Thursday Dec 30 2010
The End of the Rainbow
The real story is not whether Obama or a Bush is President, the real story is that government grows non-stop while business has lost some 8 million jobs since 2007. I suspect we are at the point where government equals business in terms of expenditures. Government promises are certainly high in terms of off the books future promises of expenditures. As I write the Governor of Indiana is introducing legislation to allow Indiana cities to go bankrupt. Hamtramck, Michigan wants to go bankrupt but the state fears a cascade of filings if that happens.
Our lead prediction is then that this is the year we discuss how much government is enough. As we have noted municipalities will be defaulting in various way. This week New York City, that can decide what you eat or smoke in a restaurant, was unable to remove snow from its streets-a default in kind if ever there was one. Consider this website
http://www.illinoisisbroke.com/
The inevitable defaults in pay or services or pensions will only exacerbate the continued deflation see number three below.
Commodity Price Boom and Bust
So far commodities are on track for a repeat of the first half of 2008, see our later report in these pages. Price rises are not coming from wage increases but from speculation. We show later that gold peaked before oil in 2008 and will follow this story. This is further reflected in speculation in the ETFs of various emerging economies. China is on borrowed time manufacturing a false sense of growth constructing unoccupied or unaffordable buildings.
Deflation Is Not Over
Gary Shilling has predicted another fall in housing prices. The WSJ notes prices are dropping, Shiller has an op ed to this effect. The government woes cited above will result in lay-offs and reductions. A third year of unemployment benefits guarantees just that, continued unemployment at the 10% level. Excessive government mandates have made employees a liability not an asset. I suspect this is a long-term reduction in the work force.
Bonds at the Turn
Bond prices have weakened in the face of a good deal of supply. The five year note did not go well. The seven year note auction went well yesterday. We suspect that deflation means this is another time to accumulate 30 year paper paying over 4.25%. But we want to see evidence of a bottom before making a commitment.
Stocks
The stock market pays a 2% dividend, 30 year bonds pay over twice that. The stock market is very expensive. But QE II has six months to go. We look for a sideways path for stocks up and down. The real downturn will probably not surface until the last half of the year. The weekly A/D line is still headed up. Remember that interest rates fell from 1982 until recently. This is what led people to invest in stocks seeking a greater returns. The only logical way for stocks to return to real value now is to fall in price to offer a higher dividend, at least for those stocks that will still be paying dividends.
Technology
After numerous failed announcements over the advent of electronic books the last ten years, the E Book took off in 2010. Kindle prices fell making it the reader of choice. Apple finally invented the must have tablet, again after numerous industry failures. That should set the stage for another long waited technology to be come mainstream, videoconferencing. Actually seeing the other parties is not necessary but having access to a common computer desktop is. This is now being done on webinars. The difficulties with air travel seem to make this a sooner rather than later event.
Politics
Political parties were born of the American Revolution. The Republican Party was formed in 1854 as an anti-slavery party and won the Presidency in 1860. Democrats swept to power amid the Depression. Democrats held that power until 1994. The election swings back and forth since in Congress indicate the overall dissatisfaction of the public with both parties. Potential mass bankruptcies of governments now pose the same sort of turning point, a major event. The point is that new parties emerge over major dissatisfaction with the status quo. We are there now. A failure to deliver real change by the Republicans will surely issue in at least a third party of some significance. The socionomic observation is that world wide people are unhappy with all existing office holders.
Monday Dec 27 WSJ
Nothing in the US is shovel ready. We’ve created a wall of regulatory obstacles-environmental, historical sites, etc that blocks daoin any major project on a predictable or reasonable schedule.
Tom Esvlin, Chief Recovery Officer Vermont for Federal Stimulus MoneyPage A 17
This explains why the New Normal is an unemployment rate of 9.8% (much higher at the U-6 level for those that have given up looking). There is simply not enough money to employ that last marginal 5% who did things the economy more or less can do without. Elsewhere there is a report on page A 11 of US workers going to Australia.
Page A 11 features a letter to President Obama from the CEO of ATP Oil and Gas. It seems ATP is ready to do to complete an offset well, one that taps into a known formation. But the permit is not forthcoming. ATP notes that the drilling moratorium has been lifted, that the rig was built in the USA, that this will decrease the importation of foreign oil, etc. Does anyone think ATP will get its permit? And so oil hovers near $90 as winter storms rage shutting down airports.
Is Houston a Bankrupt? The Mayor of Houston, Bill White, lost the Governor’s race in Texas to Incumbent Rick Perry. A report by three Houston CPAs claimed that Houston, TX is bankrupt. Now page A1, Houston Mayor Annise Parker is ‘cutting up the city’s credit card. Non-profits are no longer exempt from Property Taxes, yes churches can help pay for roads and drainage, always a problem in a 50 foot elevation Gulf Coast town. We mentioned in our last update that defaults can take many faces. Now a City has defaulted on its pledge not to levy Property Tax on non-profits.
Tuesday Dec 28 2010 WSJ
The front page has a long article on how Germany’s Merkle wonders just how many bailouts are necessary in Europe. The better observation is on page A15. There a columnist notes that Europeans are protesting cuts in spending. Here an entire new TEA party has emerged to protest expansion of spending.
On the same page A15, China’s Real Estate Frenzy. The writer has sold a Chinese apartment for 2.5 times what he paid five years ago. US Housing prices peaked at 6.4 times average annual earnings. In Beijing, prices are at 22s. This is of course the very picture of building to create the illusion of growth evidenced by Chinese ghost towns. The real estate speculation bubble from real estate to turmeric will burst in the next eighteen months. When it does the plans to rescue Europe will go up in smoke. The Chinese growth miracle will be revealed as the same as Japan in 1990.
An example of this rampant speculation is literally pictured on page C2. A Buddhist monk sings up for shares of EDL Generation Public at the Lao Security Exchange in Vientiane. The country’s first initial public offerings came to a close. I don’t know exactly how monks in Laos make a living but I would guess this represents a substantial portion of this monk’s savings. Again, we have rampant speculation in emerging economies. This is typical of ‘emerging market tops.’ We have millions, indeed hundreds of millions investing for the first time in their lives in new markets. There is no experience with downside. While the monk’s faith in the future of Laos is admirable, this is akin to the same peak in commodity trading in 2008 worldwide.
Let’s hop in our time machine and take a look back at how that unfolded last time.
Silver at top peaked before oil, about five months. Oil had a final parabolic move from 90 to 145 in a mere six months. The next six months saw it lose 75% of its value from 145 to 35. Copper was along for the ride with oil, only to lose about the same in value
Regrettably we can only fast forward to today Dec 28. Gold and silver look a bit higher before topping say 32.50 for silver. Copper at bottom, again looks to be extending a sideways pattern. This would be in keeping with the recent run up in homebuilder stocks. Note that oil has already posted a higher high than silver in keeping with the 2007-2008 analog.
As for oil, we have renewed demand, the coldest winter in years with even stock trading slowed at the NYSE, and the refusal to allow drilling in known formations in our own waters. Now couple that with the mania demanding hedge fund performance, own what is hot, and the speculation will result in, shall we say, a blowout in oil.
It is clear that the 4.8% level is THE resistance. If bonds break this yield level it will be the message to the FED that the market is weary of zero interest rate returns. The argument for the yields holding at that level is the massive deflation represented by falling real estate all over the world. Nothing has really changed since 2008 as far as equities. All debts must be paid. Tiny Ireland and its problems has become the poster child for the world in that regard.