The terrorist acts at the Boston Marathon were reprehensible, performed by a coward, or group of cowards and aimed at doing damage to so-called “soft targets”. Let’s ditch the political correctness and call it what it is: innocent, civilian men, women and children. Yep, folks, it sure is a new era upon us.
Throughout the day yesterday, Gold was selling off in a hard way, as were other commodities. stocks were in a steep descent, only deepended by the bombs at the Boston Marathon in the last hour of trading. It was a brutal reminder just how fragile this economic recovery has been.
For those fortunate enough to have solid 401(k) and investment balances, the past few years have been quite good as the U.S. and other countries (most notably and recently Japan) have pumped trillions of printed dollars into the economies of the world, which has been driving the stock market to pre-crash highs once again. The big question is whether those dollars have been chasing solid fundamentals in the underlying companies, or just fleeing low-return bonds and treasuries, and selling out of traditional safe-havens like gold.
There are two components to consider in the record sell-off in commodities: First, in a world of hyper-inlfation that many think will eventually arise from all the monetary stimulous, commodities can help protect against the loss of purchasing power since they too will rise to meteoric levels if, in fact, inflation kicks in hard. The second is in severe financial duress, commodities such as silver and gold are viewed as safe-havens against collapsing currencies, which can (and did in post WWI Germany) become literally worthless.
The only rational explanation for the recent sell off in gold is that despite slow growth and many fundamental problems in virtually every major economy world wide, the market thinks the net result of all the currency printing is still going to be slow growth. With China, the world’s second largest economy logging a decrease in growth for the first quarter, yesterday’s steep sell-off in both the stock markets and commodities, aggravated (although not caused) by the bombings in Boston show an incredible amount of uncertainty… the beneficiary? U.S. Treasuries. The good news for the U.S. is that with demand for treasuries comes more cheap money to further over-stimulate the economy. The only rational conclusion I can draw is that the opium of trillions of stimulous being pumped into the economies world over will continue and the market will recover, until the next “trigger event” causes a decline of such epic proportions that we wont be able to recover.
Yes, the world as we knew it is gone for good. We were reminded yesterday just how vulnerable we are to attack. I believe that our financial world has changed as well as we are well beyond the point of no return with the reckless “print and spend” strategy of the federal government. And I believe our day of financial reckoning is right around the corner, just when all of us were starting to feel some comfort again. Shedding debt and acquiring safe-haven assets is now more important than ever to protect your family’s financial future.
Trillions upon trillions of new debt. High unemployment. Anemic growth.
Let’s face facts: THE WORLD IS IN SHAMBLES. Unfortunately for all of us, neither Romney, Obama, or resurrecting Ronald Regan from the afterlife will solve the problems. To compare the federal government (or the governments of the Euro Zone) to your own household, the only thing the economies of the world are running on right now are borrowed funds. When the United States wants to borrow money, they sell treasury bills to investors to raise funds. The issue coming to the forefront lately is that sooner or later, the United States will reach the tipping point with its debt load, and no longer will be able to afford to make the interest payments. At that point, investors will no longer be willing to lend even more money to the United States, and the currency will collapse.
Sound unrealistic, and like it can’t happen here at home? It’s already dangerously close to happening in Greece, Ireland, Italy and Spain. The United States is already borrowing as high as 40 cents of every dollar it spends, and total tax revenues collected are far less than the amount needed to pay for the massive largesse of federal and state government services, medicare, social welfare programs, and all that’s left in the social security “fund” is a bunch of ‘IOU’s” from Uncle Sam. We face the beginning of the current wave of the baby-boomers retiring, which will swell the ranks of social security receipients, thereby exacerbating the problem.
If this was your household, this would mean that you earned, for instance, $4,000 per month in take home pay, but had bills the debt service was $6,000 per month. Obviously, millions of americans did just that as bonuses disappeared, hours were cut, and jobs were lost over the past five years. And they resorted to borrowing money from credit cards and lines of credit in order to fill the $2,000 per month gap between income and expenses. As they did so, the payments increased. The gap of $2,00o per month soon became $2,300 per month, then $2,700 per month, and on and on until there was no more available credit since the credit limits were reached. this same scenario is unfolding across the nation at the state and county government level, since as people have lost jobs, companies have shuttered their doors, deferred purchases, and generally tightened the proverbial belt, tax revenues have fallen dramatically for many local governments.
The only difference between your household (same goes for local governments) and the federal government is that neither you or Stockton, California can print its own currency… but Uncle Sam can. And boy, has he ever. The only reason Bernanke & Co. have been able to get away with this much artificial stimulous has been general deflation of assets and slow growth, which is keeping inlfation in check, despite Bernanke going hog wild with the printing press. If the economy picks up steam, inflation is sure to follow. The problem here is two-fold: First, if this scenario unfolds, inflation is likely to be incredible. Inflation is based on expectations, and the premium we will all have to pay is based on the “expected” loss of purchasing power in the future. The second thing is wealth will further be destroyed for the banks (and ultimately investors) when we repay our long term debt on things such as home mortgages with inflated dollars. In either case, current consumption in excess of current income creates a destruction of wealth. The bottom line is that whether its your household or the federal government, or the whole world for that matter, consuming more than we produce eats into the excess we have stored up. When the excess is all gone (and as a world we are dangerously close to the tipping point), wealth is destroyed, and there will be riots in the streets. There already are riots in many parts of the world, and the reality is here with us now.
Unfortunately for most of us in the world, midsummer 2007 will likely be the turning point from the “good ol days” of yesteryear to the mess we have on our hands now.
Before summer ’07, things were pretty much normal, if not good for the majority of us– we went to our jobs, our kids grew up and went off to college, we paid our bills, and had the general feeling that every day was a step forward as we productively built our futures, one brick at a time.
Then came the winds– the housing bubble “burst” in August of 2007. We notice that the sky was a little less sunny, but I dont think any of us had any idea of the magnitude of the storms to come.
Within one year, Lehman Brothers filed for bankruptcy, which was a first in a chain of events that set the financial world on edge. We learned about the widespread greed on Wall Street with “securitized” mortgages, and the mess of underwater home values. The newspapers of the day’s headlines read: CREDIT MARKETS FROZEN, and we wondered as the rain started and the winds howled at how it would affect us.
People stopped spending and hoarded cash. Businesses sales plummeted, resulting in job cuts and a soaring unemployment rate. This fed the cycle even more as the folks that still had a job worried about whether they would also lose it, and tightened the belt. Those who were already unemployed didnt have the choice, and did what they had to just to survive.
2009 came and went with little change– things were tough. by summer 2010, the Obama administration was trying to tell us all that the recession had “officially ended” in the summer of 2009. By the fall of 2010, the stock markets began responding positively. Then Tunisia. Then Egypt. Now the crisis in Japan, and the “war” in Libya. The markets have been hammered as of late, and new worries abound about soaring food, clothing, and energy costs and the impact on what amounts to an anemic recovery, at best.
Are we headed for the fated “double-dip” recession, and just too myopic to see that we may already be “in” it? I dont have a crystal ball– but I do have my concerns.
Unemployment has come down a bit, but the numbers are skewed. The number of people who are considered gainfully re-employed are re-employed at much less than they used to make. Businesses are still struggling. People are still worried. Tax revenues are down at the Federal and State levels, while the total debtload is up dramatically.
All Americans ended up tightening the proverbial belt when the wheels started coming off the economic wagon, and dealt with debt by either paying off gobs of obligations, filing for bankruptcy, or settling the debt. What did the federal government do? It took on more debt. It’s “income” from tax revenues is down dramatically, which is no different than any of us taking a big pay cut. We paid off debt in our households– Our government borrowed more. Their only solution has been to print more money to pay off the debt– a benefit they have that we as citizens cannot do. Our dollar is therefore losing value, and there is now talk of the dollar losing it’s status as the world’s base currency. The largest bond buyer in the world, PIMCO, has quit buying U.S. Treasuries. China has already slowed it’s pace in buying up US treasuries, and threatens to cut even further.
All of this sure isnt stacking up in favor of a robust recovery, and even hints at possibly plunging us into the double-dip scenario. State governments are functionally bankrupt. The federal government is definitionally bankrupt. Many households have drained their resources just weather the storm since 2007, and dont have the emergency nest eggs they had before the crisis began.
Are we headed for another several years of turmoil? I wish I knew for sure. What I do know is that even if we are in a “recovery”, it looks to be a long and treacherous road to recovery, and by the time it happens, we are unlikely to remember what “normal” felt like in the first place…. it begs the question… is THIS the new normal? Was pre-2007 the world as we “knew” it? are we going to be bouncing our grandkids on our knees some day recollecting the “good ol days” before 2007?
The recent earthquake and tsunami in Japan has wreaked havoc on Japan’s infrastrutcture and economy. And the aftershocks are still being felt. Not only are there geophysical aftershocks to deal with, but aftershocks in the Japanese economy and the ripple throughout the rest of the world’s financial markets.
Of particular concern in the timing of the event, as the world economies were showing a few signs of life after a three year period of economic devastation. Japanese Auto production has been shut down. The Germans have shut down their older nuclear plants. The markets have tumbled. What are the long term impacts likely to be?
For one, as Japan must now focus its capital on rebuilding, the net worth of the world will not grow. Using capital to expand and build can be engines for growth. Rebuilding what already existed but now is lost is a net-net absorption of wealth.
The Bank of Japan has already released capital into the markets to boost rebuilding efforts. This will surely have ripple effects on US issued treasuries and the debt of foreign governments all over the world.
The Japanese disaster is very unfortunate, and our hearts go out for all the families affected in this crisis. While I struggle with grasping the implicaitons of what the horrendous event may have caused– ripples that will be felt long into the future– when looking at the anemic economies of the world, the unrest in the middle east, and the devastation on Japan, it’s no wonder that the markets are spooked.
Aside from a few bright spots here and there, there is major unrest, major natural disasters, hyper-inflation on our doorstep, and governments, both domestic and foreign, that are basically bankrupt.
The next several months will tell the rest of the story…
With oil, clothing, food, and utility prices on the rise, the cost of living is going up for all of us. Prices at the pump are now topping $3.30, and some analysts see $4 to $5 gasoline by summer. Combined with 9% unemployment, it’s a disaster scenario. Welcome back the 1970′s Carter era stagflation.
Let’s look at each element of the above hypothesis and delve into some more detail. First, there was inflation worry with the U.S. Treasury printing money like it’s going out of style to begin with. Combine that with the unrest in virtually all of the middle east, and the resultant impact on oil prices, it’s a combination that is sure to drive the cost of living through the roof. Increases in oil prices affect much more than the cost to get to and from work, if you are lucky enough to have a job. Gasoline and Diesel fuel prices drive the costs of all goods– fertilizer prices go up and it costs more to produce food. Transportation prices go up, and the cost of getting food to your local grocery store goes up. Same goes for just about every good you can think of.
Now let’s look at the truth behind the unemployment figures… Companies have shed countless jobs, and although the overall employment rate appears to have increased, many people have accepted jobs where they are making much less than they were before. Bonuses are not being paid like they were. independent contractors and the self-employed, who arent part of the unemployment data are either unable to pay their bills, or just scraping buy. What that all spells is a stagnant, lackluster recovery, regardless of the current bubble of exhuberance that Wall Street finds itself in.
It’s still good strategy to reduce debt levels and save whenever possible. Make sure you plan and take advantage of every law, every bit of tax savings, and every bit of debt reduction you can– It’s my belief that we still have several more months of storms before we see the sunshine, and we are going to face another several years of stagnant growth and sacrifice. Stagflation was defined in the 70′s as “high unemployment coupled with high inflation”. Folks, I think we are looking at an era of S-2… the second round of stagflation.