The State of the American Economy.

Given everything the state of the American Economy is getting better and better. But you object that unemployment is high and the investment climate is horrid! The US government is horrid! We don't have a leader and Congress is ......! All that is true. But the actual economy is slowing mending. The most recent economic data support the idea the economy is actually growing.

A second key element is the state of the banks:

Small Banks Delinquent Loans

Large Banks Delinquent Loans.


So the banks are slowing dealing with the problem loans. They are slowing working through the junk and cleaning up their balance sheets. Contrast this with both Europe and China. In both of these have not even started cleaning up their banks. The European banks still don't even know which loans are junk and which are good. The Chinese banks are going to have property loans that will be delinquent. The result is both Europe and China are far behind the US. While the Chinese economy is still growing, there are signs it will slow and have the first recession in a long time. The net impact of all of these factors is the US stock market will at some time be a great place to invest.

Bur what about Europe? Isn't there is a significant risk that Europe implodes (explodes?). The banking system in Europe is slowing grinding to a halt and this will cause a severe recession for Europe. What's worse the banking system and the governments of Europe are intertwined in a very complex and dangerous way. If a government (think Greece) goes bankrupt, it will force ALL the banks in that country to go bankrupt. The banks have significant government debt on their balance sheets and cannot survive if the government goes down. But if all the banks in the country are bankrupt, then they don't make loans. When banks don't make loans, the average business cannot get loans and lays people off. This decreases taxes and forces the government to cut back. But if the government becomes more bankrupt (losses increase), then the banking sector is hit a second time. They make even less loans and cause the economy to contract further. OUCH!
A long and very sad depression can result.

One piece of good news is that the Ted Spread is falling. This is an important measure of the banking system.

This graph shows the slow drop in the risk premium for lending to banks. The system is slowing getting better.
But without a question, the raw economics of Europe is uncertain. The fact that Governments HAVE to pull back and spend less means a drag on the economy. The importance of the Government sector in Europe is huge and if it truly cuts expenditures, the economy will falter. So European banks are not lending and the Governments are cutting back. The situation is dire.

So we have two very contradictory trends: One: the US economy is ready for a dramatic rise. Two: Europe may fall into a depression. What will happen? The direction is likely to come from a 'tipping point'. In other words, some event will happen that in normal times would be minor, but it will force either a depression in Europe or a strong rebound in the US Economy.

One event that would cause dramatic changes is Iran. The Israelis are clearly unhappy with the nuclear developments in Iran. Will they act? Will a military strike occur? This would be a tipping point.

Are there any other options? The muddle through option is always possible. In other words, nothing much happens we go up a little and then down a little. We don't really go anywhere. But with the dramatic and powerful forces at work, I suspect a 'tipping point' event is far more likely.

Main Street or Wall Street?

The basic "Main Street" economy is starting to recover. Retail sales are strong; Apartment rentals are strong; Purchasing Manager's index is strong. The overall impact is the base economy in the US is slowly recovering. But.....

"Wall Street" and the banking sector is weak. Europe and the large banks have had a difficult time recovering from the recession. One of the key questions is which is going to win out? Will the banking sector/Europe drag Main street down to a 2nd recession? Or will the strength of Main Street drag the banking sector out of recession? Which will win?

Long Bridge Park

A new park is open in the Washington DC area!
Check it out:
Long Bridge Park

First draft of Powerpoint

For 10 days, I returned to a remote corner of the Dominican Republic and Haiti.
This trip was with the Foundation for Peace, an NGO that a former member of my church has setup. Our group was very diverse and included people from 4 countries (US, Kenya, DR and Haiti). We included local people for both their translation skills and their physical efforts to help our projects. Below is a power point summary of the trip:
http://www.iow.com/dr-hati2011.ppt

Why is gold doing so well?

If you look at the following chart, we see gold has outperformed the S&P500 for the past two years.
If you look at longer time frames, gold continues to outperform all other asset classes.

Why?



1) The simple fact is a credit economy is dependent on inflation. The Federal Reserve does not have a zero inflation target, but a 2% inflation target. That means each year, without considering any other factor, gold should rise 2%. This base increase in the price of gold year after year is important.

2) WIth the large amounts of credit and the complex financial transactions, the financial system has wrung out every efficiency from the system. The amount of gains from trade in financial transactions has slowed and may be negative as some trades that don't work are reversed.

3) A financial meltdown is always more severe and longer lasting than normal recessions. When you add a system that depends on complex financial transactions to survive, the world has become a scarier place. The problems are greater than the systems ability to solve them. The net result is a rush to safety. You just cannot devalue all the currencies at the same time. The race to the bottom of the currency world will propel gold to new highs.

4) You have a huge wealth transfer from the West to the East. The problem is the wealth has all be in US Treasures. How to pay off the Chinese for all the goods we bought? Inflate the dollar and pay them back with lower priced dollars. It is a tried and true method of paying your debts when you control the printing presses.

5) Because of the new wealth of the East, their central banks are uninvested in gold. They don't have the reserves of gold that were bought by Europe and the US in the 1800 and early 1900s. As a result, China, Russia, and a host of countries are increasing their central banks reserves of gold.

Future of gold? Until the US has a balanced budget, I cannot see the price of gold falling for a significant time. The best, easiest, and only possible political solution to the massive government debt is inflation. Until the debt is brought under control and the Fed is not FORCED to print money, gold will be one of the best investments for US citizens.

Greece and US Markets

Greece is in trouble. That statement is agreed on by almost everyone. What's more the trouble is not liquidity, but solvency. In other words, not only can Greece not borrow money in the normal markets, but the physical demand of the interest payments is greater than the national ability to pay the debts. The country is broke.

What are the possible solutions to the problem?
1) Give Greece a grant so they can pay the debts and start a normal life. While this solution would be best for the financial markets, Germany and France taxpayers will object. The idea that Europe can act decisively and quickly is most unlikely. Thus, this option, the best for financial markets, the Greek economy and Europe as a whole is off the table.

2) Let Greece default. Not a real option, because the banks of France and other European countries will go broke. Not to mention the ECB- the European Fed will also go broke. The taxpayers of France and Germany will pay more under this option than just bailing out Greece in option 1. The leaders will do all they can to prevent this from happening.

3) So what does Europe do without doing 1 or 2? Try to kick the can down the road. The leaders will try everything possible not to make a decision that really solves the Greek insolvency problem. They will meet; They will argue; They will make small as possible decisions. It is risky to take any decision and thus they will try as hard as they can to kick the can down the road.

What impact will this have on US investors?
1) Banks and the financial system will be frozen and not good investments. The US financial system will not be hot investments as long as Greece is insolvent, but still alive.
2) The dollar will be much stronger than the Euro. While the dollar has lot's of problems, the Euro has more. In the race to the bottom, the Euro will win.
3) Gold will continue to do well. Where does other countries (China, Japan, Middle East) put their money? Euro.... no
Dollar.... already too much... The simple fact is gold is one of few investments that makes any sense.

I wish I could find more investments, but at the present time, all the alternatives look weak.

Current Economic Malaise

The Slowing of the United States Economy.

Recently the economy of the United States has started to slow. After a really bad recession, this is not good news.

Exports are strong.


Loan losses are starting to fall.


But look at the demand for mortgage loans:


The Initial Claims for employment are spiking up:



Covered Employment is still not responding:


What's more the Money Multiplier is now FALLING after a really bad fall during the recession.



So what is doing well?

From this chart we see gasoline is the largest increase in retail sales, which is not a good thing for the economy.
By having gasoline prices rising, we see a 'tax' on the consumer that is zapping the recovery of the economy.

Overall, the economy is at best sputtering. At worst, we are headed to a double dip. Because the fiscal policy and monetary policy are about to take the 'gas' off in June, this summer looks to be very dicey. Don Coxe has described Quantitive Easing (which the FED has been doing) as 'heroin' for the economy. When you pull the heroin, you will get some violent reactions. This summer may be a very bumpy ride and I expect the stock market to fall as the monetary policy ends.

Updated Charts

Updated Charts

Well production has bounced back

Lower Production levels confirmed.

Updated Nat Gas Charts

The charts show the clear fall in natural gas production from the crazy highs in December. The high decline rates on the shales and horizontal wells are often forgotten. While the amount of gas in the fields is huge, getting the gas out is going to be costly. Why? The number of wells drilled has to increase at increasing rates. This exponential growth in drilling starts to run into all kinds of constraints from pipelines to frac fluids. In addition, oil is over $100 a barrel, which means it is more economic to drill for oil than nat gas. I am becoming more and more bullish on nat gas.

Updated Nat Gas Charts

New Gas Production Chart

The following chart is a new type of gas production chart. The North American Market is both the US and Canada production. So I took the daily production estimate from Roby and Gasguy and added them together. Then I averaged the past 7 days (line 1) and the past 30 days (line 2). While you do not see the daily changes, the lines have plenty of volatility. Note the most recent decrease in production, in part caused by cold weather.

Production levels off