Today’s existing home sales report was down another 4.9% to an annual rate of 4.82 million units, the lowest in nearly a year. And this, remember, is in the sixth year of a recovery with reported unemployment below 6% and the Fed preparing to raise interest rates to head off incipient overheating.
Mortgage rates can’t be the problem, since they’re down lately to less than 4% on a 30-year fixed loan. That’s amazingly cheap, especially to people of a certain age who remember when 7% was a really good deal. In normal times a rate this low would set off a buying frenzy. This year it can’t even keep demand steady.
The real problem has nothing to do with housing per se and everything to do with that fraudulently false unemployment number. The truth of the labor market is that 1) most of the new jobs being created are either part-time or low-wage or both and therefore can’t support a mortgage, and 2) most of the improvement in unemployment comes from people dropping out of the workfore and no longer being counted as unemployed. These people also generally can’t get or don’t want mortgages. Meanwhile, the relative handful of Americans who do qualify for loans seem to be choosing cars and college degrees over houses.
And the US, remember, is the global success story. We monetized our debt first and fastest and are now reaping the rewards. But with the rest of the world flat-lining or worse (result: falling profits for US multinationals), the oil sector contracting (result: layoffs in once-booming Texas and the Dakotas), and now housing a net negative with no recovery in sight (result: layoffs of highly-paid appraisers and mortgage bankers), the odds of the Fed raising rates anytime soon are becoming more and more remote.
Much more likely is the US joining the race to negative rates. Somewhere down there must be a mortgage rate (1%…-1%?) that gets us buying again.
This post Profit from the Greatest Unwind in Economic History appeared first on Daily Reckoning.
[Editor’s Note: Jim Rickards has launched a brand new monthly investment letter called Strategic Intelligence. The latest issue printed last Friday. Before you read today’s essay, please click here to see why it’s the resource every investor should have if they’re concerned about the future of the dollar.]
Early signs indicate that the greatest unwind in modern economic history could begin this year in China. For many investors, the fallout will be painful. If you’re properly positioned ahead of time, however, I believe you can profit.
To do so, it’s important to understand the dynamics in play. Bubbles have three consistent characteristics: They are easy to spot; they persist longer than most investors expect (that’s why they’re bubbles in the first place); and they end badly with massive losses for investors who are still in at the top.
These three traits are related in terms of investor psychology and behavior. Even when investors see a bubble, they often cannot resist riding the wave, because they assume they’ll be smart enough to get out at the right time. The fact that bubbles last longer than most analysts expect tends to validate this investor assumption. People waiting on the sidelines for bubbles to pop are routinely ridiculed by those reaping large gains as the bubble expands.
But in the end, the bubble profiteers tend to stay too long at the party and suffer massive losses, as bubble markets can easily lose 30% or more in a matter of months, sometimes weeks, as assets are dumped and investors head for the exits. Today, the greatest bubbles in modern economic history are in China.
China is at risk of seeing multiple markets in real estate, stocks, corporate loans and commodities all crash at once. Chinese growth statistics have been overstated for years. This is not because the officials lie, but because 45% of Chinese GDP is investment and much of that is wasted on white elephant infrastructure that will either never be used or produce scant gains in productivity.
Adjusted for waste, real Chinese GDP growth is more like 4% than the 7.5% claimed until recently. Chinese growth is also slowing for other reasons having to do with demographics and declining marginal returns to factor inputs. Growth will no longer be sufficient to service the mountain of debt on which the growth was built.
The Chinese people have extremely high savings rates but limited choices as to how to invest their savings. They are generally prohibited from buying foreign assets. Local banks pay almost nothing on savings accounts. This has forced Chinese savers into real estate, local stocks and so-called “wealth management products” (WMPs). This has resulted in property and stock bubbles, which are just beginning to come down to Earth.
The WMPs seem safer because they are sold by banks and offer steady yields of 5% or more. But underneath, the WMP market is a giant Ponzi scheme. The WMPs may be sold by banks, but they are not guaranteed by the banks. The proceeds are diverted to wasted real estate projects and dubious loans to inefficient state-owned enterprises.
Chinese investors who try to cash in their WMPs receive proceeds not from profits on the loans but from new sales to new investors in an ever-expanding pool. This is the essence of a Ponzi scheme.
Almost all of the economic data coming from China lately suggest the greatest unwind in modern economic history could happen this year. Rail and sea cargo shipments are declining, producer prices are crashing and loan growth has hit the wall.
Chinese officials can see this house of cards collapsing but are determined to prop it up as long as they can. Like central banks everywhere, the People’s Bank of China is using easy money to reflate asset bubbles.
Last November, China cut interest rates for the first time in two years. On Feb. 4, China cut its reserve requirements for banks, a technical move that allows banks to make more loans with the same amount of capital. Both of these moves are intended to ease credit conditions. Another rate cut is expected soon.
China is also likely to join the global currency wars now raging in Europe and Japan. A devaluation in the yuan will help Chinese exports relative to competition from Japan, Korea and Taiwan. Since 2012, China has been quiet in the currency while its Asian trading partners and competitors have engaged in repeated devaluations. Now China has had enough and is ready to shoot back.
If you’re a U.S. investor and use dollars as a reference currency, China offers three ways to win. China has weak national fundamentals. Certain companies have weak sector fundamentals, especially those in financial services with large loan and investment portfolios. And the Chinese currency will weaken.
This means that a short position in the Chinese financial sector, including the purchase of put options, can produce profits from a slowing economy, cheapening currency and higher credit losses.
P.S. I track the coming Chinese Credit collapse and give you actionable ways to profit along the way in my monthly newsletter, Strategic Intelligence. Click here to subscribe now.
The post Profit from the Greatest Unwind in Economic History appeared first on Daily Reckoning.
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If you’re nervous about investing in biotech stocks, you’re not alone.
Biotech stocks can be scary. They are based on a lot of hope and promise, and they do appear to traditional investors to have gone too far too fast.
In October 2013, The Wall Street Journal ran a story saying that biotech stocks might be too overpriced.
Here’s the second paragraph of the article:
“‘We like to invest in companies with innovative products, but at reasonable prices. Biotech has become too rich for our tastes,’ says Curt Gross, research director at FAI Wealth Management in Columbia, Maryland, with $325 million in assets.”
Boy, I’ll bet Mr. Gross could kick himself now for saying that, because most biotech indexes are up 50% since then.
But in a way, I don’t blame him for being cautious.
If every new drug that comes along gets priced the way some of our newest drugs have been, the biotech capitalization is unsustainable.
I’m thinking, for example, of the hepatitis C cures that cost nearly $100,000. I’m thinking of a therapy in the works that the company is planning to price at $250,000.
I’m thinking of a company that is already preparing insurance companies for the fact that its CAR T therapy for cancer may cost $300,000 per patient.
There’s clearly something of a bubble in our expectations about how many biotech companies can be successful and how much we can pay for their brilliant therapies.
Some of those bubbles will burst.
Yet we have never before in human history been looking down that tunnel at such a bright light.
Small biotech companies with big therapies that are successful will see their stock prices double, and then redouble, and then redouble.
But it will be a roller coaster. Biotech is a disruptive field with lots of players, so expect downs as well as ups.
A reader of my Breakthrough Technology Alert wrote to congratulate me because he had just sold some shares for a nice double. He had waited after my recommendation for a pullback, which never came, and bought in at about $40 a share.
He sold when it reached $80. He was afraid. What had happened to his shares clearly went against everything he had learned over many years — that a stock that doubles in a month or two is a gift horse and you’d better sell before someone looks at its teeth.
My message to you when you invest in biotech stocks is you should not panic and sell a stock just because it has increased dramatically in price.
In most of investing, where incremental increases in stock prices over lengthy time frames constitute success, entry prices are crucial.
Biotech investing — at this point in time — is different.
If you’ve done your homework — waited long enough to be reasonably certain the company’s therapy is more likely to work than not and examined the underlying science as well as the quarterly reports — you want to get in as soon as you make the decision to invest.
Every time I make a recommendation when a stock has been soaring, I’m tempted to tell readers to wait a bit for a pullback. But I don’t. I’ve learned the hard way that although a pullback sometimes comes, the recommendations made in this portfolio are far more likely to go up, and to go up suddenly, than to go down. When a pullback does come, it’s impossible to know when to act. Is that price the bottom? Will the stock go down more tomorrow? Don’t ever let yourself get into that place.
We are not traders. We are investing in solid science. And science is the driver of wealth and prosperity.
If you had purchased shares in the 13 companies I have recommended over the past 15 months when I recommended them, you’d be much further ahead now than if you had waited for pullbacks, even though a number of them did pull back before they went up again.
From Feb. 25-April 14 last year, biotech essentially crashed. It performed another, though less dramatic, swoon last September. Those are steep hills on this roller coaster ride, and you simply must accept that it is a roller coaster and not all the hills will be up.
Despite those swoons, most biotech indexes are up more than 50%.
If you do accept the volatility that comes with biotech investing, you’ll likely be a winner.
Because the reason other people — smart people — are investing in these companies is that we are on the verge of seeing cures for many cancers and much of heart disease — not just treatments for these diseases, but cures.
“In the next 10-20 years, 58% of financial advisors will be replaced by robots and AI.”-Frey and Osborne, Oxford University.
This article's goal is to demonstrate how true those statements are. Below you will find the face of today's investment bank as pictured by the article "Yes, Goldman Sachs is a great place to work"...
... and this is the face of invesment banking tomorrow://// Have the payee sign the resolution transaction and send it back over the wire LetterOfCredit.signInchoateTx(new_tx, lc_tx_script_pub_key, this._payee_key_priv); new_tx = new Transaction(LetterOfCreditTest.params, new_tx.bitcoinSerialize()); Set<ECKey> keys = LetterOfCredit.checkInchoateTx(orig_tx, new_tx, lc_tx_script_pub_key); Set<ECKey> signed = keys; Set<ECKey> candidates = keys; Assert.assertEquals(1, signed.size()); Assert.assertTrue(signed.contains(this._payee_key_pub)); Assert.assertEquals(2, candidates.size()); Assert.assertTrue(candidates.contains(this._xch_key_pub)); Assert.assertTrue(candidates.contains(payer_key)); // Have the exchange sign the resolution transaction, send it // back over the wire and make sure it is complete LetterOfCredit.signInchoateTx(new_tx, lc_tx_script_pub_key, this._xch_key_priv); new_tx = new Transaction(LetterOfCreditTest.params, new_tx.bitcoinSerialize()); keys = LetterOfCredit.checkInchoateTx(orig_tx, new_tx, lc_tx_script_pub_key); signed = keys; candidates = keys; Assert.assertEquals(2, signed.size()); Assert.assertTrue(signed.contains(this._payee_key_pub)); Assert.assertTrue(signed.contains(this._xch_key_pub)); Assert.assertEquals(0, candidates.size()); } }
Decentralized - dispersed functions, powers and assets away from a central location or authority
Autonomous - self-governing; independent; subject to its own laws only
Commercial - of or relating to a system of voluntary exchange of products and services to the market
entity - something that exists as distinct, independent, and/or self-contained
DACe (pronounced “dak-ee”) - A network-based logical business entity that replicates the functions of centralized legacy businesses and business operations profitably and at substantially lower costs through disintermediation. Disintermediation is: the reduction of rent seeking by connecting natural producers and natural consumers of products and services directly (in our case, peer-to-peer) while providing the ability for said actors to facilitate the required business functions through decentralized software designed exclusively for network-based, distributed use with appropriate failsafes for both temporary and catastrophic failures.
UltraCoin is an example of a DACe. It is essentially an investment bank/brokerage in the cloud without the bank and brokerage components. It consists entirely of computer code. It currently facilitates the trading of the exposures of over 45,000 tickers, long, short or in unique relative combinations, and can do so while offering up to 10,000x leverage without the risk of default, negative equity, non-payment or margin calls.. It provides its own exchange and rents space along the Blockchain rails with which it often does business. Best yet, it is totally transparent by allowing all users to track their assets at any time, and it never, ever holds or has any control over your assets. Your capital stays either in your wallet or the blockchain (of which I will define below) at all times. Users are never exposed to our balance sheet, or the counterparty risks inherent therein. Deals are done in basis points, negating the need for gouging to support billions of dollars annually in salaries and bonuses - and computer code has no incentive to Bernie Madoff, and abscond with your money.
UltraCoin’s aim is to disintermediate the banking system by congealing the business processes of Wall Street banks into software and code that lives and thrives in the cloud, and the blockchain in particular.
This DACe in the cloud allows disparate consumers of banking products and services to purchase said services directly from each other through the UltraCoin using unbreachable smart contracts as the medium.
Through the disintermediation of investment banks and brokerages, the nominal and economic profits of rent seekers are now redistributed to consumers as “inefficiency rebates” - or extreme discounts to products and services in the absence of the rent seeking middlemen who charge for what software can now to better, cheaper, safer and more efficiently. These inefficiency rebates reallocated to consumers can be, and are substantial. Wall Street banks compensation and benefits as a percentage of revenues range from 40-50%.
A few months ago, I approached several of the big banks to discuss partnership, and relayed the reaction of one of them in the post, "Reggie Middleton's Open Letter of Commoditization and Disintermediation to Wall Street: Pay Attention Jamie Dimon!". Banker's hubris will be our profits, methink. Further to that point, this downloadable research document forensically describes the specific weak points in the banking business model, to wit: Banking Risks, Rewards & Demise: The Rise of Programmable Currencies & Smart Contracts
Stress Test on [This Bank’s] Earnings Resulting from the Introduction of Smart Contract Platforms as an Alternate Value Transaction System
We have carried out a stress test on [This Bank]’s 2013 earnings to assess the potential impact of digital currency transaction platforms on the bank’s future earnings. The revenue of the banks is categorized into interest income (net of interest expense) and non-interest income that comprises income from investment banking operations, asset management business, trading income, insurance, and other commission or fee based businesses.
[This Bank] derives more than 60% of its total revenues from net interest income, and less than 40% from non-interest income. Net interest income depends upon the bank’s net interest margin and volume of loans and advances as well as deposits with the bank. A decrease in margins and volume could significantly impact net interest income, due to [This Bank]’s heavy reliance on interest earning assets for revenue.
In assessing the impact of an alternate digital currency transaction system on the bank’s annual revenues and profitability, our analysis assumes a certain percentage of business that is vulnerable and a certain percentage reduction in fees (see below).
[This Bank] could see around 3% decline in its non-interest income. The bank’s net interest income could fall by 7-8% from a contraction in its net interest margin.
The bank could see lower charge on account of compensation benefits for employees (due to decrease in variable pay). However, this will not be enough to offset the decline in revenues.
Net income could drop by as much as 21%.
Veritaseum’s UltraCoin is not a concept, nor a whitepaper or even a prototype. It is a functional, ongoing business in the form of a nascent start-up. Here is a snapshot of revenue ramp-up before the official launch. The provervial "hickey stick"!.
We are on the lookout for financial and strategic partners, liquidity providers and traders. If you qualify of any or all of those, I'd love to hear from you.