How Much Debt Is Too Much?Thus one problem we have going forward is that we are not in a war of the magnitude that led to sharp rises in debt in the past. Therefore, we cannot anticipate that the debt will fall with the end of hostilities.That's some seriously bad news. Sigh.In fact, there is every reason to believe that the debt as a share of GDP will continue rising long past 2019. The CBO's latest long-term budget forecast shows the national debt reaching 181% of GDP in 2035, 321% in 2050, and 716% of GDP in 2080.
That's actually some good news. I doubt that I can live to the age of 116 so it is unlikely I will ever have to worry about a 716% of GDP debt load. Hurray!Of course, this forecast will never come to pass.
That's more bad news. Apparently we can't just let deficit spending grow forever, even if our economy desperately needs it in order to appear healthier than it would otherwise be.Interest on the debt would rise so rapidly that eventually more than 100% of projected revenues would be needed for that purpose alone. According to CBO, interest on the debt will rise from 7.7% of federal revenue this year to 21% of projected revenue in 2020, 39% in 2035, 68% in 2050, and 138% in 2080.
There's more good news. Based on actuarial tables, I should die in 2042. That means I have an 8 year buffer between me and the 68% interest payments due in 2050! Hurray!
In summary, that's two sets of good news, two sets of bad news, and one set of heavy sarcasm. In my opinion, it balances out quite nicely.
Why We're Facing Deflation - John MauldinI wrote in 2003 -- when Greenspan was holding down rates too long in order to spur the economy -- that the best outcome or endgame over the course of the full cycle would be stagflation. I still think that’s the most likely scenario. The Fed will fight deflation and knows how to do that. They also know what to do when inflation becomes too high. But there’s a cost.
It’s not a matter of pain or no pain; it’s a matter of choosing which pain we’ll face, for how long, and perhaps, in what order. As I wrote a few weeks ago, like teenagers, we as an economic polity have made some very bad choices. We’re now in a scenario where there are no good choices, just less-bad ones.That really sums up my thinking on the matter.
I turned bearish in August of 2004. Since then we've seen inflation rise as oil rose (to $140+) and we've seen inflation fall (as prices collapsed due to the credit crisis). So let's see what inflation has averaged since I turned bearish. That's something I've never actually checked.
In August of 2004, the seasonally adjusted CPI was 189.2.
In July of 2009, the seasonally adjusted CPI was 214.469.
That's a 13.4% increase over 4 11/12ths years. That's a 2.6% rate over pretty much the entire full cycle. That's assuming that today's conditions somewhat mirror those in 2004. I think they do to some degree. By 2004, the stock market had risen well off its low. We were also told that the economy had recovered from the dotcom disaster.
Maybe 2.6% inflation is all we end up getting over the next full cycle. In any event, history has shown that a relatively tame average inflation rate of 2.6% can still inflict pain in large quantities.
If I could know for sure that inflation would average 2.6% going forward, then I'd be even more comfortable than I am now by simply riding it out in Treasury Inflation Protected Securities (TIPS).
I can't quite put my finger on why but deep down that must be what I think. I can't get excited enough about deflation to drop the inflation protection that TIPS offer. I also can't get excited enough about inflation to borrow vast amounts of money to overleverage myself chasing hot commodities. About the only thing that seems to remain a constant is my desire to protect my nest egg. Perhaps it has something to do with the legendary nature of this "new" economy's ability to eat up nest eggs and spit them out.
This is not investment advice.
Here we go, again?
September 11, 2009
Commodity Inflows Reach August Record, Barclays Says (Update1)Sept. 11 (Bloomberg) -- Investments in commodity products advanced to $2.63 billion last month, at least double the amount recorded for any August, with investors favoring Europe over the U.S., Barclays Capital said.
September 9, 2009George Washington Fund Adds Commodities as Protection (Update1)Sept. 9 (Bloomberg) -- George Washington University is increasing holdings of commodities such as oil and natural gas out of concern that a return to inflation rates last seen in the 1970s may ravage the value of its $1 billion endowment.All it takes to have higher inflation is for investors to assume higher inflation is coming. It will then be a self-fulfilling prophecy.
September 11, 2009
U.S. Import and Export Price IndexesThe U.S. Import Price Index increased 2.0 percent in August, the U.S. Bureau of Labor Statistics reported today, driven primarily by a 9.8 percent advance in fuel prices.
Meanwhile, over in India...
September 11, 2009Ration officials seize 15 tonnes of illegal rice stockIt may be noted that the Dy CR authorities are on their toes to check black marketing and illegal stock piling of essential commodities in the wake of the recent huge increase in prices of food grains and their household essential commodities like kerosene. The officials have also been clamping down on malpractices in the distribution of such commodities through the Authorised Ration Shops (ARS) under the PDS.And lastly, the inflation adjusted real rate on the 5 Year TIPS has dropped to just 0.85%. A low real rate environment primes the pump for more commodity investing. It hit 0.01% on March 10, 2008 and we know how that worked out. Three months later we were looking at $140+ oil.
This is not investment advice. Heck, what advice would I even give? Load up on commodities before they crash again? Load up on commodities in case they don't crash again? You tell me and we'll both know.
I can say that the lower real yields are helping my TIPS investments in the short-term and hurting them in the long-term (as I roll over maturing TIPS into the lower yields). Further, the lower real yields go back to a long standing theory of mine. It is going to be more difficult to make money off of money in the future. That was the whole thinking behind my many The Death of Real Yields posts from the past.
For the past three months (April to July), the seasonally adjusted CPI has been running at a 3.4% annual rate. Based on what I'm reading here, it may actually be sustainable.
It's been a LONG time since I have done this, but I am now changing my short-term inflation mood (as seen in the upper left hand corner of my blog) from neutral to holy crap, something wicked this way may be coming again. Nothing is locked in stone but my gut tends to be driving my analysis right now. I very much tend to trust my gut as it always tends to gurgle when the propaganda is flowing in the financial news.
We were heading into Thanksgiving in 2007. I felt the need to heckle Larry Kudlow in order to bring some much needed humor to my doom and gloom blog. Imagine that!
November 21, 2007
Happy Thanksgiving!Three More Years of Goldilocks? - Larry Kudlow, November 21, 2007If heckling was an Olympic Sport, I'd say I did rather well. Granted it could not have been worthy of 10.0, due to the extremely low difficulty of the maneuver. However, I think I should have at least gotten a bronze medal for nailing the timing. The recession started just one month later and we're STILL in it. The DJIA closed that day at 12,799.04.
Further, the Candy Mountain video really does our global economy justice (the ending will clear up the reason). I hope you enjoy it yet again.
This was followed up with a Candy Mountain sequel in late 2008.
August 13, 2008
Rude Shock AlertThere's got to be a pony in here somewhere!The mere mention of Candy Mountain is enough to bring the entire global ponzi scheme crashing to its knees. Hindsight shows that the timing was once again right on the (lack of) money! The DJIA closed that day at 11,532.96.
I have great news for the bears amongst us who are somewhat superstitious. There is a new Candy Mountain video! Yes! Here it is. The world is once again in peril. Seek shelter!We're from the future Charlie. The world is in peril. All that is good has been consumed by evil...I know not what the future will bring, but I can say that the DJIA closed today at 9,627.48. I'll pass.
China Merchants to Curb Costs as Its Profit Slips"Trading activity in Europe and the U.S. will require more time to recover as the financial sector needs time to digest toxic assets and consumer spending remains weak," Mr. Fu said. "But if there's no second wave to the financial crisis, the company's first-half result next year could outperform that of this year."I just want to make a few comments on this rich and fertile paragraph. It isn't often that there is so much to heckle based on so few words.
First, the financial sector needs time to digest toxic assets? It sounds a bit like eating bad shrimp. You know what I'm talking about. You buy some shrimp, leave it in your car for a hot summer afternoon, and then decide it still looks rather tasty the next day. Here's a thought. Once it enters your mouth, I suggest spitting it out. Time is not your friend when it comes to digesting it.
Second, consumer spending remains weak. Big surprise there, huh?
Third, what's all this talk of a second wave to the financial crisis? Who said anything about that? Surely a second wave isn't priced into the global stock market that's seen the most impressive 6 month rally in well, pretty much forever.
Fourth, even IF there is no second wave to the financial crisis, the best they can offer for guidance is that the company's first-half results next year could outperform that of this year? Could? That's the best they can do? Could?
If "ifs" and "buts" were candy and nuts we'd all have a Merry Christmas.
The company attributed the fall in earnings to a decline in trade with China, resulting in weaker demand for container port services.China is growing robustly though. Count on it. I'm certainly willing to invest (my time, as it relates to heckling and sarcasm).
It sure feels like 2004. Easy money is trying to push up asset prices again. I watched the DJIA climb to 14,000+ as a bear. I wonder how long I'll be watching it on this pass. I wouldn't short the momentum train, but I have no great desire to ride it either.You will note that at least one of the containers is empty.
September 7, 2009
Closely Watched Buffett Recalculating His BetsFor the moment, however, Mr. Buffett seems to be retrenching a bit. Like so many people, he was blindsided by the blowup in the housing market and the recession that followed, which hammered his holdings of financial and consumer-related companies. He readily concedes he made his share of mistakes. Among his blunders: investing in an energy company around the time oil prices peaked, and in two Irish banks even as that country’s financial system trembled.He should not have been blindsided since he was actually warning us of the bubbles (see below).
Mr. Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of the second quarter, according to Bloomberg News. Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.
Nearly my entire nest egg is in inflation protected government debt (TIPS and I-Bonds). His advice in 2004 has served me well and continues to serve me well.
May 3, 2004
Inflation Heating Up, Says BuffettHe suggested one way to protect oneself against inflation was investing in Treasury inflation protected securities.Inflation did heat up. It then crashed. Since investors are once again enamored with commodities, we're going to give it one more chance I guess.
And now, back to the "blindsided" comment from above.
On May 1, 2005 Warren Buffett and Charles Munger warned of the real estate bubble.
On May 8, 2006 they both warned of the housing bubble again and also warned of the commodity bubble (oil in particular). Buffett said..."I don't think there's a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there's been a terrific [price] move. It's like most trends: At the beginning, it's driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant.
Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we're seeing that in commodities and housing...Orgies tend to be wildest toward the end. It's like being Cinderella at the ball. You know that at midnight everything's going to turn back to pumpkins & mice. But you look around and say, 'one more dance,' and so does everyone else. The party does get to be more fun -- and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice." So how on earth did he get blindsided? Perhaps it was temporary insanity. The clock really did strike 12, and everything really did turn back to pumpkins and mice just as he predicted.
August 22, 2009
What Chinese authorities don't want you to see"This is a seriously large building," says Hendry. "We're talking at least half a billion dollars to construct this thing. It's empty! Who is going to fill this thing? Who is going to pay the debt that that building is resting on?"
August 20, 2009Great Mall of China isn’t so greatThe South China Mall in Dongguan, China sounds good on paper. The holder of the title “World’s Largest Mall” is more than twice the size of the previous record holders, Mall of America in Minnesota and Edmonton Mall in Canada. The building includes nearly 7 million sq. ft. of space and is complete with 8,000 parking spots. It also features amusement park rides, themed outdoor areas, an indoor rain forest, and an artificial canal system.
But there is one thing missing … peopleSeptember 9, 2009
China Auto Sales SurgeManufacturers and dealers have been offering price cuts on their vehicles, in some cases equivalent to a 5% purchase tax cut, to encourage consumers to buy larger models and meet sales targets, Mr. Zhang said.
Last week, a senior minister from China's economic planning agency warned of excess capacity arising in the next few years.September 4, 2009
Wanted: Greater Fools To Support The Chinese Stock MarketAfter easy-money assurances failed to prevent a swoon in the Chinese stock market, one imagines the government is now happier than ever to get more liquidity pumping in.
The comment section of that last link is especially worthy of reading. CramerIsAssMonkey's (LOL!) comments led me to the following link.
August 31, 2009UPDATE 1-Beijing's derivative default stance rattles banksFor banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like.
Oh the fun I'm going to have with this one!Playing It Safe Can Hurt ReturnsBut those "who impulsively transfer assets to more conservative funds during market slumps may hurt their ability to save enough for retirement," Ms. Hess says.
That's not what I call playing it safe. Playing it safe would be taking money out BEFORE things fall apart. Taking money out AFTER things fall apart is actually playing it risky.
Hewitt has found that most investors who flee equities "are unlikely to reallocate their investments [to stocks] when the market rebounds," she adds.Makes sense. I fled in 2004. I have no great desire to jump back in. Ever! I'm perfectly happy in inflation protected treasury debt. Before you laugh at the insanity of investing in US debt over stocks, keep in mind that THAT debt is what is currently propping up the stock market. Without that support, watch out below.Likewise, younger investors who abandon stocks are likely to pay a higher price than their older counterparts. Why? They are giving up more in the way of potential future appreciation, Mr. Hu says.What's the cost of abandoning stocks right now though? Could we see a study showing the performance of those who flee every time the stock market rallies 50% in just 5 months? That would seem more like playing it safe to me, but what do I know? Unfortunately, we cannot point to a study. It's never happened before.
How about a study that shows if we should flee stocks if the price of oil doubles in just 6 months (oil was just $31 in February and it's now $71)? That also happened in late 1999 (doubled in price from February of 1999 to August of 1999). Hindsight shows that it was a great time to abandon stocks. Kudos to those who gave up on "potential future appreciation" of stocks as the price of oil was rising.The Ultimate Sucker’s Rally...Incredible. We have never seen a stock market rally like this in all the history for the S&P 500. In no other time has the S&P index run up nearly 50 percent in the matter of 5 months.
Indeed.It would be one thing if earnings were flying off the charts and stocks looked cheap.Indeed!
But one thing is certain, if earnings don’t show up and employment doesn’t start picking up we are heading back down and in a fierce way.Indeed!!Can the stock market rally continue?Can the summer stock market rally that has seen investors turn almost universally bullish continue as autumn sets in?If investors are almost universally bullish then what's not to like? Although we probably won't find new investors (since most investors would presumably already be fully invested), we should at least trade sideways as long as nobody panics. BOO! Oops, sorry about that.However the financial world has become almost universally bullish and talk abounds of recovery, a resumption of earnings growth for companies and consumers coming out of their shells and spending again. Recently even some of the more cautious investment strategists have 'thrown in the towel' and have recommended to their clients that they now load up on risk.Does now really seem like the best time to "load up on risk"? Is it just me or has the entire world gone insane?
If you thought stocks were risky BECAUSE they tanked 50% AND now consider stocks safe again BECAUSE they have risen 50%, then there may be a market for insanity bunkers.
I'm sealing up my insanity bunker and bracing for the worst. Well, not really. I don't live in an insanity bunker. It just seems like it for the last decade.
What's an insanity bunker you might ask? Heck if I know. I'd probably start with a large inflatable box with lots and lots of barbed wire. I could then sell them on late night TV using infomercials! Hahaha!
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