Economic Charts

All economic charts are at the bottom of the page.

Friday, August 27, 2010

Economic Craziness

The Economic Insane Asylum is a great article explaining some of the problems we face in our economy today, brought to you by .   I like it cause it takes me back down to earth after having watched main media news over the past few days.  They talk about the recovery, how stocks will take off and their charts.  Unfortunately, we are making history here so prior charts don't always work.  Negative sentiment is high, which they point out can indicate a turn around.  Unfortunately sentiment can get a lot more negative.  I don't think it has been as negative as they view it given the reality we face.  This is not what we faced back in 2000 or in the 80's.  Sometimes you have to pull away from your charts and look at the underlying fundamentals.  Job growth is a major fundamental, where is that going to come from?  We exported those overseas and do not really produce anything (except corn for fuel these days).  National Debt, we have the highest dollar about of national debt and if you take in Fannie and Freddie's debt, we face a Debt-to-GDP that is 130% (never before seen and that is just what we know of).  Small banks are failing all over the country leaving us with the big banks that caused this issue.  Pension funds are at risk of default, 401k's have been reduced by 50% (for those that didn't jump out and are willing to face the reality of their loss).  Retail investors are fleeing from the stock market and pulling money out of their 401k's to survive on (which means more people delaying retirement and fighting for jobs).  Home inventories are skyrocketing and we continue to build more (you know their is a limit on how much we need to build in one decade.  what happens when we run out of forests to topple over, do we start building up?).  The dollar has been devaluating against other major currencies for the last decade ( or longer, only have last 10 years of data) meaning it is worth less that it was a year ago or 10 years ago (whether you like that fact or not).  The inflation/deflation argument, that is an argument nobody seems to win.  I think we have both.  Currently we are experiencing inflation in some areas (wheat, eggs, chicken and etc) and deflation in other areas (oil, house prices, electronics).  It really depends on which one you need more as to how much it hurts you.  If you already own a house then deflation hurts and you have to eat so inflation is hurting you (burning the candle at both ends).  If we are talking about a pristine environment, which every seems to think we are in, then we are going to experience deflation first (as we are in some categories) and then inflation due to our devaluating currency ( it is devaluating as we speak).  We buy goods from China, Japan, Europe and all over the world.  So with that in mind look at these charts:
These are just two currencies vs the dollar.  The way you read them is the first currency in the pair is your long position and the second is your short position.  If I have USD/JPY then it shows how the USD is doing against the Japanese Yen.  If the pattern is moving up and to the right then the dollar is getting stronger vs. the Yen.  If it is moving down and to the right then the USD is getting weaker vs the Yen.  If you look at most major currency pairs you will see the dollar devaluating.   Putting that aside, as all currencies are devaluating in purchasing power due to real inflation (not the number they tell you as that is kept artificially low so they don't have to increase cost of living allowances for Social Security as COLA is pegged to inflation.  NOTE: see CPI data at the bottom of blog).  Other things to keep in mind, M3 money supply is contracting (tighter credit environment for small business and such), disposable income is shrinking as well as GDP (remember GDP was propped up by stimulus in 2008 and later).  In our Keynesian economy we have to have a strong consumer to buy endless junk or we collapse.  Also, consider number of people on food stamps, debts of all states, bankruptcies and defaults (all bad numbers currently).  Even if some of that was a little more positive we still face the 400 lb gorilla in the room which is our countries debt.  If somebody can explain to me how that gets paid back (not just interest payments, that is like an interest only loan and we all seen how those turn out) I would be less concerned.   Currently that debt seems to be and more than likely is un-payable even if you raise taxes (you can only bleed so much from a rock).
So why do I bring all this happy news to you?  We need to keep our eyes on the fundamentals, the important stuff, so when we are being told things are rosey we can distinguish real from fluff.  For some, this may be new news so they need to build a financial plan if they deem it necessary to deal with these fundamentals (please consult with a financial advisor who is not biased toward any products).  I watched a financial show the other day that was pumping the market up quite a bit (with no data or reasoning behind it other than opinion) and making the point that if everybody is negative then it is a self fulfilling prophecy.  How that may be true in normal markets, it will damage people further to believe the hype and then suffer due to fundamentals falling to the floor.  Remember it is the job of these financial shows to pump the viewers to invest.  Have you ever found a  person in sales that said it was a bad time to buy?  i.e in 2006/2007 it was a great time to buy real estate, after an up to 50%+ drop in value you know better.  Their is no guarantee that this is going to happen (nobody can guarantee that), but currently nobody knows how to get out of this mess other than to inflate their way out or default on the debt (which most likely would mean losing reserve currency status).
Be careful out there and make sure you do your homework, now more than ever we need to become our best source of information and ask the right questions to advisors.  [ Read more on highlighted article.. ]

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