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Inflation or Deflation. What’s Next For The US?

Bloomberg Writes: Japanese Ask, What’s Wrong With a Little Deflation?

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As Haruhiko Kuroda tries to spur Japan (JGDPAGDP)’s inflation rate, he faces a worrying question: What if his Bank of Japan predecessor was right about why he will fail?

In June 2011, then-BOJ Governor Masaaki Shirakawa faced extreme pressure to double the monetary base, a step Kuroda took just days after replacing him in March. When Shirakawa, a University of Chicago-trained economist, was asked why he’d refused to budge, he offered a surprising excuse: Japan’s aging population, whose fixed incomes would be eaten away by rising prices. Politicians thought the rationale was a copout. Shinzo Abe’s first act as prime minister was to dump Shirakawa.

 “The only easy part is starting to print the money because it does not hurt anyone for the first year,” Schulz says. “But after that, when prices start to go up, it really depends on the view at that time: Will people only see the higher costs, or will they see the brighter future that the government is selling with its money? If they don’t, a turn in public opinion will stop the BOJ before expectations have changed enough to get the economy on an inflationary track.” Kuroda could yet prove his predecessor wrong, but he’s going to need help from his prime minister — and soon.

Read The Rest Of The Article Here

A superb article on deflation and I definitely recommend reading it in full.  

I have been a proponent that the US has been in a deflationary environment since at least the early 2000’s. I know there are a lot of people running around screaming inflation, but we must first define what inflation and deflation is. While there are many definitions, mine is …..Inflation is expansion of credit, while deflation is contraction of credit. Simple as that.

The reason most people believe we are experiencing or will experience inflation and/or hyperinflation is because of FED’s massive infusion of credit into the system over the last 10 years. Without it, we would have already seen concrete evidence of deflation all over the place.

Here is the situation. Deflation is destruction of credit and subsequent decline of prices due to defaults, overcapacity and the self feeding trend it generates. We have already started the process of deflation in two very important areas as % of GDP. Financial and real estate sector in both 2000-2003 and 2007-2009.

However, due to the FED’s crazy insistence on inflation they did paper over any sign of deflation by infusing massive amounts of credit and money supply into the US Financial system. What you have to understand is that such a move didn’t fix anything, it only made things worse and the upcoming recession more severe. Now with velocity of bailout money slowing down, more defaults and deflation is unavoidable.

That is where we find ourselves today. So, will the US experience a Japan style deflation? Yes and No. I will talk about it in more detail in my future writings.  

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Stock Market Update (Sept 16th, 2013)

daily chart Sept 15, 2013

 

The stock market is behaving just as anticipated so far.  The Dow is getting into a very exciting territory. As I have mentioned in the past, we are close to the moment of truth. We are either going to get a confirmation that the bear market rally that started in 2009 is now over or go on to set the next top.

My work shows that there is an 80% probability that the bear leg down has started with the top set in August of 2013. However, there is a 20% chance that the top will complete in March of 2014 instead. Without going into too much details in regards to the timing involved, what will happen over the next few weeks is incredibly important.

Even though the futures are up close to 1% due to Summers drop out, I believe the market will give up gains and this week will be somewhat uneventful. The market is moving up to close the gaps in 15500-15400 range as I previously discussed.  Thereafter, it should pause for a little to digest the gains. At that point we should either see divergences indicating the next leg down OR continuation of the run.

Once again, not much to do right now, but wait. Maintain your long position (if you have one) and wait for various confirmations that the bull run is over to kick in. I will keep you posted.  

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University Education. Another Massive US Financial Bubble.

Bloomberg Writes: Google’s Boss and a Princeton Professor Agree: College Is a Dinosaur

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Colleges and universities are indecisive, slow-moving, and vulnerable to losing their best teachers to the Internet.

That’s the shared view of Google (GOOG) Executive Chairman Eric Schmidt and Anne-Marie Slaughter, a former Department of State official and until this month a tenured professor at Princeton University. They explored the problems of higher education on Friday in a one-on-one conversation sponsored by the New America Foundation, where Schmidt serves as chairman and Slaughter is the new president.

Colleges have the luxury of thorough, democratic deliberation of issues because “they never actually do anything,” Schmidt said during the event. He cited Princeton, where he graduated in 1976 and once served as trustee, which spent six years deliberating over whether to change its academic calendar—and in the end did nothing. “Don’t get me started on that,” Slaughter laughed.

Slaughter agreed that traditional colleges and universities, with their high fixed costs, are at risk. “They’re going to lose their top talent,” she said. “We can become global teachers. The best people can become free agents.”

Read The Rest Of The Article Here

It is unbelievable how much College Education costs today. The cost of education has gone up by  7-8% per year over the last decade. Some colleges increased their tuition 50-100%  during the same time. Basically the costs of educations has skyrocketed.   

Is there a reason for that? Not particularly. Schools are just getting way too greedy. On top of it all there is $1.2 Trillion of student debt out there. That is a truly staggering amount .  The worst part about this whole “college scam” is the fact that we are ending up with a generation of college graduates who are so deep in debt that it will literally take them decades to get back on their feet.  That in return puts a significant drag on the US Economy as major purchases such as cars and homes would have to be postponed.   

I will have a complete breakdown of this enormous problem in my future posts, but for now I do hope new technologies discussed in the article above blow this “College Monopoly” sky high.  It is a must for our future economic growth. We must find a way to provide affordable education to the masses. That would be a win-win for everyone.   

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Why Did Larry Summers Really Back Out From FED Chairman Role

Reuters Writes:  Dollar slips, bonds & shares rally as Summers drops out

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SYDNEY (Reuters) – The U.S. dollar slid while bonds and shares rallied in Asia on Monday after Lawrence Summers dropped from the race to be head of the U.S. Federal Reserve.

Investors wagered that Fed policy would stay easier for longer under the other main candidate, Janet Yellen.

The surprise news comes just before the central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its monthly asset purchases from the current pace of $85 billion.

Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale it back quicker than the more dovish Yellen, who is currently second in command at the Fed.

Read The Rest Of The Article Here

Why did Larry Summers really drop out?  Do you think it was because he was afraid of the confirmation fight? Guys  like Summers are rarely impacted or afraid of confirmation committees or pressures associated with holding such an office.

Here is what I believe the real reason is. You see, as opposed to Mr. Bernanke who is an economic theoretician working with hypothetical economic models to drive US Monetary Policy,  Mr. Summers is a market participant closely familiar with how the real world works. I believe Mr. Summers clearly understands where we are in the economic cycle and this credit infused massive financial bubble. He know what is coming over the next few years.  

Simply put, he doesn’t want to be a captain of the Titanic (that is the US Economy) when it sinks and then be blamed for it.  I believe Mr. Summers has enough common sense to understand that the monetary policy US Fed has instituted over the last decade cannot continue for much longer. When it ends (and it will) the markets and the US Economy will suffer though a deep recession or worse on both the main/wall street.  Would you want to be in charge of a sinking ship, no matter how prestigious or powerful the job is?  I know I wouldn’t.

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DOW Jones Reshuffling. Does It Make A Difference?

BusinessWeek Writes: How New Entrants Will Swing the Dow

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The venerable Dow Jones Industrial Average just announced its biggest rejiggering in some time: booting components Alcoa (AA), Bank of America (BAC), andHewlett-Packard (HPQ) to induct Goldman Sachs (GS), Visa (V), and Nike (NKE)into its elite group of 30. Prepare yourselves for a very different blue-chip index.

Read The Rest Of The Article Here.

Does this matter? From a trading perspective the answer is most definitely NO. The Dow Jones average will experience no deviation from its original trading pattern due to these changes. It will continue to perform as if there was no change. However, I do want to bring your attention so something interesting.

Please note that we have two huge Finance conglomerates coming into the index (Visa/Goldman Sachs).  What does that mean? It is simply another confirmation that the Financial sector is now the largest sector of the US economy as the % of GDP.

Is that good or bad? Historically speaking that is really bad. If we study history we soon learn that when any given society shifted from production to money shuffling (as the US has done in a big way over the last 2 decades), it always ends badly for the Nation in question. Will this be the case for the US as well? I am afraid so. 

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US Congress and Senate Is Full Of Vomit

Yahoo News Write: U.S. lawmakers unite in fury over Putin’s op-ed in New York Times

crazy mccane

 

It’s not every day that an opinion piece in The New York Times simultaneously insults the Republican speaker of the House and nearly causes the top Democrat on the Senate Foreign Relations Committee to  “vomit.”

But that’s exactly what happened when Russian President Vladimir Putin penned an article calling for the U.S. government, which is considering launching a military strike on Syria for alleged war crimes, to use restraint in the Middle East. In his piece, Putin also took issue with part of President Barack Obama’s national address on Syria on Tuesday night, which made the case for military action and praised “American exceptionalism.”

“It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation,” Putin wrote.

“I was at dinner,” New Jersey Democratic Sen. Bob Menendez said on CNN after he read the piece. “And I almost wanted to vomit.”

Other lawmakers were equally blunt.

“I was insulted,” House Speaker John Boehner told reporters on Thursday morning. “I’ve probably already said more than I should have said, but you’ve got the truth.”

Arizona Republican Sen. John McCain called Putin’s piece an “insult to the intelligence of every American.”

Read The Rest Of The Article Here

 

Yesterday, President of Russia, Vladimir Putin sent an open letter to the American people published by The New York Times.  You Can Read The Letter Here. As a matter of fact, I challenge you to read the letter before you continue. 

Let’s put away any sticking points or special interest between Russia and the US for a second. Yes, you can argue it is a divergence and Russia is playing their own game, but stick with me for a second.

Shockingly enough, Putins message is fairly simple. It is the message of peace and desire for reflection on what is really going on in Syria.  He is essentially asking American people to pause and really think about the situation and its ramifications on the whole region and the international community before getting into another mindless war.

What’s American response? “I was insulted”, “I wanted to vomit”, it is an “Insult to the intelligence of every American”. We want WAR and we want it NOW. We don’t even care if by doing so we are partner up with Al Qaeda.

What the hell is going on here? I am an American and I am not insulted. I think Mr. Putin brought up some very good points. I think the American Government has lost touch with reality and went completely off the rails.

I think it is our Senators and our Congressman that make most Americans want to vomit. The proposed strike on Syria has a 7% approval rating, yet these idiots are still pushing for war. While this is quite entertaining, I am watching this unfold in disbelief.   

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Why The USA Housing Market Is About To Collapse

(Quick Note:  Dear reader….. I can drop a substantial amount of economic and statistical data on you to support the points below. However, if past is any indicator any such economic data would put most readers to sleep within 10 second.  Plus, a volume of data/analysis can be published in regards to every single point below. As such, I offer only a quick summary and my conclusion for your reference.   Should you require any additional information about the thesis below, please contact me directly. )

housing bubble

 

Yes, I called it perfectly in 2006-2007 and now I am saying that it is not over. 

Before we can understand where we are now and where we are going in the future we must understand where we came from. The Real Estate run up that we have experienced between 1997-2007 has no historical  precedent.  Real estate data going all the way back to 1790 clearly shows that the US housing market basically appreciated at the rate of inflation.  Yes, there were some bubbles and substantial declines, but overall, appreciation at the rate of inflation is an appropriate way to look at the US real estate sector.

real estate 1 investwithalex

 

A QUICK HISTORY LESSON:

All of that changed in 1997 when Bill Clinton signed The Taxpayer Relief Act into law, basically allowing $250,000 in tax free capital gains in real estate.  While real estate was already appreciating at a good clip at that time, that law added fire to the trend. 

Later,  fearing significant economic slowdown in 2002-2003 the Bush administration added a huge amount of jet fuel to the Real Estate Bubble by cutting interest rates and making mortgage finance available to everyone (even to the dead people).  As people used to say, if you can fog a mirror you can get a mortgage. Of course, all of that led to the largest finance bubble in the history of mankind that “kind of” melted down in 2007-2009. I say “kind of” because most of those excesses are still in the financial system and will have to be worked through in the future.  

 

WHERE ARE WE NOW?

Issue #1: US Home Ownership Rate Is Plunging

On historical basis, home ownership rate in the US is in free fall. Take a look at the chart. I think it speaks for itself.  

homeowership-rate-investwithalex 

Issue #2: Real Estate Affordability Is Plunging

Take a look at the chart as it speaks for itself. The affordability index is in free fall as well. Most likely due to higher interest rates and rising prices. 

Housing Affordability Index

 

Issue #3: Interest Rates Are Going Up             

The trend has shifted up and the 10-year rate is up 100% over the last 12 months. I gave detailed interest rate analysis here. Please take a look here.

 

Issue #4: US Economy & The Stock Market Is About To Turn Down (Big Time)

Please read “The Long Awaited US Stock Market Decline Is Likely Here” as to why.

 

Issue #5: Who Is Buying All Of These Properties For Cash Today?

Chinese buyers, hedge funds, banks themselves, investors, speculators, etc…..  Who cares!!! Remember all those Japanese investors buying everything they could in California and Hawaii in the late 1980’s. I wonder how that turned out for them.

On a more serious note, notice that I didn’t say Average American Family. That is the only category that we should track if we want to accurately predict the future trend in the US Real Estate market. Every other category is irrelevant over the long run.  And guess what? They are not buying.  See the charts above. 

 

Issue #6: Bear Market In Real Estate (sucks people back in)

As I have said here before (US Real Estate At A Turning Point), this is how the bear market works. This is the stage #2 bounce, before the big decline (stage #3).  The bear market tends to suck people back in, offer them perceived safety and a high return before slamming the door, ripping their head off, drinking their blood and taking all of their money.  The US Real Estate market is topping in Stage #2 run up here. That is why you are seeing so many divergences. The market should turn down soon. Beware.  

 

FUTURE OF REAL ESTATE:

Real estate is not made of Gold.  There is a tremendous amount of land available in California, Florida and all over the US.  There is no housing shortage. As such, expect real estate to decline significantly in order to revert back to its natural inflation adjusted mean. It might take a few years, it might be different for various cities, but one way or another the market will get there.

BubbleBurst investwithalex

 

HOW FAR DOWN?

Let’s do very simple math for the San Diego market.  It doesn’t have to be exact for our purposes.

Setup:

  • San Diego Median Family Income: $61,500
  • As Per Various Financial Guidelines Families Shouldn’t Spend More Than 30% Of Their Income On Housing.  That means a $1,500/monthly payment.
  • Median Home Price in San Diego: $500,000 (pushing that level again as per Trulia.com)
  • Interest Rates: 30 Year Mortgage 4.72% (Rates as of 9/4/2013) 

With such fundamental input variables median house value should be $290,000 -OR – A 42% DECLINE     ($1,500x360month@4.72%)

What if interest rates go to 7% over the next 5 years, which can easily happen? 

The fundamental value of the median house drops further to $225,000 -OR- A 55% DECLINE

Also, don’t forget that markets oftentimes overshoot to the bottom, just as they set blow off tops. In such a case I wouldn’t be surprised to see a median price of $150,000- 200K -OR- A 70%-60% DECLINE

You say impossible….. I say study financial markets. Nothing is impossible. 

Now, I understand and agree that there are various market forces at play that make the picture a lot more complicated. Interest rates, timing, mortgage finance, cash buyers, the FED, foreign buyers, speculation, location, supply/demand, etc….    However, fundamentals will always prevail over time. Everything else is just temporary bullshit.

 

ADVICE: 

Your house is not an investment. Don’t be confused. It is the place you live and raise your family. If you are happy with your house, have a fixed interest rate, can afford your monthly payments and don’t care if your house depreciates in value, I would stay put.

If you find yourself in a contrary situation……..I would consider various options. 

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Germany Should Leave The European Union. Like Now!!!

BusinessWeek Writes:  German Euro Skeptics Could Give Merkel An Election Shock  

 investwithalex germany

German parliamentary elections are coming up on Sept. 22, and Chancellor Angela Merkel has a problem on her hands. A euro-skeptical political party known as AfD is rising in the polls and could deny her Christian Democratic Union and its coalition partners the majority they need to continue governing.

AfD, or Alternative for Germany, currently holds no seats in the Bundestag, and until recently it barely registered in public-opinion polls. But a survey released on Sept. 4 by the Forsa polling group showed it with 4 per cent support—just shy of the 5 per cent needed to win Bundestag representation. Peter Matuschek, Forsa’s chief political analyst, says the poll may have underestimated the party’s strength. Many supporters, he told Spiegel, “are too embarrassed to admit that they are planning to vote for the AfD,” which wants Greece, Spain, and other crisis-hit countries to leave the euro zone, and possibly break up the existing monetary union itself.

Read The Rest Of The Article Here

An important election in Germany is coming up on September 22nd.

So important in fact, that the future of European Union is at stake. While most believe that Chancellor Merkel will maintain control, there is an increasing number of observers (including myself) that believe CDU will lose control.

Why is this so important? It could spell the end of the European Union as we know it. German people are fed up with supporting Greece, Spain, Italy and the rest of the freeloaders.  European Union is a  mess on multiple levels. While it is a great idea on paper, culturally speaking there is just too many differences on both the economic and cultural level.

Germany is an economic powerhouse and it should act like it.  I believe German people feel the same way and will act accordingly in 12 days.  If Merkel losses control, I have a hunch that it will set Germany on the course to eventually leave the European Union and go back to the Deutsche Mark.  This would lead to a huge surge in German Economy and that is all that German people should care about.

As soon as that happens, European Union will collapse under its own weight. While most people believe that it would be a bad, I respectfully disagree. I think it would be a boon to all European countries for various reasons. All we can do now is wait and see.  

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GOLD

investwithalex gold

 

People keep asking me about Gold and other precious metals.

Short Answer:  I have no idea. I am too stupid to understand the metals in order to predict them.

Longer Answer: I have studied Gold for a while now and have heard every bullish and bearing argument for or against it. I understand inflation, deflation, safety and currency issues associated with precious metals. However,  I cannot put a complete analysis together in order to give you a legitimate answer.

Basically, precious metals are too complicated.  Some people see it as money, others as inflation/deflation hedge, then you have fundamental/industrial demands for the metals, then there are national reserves, etc….

All of those points are easy enough individually, but when you put them all together you get a lot of interference and noise without any clear direction. Perhaps it is easier for other people to understand, but it simply does not make sense for me.

I cannot see any fundamental reasons for owning gold.  Is it a hedge against inflation/deflation?  Not really. I would rather hold US Dollars in a deflationary environment and a portfolio of inflation protected stocks in an inflationary environment. Plus, the long term gold chart doesn’t look good from a technical stand point. It is either showing a sideways movement or a breakdown.

investwithalex gold chart

Can Gold and other precious metals appreciate significantly here? Sure, but they can also break down. Once again, I have no idea, nor do I find myself qualified to issue an appropriate opinion. 

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Cash Is King

Bloomberg Writes: Why Cash Costs the U.S. Economy Real Money

 Investwithalex_cash

The use of dollars and coins costs the U.S. economy at least $200 billion each year—roughly $1,739 per household—according to a new study from Tufts University. One reason: Americans waste an average of 28 minutes each month just getting to their cash, with part-timers, retirees, and African Americans likely to spend even more time accessing their money. The worst hit, not surprisingly, are low-income consumers, who are dinged with higher fees, along with the lost time.

For businesses, the biggest cost of cash comes from theft. Even if they can afford armored cars and guards to prevent outsiders from taking their cash, there’s still the risk that insiders will drain the coffers. Government, meanwhile, pays a price in lost tax revenue and the cost of actually making currency.

As technology continues to surge forward there is a considerable push from various interest groups to become a cashless society.  Articles such as the one above are clearly sponsored by the Banking Industry with their own agenda, but there is an important red flag here that you should be aware of.

Call me old fashioned, but I love cash. It’s a great feeling to hold a stack of crispy new $100 bills in your hand and smell them once in a while.  Just one second, I need to go do that…..

All joking aside, this is an important matter that can have real implications on your life.  As I have said before,  cash is king. It is the only thing that you will have control over if something does goes wrong. In the worst case scenario none of your stock holdings or bank database entries will mean anything. They will be worth ZERO.  Cash could be your insurance policy and as such I would suggest keeping a considerable amount of cash that is readily available to you.

Do not buy this nonsense that using cash has real economic cost. The real cost here is losing your freedom and being at the mercy of large financial institutions and/or governments. Remember Cyprus? It reminds me of a time when I tried to withdraw $125,000 in cash from my Bank of America account.  They looked at me and said “Sir, I am sorry, but we do not have that much cash available. It will take us a few days to get it”.

Fair enough, but I do not want to find myself in such a situation ever again. Therefore, I would highly recommend having a considerable amount of cash stashed away somewhere safe for your own good (preferably not in your mattress). It’s a great feeling. Trust me. Mine is buried somewhere in the Nevada desert. 

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