The United States is
facing both a structural and demand problem - it is not the cyclical
recessionary business cycle or the fallout of a credit supply crisis
which the Washington spin would have you believe.
It is my opinion that
the Washington political machine is being forced to take this position,
because it simply does not know what to do about the real dilemma
associated with the implications of the massive structural debt and
deficits facing the US. This is a politically dangerous predicament
because the reality is we are on the cusp of an imminent and
collapse in the standard of living for most Americans.
The politicos’ proven
tool of stimulus spending, which has been the silver bullet solution for
decades to everything that has even hinted of being a problem, is
clearly no longer working. Monetary and Fiscal policy are presently no
match for the collapse of the Shadow Banking System. A $2.1 Trillion YTD
drop in Shadow Banking Liabilities has become an insurmountable problem
for the Federal Reserve without a further and dramatic increase in
Quantitative Easing. The fallout from this action will be an intractable
problem which we will face for the next five to eight years, resulting
in the “Jaws of Death” for the American public.
economic news has turned decidedly negative globally and a sense of
‘quiet before the storm’ permeates the financial headlines. Arcane
subjects such as a Hindenburg Omen now make mainline news. The retail
investor continues to flee the equity markets and in concert with the
institutional players relentlessly pile into the perceived safety of
yield instruments, though they are outrageously expensive by any
proven measure. Like trying to buy a pump during a storm flood, people
are apparently willing to pay any price. As a sailor it feels
like the ominous period where the crew is fastening down the hatches
and preparing for the squall that is clearly on the horizon. Few crew
mates are talking as everyone is checking preparations for any
eventuality. Are you prepared?
What if this is not a squall but a tropical storm, or even a hurricane?
Unlike sailors the financial markets do not have the forecasting
technology to protect it from such a possibility. Good sailors before
today’s technology advancements avoided this possibility through the use
of almanacs, shrewd observation of the climate and common sense. It
appears to this old salt that all three are missing in today’s financial
Looking through the misty haze though, I can see the following clearly
looming on the horizon.
Since President Nixon took the US off the Gold standard in 1971 the
increase in global fiat currency has been nothing short of breath taking.
It has grown unchecked and inevitably became unhinged from world
industrial production and the historical creators of real tangible wealth.
as a country, we haven't deleveraged at ALL. All the moves
made by the private sector have been vastly outpaced by the
federal government's efforts to add leverage to the economy. The
net result is that we are much more indebted now than we were
before the recession began; as a result, we are digging ourselves
even faster into debt.
As of Q2 2010, total non-financial debt is rising at a 4.8%
annual rate but GDP is growing at only 1.6% annualized. US
debt as a percentage of GDP continues to climb, which should
put to bed any talk of a deleveraging or deflating economy.
Consumers are clearly only part of the equation - and, for
now, the smaller part. The US government, in fighting the
claimed deleveraging, is sending the total debt level into the
stratosphere. As we watch it soar upward, the dollar steadily
The ECB said it spent €323 million on government bonds last
week, up from €237 million the previous week and its highest level
since mid-August. The bank doesn't offer breakdowns of its
purchases by country or maturity.
(Richard H. Schweizer is the pseudonym of a Swiss banker
with more than 25 years of experience managing money and trading
Spreads of Irish government bond yields over German bunds
exploded to new highs for the Euro era on Friday. It was enough to
draw a statement from the IMF denying rumours that they were
preparing an Irish rescue package; a harsh reminder that the
European periphery remains fragile.
Morgan Stanley had already noted that concerns about economic
growth and the availability of external funding have been pushing
CDS spreads higher in recent weeks for both the PIIGS and
Central/East European countries.
The chart below suggests a correlated credit tsunami in the
making. The welter of austerity programs being imposed on the
PIIGS and CEE economies are unlikely to be growth boosters in the
And there’s that little problem which won’t go away. How do
the PIIGS return to competitiveness so long as they are locked
into the Euro ? It’s as if the PIIGS are being crucified on a sort
of Eurotrash gold standard. Does anyone believe the Germans –
scarred by memories of Weimer Republic hyperinflation – will
really go along with ideas of printing money and a weak Euro in
order to save their profligate brothers on the periphery. If not,
labor prices need to be cut dramatically in the PIIGS.
While CEE countries are in the shadows of new worries about the
PIIGS, it may be the capacity of the average Budapest cabbie to
service and repay the CHF loan on his taxi which turns out to be
the tipping point for the health of the European banking system.
Cheuvreux, part of Paris-based Credit Agricole, recounted the
following anecdote in a recent report aptly christened the Swiss
A taxi driver
in Budapest took a Hungarian Forint equivalent loan for HUF 2.5mio
in Swiss Franc to buy his taxi a little over two and half year
ago. Then he was paying HUF 70,000 monthly but is now paying
almost 30% more while his revenues have fallen 20% and this in a
country where his auto monthly payment now represents more than
50% of average net wages. How long can he keep it up ? Like
Poland, 60% of Hungary’s mortgage loans are denominated in Swiss
Francs so likely the same taxi driver probably has a Swiss Franc
mortgage. Extrapolate the monthly instalments for CHF denominated
mortgage loans on the chart below, up the rising curve of the
strengthening Swiss Franc and it’s clear the average Budapest taxi
driver is on a stairway to hell.
The Q Ratio is a popular method of estimating the fair value
of the stock market developed by Nobel Laureate James Tobin. It's
a fairly simple concept, but laborious to calculate. The Q Ratio
is the total price of the market divided by the replacement cost
of all its companies. The data for making the calculation comes
from the Federal Reserve
Z.1 Flow of Funds Accounts of the United States, which is
released quarterly for data that is already over two months old.
The mean-adjusted charts indicate that the market remains
significantly overvalued by historical standards — by about
41% in the arithmetic-adjusted version and 52% in the
geometric-adjusted version. Of course periods of over- and
under-valuation can last for many years at a time.
This is probably one of the most critical charts you will ever
see. In several years, when the dollar's reserve status is but a
memory, some will look back and say it could have been avoided.
But as the "You Are Here" arrow is just to the left of the tipping
point, it may very well be too late as is.
readobservations from guest poster JM:
Death to the Uber and Hyper Twins: Mother Nature’s Humble
“The great enemy of the truth,” John
F. Kennedy declared in a 1962 commencement address at Yale
University, “is very often not the lie – deliberate, contrived and
dishonest – but the myth – persistent, persuasive and
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important