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April 26, 2011

Unrealistic Expectations Forces the Creation of Bubbles

I just got through reading Jeremy Grantham's Q1 letter to investors (see here....http://www.gmo.com/websitecontent/JGLetterALL_1Q11.pdf) in which he makes an eloquent plea for the need for a worldwide plan for growth and the utilization of diminishing resources.  

The thing that stuck me the most was how unsustainable our expectations are with respect to equities.  We are so accustomed to expecting exponential numbers quarter after quarter that we fail to grasp how impossible it is to sustain, particularly in the absence of steroids (AKA debt, stimulus, etc).  

If the world's population were expected to grow at the rate it takes to see share price appreciation these days (8-10% annualized), we'd have a trillion people in the planet in less than 60 years.

As Grantham points out, we are burning through our resources at an unprecedented rate, fueled by an expansion mania that is completely unsustainable.  Unfortunately, it takes geometric rates of both debt and resources to fuel the raging fire.  

The question on most people's minds is "when will it stop?"  Will the crash come sooner or later?  Nobody in their right mind actually expects this party fueled by low interest rates, low taxes, and the cheapest labor since 1947 to be sustainable.  In fact, one questions how it has lasted this long.

We all know the answer - social transfer payments (aka wealth shift) :

Extended unemployment benefits, payroll tax holidays, Cadillac benefits for prisoners, the elderly, and the infirm.  Expenditures on defense so outrageous compared to the rest of the world as to boggle the mind. 

And waste.  Pure, unadulterated waste.  2 generations of iPhones a year, trashcans full of restaurant portions for one that would feed a village elsewhere, homes in the burbs requiring gallons and gallons of gas a week to commute a single person to work.

We are at a manic stage in the debt/resource crisis.  Secretly sensing we are all on borrowed time is both incredibly stressful and compelling. 

Eat now for tomorrow you starve.  Buy a car for tomorrow's will be more expensive.  Hoard silver for the dollar is doomed.  And when you get through with all that, anesthetize yourself with alcohol, drugs, mindless texting, TV and Advil PM to sleep.

What politicians don't realize is that Americans have become zombies.  Paralyzed, going through the motions, waiting for doomsday.  Stressed out, miserable, oppressed people who are hoarding guns and ammunition do not productive citizens make.

But politicians are too busy squabbling to actually fix anything.  And Bernanke and all the other central bankers of the world are simply trying to keep all the plates spinning for as long as they can.

One in ten.  That's how many people this finite world can actually sustain.  Something less than a billion.  And time is running out.   







April 11, 2011

Why We Never See It Coming

According to Nate Hagens, two aspects of human nature virtually ensure that, when crisis hits, we never see it coming.

1)  Steep discount rate - with so much stress in our lives and so many decisions to make on a daily basis, we can barely handle today, much less prepare for the future.

2)  Cognitive dissonance - there is a protective mechanism in the brain that virtually turns off awareness of future danger.  We have green lights and red lights but no yellow lights.

Hagens also talks about addictions and how they are on the rise.  Cognitive dissonance leads us to seek out addictive behavior to make us feel better today, creating an even steeper discount rate (can't worry about debts and deficits cuz I'm too busy focusing on my next "fix")

Check him out on You Tube.  It's a very interesting lecture series.









Cassandra Speaks - Outlook for April-October

The next 6 months are going to be very volatile for precious metals and markets in general.  Here is how I think it plays out:

1)  Earnings season shows stronger than expected performance, especially for labor-based businesses like IBM, Google, mobile, telecom, and even banks.  People think the banks will have crap earnings, but the banks that have been investing in super short duration treasuries have actually seen a boost in their spreads (borrow from Fed at zero; buy treasuries higher)  They are also lending again (at higher rates) so the spreads are even greater.  A real purging of OREO has not yet taken place and people are opting to strategically default on mortgages and pay credit cards instead, which benefits bank accounting for loan loss reserves.  M&A biz has been good, especially for JPM.  (Note that proxy statements have shown bank CEO comp back in the stratosphere.  No way would Jamie Dimon be getting $20 mil if JPM was about to report problems) 

Consumer companies will report top-line growth with some slight margin compression.  More of the rising input costs have been able to be passed on to consumers than originally believed (mostly in sneaky, wealth shifty ways).  Hidden inflation is rampant (176 sheets on a roll of TP instead of 200 in 2010 and clothin thread count as thin as tissue paper)  Auto dealer "deals" disappeared in March but the sales were surprisingly strong anyway.   Translation?  Vendors are in the sweet spot where consumers are forced to buy at full price things they have been postponing and also stockpiling what they can due to fear of inflation.  This pulls future sales forward, making profits look better than they really are.  (This theory is proven by both the strong retail sales figures and the huge spike in consumer credit balances for the first three months.)

Materials, mining, etc will show significant top-line growth which will more than offset the rising input costs.  The effects of the tsunami in Japan, higher oil prices, etc. will not seriously affect Q1 earnings because they happened too late in the quarter.

Strong earnings and better jobs numbers will make it appear certain that QE2 is ending. Gold and silver will fall as they did in January and February.  The dollar will strengthen because QE2 will soon be ending and the govt will be telegraphing massive budget cut wrangling to appeal to voters.

2)  Post initial earnings euphoria, there may be a quick sell-off in stocks in anticipation of the Fed ending QE2 and lemming-like sell-May theory.   Here's where it gets tricky.  Moving to cash is the only alternative because, when QE2 stops, interest rates will rise and people won't want to be in treasuries ahead of that so they may very well end up "buying on the dips" - not because they trust stocks but because stocks are the only game in town.  (Other than shorting treasuries, God forbid!)  Japan's reconstruction spending and China's government low income housing construction efforts will continue to offset Euro zone austerity.  Commodity prices will stabilize or decline as tighter monetary policies around the world plus the end of QE2 kick in and the dollar strengthens.  Stocks will moderate but not sell off badly because as commodity prices ease it will seem like a real private-sector recovery is happening and stock valuations are not terribly stretched.

3)  QE2 will end.  There will be no immediate QE3, not because the US doesn't need to monetize it's debt, but because Bernanke is human and needs personal validation.  Right now he is being blamed for rising commodity prices and getting a lot of flack for his policies.  I firmly believe Bernanke is going to let the shit hit the fan for a few months (July to Oct?) to prove that his monetary policies are good and to get people to fall in line with what he thinks.  During this period commodity prices will fall and treasury interest rates will rise.  People will begin worrying about deflation/recession again.  The effects of govt budget cuts will start showing.  Overly tight monetary policies in other countries that were put in place to counteract the flow of hot money from the US will become deflationary when QE2 stops.  People will stop inflation-panic buying behavior. Q-2 earnings will show cracks and stocks will begin to slide.  Commodities will slide.  Dollar will strengthen.  Money will flow into higher yielding debt again.  Bond vigilantes pile on, driving interest rates up.  Higher interest rates threaten the already-questionable real estate recovery. 

4) An infinite QE3 begins (regardless of what Bernanke says, the world realizes that the Fed has no choice but to buy everything the market won't)  Political wrangling shows no sign of resulting in actual belt tightening (seriously...this govt can't even get together on $40 billion of cuts...$1.5 trillion?  Never in a million years)  At this point all faith in the dollar goes out the window.  

Two ways to play it:  either hold on to your precious metals positions or try to play the swings.  Either way, by September it will be time to fully be in physical metals because these will skyrocket once QE3 begins.