Can we nationalize the world?

Would you like my comments five nights a week? Daily subscribers received the following message on January 26th: “Gold is rapidly becoming my best bet for quick profits in the next 30 days. Traders should be long with a stop at $870 as a move to $1000+ seems likely in February.” Today gold reached a high of $1004 and closed at $1001 giving readers a nice profit in less than 30 days. Subscriptions are only $1 a day, for more information go to: http://www.earlywarningwire.com/Interest%20Rate%20Email%20Flyer.pdf

My first interest rate/economic forecasting class will be held on Tuesday March 24th from 6-9pm and seating is limited. For registration details: http://www.earlywarningwire.com/PDF/interestrateclass2009.pdf

For those still long stocks (love to lose in company rather than win alone) 2009 has been painful and today’s volatility based on rumors of bank nationalization have worldwide financial markets diving for cover. Credit default swap prices (bets against a company or country’s survival) have skyrocketed this year with the premium on a U.S. debt default now trading at $90,000 for a $10 million obligation. The problem is that a domestic investor can NOT purchase this insurance policy in the U.S. and might have trouble collecting if the U.S. ever reneged on its debt. There is a very active CDS market for U.S. banks and the prices for Bank of America, Wells Fargo and Citibank swaps soared this week after Senate Banking Committee Chairman Dodd said that banks may have to be nationalized for a short time to help the country survive the worst credit crises in at least 75 years.  Bank of America was trading today at $293,000, Wells Fargo at $260,000 and Citibank at $475,000 for a $10 million obligation.  If these banks failed you would collect the $10 million premium for the cost of the initial (annual) premium. Could they be nationalized wiping out the common shareholders? Better than a 50/50 chance because it is almost impossible for these banks to be able to raise new capital with their share prices making a made dash for the basement. Today closing prices were: BAC – $3.79, WFC – $10.91, C – $1.95. The U.S. isn’t the only country having credit problems as Russia’s currency (ruble) is falling fast and the Central Bank is investing in gold as it desperately tries to hold onto precious reserves. The U.S. dollar is rising against almost all currencies (except gold) because on a relative basis our trading partners are closer to going down the drain. The once safe country of Switzerland is very close to bankruptcy because the money (francs) it lent to other European countries has little chance of being paid back and because the franc has appreciated against the currencies of the borrowing nations the actual amount due is significantly higher than the original debt. Default is the only option as the famous “carry trade” has demolished more money than any market crash could possibly accomplish.  The only safe haven for investors is 100% cash (under a mattress) or in U.S. Treasury bills which earn 0.3%. For traders who always use stop losses gold has been a safe haven and great bet against the demise of most countries. The fear of inflation is slowly disappearing and the reality of deflation is beginning to enter the psyche of the average consumer. The days of wanting to buy a house for fear of higher prices in a couple of years is on its way out and real estate agents will have to come up with a new reason to buy as declining home prices are not even close to bottoming. The real problem is that there is no world entity that can take over every central bank in the world and tell everyone that the worst is over and stabilize all markets and prices. We all want so desperately to believe everything will be ok and back to way we need it to be, but are being forced to realize that the world has changed and this is not a normal cycle but a very serious secular change. Unemployment is soaring and even 24/7 printing presses are not helping slow the momentum of the deflation monster. The Wizard of Oz has disappeared at the exact time he is needed.

Is the rate on your CD guaranteed?

We are all aware that the FDIC has insured CD’s to a new limit of $250,000 and I encourage everyone to place cash in these insured products with maturities up to a year. The best source of information is Bank Rate Monitor which lists the highest paying CD’s each day on its website. If the bank where your CD was issued fails the FDIC guarantees the principal and interest but not necessarily the rate. According to an article in today’s LA Times the interest rate on existing CD can be changed once the issuing bank has been taken over by the FDIC or another bank. You won’t lose any principal but the income that appeared to be guaranteed can be cut substantially.

The real bear market: Commercial real estate

Although the U.S. stock market decline has received the big headlines the commercial real estate market is in the early stages of a devastating bear market led by a dramatic increase in vacancy rates. U.S. office buildings will see a 47.8 million square foot loss in leased space this year and lower rents are sure to follow. Hundreds of billions of dollars of loans are coming due this year on commercial properties and with the securitization market frozen borrowers may be faced with an expensive extension by lenders or forced to sell into a market lacking buyers.  This is yet another reason I don’t see any relief from the recession/depression until January 2013.

Long term interest rates

Today’s CPI (retail inflation) showed a slight increase but will soon begin a series of negative numbers and that will not give consumers and businesses an incentive to borrow. When interest rates are positive (current 10 yr. 2.79%) and inflation negative it creates very high real interest rates and cost of borrowing. Statistics released this afternoon in the Fed’s weekly H.8 report show commercial bank lending turning down and this despite almost $2 trillion of injections by the Federal Reserve. The old expression that you can’t push on a string is appropriate today as the money that the Fed is printing is sitting at the Fed unused by banks that are afraid to lend. Unless the government guarantees banks against loan losses it will be years before banks take the normal risks needed to initiate loans.

Fed head Bernanke goes to Congress

Tuesday Fed Chairman Bernanke will give semi-annual testimony to the Senate Banking Committee and Wednesday to the House Financial Services Committee. Is it my imagination or are we seeing Congressman Barney Frank more often than the Treasury Secretary or Fed Chairman? Most of the two day hearings will be spent in question and answer sessions where Mr. Bernanke will repeat over and over again that it takes time (years) before recent stimulus will have an effect on the economy. Of course few politicians have the patience necessary to wait that long as they will be running for re-election before the economy recovers and that may not help their chances of winning. I have written for months that the U.S. is a society of impatient consumers and business people and we are about to learn a painful but necessary lesson from the universe that we don’t always get what we want but do get what we need.

The circus is in town

The dates are set for my four interest rate/economic forecast classes. They will be held on March 24, June 10, September 15 and November 18. The classes will be held from 6-9pm and seating is very limited.
Registration details: http://www.earlywarningwire.com/PDF/interestrateclass2009.pdf

This week the circus took center stage in Washington. Ringling Bros. has three different troops that are performing before thousands of fans this week in Fayetteville, Greensboro and Atlanta. The other circus had a national TV audience as congress did its best to audition for parts in the real circus of life. The TV ratings might have been high but anyone with an interest in the economy and its potential recovery had to be embarrassed by the performance of our country’s highest officials. On Tuesday (2/10) Treasury Secretary Geithner and Fed Chairman Bernanke testified before the House Financial Services Committee and its chairman Barney Frank. The hearing saw most members criticizing these public officials for allowing the mortgage and credit crises to grow into its now unmanageable state but conveniently forgot that its chairman on July 14, 2008 told the same audience that “Fannie and Freddie are fundamentally sound and in no danger of going under and their financials are solid.” Less than two months later the twins were adopted by the federal government. Tuesday afternoon Geithner was reprimanded by members of the Senate Banking Committee headed by Senator Dodd. The day ended with the Dow falling 381 points as investors became discouraged that the administration’s plans for getting out of this mess had more headlines than substance. All financial markets hate uncertainty and every day there seems to be less certainty and more confusion about the future of our economy. The solution is painful and will take more time (years) than most Americans think they can endure. Patience, savings and only spending what we have in our pockets is something that went away in the seventies and is only now making a comeback. It took years to create the biggest credit bubble of all time and anyone who believes a solution or stabilization of conditions can be achieved in weeks or months is making the biggest mistake of their investment careers. My theme for 2009 continues: Trade the market you have not the one you had in the past. Our biggest enemy is ourselves as we always assume that our past experiences will be repeated in the future. This past Sunday I distributed mirrors to all of the participants in Food on Foot’s work program where homeless and poor individuals collect trash daily to earn their food. I told each of the workers that when they get upset about their life and it appears that they will never leave the street to pull out the mirror and face their real enemy…themselves and their unwillingness to change. Finally I told them the reason God gave us two eyes in front of our head instead of behind it is he wants us to focus on what is ahead of us instead of the memories of what is in our past.

Scanning the globe

Five nights a week I send an email to subscribers who pay $1 a night to Food on Foot. A few of the highlights from this week’s events are worth sharing today as we head into the long holiday weekend. If you want to see a sample of one night’s letter send me an e-mail and I will respond within 24 hours.

In the 1980’s the Japanese bought thousands of U.S. properties as they “appeared” to be cheap when prices in yen and today the Chinese are coming in tours that are organized for potential real estate investors. Will they meet the same fate as the Japanese that eventually sold much of what they bought at huge losses? (Probably).

The head of the New York city council announced a plan today that would have the city purchase empty luxury condominiums and turn them into subsidized housing for middle-income families. With deflation in full force the middle class is now larger as the wealthy have lost so much of their assets that they have dropped into the middle class.

There has been much worry in the press about a possible buyers strike by the Chinese of U.S. Treasury bonds but a Financial Times story quotes a senior Chinese banking regulator that Treasuries are the “only option” in a perilous world. I clearly remember the middle seventies oil crises when everyone was worried that the Saudi’s would stop buying Treasuries and I wrote that there was no place else for them to put their billions in profits.

One of the best stories of the week shows the desperation level of many state governments as they consider risky bets to close huge budget deficits. New York is considering moving its $1.3 billion fund used for lottery prizes from the safe confines of U.S. Treasury bills to stocks, real estate and hedge funds. They have used an 8% assumption rate for growth each year and Treasuries return near zero so they do what any strung out gambler does they increase the risk and gamble it all in an attempt to stay in the game. If they go through with this proposal the federal government should NOT give them bail out funds and the voters should march to Albany and throw out every politician that approves this ridiculous proposal. Isn’t this kind of decision making what got us in the mess we are in now? This violates one of my key rules of investing: NEVER add to a losing trade.

How does a state that receives so much from gambling revenue allow citizens to drive across the state line to play the lottery? Amazing but true that the Nevada legislature is considering a state lottery because so many are driving to California and Arizona to play the lottery.

From Philadelphia we see that the supply of unsold houses is competing with empty apartments and driving rents lower.

The federal government is trying to give away the bailout money but doesn’t have enough people to process the applications. The backlog is over 2,000 and growing each day and approvals are coming at the rate of 50 per week which equates to a 9 month wait for most banks. The government’s biggest enemy is itself but I’m sure no one is surprised.

Each night I post 5-10 of these stories with my forecast for the financial markets and economy and all for only $1 a night.

Interest rates, gold, the stock market and more…

Long-term (10 yr.) interest rates finally found a resting place this week (3.00% and demand for the three auctions (3 yr., 10 yr. 30yr) went better than expected but these buyers are now gone and who will be there next week when $94 billion of 2yr. 5yr. and 7yr notes are auctioned? This week Germany held an auction for government bonds and received no bids for the last 20% of the issue. Could that ever occur in the U.S.? Doubtful but the dollar would be smashed if it ever came close to reality. Gold continues to be the #1 best bet for trading profits and $1000 seems to be within reach in the next 30-60 days. Everyone seems to be long but the old adage that a trend stays in motion longer than anyone ever expects might be true in this case. U.S. stocks appear to be sold out and bad news doesn’t bring in many new sellers but the uncertainty created by the circus clowns keeps buyers on the sidelines. Long-term investors should remain in cash with insured CD’s the best bet as a few banks are still offering rates near 3% for one year. The best investment in a DEFLATIONARY period is always cash as its buying power increases as asset values fall.

Pac Man continues to eat everything in sight

The dates are set for my four interest rate/economic forecast classes. They will be held on March 24, June 10, September 15 and November 18. The classes will be held from 6-9pm and seating is very limited. Click here for registration details.Would you like my thoughts five nights a week for only $1 a day? Sunday through Thursday evenings I send an e-mail with important comments on upcoming economic events and specific investment ideas to keep your capital safe and growing in these very treacherous times.

The spring of 1980 saw the U.S. in a credit crisis with interest rates soaring to double digits and inflation out of control and the creation of the popular Pac-Man video game. The head of the Federal Reserve was Paul Volcker (now on President Obama’s Economic Advisory Board) and his solution to curtailing rising prices was to increase interest rates to a level that would effectively end all lending. His plan though painful worked and by the mid 1980’s inflation was down to much more tolerable levels. By pushing interest rates to levels far above inflation borrowers had little incentive to invest as the real cost of money (after inflation) was too high for profitable ventures. Today the world finds itself in the same situation (high real interest rates) but it is not the preferred plan by the current Federal Reserve. With bank lending difficult if not impossible to obtain by businesses and consumers total debt (other than govt.) has begun to contract and interest rates are higher than inflation (near zero). Investors are risk takers but if the cost of the capital is too high and the expected return too low these players will sit on cash and await better opportunities. In a DEFLATIONARY period one the few assets that rise in value is cash and that is why the smart money liquidated assets last year and is now hoarding dollars. Raising short-term interest rates above the level of inflation is much easier than lowering interest rates below inflation when prices and asset values are declining because interest rates can’t go below zero. This is why the Fed has begun to implement other programs that should create liquidity (oxygen) for investment markets. The overnight Fed Funds market will remain at its 0.00-0.25% for a very long time (years) which will allow banks to borrow cheaply and lend at a higher rate when they feel the risk of the value of the collateral has stopped declining. The Fed is patiently waiting for the most opportune time to buy long-term Treasury bonds which should drive down long-term interest rates. It may take billions (or trillions) of dollars and they do have the ability to print an unlimited amount of dollars. The old age of “never fight the Fed” will be soon be tested as investors are lining up and making big bets that the 1980’s villain (inflation) will be making another visit later this year. As bright minds are usually early and inflation is a long way off as the patient (economy) is still in the intensive care unit and won’t be released any time soon. Though it appears that many credit spreads (Libor, etc) have returned to near normal it is only because the Fed continues to pump liquidity into markets until normal players begin to come back the Fed will be the only available source of oxygen. Confidence is a key part of any economic revival and today’s jobs report will not instill anything but fear in the minds of consumers and businesses.  Pac-Man has returned from a long hibernation and is destroying jobs that won’t return for many years.

If you have a job, hold on tight

Today’s jobs report reminds me of what is must be like for athletes on professional sports teams during the pre-season training period. Every job (except those on guaranteed contracts) is up for grabs and it is frequently every man (or woman) for themselves. I expect the upcoming baseball season to see many free agents lowering their salary demands as they realize they may be sitting out a season if they don’t become realistic (Manny Ramirez?). Today’s report was as expected and will be repeated almost every month this year. The “experts” hit a bulls-eye with their projection of a loss of 600,000 jobs in January. The actual loss was only 598,000 but December was revised down 53,000 and November fell an additional 13,000. The trend of changes is a great confirmation that the downtrend in employment in firmly in place and shows no signs of ending this year. The only three areas of growth were in government, education and health services (all counter cyclical). Temporary jobs fell 76,000 after a similar decline in December and are pointing to a much higher unemployment rate (8%+). Aggregate hours worked fell 0.7% in January, 0.8% in December and 0.8% in November as employers desperately try to keep workers on the job but with fewer hours. The next step for business will be more layoffs and that will drive the unemployment rate much higher. The number of workers that are working part-time because they can’t find full-time jobs soared to levels not seen in over 50 years and is a good leading indicator of a higher unemployment rate. Another excellent leading indicator of future job conditions (average duration of unemployment) is also hitting new highs. Finally the unemployment rate rose to 7.6% and is 2.7% higher in the last 12 months. So many people have given up searching for a job that the labor force participation rate has now declined to 65.5% down from 66.1% a year ago. When the economy begins to recover (2014) many of these people will re-enter the work force and create an increase in the supply of available workers thus putting further pressure on wages. It is very similar to those that are watching the supply of homes on the market for clues the housing market has bottomed. The shadow inventory (not currently on the market) is growing and will prevent prices from rising again as it re-enters the market place over the next five years. The bottom line to today’s report is that we aren’t even close to the bottom of this recession/depression and the stimulus package about to pass Congress will only give a short-term boost to the economy and is nothing more than a short-term solution to a long-term problem that can only be overcome by time, time and more time. It took years for rising price expectations to create buyers of real estate, stocks, commodities, etc. in the belief they would never go down or at worst go sideways because we only see life through our own experiences. It will take many years of deflation to lower and extinguish these expectations and not until the majority are sitting in cash and lowered debt levels before we will see the sunshine of a growing labor market and rising asset values. The motto for this year is to invest based on what the world “is” NOT what you would like it or need it to be and realize that the early 2000’s are gone for a very long time. If you have a job consider yourself lucky and don’t assume that greener pastures are awaiting you in another field.

Where to hide

The best place to hide is in cash even though it is earning near zero interest. The return OF capital is more important than the return ON capital. The Federal Reserve reported another decline in consumer credit for December with a decline of $6.6 billion following an $11.1 billion decrease in November. This is unprecedented as the consumer is being forced to pay down credit card debt that has been used to fuel the spending binge of the past decade. If consumers can only spend what they have and not increase credit card debt there is NO chance of a sustainable recovery for at least 4 years. Are you getting the message yet that we are not in a normal cycle that everyone uses as the basis for their spending and investment decisions? Did you make enough mistakes in 2008 with your hard earned $$ or do you need to suffer more losses this year? Losing in company always feels better as you can share the pain with your friends but at some point the pain will be intolerable and the real question is are you ready to win alone?

Can the U.S. stock market rally despite rising unemployment?

Markets do a great job of discounting the future and often see events that never occur but it appears the U.S. stock market is in the early stages of a significant intermediate term rally. Watching the market’s positive reaction to the jobs report could be a signal that stocks are ready to advance on the fist sign of good news. One of my favorite charts shows the tight correlation between the Australian dollar and the S&P 500.  A move above 68 cents for the Aussie should be followed by an advance to the next resistance level at 72 cents and then 80 cents. If this relationship continues it could move the S&P to at least 900 if not 1000. We are in an overall bear market for stocks and only nimble traders using tight stops should consider playing in this very volatile period. Long-term investors should be in CD’s and cash to make sure 2009 is a guaranteed profitable year.

If you have any questions regarding your own situation I invite you to send an e-mail and I will respond within 24 hours.