2010 Outlook: When Hope Turns to Fear: Part IV
The unfolding depression and continuing BOOM, commodities and natural resources.
As the commencement of the next leg down in the developed world's economies continues to unfold like the sunset at the end of the day, the emerging world is HEALTHIER than ever and economic sunrise is still on their horizons. Economic trains traveling in completely different directions. In the emerging world, growth, capitalism, creative destruction and competition are embraced; they know the recipe for an expanding economy which means more food on everyone's plates.
At no time have the opportunities for investors been greater. Markets will ZOOM higher and lower to price in the new paradigms of accelerated defaults and the central bank printing presses combating the unfolding insolvencies. Buy and hold is dead, so absolute return investments with the potential to thrive in up and down markets are required as a component of any diversified portfolio. You also need to learn how to restore the functions of money so your purchasing power cannot be stolen through debasement. This is what I do -- click here (http://www.traderview.com/portfolio_analysis_analysis.cfm)
In the United States and Euro zone, socialism is on the march and misery is being spread in ever-widening circles as the last vestiges of wealth creation are destroyed and fed to the elites, their government lap dogs, crony capitalists and their something-for-nothing constituents in a failing effort to rescue themselves. Fights over decreasing income are unfolding between the public versus the private, as there is a little less food on everyone's plates. Everyone wants to be paid and have free healthcare, but no one wants to work, make products people want to buy at reasonable prices or compete in the world except for public servant with HOT AIR lip service, it is a recipe for disaster!
In the US and Euro zone, POLITICS holds preeminence in ALL its affairs, thus political solutions are always substituted for PRACTICAL solutions. Capitalism, competition and creative destruction of entrenched crony capitalists is BANNED through tax and regulatory corruption. Capitalism is alive and well in the emerging world, and it is dead and buried in the developed world. This is not a failure of capitalism in the developed world; it is a failure of socialism. We live in the land and times of George Orwell, where black is white, up is down and socialism is called capitalism.
Don't forget, true capitalism is DISINFLATIONARY - its creative destruction provides more goods and services for less money because entrepreneurs compete for customers. Socialism is INFLATIONARY - it is always less goods and services for more money because elites short circuit the creative destruction and substitute crony capitalists who, through regulatory and tax manipulation courtesy of corrupt public serpents, mandate the winners in the competition for CUSTOMERS.
Secular bull markets in commodities, energy and natural resources continues unabated; when the global financial crisis (primarily in the developed world) begins its next leg down, a countertrend pullback will provide an EXCELLENT buying opportunity. As our title for the 2010 Outlook "When Hope Turns to FEAR" hits its recognition point (the peak of the RELIEF rally which should be some time in the next three months), a brutal wave down for the western economies will unfold. Let's take a look at the BIG picture of the continuous commodity index going back to 1972 using a HIGHLY significant quarterly bar chart:
This is an INTERESTING look at the commodities and inflation MEGA trend (also known as the death of G7 unsound money.) Then carefully look at the range in which they traded from 1974 through 2006. Then we move to PERMANENT new highs as G7 currencies commence their next descent into their ultimate demise as competitive devaluation and money printing attempt to rescue BANKRUPT governments, globally uncompetitive domestic industries, economies and financial institutions.
That leg up is also an illustration of the developing world ASCENDING into global economy and capitalism, in turn, driving huge new demand.
The first leg up began in 2002 and finished in July 2008. The corrective wave down began when the crash in financial markets began in July/August 2008. The corrective wave was a Fibonacci correction of 61.8%, and STOPPED at the top of the old trend channel, confirming that RESISTANCE had now become SUPPORT in this secular bull market. This chart is an illustration of permanently higher commodity and natural resource prices, and the unfolding secular mega bull market.
Notice how all new highs in all the internals confirm the price action, except in the most recent one, which is a key reversal possibly signaling that the RELIEF rally in the G7 economies is coming to an end. The internals only retreated to neutral, which is also the mark of a bull market, along with unfolding bullish crosses in slow stochastics and MACD.
My belief is that commodities will take a tumble when the next wave down in the G7 economies commences. Then they will have a Fibonacci retracement of the move off the 2008 lows, with bullish divergences in the internals; then, the huge third leg higher will commence as everything priced in G7 currencies REPRICES higher to reflect the lost purchasing power in which commodities are denominated.
Any discussions about commodities and natural resources must recognize the ascendance of 100's of millions of people into higher income brackets in the developing world and the descending standards of living of the developed world. Both trends are set to continue as Mother Nature and DARWIN march forward, impervious to humans who believe themselves to be above the truths of nature.
Many people believe themselves to be Austrian economists because they can see Von Mises' prophesy unfolding in the G7 before their eyes. Unfortunately, they do not look at the Austrian recipe for robust economic growth in his work and they fail to recognize and acknowledge that growth is alive and well in the emerging economies. Transplanting the social moods and the economic and financial conditions in the failing social welfare states of the developed world and extrapolating conclusions to the developing world is a mistake, as it is NOT true. Remember the Von Mises quote from Part I of this 2010 Outlook series;
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further expansion, or later as a final and total catastrophe of the currency system involved" - Ludwig Von Mises
This is the choice that has been made in the United States and Euro zone, total catastrophe and collapse. The something-for-nothing personality (see Tedbits archives for the December 23, 2009 Special Edition) is in complete control. Look no further than this comment from the Prime Minister of Luxembourg, Jean-Claude Juncker, from a recent Gartman Letter (www.thegartmanletter.com, I urge you to subscribe):
"the most amazing quote yesterday from Mr. Juncker...the Prime Minister of Luxembourg...regarding the problems that Europe is facing about the anger that Germany's reluctance to act is causing. We can only hope that Mr. Juncker was either very angry and therefore saying things out of that anger, or that he was speaking tongue-very-much-in-cheek, for if not Europe is heading to dissolution far more swiftly than even we had thought likely. Speaking about the German taxpayer's collective reluctance to bail Greece and speaking about those betting on the Greek's collective unwillingness to follow through on their more austere fiscal promises, Mr. Juncker said those supporting "Europe" have "instruments of torture" to punish those betting against Greece. He made those comments in the German newspaper Handelsblatt of all places. He said further that:
We have instruments of torture in the basement and we'll show them if it's necessary...Politics can only be blackmailed to the extent to which it will allow itself to be blackmailed. We have to strengthen the primacy of politics. It must be able to stop the financial markets.
So within a week we've had the Germans called "Nazis" by one political leader, and now we have the usually refrained and even elegant Mr. Juncker tossing out off-the-cuff remarks that are either stupid or ominous...take your pick." - Dennis Gartman
Another quote from a recent Gartman letter from a trade unionist in Greece:
"We demand from the government and Brussels that people and their needs are put above markets and profits," said Stathis Anestis, a member of the executive committee of GSEE, the umbrella union of private sector employees.
Thank you, Dennis. Both quotes and comments show a complete and absolute DISCONNECT from reality. They BOTH believe they are above the laws of nature and Darwin. Further, that they can consume more than they produce, and borrow infinitely without the income to repay their borrowing. Further, that they can achieve economic success through legislation rather than constantly maintain their economic policies in a manner aligned with the real world. How absurd.
The Greek prime minister and numerous socialist puppet masters also known as Merkel, Brown, Sarkozy, Berlusconi, et al are saying speculators are the source of their problems. I beg to say that a country with 11 million inhabitants (about the size of Chicago or Los Angeles), which owes $300 billion Euros is BANKRUPT and it is only REALITY to sell it short; its financial demise is INEVITABLE as the debts are inextinguishable and unpayable. This is a common sense conclusion, except in the halls of government and in the land of the tooth fairy.
They are trying to SPIN this UGLY reality to the masses as "sinister market forces" rather than the betrayal of the citizens by their leaders, as these MORALLY and FISCALLY corrupt public serpents would like. They cannot find Mother Nature and put a bullet in her head or lock her away. Survival of the fittest is working on these fraudsters until the ultimate crisis caused by their hubris arrives; they are the pinnacle definition of UNFIT. They refuse to create the conditions of economic health and REAL growth. Income growth is set to continue its decline as the G7 sinks deeper and deeper into non-competitiveness in the hands of public serpents who implement, more and more, the "policies of insolvency."
We will take a pick, Dennis, and it is ominous, but anyone who follows Europe knows that POLITICS, crony capitalism and elites have short circuited capitalism for decades, and that is the bottom line of NO GROWTH. Washington is following this same path and faces a similarly bleak economic outlook. Properly measured for inflation, Europe has not grown in decades; the only thing that has grown is socialism and DEBT. Now they are collapsing under the obligations of the welfare states with the reality of NO INCOME or ECONOMIC GROWTH to service the debt.
There are three elements to defining DEMAND and income growth -- consumer spending growth, manufacturing and savings; all are lacking in the US and Europe and all are present in the emerging world. First let's look at the size of the economic pies between the emerging world and developed economies at purchasing power parity (courtesy of www.agorafinancial.com):
As you can see, the emerging and developed economies WERE equal in size as of 2008, now they are UNDOUBTEDLY UNEVEN. Many economists say the emerging economies are dependent on consumers in the US and Europe to sustain economic growth. Sorry Charlie, that's a FALSE supposition and this chart of US consumer spending versus spending in the emerging world illustrates this (source: JP Morgan and www.wsj.com):
Consumer spending only needs to keep rising at the same rate domestically for growth to continue in the emerging markets. Domestic consumer spending is COMPLETELY substituting for the drop in the US. This is called self-sustaining growth and it is set to continue, and it is DECOUPLING (something G7 economists refuse to RECOGNIZE or acknowledge.) It is new cars, appliances, roads, infrastructure and etc., all being created for RISING middle classes.
What is the third element and why is it going to continue? Simple. The emerging world has savings, lots of it at all levels of society: government, corporate and personal. Savings is the seed corn of expanding economies. They have low taxes, so they have incentive and are motivated to work because they get to keep the money they earn. They have state-of-the-art manufacturing facilities, not the decrepit infrastructure of the G7 (where manufacturing has been tortured to virtual extinction under rules, regulations and taxes which render them uncompetitive in the global market place).
Next, let's look at a chart of savings and economic growth in India, courtesy of www.ft.com:
Or let's look at deposits versus lending growth in China:
Notice in China that DEPOSIT growth is growing faster than NEW lending. Banks that have deposits growing FASTER than top-line loan growth do not have balance sheet problems. PERIOD. These emerging powerhouses have the FUEL for growth, both financially and in rising domestic consumption.
A real estate bubble is clearly evident in China, but in the developed world many bubbles have been blown and collapsed over the last 4 decades where their economies just roll forward and China is early in that same cycle. Their banking systems still actually have REAL reserves, contrary to G7 banks which basically have reserves which are accounting fictions, illusory at best and non existent at worse. Last year saw record lending in China, but as much as half are open lines of credit and HAVE NOT been drawn down. Ready working capital is available to the private sector, whereas in the developed world it is almost non-existent.
Emerging economies have CREATIVE destruction where new ideas and better ways of doing things create bright futures because consumers will always be motivated to choose them over developed-world competitors; to do so is to get more goods and services of superior quality for less money. This is why people choose Wal-Mart, Costco and Target to have a higher standard of living for less money. It is a rational thing to do.
The emerging markets have the American dream and they are realizing it every day; it motivates them as it did at one time to domestic entrepreneurs who are now retiring because working in the G7 provides no rewards. Sentiment is high and rising so that people, the private sector and governments will invest in the future. Self-fulfilling prophesies.
Those who point to patriotism in buying American are just saying you should sacrifice the well being of you and your family for the good of elites, public serpent special interests, trade unionists and crony capitalists (crony capitalists are leeches on society as are political entrepreneurs who would fail if they were not suppliers to government, i.e. ethanol, windmills, solar and all forms of green energy, too-big-to-fail banks, Fannie Mae and Freddie Mac, Government Motors, GMAC; all politically correct but practically incorrect as producing more than they consume (profits) are NOT in the business plan, losses are socialized i.e. sent to the public and taxpayers, and profits are privatized to government supporters.) As usual, the public are the PATSIES.
Sir John Templeton nails what is unfolding in a 2005 Memo, it details how you cannot hide from competition behind politics and to do so will lead to the demise of the people and countries that do. Click here for the Memo: http://www.traderview.com/tedbits/ Memo-JohnTempleton-061505.pdf
These media stooges and would-be patriots are actually PREYING on you and your family. Patriotism is the last refuge of scoundrels. I believe in the constitution; they do not. If we had constitutional government we would still be the global economic powerhouse we used to be, children would still be getting an education rather than an indoctrination and industry would be thriving rather than fleeing the United States and the predators on Capitol Hill. There is only one patriot on Capitol Hill: Ron Paul.
Banks are sitting on record CASH levels (courtesy of www.gluskinsheff.com):
While lending is contracting at a record rate and at 5-decade lows,
Obviously the REAL economy is being FROZEN out of working capital. Let's look at where the DOMESTIC US banking system is deploying their loan books, courtesy of James Turk and http://www.fgmr.com/what-are-banks-doing-with-their-depositors-money.html:
They are invested in growth in government, not the private sector. This is a disaster unfolding. How can the private sector grow without WORKING CAPITAL? The answer: it can't. This is a picture of capital misallocation and economic destruction on a GARGANTUAN scale. New lending is going to government rather than the private sector; as Ross Perot once said: Do you hear that sucking sound? It's the federal government sucking the life out of the private sector. In the G7, income growth is dead and only a function of PHONY accounting and government growth reported as GDP. "Government as a percentage of GDP" is hitting post-WWII highs and SOARING under the corrupt socialist progressives in charge of the US and G7 governments (courtesy of http://www.gluskinsheff.com/):
Can you say "capital destruction?" What a HORRIBLE picture of government growth, a dollar in and a dime out. Notice how it AGGRESSIVELY turned higher in 2006 when radical progressives took over the budget process in 2006? This is a picture of a horror movie unfolding in the US economy. The angle of ascent is ALREADY ENSHRINED in law! This does not include the radical new expenditures of the dreaded healthcare initiative. Relentlessly higher taxation, government as a percentage of GDP and regulation GUARANTEE a decline in economic growth (in the G7 in general and the US in particular), so the printing press will be substituted in its stead, robbing SAVERS with stealth taxes while their money sits in the bank.
So virtue suffers a double drubbing, the tax of debasement and of low interest rates which transfer the income of savers to banksters and government serpents, and forces the bedrock of the banks, "savings deposits," out the risk curve and OFF the BOOKS. Grannies, widows and orphans are crawling out on a limb which will be sawed off by public serpents and crony capitalists when those investments collapse with the economies in which they reside. This is why we are continuing to decline into the inflationary depression as government parasites KILL the private sector host. In Europe it is over 50%.
Their asset-backed economies, which are falling with the mal-investments that provided the illusion of growth through misstated inflation revert to their pre-credit-bubble valuations. In the United States, PERSONAL employment growth has DISAPPEARED for OVER a decade, while debt multiplied. Employment is at ALL TIME lows in the key "males, 25-54 year old" category:
This is a picture of falling income growth and DEINDUSTRIALIZATION, as taxes and regulatory corruption force manufacturing OFF SHORE to preserve competitiveness. The US private sectors, investors and entrepreneurs are now in fetal crouches trying to keep a low profile, or risk being the next victim of the "something for nothings" who are hunting them down like animals on the way to being the next entrée on the socialist welfare state buffet table. People who create wealth are on the endangered species list and headed for extinction in the G7. (See the something-for-nothing essay in the Tedbits archives, Dec 23, 2009 Special Edition)
Leaving only the losers to provide for themselves, look no further than the workers paradises of Venezuela and Argentina to know where the G7 is headed. Runaway inflation, currency devaluation, shortages of critical goods and services and growing entitlements without the incomes to pay for them.
In Conclusion: Long term commodities and natural resources are headed one way: HIGHER. Exploding demand and economic growth in the emerging world, along with relentless money printing and currency devaluation in the developed world both provide powerful support for increased materials prices, as well as the competitive devaluation raceways that G7 currencies will undergo in substitute for the policies which would allow income growth to begin.
At no time have the opportunities for investors been greater. Buy and hold is dead, so absolute return investments with the potential to thrive in up and down markets are required as a component of any diversified portfolio. You also need to learn how to restore the functions of money so your purchasing power cannot be stolen through debasement. This is what I do...
When the next leg down of the G7 inflationary depression accelerates, a correction in commodity and natural resource prices is to be expected. Throwing the babies out with the bathwater, just as we saw in 2008. Then it's "too the moon" time. No way can a recovery take place in the developed world under current and future policies which are anti-growth in everything but government.
Ob@manomics is a recipe for economic destruction, as can be seen in its budget proposals: Higher taxes, reduced incentives to invest, more regulatory corruption, more allocation of capital to political entrepreneurs, crony capitalists, dozens of new government-sponsored enterprises, new entitlements and endless government spending with no provisions to PAY FOR IT from economic and income growth, so the alternative will be PRINT IT. It is a recipe for ever-increasing insolvency inculcated into our economy BY LAW. Fairytale revenue, interest rate and growth projections will deepen the deficits beyond the projected obscenities, but as Pinocchio says: it's vital we make these spending....,er investments now to save ourselves. Bankruptcy, moral and fiscal in Washington DC.
Two senators from both sides of the aisle introduced legislation for NATIONAL ID cards, without which you will not be able to be employed. It's called branding and it will be the final step of enslaving the US population to be SOLD by WASHINGTON DC. They don't work to serve you, you work to serve them. Take a peek at this essay from Ron Paul: http://www.lewrockwell.com/paul/paul248.html
The founding fathers are rolling over in their graves; this is why they prohibited a national income tax and separated the federal government from FIAT money. They knew that with these powers they would never stop taking everything; they are and they will. Slavery began years ago when they decided to tax people after they left the US (the US is the only country in the world to do so). We are now all slaves to runaway and irresponsible governments.
You knew Greece would be rescued, as will the rest of the PIGS (Portugal, Italy, Spain), moral hazard rolling uphill until the core sovereigns fall in a vain attempt to preserve the welfare state and its unpayable and inextinguishable debt. As Bill Gross of Pimco remarked in his last missive:
"If core sovereigns such as the U.S., Germany, U.K., and Japan 'absorb' more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle."
That my friends is the end game, when sovereign governments reduce themselves to worthless junk and the IOU's become worthless promises of morally and fiscally bankrupt central banks, governments and their something-for-nothing societies. At that point their currencies sink to their intrinsic value: NOTHING. The highly regarded Chris Wood, CLSA of Greed and Fear echoed my commentary today, on both Asia and the developed world on CNBS: http://www.cnbc.com/id/15840232?video=1428324968&play=1, don't miss this video. I promise you he won't be invited back to CNBS, aka BUBBLEVISION.
This newsletter has been a vocal opponent of naked credit default swaps for YEARS -- bankers preying on the economic system with the complicity of public serpents and central bankers with no complaints until they, themselves, are the targets. Hoisted upon their own petards. CD'S are nothing less than fire insurance policies on your neighbor's house, with the users as the match. Governments did not interrupt their bankster masters as they created bets where the house is the only possible winner, now they are the prey.
No market participant can watch sell signal after sell signal fail in stocks and bonds without coming to the conclusion that relentless debasement and plunge protection teams are at work while headline markets REFUSE to go down (as they would in a normal monetary environment.) Low-volume rallies and high-volume declines. The declines fail and the rallies just keep on going, no professional market participant can witness this and not come to certain conclusions, and as I noted above it is OMINOUS. Non headline markets go up and down in normal fashion.
These are Austrian recipes for a societal economic suicide in the G7, and conversely, Austrian recipes for societal income growth and rising standards of living in the emerging worlds. This is as plain as day and NOTHING will derail it. As I said in the opening paragraph, trains heading in opposite directions, one into a bright future, the other into the darkness of an economic winter. When analysts project G7 economic and financial system problems onto the emerging world: Don't believe it....
Don't miss the next and final installment of the 2010 Outlook: When Hope Turns to Fear.
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