Flush with ‘Cash’ – well – FLUSH ‘Something’:
CNBC keeps telling us about all the cash that Corporations have on hand and how that proves that they’re in great shape. And how with a $1 Trillion in cash – let’s stimulate growth and jobs? Do you know why the Corporations are sitting on a $1 Trillion in cash? It’s because they've borrowed $7.1 TRILLION dollars in nonfinancial industry debt loads. Quoting from Marketwatch: “Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. The Fed data underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers. "While this is generally recognized for households, it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancial corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."
So, these big wonderful cash flush companies - are really broke and in hock up to their ears. They owe $6 Trillion more than they have. My bigger issue is why anyone on CNBC isn’t telling us that? We also had David Rosenberg (chief economist at Gluskin, Sheff and Assoc. say on Friday: “The odds of a double-dip recession in the U.S. are "certainly higher than 50-50, and the economy could contract again by the end of this year – and is unlike anything we’ve seen in the post war period."
Very few of us remember the 1930’s – but in the 30's the US confiscated the nations gold and basically defaulted. The US pulled off the single biggest robbery of all time. It happened by Executive order - the same type of Executive order that President Obama has used 36 times already in his short career. Executive Order 6102 required all U.S. citizens to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Most citizens who owned large amounts of gold had it transferred to countries such as Switzerland. Then, once they had everyone's gold, the government crushed the currency. They raised the price of gold from the treasury for international transactions to $35 an ounce. The resulting profit that the government realized funded the Exchange Stabilization Fund in 1934. Yes – they gave you $20.67 per ounce – and then instantly raised it to $35 an ounce. That was the single biggest outright robbery in the history of our nation.
Now we could go on and on about what has happened without a gold standard – the 90’s run up and crash, the housing bubble, soaring inflation, 41 million on Food stamps, cities laying off police and firemen, millions in foreclosure – but the sad part is – that WAS the plan. There's only one way out of this mess and that would be to allow capitalism to run amok. You know - where the market prices everything, there is no ‘too big to fail’, no bailouts, no winks and nods. That system works perfectly, but it keeps the Central bankers on the sidelines (and since they run the world) that's NOT going to happen.
Now James Taylor contributed and Laurence Kotlikoff (a Prof. of Economics from Boston University) wrote - the way out is for the U.S. to cut entitlement programs and DOUBLE taxes. Yep – the International Monetary Fund (IMF) has pronounced the U.S. ‘broke’, and to narrow our fiscal gap - we need to ‘double our taxes.’ Such a tax hike would leave the U.S. running a surplus equal to 5% of GDP this year, rather than a 9% DEFICIT. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be. This actually coincides with a report the Congressional Budget Office released which says our ‘unofficial’ debt is $202 Trillion - more than 15 TIMES the ‘official debt.’ How can the fiscal gap be so enormous? Simple - we have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.
This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.
Unfortunately, this will ‘stop’ in a very nasty manner. The first possibility is massive benefit cuts to the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.
I think we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. Bond traders will kick us miles down the road once they wake up and realize the U.S. is in worse fiscal shape than Greece. The U.S. is broke and can no longer afford the ‘no-pain, all-gain’ solutions.
The Market:
We had a down week, pretty much as I thought we'd have, and was because the Street was mad at Bernanke for not flooding the system with even more money immediately. But now things get really interesting. The Street has knocked 400 points off the averages in two days. That was the shot across the bow to all the incumbent politicians - that if they would like to see a strong market heading into the elections in November, they better get Obama to tell Bernanke they want the entire Quantitative Easing #2 (QE2) of the highest extreme – NOW! When Ben only announced that he was going to play with some more mortgage paper, The Street wasn’t impressed at all. Now – what The Fed did was monumental in scope – Ben told the whole world that YES we are monetizing debt. That statement alone (in a different age) would have sent the market down by 40%, because that's an absolute decision to basically print unsterilized money. The Federal Reserve is the only major central bank to have specified that it wants to maintain the size of its balance sheet at a certain level, meaning that it is effectively now targeting the money supply. This is quantitative easing in its purest form and marks a significant change of tact. However, The Street wanted more and it didn’t get it!
Now on Friday, Thomas Hoenig (Federal Reserve Bank of Kansas City President) said: “We need to get off of the emergency rate of zero, move rates up slowly and deliberately, which will bring policy in better alignment with the economy's slow, deliberate recovery. While the markets may like the current stance of monetary policy, I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut."
The problem is – the average consumer is ‘spent’ – money has been coming out of mutual funds for months – and The Street needs a gimmick to continue to get their $100 Million dollar paydays. When Ben didn't come thru on Tuesday, The Street pulled the market down 400 points on Wed and Thursday. Now the Fed comes back with something akin to saying "up yours, you'll get what we say you'll get". The real issue here is we have a boatload of Congressional people up for election in 2.5 months – and they’re out promising folks the moon, and here's the Fed telling Wall Street to go pound salt. The folks in Congress clearly want the market to go up, in order to point to it and say "see, we saved the world, re-elect us!" You have to know that in dark room sessions, the Obama people and the Feds are sitting at a table with Goldman trying to hammer out a deal. Now the only certainty is ‘If” the Fed sits tight – then Thomas Hoenig has become the spokesman for what the Fed really wants to do in the near term. If that’s true – The Street is going to press the issue once again by selling the market.
As we come into the new week, I feel that Monday could be an up day. But I think it's a set up. The street played their game on Wednesday and Thursday. Then The Fed came back on Friday and fired back a bit. But The Street knows that Monday is the "middle of the month", where mutual funds usually put their money to work (most funds put cash in on the first days of a new month and then the "middle" of the month) so it seems to me that the Street is going to let them come in – allow the market to go up – and then I think The Street yanks the rug and we go down again.
Maybe I'm wrong and they reach a back door deal this weekend, but Thomas Hoenig was a direct push back to Wally Street, and if they don’t settle their little dispute, I tend to think that by mid week we see another stellar market fall – right AFTER they invite the mutual funds to come in and place their money on Monday – crushing another round of John Q. Publics yet again.
Tips:
We’re in metals and in and out of a couple small positions in ‘short’ ETF’s: We’re back in (and out) of TZA, DXD and SDOW (all 3 inverse market ETF’s (that is to say these ‘Exchange Traded Funds’ increase in value when the market goes down)
We've been leaning short, but not by too much. Some readers have written and have said that they did well. We suggested the inverse DOW on Wed morning at 26.12 and it hit a high of 27.57. We liked the TZA at 35.50 and that hit 38.16. We also took advantage of the VXX mid-last week – and expect that to continue this week as well.
The metals we like for a long time – unless something dramatic occurs. I’m still looking at a fade thru August – the inverse ETF’s are a smart play – and potentially look for the ‘stimulus’ in September for the ‘insanity run’. Please be careful out there.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
I’m going to take a trip to Chicago to bring my oldest son home for the remainder of the summer – it’s been too long – so personally I’m looking forward to that!
If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a month or so ago now:
http://www.youtube.com/watch?v=K2Z9I_6ciH0&feature=PlayList&p=6F63374ED7A97658&playnext_from=PL&index=5
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com
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