Sunday, September 25, 2011

Ready For the Week?

Time to strap on your big boy (or girl) pants.  This will probably be a rough week.  If it's not, hang on, this situation isn't over, yet. 

Bayou Renaissance Man, one of my every day reads, has done some very good work on the economic big picture lately.  This piece talks about some of the very large bombs that are likely to drop soon. 
  • If the Euro tanks (as appears increasingly likely), the economy of the European Union will go to hell in a handbasket for several months at least, while the various banksters and politicians involved try to salvage the shattered remnants and glue the pieces together in some sort of new structure.
  • That means that everyone who exports goods to Europe (primarily China and other Far Eastern nations, but also including some very large US corporations - for example, Boeing) is suddenly faced with the loss of a major market. Their companies can no longer sell their goods into that market, which means there's a massive oversupply of them. They've already had to face a considerable reduction in demand from the USA, too. They'll have to eat even more losses, lay off workers by the hundreds of thousands . . . hel-loooo, economic disruption!
  • Until recently, China's money has been keeping our economy afloat. They own trillions of dollars in US bonds and other securities. If their economy tanks due to a reduction in demand from the USA and Europe (the first signs of economic problems are already visible there), they're going to have to redirect all their reserves into keeping their own country afloat . . . which means they'll dump US debt for pennies on the dollar, in a desperate attempt to get as much liquidity as they can to preserve the Communist Party government from the wrath of its citizens.
and there's a lot more.  You should RTWT.

Several writers have scaled the US budgetary problems down to a more comfortable size ("a billion here, a billion there, pretty soon it adds up to real money" - Everett Dirksen, US Senator, 1960s) and Peter adds this from National Review Online: 
Let’s remove 8 zeros and pretend it’s a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Budget cuts: $385
How long do you think such a household budget would exist without a creditor demanding money or cutting off the credit line?  Any doubt S&P was wrong to downgrade our credit rating?  The deficit doesn't matter, because we can print more - as the Keynesians in the central banks seem to think?  If so, prepare to pay a million dollars for your McWendyBurger.

As Denninger says, Welcome to the Collapse of 2011.   For various reasons that Karl covers, this one figures to be worse than the crash of '08.  Markets are re-valuing everything, and they're trying to figure out what is real.  This could take a while and be extraordinarily painful. 


4 comments:

Reg T said...

I'm pretty ignorant of how our economy and monetary system operate together, especially these days, but I thought that - traditionally, at least - when the market (Dow, S&P, etc.) drops, and when our currency is further debased, precious metals rise in value in an approximately inverse proportion. Yet here we see - for the moment, at least - precious metals take a huge hit.

I'm not incredibly concerned, as I only have a small amount invested in silver bullion, and am pretty nicely covered with the commodities I need to actually get by, but I am curious nonetheless. How does this work, SG?

Reg T said...

Sorry, I meant to add that I did read "Mr. Gold's wild ride", but I guess I am wondering why the swings in metal prices don't match the simplified way I understood they responded to stocks and currency. That seemed to make some sense to me, in my ignorance, at least.

Is the notion that precious metals are a hedge against inflation and market swings something that only applies to those few of us "preppies", while the actual prices respond much more significantly to those who chase those precious metal prices for investment, instead? I could see where the investment forces probably wield a much bigger hammer than that of us few who buy as a hedge.

Graybeard said...

Reg, you're basically right, although there are some things that complicate the picture. There are charts that show the price of gold vs. many currencies, and the movement counter to the dollar is apparent. I think that if gold starts rising in all currencies, it means that there's a worldwide shortage - or that all currencies are going down the toilet. There is a real shortage.

The dollar has been up like crazy this month. The dollar index is currently 78.41 - it was south of 73 for much of May. That alone drops the price. The dollar is up because of the "flight to safety" in the world's reserve currency - for now. How much longer? I'm really bad at figuring timing. I thought Greece collapsing, followed by the Euro and the dollar would have happened already.

This technical analyst sees the movement in gold as part of a normal market correction. Nothing to see here. Move along.

Graybeard said...

My turn to hit "post" too soon.

There's always talk that the gold market is manipulated (Google/Bing GATA). Personally, I take a skeptical view of that; the market is bigger than any entity, Federal Reserve or European Central Bank or whoever. Do they sell gold in attempts to keep the market down? I think so. Was George Soros' statement "I'm selling gold" and attempt to reduce prices so he can buy more? I think so. I just don't think they can control the market forever.

The free stock analysis newsletter I get is saying we may be in for a stock market rally, (details here until Monday 10/3 although the long term still looks grim. Just enough to drag in a few more sheep to fleece.