Recession 2008 » Depression 2009
WHAT'S THE REAL PROBLEM
As usual, we are concentrating on the effects while the real problem goes un-noticed. While the world is speculating as to the end of the defaulting sub-prime mortgages and its resulting CREDIT CRUNCH, both of which are only EFFECTS, of the real problem of MASSIVE OVERCAPACITY and MASSIVE REAL ESTATE OVER BUILDING of both residential and commercial properties. Concentrating on reducing interest rates (which caused the problem in the first place) will actually make matters worse; witness the last two rate cuts. And yet the clamor for rates cuts is turning into a crescendo.
Every bubble has always been caused by excessively low Interest rates, out of thin air monetary creation and easy credit. But this time around, an almost complete lack of any underwriting standards was added to the mix, thus allowing anyone and everybody to borrow any amount for any reason with no documentation required. The result was a degree of SPECULATION unheard of in the annals of investing.
RESIDENTIAL REAL ESTATE was the first and biggest bubble to burst. 1% no documentation mortgages combined with five solid years of 20%+ price appreciation caused a level a speculative overbuilding that will take more than TEN years to get back to some semblance of equilibrium. You can foreclose on homes and default on most of the CDO's, CMO's and whatever other anachronisms that there are: You can take massive write-offs and have the Government re-capitalize (Bail-out) the banks, but after all of that and whatever else you may do; the vacant homes still remain standing, flooding the market. Only time and much, much lower prices will clear the oversupply. And that my friends, is the real problem that NOBODY is talking about.
OUR GOLDILOCKS ECONOMY
Goldilocks was and is only a fairy tale. She never existed and neither did a Goldilocks economy. She has always been a Wall Street fairy tale which, in conjunction with the Governments hidden and contrived INFLATION statistics, make Disney seem like an armature when it comes to selling Fantasy.
OVERCAPACITY, thanks to our new world-wide economy, is now world-wide, with the worst case being in China. If you think that the USA and Europe can go into a mild recession while China, which has now frozen all new lending can slow down its growth to a mere 10% as it pulls the rest of the world out of recession, then you must also believe that Santa is real too and you don't know the first thing about economics. The Piper Must Always Be Paid and China will crash and burn along with the rest of us. There is a time and a place for every thing and now is the time to take profits; China and Brazil included.
PENSION FUNDS and INSURANCE COMPANIES: They are not immune to the now Junk (alias AAA) Bond defaults. So far, nobody has noticed because they are not on margin and they do not have to mark to the market on a daily basis. But with the Baby Boomers getting ready to retire, what will happen when they begin having to start paying benefits?
KILLING THE GOOSE THAT LAYS THE GOLDEN EGGS
Most of the world is moving to some form of Capitalism, for the simple reason that Capitalism is the only system that creates wealth. However, all of our politicians since FDR, have their Heads up their A-- and are moving slowly but steadily towards Socialism. And in the name of Environmentalism and Global Warming, they have, in their ultimate wisdom, put 85% of the USA ( containing the world's biggest un-tapped oil reserves) off limits to drilling, thus funding all of our Enemies ( IRAN, RUSSIA, VENESWELA etc.) and jeopardizing our national security while guaranteeing that our coming Recession turns into a Depression. While the world around us cuts taxes, our Congress and presidential hopefuls are busy figuring out new ways of taxing the most productive aspects of our society. What can you expect when the two richest men in the world, who have made all their money under a capitalist system, are Socialists both in their hearts and in their minds?
Do you all not realize that on the day we would announce the permitting of drilling in Anwar and off shore Florida and California, oil would drop to $50 a barrel overnight and be back below $25 a barrel within five years. What effect do you think that would have on the war in Iraq, on Iran's nuclear ambitions and Russia's new found power and intransigence?
NOTE: There is not an economist, analyst or politician on the planet that even if they knew anything, has the integrity to tell us the truth, especially if they still want to keep their jobs. It is much easier to go along with the know nothing media journalists cum analysts and pseudo-economists who are clamoring for just a few more interest rate cuts that will solve all. After all, they all know more than the Fed Chairman, don't they? Just ask them.
HOPE VS REALITY
I am always amazed at the degree to which people only hear and see what they want to, completely ignoring the facts as they drive their investment vehicles, looking only through their rear view mirrors. Have you also noticed that the flood of new analysts and journalists on both the financial channels and at the Wall St. Journal are all getting younger and younger and more enthusiastic? None of them have ever even heard of a Bear Market, let alone seen one.
Inflation has by definition always been a monetary phenomenon. The money supply has been growing at a compound 10%+ rate of growth above the GDP rate of growth for going on 15 years and we still only have core inflation of 2%? That's even a bigger lie than the world's proverbial biggest lies. In cleaning out my files, I came across my 1999 income tax return and so I compared my expenses to my 2006 return and discovered that they have been increasing at a 10% compounded annual rate of growth. That, my friends, is called Inflation.
GDP RATE OF GROWTH
If GDP grew at a 3.9% in the third quarter, with core inflation reported being 2.5% and the PPI at 3.5%, what would be the real GDP rate of growth be if true inflation is at 10%?
Also, what would the real income rate of growth be at a 10% inflation rate? When the French and German Governments project 1% growth for 2008, what do you believe they really think and expect?
As far as the credit crunch is concerned, I repeat: you ain't seen nothing yet. I CAN GO ON, BUT IF YOU HAVE NOT GOT THE POINT BY NOW, YOU NEVER WILL.
WHERE TO NOW
Nothing has changed. We are on track to what I have been calling for the last three months or so: A retest of the August lows followed by a Santa Clause year end break-out rally to new highs (at least on the DJII). This would be the kind of action that would generate both a Divergence and the kind of Sentiment figures that would set the stage for a BULL TRAP to end all traps and trigger the kind of Bear Market that would rival the 1973-74 and if we are not ultra careful, the 1929 - 32 Bear Markets. Do not try to play for this maybe year-end rally. Keep your powder dry and wait for you opportunities to go short. For those among you who think that you are good enough to play both ends against the middle, all I have to say to you is GOOD LUCK.
We getting our 5% pull back that we have all been hoping for. Will you all once again looking a gift horse in the mouth? Have you increased your positions and/or begun scaling in? The world is finally beginning to realize the true value of the US dollar and it won't be long before they begin to distrust all fiat paper currency. What do you think will happen to gold once this realization sets in? We have only entered the middle of the third wave up, with my initial target for this move being in the $1,300 per oz area. My long-term projections are in the $5,000 plus Zone . NEED I SAY MORE? Can I make myself any clearer? BUY GOLD.
GOOD LUCK AND GOOD BLESS
Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL