Saturday, April 26, 2008

The Domino Effect...and Deflation...A Crashless Depression...Mega-Trend Losers and Winners: Staying Ahead of the Curve.

Domino One:
As home prices continue to fall there are several grave concerns that are facing the U.S. economy. One is a continued theme of the over-extended consumer. For years, the U.S. economy has considered consumer spending as the cornerstone for economic growth. At one point, consumer spending (1) was said to account for nearly two-thirds all economic growth. However, soon the consumer will be reigned in, and a price must be paid. Most of the consumer debt is self-inflicted. As the old adage goes, people have spent money they didn't have, to buy things they didn't need, to impress people they didn't even like! Now it is time to pay the piper. The rebate stimulus plan will not pull the U.S. consumer out of the tailspin...there is no quick fix. (2)
1. For years, consumers have treated their homes as nothing short of an ATM machine. Not only have they borrowed against the equity of their homes, but they have even borrowed against the anticipated rise in property value.
2. As a new round of ARMs are set to expire, another segment of American consumers are sweating bullets. Trying either to unload a house that they shouldn't have bought in the first place or borrowing from a 401K plan to bail themselves out.
3. As the U.S. economy continues to shrink still a third portion of consumers are hitting the wall with job loss.
4. Gas prices effect every aspect of the economy. Therefore, it is only logical to conclude that the consumer will have less disposable income.
5. Last, as mentioned in earlier blogs, the easy credit in credit cards has given the consumer yet another avenue to over-spend.
Domino Two:
Most lending institutions will continue to stay under pressure for the foreseeable future.
1. Bank and other lending institutions have over-extended credit in the real estate market.
2. Banks are now need blood transfusions to stay afloat.
3. Auto finance companies will be the next to feel the pressure.
4. Eventually, credit card companies will realize that a credit risk needs more than a pulse for credit.
Domino Three: Deflation...and how it will impact EVERYONE!!!
It is becoming increasingly apparent that U.S. financial markets are at a tremendous risk for deflation. Everyone knows that investments which move sideways...or move down are already losing money. However, the reader's attention should not be focused on investments are earning anything less that 10-20 % a year. Bonds are bombs right now waiting to shatter any true gain. According to the CPI calculator (3) (an extremely conservative gauge on inflation), $100,000.00 in 2006 is the equivalent of $105,916.67. Factor in oil, consumer prices including basic living expenses, health-care, a FED that is over-printing (4), and a Congress that is satisfied being the LARGEST DEBTOR in world history (5), it is easy to see that these CPI numbers are a farce. The investor should not be lulled to sleep in this dangerous predicament. And this is the real story that is not reported on CNBC, MSNBC, or Fox Business!
Domino Four: A Crash-less Depression
The investment community has become keenly aware of the terms "crash", and "bust". It is the contention of this article that those things will not happen during the next depression. Many of the 'lessons-learned" by the Fed, government and investment community have in-fact created shell games, Ponzi schemes, and other artificial stimulus plans which prop up the economy by creating liquidity. One need only view the policies of Greenspan (6) and Bernake (7) to understand the real goal of the FED (8) , which is to manipulate monetary policy to avoid the natural outcomes of the boom and bust cycles. However, the manipulation comes at a price. Everyone who holds dollar-based assets will suffer the same fate. While is appears that stock market increases or at best stays the same on paper it appears that everything is o.k., when in fact, deflation has under-minded all investments. This is not to say there will not be winners on Wall Street, but more importantly to underscore the fact that most investments will lose long term!
The U.S. Dollar, and those who have dollar based assets.
Regional Financials which are largely over-exposed to an ailing economy i.e. RKH
Housing sectors. i.e. XHB
Real Estate i.e. RWR
Entertainment and Recreation Vehicles i.e. WGO
Green Energy bubbles i.e. FSLR
Banks with heavy domestic credit card exposure: V, MA, COF
Real Estate shorts i.e. SRS
Domestic Oil i.e. PQ
Oil Equipment i.e. HAL
International Oil i.e. BP
Infrastructure i.e. ABB
Technology i.e. MSFT
Foreign Specialty Chemical i.e. RPL.NS
Farm Equipment i.e. DE
International Tobacco i.e. PM
Green Technologies i.e. VLNC, TAN
Gold Short DZZ

Sources Cited:








1 comment:

boom and doom said...

TC, I agree with what you have detailed out, but I think the powers that be have manipulated the system to avoid the "big one" this time. While things will not be rosy for the near future, the rich will benefit and the "average" American consumer will lose more of their wealth and be worse off. It is going to take something like Social Security becoming insolvent to wake people up and demand a change in the way the government, Fed and those in the know operate and take advantage of them (us).