Moses Kim's Instablog 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 calling the stock market crash of 2008, Moses Kim has been trying to stay a step ahead of the game with thorough economic analysis and an open mind. http://twitter.com/ExpectedReturns Moses Kim http://seekingalpha.com The Case for Depression, Part 4: Dollar Collapse http://seekingalpha.com/instablog/429262-moses-kim/37191-the-case-for-depression-part-4-dollar-collapse?source=feed 37191 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.

The value of a currency is determined by a number of variables. In this article, I will focus on the dynamics of demand, supply, current account deficits, and aggregate government debt.

 
Demand for Dollars
 
The dollar has enjoyed a boost in demand and an exchange rate premium due to its privileged role as the world's reserve currency. As a function of this status, world trade is, for the most part, transacted in dollars. However, recent developments on the periphery have slowly undermined the dollar's dominant position in global trade.
 

World trade in dollars has been declining since the start of the decade. Recent currency swap agreements between countries, mostly involving China, have been used to bypass the dollar in global trade. Arrangements such as these threaten the dollar's role as global reserve currency, removing any support to the dollar's value such an arrangement provided. This decreased demand is clearly reflected by a falling percentage of foreign reserves held in dollars.
 


Further, in a low interest rate environment, the dollar has become the carry trade currency of choice. Investors have long been waiting for a powerful countertrend rally in the dollar, but as the example in the yen shows, prolonged weakness in carry trade currencies can and do occur. Also keep in mind that alternative assets, such as gold, become much more attractive in an environment where yields are essentially 0%.



Massive Supply

It's been well-documented that the Fed has embarked on a campaign of massive monetary stimulus. Unfortunately, it's hard to quantify the extent of money supply growth, since the government has stopped reporting M3 money supply figures.


The real problem brewing under the surface are accumulating bank reserves, which can be thought of as a proxy for risk aversion. Once these reserves are deployed, expect inflation to increase significantly. Sooner or later, banks will have to focus on their core business, which is lending to consumers. Here is a chart of the quickly accumulating bank reserves. Is there any question there will eventually be a flood of dollars hitting the system?

 


Current Account Deficits

Current account deficits are the quantifiable measure of a country's profligacy and overconsumption. Current account deficits are historically a short-term solution to a nation's underproductivity, which must eventually be settled through the balancing of capital and current accounts. As a nation continually funds consumption via debt, its currency naturally becomes less and less valuable as a medium of exchange.
 
Current account deficits as a percent of GDP in the U.S. have exploded to troubling levels, especially since President Nixon removed the last vestiges of our link to gold in 1971. Over the long run, the value of a currency is inversely correlated to the level of current account deficits. Persistent imbalances in current account deficits will weaken a currency without exception. The downward trend over the last decade in the dollar evidences the detrimental effect of long-term current account deficits. Notice how gold, as an alternative to the dollar, has risen in response to rising current account deficits.




U.S. Government Debt and the Treasury Market

Moving forward, the Treasury market will inordinately dictate major moves in the dollar. But before I explain why, I want to briefly overview the relationship between treasury debt, inflation, and the value of the dollar under the Maestro, Alan Greenspan.
 
The "great moderation" in the Greenspan years was facilitated by the recycling of dollars into our capital accounts- such as stocks, treasury debt, and agency debt. This meant that inflation was temporarily stifled as dollars were sterilized in debt instruments, while asset prices received a jolt from the attendant low interest rates. Furthermore, the tremendous demand for U.S. capital products proved to be supportive of the dollar. If there ever were a period of getting "something for nothing" in America, it was during this era of massively inflated asset prices, and moderate consumer price inflation.

Now what happens when our debt grows to a level that forces the government to become a major player in the bond market? Foreign actors will start unloading their treasury debt, especially on the long end of the yield curve, to an increasingly overburdened government. As demand for Treasuries falls, yields will rise, which makes the burdens of servicing debt greater.

Due to collapsing tax receipts and excessive stimulus measures to stave off the effects of this crisis, our budget deficit has exploded in 2009. This phenomenon is what forces our government to "monetize" debt.

 


The monumental and ever-increasing level of debt the government has directly taken on through its program of quantitative easing is troubling. The reason is simple: in an inflationary environment, the Fed will be inhibited from containing inflation by selling bonds in the open market, and thereby, soaking liquidity from the system. Due to the sheer size of our program of monetization, any move to sell treasury instruments will likely be met with panic from foreign investors. This is something to keep in mind moving forward.



Total Debt Including Unfunded Liabilities

And now we come to the elephant in the room: aggregate government debt, including unfunded liabilities. Decades of kicking the debt can down the road in Ponzi scheme entitlement programs, like Social Security, has created a behemoth of debt that is quite literally unpayable. Absent a growth miracle, and a bigger miracle of fiscal austerity by our government, there is no way we can fund these accruing liabilities through our dwindling tax base.

According to the Dallas Fed, current unfunded liabilities are about $100 trillion dollars. While a restructuring of entitlement programs is absolutely necessary, it is not politically viable. If recent government actions are any indication, our government will attempt to mask insolvency through the printing press.
 

 
Conclusion: Implications of a Weaker Dollar
 

A weaker dollar poses tremendous complications for Americans. For one, it makes imports more expensive, which is effectively inflation. Ultimately, this means a standard of living lower than what we have come to expect. If confidence in the dollar totally erodes, then things will really get ugly.
 


While we could possibly stave off an inflationary spiral if we enacted the correct policy right now, the reappointment of "Helicopter" Ben Bernanke all but destroyed any hopes of a stable currency. The inflationary spiral of the late 70's and early 80's was brought to a halt through the politically unpopular actions of Paul Volcker. It's counterintuitive, but central bankers that are denigrated politically are doing their job correctly. Celebrated central bankers like Ben Bernanke are succumbing to political pressure, making decisions based on expedience rather than prudence. The inherent deficiencies in our system virtually guarantee that long-term implications of massive debt will be ignored. Unfortunately, the "long-term" may finally be upon us, and a dollar collapse of shocking proportions is increasingly likely. This Depression is just getting started.

]]> Tue, 24 Nov 2009 22:38:24 -0500 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.

The value of a currency is determined by a number of variables. In this article, I will focus on the dynamics of demand, supply, current account deficits, and aggregate government debt.

 
Demand for Dollars
 
The dollar has enjoyed a boost in demand and an exchange rate premium due to its privileged role as the world's reserve currency. As a function of this status, world trade is, for the most part, transacted in dollars. However, recent developments on the periphery have slowly undermined the dollar's dominant position in global trade.
 

World trade in dollars has been declining since the start of the decade. Recent currency swap agreements between countries, mostly involving China, have been used to bypass the dollar in global trade. Arrangements such as these threaten the dollar's role as global reserve currency, removing any support to the dollar's value such an arrangement provided. This decreased demand is clearly reflected by a falling percentage of foreign reserves held in dollars.
 


Further, in a low interest rate environment, the dollar has become the carry trade currency of choice. Investors have long been waiting for a powerful countertrend rally in the dollar, but as the example in the yen shows, prolonged weakness in carry trade currencies can and do occur. Also keep in mind that alternative assets, such as gold, become much more attractive in an environment where yields are essentially 0%.



Massive Supply

It's been well-documented that the Fed has embarked on a campaign of massive monetary stimulus. Unfortunately, it's hard to quantify the extent of money supply growth, since the government has stopped reporting M3 money supply figures.


The real problem brewing under the surface are accumulating bank reserves, which can be thought of as a proxy for risk aversion. Once these reserves are deployed, expect inflation to increase significantly. Sooner or later, banks will have to focus on their core business, which is lending to consumers. Here is a chart of the quickly accumulating bank reserves. Is there any question there will eventually be a flood of dollars hitting the system?

 


Current Account Deficits

Current account deficits are the quantifiable measure of a country's profligacy and overconsumption. Current account deficits are historically a short-term solution to a nation's underproductivity, which must eventually be settled through the balancing of capital and current accounts. As a nation continually funds consumption via debt, its currency naturally becomes less and less valuable as a medium of exchange.
 
Current account deficits as a percent of GDP in the U.S. have exploded to troubling levels, especially since President Nixon removed the last vestiges of our link to gold in 1971. Over the long run, the value of a currency is inversely correlated to the level of current account deficits. Persistent imbalances in current account deficits will weaken a currency without exception. The downward trend over the last decade in the dollar evidences the detrimental effect of long-term current account deficits. Notice how gold, as an alternative to the dollar, has risen in response to rising current account deficits.




U.S. Government Debt and the Treasury Market

Moving forward, the Treasury market will inordinately dictate major moves in the dollar. But before I explain why, I want to briefly overview the relationship between treasury debt, inflation, and the value of the dollar under the Maestro, Alan Greenspan.
 
The "great moderation" in the Greenspan years was facilitated by the recycling of dollars into our capital accounts- such as stocks, treasury debt, and agency debt. This meant that inflation was temporarily stifled as dollars were sterilized in debt instruments, while asset prices received a jolt from the attendant low interest rates. Furthermore, the tremendous demand for U.S. capital products proved to be supportive of the dollar. If there ever were a period of getting "something for nothing" in America, it was during this era of massively inflated asset prices, and moderate consumer price inflation.

Now what happens when our debt grows to a level that forces the government to become a major player in the bond market? Foreign actors will start unloading their treasury debt, especially on the long end of the yield curve, to an increasingly overburdened government. As demand for Treasuries falls, yields will rise, which makes the burdens of servicing debt greater.

Due to collapsing tax receipts and excessive stimulus measures to stave off the effects of this crisis, our budget deficit has exploded in 2009. This phenomenon is what forces our government to "monetize" debt.

 


The monumental and ever-increasing level of debt the government has directly taken on through its program of quantitative easing is troubling. The reason is simple: in an inflationary environment, the Fed will be inhibited from containing inflation by selling bonds in the open market, and thereby, soaking liquidity from the system. Due to the sheer size of our program of monetization, any move to sell treasury instruments will likely be met with panic from foreign investors. This is something to keep in mind moving forward.



Total Debt Including Unfunded Liabilities

And now we come to the elephant in the room: aggregate government debt, including unfunded liabilities. Decades of kicking the debt can down the road in Ponzi scheme entitlement programs, like Social Security, has created a behemoth of debt that is quite literally unpayable. Absent a growth miracle, and a bigger miracle of fiscal austerity by our government, there is no way we can fund these accruing liabilities through our dwindling tax base.

According to the Dallas Fed, current unfunded liabilities are about $100 trillion dollars. While a restructuring of entitlement programs is absolutely necessary, it is not politically viable. If recent government actions are any indication, our government will attempt to mask insolvency through the printing press.
 

 
Conclusion: Implications of a Weaker Dollar
 

A weaker dollar poses tremendous complications for Americans. For one, it makes imports more expensive, which is effectively inflation. Ultimately, this means a standard of living lower than what we have come to expect. If confidence in the dollar totally erodes, then things will really get ugly.
 


While we could possibly stave off an inflationary spiral if we enacted the correct policy right now, the reappointment of "Helicopter" Ben Bernanke all but destroyed any hopes of a stable currency. The inflationary spiral of the late 70's and early 80's was brought to a halt through the politically unpopular actions of Paul Volcker. It's counterintuitive, but central bankers that are denigrated politically are doing their job correctly. Celebrated central bankers like Ben Bernanke are succumbing to political pressure, making decisions based on expedience rather than prudence. The inherent deficiencies in our system virtually guarantee that long-term implications of massive debt will be ignored. Unfortunately, the "long-term" may finally be upon us, and a dollar collapse of shocking proportions is increasingly likely. This Depression is just getting started.

]]> gld u.s. dollar gold Get Ready for a Lower Dow to Gold Ratio http://seekingalpha.com/instablog/429262-moses-kim/25750-get-ready-for-a-lower-dow-to-gold-ratio?source=feed 25750 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. 
]]> Tue, 01 Sep 2009 22:38:05 -0400 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. 
]]> gld Death of the Consumer http://seekingalpha.com/instablog/429262-moses-kim/24186-death-of-the-consumer?source=feed 24186 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.
]]> Mon, 24 Aug 2009 00:33:20 -0400 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.
]]> The Public Will Be Fooled Again http://seekingalpha.com/instablog/429262-moses-kim/22493-the-public-will-be-fooled-again?source=feed 22493 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.

]]> Thu, 13 Aug 2009 01:01:01 -0400 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.

]]> S&P 1000: Now What? http://seekingalpha.com/instablog/429262-moses-kim/20697-s-p-1000-now-what?source=feed 20697 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.

]]> Tue, 04 Aug 2009 02:26:22 -0400 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.

]]> A Closer Look at Unemployment Claims http://seekingalpha.com/instablog/429262-moses-kim/20043-a-closer-look-at-unemployment-claims?source=feed 20043 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.
In other words, continuing claims can go down while the unemployment picture actually deteriorates.  Government reports have increasingly distorted the true state of the economy. Nonetheless, even the data the government provides paint a scary picture. Recently, the number of people out of work for over 26 weeks has exploded.
 

Continuing claims, while down in the latest week, have also been trending up lately. Notice how initial and continuing claims were closely correlated for the past couple of years. Only recently have continuing claims diverged with initial claims. This indicates that the unemployed are having a tough time finding jobs. 

 
The following chart showing the average number of weeks unemployed corroborates this.
 

As you can see, the real unemployment situation is substantially worse than advertised. Without sustained growth in jobs, any upturns in the economy will be fleeting. The cumulative effect of protracted unemployment on our economy will be considerable. Non-stop cheerleading from the media aside, the data are still showing that the recession is far from over.

]]> Thu, 30 Jul 2009 20:13:25 -0400 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.
In other words, continuing claims can go down while the unemployment picture actually deteriorates.  Government reports have increasingly distorted the true state of the economy. Nonetheless, even the data the government provides paint a scary picture. Recently, the number of people out of work for over 26 weeks has exploded.
 

Continuing claims, while down in the latest week, have also been trending up lately. Notice how initial and continuing claims were closely correlated for the past couple of years. Only recently have continuing claims diverged with initial claims. This indicates that the unemployed are having a tough time finding jobs. 

 
The following chart showing the average number of weeks unemployed corroborates this.
 

As you can see, the real unemployment situation is substantially worse than advertised. Without sustained growth in jobs, any upturns in the economy will be fleeting. The cumulative effect of protracted unemployment on our economy will be considerable. Non-stop cheerleading from the media aside, the data are still showing that the recession is far from over.

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