Deflation, be damned, boom times in the Pipeline!!
Inflation set to accelerate, for the same reason!!!
"Arm"ageddon, Part II
Deflation, be damned, boom times in the Pipeline!!
The numbers are in for 2006 and they are shocking in their implications for Global growth. The Central banks around the world are in a powerful chorus of keeping the "good times rolling". The world has undergone a period of above trend growth during the last three years seldom seen in history, and we are set and primed to add a forth. The financial leaders of the world governments and central banks have decided to underwrite the whole project of globalization. And it is working.
Money and credit growth is at a rate that is like a freight train, mowing down any deflationary episodes such as a slump in the American housing and automobile markets. Don't stand its path. Learn to profit from it.
Here's a look at the numbers; the economist magazine is reporting that money and credit expanded on an average of 18%, in 2006. As Gary Dorsch of www.sirchartsalot.com and Global money trends magazine puts it "Baby step rate hikes by central banks have failed to rein in explosive money growth. In Australia, the M3 money supply is 13% higher from a year ago, British M4 is 13%higher, the Euro Zone's M3 is 9.3% higher, a 16-year high, Korea's M3 is 10.3% higher, China's M2 is 16.9% higher, a 16-year higher, Russia's M2 is 45% higher, and the US M3 has been reconstructed to show 10.7%growth in 2006." This is a prescription for over 1 trillion dollars (see definition of a billion and trillion dollars in the last Tedbits at www.Traderview.com ,) of new money and credit in the USA by next fall. Add this explosive recipe for growth, to the money and credit creation of the Derivatives explosion I detailed in the last Tedbits and you have more stimulus in the pipeline than has ever before seen in history. It is a recipe for explosive growth. (Editors note; I urge you to subscribe to Gary's work it is very affordable and one of the most thorough and insightful world economic commentaries available anywhere.)
Bernanke, and the other Central Bankers are on a mission, "Whip deflation now" and are being pushed by their local politicians looking to the next election who are willing to do anything to keep the party going. In Japan The LDP under Shinto Abe just stared the Central bank down and an interest rate hike was averted. Central Bank Chairman Fukai was forced to stand down from a well-telegraphed interest rate hike; the politicians are firmly back in charge, as they were before former Prime minister Koizumi took power. Central bank independence is dead in Japan, it is not a recipe for good things. So its off to the races for the carry trade and monetary stimulus. Do you think they would drain liquidity by 40% now like they did last spring when Koizumi was still in Charge? No way, Old scholl politicians are firmly back in control. So it's GO GO GO for now.
Much of the growth is also due to the emergence of the BRIC (Brazil, Russia, India, China) economies as they have joined the Capitalist world of business creation and increasingly let go of the command and control economies they once embraced. Add to this the New EU 15 (Poland, Ukraine, Romania, Czechoslovakia, etc.) As the former communist country's have embraced market economies, (sound policy changes such as flat taxes, less regulation, sound banking reform, etc) ala Ireland, the former slacker of the European Union that is now tiger of the Old EU. These countries are unleashing the dynamicism of their entrepreneurs in the 10's if not 100 of millions (3 billion people entering the labor pool and capitalist business model), and by allowing them to keep more of the of the fruits of their labors, these countries are growing beyond belief. Chinese, Russians, Poles, Indians, are ready to rumble, enthusiastically embracing business creation, competition, hard work ethic and using their natural advantages of low labor costs and high savings rates. This is capitalism and productivity growth writ large across the globe; wealth is being created at an astounding pace. This type of growth is tremendously deflationary, as more is made of better quality for less...
I travel the world a lot and my wife is mainland Chinese (In china "to get rich is glorious" capitalism reigns supreme, just don't challenge the politicians), these people are ready to work hard, they want to get rich, they want their piece of the pie. And they are ready to work long hours and they want to do it in a smart manner. In the UK 100,000s of people have been embraced from the former communist countries of Eastern Europe and are climbing the ladders of success, starting in entry-level positions and working their way up the totem pole. The UK sees no threats, only the advantages of a young, dynamic, low cost input into their businesses. They are thriving because of the injection. These are the benefits and winners of Globalization.
Some Americans and businesses are embracing Globalization and becoming fantastically wealthy and prosperous. While another group lead by the Democrats and the unions are fighting it tooth and nail. Calling for higher taxes, more regulation of business and markets, higher minimum wages (a 40% rise in the minimum wage does not make us more competitive, it is inflationary), attacks on the Oil companies (Exxon Mobil being the poster boy of Capitalistic excess, in reality their profit margins are less than MacDonald's restaurants and they are owned by the public, institutions and pension funds). The Congress believes like the Central Europeans before them that they can undo globalization at the stroke of a pen, it is a false belief. And Americans will be worse for it.
The Losers will be the French, Italians, Spanish, and Germans, as they are deathly afraid of the "Polish Plumber" a real or imaginary threat to their future socialist livelihoods. The "foreign devils" in the minds of local politicians and media, who use this to scare and manipulate their citizenry. These central European politicians are trying mightily to stop these hard working people from freely moving between countries and joining the local labor forces as is mandated by EU membership. These people and politicians are fools and slackers, and slaves to the corporatist business model embraced by themselves, non-competitive national champion corporations, unions, politicians and Brussels. What an unholy alliance!!! In France you are deemed rich if you make 4000 Euros a month, and Ms. Royal and her socialist comrades argue it would not be fair if people making more then this sum receive tax breaks. Why would anybody work hard and build business if they only look to have it taken from them above that figure? However the Money Train mentioned above is even bringing some of these economies to life such as Germany. Years of wage restraint have energized the export sector and made it very competitive, now the local construction market is finally coming to life. Germany is booming lets see how long it takes the politicians to rob these vibrant sectors and destroy their futures once again. Oh and by the way they just increased the VAT tax from 16 to 19%, once again taking any new success from the citizens and transferring it to the politicians, which group do you think will spend the money better?
So there you have it Boom times in the emerging world, Asia, the BRICS, parts of America and Eastern Europe and the twilight of empire in another. It will be their demise sooner or later as I will outline in a shocking Tedbits in two weeks.
Inflation set to accelerate, for the same reason!!!
Do you really think inflation can be contained in the face of the global Tsunami of monetary stimulus? Inflation is set to runaway to the upside, along with the global asset inflation they are fostering. Watch the yield curve go from inverted or flat in the world and revert to normal levels in the future as economies boom and long term rates rise. Cash will not hold its value in the bank, so look for it to move into anything that can't be printed by a central bank. Gold is poised to break out against every currency from formidable time and price basing and corrective action. The next move is set to begin as we speak, get long. Notice how gold did not collapse with the price of oil? In the face of a stronger dollar? As predicted by the Asses on Wall Street.
Commodities are set to continue their move higher in the mega bull market that looks to be entering wave 3, the most powerful thrust in a five-wave move. The Dow is projected 5000 points higher after turning the 2000 through 2006 period in which was supposed to be the beginning of a bear market into a consolidation pattern, with projections as outlined above. But that stock bull market is in cash denominated terms, in terms of real money i.e. gold it is a bear market (see Tedbits for the beginning of January). Cash is trash and things are in, things that can be repriced as the currencies they are priced in just lose value.
Wages will rise nominally (how do you think they will reduce the impact of a 40% rise in the minimum wage in the next two years? By debasing the money supply by that amount so the REAL pay rate never actually changes!!! LOL) but not in purchasing power as the currencies lose purchasing power versus things like gold, stocks and real estate faster than the 4 or 5 % pay raises can overcome. Rising wages is the definition of inflation to the Federal Reserve board. Interest rates are set to rise on the long end and stay the same at a minimum on the short end. Bonds are bombs, and the liquidity will temporarily overcome their demise, this is the sector that can bring the house of cards credit creation to its knees, but not now!!! But what will be killed will be...
"Arm"ageddon, Part II
The sub prime mortgage market, Adjustable rate homeowners and sub prime lenders as 2 trillion dollars of mortgages resets in the next year. Part I of this unfolding debacle put the housing market into the worst year over year performance in recorded history. Down over 17%. Part II will finish the job, after 2007 look for a recovery. In the meantime watch the show as the enormous liquidity being created at this works to cover the fingers of instability caused by lender, sub prime borrowers, and home speculator defaults. It is going to be quite a show and the problems are accelerating.
As regular readers know I started the "Arm"ageddon series in October of 2005 and it has unfolded as predicted. Wall Street is saying the real estate market has seen its worst, WRONG. Forget about it, the worst is yet to come. The Higher interest rates dictated by the boom in the pipeline outlined above will put a lid on the coffins of the fools that bought the hype of the housing market in 2004-5. The magazine covers touting the sure thing investment that the housing market was supposed to be. The reckless lending is going to hit the unqualified people who were just looking to realize the American dream, after reading the media coverage of the real estate market. Asset prices and real estate in particular were reacting to the below market rates and easy money, courtesy of then Federal reserve chief Alan Greenspan, aka "Jack the ripper" when this is over. I still vividly remember his testimony to congress egging the public to borrow money against their homes and use ARMS (adjustable rate mortgages). CNBC was also at the forefront of the hype as was Business week, Forbes, and all the mainstream financial press. It's all going to come to tears, for the simple minded and poorest among us. Here are some of the gory details.
Nationally Mortgage foreclosures are up 51% in 2006, in California up 94%, in Nevada 175%. This is but the tip of the iceberg. The Federal Reserve is doing its best to create liquidity and support the Asset based economy and largely will succeed as I outlined above. But these poor fools are going to be left holding the bag, the losers as the excesses in the previous credit and bubble blowing Alan Greenspan take these people to the poorhouse. I outlined in the first letter of the year how two-sub prime lenders went down in December, 10 more have done so since. The door to refinancing is closing as lending standards are tightening; sub prime lenders are in full retreat, long-term interest rates are rising and the pool of buyers are shrinking as they realize its now a buyers market.
Additionally, the ability to refinance is closed to many as there is no or negative equity in their real estate. With every notch up in long term interest rates there are a few less bidders for each property, and the value of the home notches down as well. Their no or low money down loans, the interest only loans are now requiring adjustments as is in the contracts. But nobody will touch them as they try to get a fixed mortgage, or roll into another low interest ARM. Why you ask? These mortgages were securitized, the lenders no longer hold the mortgages, they have no incentive to take these balance sheet bombshells and move it onto their books. NO WAY. Let the holder of the securities deal with it, along with Fannie Mae and Freddie Mac as the guarantor of these mortgages. Freddie and Fannie are also known as the "American Taxpayer" as the US government guarantees Freddie and Fannie. Republican and Democratic Congressmen took turns shielding them from the scrutiny of regulators in exchange for campaign contributions over the last 10 years. It was a shameful display seeing congressman attack anyone who questioned the shenanigans going on in these companies. The full story of the malfeasance in this lenders is yet to be seen, but will be as they too are left holding the bag as they and the American Taxpayer make good on these wishful thinking loans. But what's a few hundred billion when you have a printing press in the basement?
The poorest people in America are set to become a lot poorer. New American Bankruptcy laws will lock them in as indentured serfs to the big bank and credit card lenders, thanks to their buddies on Capital hill who passed a law shielding them from their poor judgment in lending. The Federal Reserve will take care of the broad middle class, the big Banks and financial institutions. It is why they are doing the money train as outlined above. But these sub prime borrowers and homeowners are done; you can put a fork in them. The greatest experiment in fiat money and credit creation in history rolls on, to its inevitable end of a Kondratieff winter. But the winter is still not here....
In Conclusion, enjoy the ride it is going to be the roaring twenties all over again. But Keep your eyes open, learn to make money in falling as well as rising markets as the roller coasters will be in full swing as episodes we are seeing in the American housing markets, repeat in other Asset classes. They will only be trading opportunities, both up and down. My next down bet is on the Asian stock markets as they look like NASDAQ 2000, but these crack ups will be papered over just as the NASDAQ debacle was, and in the same manner, cubic money and credit creation!!! Don't miss the next shocking edition of Tedbits, it is a story of power shifting around the world!!!
Thank you for reading Tedbits. If you enjoyed this newsletter subscriptions are free at www.traderview.com , send it to a friend, check out previous issues and if you want to learn about making money in up and down markets give me a call.
