Tag Archives: Commodities

Overextended…

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… is exactly where the market was back in March when the S&P 500 hit 666.  Everyone thought the world was coming unhinged, and well it was and still is.  However, not everything comes tumbling down instantly.

With every play there are acts, and at some point the climax.  Without the climax how can we have resolution?  They are conditions dependant upon eachother unless we are speaking of the experimental genre.  With our money supply and government expendatures into the stratosphere we may be in the experimental, however let’s stick to the traditional for our discussion.

As this drama plays out I think we will have the main plot divided by smaller and yet smaller sub-plots each with their own climax and resolution.

While the market tops and is due for a correction we are jumping for joy at watching green shoots emerge from the abyss.  The media and figureheads talk about these shoots sprouting from here and there, but I don’t seem them.  Withered shoots perhaps.

Let’s introduce the buildup to the climax, and considering the climax euphoric the buildup sets the stage for euphoria.  In our case hope.  Beyond oversold conditions that we reaached in March we also had hit a stage of dénouement (catastrophy). However, this was only a subplot as if it had been the true bottom we would not have seen a short rebound in prices that have taken us up over 35%.  We needed complete disgust with the markets and an unwillingness to jump back in, which we didn’t see.

Instead will we go from Climax (the present) to catastrophe and back again I imagine a few more times before this is over.  We are fairily resiliant beings and can stand being pushed, pulled, and battered a bit before we completely throw in the towel.

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We are now starting a push into anxiety as the green shoot euphoria wears off.

Where are we going?
If the past is able to predicate the future, and if we are playing out subplots within the overall plot that leaves us with a theme of euphoria, despondency, optimisim and so on.  With despondency we will need to see disguist, lack of conviction in the government, and a swearing off the the financial markets. We aren’t even close.
Meanwhile as we go through these girations, while the Alt-A mortgages readjust, and commercial real estate weakens I’m expecting to see price fluxuations, and gyrations that flow with human emotion.  After all with so many players the markets are more emotion driven than anything else.

If the markets weren’t emotion driven then how can we explain people buying equities when the P/E ratio of the S&P500 is over 100, or how technical traders use patterns to profit?  After all we humans tend to do the same thing over and over again.  History repeats whether we like it or not.  The Romans clipped gold coins to fund increasing government expenditures, and in the modern era we print. Nothing has changed except the means in which it is accomplished with the same outcome.

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Short-Term:
A recovery in the dollar based on nothing more than everyone else is hurting perhaps worse than us, and it is very oversold.  Bernake and co might pull-in some liquidity to lessen foreigner’s fear of a devaluing dollar to support our debt markets.  This however, will undoubetly cause a collapse in the equity markets, commodities, and precious metals, while the dollar will rally as will bonds.

Winners: The US Dollar, Bonds
Losers: Everything else — Note: I’m cautious in shorting commodities due to when the next scenario will hit.

Intermediate-Term:
As liquidity is reduced Bernake will realize if he hasn’t already that there is no way out and that we will never be able to repay our debt.  The only way out will be a default via inflation, but that will prove futile once inflation hits 20%.  Wages will not rise and people will protest.  A depression will follow.

Winners: Precious Metals, Raw Commodities, Real Estate
Losers: Everything else

Longer-Term:
We will survive, and I hope we will change our ways to more responsible Americans.  The case for responsibility is huge as it has gone by the way side.  Instead of takeing care of ourselves, we look to others to make our decisions, pay for our health-care, take care of us in retirement, and essentially wipe our asses.  Fiscal responsibility needs… needs to happen.  No longer can we live off of debt that has we have no way of repaying.  I’m sorry, but a hummer purchased via your HELOC adds no value to your income.  Hence it is a poor investment and you must increase your earnings in other areas (no, housing doesn’t go up forever).
And here is our reset.  The New American emerging from the ashes. This is a ways out in time so we will revisit it as the cycle ticks on.

A bond bubble… Really?

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Bonds, bonds, bonds…  United States Government bonds ARE the safest investment in the world besides cash.  Right?  They are aren’t they?  I mean they are backed by the taxing power of the United States Government so they have to be.  Well, sure you will get your money back at a measly 2.x% these days.  Isn’t that below the rate of inflation you ask…  why yes it is.  T-bills are paying tenths of a percentage so you choose.  Besides stocks and commodites have cost many a small fortune so investing in bonds is a wise decision.  Right?

There is much talk about a bond bubble, and I’ve been watching bond prices and their rates take off recently and also have a nice correction.   Generally I watch $TNX, which is the 10-year government bond yield.  Remember bond yields move inversley to their prices.  So, if yields go down then prices go up and vice versa.

So, we have seen equity and commodity prices collapse, housing prices, and while that was occuring treasury bond prices have taken off.  This MUST be a bubble right?  Perhaps, but you have to take into account who buys and sells bonds.  We have the individual investor, which makes up a small group.  The major purchasers of bonds are large institutions and governments.  For institutions let’s look at the money market industry.  They must hold a number of bonds based on their funds requirements.  For governments they buy and sell bonds all the time.  They sell them to raise money and other governments or institutions buy them for a “safe” return.

As a last resort the Federal Reserve will purchase bonds directly, thus monetizing debt (PRINTING MONEY), thus keeping bond prices high and yields low. Therefore bonds aren’t really controlled by investors as we like to think, but much larger fish in the sea.

So, what might we see when the world loses faith in the bond markets?  Auctions will be devoid of foreign buyers signaling that foreign demand has dried up.  This will spark the necesitated increase in interst rate as an incentive for others to borrow.  Simultaneously we might see a flee from bonds as investors are concerned about their future safety.

If you look at the news you will see exports are way down from exporting countries, which means that importing coutries aren’t importing anywhere near previous levels.  Welcome to a major recession, yes there are grumblings of this being a depresssion.  I supose it depends on your viewpoint.  Now what happens when these net exporting countries decide to stop buying our debt because they have their own problems at home and have to use their saving?  They will no longer be purchasing our debt, which will make it more and more difficult for the USA to spend, and service existing debt.  Being that most of our debt is short term as the interest rate rises so do the debt servicing costs.  As these costs rise, tax income decreases then we are stuck with either printing more money (the short and easy “solution”), we cut back on gov’t services, or a combination of both.

Watch out for rising interest rates and a falling dollar.  So far we have neither, but once we do this will signal a shift from the US Dollar as secure to the US dollar as a high risk.  Expect other currencies in better situtations than us to see their currencies gain value, while the major winners will be commodities and gold.

Congressional Budget Outlook :: CBO

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Hold your hats folks as here are some of the forecasts for 2009 (link):

  • GDP falling by 2.2%
  • Slow recovery in 2010
  • > 9% unemployment by 2010
  • Decline in inflation (hmmmm… if monetary policy says anything this will reverse or at least eventually destroy the dollar)
  • Continued decline in housing prices
  • Decline in real consumption of more than 1%
  • Indeterminate on the financial system

And the best of all

$1.2 trillion dollar budget deficit for 2009*

*That doesn’t include the proposed stimulus package
*That amounts to 8.3% of GDP

So, we have an economy in decline, and digging a deeper and deeper hole to climb out of.  What I really want to know is how are we going to pay for 1) a 1.2T dollar deficit, and 2) a large fiscal stimulus package of a indeterminate size.

Let’s see our foreign friends have been purchasing our debt, which enabled us to essentially live off of their productive labor.  China for example is seeing a marjor reduction in exports, its economy is contracting, and eventually it is going to have to decide if it is worth supporting the American lifestyle at their own expense.  Presently, everyone is so intertwined I think there is a fear that if one jumps the house of cards falls down and we all lose.  However, is it possible for say China to pull out of the house of cards with minimal damage?  Is there a way they can reduce their exposure to US debt, and not have their savings collapse?  This is something I’d really like to know.

Seems to me that if they slowly shift some of their dollar reserves into commodities and other currencies SLOWLY, especially when there is increased demand they will be able to lessen their exposure.  The US import market is tanking, and has been tanking.  With unemployment increasing Bloomberg people are going to have a smaller income and will be forces to save thus hurting exporting countries.  This isn’t a US phenomena alone as Europe and frankly the rest of the world is contracting simultaneously, while being fed a mouthful of credit from central banks to re-inflate the bubble.  Last I checked it is very difficult to inflate a popped bubble.

Let’s take the latest number from Taiwan Bloomberg.  Their exports dropped by a record 41.9%.  We all know that Taiwan exports electronics, which have been a major boon ever since the technological revolution, which also saw a major hiccuup in 2000-2003.  So, this is confirmation of a major exporting taking a major hit.  There will be ramifications for the Taiwanese economy.

I can’t imagine that after the dust settles the world’s economies will look the same.  The sea of money will shift to where is sees the most opportunity and in its movement will tear apart the economies of many.

Here are a few more headlines on Bloomberg alone that tell a um telling story:

Fed Revives Discussion of Inflation Target to Counter Risk of Price Slide

ECB Expanded Balance Sheet by 36 Percent Last Year to Revive Bank Lending

Apartment Rents Fall, Vacancies Rise to Four-Year High on U.S. Job Losses

Shopping Center Vacancies in U.S. Approach 10-Year High as Stores Fail

Procter & Gamble Fights to Refinance as U.S. Borrowings Reach $2 Trillion

U.S. Banks Will Need to Raise More Cash in 2009, Meredith Whitney Writes

I’ll leave it at that, but what I’m seeing is RECESSION coupled with the Fed trying to stave it off through any means necessary, which is now including outright purchases of securities on the open markets.  Again we have no savings and are either monetizing debt or borrowing it from somewhere.  To do this will be disastrous to the dollar and our reputation as a solid financial center of the world.  Sure there are plenty of other economies in dire situations, but in the end who will come out with the heads up high and who will come out still in the sand?

All Calm on the Western Front

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Christmas is past, New Years on the horizon, hope for change lingers in the air like a slow moving mist.  2008 will go down in the history books.  Oh it was memorable, but like a lemon is bitter.  Collapse oh what collapse the economy is fine.  Bush reassured us that the fundamental of the economy are solid.  Head on over to my quotes page and you will see the stumbling follies.  How could so many miss the storm with its blackening clouds enveloping the world to unleash thunder and hail that would bring equities and commodities crashing down?

So, here we are awash in retail inventory priced to go, but to whom?  People are losing their jobs, being moved out of their houses, hoping not to foreclose or go into bankruptcy.  Silently they pray and hope things will get better.  They remind themselves that change is on the horizon, and we will be saved.  However, just as when we overextend ourselves with credit change will do the same, and at an enormous cost to the present and future generations.  How big a pit will be dug I don’t know, but I’d place a large wager that it will be quite large.

Like the eye of the hurricane all is calm in the eye, but the pre and post can be devastating… if you survive.  As we sit in the eye watching the clearing above, the clouds move by, the presents exchanged, and champagne ready to be uncorked.  As we go about our daily lives in the eye we want 2008 to go in the history books, and not to come back.  Oh I wish that were possible as it would be as sweet as honey.

As the eye passes the next front moves in.  The wind grows fierce, sheets of rain and hail pelt all and everything in its way.  Yes, I think the time is near.  Batton down your hatches, have your “preparedness kit” at hand, and be ready for 2009, it will be another year for the history books. While Subprime was the 2008 buzzword are you ready to learn all about Alt-A and Option ARMs?  Or what about oil exporting countries such as Russia who need oil to stay above $40.00 a barrel?  What happens when they sell their foreign debt?  Expect much higher interest rates.

Ahh but you say wait a minute everything will be okay as change is in the air.  The government will stimulate us out of this mess and we can continue on our merry way…  Perhaps, but I don’t concur.  Remember we are a debt laden economy with a very large trade imbalance funded by our exporting friends.  Sure we will “print” money, but I ask you at what cost?  To print money means to make more out of thin air.  To take a bit from you, me, and the rest of dollar holding persons is theft, but unseen theft.  Add that to more debt that we have no way to repay and I see a storm brewing so violent that everyone will be in shock, awe, and amazement at its velocity and ferocity.

Just remember with every crisis there is opportunity.