WORLD BANK WARNS OF US ECONOMIC TROUBLES

Stubbornly high joblessness threatens to trigger loan defaults and drag on consumption next year, hobbling a U.S. economy struggling to rebound from recession, World Bank President Robert Zoellick said Wednesday. Mr. Zoellick warned that the U.S. unemployment rate, which jumped to a 26-year high of 10.2 per cent in October, will likely remain elevated in 2010. “You're going to have problems with delinquencies of credit card loans, consumer loans, people won't be able to pay their mortgages,” Mr. Zoellick told reporters in Singapore. “Some banks are going to continue to be troubled by bad loans.”

US PARALLELS JAPAN???

We here at TPC aren’t the only ones concerned about the parallels with Japan. There appears to be an increasingly loud drumbeat over the shocking similarities between Japan in the 90’s and the U.S. This morning, Hong Kong’s leader Donald Tsang had some rather alarming comments: “I’m scared and leaders should look out. America is doing exactly what Japan did last time.”

DIVINING THE NEXT CRISIS

Stocks generally get all the attention from the media. But, in reality, they are relatively small fries compared to the Bond and Currency markets. As of 2008, the world stock market was roughly $36 trillion in size. In contrast, bonds were $67 trillion and forex (currency) which turns over $3.2 trillion per day -- ten times the daily volume of every stock market in the world. Suffice it to say, a Crisis in stocks would be the lesser of three Crises. And those of us in the US should be hoping it’s the Crisis we get as opposed to a Crisis for US debt or the Dollar.

HOME PRICES DROP ACROSS COUNTRY IN 3RD QUARTER

Home prices fell in the third quarter from year-ago levels in about 80 percent of U.S. metropolitan areas, the National Association of Realtors said on Tuesday. The industry trade group said median prices fell compared to a year earlier in 123 of 153 metro areas, while 30 areas saw prices rise. The national median price for single-family homes, which make up the bulk of the U.S. housing market, fell 11.2 percent from the same quarter a year earlier to $177,900.

THE COMING DEFLATIONARY WINTER???

Now with the Long Wave Group you focus on long-term waves (.pdf) and particularly on the Kondratieff Winter. And actually we met at a Cambridge House Investment Conference and I think we were both presenting there. And I think we have a pretty similar viewpoint on what is happening. “What is the Kondratieff Winter and the theory that undergirds a lot of your work.

My work is developed around Kondratieff Cycle that was promulgated by Nikolai Kondratieff, a Russian economist in the mid-1920s. It is a long economic cycle and he based his theory on prices, on the movement of trade, on money movements and inflation and so on. And he came up with this idea that capitalism really underwent this long cycle of expansion and contraction. The cycle lasted about 60 years, so the first half of the cycle is really the expansion phase, and the second half is the contraction phase, and the last quarter of that contraction phase essentially is the depression - a deflationary depression stage in the cycle.

THE FINANCIAL TITANIC AND REFORM

If I got paid a nickel for every time I heard the phrase “too big to fail” to describe the state of affairs of our major financial institutions, I’d be retired on my private island by now. Jeremy Grantham, famed value investor and Chairman of Grantham Mayo Van Otterloo, recently compared the redesigning of our financial system to the Titanic and aptly described the hubris surrounding the ship’s voyage as “too big to sink!” Mr. Grantham argues that many of the financial institution reform proposals have an irrelevant, misguided focus on improving the safety of the Titanic’s lifeboats rather than the structural design or competence of the captain. Maybe it’s better to plan for disaster prevention rather than disaster preparation? Grantham adds:

BROADER MEASURE OF JOBLESS AT 17.5%

With the release of the jobs report on Friday, the broadest measure of unemployment and underemployment tracked by the Labor Department has reached its highest level in decades. If statistics went back so far, the measure would almost certainly be at its highest level since the Great Depression. In all, more than one out of every six workers — 17.5 percent — were unemployed or underemployed in October. The previous recorded high was 17.1 percent, in December 1982.

CARRY TRADE IMPLOSION ON WAY....ROUBINI

In this interview with CNBC on Nov. 4, 2009, Dr. Nouriel Roubini, professor of economics at the Stern School of Business, New York University and chairman of RGE Monitor, cautions investors of the coming asset bubble and crash caused by the dollar carry trade, and at the same time shared his views on the economy and housing.

THE GREAT RALLIES OF 1929 AND TODAY

The following charts provide a simple comparison between the big stock bounce that occurred in the wake of the Dow crash of 1929 and the bounce we are seeing now in the S&P 500 index. The method of alignment was simple: Take the first definitive up trading day off the bottom of the preceding bear market low and set that as the start of the series. Then simply re-base both series to a value of 100 so that they can be compared side-by-side. The lower bar chart plots the cumulative percentage change since the start of each bounce.

The S&P 500 is up over 47% in a little over 160 trading days; a historically aggressive run with an obvious note of mania to it. This is wholly comparable to, even far stronger than, the price movement seen in the 1930s-era DOW rally.

AN INTERESTING CONVERSATION WITH TALEB ON RISK

An excellent historical discussion of the mistakes in the financial system and the unexpected events that occur.

WHAT IF THE US SOCIAL FABRIC TEARS?????

I have written before about what academics call anchoring, or expectations. My previous post was about the anchoring of inflationary expectations. This time, it’s about the social fabric of America, which is far more important. The mythic story of America has been the American Dream. America has long held to be the Land of Opportunity, where people like Michael Dell could build an empire by selling computers out of his college dorm. How much unravelling can the Dream take? I posted previously that an OECD study showed that social mobility in the United States is actually lower than more “egalitarian” countries like Denmark and Norway. But those are only statistics and statistics don’t really impact the social psyche.

NIC PERNA ON THE DOLLAR FASCINATION

Nicholas Perna is the economic adviser to Webster Financial Corp. and chief economist and managing director of the consulting firm Perna Associates. He is also a visiting lecturer at Yale University. He is a regular guest on Public Television’s The News Hour with Jim Lehrer.

ARE REPORTS OF THE DOLLAR DEATH PREMATURE???

In today’s highly charged political environment, apparently everything and anything is game for the machinations of partisan political hacks. Even the U.S. dollar has been pulled into this. So much so that it is generally believed and accepted that the US dollar is kaput, done for, worthless. And that the blame resides on the shoulders of Obama and his young administration. But what if we step back from the raging and weeping talking heads on TV and instead of opinions, we just look at the facts? Here is a chart of the US dollar for the past quarter century:

INFLATE OR DIE??????????

Gold at new record highs. Fed inflating like crazy. Dow ready to rally and inflate again soon, too. For Larry Edelson's thoughts on this week's important market action, watch the short video.

CREDIT CRISIS CONTINUES???

A recent Bloomberg article was titled ”Pandit “near death” hoard signals lower bank profits“, and stated that Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) were hoarding cash as if another crisis were on the way. Also, a Wall Street Journal article entitled “Jittery Companies Stash Cash“ showed cash on the balance sheets of S&P 500 companies was the highest in 40 years. The chart below, courtesy of economist David Rosenberg of Gluskin Sheff & Associates, shows that credit is still contracting as banks go through the painful process of repairing their balance sheets. As indicated, bank lending has now declined for 21 weeks in a row and over this entire period a total of $216 billion (15% at an annual rate) of loans and leases has vanished.

ARE SILVER PRICES ABOUT TO FALL???

Don’t get me wrong. I love silver. As a very long term investment, you cannot find anything better. If you ignore short and medium term volatility, and simply hold your metal for a long term of years, you will probably do okay. The world is running out of silver. The painful part of this "buy and hold" strategy, however, is in watching prices get periodically clobbered. Another strategy is to keep a “core” long term portfolio, while, at the same time, keeping a non-core or speculative portfolio. In the speculative portfolio you attempt to profit by buying and selling on the price swings. In both cases, you will buy on the lows, but, instead of just holding for years, you buy low and sell high on a regular basis.

THE HOMELESS KINGDOM OF BLOOMBERG???

Bloomberg is spending a fortune to stay in office, while one and a half million people have left his city for good. And in his 8 years as mayor, some believe, Michael Bloomberg has turned New York into his very own kingdom. But thousands of homeless and unemployed say the city is now too expensive to live in.

WHERE DO WE STAND IN THIS SECULAR BEAR MARKET???

It’s safe to say that the easy money in this rally has been made and that the market will have a much tougher time rising another 50%. Many are wondering whether the market highs for this year have been seen. As usual, I have no strong views about market direction in the short term, nor does my investing strategy depend on it. I think a more interesting question is: if we are in midst of a secular bear market what can history tell us about where we are now?

A DISCIPLINED APPROACH TO DIVIDEND INVESTING?

Those that have read this space for any period of time are well aware of my enthusiasm for using dividend growth stocks as a vehicle for building long-term wealth and income. However, with that said, a successful investor must do more than just buy stocks that pay a growing dividend, or more than focus on a single metric such as dividend yield. Not all dividend stocks are created equal – there is a discipline to selecting good dividend growth stocks.

ROUBINI SOUNDS ALARM AGAIN

Nouriel Roubini is back at it, delivering the latest battle call in his war against complacent optimism. This time, Dr Doom is concerned about "the mother of all carry trades", where investors are borrowing dollars at negative interest rates (due to low nominal rates, and an ever-depreciating dollar), and investing them in anything that is risky and from emerging markets. Hence the disparity between real economic growth and financial market growth.

This new carry trade is quite dangerous, as it is based on the assumption that the dollar will continue to plunge and emerging market investments will continue to pay off handsomely. Should it unwind, due to a rising dollar or emerging market crisis, markets would become dangerously volatile, which would then hamper the real economy (sound familiar?):

PROPERTY VALUES SET TO FALL ANOTHER 43%???

If you use a 20-year time horizon, and assume prices will return to the trend line, then our residential property bubble will bottom after values fall over 40% from current levels (see above (c) aka “(y) - (z)” aka “Loss Today to Bottom”). I make no predictions. I do watch numbers. The chart shows a catastrophe of falling real estate values loaded up on top of our current catastrophe in real estate values.

No one would question these numbers absent The War of the Worlds. The War of the Worlds is the United States Government versus aggregate borrower income. Uncle Sam is funding every new mortgage – high, low and in between (see chart below--the blue and red represent government-backed loans and the private market is the yellow and green). It takes very little imagination to see the world of real estate prices vaporizing without government support. If that support was lost, values would crash down faster than a big rock dropped into a shallow puddle.

A DISCUSSION OF THE CURRENT STATUS OF THE ECONOMY AND WHATS NEXT

Yesterday morning I testified to a Joint Economic Committee of Congress hearing. The session discussed the latest GDP numbers, the impact of the fiscal stimulus earlier this year, and whether we need further fiscal expansion of any kind.

I argued that a global recovery is underway and in the rest of the world will likely be stronger than the current official or private consensus forecast, but it remains fragile in the United States because of problems in our financial sector. While our situation today is quite different in key regards from that of Japan in the 1990s, the Japanese experience strongly suggests that fiscal stimulus is not an effective substitute for confronting financial sector problems (e.g., lack of capital, distorted incentives, skewed power structure) head on.

We are well into the adjustment process needed to bring us back to living within our means. Although such a process always involves an initial fall in real incomes, as the real exchange depreciates, growth can resume. The idea that we necessarily are in a “new normal” scenario with lower productivity growth seems far fetched, but continuing failure to deal effectively with the “too big to fail” banking syndrome delays and distorts our adjustment process – it also makes us horribly vulnerable to further collapses.

FALL OF U.S. EMPIRE???!!!

Although most of the headlines read that the U.S. economy is growing again, professor and author Johan Gultang seems to have a different perspective on the future of the U.S. RT's Dina Gusovsky interviews him about his new book: The Fall of the U.S. Empire-And Then What?

M-3 IS CONTRACTING NOW!

There have been several very recent articles discussing the ongoing fears of deflation in Europe and Japan. Now, the United States' contracting M3 level is also being noted. This Bloomberg article cites Spain and Ireland for being most at risk of deflation, noting spare capacity, high indebtedness and plunging spending. Germany and France are least at risk and there is a growing challenge facing the European Central Bank concerning policy due to these challenging economic variations between the countries. European economist Ben May calculates that "were the so-called output gap, a measure of excess of supply versus demand, to widen to around 4 percent of gross domestic product, that may push core inflation down 2 percentage points for every year it remains there." And although factories increased capacity usage on assembly lines for the first time in two years this quarter by 1.1 percent, May is not convinced the threat of deflation is over.

ROSS SEES HUGH CRASH IN COMMERCIAL REAL ESTATE

Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.” “All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.” U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

DEBT AND DOLLAR WOES CONTINUE

Doom and fear seem to be making the rounds this week, as they are always compelling and there are reasons to be concerned. One thing that you have probably read is that, with budget deficits of $1.4 trillion and deficits likely to be in that neighborhood for years to come, it means that the US must issue more debt to fund that gap.

USD AND A WORLD CURRENCY???

With the USD fluttering around 76 on the US Dollar currency basket index, the USDX it’s a good time to pontificate on its near term future, and longer term future. Gold’s big rally since 2002 begs a lot of major questions. The US is now flirting with an immediate debt of around $14 trillion (US Treasury bonds etc, and not including future liabilities like Medicare). The US now passes a key level of indebtedness considered to be a first stage of crisis. That puts US current debt at 100 pct of GDP. Just this week, the US needs to sell a record $130 plus billion of debt, for one week. The US is running a fiscal deficit of about $2 trillion a year, and for the total government budget that amounts to 40% of its budget. Imagine trying to run your own personal life that way.