Parking v Investing

There are two distinct trends that we have to divide and conquer to fully understand what we are dealing with (1) Parking capital and (2) Investing Capital

The motives behind each are totally different and this goes in part to also the question of the “reserve” status of the dollar. There is the dollar as a instrument of trade, and then there is the dollar that is PARKED by governments as reserves. If China demands other countries accept its currency and not dollars for trade deals, that has no impact on the “reserve” status that is determined by holding government debt. Such countries can accept their currency and the park it after conversion in US debt. Europe failed to create a national debt and thus the euro will never be a real single currency until that happens. The risks vary far too much with each nation to provide a single risk management. Thus, the vast size of the US National Debt makes it the only game in town for parking huge money. That is different from using dollars, euros, yen,  or yuan in settling trades.

There is unquestionably the inevitable revulsion toward sovereign debt on a global scale because governments have been borrowing with no intention of paying anything off. The failure of Europe to create a single debt has barred that currency from ever becoming a reserve currency globally. Politicians live under the delusion that it is less inflationary to borrow than to print. That was true in the 1960s when you could not borrow against government bonds. But after the Bretton Woods System collapsed in 1971, the “reserves” became just dollars and thus money became pure debt that now simply paid interest. You could trade in the markets with TBills as collateral. Suddenly, money and bonds were indistinguishable. What emerged was currency now that paid interest. Hence, the national debts have exploded as the USA debt is nearly 70% composed of previous interest payments. It would have been a hell of a lot cheaper just to print that did not cost interest. The national debt would be 30% of what it is and taxes would not be rising.

During the 1960s, you deposited money in a Swiss bank and you PAID them a fee to have the account. This was a throw back to how private banking really began. You paid someone to STORE your money because you had no safe at home. That was the historical role of PARKING your money – not INVESTING. This is still present today for during the financial crisis cash poured into TBills as they went to virtually a zero rate of interest during the crisis post-2007. We call such periods the Flight to Quality. It has nothing to do with investing – just capital preservation.

Under INVESTING the decision process is determined based upon the rate of return. This will benefit stocks whenever the dividends rise above the rate of bond yields and/or when the capital appreciation potential emerges (as in bubbles).

The fate of the stock markets do not thus depend upon corporate cash flow or even dividends. When the confidence in government debt declines, capital then seeks the flight to quality rather than investing and will select key stocks for capital preservation. This is why private assets rise during such periods of government (PUBLIC) economic distress or even during the craziness of hyperinflation that emerges in isolated fringe economies as was the case in Germany and Eastern Europe during the 1920s. Germany ended the hyperinflation by backing a new currency with real estate assets not even gold!

There has been no massive beneficiary of extreme deficit spending other than exporting capital to bond holders – not the poor. About 40% of the US National Debt has been held by foreign hands and thus the interest spent does not necessarily stimulate the domestic economy anymore. The kicker here is the shift between PUBLIC to PRIVATE as a flight to quality. I believe that as rates rise, the deficits will not be as “costless” as they have been and will rise exponentially. This will cause further spending reduction and the raising of taxes. This is the suicide factor because a core economy, unlike a fringe economy, has bondholders who are demanding to be paid with UNINFLATED money. As the City of Mainz discovered, when they could not sell their bonds to pay off the last issue, they defaulted. They had already raised taxes and chased the rich out of the city. All that was left was the creditors sacked the city and burned it to the grown.

As these trends unfold, do not expect corporate cash flow and earnings to rise and provide a rate of return from an INVESTMENT perspective. The Bell Curve will kick in by 2016 and that will turn downward leaving capital seeking preservation and dumbfounded where to go. This historically has been a flight to tangible assets including shares, real estate, and commodities. Effectively, everything that is opposite of PUBLIC. Hence Germany’s use of real estate to back its new currency.

We are starting to witness the suicide factor already. The rising cost of government even during economic declines. Perhaps since politicians are dominated by lawyers, we need to include common sense economics as a mandate in law school. Perhaps these people will remember and a light will go off before falling off the fiscal cliff.

Consequently, an equity price rise is by no means purely earnings based. It will rise also on a flight to quality when capital has no place to park. Likewise, forget the nonsense about HYPERINFLATION that seems to be more of a sales pitch than any authoritative study. Gold will rise as a parking vehicle for the same reasons. Our risk is the implosion and death by suicide, not that they will print forever. We do not have that much time. When interest rates start to rise, the pressure will be on the Sovereign Debt Crisis. Why these governments REFUSE to investigate what they are doing is simply because politicians are only concerned about winning the next election. Not actually fixing anything.

Watch the end of 2013. After August 7th, things look like they will go nuts and we have the German elections in September. France has abandoned sound economics and they were the #2 anchor of the Euro. If Merkel goes, what is left but a fragmented socialistic government hell bent on grabbing other people’s money to buy the next election.

 

HELLO STAGFLATION

The U.S. economy shrank from October through December for the first time since the recession ended.We are looking at the net effect of Obama’s Voodo-Economics. Yes, the US economy was hit by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The decline occurred despite faster growth in consumer spending and business investment. Government still has not figured out that in the real world, people respond in anticipation.

All our indicators have been pointing to STAGFLATION as the COSTS rise but the DEMAND is reduced. Raising taxes as drastic as has taken place with payroll (including Obamacare) has increased the cost of labor in the USA by about 10% at one clip. It would be nice if they made real world economics MANDATORY to get a law degree, for way too many lawyers take up office and they may know how to write laws, but are clueless about how people react economically.

The Commerce Department said today that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter and the first contraction since the second quarter of 2009. When everyone knew the Bush Tax Cuts were expiring in December and Obamacare was kicking-in come January with a 2% payroll tax increase, WHY would anyone hire people or expand a business until the dust settled? Of course socialists just do not get that. They think they can enact a law and everyone must comply or go to jail.

Why this seems to be a surprise decrease in the nation’s gross domestic product to the vast majority of economists is because they always forecast whatever trend is in motion will stay in motion. Many now claim that this weakness is primarily the result of one-time factors whereby Government spending cuts and slower inventory growth subtracted from a total of 2.6 percentage points in growth that will not happen again.

That is not the point. The issue is taxes are rising and they are excluded from the government view of your cost of living – it is your obligation. This is stagflation where the real costs keep rising and demand is reduced accordingly, squeezing everyone in between.

It is a global economy and one cannot forecast the US economy in total isolation. We have been warning that the economic growth in Europe is turning negative. US Exports fell by the most in nearly four years thanks to the European economic Depression. There has also been a mild recession with slower growth in China. This is also being caused by the decline in Europe. That is the real crisis point. It is where the entire world economy is dancing on the head of a pin. Multinationals are cutting back inventories in response to the economic recession outside the USA and will not replenish them until they see a change in trend. Caterpillar, Inc., the heavy equipment maker, announced this week that it reduced its inventories by $2 billion in the fourth quarter as global sales declined from a year earlier.

The economy will remain weak at the start of the year because Americans are coming to grips with an increase in Social Security taxes and Obamacare that has left them with less take-home pay. The Republican Congress and the White House allowed the temporary tax cut to expire in January regarding payroll taxes, but reached a deal to keep income taxes from rising on most Americans. The tax increase will lower take home pay this year by about 2 percent for the Social Security tax. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less. Then there is the Obamacare tax.

Meanwhile, the US economy has been creating about 150,000 jobs a month, on average, for the past two years and the tax increases are likely to worsen that trend. Even if it remained the same, that many jobs is not enough to actually reduce the unemployment rate, which has been 7.8 percent for the past two months. On top of that, the arrogance of state and local governments is hitting home. We will see more layoffs from the public sector than from the private.

Corporations have been sneaking around letting people go a few years before they become eligible for retirement to cut costs. But government is doing the same. Given them an excuse, and you are gone. First hand sources confirm this is even taking place in the Military.

It appears the computer was correct again. January looks like a turning point. The Dow will not elect a Monthly Bullish Reversal and a daily closing BELOW 13677 will signal a pause in trend. Meanwhile, gold has to close on a daily basis above 1702 to add a little bounce to its step.

309.6 Year Cycle – It’s About Time

Just to make it absolutely clear, within every wave, like in a bull market, there are always counter trends or corrections. There MUST be two sides in all trends be it bullish or bearish. The overall character of the present wave is a PRIVATE WAVE meaning that in such waves markets advance more rapidly and volatility rises. During a PUBLIC WAVE that ended in 1981.35, the leading trend was confidence in government so the bond markets did best and the Dow could not get through the 1000 level until the wave changed to private in 1985.

At the 309.6 year level, there are still tendencies for the PUBLIC v PRIVATE aspect. At this level it is a bit different. It is the rise and fall of empires so we have the most drastic elements at that level – the swing between civilization and isolationism through fragmentation. This is typically caused by government becoming so corrupt that people abandon the idea of collective societies as being beneficial. The Romans called the abandonment of the cities – suburbium.

When Rome collapsed, you moved away from government and feudalism began. The same in Japan. There is a danger of a dark age perhaps after 2032. Hopefully I will be dead by then. But it is hard to put the odds on that. But this is why we are in a growing trend of dissatisfaction that is manifesting in separatist movements. This is the opposite of civilization. People are getting fed up with government and because this is the LAST 51.6 year wave in this 309.6 year cycle, it is the PHASE TRANSITION period so things can get really nuts.

No matter what the system, there are ALWAYS two opposite forces constantly at work simultaneously – bulls v bears; democrats v republicans, and left v right. There has to always be two forces and one will be the dominant one during a period. Hence, there will be times Democrats control both houses and other times it will be Republicans. But NEVER are there no opposites. So any cycle has its dominant force, but that does not mean the opposite does not simultaneously exist.

There is no possible way that everyone will ever believe one thing regardless of what it is. There will always be people who attack, distort, lie, and misrepresent anything in an effort to say they alone are right. That is the way everything functions. It is nothing unusual.

At the 309 year level, weather has played a greater role in altering the behavior of society. There is the first Heroic period in Greek history separated also by a dark age, and then the Hellenistic period. During the dark age, because of weather Greeks took to ships and migrated south. Other cultures called them the Sea People. Rome (1) overthrew its king, (2) Republic became an Oligarchy, (3) after tremendous civil wars, it became Imperial Rome, and then collapsed. China also was invaded by the Mongols and was taken over by them even though they did not know how to read or write. They too were weakened by floods, famine, disease, and corruption.

It is pointless to argue. Some people have their mind set and will never yield. So why bother? Others have a open mind and judge accordingly. They are the minority. Look at the Presidential elections. The winner is typically decided by less than 10% of the vote. Democrats will NEVER convince Republicans they are right etc..

The people who come to our conferences are typically the cream of the crop. The open minded and most intelligent rather than the mindless drone who believe only what they want to because of predetermined biases. That’s life. You will NEVER convince people who are antagonistic to anything that disagrees with their dogma.

Nothing lasts for ever. That is why I was impressed with Margaret Thatcher. She understood cycles and that the Conservatives would lose. When I asked her why, she said “It’s Just Time.”

International Advisory Board

New-Office-2

In response to many former clients who have asked to join the International Think Tank operation under construction in Switzerland, we will be establishing an international advisory board for those who would like to contribute their expertise. The key will be to accept no grants so we remain entirely independent and not bought and paid for as most so called think tanks in Washington really are churning out studies for the highest bidder.

Asset Class Allocations

When you actually conduct studies of relationships that people ASSUME exist, you find that they rarely actually exist. Investigating stochastic behavior of the prices and volatility of of the leading commodity markets and comparing them to the debt and equity markets, produces a very interesting result. We observe a substantial degree of uniformity in the behavior of the series. It is totally inappropriate to treat different kinds of commodities as a single asset class. Agriculture, metals, meats, etc.., are normally treated as a single asset class in the academic literature and in the investment industry. However, commodities can be a useful diversification to equity volatility as well as equity returns if truly managed as separate asset classes. Risk measurement, options pricing, and hedging strategies exemplify the economic impacts of the differences across commodity spectrum correlated to equity and debt markets. We will be including these studies in the future for asset class allocations.

Nothing is Certain

In research, 99% of all mistakes are caused by ASSUMING something from the outset. The ONLY way to conduct research is to follow the breadcrumbs. Whatever you may have thought would be the outcome, is typically wrong. This is why I created a computer model to do research on its own without any predetermine rules. It has taught me a lot and impressed the hell out of even governments because it is free of human bias.

Take the Chernobyl incident. Everyone assumed that a nuclear accident would kill all life. Sorry, that ASSUMPTION was dead WRONG. It turned out some species were sensitive while others adapted.

http://www.thebulletin.org/web-edition/features/wildlife-and-chernobyl-the-scientific-evidence-minimal-impacts

The BBC did a story on this very startling discovery that Chernobyl “contains some of the most contaminated land in the world, yet it has become a haven for wildlife – a nature reserve in all but name.”

http://news.bbc.co.uk/2/hi/europe/4923342.stm

It is what it is. You have to just follow the breadcrumbs and stop trying to further theories that support what someone wants to happen. The Black Death killed off half of Europe. Some were not affected and survived. Nothing is Certain. The fascinating thing is waking up each day to a clean slate to see what can be discovered. It keeps life interesting and engaging.

Krugman Says We Are In A Depression & More Gov’t Spending Is Necessary

Fischer Black and Myron Scholes won the Nobel Prize for Economics. Scholes was  involved with Long-Term Capital Management that blew up on that formula. The fund, which started operations with $1 billion of investor capital, was extremely successful in the first years, with annualized returns of over 40%. However, following the 1997 East Asian financial crisis and the Russian Financial Crises the highly leveraged fund in 1998 lost $4.6 billion in less than four months and failed, becoming one of the most prominent examples of risk potential in the investment industry that the Federal Reserve stepped in to bailout because of what they owed the banks. So a Nobel Prize is by no means an endorsement of any theory’s validity.

The Nobel winning Princeton Economist Krugman who writes for the NY Times is a highly dangerous socialist who is of the “New Economics” thinking following Marx and Keynes that government can manage the economy. He currently claims that the economy now needs all the help it can get to End This Depression Now! in his new paperback edition that has just been released with a new preface.

“The U.S. economy is recovering but slowly,” and still experiencing “depression conditions,” says Krugman. “Almost four million workers have been out of work for more than a year…we haven’t had anything like that since the ‘30s” [and]… there’s lots of unused capacity…a lot of savings that have nowhere to go.”

Krugman’s solution is MORE government spending, not less, in order to GROW the economy. I too can have a trillion dollars anytime I want. I write one check from one account to a second account for $1 trillion and my bank statement will say I am a trillionaire for a brief shining moment until it bounces. Krugman  fails to understand that government spending FAILS to stimulate the economy following a bell curve with diminishing effects BECAUSE we no longer are borrowing from ourselves but China. Krugman say: “A growing economy is the best solution to all our problems.” True, but it is the private sector that actually creates stuff that contributes to the national wealth no “public servants”. He is by no means even concerned that more government spending will lead to bigger deficits. “There is no good reason dealing with debt should be a priority today.” Krugman, goes even further saying that “the 10-year outlook for debt [in the U.S.] is not too bad.”

Krugman is still of the Marxist school and actually thinks that government jobs will grow the economy. He now suggests that the federal government should reverse state and local budget cuts in infrastructure and education. “Just undoing that would lead a long way back to full employment. It is in fact that easy.”  He is totally ignoring the tax increases at every level of government.

2013-Budget-Table

I honestly do not know what even to say. Germany is over 50% of the people working for government. He clearly sees no problem with everyone working for government and fails to understand that someone has to produce something. He is also ignoring the rising interest costs. Here is President Obama’s own official budget. This 2013 budget assumes NO rise in interest rates and interest expenditures jump from $230 billion currently to almost $1 trillion annually by 2022. If interest rates rise 1% we will see interest expenditures approach $1.5 trillion annually and 40% of that goes offshore. You better tear down the wall between the US & Mexico because we are going to need EVERY Mexican to come here to work off the books to make up for all the government jobs producing nothing – which is why they are call “public servants”. 

2013-Budget-Debt

Now look at this portion of the budget. The receipts (taxes) are at $2.3 trillion and spending is at $3.6 trillion for 2013. Look at 2022. The deficit is cut in half, but the taxes are 100% of that reduction rising to $5.1 trillion when spending rises to only  $5.8 trillion. Krugman must be of the mindset that taxation has no impact on the economy because it is not a “cost” of living, but an “obligation” that somehow does not count.

I just fail to see his logic if there is any. All I can do is say get a real job to observe how people truly react outside of school if you want to understand real economics. Even Paul Volcker admitted this “New Economics” thinking failed a long time ago.