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I am a molecular biologist that has worked in the biotechnology and pharmaceutical industry for over 10 years. While considering buying a home in the year 2004, I started to get the feeling that something was very wrong. Since then I have studied economics and all things financial to educate... More
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Economic Disconnect
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  • Gold and Silver with a Note of Caution
    Gold and Silver with a Note of Caution
    By now regular readers know that I am invested in Gold and Silver. For anyone new, I am invested in Gold and Silver via physical holdings. That brings whatever bias it does and my long term view of the metals is such that I think much higher prices are in the future. On this blog I have always written that an average portfolio should hold 5% in metals with 10% being a bit more aggressive. I hold about 25% of mine in silver and gold bullion (a bit more silver than gold) which is higher than my normal 20% because I found a few deals over the past few months I liked. I have this up front so you know where I am coming from.

    As a metal head I love headlines on bullish blogs like these:
    via Gold Versus Paper:
    Gold Bull, Bitches!
    The line "Gold, Bitches" cracks me up every time.

    via Zero Hedge (where I think the above line was born):
    First Gold, Now Europe Running Out Of Silver

    Of course some headlines are not as happy; here is an absurd one from Clusterstock:
    Every Doctor, Dentist, And School Nurse Bought Gold This Week
    Now I know for a fact that my doctor and my dentist have no gold or silver. They think I am a nut for buying it so this one is over the top. I would also doubt school nurses bought much either. Only one person I know in real life (ie, non blog connected) has any gold or silver. I cannot even get anyone to buy a little though I hammer them all the time. Some do trade in and out of some ETF's, but that's about it. So my own experience is that not many people own gold and/or silver. Results may vary in your circles.

    After a strong couple of weeks I feel that it would only be fair to try and offer some thoughts I have regarding the metals that are more cautious in nature. While nothing here is investment advice (nobody in their right mind would listen to me!) I do harp on the metals a bit so some things have me a bit more cautious short term and I thought I would share.

    In no particular order:
    -Gold right now is being termed a "safe haven". While that may well turn out to be more true than you will believe, in the short term metals are about as safe as shaving with a samurai katana sword. It will work if all goes perfect but.....

    Volatility can run heavy in metals (especially the miners) so a smooth ride is not really a fair expectation. Silver tends to move much more than gold up and down as well.

    -Near term (3-6 months) I think gold $1500 and silver $25 are realistic targets. I also think that at some point gold (to a lesser degree silver) may become a target for government caps or restrictions on price movements. Of course this will only make physical metals go wild to the upside, but the paper proxies like GLD and SLV may fall on really hard times. There could be two metal markets; the paper and the real. It's kind of like the real housing market with no government help and the one we have now. Still, the paper proxies do have some tether to real bullion and this thought does bother me quite a bit. Of course if it comes to this I think it will resolve in gold's favor.

    -Gold is money, real money. It has been for as long as gold was mined. Gold is the anti currency. Gold can be seen at times as all of the following:
    inflation hedge
    deflation protection
    anti-dollar play
    anti-euro play
    pro-euro play
    momentum play
    waste of time
    Volcano insurance
    Contrary stock market play

    And many more. Obviously gold cannot be all these things all the time. There may well be people buying gold for reasons that make little sense and this could change.

    Of course I am still of the mind that over the next year we will see ever more currency issues and debt problems. Gold is "hard money" and it should be clear by now that many debts of all kinds are extremely "soft money" which depend on so much else to be made good. In the face of the wave of sovereign country issues, US state issues, pension issues, and back issues of Sports Illustrated I hold that more paper will be made to keep the system "liquid". The balance will be the metals. Stocks may well go up as well, maybe even more so than the metals, but there is only one true "hard asset" at the base of the value pyramid.

    Have a good night.

    Disclosure: GLD, SLV, PHYS
    Tags: GOLD
    May 13 10:26 PM | Link | Comment!
  • Where Did All This Shadow Inventory Come From?
    Thursday at last! I get Friday off from the boxing training and thus there will be Friday night Entertainment. Get your requests in, we had quite the mixed bag last week and it was fun.

    How You View Things
    There has been a flurry of talk about a possible Value Added Tax coming our way. I am going to probably blow some minds right now and maybe generate some nasty comments, but I am actually not against the VAT overall. Now do not get me wrong, I am against taxes in all forms at all times (and I am well versed with all the negative aspects of this tax), but at least this one is going to target everyone that buys stuff, including the 50% of the country that pays zero income taxes. At least I can work with that. Add to this businesses will have to pay at all steps of the process and think how those amazing profits during this V-shaped recovery will be able to handle just that. I say go long tax accountants if it comes true.

    That said, how you view things fits here because in it's simplest form the VAT is a subtle, tricky tax that goes unseen for the most part. That is why governments love them. Consider the following:

    The Government spends too much and wastes way too much. We cannot expect them to change and we cannot vote them out because the next set of people do the same thing

    How you view things puts you into one of two camps (I am simplifying, but in the end this is all there is to it):
    A - We need to support various programs and if that comes with the price of the waste and corruption we must lie, beg, steal, and tax to get the money the government needs

    B - The only way to get change is to starve the fools into default and we will start over

    Where are you?

    Where Did All this Shadow Inventory Come From?
    Today brought word that retails sales were making a killing and blowing away expectations (who does these estimates anyway?). While rates of change make zero impression upon me (all that matters is what the final numbers are, not the rates of change) all the spending seems at odds with high unemployment and falling wages. From Yahoo Finance we get this dandy of a headline:
    Shoppers hand retailers a basket of Easter cash
    Poetic, just, and perfect for our times. Even better material in the story:
    "There was a lot of talk about the frugality of the American consumer and that the recession taught people to save more," said Sherif Mityas, a partner in the retail practice at management consultant A.T. Kearney. "But U.S. consumers have short-term memories."
    Never a more apt description of what ails us.

    So where is all this cash, plastic, or whatever coming from? I really have no idea. I would guess unemployment checks that run for all time help, but that does not seem quite right. Home equity extraction? Ha, kidding. Maybe an alternative form of mortgage money extraction? Like, not paying your mortgage:
    Are Strategic Defaults Fueling Consumer Spending?
    It wasn’t until this past week when a colleague mentioned the term strategic default did I realize what was likely occurring. Many consumers are spending their mortgage payments! It’s beginning to make sense in the most disturbing way. As homeowners face staggering payments on houses that have negative equity, a large number are simply deciding not to pay their mortgage bill, resigned to the fact that eventually they will lose their house.

    And what happens with the money that would have been sent to the lenders? Well, an increasing mentality of “eat drink and be merry – for tomorrow we’re evicted” has set in.
    There is more in the article.

    I have to say I cannot believe that enough people are not paying their monthly mortgage to goose auto/electronics/other retail sales very much. I just do not think the numbers add up. I could be wrong.

    And it appears that I might be.

    If this story has merit, suddenly the numbers do start to add up:
    Bank of America to Increase Foreclosure Rate by 600% in 2010
    You did read the title right. How's that for a rate of change you rate of change fetish freeks out there!

    From the story:
    I attended a local Building Industry Association conference on Friday 26 March 2010. The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.
    After his surprising statement, two questioners from the audience asked questions to verify the numbers.

    Bank of America is projecting a 600% increase in its already large number of monthly foreclosures.

    This isn't unsubstantiated rumor; this comes straight from one of the most powerful men in Bank of America's OREO department (yes, that really is what they call it). It appears they have too many properties already.
    Wow, just wow.

    Of course there are many that have argued the "shadow inventory" story was way overblown. Try that now.

    There are many saying housing has bottomed. How does that look?

    I have heard time and again that banks are on the mend and their books are not as bad as I would portray them. OK.

    It is obvious that banks have been sitting (squatting?) on homes in foreclosure, without the foreclosure part. The tales of 2 years payment free may well be very true. Could this possibly help things like sales? I could be persuaded at this point!

    Along these lines, an example. If you have not been reading the comments section, you are missing plenty. Loyal reader Gawains is an experienced real estate professional that knows the ins and outs of the business. From the last comment thread:
    Today was repo day. There were probably, oh I don't know, 500 foreclosure sales on the courthouse steps. So we should be getting a lot of new assignments over the next few days. What fun that will be.

    Want to know what I did this afternoon? Well, we got a request for a full interior price opinion and repair addendum on a repossessed home listed with another company. The company is thinking of transferring it to us because it hasn't sold. Current list price, $175,000.

    Now, this house happens to be in one the nicer, established neighborhoods in north McAllen. Great location, good schools, easy access to main roads and shopping. 5 bedrooms, 4 baths, 3500+ sf, wood fence, in-ground pool. So I went over there to check it out.

    Oh, my God. It's been completely stripped! All the lights, all the interior doors are gone. So are the appliances, the a/c unit and the pool equipment. The granite counters in the kitchen are ripped out, and all the cabinet doors are gone. Same for the built-ins and bathroom vanities. But this is what really gets me. They took all the drawers too.

    Drawers? Why would you steal drawers? I mean, it's not like you can just slide them into another cabinet. You'd have to build new cabinets specifically to fit the drawers! It doesn't make any sense.

    If there's one thing I hate more than a thief, it's a stupid thief.

    So, I'm looking at about $35,000 in repairs at least. A typical homebuyer cannot purchase this house. It's not fit to live in. Only a professional investor with a lot of capital can buy something like this.

    Calling all flippers, calling all flippers. Oh, sorry, I was having a flashback.
    I cannot believe $35k makes that house whole again, but maybe he gets deals.

    This is what is going on folks. You will not see it in CNBC. You will never, ever see Ben Bernanke have to address something like this at one of his dog and pony shows at the Senate. Want a glimpse at how bad things were at the top? Gawains offers:
    I see this all the time. Here's how the scam works.

    No credit? No problem! You too can buy a house. No down payment? No problem! We can give you a 0% down, interest-only ARM, and roll over the closing costs. It will cost you practically nothing.

    Oh, and you'll need furniture. No money? No problem! You can completely furnish your new house with no down payment and no interest for a year.

    So what these people do is fill out some paperwork. They can even lie bald faced, since no one really cares. They move into the house and furnish it. They do not make a single payment. What does it cost them? Utilities and food for a few months.
    Then, when they get the first default notice, they just rent a moving truck, load up the furniture, strip the house, and disappear.

    Great way to renovate and refurnish a house in Mexico, where you cannot be prosecuted since the crime occurred in America.

    You guys have no idea what I deal with. And frankly, to tell you the God's honest truth, I'm more than disgusted.

    Two years ago I got this assignment on a ranch house out in the middle of nowhere. It had been completely gutted of course, but here's the thing. They left the back door open and the goats got in and shit all over the house!
    And I have to walk through this mess, while taking pictures and making notes.

    Then I get this phone call from a contractor who wants to get into the business of cleaning repossessed homes. Oh, really? You want to clean a home? I got a home for you to clean.

    After he had shovelled all the goat shit out of the house, it was a four-foot mound in the front yard that had to be hauled off.
    Needless to say, he never called me for another cleaning again.
    Talk about closing the barn door after the goats have left!

    Going back to my intro question, where are you now?

    Have a good night.

    Disclosure: NONE
    Apr 08 10:27 PM | Link | 1 Comment
  • Market Data Means What It Means Unless It Doesn't
    All lies and jests
    Still a man hears what he wants to hear
    And disregards the rest
    -Simon an Garfunkel "The Boxer"
    As a scientist one of the most frustrating things about economics and market trading has to be the total lack of structure and reason behind moves in the market. I mean there is no evaluation or set of criteria. A narrative is set and then whatever information comes out is ignored or explained away if it does not fit the current consensus story. This happens on the way up and down. Puzzling.

    Tonight I wanted to look at two examples of this phenomena in action.

    November Durable Goods Report
    Karl Denninger was all over a major revision to the November Durable Goods report:
    Durable Goods "Mistake or FRAUD?
    On January 5th the durables report for November was 'released'.

    It showed a 0.2% increase. I didn't write on it at the time, as it didn't appear to be particularly consequential. The report, of course, came in the middle of the first-week January market rally.

    But now, in the dark of night, the number has been revised - to a decrease of 0.7%. The reason is a claimed "statistical error."
    There is more in the article.

    I sort of remembered this number being trotted out as "proof" the economy was doing the whole "V" shaped recovery thing. A sample of new stories from that data release:
    Durable orders up, jobless claims at 15-month low
    WASHINGTON (Reuters) - New orders for long-lasting U.S. manufactured goods, excluding transportation items, surged in November and new applications for jobless aid hit the lowest level in 15 months last week, pointing to a firmly entrenched economic recovery.

    Capital equipment orders strengthen in November
    Orders for durable goods rose a seasonally adjusted 0.2% in November, held back by a massive 32.6% drop in aircraft bookings. Excluding transportation goods, orders rose 2%.
    "The nation's manufacturers are returning to health," wrote Jay Bryson, global economist for Wells Fargo Securities.

    So here we have a 0.2% positive print being lauded as wonderful, but almost no major media coverage of the massive downward revision can be found today. I wonder why?

    I would also note that GDP played the same game with a +3.6% print initial (Rocket Ship Recovery Baby!) and then was revised all the way down to +2.2% (Backward looking indicator anyway). What makes me uneasy is this kind of massive revision work is starting to happen more frequently. Also worrying is the market's total lack of interest in the data.

    Home Sales and Seasonality
    Existing home sales for December came out today and they were much worse than consensus calls. A -16.7% print was worse than the -10% expected. Of course the downside surprise was shrugged off as unimportant. How this was done makes me laugh though.

    Anyone that follows home sales knows that there is a monster seasonal factor associated with it. Not many people buy homes in the dead of winter and the Summer months are prime time due to children being out of school and other factors. Ok, no problem there.

    Today the fact that December is a slow month for home sales was repeatedly harped on. Nothing wrong there either. The problem is that EVERY May-June-July home sale bump up is celebrated as proof positive housing is turning around when the EXACT same seasonality issue applies as well! You see, just tell a story and stick to it. It works for criminals!

    Of course data being massaged is troubling but at least we the public get to see some of it. If given the choice maybe it could fall under the umbrella of "National Security" like the AIG bailout.

    See this Zero Hedge article and Barry Ritholtz offers his take.

    If this is not all the proof you need for immediate removal of Tim Geithner and the voting down of Ben Bernanke (maybe there is still time?) then you may have a serious problem.

    Have a good night.
    Jan 25 10:03 PM | Link | 1 Comment
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