Currency Wars

Behind the scenes major changes are happening in fiat currencies and reserve currency. Many countries (China, Russia, Japan, France, Arab nations) have already suggested an alternative currency or basket of currencies (including gold) to obtain reserve status instead of the dollar (here).  Thou the link is to an older article, this has been articles published throughout 2010 as well on this reoccurring issue.  Recent moves by China have added to the currency wars of the past two years, see video.

Certain areas of Malaysia have somewhat given up on fiat currencies and have allowed gold and silver to be traded as currency, along with their fiat currency (here).  The IMF is pushing an idea of using SDR (Special Drawing Rights) short term and then move to an new reserve currency called the bancor later, as SDRs are not currency and have limitations (here).   There have also been rumors of China backing its currency with Gold (which may be difficult due to supply in the world and price, price would have to skyrocket from here to do this).  China has been buying sources of gold (mining companies) and gold itself (here).   India also in the race for gold bought 200 tonnes from the IMF during the IMF's effort to raise more cash.  Now I am not trying to make this about gold, but gold does play into this whole equation from an international point of view.  Continuing on the theme of diversification from the dollar as a reserve currency some oil producing nations, over the past 2 years, started selling oil in Euro's instead of dollars (even though the dollar is the reserve currency.  Iran has done this and Iraq did but was changed back to the dollar after US occupation).  Russia even started trading its oil in Rubles.  US officials over the past few years have been trying to get China to unpeg from the dollar to allow the yuan  to free, they thought it would make the Yuan appreciate vs the dollar (makes US products cheaper, but wait we don't produce anything).  Unfortunately, and it may be too soon to tell, the unpeg from the dollar has not appreciated the Yuan.
So what does all this mean to us?  Well the little guy is stuck in this international currency war that is much more far reaching that I have had time to portray.  We have yet to see how this plays out.  If the dollar is removed from reserve currency status, it could mean rapid depreciation of the dollar.  From where I am sitting the US continues to borrow(increasing debt), solidify that outcome.   Now this is not to say China wants rapid depreciation (if they did they could have pulled out of our debt overnight and stopped lending to us), lets face it they owns 843 billion in our debt.   They don't want to see that go down the tubes quickly, but they have been maneuvering silently in efforts to hedge risk (buying short term bonds instead of long term, selling some bonds and buying the Euro and the Yen and the increases in gold supply and sources).  What this does mean, is that we need to think about our exposure to fiat currencies and how we can diversify our currencies (Do your homework).

GDP Quarter over Quarter

The GDP numbers came out this morning show a steeper decline, in quarter over quarter growth, from the previous quarter.  Again GDP shows annualized change in the inflation-adjusted value of all goods and services produced by the economy.  It is considered a broader gauge of economic activity and provides insights into the overall health of the economy (I would consider this number in correlation to debt as well, as the debt we have been building lately has caused a lot of the growth in GDP and now the air is getting let out).  Forecast was for 1.5%, the number came in at 1.6% which beats forecast but is worse than the previous quarters number of 2.4%.

The markets are reacting positive to this lower number, as it beat forecasts by .1%.  Why would stocks pop, well some would say the forecasted number was already priced into the market and because it was better that makes stocks a bargain (I beg to differ, the number was lower showing shrinking GDP and taken with other fundamental data, this isn't great news).  Also bear in mind stimulus money that was still out there propping this up (well if we get QE2, then GDP will most likely pop back up again of course so will debt).

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 financialsense.com .   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.. ]

A More Realistic Debt-to-GDP ratio

If you watch mainstream media, they will tell you that Debt-to-GDP is 54% or somewhere in that arena.  Other economists come to consensus by dividing total Debt by current GDP.  If you do this, we get a number 93.77%  (  (13,371,301,700,295.28/14,623,900,000,000)*100 = 93.77% ).  The problem is that it doesn't account for Fannie Mae and Sallie Mae, which are government owned entities now.  In an article posted on www.theburningplatform.com, JimQ points out that Fannie and Freddie add an additional $5,602,000,000,000 to the number, thus bringing our known debt to 18,973,301,700,295.28.  Do the math over again and you get a Debt-to-GDP ratio of 130%.  So as you can well see we are much farther than stated.  This does not take into account any programs like Social Security, Medicare or others (which brings the number much higher).  [ read more... ]

Mortgage Delinquencies

The number of mortgage delinquencies was down from the previous quarter.  Mortgage delinquencies represents the number of mortgages that were at least one payment behind in the last quarter.  It is considered a lagging indicator.   When correlated with home inventories is considered a signal of the housing markets health.  The prior quarter was 10.06%,  this recent quarter came in at 9.85% ( a small improvement).  This on the surface would seem to be good news, but remember the signal is for home inventories to be down as well.  Unfortunately home inventories are soaring, so this does not signal a recovery ( read more on home inventories here ).

Unemployment Claims

The unemployment claims came out today at 8:30 am with a little more of a positive feel to it.  Initial claims were forecasted to come in at 488k, but actually came in at 473k (down from the previous week).  Though this is an improvement, we must keep in mind that these claims, much like the market, do not travel in a straight line.  We need to see weeks of improving numbers.  Also, keep in mind the prior week was revised from 500k to 504k.  There seems to be a little gaming here of bringing numbers forward to bring down the next weeks numbers (which has been discussed by alternative media of late).  Though the markets are rallying off this news, keep your head on straight and stay focused.

Are we in a Depression or Recession

The question has been recently posed to whether we are in a recession or a depression.  Well if you have been following this blog and analyze the charts at the bottom you know we are in a depression.   To the main media I say welcome to the club.  It is amazing that they are starting to recognize what we have known for a long time now.  Many would question whether they new and just gave positive news to continue the gambling casino or if they simply didn't know.  If economists and financial commentators didn't know, they may want to seek a new profession.  The question you always have to ask your self when assessing our situation is, how do we get out of the massive debt we are in?  (That is the 400 lb gorilla in the room).  If you believe there is no way to pay the debt, then you know we are in a depression, not simply a recession.  Not only is debt a problem, but you have to create jobs/income to get out of this debt (just like you do at home).  With jobs continuing to look bleak and the outlook for good paying jobs going forward not looking better, the answer is simple.  David Rosenberg (former chief economist at Merrill Lynch) came forward this week to say we are in a depression.  Here is the video of him on CNBC.

New Home Sales Numbers

More disappointing news today when the New Home Sales numbers were announced 10am today.  New Home Sales is a measure of new single-family homes that were sold during the prior month.  Like existing home sales, it is a leading indicator for most of the same reasons, but also adds in construction jobs and materials that could be produced.  Construction hits a wide array of other industries and services for example, lumber, copper, plastics, electrical workers, plumbers and such.  The forecasted number was 333k, but the actual number was 276k.  The graph for the past year is provided below:

Home Prices Continue to Decline

I decided to look into declining housing prices a little more, as an individual asked me the other day what I thought housing was going to do. With new housing orders declining, lack of credit to individuals and number of foreclosure/short sales occurring, we will be/have been seeing house prices decline. There is a lot of shadow inventory on the market with few buyers. More mortgage resets coming ahead and with the jobless rates continuing to climb, prime loans are starting to default.  Here are some video's going into this further.

Durable Goods Number

The Durable Goods number is  a measure of the change in total value of new purchase orders placed with manufacturers for durable goods, excluding transportation items.  This begs the question, what is a durable good?  Well a durable good is a good that does not quickly wear out or one that yields services or utility over time rather than being consumed.  Examples are appliances, autos, electronics, housewears, sporting goods and such.  So durable goods span a wide range of products.  The number is announced about the 26 days into the next month at 8:30 am.  So what does the Durable Goods number tell us, well it is touted as a leading indicator of production.  A rising number means that manufacturers will need to increase production to fill orders.  The number reflects the previous month.  Forecast was set for a 0.6% number, but came in at a shocking -3.8% number.  To put this number into perspective for you I will provide the following graph.

What impact did this have on the stock market?  Well as I believe a picture is worth a thousand words, here it is:

Notice the the 80 to 90 point drop after the announcement on higher volume.  The reaction toned down as it usually does and brought the market back up.  It will be interesting to see how we close today.  Considering this data and the data provided at the bottom of this blog, I would say our economy is not as strong as being reported.

Existing Home Sales

The existing home sales number represents the number of residential buildings that were sold in the previous months, excluding new construction. Existing home sales is considered a leading indicator of the health of the economy as it touches home improvement, financing (mortgages), real estate transactions, transportation and others. The number was forecasted to come in low, as forecasts called for a number of 4.68M vs the previous months 5.37M. The number for July came in at 3.83M, which is considerably under the lowered forecast.

The immediate market reaction was negative as the Dow sold off down to 9970 and then regained its footing.  As of this writing the Dow is at 10017 and down 140 points.

How Low Can the Dollar Go?

A recent article by the New York Times entitled "Markets Fall, but Yen Strengthens Against the Dollar" and published by the Associated Press, highlights how the Yen has made significant strides against the dollar and the Euro.  While this is not good for Japanese exports it does highlight one significant fact, the dollar is losing value.  As of this writing the Yen is trading at 84.39 vs the Dollar, which is significant considering That in July 2007, it was 123.4568 vs the Dollar.  This represents a decline in the dollars value vs the Yen of approx 31%.

The reasons stated for the recent declines are due to foreseen economic weakness in the U.S and that it is difficult to predict how low the dollar can go.  With the weakness in the U.S. economy and now weakness due to a stronger Yen in Japan, the outlook for a double-dip recession becoming world-wide is starting to become clearer.

Bill O'Reilly on the Coming Economic Crisis

Mr. O'Reilly talks about how Erskine Bowles, who was appointed by President Obama to co-chair a commission to examine U.S. Debt, assesses our situation.  Mr. Bowles shares very candidly that we are  in an economic crisis that could bankrupt us.  Bill asks, if the government will actually take the necessary cuts to get us out of this.  This goes into an ongoing debate of if we are approaching the point of no return or if we are already beyond that point.

Increased 401K Withdrawals

The Huffington Post released an article recently describing how many Americans are being forced to withdrawal money from their 401k's to make ends meet.  The amount of hardship withdrawals have reached a 10 year high.  A hardship withdrawal is not a loan, this is a permanent withdrawal that carries a penalty and must meet certain hardship qualifications to obtain.  In the second quarter of this year 62,000 people initiated hardship withdrawals compared to 45,000 last year,  45% of those that withdrew last year also withdrew this year, showing a dependancy on their 401k's to make ends meet.  The number of people taking out loans against their IRA this year grew by 11% over last year.  [ Read more... ]

In my viewpoint this is a very disturbing trend as more and more people are depleting their 401k's just to survive.  Another disturbing issue is the amount of loss investors/retirees have taken in their 401k's over the past 3 years to the scandalous Banks, Hedgefunds and risky investment assets that were bailed out.  Now more and more retirees have had to go back to work to make ends meet.  This combination of events means a tight employment market will be flooded with an increased number of people that otherwise would have retired in the years/decades to come.  

Small Investors Flee the Market

An article in the NY Times yesterday discusses how small investors have pulled more than $33.12 billion out of the domestic stock market mutual funds over the first 7 months of 2010 and moving into bonds (possibly creating a massive bond bubble).  This could turn out to be the biggest flight from the domestic market since the 1980's (with the exception of 2008 where investors pulled out $151.4 billion).  The article points out that the difference here is that investors are pulling out of the market while shares have been rallying.  A chief economist of the Investment Institute says this exodus from riskier assets is very unusual.  Comment on the following excerpt from the article:

"For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession. "

 I would argue that we haven't had a recovery, if you removed stimulus (which is currently occurring) we would have been moving downward (sideways at best) in the market and the economic fundamentals.  While stimulus helped the economy, it is also the reason our debt increases and that the piper will have to be paid soon.  [ Read more ... ]