I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
This is the End and a New Beginning
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I've been thinking about this for some time.
After 21 years of writing this blog almost daily, I've decided to stop
writing the daily updates on the blog.
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Silver Deep Dive
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Silver had a memorable year (+148%). Some of this can be explained by a
decline in the dollar. I decided to do some ML analysis to look for other
insights....
The following chart shows the net imports of aluminum scrap into China over the years. The exponential trend line shows a 23% average annual growth.
2.5 billion kilograms represents roughly one pound of aluminum scrap heading into China for every man, woman, and child on this planet. This is just the scrap aluminum though. It doesn't even count the aluminum that's being mined.
The following chart shows what would happen if this trend continued to the year 2030.
450 billion kilograms of aluminum scrap would represent roughly 150 pounds for every man, woman, and child currently living on the planet. Looks like I better start drinking more canned soda pop to pull my fair share!
Aluminum, used in homes, cars and drinks cans, has advanced 19 percent this year on the London Metal Exchange as China's 4 trillion yuan ($586 billion) stimulus package and state stockpiling increased imports to a record and as the world recovered from its worst recession since World War II.
Once everyone has stockpiled, then who will be left to buy? I've stockpiled a lot of aluminum foil over the years on the hopes that hindsight would someday show I was being silly (better being silly than being right during hyperinflation). I think that someday is quickly approaching.
He expects the price of aluminum on the London Metal Exchange to drop to $1,500 a ton by the end of the year and the price on the Shanghai Futures Exchange to decrease to 13,500 yuan per ton.
Despite a recent increase in inflation expectations from the bond market, 1.99% is still a far cry from what many gold bulls are expecting.
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Yet there's one important caveat - the bond market could end up right, which would likely be bad news for gold or any short position against treasuries.
You know what they say about the market. It likes to inflict the maximum pain on the maximum number of people. The bond market could indeed be right. Maybe every farmer in China won't be flying in aluminum planes in the coming years. In sharp contrast, perhaps we'll actually still be fighting deflation (much like the Japanese have been doing unsuccessfully for decades). If so, the pain I experience by hoarding a bit too much aluminum foil will be dwarfed by the pain felt by investors of today who backed up the truck on commodities at these prices.
Something is happening that Adolf Hitler does not yet understand—a new re-enactment of the old American miracle of wheels and machinery, but on a new scale. This time it is a miracle of war production, and its miracle-worker is the automobile industry.
Even the American people do not appreciate the miracle, because it is too big for the eye to see in an hour, a day or a month. It is, in fact, too big to be described. It can only be understood by taking a sample.
Worst housing shortage is at Detroit. With Ford's Willow Run bomber plant nearly ready for 70,000 workers, there are virtually no houses near the plant and it is almost impossible to rent a house in Detroit, 25 miles away. Now plans are afoot for 45,000 new dwellings in the Detroit area but pipe for water lines is still lacking. And by year's end Detroit must house 190,000 more war workers.
If it's still true that the country mirrors GM, we're having our collective asses handed to us on plates in the form of Toyota wheel covers. To most, that seems OK. Is it?
This is just a handful of the photos I have of such places. I have dozens more (the lighting conditions were fairly similar in this selection taken over the course of three summers). Among the abandoned houses of Detroit, the lucky ones aren't burned completely or bulldozed, but allowed to be consumed by the foliage once meant to beautify them. This is something that has obviously been fascinating me lately. We might see ghosts of lives lived well within these walls, sentimentalize the structures and feel sad that they have been allowed to go wild. . .
Mere words cannot do the photos within the link justice.
– 2,310,984 prisoners were held in federal or state prisons or in local jails – an increase of 0.8% from yearend 2007, less than the average annual growth of 2.4% from 2000-2007.
Keep in mind that prison population is growing much faster than the population as a whole. Also keep in mind that 2.3 million prisoners are not considered unemployed. They are technically not working at the present time but they are also not able to work at the present time.
There are 15.1 million unemployed people in this country. I might be a bit biased (since my girlfriend is unemployed and I have too in the past), but I think it is a good idea that the government is willing to extend unemployment benefits.
The blue line is for the optimists. The exponential trend line simply reflects a return to business as normal. As seen in the following link, the Nasdaq is still firmly convinced that the Nasdaq is a good investment long-term.
Despite the recent devastating global bear market, there is no doubt in my mind that we are simply going through another cycle. Mind you, I did not say just another cycle. This cycle has been extraordinary. Right now, the overwhelming belief is that equities are dead. Even during the most powerful rally in more than 70 years—nearly a 40% rally off the March 2009 low—most believe that this is nothing more than a bear market rally.
The red line is for the pessimists. In spite of the "most powerful rally in more than 70 years" the 10-year moving average is continuing to roll over. Go figure.
Consider the dividend yield -- the annual dividend divided by stock price. The yield for the Dow Jones Industrial Average has fallen from 4.7% on March 9 to 2.95%, about the same as in September 1929 -- and lower than at all other stock-market peaks of the 20th century, writes Prechter in his most recent report. With the dividend yield so low, "people are too optimistic about making capital gains," Prechter says. "When dividend yields are low, it has always indicated a market top," he adds.
But that isn't all that gives Prechter pause. At the end of July, mutual-fund cash holdings stood at 4.2% of assets, not much higher than the all-time low of 3.5% at the July 2007 stock-market high.
Moreover, sentiment readings have gone bullishly haywire -- a notably contrarian signal. Prechter, who predicted both last year's major decline and the 1987 crash, and who is issuing an updated version of his 2002 Conquer the Crash later this month, notes that the Daily Sentiment Index reported by MBH Commodities recently hit 92% bullish, compared with just 2% at the March low.
I'd like to think that I'm neither an optimist nor a pessimist. That said, I'm leaning very heavily towards the pessimist arguments. It certainly wasn't the "overwhelming belief is that equities are dead" that managed to rally the stock market the most in 70+ years. I can tell you that much. Somewhere, someone must have believed. It surely wasn't me. In fact, it's the only thing that prevents me from investing much of my money in hard assets right now. I respect the damage that yet another deflationary downleg could do.
I've been riding the inflationary/deflationary fence since 2004. No complaints so far! Have I been too pessimistic? Hindsight says otherwise. If anything, I've been consistently too optimistic. I thought our economy would experience serious pain, but the pain that appeared has exceeded my expectations (as seen in the nearly 10% unemployment and rising if nothing else).
My central point is that the global economy is cruising toward mild stagflation with a 2 percent growth rate and 4 percent inflation rate. This scenario is the best that the central banks can hope to achieve; it combines an acceptable combination of financial stability, growth and inflation. But this equilibrium is balanced on a pinhead. It requires central banks to constantly manage expectations. The world could easily fall into hyperinflation or deflation if one major central bank makes a significant mistake.
I believe with 100% conviction that this is indeed the best scenario that central banks can hope to achieve.
The bottom line is that, regardless what central banks say and do, the world will be awash in a lot more money after the crisis than before -- money that will lead to inflation. Even though all central banks talk about being tough on inflation now, they are unlikely to act tough. After a debt bubble bursts, there are two effective options for deleveraging: bankruptcy or inflation. Government actions over the past year show they cannot accept the first option. The second is likely.
1. We can officially declare national bankruptcy. This would take a VERY brave set of politicians. I am 100% convinced we don't have many left. Can you imagine one of the politicians actually standing up in front of all of us and saying that we spent all of OUR money bailing out the banking system but there isn't anything left for the rest of us? We're now going bankrupt? Oh yeah, I can sure picture that. NOT!
2. We can allow inflation to silently erode our debts. This does not take any VERY brave politicians. It can happen behind closed doors using a monetary printing press that can print them "at essentially no cost". In fact, it has already happened.
Long-term, my money is firmly on #2. That's the you-know-what that will be hitting the fan in my opinion.
Hyperinflation was used in Germany in the 1920s and Russia in late 1990s to wipe slates clean. The technique was essentially mass default by debtors. But robbing savers en masse has serious political consequences. Existing governments, at least, will fall. Most governments would rather find another way out. Mild stagflation is probably the best one can hope for after a debt bubble. A benefit is that stagflation can spread the pain over many years. A downside is that the pain lingers.
Gold and oil prices continue to confirm the long-term theory. Both are far more expensive than when I turned bearish in 2004. I rode some of that action from 2004 to 2006, but now sit entirely in inflation protected TIPS and I-Bonds. I think at least some stagflation will arrive at some point and it may linger for MANY years, perhaps even the rest of my life.
We've ridden a long-term deflationary wave by outsourcing our manufacturing to the rest of the world (China in particular). I believe that wave is coming to an end for the most part. "Made in USA" is now pretty much a relic. There just isn't that much manufacturing left to outsource.
How much do I believe in the long-term stagflation theory? Let me simply share an example. I bought a new Swing-A-Way can opener (great product!) at about the same time I turned bearish in 2004. It was "Made in USA" at the time. Although it continues to work fine I know that it is only a matter of time before rust and/or a dull blade eventually takes their toll. As part of my "hoard future needs now" mindset I therefore opted to buy another and tuck it away. When I saw that it was now "Made in China" I actually decided to buy two.
I could be wrong, but I just don't see products made in China getting all that much cheaper over the long-term (especially if oil keeps rising in price). We keep sending them paper money and they keep sending us real goods. If that isn't sustainable long-term (which I strongly suspect it isn't), then it would stand to reason that prices are going to go up long-term.
The bear market caught a lot of retirement investors too exposed to stocks, but shying away now could mean missing a rally.
The Nasdaq is up a whopping 66% from the bottom set in March. We're now told we might miss a rally if we don't invest now? Hahaha!
How you should proceed depends on your age.
At 45, the only way I'd put money back to work in the stock market at these prices is if sharks with frickin' laser beams were pointed at my head.
Our research has shown with stocks, including in 2008, that there has never been a 15-year period where average stock returns were negative. So we still think stocks are an important part of the portfolio.
My research has shown with United States trade, including in 2009, that there has never been a 15-year period wherethisorthishas happened.
My research has shown with United States budget deficits, including in 2009, that there has never been a 15-year period wherethisorthishas happened.
My research has shown with United States oil production, including in 2009, that there has never been a 40-year period wherethishas happened.
Stuff happens.
So I still think owningthisis an important part of my portfolio.
So we have a lot of people that will get very upset about money going to foreign aid, money going to needy families, thinking that that might not be a good expenditure, but the point here is we’re giving much more money to Goldman Sachs and Citigroup, Bank of America, than we are to foreign aid or to needy families.
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