April Fools day, and a fine day it is outside. This morning I watched the eagles fly up the river right behind the Geese that nest on our property. I've never heard of a Bald Eagle attacking a Canadian Goose, but I suppose it is possible. The Geese appeared to be slightly faster than the Eagles, and it all started when our female goose took off from the river, and one of the mating eagles across the river in the tree dive-bombed her. Once she was airborne, the male Goose went airborne and the two out sped the Eagle; assuming the Eagle was trying to catch one of them. We named the Geese Honk and Sqwonk, and they've nested here for at least 6 years. We know it is the same because the female has a bad limp, and at least the female was from a previous pair that nested here 8-10 years ago. There are three other pairs that nest on our neighbor's property downstream from us. Soon, they will all have their yellow babies up on our lawn. You would have a hard time determining what are the dandelion heads and what are the babies (until they move) as they play in lawn.
Ah, spring on the river... A wonderful experience every year.
Big Picture
Overall, the Global Economy is not being driven by fundamentals. It is driven by central bankers. As I will go into, every single central banker from the G20 is attempting to stimulate in order to stave off deflation. However, I find it difficult to conceive how any developed country could pay off their debt at this point. If it is true they can't pay, then we are in a Deflationary period; not an inflationary period. Folks, I will show that your decision to invest (vs. trade) is based on your big picture view of inflation vs. deflation.
Since the beginning of this year,
I've written about short term movements in currency as it related each country's
economy. (The Euro is a conglomeration
of individual sovereign governments, although they are finding once a downturn
occurs - and it always will - they are not so sovereign after all.)
In my newsletter I've written
about long term investing as the way to build wealth. The idea is to build wealth using the magic
of compounding. Any other type of
investing is speculation, and in speculation timing is of the utmost
importance. In speculation, the trader
will find it very important to know when to get into the market, when to take a
profit, and when to take a loss.
Assertion: the shorter the time frame for trading, the more stress there
is and the more critical it is to get timing correct.
Let me take the idea of a the
"big picture" one step further.
The investor (and the trader) need to have a view of inflation and
deflation. This is really important, but
I won't go into a long diatribe here.
What we know is Dr. Bernanke and his counterpart in Japan want to create
inflation (moderate inflation - not runaway).
Why? You should answer this for
yourself.
In normal times, it would be
common sense to suggest that the amount of money being printed world-wide
increases inflation. That is common
sense, which does not seem to be working since Dr. Bernanke took over the
Federal Reserve. Why? You should answer this for yourself, but if
you review last Thursday's and Friday's blog, you will notice that when Lehman fell and started the global financial problem in 2007-2008, that was de-leveraging (the paying off of debt) which led to a huge deflationary cycle (ending in
2010).
Then let me suggest a Deflation definition:
(This is beyond the simple things you hear on talking heads)
Deflation is a
contraction of the total money supply and credit.
Within this context the money
supply (and credit) decreased from early 2008 to middle 2010. The money supply has increased from 2011
through 2013 as central banks world-wide cooperate to create inflation. Increasing money supply is actually not working that well, as the
banks are not able to push inflation up.
So what happened in 2007 that is
important regarding deleveraging? Real
estate peaked and dropped in half.
Commodities crashed. Stocks
crashed 57% (and that is a lot of cash lost since most investments could be considered
liquid and converted to cash immediately).
In essence, economists, bankers and even retail investors don't see deflation until it is too late. One of Dr.
Bernanke's most famous lines in 2006: " "Housing markets are cooling
a bit. Our expectation is that the decline in activity or the slowing in
activity will be moderate, that house prices will probably continue to
rise." (Which reminds me that
really smart people are not infallible. I'm OK with being incorrect - even at his level. Gambling the whole future of the US based on theory from his doctorate on the depression is not OK!!!)
A the moment, then, the "big
picture" is there could be inflation or deflation. The global economy is walking the tight rope
with a "tipping point" that is not known.
Remaining within the lines of
unknowns, deleveraging is still ruling the markets. Cyprus (Greece, Spain, Argentina, and so-on)
are small examples where debt is being removed (as well as direct fiat
money).
In the USA, as stated on Thursday,
the TBTF (Too big to fail) banks are deleveraging (or shifting derivatives to
the bank's customers).
Folks, you should ask yourself,
what happens when you have slow growth and deleveraging? Dr. Bernanke knows. Do you know?
With a 1.5% GDP growth (the lastest GDP) the jobless rate will rise more
than 1% point per year. No USA
government, right, left, center can endure high and rising unemployment. The pressure to create jobs will remain
strong.
Once most of the deleveraging is
completed, long term growth will continue at 3% and above. Biotech, robotics, new Internet technologies,
semiconductors, and possibly other yet to be determined (nano-technology for
example) promise tremendous productivity and economic growth.
For now, the impact of private-sector deleveraging is severe.
Looking at Specific Economies
China
1.
PMI - printed stronger than expected at 50.9 in
March. (Expansion or contraction is
determined by 50 - PMI > 50 expansion, PMN < 50 contraction.)
2.
This is an 11 month high for China's
manufacturing.
3.
China's recovery is getting
"goosed". That is a good thing
for the global economy.
4.
As long as the Chinese economy sustains growth,
Australia, New Zealand and the Asian Tigers will do well.
USA
2.
Construction spending met expectations, and
indicates that housing continues to gain traction. While the report was not outstanding, it was
positive for the US economy
3.
Year-on-Year the money supply is increasing
since 2011.
4.
5.
At present, near-record high annual growth in
the broadest U.S. money measure M3 is suggesting a significant inflation
problem in the year ahead. (Then why don’t we see inflation showing up? Answer money in the USA (as measured by M3)
does not measure the deleveraging of debt on a worldwide base). In general, there is a huge difference of
opinion between the deflationary camp and the inflationary camp, and so the
investor has to develop their own World Wide Big Picture VUE (Big Picture
View).
6.
Oh, and gentle reader you should never
forget. President Obama predicted
financial Armageddon if the sequester took place. He could only be referring (in emotional
terms) to deflation in the economy if those price cuts took place. Therefore, the judge on Dr. Bernanke’s
monetary theory and Keynesian economics in creating inflation has not been able to rule yet.
7.
I am going to make this a separate point. I had a young friend whom I was teaching 7th
grade algebra to. She would go with me
to chop wood, stack wood, and build her kindling business. We would talk about
story problems in cash flow (kindling business), and the Chinese Triangle, and wood storage space calculations. I would
question her on what she though money was.
Then my wife and I gave her a substantial amount of cash in Turkish Lira
for graduation, and asked her if that was money. Her answer was “NO”. I asked her when she used her credit card,
was she creating money? Her answer was
“NO”. What is your answer to those
questions?
8.
There is more to inflation/deflation than the
money supply (the velocity of money).
Finally:
I hope you had a very good weekend. I worked in my gardens; worried about the
horrendous problems the voles have created this year with my lawn and maple trees; soaked up some sun; and
took naps as often as possible.
I sincerely wish every one who needed to let down from the
stress would visit NE Washington and British Colombia (especially BC as the
people are much less stressed it seems then on my side of the border.)
I will create another blog post on why it is positive to
invest long term (even with USA issues); why the USA is not going to crash
until the creditors say no mas… Yes we are going to have a stock market correction at some
point, but if we invest in the correct companies and countries (big IF I know),
we can accumulate wealth inflation or deflation.
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