Congressional Budget Outlook :: CBO

Posted on January 7, 2009 by TheGauntlett

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?

Withdrawal Symptoms

Posted on November 4, 2008 by TheGauntlett

If my emotional barometer is any indication of where people’s minds are at the moment then I can only label it as coming down or recovering from a major hangover. It is the Sunday afternoon after a big night out sipping on your bloody mary to ease the pain.

We have been living on credit and tons of it. At some point it becomes unsustainable and the house of cards tumbles down.

Getting back to my analogy, think of drinking a ton of alcohol or coffee. You keep wanting more and more when you finally get to a point where your body is completely dependent. Any reduction in the drug will cause mild to severe withdrawal symptoms, any increase doesn’t do anything.

This is what happens with credit expansion. Too much and everyone goes on a spending spree with all the cheap money. Take away the cheap money and people stop spending, jobs vanish, incomes decrease, and the previously incurred debt can’t be paid off.

So, instead of going through withdrawal you decide to take a lesser amount of the drug to make your hangover go away or slightly abate. However, you are still hungover. This pattern will continue until either you are completely free of the drug or your tolerance is now much lower enabling you to start increasing the amount as it now has a new profound effect as it did when you first started.

It seems to me that we are in the post-crash hangover stage, but we aren’t completely free from the addiction. We have taken a bit of the drug to ease the suffering. The more of the drug we took the more likely we are to repeat the cycle. We still need the drug to continue, otherwise we are going to feel like crap. Hence, we still have a ways to go before we can recover.

If all goes as planned we will have a new President tomorrow and no longer will have to listen to the political banter at least for a while. One piece of the uncertainty puzzle will be put into place, and we can focus on other issues.

In a NY Times article:

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap,” said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “So investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows and from the endless pre-election rhetoric.”

Other factors seemed to be playing into the rally as well, including a continuing round of coordinated interest rate cuts worldwide, the ongoing thaw in the credit markets, and the increasing resiliency of the markets to the daily drumbeat of bad economic news. The extreme volatility of recent weeks has calmed in recent days, though trading volume remained light.

Yes, the bear is taking a nap, but we are still very hungover and have taken a bit of the drug to help relieve the pain. People haven’t completely capitulated and given up on equities. They are hesitant yes, but still hopeful that things will turn around.

There is a major bear lurking around the corner and it isn’t just in the US. They are giving birth around the world and China is no exception. In a Financial Times article:

Wen Jiabao, China’s prime minister, warned that high growth was needed to maintain social stability as fresh evidence emerged on Monday that China’s economy was slowing quickly.

…

“We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development . . . and factors damaging social stability will grow,” he wrote in the magazine, Seeking Truth.

So, while equity markets recover mildly on noticeably low volume, bears are growling from afar. Manufacturing is way down, consumer’s aren’t spending, banks still are reluctant to loan, major exporters are slowing. I’d call this a worldwide slowdown of massive proportion. We still have credit cards right?

What lies ahead…?

Recession, higher interest rates, massive inflation, higher commodity prices, continued decrease in housing, rising unemployment, and eventual devaluation of the United States dollar. When will all of these things play out?

My crystal ball has a few cracks, but for inflation to take hold we have to complete the current phase of de-leveraging and disinflation (which is bringing down prices). Once this phase is complete all the newly created money will directly cause inflated prices.

Banks are lending — NOT

Posted on October 22, 2008 by TheGauntlett

The theory was beautiful (well in the abstract)…

Give troubled banks more credit and they will lend it out and the economy will stop its free-fall. Now, that sounds like utopia to me. Create credit and we will all be saved for unemployement, slowing production, decreased consumer spending, and rising interest rates.

HOLD ON… let’s put a toe back on the plane of reality…

Banks aren’t lending much more than before eventhough they are being handed gobs of cash. Why wouldn’t banks lend out free money?

What if…

there aren’t any borrowers worthy of getting loans? — Let’s say during a recession! Oh right the economy slows WAY… DOWN.
there are more troubled banks and unknowns on banks balance sheets.
banks are holding the cash knowing full well that there is another storm on the horizon

I didn’t pull this out of thin air like the Fed does with money. An article in the NY Times starts with

The banks aren’t lending. And despite what you have heard, they probably won’t start just yet.

Sorry Paulson your plan isn’t working.

“Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital,” Mr. Paulson said in a statement Monday. “And we expect them to do so, as increased confidence will lead to increased lending. This increased lending will benefit the U.S. economy and the American people.

Of course, with a $250 billion injection into America’s biggest banks — not all of which were troubled — Mr. Paulson has a political sales job to do. And no requirements to lend were attached to the money. (Some banks may use the money to buy others.)

But Mr. Paulson is making a big assumption about confidence, because until the real economy recovers — which could take more than a year — lending to Main Street is unlikely to return rapidly to normal levels.

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”

Again banks don’t want to lend into a very uncertain future. They want confidence in the economy — there isn’t any and the opposite is occurring. People are spending less as they become more concerned about the safety of their jobs. Most Americans have no savings cushion to fall back on.

Roger Bootle and Jonathan Loynes of Capital Economics in London wrote a sobering note on Monday about the cash infusions into European banks that may apply here as well. “We expect rising loan defaults and further asset write-offs over the next couple of years to practically wipe out the governments’ capital injections, leaving banks back at square one,” they said. “Given that banks will need to increase their capital in order to expand their lending book, these measures on their own are unlikely to prevent bank lending from stagnating.”

Wait a minute… all that money being put into the system to restore confidence and spur lending may just vanish? So at the end of the day more banks fail, the economy continues to contract, available credit continues to contract, unemployment rises, and interest rates eventually rise. This isn’t what Paulson sold to us with his bailout plan. Were we duped?

Nah, the individuals responsible for the government’s actions are always in need of votes and making a horrible situation look not so bad or at least feasible to fix. At the end of the day our failed bailouts will have a disastrous effect. The consequences are a HUGE debt burden, a larger interest payment on that debt, the world losing confidence in the value of the dollar, and a prolonged recession probably followed by major inflation. I’ve been singing this song for a while and it will take time to play out, but as you can see this is a VERY rocky road.

Look both ways before crossing the street

Posted on October 21, 2008 by TheGauntlett

I received an email from a friend and here is my response. You ought to be able to decipher what the questions were about. These are my opinions of the present situation, and are by no means recommendations.

—-
1) Voting for McCain…

I really don’t think voting for A or B is going to matter. I’m voting for Ron Paul because I believe that change has to come from going against the herd. I refuse to be partially responsible for either of them being in office.

The odds are in favor of the democrats getting into office and taking over Congress. I’m actually a bit frightened by this, but either situation is grim. Hopefully it will be better than the last 8 years.

2) Deflation / Inflation
This is tricky and something I’ve been trying to better understand. There are many many many factors at work here. We are headed into a MAJOR recession… thus your cutting spending was a wonderful idea. A recession is a drag on the stock market. Many think that after a brief rally it is going to drop much further. I know you are invested at the moment. One way to hedge against a drop is to invest in a inverse ETF fund such as SDS, QID, DXD, or TWM (these are leveraged 2x FYI). These ETFs have saved me much pain. The overall trend in the market is down. Bear market rallies tend to be severe and swift to the upside, while the markets overall continue to decline.

As for Deflation and Inflation what this means is a decrease or increase in the money supply. Generally during inflation when the Fed is creating money prices of everything goes up because there is a surplus of money that has to go somewhere. When the money supply contracts either by the Fed reducing the money supply or debt is paid off. Then prices decrease. However, under a fiat monetary system credit and continued inflation are essential to keep it up. At the moment with the Fed creating TONS of money we are looking at the potential for hyperinflation in the future, which nobody wants. So, the Fed is walking a tightrope between deflation and inflation. I imagine they will lean towards inflation over deflation ultimately. At the moment we are primarily seeing deflation as prices are coming down everywhere (commodities, housing, stocks).

During deflation the market will come down as will all prices. I think that regardless the markets will continue their descent due to the upcoming recession, decrease in consumer spending, decrease in imports and exports, and increase in unemployment. Once the recession takes hold and the effects of the monetary inflation occurring now start to be felt we will probably start to see increases in commodity prices across the board.b With companies facing difficult times I don’t foresee the created money moving into equity markets.

3) War with Iran
The conflict between Iran and Israel is heating up. I received a report that said Israel won’t be doing anything until after the election, but who knows. In this case we would see the value of gold skyrocket, oil go through the roof, and the dollar go through the floor. This is slowly moving from a remote to more plausible reality. I hope this doesn’t happen as the US can’t afford to be involved in another conflict. We are already spread so thin. Because of this and the enormous debt load the US government (its citizens) now carries I fear for the support and longevity of the dollar. At this point I think it important to own some gold and have some money invested in foreign currencies. <Thank you Gary North and Chris Martenson> These are for the long-term and may lose significantly in the short term. There are many uncertainties at the moment.

Oh and least I forget… At this juncture in the Republicans and Democrats are but different sides of the same coin.

Another bailout, more credit… when will we learn?

Posted on October 20, 2008 by TheGauntlett

It seems that the tune to march to these days is credit o credit we need more credit. Somehow somewhere we forgot quite quickly that credit got us into this mess. If credit is expanding much faster than real economic growth the outcome will be instability in the economy. That is like an individual taking on more debt while their income stays steady or worse is in decline. At some point in the future the debt will become unmanageable. Once debt is too great a burden that individual is going to have to either sell assets to pay off the debt, declare bankruptcy, increase their income, or default. The one thing that makes the government lucky or so it seems is that they can increase “income” through inflating the money supply event hough it is really illusionary. All they have done is take money from every taxpayer to service the ever growing debt burden.

I find it distressing that Bernake and Co. are talking about further fiscal stimulus to the tune of $150 billion dollars and Democrats want double that. We are already over $1 trillion in debt for this year. Where o where are we to find this money? Perhaps a leprechaun will appear beneath the rainbow and we will be saved. If the politicians and bureaucrats have their way this is exactly what will happen.

American’s have no or very little savings to invest in capital goods. We are laden in debt and attempting to service that debt. If unemployment rises substantially then servicing that debt will become even more burdensome. Another stimulus package will probably be used to payoff existing debt, which does nothing for stimulating growth.

So, what do we do… Many have proposed various solutions.

Why not reduce the size of the government for one.
– Yes, people will lose their jobs. However, with time they will find other jobs as that money can now be used for other things.

Reduce taxes, and the size of the tax code.
— Our tax code is way to complicated and confusing. I would love to know the cumulative hours wasted on tax returns every year by companies and individuals. Imagine if we had a flat tax of 10-15%… get rid of tax incentives, credits, exemptions, etc… Not everyone is going to be happy about it, but a reduction in the tax burden in actual numbers and time would enable people to use their money elsewhere and as they choose versus having someone decide for them where to best put it to use.

Return our currency to one backed by a physical commodity — GOLD and SILVER
— The government would hate this, but it would eliminate the major booms and busts and enable constant growth. Money would again have a true value versus the value instilled by the gov’t. Money’s value would be returned to the people and taken away from the money printers, and confiscators of our savings.

Bring our troops home
— We don’t need to be the world’s police. Occupying over 140 countries is absurd and very costly. I agree that we need to have an army to defend the country, but it needs to be defensive and not offensive. Our paws are in too many honey jars. We are bound to piss off the bees, which we are continually doing and then blame them for getting upset at us. Ironic don’t you think.

Remove all subsidies and tariffs
— All they do is distort the market place and what people produce. For example why do we have corn syrup in our soda, but in the rest of the world they use sugar? Corn is highly subsidized, while sugar has many tariffs on it. Corn Syrup is cheaper due to government policy. Corn farmers love this, while it hurts all of us. We pay for those subsidies, and also pay high sugar prices.

I’m going to leave it at that, but there are plenty more options. People say that ignorance is bliss. NO it isn’t bliss it is being LAZY. Will you get out of a parking ticket or a speeding ticket if you claim ignorance? Not unless you are really smooth with words.

What happened to being responsible? If you take on too much debt then you have a problem. American’s have a virus, and it is contagious. We live beyond our means, and then when we get in trouble someone bails us out at the cost of everyone. The one’s who really pay are the responsible ones who are living within their means.

Why Gold?

Posted on October 20, 2008 by TheGauntlett

I agree that we are probably going to see a continued decline in commodity prices especially PMs. However, given the increases in the monetary supply I forsee this trend reversing. When the trend reverses, which isn’t going to happen immediately because we are headed towards a major recession, with unemployment rising, and more likely interest rates as well, inflation will be severe.

The Money Supply graphs are frightening. Once that money goes into the system I wouldn’t be surprised if we start to see hyperinflation. For all of our sakes I don’t want that to happen.

As for investing in PMs I think there are two types of people who purchase them. The first is the speculator, and the other the long term purchaser regardless of price. (I’m leaving out purchasers for industry and jewelry). As much as I don’t like to see the value in relation to fiat currency of my PMs decline my intent on owning them is for more of the oh shit situation. Throughout time gold, and silver to a lesser degree have held up as a store of value. They aren’t going to be worthless as can a paper currency backed by nothing. Politicians and those involved in the government don’t like PMs as they aren’t easily created. Having a currency backed by a scarce resource means that they have to control spending as they can’t print money to pay for various expenditures.

So, why gold and silver? What happens if the fiat currency fails? All of a sudden you and I have a bunch of roman numerals in our bank accounts. Sure we can go get paper currency, but it is better to use as heat. If this happens chaos will ensue until another solution is created or we go back to a currency backed by PMs. I doubt the latter case would occur as bureaucrats aren’t going to want that option.

My other concern is war with Iran, which is looking more and more likely. In this scenario gold and oil will skyrocket. Oil will also be much harder to obtain and the government will probably institute a rationing scheme instead of letting the price rise. I’d rather pay $50.00 a gallon for gas then not be able to get it or to have to wait in line for days. I presume many of you don’t agree, but gas or no gas you pick! Would I drive much NO… however, if I needed to go somewhere I could get the fuel I needed.

Lastely, beyond Gold and Oil we all need food and water. Don’t forget food.

-T

The US Dollar gaining? What?

Posted on October 7, 2008 by TheGauntlett

Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession. Hmmm so does this mean a inflationary depression? Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations. For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar. Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off? Deflation is like the grim reaper knocking on your door for a fiat currency. A fiat currency survives on debt and inflation (credit expansion). Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value. That sounds like a good thing but it isn’t. As the currency gains in value debt becomes more expensive, and thus more difficult to pay off. Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930. Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest. The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply. Say the loan is $100.00. That is $100.00 of money put into existance with a very small percentage actually backing it. Now I repay my $100.00 loan and that credit is erased and the money supply contracts. This is the normal situation that occurs daily. However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services. Everything is based on debt today. The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar… Why I ask is it getting stronger. Many argue that it is because Europe is weakening, which may be part of the picture. However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate. However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market. As they purchase dollars its value goes up. Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper. They are stepping in and becoming the new mainstay for that market: which one? EVERY MARKET <Interesting…>

And tomorrow is a new day!

Potential outcomes at current juncture…

Posted on September 23, 2008 by TheGauntlett

I’m attempting to grapple everything going on apart from my disgust… and come up with a couple scenarios. Any help will be appreciated.

Overall economic trend:

- Economy is sliding deeper into a recession

- Housing prices continue to fall

- The dollar’s short-term value is undecided, and long term looking weak

- Unemployment rising

- Prices falling

- Interest rates falling

Present Situation:

If a bailout is passed we might be able to presume that:

- The dollar will lose value potentially very much if large reserves are sold off

- Interest rates will have to rise as that is the only way foreigners will want to hold dollars

- Imports will become very expensive

- Prices will skyrocket

- Recession will deepen – Depression?

- Stock market will rally — for how long?

If the bailout isn’t passed:

- Dollar might stabilize a bit

- Uncertainty will continue

- Markets will gyrate while overall trending down

- Financial markets will tighten

- Stock markets will plummet

Finally: A potential indicator of a dollar collapse

If interest rates rise and the dollar falls people are selling off their dollars and treasuries, which means nothing but bad for the dollar.

—–
How am I doing so far?

Trevor Gauntlett

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