|
-- Posted Wednesday, 5 April 2006 | Digg This Article
The Blue Chip & Income Report It may sound weird to some, but I believe the U.S. stock market would be far more likely to suffer a sharp fall if it would actually go to a new, all-time high (basis the DJIA) then if it started falling right now. Hard to imagine, but in the carnival-like atmosphere that the “Don’t Worry, Be Happy” crowd will surely create on a new, all-time high in the DJIA, there would be a series of negative technical divergences and non-confirmations, all of which I believe would be the straw that breaks the bull-run camel’s back. Yes, we would have to stomach Cramer, Kudlow and the rest of the pied pipers of Wall Street telling us the water is fine and to jump in. But, nothing could be further from the truth, IMHO.
Americans have been robbing Peter to pay Paul, but Peter is tapped out!
A good part of America’s current prosperity is based not on genuine gains in income, nor on high productivity growth, but on borrowing from the future. Much of this borrowing came by way of extremely low interest rates thanks to former Fed Chairman Greenspan’s opening of the monetary floodgates after the Internet bubble burst. This, in turn, created a far more dangerous bubble in the real estate market where refinancing of ones home was not used so much to send the children to college but to buy plush hot tubs, $5000-barbecues and a whole host of items not necessary for every day life.
No one country is more impacted by the health (or lack of) of the U.S. economy than our neighbors to the North, Canada. In a speech in New York City recently, Bank of Canada governor David Dodge said that unless the imbalances that have caused a huge current-account deficit in the U.S. are corrected soon, the likelihood of a “disorderly correction” will grow. How huge is it? America went deeper into debt to foreigners last year as the deficit in the broadest measure of foreign trade hit a record $804.9 billion. That’s up 20.4 percent from the previous record of $668.1 billion set in 2004. The 2005 deficit was a record not only in dollar terms but also as a percentage of the total economy at 6.4 percent of total economic output, up from 5.7 percent in 2004. Remember, the current account covers not only trade in merchandise and services but also investment flows. The deficit represents the total amount of borrowing that the U.S. must do every year from foreigners.
Do you want to help many Americans? Let them in on a little secret- if you borrow money, it eventually has to be paid back! We’re a nation of debt junkies. The windfall in the real estate boom could have gone a long way in pairing down our debt but instead we as a nation are worse off than before the windfall. Federal Reserve data shows that the value of household real estate climbed 71% over the past five years. But mortgage debt grew even faster, up 75%, as Americans refinanced or took out second mortgages. Outstanding consumer debt is up 27% over the last five years, well ahead of the “reported” 13% cumulative inflation rate. Saving for Johnny or Jane’s college is more and more being left to Johnny’s and Jane’s abilities to finance. Over the last 10 years, annual borrowing through student and parent loans jumped 194%. That’s far ahead of the 66% increase in total cost of four year private colleges. Perhaps the saddest place to see debt burdens rising is among the elderly. Among households headed by someone age 75 or older, 40% had some sort of debt in 2005, up 33% from just 2003.
Uncle Sam, Go Home!
At a time when the United States is faced with an unprecedented need for external financing (the U.S. economy requires more than $2.2-billion dollars each day from foreigners to make up for its lack of savings), it continues to anger people and nations all over the world. The blocking of the Dubai-owned company from managing and operating some U.S. ports on the basis it posed a threat to U.S. security, may have scored some political points at home for some congressmen and senators, but it was just another log thrown on the fire of trade frictions and protectionism that’s pushing international relationships and economic balance towards a tipping point. Kudlow and the pied piers may want you to think it’s a benign situation, but it can quickly turn malevolent given the unbalanced nature of the global economy.
The “Don’t Worry, Be Happy” crowd on Wall Street would like you to believe that the stock market is the best investment vehicle for you. I was once guilty of conveying that message. If it was true, why then do we know so few people who prospered from “being in the market” versus those who obtained wealth from owning a business, buying and selling commercial real estate or just inheriting it? The only time the stock market is a direct cause for ones wealth seems to be if the person had a senior management position with a company and was granted stock options or they sold stocks, bonds and other financial assets as a salesman.
A recent Bloomberg-Los Angeles Times poll reeked of serious unrealistic investor expectations. Affluent investors were given a mythical $1 million to invest. The results were:
• About 30% would put it in real estate, 22% in stocks, 14% in mutual funds and just 8% in bonds.
• 60% of them expect returns of 10% or more in 2006.
• 80% said stocks will perform as well as or better than they did on average in the last decade.
• Two-thirds expect lower household debt and higher net worth this year (hold on a minute, I need to stop laughing).
• 64% are confident that Bernanke will be able to keep the economy stable.
If you want any further proof that Americans in general are hooked into whatever Wall Street feeds them, realize that the greatest commodities bull market in the modern era has been underway and not one person in the poll chose commodities. Ironically, a poll of people who were called “less affluent groups” (earned less than a $100,000 a year), saw 5% of them chose gold.
Where Do We Go From Here?
I believe America has entered a period of social, economic and political upheaval unlike anything it has ever witnessed. With regard to the financial markets, there are three key factors that I believe will have the biggest impact going forward. They are:
• the U.S Dollar
• the real estate bubble and
• the Middle East.
If you ever wondered what it must have been like during the fall of the Roman Empire or when the Great in Great Britian no longer described your dominance as a world power, have no fear that you won’t be around during the demise of the United States of America as the world’s number one economic power. It’s unfolding right before your eyes (except on TOUT-TV).
While it’s a cheap laugh to listen to Kudlow, Cramer and Liesman on TOUT-TV, it’s truly a shame that the network stacks the deck with similar pied pipers. On rare occasions, they allow a David Tice or Bill Gross to tell their audience the real facts on what the many expanding deficits are doing to our nation but dare those gentlemen try to raise their voice over Kudlow or Liesman. Please read http://www.grandich.com/docs/alertGL_04-04-06.pdf
Again, you won’t hear much about it (if at all) on TOUT-TV but I suggest you read publications like the Financial Times to get a real sense of what foreigners are thinking and doing. You would discover that the rising tide of US protectionism is a real and present danger on the world economic stage. The United Arab Emirates decision to switch 10 per cent of its reserves out of the U.S. Dollar in response to the US rejection of Dubai Ports World as a potential owner of American ports, is a shot across our bow of things to come. And, constantly beating the Chinese up in the press and Congress over the Renminbi and trade practices may make for good sound bites on Election Day, but it’s doing serious damage to a country who has been supporting our huge debt appetite.
“The bubble's not popped. The market is self-adjusting now.
The prices are reducing.” - John Corcoran
I bet there are real estate agents twisting Mr. Corcoran’s famous quote about bubbles in explaining why it’s still a great time to buy real estate. (Do you know what the realtor said all the way down after being thrown off the top of the Empire State Building – so far so good).
Make no mistake about it: much of the consumer spending in recent years has come thanks to the combination of sharply lower interest rates and increasing home prices, which allowed many Americans to refinance and/or take out second or even third mortgages. Extremely creative financing and ultra liberal lending practices also put people in homes that 20 years ago could have never happened. All of this IMHO merely delayed the day of reckoning for living beyond our means.
While they don’t ring bells at tops, the housing bubble has clearly burst. Sales of new homes plunged by the largest amount in nine years in February while the median price of a new home dropped for the fourth straight month. The inventory of unsold homes hit a record at the end of February.
Another bearish indicator has been the slowing volume of home-equity credit lines from commercial banks. From 2002 to the middle of 2005, they were growing at an annual rate of about 35%. However, in March banks held $433 billion in revolving home-equity loans, which was actually down from the peak in August of $439 billion. Home-equity loans were heavily marketed by banks and other lenders as an “easy” way to get fast money by simply writing a check. I guess that “reality” of actually having to pay for something is hitting “home”.
The bubble was able to continue thanks in a major way to a tempting array of cut-rate mortgages that put people in homes who might otherwise not have been so “fortunate”. Adjustable-rate and other, riskier loans with low initial payments allowed homeownership rates to hit a record 70%. But, now trouble is brewing according to Chris Krehmeyer, executive director of Beyond Housing, a non-profit group that offers homeownership support services in St. Louis. “Sixty percent to seventy percent of the calls to our hotlines are now related to ARM (adjustable-rate mortgage) loans.”
According to the Mortgage Bankers Association, about one in five homeowners in several states with high-interest (subprime) ARMs were at least 30 days late at the end of the year. I wrote last year how states like California, where about 60% of all loans in 2005 were adjustable rate, could witness the dark side of the bubble as early as 2006. California, say good-bye to Mr. Bubble.
The Middle East
Who would have ever thought that Saddam Hussein would end up the lesser of two evils versus what’s now unfolding in Iraq? Yes, a horrible dictatorship was been removed but in its place is a broken state that’s on the cusp of civil war and is all but certain to lead to a fragmented nation. Mr. Zalmay Khalilzad, U.S. Ambassador to Iraq, said recently about Iraq being the future incubator of a new generation of Osama bin Ladens, it could “make Taliban Afghanistan look like child’s play.”
While the insurgency is seen almost daily on the news, we don’t get to see the endemic lawlessness that has now enveloped into a sectarian war. Economic reconstruction is a non-start, while oil production is still less than half of pre-war levels.
It’s propaganda when we’re told how the Iraqi Army is going to take over. Many only exist on paper and their pay actually goes to senior officers. The army remains poorly trained and very demoralized. Here too, the sectarian effect splinters men all the way down to small platoons. The fear is they will desert and end up fighting one another.
Here at home, the increasing anxiety over Iraq threatens the Republican party as President Bush’s approval ratings continue to sink. It’s a terrible thing to say, but it appears the only thing that could bolster America as a whole to supporting the war efforts again would be a significant terrorist attack on American soil. Such a horrible possibility would likely galvanize President Bush’s “war on terrorism”. Without such an event, the likelihood is that come election day, the Democrats will once again gain control of Congress (and heaven-forbid, another Clinton could be in the White house living quarters - but no interns hopefully this time around).
A Doubleheader No One Wants To See Played
Hard to imagine what’s taking place in Iraqi could be just an “opening act” to what may play out regarding Iran. The White House recently issued a new national-security strategy that identified Iran as the “single country” that may pose the biggest threat to the U.S. The report used language like “ally of terror” and “enemy of freedom” to describe Iran. Meanwhile, it said the U.S. reserves the right to pre-emptively attack enemies, especially if they’re armed with weapons of mass destruction (I hope we have a new way of verifying if they have WMDs this time around).
Ironically, at a time when the average American isn’t prepared to hear about another madman that needs to be removed, President Mahmoud Ahmadinejad of Iran is a loose cannon with the potential to fire at us both economically now and nuclear (if reports are correct) down the road. Some independent intelligence think tanks have already reported that Iran is not only supporting the insurgency in Iraq, but also giving support to Al Qaeda leaders living within Iran’s borders.
My real fear is how Israel plays out in all of this? On March 8th, Israel’s Defense Minister Shaul Mofaz was asked whether Israel was ready to use military action if the Security Council proves unable to act against what Israel and the West believe is a covert Iranian nuclear weapons program. He responded by stating, “Israel has the right to give all the security that is needed for the people of Israel.” (In 1981, Israel bombed Iraq’s Osirak nuclear reactor to prevent Saddam Hussein from getting nuclear weapons.)
Newsweek Magazine reported in February that a senior Israel Military source told them Israel’s Air force can cripple Iran’s nuclear program. The U.S. just happened to have sold Israel 100 U.S.-made BLU-109 “bunker buster” earth-penetrating bombs last year. What a coincidence!
One last comment on our War on Terrorism
The U.S. GAO (Government Accountability Office), using undercover investigators this past December, managed to slip radioactive material – enough to make two small “dirty bombs” – across U.S. borders in Texas and Washington at “secure” American points of entry. Senator Norm Coleman, R-Minn., said of this, “This operation demonstrated that the Nuclear Regulatory Commission is stuck in pre-9/11 mind set in a post-9/11 world and must modernize its procedures.” I assume you also heard that dangerous weapons and undercover agents continue to get by security at American airports. Sorry, but it’s not a question of “if?” but “when?” a major terrorist attack takes place on American soil.
Bottomline –
While the U.S stock market can make a new, all-time high in the DJIA and some other indexes, America is already well on its way down a slippery slope that is going to cause social, economic and political upheaval never seen in its entire history.
~~~~~~~~~~~~~~~~
To get commentary or daily reaction to the markets, contact Peter Grandich at 732-642-3992 or email peter@grandich.com
-- Posted Wednesday, 5 April 2006 | Digg This Article
Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.
Grandich also provides a variety of corporate finance and development services to publicly-held companies.
Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.
Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.
Previous Articles by Peter Grandich
|
