Balloon's Deflate Even When They Aren't Popped

Have you ever noticed your children's balloons a week after you got them? Maybe they are the one's you get at the local "super" market. Maybe they are the nice mylar balloon's that crashed in Roswell, NM, and they last for weeks... But, in the end, they end up deflating. Why do they deflate? Well, inevitably, no matter how good the material is, it is porous. The helium is smaller than those pores, but inevitably it will run out of helium and fall to the ground.

It is odd how similar those balloons are to the current state of the economy. The economy was full of helium back in the roaring noughties and most believed the balloon was popped. I agree, there was alot less helium in the balloon in 2009 than there was in 2006, but has the balloon been completely sealed and encased in a non-porous substance?

Today, our economy is more porous than ever. We have reinflated the balloon, but it is losing helium everywhere. Deflation is the biggest factor of all. This all stems from this recent recessionary period that have hit incomes hard. Incomes are the helium that puts the rise in the balloon. In the past, it was known that when you graduated college, you would be more marketable for a higher paying job. Why shouldn't graduates be? They now have encumbered a large amount of debt from getting an education, so economics would tell us that they are worth more. However, in today's economy, jobs are scarce. Every 3-6 months, more and more graduates are being pumped out of the system to compete for jobs that are attracting tons of applicants. Moreover, these other applicants are more qualified with years more experience than those graduates. Thus, we now have another economic problem. Supply and demand of jobs and applicants. With the supply of applicants increasing, and the decrease in the number of actual job openings, it results in an employer's dream - an ability to pay less.

We need to also take into account the recent hit in pensions, 401(k)'s, personal incomes, bonus's, etc that are being cut. This is cutting into, already employed people's dreams of retirement. Simply put, because of the economy, people are staying employed longer because they can't afford to retire - thus, taking up spots that are higher paying that the younger would occupy. This results in less upward mobility and lower pay for all.

So, what does all of this mean? Well, graduates now coming out of college are getting paid less (I have seen some taking $10/hour jobs and they aren't even able to afford their student loans, thus living at home longer, which could potentially lengthen the time that their parents would normally work, thus worsening the whole cycle). With this lower pay, these graduates are going to have less expendible income, and this will cycle through over the next 5-10 years throughout the entire working population. As time goes on, incomes will then lower, as the graduates are more willing to work for less (even if the raise is from $10 to $13, as opposed to what would've been $17 to 20/hr). Couple this with lower ability to spend due to more debt for schooling, we will see expendible incomes drop dramatically causing another shortfall. This shortfall will be seen from tax revenue's to housing. Including the rise in medical costs, the rise in various insurances and the rise in food and energy, this next generation that is being pumped out will have a much worse time than the previous generation.

See: http://lifeinc.todayshow.com/_news/2010/11/30/5545875-more-students-getting-a-load-of-debt-along-with-degree

In summary, the people graduating from 2009 and onward will have a much harder time and if the cycle doesn't change soon, we will be in for more trouble than we think because of this. The up side to this is that large corporate profits will increase due to their lower cost of overhead and it will help the big business get bigger - and thus, personal portfolio's will also increase in value due to the uptick in the markets. However, that is for the portfolio's that actually have money. Unfortunately, it will be harder for small businesses to start up because of this expendible income dilemma and the big businesses and rich will get richer.

Robin' the 'hood

I think it's appropriately titled. Seeing that it is exactly what the rich are doing. It is the exact opposite of the old English tale of the man in tights who stole from the rich and gave to the poor. Today, we have huge money chasing investments that might sometimes pan out. With hedge funds and investment banks making billions every quarter, they were unstoppable. They made their multi million/billion dollar clients even more. As time went on, their positions began detiorating, until the point of collapse. Now, these big money makers are getting bailed out. The bailouts are increasing and the burden is shifting from private debts to public debts. Let's break it down for the layman. The losses of the rich are being transferred to the poor. Moreover, the bailouts themselves are keeping alive the dying business ventures - and propogating the overly excessive salaries to these rich. When it all collapses, the rich will be richer, the poor will be poorer. The poor will foot the bill for these debts encumbered by the rich.

What will be the breaking point?

Countrywide CEO Mozilo settles with SEC for $67.5M

Extra! Extra! Read all about it...

http://finance.yahoo.com/news/Countrywide-CEO-Mozilo-apf-1381976931.html?x=0&sec=topStories&pos=main&asset=&ccode=

Let me summarize: "The civil complaint... accused Mozilo of acting on his inside knowledge of the company's precarious state when he sold shares between November 2006 and October 2007 ahead of its collapse, reaping more than $139 million" - He then settles with the SEC for $67.5 MM ----- FOR A NET PROFIT OF... $71.5 Million ----

So, everyone who is reading this - Because this sets the precedent - Go ahead and rob your local bank... When you are in court, go ahead and tell them that you will settle with them and pay them a little less than half of what you stole, as long as you can be let free and not admit guilt... wait wait... don't do that - You're stealing 10's of thousands of dollars. Not millions... If it were millions - you'd be okay - DO NOT ROB FROM BANKS - Rob from investors instead!!

"nonconventional polices have costs and limitations that must be taken into account in judging whether and how aggressively they should be used."

That is the quote from Bernanke's speech this morning - Hence, the continued purchases of stocks will resume. The real scare here is that he is simply saying that because of unemployment and the risk of DEFLATION, more money is needed to be injected into the economy to spur growth.

What the heck does that mean? Let me go ahead and put it in layman terms, and put it in first person as though I were Bernanke.

"We have thrown in so much money into this economy, be it by giving money to the banks, by buying up treasury bonds, by buying up stocks - That we had expected the economy to pick up so much that inflation should have happened by now. Well, we have come to realize that we can't force banks to lend, and the low rates on treasuries isn't spurring demand for loans (which people couldn't get because of factor 1), and stocks are flying high - but it is only making the rich richer - not the public feel good enough to go out and buy stuff. So, uhm. We need to pump more money into the economy through continued different ways - If all else fails, we will at least kill the dollar in order to spark up our exports... "

Why does the fed want inflation so bad? Think about inflation as money you are making - If inflation is 10% a year, that means the price of all goods goes up by 10% a year. Bad, right? Well, let's say you have your home loan at 5%. If your home is increasing in value by 10% and your rate is 5%, that means your REAL RATE OF RETURN is actually 5% - You are making 5% a year on your home... Now, think about this in terms of government debt. If you are paying 2.51% on a 10 year treasury, and you have $1 Trillion of debt outstanding - and inflation is at 5% - That means, you are actually making 2.5% - Inflation can be a good thing - Especially if you have TRILLIONS of dollars of debt (i.e. The United States).

Let's flip it - DEFLATION - That 2.51% rate on your treasuries, coupled with 5% DEFLATION, the real rate is now 7.51% that you are paying. So, as you can see - The fed is trying HARD to avoid deflation. Moreover, deflation is a downward spiral (see Japan) - As once goods are cheaper next year, there is no urgency to buy now - Why not wait and see what happens? Sound familiar? Real Estate has experienced DEFLATION - And because of that, people are taking their time buying a house.

Overall, this economy is not going to get better. With Quantitative Easing 2 (QE2), we will only see the stock market fly higher, bonds go lower, and the overall economy continue it's downward slide. Moreover, once the patient (economy) is taken off life support (Fed Policy), the patient is likely to continue it's problems.

Jobs, once again, are diminishing

I find it hard to believe that the stock market, Wall Street, is rising - when on Main Street - people are losing their jobs... The disparity between the rich and the poor are getting larger right before our eyes. It is more than just the numbers, it's the actual cause and effect of what is happening - The effect is that we are going to slowly see underemployed people. What do I mean by that? Well, real example - An opening for a $12-16/hour job for an administrative intern is being flooded with resumes by past mortgage brokers, real estate agents, engineers, and construction workers - No one with real experience in that field, but also no one that, in their previous life, would've dreamed that they had to work for that amount of money. As the rich continue to get richer on Wall Street - The Fed flooding the big banks and businesses with money to merge/acquire other businesses - The people that get laid off because of this - All of this will have an effect that will affect everyone!

The equity markets are rallying behind a thought that the fed will continue to pump money into the system. What happens when that stops? That'll be for another post.

(The Beatles: Love) Jobs... Jobs... Jobs... All you need is Jobs...

The overall concensus for today's job numbers were a mere loss 5,000 jobs in the prior month of September. This number, though still a decline, would have made the market rally, as it shows strength in the economy and that companies are laying off less people. You would figure that if the number was 10 times as bad, however, that the market would plummet, as the jobs report would indicate that 50,000 jobs were lost and the economy is losing steam.

Well, the jobs report came out - Actually, it was 19x as worse - at 95,000 jobs lost... What has happened? The market is in the process of rallying. It is because investors expect the fed to pump more money into the system and to hold up every asset - thus supporting my prior predicitons. Where is this money coming from? Is there that much money on the sidelines? Are foreign investors really throwing money into a stock market in which they are losing more on the value of the dollar than they are making in the actual equity markets? I think not...

The money is coming from the federal government. They are buying stocks as if they were a hedge fund manager. The only difference between a hedge fund manager and our government is that a hedge fund manager is playing with money that is given to them by individuals and entities that seek a return - The government is playing with OUR money as if it is an unlimited source... They are hoping to recoup the losses by the banks (which the reports are out that they made money on TARP... But, you need to follow the money trail). If the market does sell off, which it won't because of the unlimited supply of money flowing into it - The U.S. will inevitably collapse upon itself. That is why the dollar is falling and getting weaker (among other reasons, i.e. a currency war that has the first country with the weakest currency sparking up their exports, thus increasing domestic manufacturing, and increasing jobs - in which Japan was aggresively trying to do, but has failed miserably because the mighty USA is able to manipulate the market even better - as we are now seeing). Mortgage rates continue to fall, as do treasuries - slowly approaching my low of a 3% rate on mortgages (though, I believe it will bottom around December - let's see how low it will go).

Moral of This Story:

The SNEAKYnomics is turning out to be very sneaky indeed... Prop up the stock market, come out with inaccurate reports only to come out with revised reports later, increase the GDP by killing the dollar and increasing demand for US goods (what do we make anymore?), buy up treasuries to reduce the cost of borrowing further than the fed funds rate can produce - which yields supposedly higher demand for loans (though it's not), and allow the banks to get bigger and bigger... I love this economy!!! Free market forces are harder to predict, because it's based on human emotions... But, when this manipulated market is run by a few people that react to the situations at hand - It is very easy to predict what is happening... Because they are driving by looking at the rearview mirror... Unfortunately, there are always bumps you don't anticipate.

Fed Isn't Just Buying Treasuries

It has come to my attention that the fed has a strategy to prop up the stock market. With the limitless liquidity provided by the fed, it would be possible for the stock market and other equities to rise in value even during a time of high unemployment, deflation, soaring commodities, etc. Facts will come soon with quotes and references, but doing research on Bernanke, he explicity stated that it may be a need of the fed to do so. Despite the fact that the fed had purchased multiple equities by way of TARP, this is on a different level.

The question is this: What happens when you push interest rates to as low as they can possibly be without people crying foul/manipulation, consumer confidence is not rising like it should be, expenditures and consumption is not increasing, overall home sales are declining, banks are not lending at the pace they should be, and the only thing that these low rates are spurring is refinances for current mortgages? Well, here is what you do - Increase, artificially, people's investment portolio's, increase their 401K's, make them feel wealthy again, and then hope that confidence rises and, thus, rising consumption. This is exactly what is happening right now behind the scenes, and here is the problem - How do you get out? Selling these equities will spark a fierce drop in the stock market. However, with the SEC making it impossible for stocks to make such a dramatic move by passing certain legislation, this will be much harder than previously done (Seems interesting, just as the market begins to rally, they had passed that rule... Google it). So, now that it is harder to get out of it, what about the artificially low interest rates? How do you get out of those positions? Once again, that will spark a massive sell off... The only logical asset to hold is gold and other precious metals, as when this market falters because of the massive fed sell off - The commodities will skyrocket...

BUT WAIT - They are skyrocketing right now... As China is decreasing their dollar holdings and the dollar continues to weaken, the money is flowing into gold and other precious metals - Why is it that the safe haven of gold for (non existant) inflation is rallying during a time of deflation? Why is it that treasuries are skyrocketing right now to all time lows? Where is this money coming from? Could it be that countries are beginning to buy up the assets that will perform best once this bubble pops?

... Article to come: The New Bubble - The Taxpayers Money Being Used to Prop Up Wall Street.