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Moses Kim is a graduate of Columbia University with a B.A. in History. He is a diligent student of the markets focused on long-term economic trends. Moses Kim believes the markets are inefficient, and that these inefficiencies can be exploited to attain profitable returns. After successfully... More
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  • The Case for Depression, Part 4: Dollar Collapse
    The history of the dollar is one marked by a dominance unrivaled in history. Following the Bretton Woods Agreement of 1944, which established the dollar as the global reserve currency, Americans have enjoyed an era of unprecedented wealth and prominence.

    The impressive growth in America could not have occurred without a stable dollar. Stable currencies are the unheralded but undeniable foundation of any vibrant economy. Stable currencies allow for longer term transactions and help instill confidence in the public, which is critical, since the value of any fiat currency is ultimately a function of public confidence.

    That being said, there are several factors that lead me to believe the dollar is headed for a precipitous decline, and that this decline will exacerbate what I perceive currently as a Depression in our country.
    More »
    Tags: GLD, u.s. dollar, gold
    Nov 24 10:38 pm | Link | Comment!
  • Get Ready for a Lower Dow to Gold Ratio
    Assets are continually revalued against one another in an ongoing process to determine proper valuations. Investor preferences move in big waves, from paper assets to hard assets. The decades of the 80's and 90's were clearly periods when paper assets such as stocks, bonds, and derivatives performed exceptionally well. That era of paper wealth is gone for now, as evidenced by the mass failure of financial institutions last fall, and we have entered into a period when hard assets are in vogue.
     
    The Dow to Gold ratio is a useful tool to track this process of asset reallocation, since gold is the ultimate hard asset. Usually, when hard assets enter into a bull market, the Dow to Gold ratio goes to under 5. For example, the ratio hit 1 in 1896, 2 in 1932, 3 in 1974, and 1 again in 1980. The current bull market in gold has brought the ratio from a high of 44 in 1999, to its current reading of 10.

    In addition, there seems to be a tendency for the ratio to "overshoot" on the downside based on how overextended the ratio becomes. For example, an 18 Dow:Gold ratio eventually fell to 2 in 1932, and a 27 Dow:Gold ratio eventually fell to 1 in 1980. Considering that the Dow:Gold ratio was at 44 prior to this move, it looks like we still have a long way to go on the downside. 
     
     
    The decade-long move in gold may seem overextended, but there are still several bullish factors working in gold's favor. First, gold has been able to trade above 900 since the supposed recovery in the economy and massive rally in stocks beginning in March. A similar consolidation pattern in gold in 2006 preceded a 50% surge in prices. Anyone familiar with fractals is eyeing this pattern and its potential completion. Second, gold has been able to rise along with the dollar index, which is usually a bullish signal. Third, we are moving into a historically bullish season for gold.
     
    With stocks overpriced at over 100 times reported earnings, a decent-sized pullback is in order. Therefore, I expect the Dow to Gold ratio to decrease in the coming months and years. Nonetheless, keep an eye on the Dow to Gold ratio as an indicator of investor sentiment and the relative valuation of asset classes. 
    Tags: GLD
    Sep 01 10:38 pm | Link | Comment!
  • Death of the Consumer
    Moving forward, the most critical indicator of the viability of our economy will be consumer spending. Simply put, without a buoyant consumer, there will be no recovery. Due no doubt to the negative characteristics of consumer data. the death of the consumer is receiving scant coverage.
     
    America is a nation whose growth in recent decades has been predicated on a model of consumption. From a nation that used to save to invest, we now borrow to consume. As buying power in Treasuries from foreign entities wanes, we will be forced to fund our consumption through currently non-existent savings. An increased savings rate will put pressure on consumption, which will in turn pressure GDP. In the following chart, notice how consumption as a percent of GDP remains above historical norms. Consumption would have to contract another $800 Billion for personal consumption expenditures as a percent of GDP to revert to historical levels.
     
    It is important to realize that what we are experiencing now isn't a classic inventory-led downturn, but a structural debt deflation. Since Americans have been wont to save, consumer credit has played an outsized role in our economic growth. As such, it is critical to be keen on developments in the availability of credit, which can be measured by consumer credit outstanding.
     
    Consumer credit outstanding, a measure of short and intermediate-term credit, is falling precipitously. Banks are, quite justifiably, not willing to service loans to deteriorating credit risks. Until the unemployment picture improves, banks are unlikely to rapidly increase the extension of credit.

    Notice that consumer credit outstanding has rebounded off of every single downturn besides the recession of 2001. Before we can realistically call for an end to the recession, we need to see a halt in the decline of consumer credit outstanding, and eventually a rebound. We are experiencing nothing of the sort yet.

    Retail Sales
     
    Consumption in the past decade, as reflected by retail sales, has enjoyed an impressive and inexorable rise. Year over year E- commerce sales growth remained robust even in the midst of the recession of 2001.; in fact, the rate of growth accelerated. As you can see from the following chart, E-commerce retail sales are declining dramatically.

    The consumer is conspicuously missing in this supposed "green shoot" environment. At the very least, the V-shaped recovery thesis is not corroborated by data on the consumer front. Hopes of recovery must therefore be regarded as mere presumption until the outlook for the consumer improves.
    Aug 24 12:33 am | Link | Comment!
  • The Public Will Be Fooled Again
     If there's one thing you can bank on, it's that the public will be controlled by emotional whims rather than rational judgment. I do my best to lay out the facts, and whenever possible, support my claims with hard data. When the characteristics of the the data change, my outlook will as well. Until then, I will report things as they are, not as I want them to be.

    That being said, I see foreboding storm clouds in the horizon not unlike the storm clouds I perceived in 2007. I will lay out briefly why I feel the economic will deteriorate further.

    P/E's in the Stratosphere
    In a sign of the crazy times we live in, P/E ratios at historically high levels are shrugged off by investors. Speculation is rife, and like in all bubbles, ridiculous P/E ratios are justified by unrealistic growth scenarios that will never materialize. Trailing 12 month P/E ratios are at 67, which implies fair value in the S&P is closer to 250 than 1000. The truth hurts, but 401k's are about to turn into 101k's.


    GDP Minus Government Spending Collapsing
    The brouhaha resulting from improving GDP figures masks the inconvenient fact that without a 10% increase government spending, GDP figures would have been disastrous. Although Big Government cheerleaders led by Paul Krugman will celebrate this development, the fact remains that you can't get something for nothing. Debt-financed spending is not without cost; the costs are merely transferred to future generations. While the model of instant gratification has served us well, we are rapidly approaching the breaking point. Below is a chart of GDP minus government spending. Note the growing role of government spending in GDP. 
     

    Unemployment Rising
    The way the media report unemployment, most people probably think we have achieved an upturn in unemployment. However, only the rate of decline in job losses is improving. We are still shedding jobs at an unprecedented rate, which makes it hard for me to see how we will get out of this downturn after just 20 months. The following charts of initial claims, continuing claims, and average weeks unemployed help bear out the extent of the unemployment crisis.



    Consumer Spending Weak
    No other indicator will give you a better idea of where we are headed than consumer spending, since consumption accounts for 70% of our economy. Even with stimulus checks from the government, consumers are retrenching at a rapid clip. As long as the unemployment situation isn't addressed, consumer spending will continue to remain weak. Note that stimulus in May and June skewed numbers to the upside.

    Any objective economic analysis will show that "green shoots" are just a mirage. We are approaching a major inflection point in the economy that will catch most people by surprise. Investors should exercise caution in the months and years ahead as sell-offs are likely to be brutal. Don't be swayed by media hype; stay focused on the facts.
    Aug 13 01:01 am | Link | Comment!
  • S&P 1000: Now What?
    With the S&P closing above 1000, more and more people are convinced the economy has bottomed and a new bull market is at hand. Apparently, the reflationary efforts of the Fed have been effective in supporting stock prices and keeping consumer prices steady. The mainstream media says good times are here to stay, and that monetizing debt to fund $2 trillion dollars in deficits will not have long-term consequences.
     
    The truth is, monetizing debt has historically been inflationary, which is why I would perceive the S&P at 1500, 2000, or even 10000 as a sign of trouble. While on the surface the current rally looks impressive, the S&P should be viewed in real rather than nominal terms. The S&P is denominated in dollars, so the dollar's relative value against other currencies is of critical importance. Since peaking in March, the dollar has fallen sharply against the Euro. A look at the S&P denominated in Euros reveals a much less buoyant rally:

    There's a widely held belief that the stock market is a leading indicator of economic conditions. While this relationship typically holds true, it was proven dead wrong during the Great Depression. After the crash of 1929, the Dow rallied nearly 50% to much celebration. At the time, some of the most respected economic minds were calling for the end of the downturn. We now know in hindsight that the crisis was only beginning. A comparison of the 1930 bounce, and subsequent decline, with the current rally suggests the worst is perhaps not over for stocks and the economy. In other words, the current rally is well in-line with a structural bear market. 

    The way human psychology works, confidence can turn on a dime and feed on itself. When the inevitable shift in sentiment occurs, I would not want to be long this market unless I was in gold, silver, or resource-related stocks. I expect sell-offs to be brutal, and strongly believe economic events in the next 6-12 months will destroy any hopes of recovery.
    Aug 04 02:26 am | Link | Comment!
  • A Closer Look at Unemployment Claims
    Behind the excitement over stabilizing initial and continuing claims data lies the truth: people still aren't finding jobs. Continuing claims were down in the last week, which was apparently cause for celebration. However, continuing claims only include those who have yet to exhaust their 26 weeks of benefits. Unfortunately, there is a quickly increasing portion of the population that has exhausted their benefits. From CNN Money:
    In the next few weeks, the victims of the mass layoffs that happened six months ago -- when the pace of layoffs was at its zenith -- will start running out of their basic benefits. A total of 4.4 million people are expected to face this fate -- or 65% of the entire filing population.

    And while they may have up to another year of unemployment insurance benefits -- thanks to the confusing patchwork of extensions that were enacted last summer -- they will be soon be unaccounted for in government unemployment reports.
    More »
    Jul 30 08:13 pm | Link | Comment!
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