Lessons from the Crisis – John Mauldin

by Myke on March 29, 2010

in Debt and Deficits

John Mauldin describes why we should be concerned about Greece and increasing debt.

Link: What Does Greece Mean to You?

It seems we did not learn the lessons of this crisis very well. First, we have not fixed the problems that made the crisis so severe. We have not regulated credit default swaps, for instance. And European banks are still highly leveraged.

Why is Greece important? Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth. And just a few years ago this seemed like a good thing. The rating agencies made Greek debt AAA, and banks could use massive leverage (almost 40 times in some European banks) and buy these bonds and make good money in the process. (Don’t ask Dad why people still trust rating agencies. Some things just can’t be explained.)

Except, now that Greek debt is risky. Today, it appears there will be some kind of bailout for Greece. But that is just a band-aid on a very serious wound. The crisis will not go away. It will come back, unless the Greeks willingly go into their own Great Depression by slashing their spending and raising taxes to a level that no one in the US could even contemplate. What is being demanded of them is really bad for them, but they did it to themselves.

But those European banks? When that debt goes bad, and it will, they will react to each other just like they did in 2008. Trust will evaporate. Will taxpayers shoulder the burden? Maybe, maybe not. It will be a huge crisis. There are other countries in Europe, like Spain and Portugal, that are almost as bad as Greece. Great Britain is not too far behind. [click to continue…]

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Are Lower Gold Prices a Buying Opportunity?

by Myke on February 19, 2010

in Hyperinflation,The Mediocrity Scenario

Paul Brodsky at QB Asset Management Co. warns:

There are more American net-debtors than net-savers and US federal and state governments are deeply indebted. Thus, it is politically expedient for policy makers to inflate away the burden of existing and future US debt repayment (which will grow as the burden shifts from private and state debtors to the government).

Link: Is Gold a Crowded Trade? by Paul Brodsky

Investing in gold is tough because it challenges the investor to come to terms with the faults of his or her government, and then to act upon them. It requires the admission that there is risk in holding cash. This is counter-intuitive to this generation’s vintage of financial asset investor accustomed to thirty years of a credit build-up alongside declining interest rates.

There is certainly much more chatter in the press than in years past surrounding gold, and there certainly is more US retail investment (through ETFs) than there has been. That has been reflected to some degree in its rising price, no doubt. An ounce of gold has risen from about $250 in 1999 to current levels, having moved higher in each year and making it one of the best performing assets over the last ten years. So then, is a person that pays $1,100 an ounce today top-ticking the market by entering a crowded trade that has little upside and great downside?

We don’t think so.

Do your own research. Call your investment advisers and ask them what percentage, if any, they recommend investors allocate towards precious metals. Ring up prominent friends with substantial portfolios and ask them how much gold they have as a percentage of their portfolios. What about your fund managers overseeing, say $50 billion? Are they actually long $2.5 billion to $5 billion in precious metal plays? Our guess is that the figures in both cases will be very small, say 5% to 10% (if any at all). [click to continue…]

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Are Huge Real Estate Defaults Coming in 2010?

by Myke on January 30, 2010

in Real Estate Defaults,The Instability Scenario

David Galland interviews Andy Miller about the next downturn in the real estate market and its impact on financial institutions.

I hope Andy Miller is wrong but I fear he is right.

An Insider’s View of the Real Estate Train Wreck – John Mauldin, Outside the Box

David Galland: Andy Miller has been singularly successful in pretty much all aspects of the real estate market, including financing and developing large projects – such as shopping centers, apartment communities, office buildings, and warehouses – from one end of the country to the other. His expertise has also allowed him to build an impressive business providing assistance to large financial institutions that need help in dealing with problem commercial real estate loans. As you might suspect, business is booming.

Back in 2007, Andy was almost alone among his peer group in foreseeing the coming end of the real estate bubble, and in liquidating essentially all of his considerable portfolio of projects near the top. There are people that think they know what’s going on, and those who actually know – Andy very much belongs in the latter category.

As you’ll read in the following excerpt from my latest interview with Andy, who now spends considerable time each day helping the nation’s biggest banks cope with growing stacks of problem loans, he remains deeply concerned about the outlook for real estate.

No one has been more right on the housing market in recent years. So, what’s coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?

MILLER: I don’t think so.

For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.

If it’s true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn’t help a homeowner whose property is worth less than the mortgage. So when the supply of government-facilitated loans dries up, it’s going to put the home market in a very, very bad place.

Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.

The public doesn’t have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It’s huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can’t get people to focus on it, and it’s very esoteric, it’s very hard to understand. But it’s not something the bond market won’t notice. The government can’t keep doing what it has been doing to support mortgage lending without pushing interest rates way up. [click to continue…]

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The FED Must Continue To Buy Its Own Debt

by Myke on January 5, 2010

in The Instability Scenario

Craig Harris at EarthBlog News describes why he’s concerned about the still unfolding financial crisis.

Click on the link to read the whole post.

Link: An Introspective Look at the Future of America, by Craig Harris

If the FED had done nothing, the whole system would have quickly degenerated into a deflationary collapse and failure of the financial system due to insolvency. The course the FED chose however is the one myself and many others predicted beforehand… the FED chose to solve the problem of too much debt by creating even more debt by taking the unprecedented action of buying it’s own debt under euphemisms like “quantitative easing” and “debt monetization” and also covert buying to artificially force negative real return rates of interest. Through this course of action, the FED so far has been able to turn what would have been a rapid deflationary collapse into a decaying inflationary depression which is euphemistically called “a recession that is now over” by the six people who control 96% of the global media and attempt to pass off propaganda as “news” to a woefully misinformed, dumbed down and apathetic general public.

Going forward, if the FED doesn’t buy enough of their own debt, then interest rates on the long end would rise and the risk becomes a deflationary collapse into insolvency for the FED and it’s banking system. If interest rates remain effectively at zero on the short end and artificially suppressed by quantitative easing on the long end, then the real estate market can recover and the banks can regain solvency. If interest rates rise as the free markets would argue for however, then the real estate market sinks even further, the US dollar rises, and greater insolvency of the banks follows. The higher interest rates go, the thinner the knife edge gets and the FED would quickly find itself staring into another October 2008 collapse kind of situation. On the other hand, if by buying enough of their own debt they can keep short and long term interest rates down, then the free money percolates through the banking system, puts pressure on the dollar, lifts commodity and real estate prices and pulls out of the collapse via inflating away the debt so long as they can avoid run away hyperinflation in the process. This is the path we have traveled throughout 2009. [click to continue…]

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Overspending and Budget Deficits in Socialist Greece Reach Tipping Point

by Myke on November 27, 2009

in The Instability Scenario

Ambrose Evans-Pritchard at The Telegraph describes the overspending and debt problems in Greece. It could provide some insight into what happens when government bonds (debt) cannot find any buyers.

Link: Greece tests the limit of sovereign debt as it grinds towards slump

Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance.

Euro membership blocks every plausible way out of the crisis, other than EU beggary. This is what happens when a facile political elite signs up to a currency union for reasons of prestige or to snatch windfall gains without understanding the terms of its Faustian contract.

[click to continue…]

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The Financial Crisis Drags On – Joblessness Rises

by Myke on November 8, 2009

in The Instability Scenario

John Mauldin at Thoughts from the Front Line describes the ugly secrets of the unemployment report.

Link:  The Ugly Unemployment Numbers

The headlines said unemployment, as measured by the “establishment survey,” was down by 190,000; and even though that was slightly worse than forecast, market bulls were cheered by the fact that the number was not as bad as last month’s. It is an improvement that we are not falling as fast.

Well, maybe. What I did not see in many of the stories I read was that the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey polls larger businesses; the household survey actually calls individual households. [click to continue…]

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Lessons from Argentina’s Hyperinflation

by Myke on November 2, 2009

in Hyperinflation,The Instability Scenario

John Mauldin describes the hyperinflation that infected Argentina in 1989, emphasizing that it was a political decision to print money to cover massive budget deficits. Now the United States is tempted to follow that path rather than make the painful adjustments to less spending. Excerpts below.

Link:  Catching Argentinian Disease – John Mauldin – InvestorsInsight.com

As is often said, those who do not understand history are doomed to repeat it. … the United States in particular, and the developed world in general, are faced with a series of very unpleasant, if not downright bad choices. The time for good choices was ten years ago. Now we face the prospect of painful decisions, no matter what we do. It is not a matter of pain or no pain, of somehow avoiding the consequences of our bad decisions, it is simply deciding how much pain we will take and when, or allowing the pain to build up to a climactic event. Today we look at what I think would be the worst choice of all.

Catching Argentinian Disease

At the beginning of the 20th century, Argentina was the seventh richest nation on earth. It’s very name means “silver.” “As rich as an Argentine” was a byword. Even after falling from the heights through a series of bad decisions, the country was still so wealthy that, in 1946 when new president Juan Peron first visited the central bank, he could remark that “There was so much gold you could barely walk through the corridors.”

Argentina had actually defaulted on its debt in the late 19th century, not once but twice! But still they managed to avoid destroying the currency and devastating the country. But in 1989, after years of massive budget deficits that were financed with borrowing from abroad and Argentinian citizens, the country was left with so much debt and no one was willing to lend it any more money, that the leaders felt compelled to resort to the printing press. [click to continue…]

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Is the Financial Crisis Really Behind Us?

by Myke on October 24, 2009

in The Instability Scenario

Media, government officials, and some economists say the Recession is over; other observers say that the causes of the Financial Crisis continue to undermine economic health.

Michael Panzner, one of my favorite guides through the financial crisis turmoil, pointed to the list below on James Wesley Rawles’ blog. If you find reading this list depressing, remember that awareness is essential to preparation. Being prepared always beats being blindsided.

Link: Twenty-Two Reasons Why this Recession is Different and Why it Will Endure – SurvivalBlog -  James Wesley Rawles

  1. A broken global credit market that has not fully recovered. See: After Lehman, U.S. firms adjust to new face of credit
  2. Lack of transparency in Mortgage-Backed Securities and other re-packaged debt instruments. See: Geithner Blames Lack of Transparency for OTC Derivatives Hit on Market.
  3. The increasing Federal debt, which is growing at an unprecedented rate. See: The National Debt Clock.
  4. Mountains of consumer and corporate debt. See: Observations on the US Debt.
  5. The Federal budget deficit. See: Federal Deficit Hits All-Time High of $1.42 Trillion. [click to continue…]

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The Transition to a Sustainable Lifestyle

by Myke on October 20, 2009

in Transition Scenario

Richard Heinberg describes the growing awareness that the American way of life – I’d call it unsustainable consumption – is dysfunctional. These leaders of the transition are growing food locally, investing in local economies, rebuilding skills, and preserving local ecosystems.

Link: MuseLetter #204 / April 2009: Post Carbon Institute Manifesto – The Time For Change Has Come

The winds of social change are upon us. Consumerism as we’ve known it is at death’s door—not because everyone has joined the Sierra Club, but because suddenly nobody can afford to buy much of anything. Our new historical moment requires different thinking and strategies, but it also opens new opportunities to solve some very practical problems. Ideas from the environmentalist community that for decades have been derided by economists and politicians—reducing consumption, re-localizing economic activity, building self-sufficiency—are suddenly being taken seriously, and people want to know more about them.

Quietly, a small but growing movement of engaged citizens, community groups, businesses, and elected officials has begun the transition to a post-carbon world. These early actors have worked to reduce consumption, produce local food and energy, invest in local economies, rebuild skills, and preserve local ecosystems. For some citizens, this effort has merely entailed planting a garden, riding a bike to work, or no longer buying from “big-box” stores. Their motivations are diverse, including halting climate change, environmental preservation, food security, and local economic development. The essence of these efforts, however, is the same: they all recognize that the world is changing, and the old way of doing things, based on the idea that consumption can and should continue to grow indefinitely, no longer works. [click to continue…]

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New Evidence of a Strong Economic Rebound

by Myke on October 12, 2009

in The Recovery Scenario

Jon Markman at Money Morning describes the indicators that suggest a strong recovery is imminent. Excerpts below.

Link: Here’s Why the U.S. Rebound Will Be Stronger Than You Think – Jon D. Markman – Money Morning

What’s the best way to follow a Great Recession?

How about with a Great Recovery …

According to the latest data from the Economic Cycle Research Institute, the economy is poised for its strongest recovery in more than 30 years. The monthly growth rate of its Weekly Leading Index is now sitting at a level that has not been witnessed in at least four decades.

That’s big.

[click to continue…]

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