Double Dip Foregone Conclusion in 2011
Jan 25, 2011 10:56 PM
Energy Commentary from Karl Miller
Investorideas.com energy newswire; Karl Miller Editorial
Economic data is increasingly confirming that the U.S. real estate crisis and the immanent failure of hundreds of regional and community banks across the Country is reaching a critical level. Consensus polls among numerous financial Analysts indicates they believe no level of continued quantitative easing or other measures by the Federal Reserve or U.S. Treasury can solve the pending implosion of the real estate market and the continued unemployment levels exceeding ten percent of the U.S. population.
With the U.S. equity markets back near 2007 levels and poised to end the year on new highs, interest rates still at historical low ranges, and major financial institutions touting up to twenty percent growth potential in 2011, we reached out to institutional investor and energy executive Karl W. Miller who has consistently prodded the Obama Administration for several years to take firmer action on the economy to ward off another major financial crisis.
According to a statement emailed from Mr. Miller, "The U.S. Economy is fundamentally worse at 2010 fiscal year end than it was in 2007. We as a nation have not addressed the underlying fundamental problems required to sustain a meaningful economic recovery. We are bracing for the worst, which is yet to come and believe that a double dip recession is a foregone conclusion and already upon us. Energy prices are currently at non-sustainable levels and are not reflective of fundamental physical market conditions. The true chronic unemployment rate is over ten percent and becoming evergreen with no near term hope to create a stable employment environment."
Mr. Miller's statement further added, "the commercial and residential real estate market has reached a critical level and equivalent to a ticking time bomb. The Federal Reserve and commercial banks has been playing hide the football for almost three years now, with no tangible improvement, with overall asset values continuing to decline. We believe the U.S. equity markets are now massively over valued across the board and positioned for a substantial correction based upon the fundamental facts that the average American has lost their home to foreclosure, is facing foreclosure, lost significant equity value embedded in their home, is unemployed or has suffered a substantial reduction in income all of which have had massive financial impact on the overall economy. The U.S. financial system has been temporarily stabilized by the Federal Reserve and U.S. Treasury, but the underlying core problems have worsened and have percolated down to almost every state and local government entity during the past two years, many of which are now facing insolvency and severe financial deficits, driving up their cost of capital and making matters worse."
According to Mr. Miller, "the financial hole in the U.S. Economy is bigger than anything we have ever seen and the Federal Reserve continuance in printing money and attempting to warehouse the real estate securities and other defunct collateral to float the economy has become completely ineffective. This is clearly demonstrated by capital continuing to migrate to the short term U.S. Treasury market going into year end. Everyone is in the same boat, they can't afford to open 2011 with their capital exposed to another massive market correction, which is imminent."
Looking outside the U.S, Europe is laden with a debt crisis that continues to worsen, deficits are rising among the Euro member nations, and China is teetering on the brink having to raise interest rates and continuing to tamper with its currency to hold the economy together.
Money managers seem to have concluded they have nowhere safe to place their capital in size outside of U.S. Treasuries and high grade corporate bonds. Some are attempting to make a case for a rebound in the U.S. economy along with the major financial institutions with not much success. Mr. Miller has previously referred to this a "fabricating a market". Indeed, that is a hard sale given the economic circumstances and fact that one of the unintended consequences of the Federal Reserve monetary policy has been to addict the U.S. and global economy on artificially cheap money which is not sustainable.
Ever basis point matters now more than ever, and higher longer term interest rates have a massive negative impact on the U.S. and other global economies. We are closing in on 4 percent in the 10-year treasury and interest rates are going higher. State and municipal bonds are no longer a secondary default safe haven to U.S. treasury securities.
Bottom line, Equities are in for a tremendous beating in the overleveraged U.S. and Europe in 2011 and money managers do not want to come out of the gate net long and try to play catch up all year long.
If we follow Mr. Miller's terms, the institutional investors fabricated a rally in 2010 and will fabricate a market sell-off in early 2011, whether they want to or not, it too seems to be a foregone conclusion.