Wednesday, May 26, 2010

Did you say DEflation?

Read it and weep, folks: The U.S. money supply fell by $300 Billion in the first quarter of 2010. This happened despite the trillions of dollars borrowed and printed over the past couple of years which were supposed to turn the economy around and prevent a depression.

When the money supply goes down, it tends to accompany deflation, or a general drop in prices. It was a strange blogger named Alstry who first made me aware of the concept of a deflationary spiral as the ultimate outcome of our mounting debts, and today's news may be the first bit of evidence that his verbose rants have been right all along.

My limited understanding tells me that cash is a good thing to have during a deflationary spiral, because as money becomes more scarce, its value actually increases relative to everything else. That's why I've been hoarding cash for nearly a year now. Of course, if the Federal Reserve Bank turns around and prints $10 trillion dollars this year, then deflation will be fended off for a little longer. Government policymakers can be fickle, so it's impossible for a private citizen to know for sure how to weather the storm.

May 29 Postscript:
Remember that high inflation helps a debtor, whether we're talking about a homeowner or a nation, because the fixed amount of money owed becomes a smaller fraction of the total money available. Conversely, deflation is a disaster for the debtor for the opposite reason. A little bit of deflation will make our debt larger in proportion to the economy, thus drawing away a larger fraction of the money to make next month's payments, which leads to more deflation, etc.

Monday, May 24, 2010

Stock market update

The S&P 500 index is flirting with the rising lower trendline.

Since market pessimism is approaching a multi-year high, this will probably be the low point for the short term at least. However, if the index eventually falls through the lower trendline, then that would be a key bearish signal.

Saturday, May 22, 2010

Socialism Sucks, Part Deux: Nanny State

I never thought I would see this day. An article in the New York Times has actually placed the blame for Europe's problems where it belongs: European Socialism. When the centerpiece publication of the American Left comes out against a core principle of the Left, you know times are a-changin'. I only wish I could have seen the confused looks on all of the NYT readers' faces this morning when they were informed - probably for the first time in their lives - that socialism is inherently self-destructive.

Some of the highlights in this article are particularly satisfying.
Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella.
Exactly right: America has been responsible for most of Europe's defense since WWII, and it was not military spending that bankrupted the continent. This topples one of the pillars of left-wing doctrine.
With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.
Many on the Left are adamantly against large families, believing that they harm humanity and the planet, but it turns out that eco-friendly small families undermine the arithmetic of the cradle-to-grave safety net. Europe is also realizing (too late) that complete health coverage for all is unsustainable. It's too bad this didn't happen about a year ago, because it might have prevented the Obamacare catastrophe from coming to fruition in this country. Instead we're doomed to go through the same painful spasms ourselves.

A subtext here is that with Europe and America going bankrupt at nearly the same time, nobody will be able to step in and take over the military defense of Europe. Indeed, Victor Davis Hanson fears that an angry Germany, robbed of its retirement savings by defaulting Mediterranean nations, might rise up again in the power vacuum to come.

Hang on to your hats, folks.

Nothing to see here

The Wall Street Journal reports that 10% of U.S. banks are now on the FDIC's "problem bank list."

By the way, that same Federal Deposit Insurance Corporation is supposed to have tens of billions of dollars of credit as insurance for our savings accounts when a bank goes under, but instead the fund is now $20 billion dollars in debt.

Not to worry though. Everything's going to be just fine. Really.

Thursday, May 20, 2010

Mid-sized correction now

Today the S&P 500 index closed at 1072, which is almost 12% below its current bull market high of 1217. I call this a medium correction at least.

Interpreting the market's behavior is a little more complicated than usual. On the one hand, today's closing value - also the lowest price of the day - is still a little higher than the bottom of that crazy crash-and-recover maneuver on May 6.

On the other hand, this is the lowest closing value since early February, which is a bearish signal.

Stock market sentiment has plummeted to levels not seen since late 2008, suggesting that the market is near a short- to medium-term bottom. However, seasonal factors remain neutral at best, and the low yield of the S&P 500 forecasts a significant drop in the long run. Fundamentally I remain more convinced than ever that the global economy is doomed to suffer a large downturn, but I can't predict how much longer our government will be both willing and able to prop it up at the expense of future generations.

The bottom line is that I can't make a confident short- or medium-term prediction at this time. It can be frustrating sitting on the sidelines while the market makes big moves, but there will always be opportunities to make money in both directions, and at least I'm not losing money right now.

Wednesday, May 19, 2010

Mortgage situation getting worse

States can hide their debts for a while by selling bonds, and the Federal government can delay the inevitable for even longer by printing money, but private homeowners and small businesses don't have those options. So it should come as no surprise that another wave of mortgage foreclosures will lead the next economic downturn ... or the next round of nationalizations.
And these are the conditions with TARP, bailouts and buyouts.

The Federal government could simply decide to spend trillions each year from here to eternity to keep the economy propped up, but that would be mathematically unsustainable without printing money and hyperinflation. On the other hand, fiscal responsibility and balanced budgets would finally allow inflated prices to fall and insolvent banks to go bankrupt - but few politicians want to be held responsible for purposefully allowing that kind of pain to happen. Most prefer to give the impression of trying to help now, so that they can shrug their shoulders later when the whole system collapses more violently.

Monday, May 17, 2010

The debate is over: Socialism sucks.

The track record of socialism is a dismal one. Socialism sapped the life out of Cuba and turned North Korea into a living nightmare. It kept China a poor country and is now gradually being replaced by free market capitalism there. It ravaged Communist Eastern Europe and brought down the mighty Soviet Union after just 70 years. Now the rest of Europe seems poised to fall despite the supposedly better and "softer" version of socialism that it adopted after World War II.

I'm afraid the U.S. isn't far behind, even without the race to become more socialist under Obama and the Dems. Since their inception 45 years ago, Medicare and Medicaid have grown to comprise more than 20% of the (pre-bailout era) Federal budget. Social Security, a tiny program when it was created 75 years ago, now takes up another 21% of the budget. If we add in Welfare, unemployment insurance and the administrative costs to oversee all of these programs, then wealth redistribution totals nearly 60% of the unsustainable Federal budget, and this figure doesn't even include interest payments on the debt.

The Utopian goal of letting everyone own a home has created an economic catastrophe that has yet to be fully realized. The implosion of Freddie Mac and Fannie Mae, the Troubled Asset Relief Program (TARP) and assorted bailouts and liquidity programs can all trace their origins to "compassionate" policies that both facilitated and required banks to lend money to people who normally wouldn't qualify for loans.

Let's just admit it finally here and now: Socialism drains the vigor out of cultures and kills nations.

Socialism sucks.

It's official: Dems declare war on the economy.

I can no longer give the Democrats the benefit of a doubt. When the Speaker of the House overtly encourages economically productive people to quit their jobs and take up oil painting, she and her party are purposefully acting to harm the economy.

She makes a token mention of entrepreneurship here, but quitting a job and forcing other working taxpayers take care of you is the opposite of being an entrepreneur. It's the precise socialist attitude that's brought Greece (and soon the rest of Europe) to the brink of collapse.

Sunday, May 16, 2010

A broader view of debt

The U.S. Federal debt of $13 trillion and current annual deficit of $1.5 trillion are only part of the problem. State and local governments are collectively in debt to the tune of about $3 trillion and are adding $200 billion to that number this year. Mortgage, consumer and credit-card debts total another $16 trillion. All told, U.S. citizens are on the hook for $32 trillion of debt, or more than $100,000 per person on average.

If we were to enact Geek-like "austerity measures" to pay down Federal, state and local debts, it would involve some combination of drastically cutting programs (Medicare, Medicaid, Social Security, unemployment, welfare, military) and raising taxes. Needless to say, a combination of vastly reduced government payments and higher taxes would squash the take-home pay of the average citizen, making it far more difficult to pay off personal debts. Greece was able to convince several much larger economies (also in debt) to bail them out - I doubt we'd be able to find such saviors when we reach the brink.

Any way you slice it, it's looking less and less likely that all of these debts can be paid off in full. Printing money (and high inflation) may be the only way to prevent massive worldwide defaults.

Thursday, May 13, 2010

Fun with numbers

The Federal government is nearly $13,000,000,000,000 in debt, and is currently adding to the debt at rate of more than $1,500,000,000,000 per year. So naturally the IMF is using $100,000,000,000 of our money to help Europe with its $146,000,000,000 bailout of Greece. Or is it a $1,000,000,000,000 bailout?

Whatever. The bottom line is that indebted countries are lending money to other really indebted countries in order to delay the latter's bankruptcies and hasten the former's so that we can all reach bankruptcy at about the same time.

Got it?

Friday, May 07, 2010

Insolvency, Monetization, Nationalization: Part 2

This is an eye-opening follow-up to my earlier post from two weeks ago. It turns out that the Federal Reserve Bank is not only the agent of wealth-diluting monetization, but it is also a key player in nationalizing insolvent corporations with the very money that it creates. There's a great deal of concentrated power there that does not want to be scrutinized. I disagree with many of Congressman Alan Grayson's domestic policies, but I agree with him that the Fed has become too powerful, meddlesome and secretive, and I back his campaign to audit it.

Forty six little Greece's

All but four U.S. states this year are facing budget shortfalls which total nearly $200 Billion.

Like Greece, the states can't print their own money, meaning they have to choose between borrowing money or instituting unpopular spending cuts and/or tax increases. Greece's economic mess was created by continually borrowing too much, while the current civil unrest was sparked by switching to spending cuts and tax increases. If this sounds like a no-win situation, that's because it is.

Manipulated stock prices are the least of our problems

Yesterday's out-of-the-blue stock market plunge and miraculous recovery may well turn out to be the event that finally blows the lid off of a broken or corrupt trading system on Wall Street.

Under a more free market-minded government I would be eagerly anticipating the needed housecleaning and new regulations that would restore fairness to the market, but I only feel dread in this case.

A messed-up system of stock pricing is of relatively little importance to Obama and the Dems. Sure, they'll take some token steps to fix it, but to them the much larger problem is that some people have so much money to invest in the stock market in the first place. This money that producers and savers are frivolously investing in corporate America could be put to much better use if it were spread around to other people who aren't producing or saving, because after all (I wanna be clear, blah blah blah) at a certain point you've made enough money.

Yes, Obama and the Dems are going to get their fingers into the Stock Exchange alright, but if the other corporations and industries that they've touched are any indication, they'll make it less fair, less transparent, and less profitable for everyone. Well, almost everyone.

Thursday, May 06, 2010

More Fun Times

Well, that was the most exciting day that the stock market has seen in a while.

Right now the S&P 500 index is 7.3% below it's rally high of 1217, which puts it smack dab in the middle of "small correction" territory. In addition, at least two sentiment indicators suggest that the market is near a short-term bottom. However, it would never occur to me to invest in a stock rally at this point, because the market is still highly over-valued, seasonal timing is poor, and the global economy is still in a financial bubble that has yet to burst. I remain in cash (and short-term treasuries) and I'm not going to bet on either a rise or a drop at this point.

Wednesday, May 05, 2010

Fun Times

Greece moves to prevent all-out national bankruptcy the only way it can: slashing government spending and raising taxes, and the grateful populace rejoices with ... violent protests.

A car bomb turns out to be the umpteenth attempt by a Muslim man to commit mass murder. (Gosh, did anyone else see that coming?) This time it was a close call, because the materials were in place and the bomber almost got away. The attempts will of course continue, and as before some will fail or be thwarted, but some will also succeed.

Just when it looked like we'd finally increase our offshore oil drilling capacity and reduce our dependence on terrorist states for energy, an offshore rig blows up, threatening to cover Florida beaches with oil. I don't want to think what would happen to energy prices if we decide to curtail or entirely shut down our offshore oil production.

Like I've said before, there are any number of triggers out there that could initiate some serious economic pain, and even armed conflict. Unfortunately one can't predict when events like these will occur, or which one will be "the one," so it comes down to an unnerving waiting game.