The markets have sure been on a wild ride – particularly since the end of September and early October. I like watching all those neat little charts. I work very long shifts overnights and so I get to watch Asia open up and close, then Europe open up and about the time I get home to go to bed the US opens. What I’ve noticed is that the markets – regardless of which markets – have all had a behavioral change.
How it was:
Asia follows the US. If the US goes up, they go up. They’re heavily manipulated, so sometimes they buck the trend, but generally they imitate the US. Europe imitates Asia for about 3 hours after opening, then they go up right before the US opens, and after that they follow the US until they close.
Always, there would be some industries doing well and some that weren’t – and this was influenced by economic reports and the health of large corporations in any given industry. It was very rare to have days where all the stocks in the major indexes were ALL up or ALL down. There could often be a majority, but not unanimity.
How it is now:
The pattern of who follows who still holds true, but a new thing has started – goosenecks. This is a description of a chart where the index is low or flat all day and then at the end it suddenly skyrockets, followed by a little dip before it closes. The result looks like a swan swimming from left to right. It used to be that these only happened when something splendiforously fantabulous happened economy-wise. They were very rare. Nowadays, they are common.
So what’s up?:
Central Bank interventions – that’s what’s up. So here’s how this works: Asia opens up (Australia first, then Japan, then Shanghai and Hong Kong. India is inbetween these and the EU) and their stocks imitate what the US did the previous day. If the previous day for the US was down, then their stocks will trend down by similar amounts until one of their central banks intervenes. Suddenly, and for no reason – ZOOM! Up go their stocks – led by banks. Then the EU opens up (3:30AM EST) and their indexes follow whatever Asia was doing right at the moment – so usually up, with banks leading. Then, they drop for a bit until about 11am GMT -1 and suddenly the ECB or IMF jumps in and ZOOM! Up go the EU indexes.
Unlike Asia, EU intervention ALWAYS comes with some sort of rosy sounding headline. Today’s is this:
Wrong. Last week there was an occurrence of this kind of BS and German 1yr bonds actually had a NEGATIVE yield. That means that the expected payoff for purchasing one was that you would LOSE money. Who invests in something that guarantees a loss? The ECB does.
So, then the US futures get excited because the EU markets are all excited and the US markets open with gains, but immediately start dropping off. Around 10:30 to 11:00 AM EST the Fed hops in and pumps some cash into banks and presto! Instant rally. Of course there are the appropriately rosy articles that come out about how everything is going to be fine in the EU and then some fluff story about our own debt and spending troubles getting in hand, etc, etc, blech.
The economy is a dead body and the central banks are propping it up.
What this means for regular Joe:
Don’t be in the stock market. Keep enough money in the bank to cover your expenses and keep the rest in cash or whatever you like, but don’t leave it in an institution that dabbles in that mess. All banks invest in the markets, and when the central banks finally get to the point they can’t prop them up any more these banks are going to implode. When that happens, you can forget about 401K plans, pensions, IRAs and any other savings you might have tucked away.
People like to talk about hyperinflation and whatnot – and that is a clear possibility given what the central banks are doing – but the first thing that will happen is that you won’t be able to get to your money. For this reason, have most of it on hand in cash. Don’t mess around with risking it in some bank’s hands.
When will trouble start?
I can’t say for sure, but consider this – if things really do turn around and economic indicators (particularly producer’s indicators) get better, unemployment gets back down to 5%, and wages start increasing while prices decrease – then put your money back in. Until that stuff happens (and I don’t think it will for the foreseeable future), don’t risk your money with somebody else.
Here we go again. This time, however, Germany has cold feet. They know they are the only true economic force in the EU. France and the UK are sort of treading water (after a fashion), but certainly are not drivers. So Germany doesn’t want to be the only country bailing out Greece – especially without some sort of restructuring to make sure this is “the last time”.
Other talking heads will be quick to point out that other countries have pledged to support a bailout, but let’s take a look at this:
The other PIIGS are on the verge of total collapse:
Portugal – Just received a bailout and the Chinese have just recently bought billions of € of their debt. They have made absolutely no changes to improve their economy.
Ireland – Just received another bailout in return for the loss of their sovereignty. Their finance minister that penned the deal died of “pancreatic cancer”. Maybe he did, but then again, it sure was convenient timing.
Italy – The biggest conversation for Italy right now is “who is the most corrupt politician in Italy?” They dug their hole a long time ago and are quite happy staying right there. At least they’ve mostly stopped digging.
Greece – Can’t help itself. Their politicians are behaving just like African warlords without the murder. They just take billions straight from the public coffers to their own pockets. Very little of the money from the last bailout is accounted for.
Spain – Unemployment is still in the 20s. Their banks are running to South America to get the heck out of Madrid. The only way they stay afloat is to pay current liabilities with promises to collect on other liabilities. To do so, they need to collect from… Greece – and Ireland. Portugal too. Oops.
So who’s going to help the Germans bail out Greece? The USA, surely. But the USA will just be printing useless money and that will actually hurt things after the initial payment. Norway isn’t likely to lend to a lost cause. Switzerland just got its arm twisted by the USA to release the names of American tax dodgers… so they probably aren’t too keen on helping the USA to bail out the Greeks. The English and French couldn’t help bail them out last time and are in even worse shape now. No, it’s all Germany, all the way.
So, I can understand why Germany is upset. The smart thing for the Germans to do would be to get out of the EU, but that won’t happen. Their political parties are also political parties in other countries. Don’t think for a moment the SPD members in France and Italy are going to let their elected officials in Germany withdraw from the EU, thus collapsing their homes! Not unless the populace rises up and kicks the party system entirely.
Greece needs to just be kicked to the curb and Germany needs to leave this gang of losers (EU).
I’ve had a few people ask me what they should put their money into so that they don’t lose it. Now, I don’t have those answers, but I do have a list of the common themes I find when I go looking for them, and I’ve recently seen some stuff that gave me a good idea as well. Here goes.
Liquidity – how quickly can you convert said item into cash?
Appreciation – how much will it increase in “value” between today and next month?
Risk – how likely is it that this will utterly tank and end up costing money?
Money Markets, CDs, Bonds and other “liquid savings” instruments:
- Highly Liquid (90 days at minimum, 1.5 years max wait time)
- Low Yield – Appreciates more slowly than inflation, which means a net loss in real value
- All but bonds are not risky. Junk Bonds are risky, others are less risky
Conclusion: better than a savings account, but only slightly – with the exception that bonds could lose all your money. If you think the economy will improve only a little bit, this is a safe place to put your money.
Stocks and IRAs:
- Uncertain appreciation and yield
- Quite risky, but this can be hedged by using an Index Fund
Conclusion: could be good, but this is a long term investment. Don’t expect to see this money again for a long time. This is a good place to put your money if you think the economy has “rounded the corner”.
- They do not appreciate, but their prices are determined by inflation; thus, as inflation goes up, their prices go up and a profit can be made that is hopefully worth more than the amount the money you are being paid has dropped
- Somewhat risky. Crops are prone to flooding. Animals are prone to the FDA and CDC deciding they don’t like pigs, cows or chickens and shutting down those industries
Conclusion: these seem like good investments to look into, but it is likely that if our economy tanks too hardcore that Obama will fully nationalize these industries. Most of these already operate at a loss, and full nationalization would make them worse. In the meantime – if you are cool with spending the time it takes to be a speculator, then you can probably make money here.
Non-consumable Commodities like Gold, Silver, Gems, etc:
- Highly illiquid
- Only appreciate at the rate of inflation
- Only risky if you think the economy will improve. Gold is purported to be in a bubble right now, but Silver is not. It is about where it should be, and it will be going into a bubble, or so I hear. Gems are extremely illiquid and their value depends on your bargaining skills.
Conclusion: this is the ultimate safe haven if you think the economy is doomed and our country is doomed. Keep in mind that if you have too much of this stuff, you make yourself a target road warrior!
Useful Stuff like cars, houses, tools, and parts
- Barring strong deflationary pressures (like houses have now), these will appreciate at a lower rate as inflation
- These are risky because these things depreciate in value with time, but if the economy tanks as hyperinflation takes root – these will sell for much more than you pay for them now and they are easier to get and sell than gold and silver.
Conclusion: these are good to get if you are very pessimistic about what will be coming in the next year. Instead, look at the next suggestion!
Your Skills Fool!!
- ALWAYS LIQUID – if you have a skill people want you can sell it PERIOD.
- Some skills appreciate, some depreciate – so you must hedge yourself by learning a wide array of them. If you are reading this, you have access to the internet – WikiHow to make some product everyone needs and LEARN HOW.
- This is the least risky thing of all. If you go pick up some crappy tools at a swap meet and learn how to do some stuff that people want, then even if you don’t get hired you’ll be more useful and you will get value in that respect.
Conclusion: this is a must for everyone. You need to know how to do more than drive in rush hour traffic, answer a phone and e-mail, and eat fast food. If our economy rebounds, then you have a new skill that will save you money later – even if you end up hiring someone to do the work for you. You will be able to pick out someone who knows what he/she is saying from someone who does not. If the economy tanks, you can now do something people will need on the informal or “Black” market. Either way – you make and/or save money.
I recently bought a house and I picked now to do it for a few reasons:
- Interest rates are low
- The Fed has just monetized $600 bn of US debt
One reason not to buy a house right now is:
- Housing is over a price sinkhole.
Now, reason #2 is a truly spectacular reason to invest in “real” property. This can be land, precious metals (especially silver), ammunition, seeds, etc – anything that you personally own that would be valuable to someone in a society where paper money is worthless. You have to actually have the commodity in your possession – not a voucher.
So why a house if they are over a sinkhole, and what do I mean when I say housing is over a price sinkhole? That’s two questions and I have two answers:
Why a house?
I bought a house because I can live in it and as money becomes worthless through massive inflation (due to monetizing the debt) I will be able to pay off the house very quickly with my worthless money. It is exactly for this reason that the government is taking the first steps to start hyper-inflation in this country to pay off its own debts. Also, inflation rates are set to rise all on their own. I do not believe the Fed will be able to lower them with any monetary tricks. This is because the bond market, which the Fed purchases US debt through, is going to hell when the US’s credit rating is lowered AGAIN (it was lowered earlier this year). In order to sell our crappy bonds, the incentives for someone to buy them will have to go up – that means higher interest rates. If nobody buys the bonds, then no money is raised. Therefore, the bond interest rates will go up and mortgage interest rates (which mortgages are a fairly large portion of what the bonds are based on apparently) will have to go up even more-so in order to cover. Right now the market for mortgages is very volatile.
What do I mean by “housing is over a price sinkhole”?
A marvelous combination of perverse incentives for banks brought to you by ridiculous regulation has caused a really spooky situation in the housing market. The prices appear to be stabilizing, but there are things afoot that will destroy them some more. I envision this like a house on top of a thin piece of crust over a sinkhole that is getting deeper and deeper. The people in the house don’t know it yet, but they will fall a long way when the crust finally breaks.
Here are the main ingredients:
Banks are insured for loans that default for the full remainder on the amount because the government has decided they are “too big to fail”. They don’t get this if they short sell or loan modify, so right now they face a situation where if a loan amount owed is for $200k and the property is now only worth $100k and they adjust to $100k or short sell for $100k they are out $100k. If, instead, they foreclose on it they get the full $200k and they can then resell it as a repo for $100k. They don’t want too many people to notice this – especially with new regulation committees that have sworn to give a shit watching – so they are letting people hang on and aren’t foreclosing as quickly as they could.
If they aren’t selling (and they aren’t much), and they aren’t modifying or foreclosing – the prices have pretty much slowed to a crawl on their downward trend. This lets the politicians say, “Look! Our bullshit Keynesian measures worked! Take that free market!” But in actuality, what they are doing is sending signals to homeowners that are underwater on their loans that it is ok to just stop paying their mortgages. This is a moral hazard because people are less afraid about being evicted than they should be. I say “should be” because what will happen is that the banks will foreclose on all of them at once, claim a massive loss, get bailed out by Congress again, collect their insurance payouts, and rake in massive profits while house prices plummet to new lows.
Now, you might ask, “Why don’t you wait until after that to buy a house? They’ll be cheaper then.” That’s true, but I don’t think they’ll drop more than $50k more and interest rates will have to massively increase for the bailout. So, I just borrowed $100k at 5% interest, but I could have waited and borrowed $75k (my guess) at 25 or 35% interest.
Another reason to buy a house is that money in the bank is useless now, and going to be even more useless in the next year or two when inflation explodes. A house has many uses that precious metals do not, and I’m sure I’ll find some sort of entrepreneurial use for it.
Ireland is all setup to take a bailout from the IMF in return for their sovereignty. Portugal is nearly ready to do the same. Why now? Why Ireland? It’s because they want to round up the low-hanging and shocking fruit.
Previously, I mentioned how they were downgrading all but Italy, and why. Now they reckon it’s time to bring home the bacon – and not a moment too soon. The IMF and the Eurobank are running a ponzi scheme and they are about to run out of capital, so they need more capital. Spain is the only stable provider of free capital other than Deutsche Bank in the EU, and Deutsche Bank is starting to talk about things like “rules” and “collateral” and “can you pay this back” – the IMF doesn’t want to hear about that.
Spain is on the verge of economic collapse at the moment. Their only industry that makes money – since “green jobs” flopped and took a huge portion of their market with it – are their banks. However, their banks are mainly supported by outstanding liabilities, which after all the fluff are no more than promises. Well, they have a lot of promises coming due from the Greek bailout and they haven’t collected much of anything. How are they going to keep this scheme afloat?
They do it just like Bernie Madhoff – they get more people into the game. In this case: Ireland. Ireland needs EUD 200bn and Spain needs to lend 178bn. That’s just right! However, they need more than that since all of Greece is going to come due by the end of Q2 2011. Therefore, they will also bailout Portugal. After that (end of 2011; early 2012), they are screwed. There will be nobody else that will take a bailout. They don’t want to bailout Italy because they know that corruption is a time-honored tradition in Italy and they don’t have the raw know-how to outfox the Italians on the corruption front.
This isn’t really about bailouts. Every time they offer one they demand cuts to welfare and pensions (austerity) and the Unions freak out and riot (like in France and this is expected to happen in Ireland too). The riots are just a distraction related to the cuts. If they just did the cuts, then a bailout would be unnecessary. If they heavily deregulated (which goes hand-in-hand with cuts) then they would have an economic boom.
The real issue is that these countries are losing their sovereignty.
My big prediction for Q4 2011:
The EuroBank and Spain will declare insolvency after Greece defaults (destroying the EUR). Germany will split off from the EU and go back to the Deutsche Mark. The EU will shatter except for the few countries that were solely living off of the teat of Germany, France and UK. France will say “merci” and will also drop out of the EU. The UK will stay in for a short while because they like paperwork and they also like making painful things last longer (if you don’t believe me, walk along the Thames from Black Friars Bridge to the Tower of London and count how many times you go up stairs only to go down stairs – or how often you slope down only to slope up. They could make it level, but they don’t).
This will aid in devaluing the USD further. The markets in the US will become comparable to the markets in Asia now. China will tank once the US finally admits that we can’t afford to have them make us stuff anymore and there is no more innovation pouring in there. They’ll still catch up to where we are now, but more slowly since the influx of new capital to pay for it won’t exist anymore. The US informal economy (notably the Black Market) will grow A LOT. The US right now is facing a really big problem regarding North Korea. I’m not sure if South Korea is ready to whoop Kim’s ass by themselves or not. I hope they are, because we can’t afford to do much to help them.
I have no guesses as to what will happen beyond that at this time… maybe civil war in one or more major countries, maybe a reversal of stupid regulative controls. The former would be really, really bad; the latter would spur a new economic boom for the whole world.
Germany made some reforms to cut spending on welfare and they cut taxes. Merkel, or as the greenies refer to her “Frau Nein” (Mrs. No) has cut many green initiatives. What happened? Germany rebounded. Now, other EU member states are thinking of doing the same.
This has sparked off a few key centers of the socialist brain:
The other member states want to do what Germany has done because if they don’t they face bankruptcy. Not that I think Germany would do this, but they would be in a good position to purchase portions of those countries. So what’s stopping the other member states from following the German example?
Unions. They are threatening strikes, violence, whatever they have to in order to keep that free money flowing. The UK is considering a 100% income tax – but they forget that they have to have something to tax. Single minded, brutish thugs are holding the EU hostage and they were put into power by the EU itself.
Don’t laugh America – Obama has been declaring that Unions are going to “save” the USA too… They’re all he confers with. You know, outside of his usual cadres of socialists.
There have been a lot of news stories from the USA and Europe that viciously slam the wealthy of the world, blame them for all of our current issues and demand that we soak them to pay for a slew of governmental programs. Only these governmental programs will make sure that everyone is fairly compensated – or so they say.
Redistribution is fatally flawed primarily because, by definition, the government becomes the main source of capital. It removes incentive for citizens to take a chance on starting a business or trying a new idea, and it removes incentive for businesses to do business when it is more attractive to just accept a government handout. This stifles innovation and thus growth stalls (like the stagnation we’re in now). Government can’t collect enough taxes to pay for its expenditures, so it must borrow or print more bills. The government has nothing to fear from the populace because no matter how much the populace complains they ultimately are faced with either paying their taxes or going to jail. Because of this, it has every incentive to cheat and lose lots of money in the endless miles of red tape it can generate.
A free market has no safety net and everyone enters the market with their primary resource being “human capital”. Having wealth already is nice, but it can be lost. If they take a chance on an idea, they might make it big and get wealthy (or wealthier), or they might fail and have nothing left but their human capital – which is all they need to take another chance. A government that sits back and only collects a small percentage on transactions in a free market that is processing tons and tons of transactions stands to do well. The government also has an incentive to ensure the safety of the environment of this market – to make sure no one is cheating or coercing anyone else.
Here’s a picture (Taxes on the redistribution side are income taxes):
Businesses and Citizens kind of share a tiny sliver (that has strings attached) at the end on the redistributive side. Government is fraught with corruption (always), and that is the reason for the big red chunk that disappears into special interest’s pockets.
On the Free Trade side, there certainly would be corruption as well, but it isn’t worth mentioning because whenever someone tries to cheat, they will be left in the dust as the market changes. If the cheater gets big enough to stop that change (through regulations from the government), then consumers and businesses (which are effectively the same thing since it is impossible to have one without the other) can simply stop doing business and choke the government until the government repeals those regulations.
This is why it is so important to get rid of the income tax – by doing so the government can not even begin to plan a redistributive scheme. These schemes have been proven, time and again, to always fail. The only thing they are good for is funding special interests and bureaucrats.