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Will
2010 be a 1930 or, comparable to 1937? Is it different this time? When
one nation state of a formerly high productive stature destroys itself with
inflation, the untouched others can soften the blow and in time bail out the
fallen one. This was Germany’s fate in the 1920’s. In our current
instance, most all of the world’s economies are on their knees with
some hurting worse than others. Who can help with recovery this time? There
is no one. It will not be China as some suppose as China shall suffer the
same systemic collapse as the U.S, and all of Europe, Russia, and South
America. China’s neighbors Japan, Taiwan, Korea, India, Indonesia and
others will join the fallen.
The
interwoven complexities of international trade and finance have caught them
in all in a spider’s web of systemic collapse. Those who can shall
attempt a massive inflationary rescue. While it might appear to work for a
few months, eventually all implodes. Please note the following from John
Pugsley’s “Common Sense Viewpoint” as printed in
“Golden Insights” by James U. Blanchard III 1997.
“Inflation
will destroy debt. The end answer to all argument (inflation versus
deflation) rests in the Federal Reserve and government. Both are absolutely
committed to preventing a financial collapse or deflation. As long as they
are willing to print dollars to support any failing creditors, the cycle will
go on. What most deflationists fail to consider is that inflation destroys
debt.”
“Creditors
win through inflation and lenders lose. The deflationists do not see that if
inflation of the money supply continues, which it will, there needs to be a
deflation. All the debt in the world can be wiped out just by creating
purchasing power…and that’s exactly what is happening…the
debt problems will be resolved, but they will not be resolved by debt
liquidation through bankruptcy and collapse. They will be resolved through
debt liquidation via the creation of money. We are in for the greatest
wave of inflation in the history of the world. You had better not be on
the wrong side of the dollar.” -John
Pugsley “Common Sense Viewpoint.”
We
agree with Mr. Pugsley but, this was written years ago. We would suggest that
this time with most formerly productive nations becoming victims of both
inflation-hyperinflation and systemic collapse; the ending could be much
worse than supposed. We forecast inflation first then hyper-inflation some
time down the road.
What
happens between here and there? While in our view, our forecast episodic
adventure takes at least 2-3 years but, no one knows for certain. We forecast
2010 to be one of the very worst years of Greater Depression II; the
year 2010being the second cycle of several depressionary phases. The fall of
Lehman and a surrounding crash was only Phase One. Before Phase Two
terrorizes global markets, we suggest a short recovery arrives first.
Debts
both public and private have not been paid down to any great extent. To make
matters worse, new debts continue to plague central banks, nation’s
banks, consumers and commerce. In order to find a basing bottom and enable a
recovery, these debts must be paid, repudiated or inflated away. For now all
of these solutions are in play but as fast as old problems are resolved even
more continue to pile-on aggravating the troubles.
While
global governments are busy attempting to inflate away debts through
monetization; i.e., printing piles of un-backed dollars, notes and bonds, the
load is simply unsustainable on the math. Manipulators have gone past the
point of no return. There will be no recovery until after a smashing
correction arrives. This smash is the quick and dirty answer to final
de-leveraging of all those debts. We think it comes in phases and in fits and
spurts.
Japan
is in the worst shape with public debt versus GDP now standing at 270%. With
an aging population and not nearly enough young workers entering their
workplace, deflation arrived again and the Nikkei Stock Market is taking big
hits. The U.S. and Europe except for the U.K have 125% of debt versus GDP
with the U.K’s at 105%. (Source for percentages
Societe Generale).
The U.
S. Dollar plays a very important role in these problems. With the Dollar
being 85% of the entire world’s reserve currency; as the dollar goes,
so goes the global system. Unfortunately, the dollar has much further to fall
and for this month of December, 2009, the dollar can sink to an index low of
70.00-72.50 from today’s prices. Look for the dollar’s final
support as a minimum low sometime during the next three years
ranging from 40-46.
Stocks
are peaky and will shorter term correct. We think the nearby correction will
be mild and new buying can return in January, 2010 continuing through spring,
2010. The Dow could easily find an 8850 base and then return to a new rally.
The S&P’s might base at 950. Meanwhile, we could experience an
11-12% Dow and S&P haircut.
The
blow-off top for primary stock markets could be later May through July, 2010.
On this cycle, five extremely negative events hit world economies and
markets simultaneously.
These
are:
(1)
$40-$50 billion in U.S. credit card failures are reported;
(2)
Housing sales both new and used for the first half of 2010 fail so badly,
this market is literally in free-fall. There will be 7-10 million new
mortgage defaults with most of those in the prime paying (not
sub-prime) category caused by job losses;
(3)
First half auto sales are reported. They will be so poor more car-makers file
bankruptcy;
(4)
Commercial real estate loans bankrupt many developers and their projects
among those existing, under construction, and planned.
(5)
Insurance companies are holding so much failing commercial real estate paper,
they are in danger of defaulting with some running for government bailouts in
TARP II. At one time years ago, the 20 top insurance companies could
literally control the United States economy. They are huge asset holders of
property and cash investments.
Housing
valuations will fall on the average, nationwide in the U.S., another -30%. We
figured about one year ago that 1980’s prices would be the bottom. Now
we potentially see a bottom at 1970’s prices. More homes were
foreclosed in the last 12 months than in an entire decade in the first Great
Depression of the 1930’s.
On
the Monday morning of 11-23-09, news reported used housing sales were up
10.1%. This is nothing but giveaways prodded by seller financing, government
freebie down payment credits, and crash and burn pricing taken by bottom
feeders. Housing remains in international collapse. The last great creditor,
FHA is hurting badly.
Inflation
is now an unreported at 7% and rising. By May, 2010, it begins to bite very
hard first on the lower 1/3rd of U.S. wage earners and the jobless. Most of
their income is spent on food and energy. They top the inflation pain lists.
Consumers
with newer bought and leased autos will do “jingle mail.” They
will return newer unexpired leased cars and trucks back to dealers’
lots, give them the keys and quit paying. We saw this with houses over the
past 1-2 years. Auto lots will overflow with new-used cars and trucks. Values
will plummet. Many of these “returns” will be from the
“Cash for Clunkers” program by those who got stuck with
unaffordable car and truck payments.
Auto-maker
GM projected total U.S. industry sales for 2010 of 11mm with a new recovery.
There will be no recovery and sales could skid for the whole industry group
down to 7mm or less in 2010. In 2011 it gets even worse.
Auto
layoffs will escalate and unions will scream for help to president Obama. He
will financially band-aid a dying industry. Consumers have no buying power,
credit or cash to make any difference. Those with cash will save it and
hunker down and wait out the troubles. Auto union membership declines
rapidly. Most vehicle lending dries-up to a trickle.
The
crude oil and energy sector has fundamentals pulling in both directions.
Today we see oil price resistance at $80 with a trading range slightly lower
in the $70’s. Fundamentals show an over-supply on recession-depression
lower demands. On the other hand, inflation of prices is rising on a
weaker dollar and will escalate. Look for crude oil to visit the $50’s
and then turn-around on inflation rising to $100. Gasoline will follow as
some refineries are closing on operating losses and no new ones are being
built. Inflation ultimately wins on price escalation. Eventually, scarcity of
product returns.
Depressions
normally and historically last ten years. It could take consumers that long
to pay down all of their debts before a return to normal conditions. Savings
rates are up but with so much debt and few or zero salary raises in the face
of new and rabid inflation, consumers will be economically slaughtered.
Credit
and banks go through the wringer again. There are few bank ideas left to earn
lender income except for trading. While Goldman Sachs makes millions weekly
doing this, most banks are not set-up for it and there are only so many good
traders available for the work. Since Obama’s compensation guy is
rankling big traders with income limits this makes things worse as these
people leave for unrestricted pay in overseas trading positions.
The
bond market is so huge it takes time for it to roll over and slide off a
cliff. Asia and the U.S Federal Reserve have been our larger paper buyers.
While they still buy some to keep markets glued together they are: (1)
exiting the longer term paper for shorter terms and, (2) buying less of it
turning to other ideas in the commodity markets.
With
the higher Yen, Japan is increasingly engaged in hard asset shopping trips as
is South Korea. They are both looking for grain, gold, oil, natural gas and
other commodities they lack internally.
Junk
bonds could lose 1/3rd of today’s value just next year. Treasury bond
and note buying continues until “full faith and credit” is
repudiated on distrust. Eventually they crash but in slow-motion over years
due to the magnitude of these markets. We think no bond is a safe bond.
Municipal bonds are viewed as some of the safest. What happens when cities,
towns, counties and states are so broke they cannot pay the interest? Their
tax revenue is going off a cliff. Some are safer than others for awhile but
for how long? Who can finger a top? It can’t be done as it’s too
political.
Various
states within the United States have or, will be failing financially. Someone
reported 1/3rd of the TARP money spent so far was used to bail-out bankrupt
states. This will escalate as federal TARP money cannot help them fast enough
and in large enough amounts to keep it all glued together. Watch for fire and
police employment to get as thin as too be very dangerous in various
communities. Ten states are going financially critical and 47 are on the
watch lists.
New
York, New Jersey, Connecticut, Michigan, Ohio, Florida, Arizona, Nevada and
California are among the financially worst, hurting from falling tax revenue
on broken businesses and consumers. Watch California as they could go out of
control first within this group. They continue to contrive new taxes and not
work on spending reduction. When some states face total collapse it will get
very ugly very quickly. Michigan is among the worst of the worst. Most all of
the states are spending themselves into the ground. They refuse to cut back
as its political suicide. They will spend until there is nothing left to
spend and then scream for help to the Federal Government.
China
is in very serious trouble as the U.S. consumers have stopped buying their
stuff. Their TARP for early this year exceeded that of the United States in
both amount and rapidity of spending. It is estimated they spent in four
months from January, 2009 to May, roughly $600 Billion with most of it going
into projects now at over-capacity. The U.S.’ lack of buying cut
China’s entire year of exports by -25%. Also, note the Chinese economy
is 1/4th the size of the United States’ economy.
There
are hundreds of idle Chinese factories and millions of laid-off workers with
no new factory employment and not much work of any kind. Further, millions
sold subsistence farms to work in the city. Now that work is gone and so are
the farms that would have fed them. Watch for a slow motion or, faster
collapse of China with a descent into riots and other social problems in
2010. China need 24mm new jobs each year just to stay even and are remain far
behind that job generation power curve; never mind new job growth gains.
If
the worry of China not buying our treasury paper suddenly became real, the
U.S. government could stop most all Chinese exports into the U.S with
crushing tariffs. China would then have skyrocketing joblessness, goods
piled-up with no sales and be stuck with a trillion dollars in crappy U. S.
bond and currency paper having little or no value and no way to sell it. They
would take a $1 U.S. Trillion paper hit and be stuck with mountains of
un-saleable merchandise. The social fallout would be catastrophic. China
shall continue to buy U.S. Bonds to keep exports moving; albeit at a reduced
level.
Should
Chinese imports cease, American workers might find some lower paying
employment in re-opened U.S. factories with the return of manufacturing to
the states from Asia. After all, where would Wal-mart get all their goods to
sell in U. S. stores?
We
hope for the best and would prefer China keep it all glued together and
endure only a mild recession. With global financials and markets so fragile
and wrecked we give them a one in five of pulling it off. Rather, in a
Chinese communist command economy, forthcoming dislocations could be
legendary.
Ambrose-Evan
Pritchard, the esteemed writer for The London Telegraph says,
“The world economy is still skating on thin ice. The west is sated with
debt, the East with (too much) plant. The crisis has been contained (masked)
by zero rates and a fiscal (credit) blast, trashing sovereign balance sheets.
But the core problem remains. The Anglo-sphere and Club Med are tightening
belts, yet Asia is not adding enough (internal) demand to compensate. It is
adding supply.” (Editor: organic Chinese demand is barely beginning).
“My
view is that the markets are still in denial about structural wreckage of the
credit bubble. There are two more boils to lance. China’s investment
bubble; and Europe’s banking cover-up. I fear that only then can we
clear the rubble and, very slowly, start a fresh cycle.”
We
agree with Mr. Pritchard but contend China has other bubbles in autos, real
estate, their stock market and major water shortages and pollution as well.
If these bubbles pop one at a time, it goes easier. But, we might see
multiple bubble-popping instead. In that instance, China might take-down the
entire global system. Note the effects of the recent scare from Dubai on
their $80mm default.
Education,
particularly among colleges and universities, has hit the money wall as
students now debate if a $40,000 to $80,000 expenditure is worth it in this
economy. Newly graduated kids with good degrees but no experience go to the
end of the line for jobs.
Experienced
people get what few jobs remain as employers have a wider range of choices
and can be super picky. Further, employers have no time or money for
training. Many kids are schooling on the internet and with on-the-job
training while taking menial work for any kind of a pay check.
Public
school teachers with longer years of experience, working in grades K-12 are
being thinned out for some cheaper new grads. Foreign language teachers along
with those in math and science are still preferred over the others. Watch for
an increase in home schooling as laid-off teachers with their own children
work at home and take in other peoples’ kids for instruction-pay. The
big public school systems are in trouble. They can no longer be afforded.
Since the U.S. Government layered on piles of bureaurat red tape some years
ago, fully 1/3rd of public school budgets must be devoted to stupid,
expensive politically correct type work. It’s all a big waste as
students and teachers must suffer for it.
Watch
for more traffic accidents due to postponed road work and repairs. Bridges
can fall and broken paving causes more wrecks. Higher tax communities will be
abandoned especially by seniors with educated kids out of the house. New York
City has lost over $6 Billion in income taxes from those fleeing the city and
the state.
This
trend goes even faster. We see retired folks selling out as local real estate
taxes are unaffordable. They are migrating to lower tax states and smaller
communities offering fewer services. Much of the big city service stuff is
not required and consumers cannot pay for it. Think of Detroit’s city
wasteland on steroids.
Gold
And Silver Trading Is The Place To Be
Fund
managers and traders are not married to markets and move to ideas that
produce. Gold and silver shares can top and correct in the near term but then
take-off in new 2010 rallies. Bigger funds have invested in long-only
commodities baskets including gold, silver, grain, copper, platinum and
others. They regularly buy the whole cycle from Labor Day to May, endure the
dips and trade on 50 and 200 day averages. With a falling dollar these
managers forecast stronger gains in these markets. December gold futures were
trading near $1,200 this morning of December 1. We see a near-term mild
correction followed by more buying.
Administration’s
Politics Mostly Fail
The
Obama left wing liberal agenda designed to transfer wealth is not working.
The president’s popularity is sinking along with his agenda. The
primary problem is the administrations inability to claw out of the
employment depression. Instead, they will continue to keep digging while
installing the wrong ideas, creating more and deeper messes. This advances
the desirability of precious metals, and other hard assets of all kinds. Joblessness
is the primary economic problem.
Dollar
is the key to several markets. For December, dollar sinks lower.
Never
mind the angled line support. Look at the lower box momentum.
Personally,
I can see unbelievable opportunities to trade that we would never see again
for many years. Turn these problems into opportunities. Those on the right
side of the trade might get rich. Those on the other side are just victims.
Stay Alert. –Traderrog.
Roger Wiegand
www.webeatthestreet.com
Also
by Roger Wiegand
Roger
Wiegand is Editor of Trader Tracks
Newsletter and of the Rog
Blog at www.webeatthestreet.com.
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