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November 21, 2008

The Sun Shines but the Economy Melts
by Randolph Buss

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Reminder: this little blog is simply my tool to remind myself and any readers of my thoughts and anything else I deem important - more extensive charts and/or analysis takes place in the GMR Newsletter. This blog is updated periodically - pending travel, workload, etc.

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My Market Notes

The US "bailout" is now fundamentally out of control -- a fictitious $700 bn bailout has now turned into an "all sucking vortex" - some estimate $5 trillion.
Within the last 4 months, new public debt within the US has increased $1.5 trillion with 2 Debt Limit ceilings raised (more inside this update)
Under President Bush, the US public debt has doubled (100% increase) in 8 years from $5.7 trillion to $10.6 trillion (more inside)
My last target for the DOW of 8000 has now been met, my ultimate lowish target is ~ 6000
My long-held deflation theory with concomitant central bank easing rates globally has been verified -- more easing underway although now an easing is not producing the desired results. Interbank rate spreads remain nearly 5x above normal
US new home starts are down 40% and build permits have fallen to 1981 lows
In previous issues I have reported that between housing and financial sectors, the US is very susceptible to large unemployment in a downturn -- this will now accelerate
My call for Swiss Franc accumulation on target but observing closely as Swiss also in downturn economically; may see short term weakness
BEAR markets take 9 -- 12 months minimum to resolve although this is now a "mama bear" - meanest and very nasty -- I foresee 2009 as severe as Central Banks are "pushing on a string" as far as monetary policy easing is concerned.
So-called Quantitative Easing (QE) is now the rage -- Fed Governor Kohn mentioned the Deflation of Japan as a risk -- we now hear louder the helicopters of Ben and world central banks -- in $$$ drop mode
Latest CPI figures do not look robust by any means (graph below)

Yet, official core inflation is still running at 4%+; unofficially more
With real interest rates therefore negative, money markets are unattractive and banks actually lose money such accounts
Mortgage and credit card rates remain cemented if not moving higher despite monetary easing; consumers in debt + job loss fear
I remain VERY skeptical of monetary easing "producing" a new wave of consumer optimism; moreover, I see that monetary easing will create a larger wave of inflation later
I foresee further major bankruptcies in banks, business and as I stated a year ago, a further contraction in corporate real estate
Credit restriction from institutional side looks set to continue as turmoil continues along with risk spreads (% over US Treasury rates)
And finally, I am starting to consider the SERIOUS risk of a US default and/or a major disruption in US Treasury auctions -- buyers of US continued debt may simply start to walk away as the risks within the US market are increasing and non-transparent. This does not bode well for US Dollar holders.
There has also been talk of the US nationalized private pension plans although this seems less likely unless a full-revolution is desired. M

US Treasury : Deficits

Two Pictures

These two pictures tell the story of the recent bailout actions and the debt increases under Pres. Bush . Public debt has doubled in 8 years while the morphed bailout continues to suck even more capital. "monetary physics" tells us that real growth (GDP) can only come from true production, savings or both. Right now, the West is wallowing in negative savings and has outsourced a large majority of manufacturing to the east. Likewise, in a recession, GDP will likely fall between 3 -4 % ... which is substantial. On top of this, I fear -- looking at behavioural finance -- that consumers, who make up 70% of GDP will not be commensurate in doing their post-recession "duty" of taking on ever more "free money" debt so quickly as provided by the Central Banks . It remains to be seen how the massive liquidity injections will manifest themselves -- logic tells us of higher prices to come as more debt is created to "cover and hide" the deflationary forces. The NEED for such liquidity is overwhelming as banks continue to come to the trough for more money and yet spreads remain high. Debt to GDP is now increasing substantially.

DOW -- Consumer -- Banks

The DOW is now forming a very bearish cross of the moving averages -- this forebodes evil ahead. If anybody had any questions of this market -- this chart shows a 1929 style drop and with it trillions have evaporated off world equity markets. I have long held the opinion that for markets to recover we will need to see a recovery in both the Consumer index and the Banking index -- about the only things left in the US economy. Neither of these are looking good -- these also have or are forming BEARISH cross patterns. I would expect these charts to worsen over the next 6 months with a possible bottoming formation in mid 2009 at the earliest. If my theory is correct, the consumer will not return to rampant hedonism and debt building but rather go into "hibernate" mode : save, fearful of job loss, house loss, and rising real inflation on daily goods. This is bad for GDP and that's the only thing the Fed is selling -- consumerism.

Likewise, the Banking and Financial sectors need to recover before any broad recovery can take hold -- this is what we were told and held ransom to -- the BIG BAILOUT must occur we were told ... only it seems to be dithering. The State in US, Euroland, everywhere is being forced into the LENDER of LAST RESORT -- and the only weapon they have is to create money. The economists tell us it's not so bad -- x% of total GDP is still "ok" . Funny, those same economists never saw the coming Depression and biggest market crash since 1929. But things are different now we are told -- the world is globalized, it's all ok, we have more "financial instruments" to fight deep recessions...

This has been an abbreviated version / update : full reports available at the site.

Best regards from the GMR,
Randolph Buss
www.dinl.net

Berlin, Germany
This was just a small part ... the full GMR and portfolio entries can be read at the homepage www.dinl.net. For those new readers, the Global Macro Roundtable (GMR) is conceived as a "real world" newsletter written by market analysts and not by unknown editors doing research for others. The GMR provides up-to-date analysis and gives the reader a variety of opinions on the investment markets and sectors. We are not here to massage our egos rather we are here to provide our readers with real-world research and investment opportunities, For more detail and more charts on this article and others, please visit the site. More on this in upcoming issues - if you would like to know more, please sign up for a free subscription to Der Invest Informant. As well, please visit the site daily and read the latest information and inputs.