The market's direction is changing. The rally that began earlier this Spring has risen to high levels and have recently become unstable. Traders and investors coming back from summer vacation are once again smelling blood. These are the same folks who brought Mr. Market to his knees and subsequently allowed him to get up a little. Dumb money then wanted him to learn to walk again. He took his first step and then they thought he was in running shape. LOL.
There currently are too many traditional and non-traditional headwinds to have a sustainable economic recovery. It may be true that the financial crisis is subsiding but it is not true that the economic crisis is as well. Not at all. For a real economic recovery we will need growth in three major areas: income, wealth, and credit. We have none of these yet. My best guess right now is that it'll be another 2-3 years before we see any meaningful growth in these categories.
On top of that, what's really bothering me as of late is the upcoming tax regime changes. Of course, I don't know what type of changes will go thru but from all the talks so far we know that high earners will be affected the most. Contrary to popular belief, these folks are not the Bill Gates, Warren Buffett types. No, they are the multitude of small business owners that have put their entrepreneurial hands at work and have put in sweat and blood to grow their ventures to fruition. These are the same folks who offer employment opportunities across America and provide the backbone to every neighborhood. A hit to them is a hit to the Real America.
We'll also have increasing consumption taxes across the board. State and municipalities are equally struggling to acquire funds. We've already seen "bottled water" taxes, "major tourist area" taxes, "candy" taxes, "liquor" taxes, "fast food" taxes...the creativity is boundless. Oh, and what about the "Internet" tax. Ask Amazon if they care.
Property taxes will be revalued...downwards. Governments will be losing another source of revenue stream that's been increasing yearly over the past couple of decades. Anyway, the tax mess is just getting started. Some may say that it's always been a mess, but I would contend that the messy implications are far greater today given the multi-faceted bubble bursts.
Stay awake for this.
Tuesday, September 29, 2009
Wednesday, September 23, 2009
FOMC - Nothing New
Today's FOMC decision pretty much held to the status quo.
Interest rates will remain low. As far as I can see, this will be the case for the next few quarters. We're a long way from any real economic recovery and low interest rates is one way to stimulate or at least help maintain some sort of activity. What's telling is that bank CD rates are pitiful not to mention what measly rate they're paying for your savings account. Awful. I had locked some money into CD's around this time last year at a 1 year term for a rate of over 4% - now, competitive 1-year CD's are barely fetching 2%. Needless to say, I will not be renewing. Moreover, word on the street is that you can't even take advantage of historically low rates because banks still are not lending.
The Fed continues to sop up more residential mortgages. And, it's the ugly kind they're buying - the kind that banks want to rid. Whatever moral hazard we were concerned about is far away in outer space now. Banks continue to dump and trim off excess while we eat their waste and get sloppy in the act. I guess, in theory, we (and I mean the Fed) has an infinite life and can take it's sweet time to get back into shape. No doubt, Gen X, Y and whatever Letter is after that will pay the price. Sad.
The stock market is pulling traders back in. Of course, it's pulling the dumb money now but when Mr. Market goes up 60% in 6 months, how can you resist? It'll keep going up, no? My answer...I'm mostly in cash. I rather sit this one out because I know that real people are still suffering and will be suffering for a long time. The euphoria of yesteryear is very real but tomorrow's struggles are getting clearer and clearer. We may not see the March lows again, but it doesn't mean we steadily go up from here. I rather spend my time and money focusing on better opportunities than speculating at this point.
Interest rates will remain low. As far as I can see, this will be the case for the next few quarters. We're a long way from any real economic recovery and low interest rates is one way to stimulate or at least help maintain some sort of activity. What's telling is that bank CD rates are pitiful not to mention what measly rate they're paying for your savings account. Awful. I had locked some money into CD's around this time last year at a 1 year term for a rate of over 4% - now, competitive 1-year CD's are barely fetching 2%. Needless to say, I will not be renewing. Moreover, word on the street is that you can't even take advantage of historically low rates because banks still are not lending.
The Fed continues to sop up more residential mortgages. And, it's the ugly kind they're buying - the kind that banks want to rid. Whatever moral hazard we were concerned about is far away in outer space now. Banks continue to dump and trim off excess while we eat their waste and get sloppy in the act. I guess, in theory, we (and I mean the Fed) has an infinite life and can take it's sweet time to get back into shape. No doubt, Gen X, Y and whatever Letter is after that will pay the price. Sad.
The stock market is pulling traders back in. Of course, it's pulling the dumb money now but when Mr. Market goes up 60% in 6 months, how can you resist? It'll keep going up, no? My answer...I'm mostly in cash. I rather sit this one out because I know that real people are still suffering and will be suffering for a long time. The euphoria of yesteryear is very real but tomorrow's struggles are getting clearer and clearer. We may not see the March lows again, but it doesn't mean we steadily go up from here. I rather spend my time and money focusing on better opportunities than speculating at this point.
Sunday, September 13, 2009
Gold @ $1000
Gold's been the go to trade as of late. Most say it's because gold is an inflation hedge. This group of thinkers hold that with the amount of fiscal and monetary stimulus the federal government has dumped into the economy that inflation is just around the corner. The other major faction says that gold is rising above $1000 because it's becoming more valuable against most major paper currencies. This group contends that the Fed and the Obama administration have taken on dollar-negative policies. Either way, the gold bugs are excited.
I think, however, the reality is somewhat more complicated. What we don't hear too often in the media is the concept of the "velocity of money." This is a nuanced concept and I am not prepared to explain it in detail. However, simply stated, it describes the rate at which money in circulation is used for purchasing goods and services. What's happening now is that the velocity is not growing. Because of this, the Fed will continue to print money as long as they think deflation could be a problem. How much more? No one knows. Chances are the Fed will supply more money than is required at some point.
Of course, all this is speculation as the ultimate outcome can only come after the fact. There are so many variables in play that it is impossible to pinpoint with any accuracy. Because the velocity of money is not growing/slowing, I believe we will be in a period of deflation for the next few quarters (bad for gold) before we enter inflation then stagflation (good for gold) to end this massive financial bubble. Gold will experience a roller coaster ride, so it will test your resolve if you hold in the meantime.
I think, however, the reality is somewhat more complicated. What we don't hear too often in the media is the concept of the "velocity of money." This is a nuanced concept and I am not prepared to explain it in detail. However, simply stated, it describes the rate at which money in circulation is used for purchasing goods and services. What's happening now is that the velocity is not growing. Because of this, the Fed will continue to print money as long as they think deflation could be a problem. How much more? No one knows. Chances are the Fed will supply more money than is required at some point.
Of course, all this is speculation as the ultimate outcome can only come after the fact. There are so many variables in play that it is impossible to pinpoint with any accuracy. Because the velocity of money is not growing/slowing, I believe we will be in a period of deflation for the next few quarters (bad for gold) before we enter inflation then stagflation (good for gold) to end this massive financial bubble. Gold will experience a roller coaster ride, so it will test your resolve if you hold in the meantime.
Wednesday, September 2, 2009
Looks Like Summer's Over
The slow season is coming to an end. Traders are flocking back to the office. I expect a surge in volume come mid-September. After the incessant rally over the course of this summer, I'm ready for some real pricing action. Why? Because I hate a straight up chart. It gives no grounds for support or resistance. We need some hammering around. We need a good, solid correction to come into play.
I'm expecting a 10% correction by November. Don't know when it'll come or how it'll come. I prefer a long, drawn out process as opposed to a 3-day puke fest. I'm looking for crude to come down to $60/barrel. I'm looking for the financial sector to let some steam out after their incredible rally over cooked earnings. I'm also looking for more housing pains. Whoever called the housing bottom obviously has enough cash already and isn't one of the many who are still facing foreclosure or job loss or budget cuts. Real America is still in the process of belt tightening as indicated by the savings rate. I expect that rate to continue to increase.
I'm still overwhelmingly in cash and am happy to take things slower. Yes, I participated in the rally but I did cut out a tad bit early. I don't usually like trading in froth. That's what I see many doing right now. Good luck.
I'm expecting a 10% correction by November. Don't know when it'll come or how it'll come. I prefer a long, drawn out process as opposed to a 3-day puke fest. I'm looking for crude to come down to $60/barrel. I'm looking for the financial sector to let some steam out after their incredible rally over cooked earnings. I'm also looking for more housing pains. Whoever called the housing bottom obviously has enough cash already and isn't one of the many who are still facing foreclosure or job loss or budget cuts. Real America is still in the process of belt tightening as indicated by the savings rate. I expect that rate to continue to increase.
I'm still overwhelmingly in cash and am happy to take things slower. Yes, I participated in the rally but I did cut out a tad bit early. I don't usually like trading in froth. That's what I see many doing right now. Good luck.
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