — if not downright dangerous — proposals for solutions.
Consider this rebuttal to Al Gore’s highly popular “An inconvenient Truth”:
These are worthwhile reads. Obviously Fleck has been around long enough to know bubble-headed thinking. Merk makes some valid points about the deficit, debt and dollars. Not all of it is so bearish as one might suspect. Bears, too, can be a little extreme in their viewpoints, after all.
As part of our prior stated objective of providing alternative views on the rush to legislate government solutions to global warming, here are a few fresh articles:
Again, our purpose is not to pick one side or the other, but to foster open discussion on what we find to still be an open debate. For our original post on why we feel this way, click here.
When you consider how much sub-prime and Alt-A borrowers contributed to the demand for housing over the last few years, and then consider how many borrowers (not just the aforementioned) used gimmicky mortgages to buy their homes with hopes that continued price rises would justify the precarious nature, well… you understand that housing is just seeing the tip of the iceberg when it comes to the decline.
Just a few weeks ago analysts were celebrating the news that March’s housing start numbers came out better than expected vs. February by being positive vs. negative. Of course, bubblevision (MSNBC, etc.) reported that this lofted the equity markets higher, never mind that the year over year numbers from March 2006 were simply abysmal.
All that aside, today’s news that Existing home sales plunged 8.4% vs. February — the biggest plunge since 1989– does not come as a surprise. Rather, get familiar with that sort of refrain since the contagion consensus analysts say will be confined to the sub-prime market is only now merging upstream into other markets. With sub-prime and Alt-A borrowers finding it harder to find funding, and with each representing about 20% of all mortgages in 2006…. well, that totals 40% of housing demand drying up in a matter of months. (Granted, not all mortgages were for new homes — some were refi’s, but the overwhelming majority were.)
Likewise, the steep decline had another horseman riding alongside: It was the eight straight monthly fall in median home prices, which is the LONGEST SUCH PERIOD OF FALLING PRICES ON RECORD.
Contained? If you believe that, how about I sell you a certain bridge in NY?
It would appear that the SEC is in some kind of conundrum given their inaction and proposed grandfathering of past violators. With Goldman having received a paltry $2 million fine for being caught violating the naked shorting rules, evidence suggests that there are more than a few skeletons in the closet regarding these trades that are entered in for the purpose of manipulating the price by selling shares that are, in all ways but name, counterfeit. Money is made by all parties involved, and some suspect that major brokerage firms look the other way with their larger clients in order to protect valuable, legitimate business transaction-related revenue , such as with offshore hedge funds.
If you are interested in learning more about the naked shorting problem, we encourage you to view our recent post which includes a link to Bloomberg TV’s special on the problem, as well as read our seminal post on the problem from last October, featuring an excellent link to a audio power point presentation. Of course, if you stumble on this category some time long after we posted it, you can always pull up all Naked Shorting related post.
The following is a guest article from Doug Wakefield and Ben Hill
Last weekend, my wife and I went over to a friend’s home to watch “The Pursuit of Happyness,” starring Will Smith. During the opening scenes of the movie, Smith’s character sits in despair thinking about his own struggles in medical sales, during the recession of 1981, while the television blares in the background with the voice of President Reagan discussing the financial plight of our nation. In this snippet, we hear Reagan talk about the urgent need for our national leaders to face the $50 billion deficit. And like the swell of the bull market of the 80s and 90s, the movie goes on, drowning out Reagan’s words and numbers.Recently we posted a document to our website developed by David Walker, Comptroller General of the United States. The title: Fiscal Stewardship - A Critical Challenge Facing Our Nation. Walker opens,
“The federal government’s financial condition and fiscal outlook are worse than many may understand. Despite an increase in revenues in fiscal year 2006 of about $255 billion, the federal government reported that it costs exceeded its revenues by $450 billion (i.e., net operating cost) and that its cash outlays exceeded its cash receipts by $248 billion (i.e., unified budget deficit). Further, as of September 30, 2006, the U.S. government reported that it owed (i.e., liabilities) more than it owned (i.e., assets) by almost $9 trillion. In addition, the present value of the government’s major reported long-term ‘fiscal exposures’ - liabilities (e.g., debt), contingencies (e.g., insurance) and social insurance and other commitments and promises (e.g., Social Security, Medicare) - rose from $20 trillion to about $50 trillion in the last 6 years.” (Parenthesis his)
While supporters of the recent (last 12 months) barrage of global warming alarmism are quick to say that the scientific community is in complete agreement, and that anyone who disagrees must be in the pocket of big oil, to that we say “not so fast!” Never mind the liberal elite lobbying for Al Gore to receive a Nobel Peace Prize for his film, An Inconvenient Truth.
Its not that we don’t believe man has made an impact. It is that we are not entirely convinced that we have enough information to fully understand said impact, and for that matter, to fully understand the hows and whys behind the environmental adjustments we see.
As well, we are entirely against the reflexive reactions that are shouting down those who bring up a contrary view.
While everyone is up in arms about global warming, we think there is a more important energy related subject that ought to be getting press. Is Peak Oil right or wrong? Long term, the answer is obvious. And clearly there have been alarmists who predicted doom and gloom decades ago. But being too early is not the same as being entirely wrong. If the video interests you, consider Matt Simmons book, Twilight in the Desert, an excellent resource for getting your arms around the problem.
Something will come of this, so be positioned properly. Be vigilant!
Where’s oil heading? Consider Matt Simmons views on oil supply and where it is going. Consider that he’s not even addressing the dollar money supply problem. (M3 is recently tracking at 11%+ according to services that continue to calculate the figure…)
We keep hearing from the consensus view that the housing recession is bottoming out. That’s a concept that is as flawed as often as it said. You’ve heard us point that out enough. So here’s Nouriel Roubini on Bloomberg TV explaining why the sub-prime meltdown will not remain contained, and how it will effect the U.S. economy overall, and what might be in store for foreign economies — including their housing markets, as well. Note, also, his comments on the dollar and U.S. Treasuries.
The latest data released today shows that the New York Fed’s Factory Index stays near a two-year low, Japan’s export stocks rise, and China’s economy grew at a 10% rate last quarter. American retail sales are up, and the savings rate lingers around zero. All the while, total U.S. Credit Market Debt is at an all time high.
Translated – Americans are either spending all the money they earn (or can borrow) – and it does not look like they are buying many things made in the U.S.
The U.S. Homebuilder Confidence Index falls to the lowest level of this already terrible year, and U.S. homes going into foreclosure have doubled compared to the first quarter last year.
Translated — People who build homes aren’t feeling too good about their business prospects. They shouldn’t – since the housing backlog is about to increase as lenders are forced to put more homes back on the market which they have foreclosed on – while at the same time they tighten their lending standards.
Gold breaks through $690, Silver $14 an oz. Both precious metals (i.e. real money) – look to break key price levels. Oil stays resiliently above $60. Prices in the supermarket and at the gas pumps are increasing steadily – and picking up pace. The Fed is concerned about the economy slowing – yet per the recently released minutes from its Open Market Committee meeting, perhaps more worried about rising prices.
Translation: Unlike the classic Mullet Hairstyle (Kentucky Waterfall, Tennessee Top-Hat, or Hockey Hair — depending on your preference) – which is all “business up front and party in the back” – the massive amount of credit infused into the economy is just the opposite. As a nation, we’ve had the “party up front” running up the tab — but now we are forced to confront the rising prices and other serious consequences, which are part of the “business in the back.”
More key economic data to come this week – and of course, we’ll be happy to tie it all together for you in simple, plain English
“It is a miserable arithmetic which makes any single privation whatever so painful as a total privation of everything which must necessarily follow the living so far beyond our income.”
– Thomas Jefferson
As we write — what continues to unfold before very our eyes, in the end has all been so very predictable. The scenario we have continually warned about steadily manifests itself, becoming increasingly difficult to deny. As we’ve previously stated, the U.S. is entering an ominous period of “Stagflation” – in which economic growth slows – while prices rise. This phenomenon – simply the result of over-stimulation via expanding credit and borrowing – is initially, seemingly quite appealing. Through loose money policies, there is certainly much economic activity on the front side. However the money borrowed – in the end, must be paid back. And, when people are forced to pay down their debts – they have less money to devote to new spending, resulting in declining economic activity. But this is not all. To compound the problem, the vastly increased money supply we are awash in – causes the price of virtually everything to rise. It’s an ugly combination – a savings poor, debt saddled population, with less disposable income – is required to pay higher and higher prices for nearly everything. It doesn’t take a genius to see how this scenario will play out. Only the willfully blind choose to ignore it.
Today’s news alone perfectly defines the inescapable predicament the economy, financial markets, and not least – the Federal Reserve are in. Today, the minutes from the Fed’s Open Market Committee’s March 20-21 meeting were released. Here’s some of the Fed-Speak:
“The latest readings on core inflation were higher than expected, and it was difficult to discern whether the apparent downward trend in core inflation during the past few quarters was continuing.”
“Nonetheless, the combination of generally weaker-than-expected economic indicators and uncomfortably high readings on inflation suggested increased downside risks to economic growth and greater uncertainty that the expected gradual decline in core inflation would materialize.”
“A persistence of inflation at recent rates could eventually have adverse consequences for economic performance. All members agreed the statement should indicate that the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming. Instead, the statement should indicate that future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
In plain English – what the Fed is saying is that the economy is weakening, and costs continue to rise (Stagflation)…And that they are caught between a rock and a hard place as to what to do. They may have to increase interest rates to combat rising prices – but they realize that doing so may choke off the credit-based economy. Lowering rates (to stimulate) could prompt a further Dollar sell-off — and cause prices to continue rising. For the moment it appears the Fed will do the only thing you can when both of your alternatives are bad…nothing. In the end – it’s all they can do.
“Praecesserat per multos dies tremor terrae, minus formidolosus quia Campaniae solitus. (For several days before, the earth had been shaken, but this fact did not cause fear because this was a feature commonly observed in Campania).”
— Pliny the Younger — describing events preceding the cataclysmic eruption of Mt. Vesuvius in 79 A.D. which utterly destroyed the cities (and inhabitants) of Pompeii and Herculaneum.
Today, the metropolitan area of the Bay of Naples is packed full of millions of people (all presumably who can read) in the shadow of the still active Vesuvius. In the meantime, experts clearly state that current evacuation plans would fall woefully short when the volcano has another major eruption. This is particularly disturbing since recent discoveries show Vesuvius had an eruption (the Avellino Catastrophe) 4000 years ago, which was far more violent than that which destroyed Pompeii. The Avellino eruption destroyed a swath of territory including the area which encompasses present day Naples. It made the entire region uninhabitable for centuries.
Evidence also indicates that Vesuvius erupts violently every 2000 years or so. This includes Avellino 4000 years ago. Pompeii — 2000 years after that. 2000 years later – well, that’s now. Actually, statistical tests indicate a 50% chance that Vesuvius will have a major eruption this year – with the probability increasing every year after that.
History is rife with examples of serious (and obvious) warning signs of catastrophic events being ignored – the tremors before Pompeii’s destruction being one of the best known. We ask ourselves – what is it about human nature that causes individuals to dismiss advance warnings, which could prevent experiencing so much anguish? Why do animals listen to their basic instincts – yet “advanced” human beings often override their own (almost always regrettably so)? Why does it seem, the more “intelligent” a being is – the greater it’s ability to go into denial about impending events?
While the reasons for this phenomenon may be complex – we’ll call it the “Pompeii Principle.” It has many parallels, and can most certainly be applied to financial markets and the economy today. Like magma as it builds greater pressure over time while it moves closer to the earth’s surface – the excesses and imbalances in today’s economy and financial markets grow increasingly, grossly distorted. Record U.S. trade & budget deficits; record household & consumer debt; record/massive growth of money supply; plummeting savings; and the housing bubble all factor into the mix. Today, total credit market debt now exceeds 300% of U.S. GDP – a level only rivaled (but not surpassed) by that at the start of the Great Depression. (That’s an eye-popper)!
All rationalized away by the mainstream.
If an event like the Great Depression represents an economic Avellino, or Pompeii – would it not be wise to pay attention to the mounting pressure building beneath our very feet today? We think so. Wise also to not ignore the recent tremors caused by sub-prime lending and housing, along with the 416-point drop in the Dow on February 27th.
If things continue down the same path, something’s gotta blow – and as in Pompeii, it won’t pay to dilly-dally in the Forum.
