Outlook: 2011 Q1 update

So happy new year, and with that comes new graphs, new outlooks, and hopefully better insight.  Last year was the second year for me, and I learned a lot, and hopefully you did to.  One issue I have noticed is that since these posts come so infrequently, not everyone reads them in a timely manner.  I have looked for a widget to build a email list, but ads and silly stuff come with it, sooo... if you wish, email me and I will build an email list that will be pinged when I post.  Best I can do for now.  Email is patrick14384 (at) gmail.com (sorry the cryptic, but lots of robots rummaging around the web). 

Unemployment. So first change is the unemployment chart, this will be the last time you will see this one from me, as it is too unpredictable with people being dropped as per some formula that I just cannot be bothered to figure out.

Now look at our new chart, this one is a much longer time frame, and I cannot get Excel to show all of the years AND the projection, just gotta love it.  Oh well, so we should continue near flat for the rest of the year, there is no recovery coming for jobs.  I think that topic has been beaten to death in the media, companies are not hiring, and this year should be the year that a fair number of government employees hit the unemployment lines.  Local and state levels mostly, Federal level will follow next year.

So on to inflation.  First note, I have left the old predictions on the charts (except for new charts) as red dashed lines.  New predictions are just like the old, should be obvious once you look.  So on to inflation, I did not do so bad last year, pretty much right on target although the peak was not as high as I expected but we ended the year down.  Again, hyper-inflation is no where to be seen.  For the next 2 years as depicted by the green line, I still do not see any inflation.

So looking back I totally gaffed the call on the stock market.  It looked for a bit that I was just a bit early, but then it turned and set a new high.  This rally is unbelievable, however time is running out.  It will not get back to 14,000, but 12,000 seems reasonable, which is hard to say for me as indicators have a little more room to go up before this gets into the insane area, but we are very close. 

And the other big miss for 2010, Gold.  Just a near vertical rise.  Looks like it is stalling, and it is very hard to believe that it can go much higher, just beware, when it drops, it should drop like a rock.  I looked at the Dow Jones chart leading into 2000, and this vertical rise is steeper than that crazed mania.  This should follow the Dow Jones, so when that drops, look for this to go also, but a bit faster. 

I was expecting more government action with regards to the debt, really thought they would kick in some more cash to folks.  The government is I suspect starting to get a tad bit concerned about its own fiscal house, and so I think we see the pace of the debt piling up decrease slightly, but not significantly.  It will be nearly impossible to get to a balanced budget let alone pay down the debt.  We are almost certainly headed for either default or hyper-inflation.  But not within the next 2 years.

 
Europe is all but screwed now.  Greece's bonds are 10% higher then the German bond, Ireland's fate is also sealed, and Portugal is right on time (note my previous post) in finding itself in trouble with the markets.  And the Fed has now added Belgium to the chart.  Spain however is next, still 6-9 months away, but that will be a serious test for the EU and IMF.  This is the story for 2011, watching one EU country after another get into serious trouble, with Italy probably toppling everything over in 2012.

Credit should level a bit, temporary rest while people think that things are really improving.  When in about a year they realize it is not getting any better, the numbers should continue down again.  Consumers can only hold out hope for so long, and then things will get ugly.  

House prices are projected for another 10% fall, and I can agree with that, although it may accelerate faster near year end.  On this one I did not account for how messed up things were with tracking mortgages and the banks ability to foreclose, nor did I give government intervention its due respect.  I do believe however these problems will not occur again (they will sort out the foreclosures). 

Should be an interesting year, that is for sure!  So for the next 3-6 months overall things should be ok, but 2nd half of this year we all should start feeling more gloomy. This likely will really get going in 2012, but for now, status quo. Again, check that your bank is safe, and start considering drastic measures.  I came very close to closing my 401k, but elected not to.  I do suspect taxes will increase drastically at the end of the year, and that has me and my money worried.  I need to find a safe spot to protect it. You should consider the same also.

Patrick

Ireland debt trouble

As I have posted before, Ireland was in trouble, and over the last week or so the trouble has turned into panic.  Yeap, peaking at just shy of 800 basis points (or 8%) higher interest rates vs the Germans, Ireland has all but followed Greece and Iceland into bankruptcy and the kicker is, they have enough money on hand to get by until next summer.  Yeap, totally solvent, however the market no longer sees it that way, and hence the destruction of their ability to borrow from the markets. Below is my projections of what the graph I normally use would look like with the latest data. 

Everything after the blue line is a projection based on information from Bloomberg for Greece, Ireland, Portugal, and Spain. I have roughly subtracted out the German bond price (this is really just to show that Ireland's interest rate has soared as of this month.

What is interesting is the panic that has started, and somewhat from the markets, but more so from the government.  The EU and the IMF have jumped into action, seemingly trying to force Ireland to accept bailout funds now so as to quell the market, meanwhile Ireland up till today was not even acknowledging that it needed or was receptive to getting assistance. 

But... Ireland is not the problem.  Nor is Portugal.  It is Spain and Italy.  Look at this graph from Calculated Risk blog at to the size of the sovereign debts.

Note where Ireland and Portugal fall (nearly all the way to the right) vs Spain and Italy (on the left hand side).  Italy would be a total disaster, likely in the middle of a total disaster.

Oh well, I will keep you updated on this growing crisis, but look for Portugal to slip into disaster in another 3-6 months also. 

Outlook: 2010 Q4 update

First off I have to sort of apologize, I typically like to post these quarterlies once the inflation data comes out about mid-month, but well the computer went down due to a MS update, and then after fixing that, call it bad karma, but then one of the hard drives failed.  So one new computer later and we are back up and running. 

For those that have not heard the news, the recession (or the "Great Recession") is over.  Yeap, ended in June of 2009 in case you had not noticed.  So you should feel better now.  Everything is fine!

Unemployment. Still trending down, and at a ever so slow pace.  Keep in mind the government has pumped trillions of dollars into the economy and our net takeaway has not amounted to much.  With QE2 now I now think that this number slides sideways for some time to come. 

All we did was track sideways for the quarter with regards to inflation, and that should be troubling.  With all of the easing, printing, and low interest rates, one would think the Federal Reserve Bank leadership would begin to scratch their heads and ask, why is this not behaving right?  Either way, I am still happy with the trend, might not make it to zero by years end, but it is unlikely it will be in the "comfort zone" 2-3% prescribed by the Fed.

Amazing is the only word for the Dow, just peaking over the April 2010 high.  I will blame it on QE2 but it is only partially that.  We keep debasing the dollar in a lame effort to save our spending "fix" and when I say fix, I mean like a fix a junky gets while doing drugs.  The Dow continues to be a precarious spot, and I am now looking to go short the market, so that should tell you where I think we are headed.

To infinity and beyond!!!  Yeap, there is no stopping gold.  I am going to see if I can find a chart for oil when that peaked and compare, I suspect we will see a similar thing, but in the mean time, I am not touching this one, no one trading this is at all rational.  Why, this trade depends on run away inflation (look at the chart above) or a debased dollar.  I will grant you partial points on the debasing argument, but we are looking at ~60% increase in value of gold.  The dollar has not lost all that much value, maybe and I am shooting from the hip, but maybe 10%. 

I will be a bit off on the national debt for the end of the year, I expected at this time a 2nd round of stimulus, and instead we got a 2nd round of Quantitative Easing.  Opps.  So you will see my prediction accelerate upwards a bit faster then will actually result.  Either way, each American now owes about $44,000 or, better put, each tax payer owes $124,000.  If that is not bad enough, some states are in dire fiscal situations and have stopped paying bills,and it is not California this time.  Pulling some data from http://www.usdebtclock.org on the states, per citizen here are the top 10 states that owe the most

State Debt per citizen (ten most)

New York	$16,463
Massachusetts	$16,260
Alaska	$16,105
Colorado	$14,790
Connecticut	$14,693
California	$13,201
Washington	$13,170
Texas	$13,140
Kentucky	$12,473
Illinois	$12,101

Well with regards to the problems in other countries, the US is not all that bad off (yet).  Greece's spread soared to the previous high, and then relaxed (I cannot recall the action, I think it was the EU again), but as of late they have started their trek up.  The real worry is Ireland, and then Portugal.  Ireland announced massive cuts today in the hopes of staving off EU intervention, but once these cuts are realized, expect rioting just the same as is occurring in Greece.

Not much new here, consumers continue to shed debt while refusing to take on new debt.  One word for it, Deflation. 

Stimulus is over now, so time to wait and confirm what is about to happen, which will be a sales slump and price slashing.  It will take a couple of months for the data to come in right now is for September, so the next update should show a truer picture. 

Folks are now starting to get a tad bit motivated, but still too early to tell.  The next 3 months will be telling.  This will probably wake up the stock market from its rosy dream, so I am not too worried.  I seriously doubt with a Republican house, that there will be any more stimulus for the housing market.

The FDIC continues to shutter banks, last report was 96, and now we are one shy of matching last years total of 140 banks. 

The erosion of the economy continues, there is next to nothing good to report, maybe you can take stock in the GDP report, but that was likely propped up with stimulus, and now with a divided congress, nothing is going to happen.  So that leaves the Federal reserve out of the game (ok, QE2 but really how much impact will $0.9 Trillion have given what we are facing), and now the medics are carrying the government off the field.  Who will step in next time?

One last note, some of the graphs (namely the unemployment) will be updated in the next posting with newly revised forecasts.  It is all a learning experience, and so time to fix some of the mistakes.

Patrick

Outlook: 2010 Q3 update

Well now it is getting sporty.  I guess that is what one says when things liven up, or well maybe I am just making up the phrase.  Anyway, the slow grind that has been underway now for 9 months continues, however the stock market has started to grow a bit concerned.  Most of the concern still centers on the PIIGS, with Greece being bailed out, and now Spain is falling over the side of the cliff also. 

Unemployment. Seems to be trending down. Huh, things must be improving.  Yeah, right.  Funny how you make predictions, get them wrong, and have to admit it.  So the factor here is that the chart below is based on the U3 number, which is a massaged number that uses quirky formulas to decide who is unemployed and who desires to be unemployed. So in this chart we have retreated from the high of 10.1% (Oct 09) down to 9.5%.  If I look at the percentage of people employed (must less doctoring of that number) it has increased 0.1% since Oct 09 (higher for that is better, means more folks found a job).  My bad was using the headline number to base predictions on, and it is pretty hard to account for the 652,000 people that apparently left the job market (apparently they walked out?).  Anyway, the job situation has not improved, nor will it. 

It is interesting to me now when people talk in the media about inflation, as it seems that everyone has done a complete about face on this subject.  First if you mentioned the term "deflation" a few years ago people either had no idea, laughed, or said it was impossible.  Nowadays, printing money as fast as possible is considered a good thing, boosting prices (like cars [cash for clunkers], real estate, and banks) is completely acceptable, and I watch an analyst recently say it was a good thing.  History will tell you otherwise.  Anyway, this is still a non-factor although the latest figures are a bit ominous. A couple more months and we may be back in negative territory.

As for the market, I will be by to collect from all of you that doubted my Q2 report where I stated "Do not get lulled into this rally.  Nothing about this is healthy or normal.  The turn down starts before I publish the Q3 update. I will put money on that."  That was at 11,018.  Friday it closed at 10,097.90.  Watch out for this thing to pick up speed on the way down.  The slope of the line was not chosen at random.  It might not be perfect, but it should be close.  There is a chance I have this wrong, and that retrace to say 8,500 and then head back up over 11,000, but the odds are really remote.  Much more likely is you will see panic (true panic) set in, likely 6-18 months away, but it is coming. 

Gold just continues up.  Not sure still how or why.  I am still convinced it will fall, but who knows when rational thought will come back to this market.  Boy do I wish I had bought into it early, oh well.  Cannot win them all.  This is on a lunar trajectory, at some point it will run out of fuel...

National debt continues to remain on track, I am off by $200 billion which ain't so bad.  Europe has started to impose austerity measures, which should and I emphasize the "should" halt the upward trends of their debts, but the USA has elected to spend spend spend.  I should however qualify the US position, the federal government is spending, the state and local governments are cutting cutting cutting.  It is just a matter of time before the federal guys step in line, but like I depict, not until the end of 2011 at least.

I will include this graph over the coming months as it is so important to realize what is taking place in other countries.  It is from the Federal Reserve Bank of Atlanta and you can see what good the EU policy response did for Greece.  Looks like it will buy them about 3 months... not a lot of time for $145 billion dollars from the IMF to be burned through, but rest assured... there is another $636 billion available from the EU (but not only for Greece).  In case you cannot tell, Ireland and Portugal are the two below Greece.

People continue to pay off debts and that outweighs the creation of debt considerably.  Call it deflation, call it a slow down in the velocity of money, or whatever else you want, but this is deflationary. 

Like I said last time, the spike for home sales seems to be in on schedule in April, and now that government stimulus has expired, sales should plummet easily blowing throw the recent low from 7 months ago.  Also interesting to note the number of houses entering the market.   

Prices are on drugs, but the drugs are all gone (for now at least), and so the prices should start in earnest downward over the next 6 months, setting new lows pretty quickly (we do not have data for June yet, so one more month of upward prices possibly).  Probably be the end of the year first half of next before the prices re-align with my prediction.  

Quick footnote, the FDIC continues to shutter banks, report was 50 so far, but now we are up to 96.

Other than gold, everything else remains mostly on track.   I suspect we will start to hear of some folks not getting their debt refinanced soon, say 3-6 months away, either a country or a state, but someone is about to start the parade that should get pretty big.  As always, keep you money safe and hang on to your job!

Patrick

Europe vs the USA: Stimulus vs austerity

A short post, a significant event occurred this past weekend that will not be noted all that much now, but I suspect the history books may make note of it (it will be at least a point of debate). To date, the major players in the world have been in unison pushing stimulus money into their respective economies to try to jump start them again.  Now some will argue that it is working (siting increased spending, leveling off of house prices, strengthening GDP, etc) while the flip side will just point to the national debt and ask what about that?

So what happened?  G-20 Clash Over Recovery Risks ’Sub-Potential’ Growth.  In short, Europe has altered course, and no longer subscribes to the stimulus idea whereas the USA continues to push that as the road to recovery.  I think both sides of the coin will agree that it is bad if we all do not play the same game.

What happens now?  European governments will begin cutting back on their spending.  This will inevitably lead to layoffs, and all the bad things that occur when one is afraid for their job.  However, it will mean that investors should continue to support the government debt loads.  This does assume that the governments have the fortitude to actually cut back on spending. 

Fine, Europe is going one way, the USA can continue our method.  Well... not exactly.  Soon (soon being months - year, maybe two years) the European governments may be in better shape and investors will compare their sovereign debt to that of the USA.  Since I love analogies, picture 2 houses with machine guns firing at the zombies coming out of the forest.  Neither has an unlimited supply of ammo, but as long as both fire at equal rates it does not matter.  Say the European house slows down its fire rate to a trickle, thus conserving ammo.  What should the USA house do?  Go out in a blaze of glory?  If you had a box of ammo to contribute, whose house would you back?

We all committed to this path, its not fair that Europe has reversed course, but from their standpoint, Greece is next to bankrupt and Spain and others are headed down the same path.  They have to do something as stimulus is not working

History should note that at this moment Europe lost faith, and will likely ponder if they continued with stimulus might a depression have been avoided?  In the end it really does not matter, someone had to flinch.  The only question left now is when does the USA start to impose austerity measures?

And by the way, it does not matter all that much.  The zombies are going to win in the end regardless.  Happy hunting!

Patrick

What should I do?

It got a bit exciting, but then quelled down and now we wait for the other hammer to drop.  What the heck is he talking about?  Let's step back here and take a bigger picture view... the market may have turned and this time things are not quite right. (I wrote this before the Dow dropped 376 points today)

It could be a short drop much like the one in Jan/Feb 2010, but even I get no sense of optimism.  Really, Europe bonds are all over the headline, Germany is upset with Greece, Iceland went belly up, France is complaining about the EU, Spain is pleading that they are fine, and England has taken a kidney punch from the EU.  Across the "pond" here in the US, congress, the Securities and Exchange Commission, and now countless agencies within the government are declaring war on the free market, the stock market, bankers, and anyone else that is not miserable.  And if you are not in the US and snickering, England has proposed a 50% tax on capital gains (it is not passed yet).  Want to watch a stock market drop, watch that one if that tax gets passed.

Most of these posts have presented data trying to convince people that trouble is coming.  This one will take a different slant, what I think you should be doing.  It is obviously my opinion, and thus worthless, but if at least it gets you thinking then mission accomplished.

A quick overview, which you can get details in any of the quarterly updates on the blog, but a deflationary crash is underway.  I will guess that it will take about 5 years before hitting the bottom (stock market-wise) and rebounding.  So, we are not talking 2 quarters, we are talking years.  Why?  One simple word, DEBT.  It must all be destroyed.  Currently the consumer is shunning it, and soon the government will be forced to (that thing called "will of the people").

Ok, enough setup.  First thing, KEEP YOUR JOB!  I have said this over and over, however if you take a wrong turn at every intersection, this one will very likely save you.  Taking a 5% pay cut sounds awful, but compare that to a 100% pay cut, and it is not so bad.  Unemployment is not going to go back to the 5% range for probably 8-10 years I would guess, if ever (they will need to alter the method of calculation).

Enough on the job stuff.  #2, and again I say this over and over, find a couple of safe banks.  Here is a free site, but pay for it if you feel you must.  The FDIC closes banks now every Friday, and the FDIC also has collected dues for future years already, and even with all of that, is just about out of money.  They still have a line of credit with the government, but really, do you trust the government with your money now that they have a $13 Trillion debt?  Take the little hit in interest and know that it will be there tomorrow.

Investing gets difficult, as everyone is at different places in life, has different risk tolerances, and differing goals.  I can hear the first comment now, but in my case it is different.  Fine, so be it.  This is about generalities.

Stocks:  will be extremely dangerous for like 5 years (including your 401k).  Dow 1,000 is a crazy possibility.  I know, it is nuts, but I am thinking system wide collapse, and that includes civil unrest, frozen credit markets, and lots and lots of very unhappy people.
Stocks (shorting): risky and not for the faint of heart.  1-2 years of this should be ok, then it will get very dodgy. 
Real estate:  pure suicide.  Credit is freezing up, and government involvement is just about over.  Say 4 years before that is able to be considered (you will need to pay cash however).
Collectibles:  No one will be in the mood to shell out money for trinkets.  Food yes, trinkets... no.  Say 15-20 years before this is back in vogue.
Metals:  Gold and silver are over priced, and should fall.  That said, it is impossible to argue that having some is a bad idea.  You will likely lose money, but it will be very hard to lose everything.  In 4 years I suspect this will be a very good idea (it still will not make you money).
Municipal bonds:  Not a good idea.  How many governments (city, town, state) are reporting positive tax growth?  Not many.  Nations do not default often, but smaller governments are more likely to toss in the towel leaving you with nothing, like Central Falls, RI which gave up today.  6 years before you can consider it (bit of a guess, inflation could make this a bad idea in 6 years)
US Treasuries:  Good idea, for now.  There is a caveat, short term treasuries only (90 days to maybe 1 year if you are brave).  As much as I rail on the US government, they will not go broke immediately.  In about 2-3 years I suspect this will be a very bad idea (even short term notes) but for now it is good.  

Those are all I can think if right now, except the Euro, but you should be able to guess that one yourself.  Feel free to comment with other investments and I can give my opinion if I have one.  Again, this is not investment advice.  Just trying to paint a picture so that if it happens, you may have a better idea of what is next. 

And speaking of the FDIC, we are well on our way to surpassing last years numbers.

European Bonds: Oh no! What happened!

As I type this, you all surely have heard of the bit of turbulence that occurred in the US stock market today, with the Dow Jones dropping 1,000 points, or about 8%. A stat I saw was that at the end there were 32 stocks down for every one stock that went up. But that is not what is happening (as I type this), right now, they are STILL trying to figure out what/if something went wrong or someone made a colossal mistake at about 2:40 EDT. Mind you the market closed over 6 hours ago. The NASDAQ is considering canceling trades made between 2:40 and 3:00. Think that one through very carefully... you may be very very rich if your trade was at 2:50pm, or you may be very very poor... and as of right now, you have NO IDEA! And you thought the age of computers would prevent something like this, vs those traders that had to wait until midnight during the 1929 crash...

But, this is not the post tonight. It is about Greece, which I wanted to do 2 weeks ago, but could not get recent data until yesterday. So far, only Iceland has fallen prey to overwhelming debt, and Greece (depending on your degree of hopefulness) has all but both feet in the grave. The chart below is bonds spreads of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain along with the United Kingdom when compared to the bond of Germany (the biggest kid on the block).

 If you currently have Greek bonds, well you can still start a fire with them and get a bit of heat out of them...  If I have the numbers right (and I apologize, but I cannot find daily data for bonds) German 2 year bonds yield about 4% currently, whereas a Greek bond being 700 basis points above the German bond, or 7%, would therefore yield 11%.  They could not support the debt at 7%, who is crazy enough to think that 11% is even remotely doable? 

And of course Germany before sending money to Greece is demanding Greece get its fiscal house in order by cutting back harshly on government spending and the size of the government, which obviously sent protesters and riot police into the streets once it became clear that Greece was going to comply (they had no choice!).  We still have a bit, but as more and more folks in more and more countries get mad, it is just a matter of time before one country blames the other for its woes and armies start crossing borders. 

Seems to me that Ireland is next, but the news has picked Portugal, and at this stage, that may be all it takes (there does not have to be a rhyme or reason any longer).  Either way, both these countries are shooting for 3rd place with Spain being the dark horse, but also note, the UK is right there (it is hard to see, but Italy is mimicking Spain, and the UK has level off of late).  The original of the graph BTW is from the Federal Reserve Bank of Atlanta.

So you have to ask yourself, if the UK is here, how long before folks start seriously talking about the USA's AAA rating?  Greece's bond rating is BB+ with a negative outlook.  You can reference the post last Dec when it was A-.

Anyway, more to come.  It is now FDIC Friday as I like to call it now, lets see whose bank gets shut down this week!

Keep your money safe!!!