“Sinkholes, New Bull Markets, and Such”

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Sam Townsend

Here we take a penetrating look behind today’s headlines as they relate to health, wealth, and sustainable living success from Abundant Sustainable Living advocate Sam Townsend.  Sam is the author of the popular  Time to Head for the Ark  (www.TimetoHeadfortheArk.com) guide to Abundant Sustainable Living.  Sam, a “recovering banker and economist”, businessman, consultant, investor and author offers a unique perspective and helpful approach to improving your life and the lives of those you care about most in these turbulent “Harm’s Way” times.

 

The News . . .

 “Sinkholes, New Bull Markets, and Such”

There’s been considerable news of economic and social significance in the usually quiet early weeks of summer. With all the interest in the upcoming elections and various assorted distractions that the public media normally choose to pursue, the significance of certain news may often be missed. Key developments are signaling even bigger changes coming. “What to do About the News” can help you recognize what’s actually happening, what’s coming, and how you can be better prepared. Underlined text refers to the headline news.

Markets and “The Real Economy” – “Economic Sinkholes?”Declining economies, disposable incomes, consumer spending, and commodity prices further tarnish hopes for economic recovery. Meanwhile, as borrowers struggle with crushing debts, savers hold on to more of their liquidity even as interest rates sink to historic lows and this “Granddaddy Bear Market” reawakens from hibernation.

Not only Europe, whose socialized economies struggle under unsustainable debt loads and less productive economies just as the Global Financial Crisis begins to re-intensify, but also in higher growth export economies that include India, Brazil, and China.  Economists are voicing concerns that China’s slowdown may be worse than reported by their less than transparent government (WSJ 7/12/12).  Other major Asian export economies like South Korea and Taiwan are reporting outright contraction along with most of Europe. Asian stock markets have been declining for longer than has the U.S., especially in Japan which has been unsuccessful in “stimulating growth” in a deflationary economy for more than two decades.

Gross Disposable Product (which measure spending, even with borrowed money, but not production of real wealth which continues to erode) and “Unemployed Workers” statistics, which ignores the growing numbers of chronically underemployed who are conveniently but illogically dropped from the unemployment rate computation, are misleading and greatly understate economic and social realities.  Both statistical measures attempt to minimize the size of the holes that big government and debt-addicted economies are helping the U.S. and global economies to dig.

Those holes in local and global economies are actually more like the sinkholes we have here in Florida where our son, in the legal department of a casualty insurance company, deals with claims when “invisible” sinkholes all of a sudden swallow houses. Government statistics fuel still popular wishful thinking and are about as solid as the ground over those sinkholes.

Underemployment in the U.S. and Europe continues to rise and job creation and payrolls remain weak and vulnerable. While food prices remain high due to heat and drought-provoked shortages, most other commodity prices continue to decline from a recovery peak in the spring of 2011. The global economy is running on fumes and credit defaults and bankruptcies by households, businesses, and governments, including municipalities, states, and countries – already at the highest levels since the Great Depression – threaten to mushroom and expose global banking and financial system insolvency.

Despite massive deficit spending by governments, which is largely funded by the Fed and other central banks buying mountains of unserviceable debt too tall to climb, global business borrowing and consumer spending are again narrowing. Though collateral damage abounds, national governments and their central banks are not seeing even meaningful short-term economic benefit from massive, unconscionable, and futile deficit spending and money creation efforts, even as their unsustainable debts become a gigantic millstone around the necks of current and future citizens. Crushing debt burdens compete with productive uses of capital in “the real economy” and drain real wealth from the national substance here and around the world.

With more than $1 trillion of student loans made ($904 Billion outstanding), Federal Government Insured Student Loans have become the largest category of consumer credit – more than credit card loans outstanding or auto loans. Much like the sub-prime mortgage disaster, student loans feature unrealistic low rates and repayment and also unsupportable credit and high defaults. Student loans increasingly do not result in paying jobs for our youth and cannot be discharged in bankruptcy. Not only are our children being called upon to somehow support unconscionable and massive government and its debts far into the future, but many of them seem destined to become government serfs because of these personal debts. Our youth are our largest group of unemployed and their numbers are still rising. But for millions of them going to school at taxpayer expense, our welfare rolls and the chronically underemployed would be even larger.  Student Loans, in this sense, are a very expensive and socially destructive welfare program. Consider, too, the future viability of pension and retirement funds and other investors who own non-repayable government sponsored loans of all stripes.

“Shadow REO”: As many as 90% of Foreclosed Properties Held off the MarketStill sales of previously occupied homes declined sharply in June to the lowest level in eight months –  As reported by two private real estate analytics firms, banks and mortgage banking giants like Freddie Mac and Fannie Mae are delaying write-offs on foreclosed properties by not placing up to 90% or more of them on the market, selling them, and then being forced to recognize additional losses on “real estate owned”. Such actions sustain hope of market recovery which could be crushed by dumping hundreds of thousands more residential properties on the market. So many have been withheld that realtors are reported complaining of not enough inventory being available. This practice compounds the future write-down problem on trillions of dollars in securitized mortgage and other loans held by banks and investors that have yet to bear full market scrutiny. Since nearly all loans today are made by government controlled or regulated entities, political expedience and concerns for the survival of many banks and businesses serve to gloss over problems that are real but which are not generally reported. Today, widespread denial of objective reality is necessary to somehow “buy time” in fragile hopes that somehow catastrophe can be averted.

“Main Street” misery is increasingly disconnected from the much less real “Wall Street” world of high finance. In the not-so-virtuous and virtual reality frequented by powerful bankers, speculators, and the politicians who aide and subsidize them with other peoples’ money, many of these “high rollers” also seem to suffer from “Sinkhole Myopia”. What they have thus far been adept at is either avoiding losses or having our citizens on “Main Street” suffer much of the pain. Obviously, more pain lies ahead – and not just for investors and workers in the real productive economy.

Great Britain’s Barclays Bank was caught colluding with other “too big to fail” banks to reduce the LIBOR rate that is the pricing benchmark for about $800 trillions of loans and derivative contracts around the world. Barclays agreed to a $553 million settlement with U.S. and U.K. regulators.  Ironically, the regulators and their governments and banks actually wanted those lower rates and are being accused of twisting arms, but Barclays management and stockholders have thus far taken the fall alone.

Both the banks and “the elite powers that be” have benefited from making borrowings and other investment exposures appear to be lower risk than they truly are.  When practiced by capitalist profit-makers these days, such manipulation is recognized as fraud; but, when practiced by national governments and central bankers, the practice is instead considered “statesmanship and enlightened financial management”. Fortunately, more people are beginning to recognize that “the emperor wears no clothes”.  Now they need to know what to do about that troubling reality.

U.S. Stock Markets have been relatively quiet in these early weeks of summer….a lull before the storm?  Complacency still reigns despite deteriorating fundamentals, and that is bearish for stocks.  Many measures of market volatility are now subdued since stock prices marched steadily lower in April and May but then corrected with a normal but fairly sharp retracement in June.  July selling has resumed, but we have not yet seen a break-out to the downside. Market technicals and stock price wave pattern suggest that stocks could break the November 2011 lows (below Dow 9000) before the November elections. Timing, of course, remains speculative in a market that is only about 10% from its high in dollar terms despite having declined 80% or more over a dozen years in real terms (stocks valued in gold or a broad commodity index such as the CRB).  Tightening household budgets, again, tend to reflect economic realities much better than Wall Street’s intangible investments. (For more background on the economy and investments, see “Sam’s Blogs beginning with “The ‘Silent Crash’ is Getting Noisier” and also the Wealth Management section on www.PreparedALHWays.com.)

The big picture in stocks and in the prevailing psychological mood in general is that we are early in the next (even bigger) wave down in stock prices than the first leg of the Global Financial Crisis decline from the October 2007 high to the March 2009 low that saw stock prices drop by more than 50%. Expect many more folks to come on board with that pessimistic view as the decline accelerates. To many people, it doesn’t feel like stock prices are declining because prices rallied for about three years into this April though several broad U.S. stock indexes topped more than a year ago. That “feeling” helped sustain the illusion that the “recession” had ended and a meaningful recovery was continuing.

People tend to remember best those events that are the most recent. As market investment prices accelerate lower, pessimism will replace complacency and it will be pessimism and fear that then become instinctive as they already have for many people living on “Main Street”.

Who bears the loss?

The worst of debt and asset write-downs have thus far been avoided through preserving illusion. All sorts of financial and other performance obligations have been “papered over” by government guarantees and subsidies, central bank slight-of-hand credit creation, and debt purchases, thereby avoiding more massive write-downs of portfolio asset values by hiding them from market discipline and reality.

Besides hundreds of trillions of dollars in credit default swaps and other derivatives like those on which J.P Morgan Chase has recently admitted writing off billions of dollars, quite possibly with more to come, there exist many tens of trillions of dollars in potential losses, as yet unrecognized, in various financial and performance claims that are directly or indirectly guaranteed or regulated by government. Besides bank, brokerage company, and money market fund deposits, these obligations include pension fund guarantees, casualty insurance, and potential losses from a growing variety of “too big to fail” entities. Unlike huge unsustainable entitlement programs including Social Security annuities, Medicare, and Medicaid, many of these potentially engulfing financial claims were once considered private sector programs, but increasingly they now rely upon a mythical “government safety net”. Therefore, the question our citizens – especially those who have and rely upon assets and incomes should be asking themselves is – “Who bears the losses from their failure?”

Since debts and potential failures long ago reached the point where the aggregate exposures are “too big to bail” by governments and central banks, those with significant amounts of investment assets are increasingly concerned about getting them out of Harm’s Way”. Not only are inevitable market write-downs a threat but so also are the national governments who must somehow fund exploding funding deficits. When taxes become insufficient, expect them to come for the assets that they will find ways to appropriate.

What does this mean for savers and investors, many of whom have fled from the markets but still have heightened concerns about preserving capital, retirement annuities, and generating acceptable returns?

CASH is in a “bull market”.  Bank deposits and short-term U.S. Treasury debt and the debt issuances of the lowest risk global governments feature interest rates at historic lows.  Interest yields on the 10-year U.S. Treasury bond last month have dropped to about 1.43%, their lowest yield ever – even lower than during the historic deflation of the Great Depression. Switzerland, Denmark, and the U.S. briefly have seen rates on their short-term debt actually turn negative.  Large investors became desperate to preserve liquidity and reduce risk so they have actually paid the perceived lowest risk borrowers for the privilege of owning their debt.

Savers have been penalized for years as rates have trended lower, but interest rates on bonds and other maturing debt appear to be bottoming just below historic lows. As fears of inevitable defaults rise, expect rates to rise and then begin to cascade higher starting with debts of the lowest quality borrowers, including municipalities and states which cannot print money.  Expect interest rates to increase alarmingly even in the U.S. once fears of default rise and when debt service requirements escalate.  The Fed bought almost two-thirds of ALL the new Treasury debt issued in 2011 with bank deposits that it created out of thin air.  Further, since the start of “Operation Twist” in September 2011 where the Fed bought long-term U.S. Treasury debt to replace its short-term Treasury debt holdings, it has been buying up 90 percent of the long-term paper in order to restrain rates, though it can do so only temporarily before investors revolt and market forces overwhelm them or these bankers “break the bank”.

Bond markets are much larger than are stock markets and are more powerful than either governments or the central banks chartered to buy government bonds as a last resort. When those interest rates do finally surge in the U.S. as they have been doing in weaker European countries, the losses their holders will incur, including the Federal Reserve banks, could become almost incalculable. Treasury Bond purchases by the Fed, as those purchased by European central banks, provide any thoughtful observer proof positive that the “system” as it stands is doomed.

What may be the most economically significant headline you haven’t seen?  In a word, it’s “DEFLATION”.  Deflation in our financial system is: “Declining cash and credit” and generally also the market values of other assets, wages, and services. Deflation is the central banker’s greatest fear.  After all, their banks were founded in order to create plentiful quantities of money by lending it into existence to banks, businesses and governments.

Deflation will likely be an increasing and then continuing drag on prices and growth for many years to come as it was in the 1930s and 1940s, though ours is a larger degree problem than what produced the Great Depression. The longer government and the banks try to forestall the inevitable, the worse will be the wealth and societal destruction and the “hangover” from the greatest debt binge in world history.   History and common sense teach us that once deflation begins, it continues until the excess debt in the economy is repaid or defaulted. Never, at least since The Flood, has a society been so awash in debt with so little real tangible wealth and earning power behind it.

Deflation began during the first leg down of the Global Finance Crisis and is again increasingly asserting itself since borrowing and lending have contracted in the debt-based (instead of sound money-based) global economy.  We have all been accustomed to persistent inflation since the 1940s, so deflation is unfamiliar in our experience. So is experiencing increasing purchasing power of our money, but that is what we should expect over the near-term as “cash is king” for the relative few who are fortunate enough to hold it and who are unencumbered by debt.  Deflationary cycles skip generations. That may be because those who suffered through the last one (like my parents who have since died) avoid the excesses that bring on the next one with excess optimism, debt, and responsibility.

Buying opportunities for that cash should prove remarkable, making current concerns for low interest rates a temporary annoyance. Meanwhile, underemployment of labor and of many assets, such as real estate and equipment, grows as incomes, prices, and liquidity continue to erode, probably for years to come.

Prudent investors today are more concerned about the return of their money than for the interest return on their money. A word to the wise should be sufficient. “Cash is no longer trash” as I discuss on “Sam’s Blogs” on www.PreparedALHWays.com and in Time to Head for the Ark, along with, what we call, “sustainable living investments” which are in a stealth bull market of their own”.

Geo-Political: foreign and domestic efforts to control our lives and wealthThe U.S. Supreme Court by a narrow majority affirmed Government’s imagined Constitutional right to force us to buy a product or service whether we want it or not . . . and then to confiscate our wealth sufficient to pay for it, regardless of its price or its usefulness, or lack thereof.  No true freedom can exist without (1) a right to life and (2) a right to private property. The badly misnamed Affordable Health Care Act curtails both.

The current global financial system proclaims at the point of a gun that its (“fiat”) money has value because government says that it does. Such a credit-based system requires tight control of its citizens so that they cannot escape the system (see Time to Head for the Ark, Chapters 2 & 8). Surely it is easier to seize wealth than produce it, especially by government which cannot produce wealth but can merely confiscate, consume, and redistribute it.

Thomas Jefferson reportedly warned: “Government that is big enough to give you everything you want is big enough to take everything you have.” And lest you believe that government is inherently benevolent, consider what George Washington, our most respected President ever, said, “A government is like fire, a handy servant, but a difficult master.”

We have strayed dangerously far from the Republic under God that our Founding Fathers sacrificed to give us. Since, as Alexander Hamilton observed, “We get the government that we deserve”, we had best return to God and His ways forthwith. That’s my prayer for all of us.

Societal Change Events “Obamacare”, or, “The Unaffordable Healthcare Act” is an historic power grab to control both our lives and property through “unaffordable and potentially deadly healthcare” administration by a government unaccountable to God and the people.  It may be the most vivid example yet of government asserting the power and authority – previously accorded to our Creator God – to grant us “natural” and inalienable rights that were once considered by our political leaders “endowed by our Creator with life, liberty, and the pursuit of happiness”.

“Corn Prices Soar as Midwest Bakes” (WSJ 7/10/12) – Natural disasters have been making headlines with greater frequency. This one speaks to historic heat waves and lack of rain over much of the U.S. which threaten our food supply, but there have also been killer tornadoes and other powerful storms, fires earthquakes, tsunamis, and other environmental disasters.  We tend to forget, as many have, that God, who controls the elements, may be bringing calamity to gain our attention so that we will return to Him and His ways in repentance and seeking His mercy for us and for our land.

So what else . . . to do about the news?

What to Do About the News

 “And Now for the Really Good News”

Wealth and Resource Management – As is common during deflations, households and businesses now increasingly prefer to hold cash rather than what they can buy with it.  As liquidity and prices of many other things deflate, except for critical shortages that may develop from time to time for the unprepared, expect purchasing power of the dollar to surge even as fear grows for shrinking debt-based paper currency values. Employ your improved liquidity to acquire “sustainable living investments” that are tangible assets which are useful for producing and maintaining life’s necessities where you live.

Sustainable Living Investments are real and life-enhancing. They strengthen personal freedom and quality of life. They can preserve and build value, provide acceptable returns, and both enhance and save lives that are precious to you, even in turbulent times. Stocks, bonds – and, of course, cash – may have value as trading assets in volatile markets, but they have no inherent or reliable store of value in “Harm’s Way” when the foundations are crumbling.

Health & Wholeness is God’s best for you and yours.  Much like “state education”, the worsening “healthcare crisis” in this country isn’t due to not having enough money thrown at it.  No, it’s a crisis because much that conventional “healthcare” has become isn’t God’s prescription for our health and wholeness. It is not only unaffordable but is often unhealthy and dangerous as well. Many medical doctors are bailing from the system or are planning on doing so. That may be the most practical near-term threat to implementing “Obamacare”.

Abundant Sustainable Living, as I describe it in Time to Head for the Ark and in Supernatural Health, ”The Cure for the Healthcare Crisis”, presents time-tested and proven ways to be in health physically, relationally, and spiritually. It may even prove to be much more affordable for you and yours than “conventional healthcare”.  It should be because that’s how our Creator designed us and our environment to enjoy living in wholeness and abundance.

Abundant Sustainable Living in Local Communities and Economies – For thousands of years people have lived sustainably in local economies and doing so didn’t require advanced technologies and cyberspace delivery systems.  And also it didn’t require that life’s necessities be somehow paid for and transported from the other side of the world by people and means that people didn’t know or trust.

Now, as has always been true, all of life is lived locally – where people live and work. And the most dangerous place in the world for any of us is where we and our loved ones are!

Most of us in the developed world live in an overstressed global village that is beginning to crumble because its foundations are of sand. Consequently, if our lives are to be enjoyable, productive, and truly sustainable, then food, water, and the other critical necessities of life must be produced and available locally as well.  Those provisions and capabilities must also be acquired, preserved and defended.  All of this requires “more hands” working in a mutually supportive local division of labor than the “global village” ever could.

Be PreparedALHWaysTM

Many people are concerned about the serious nature of today’s problems which in many ways are unprecedented. ALHWays LLC publishes “What To Do About the News”TM at www.WhatToDoAboutTheNews.com – a relevant multi-media commentary on today’s headlines and what to do about them that applies lessons learned and strategies we present. PreparedALHWaysTM and its related sites, media and growing network of colleagues, associates, and business and ministry partners are coming together to help people live and work well  in “therapeutic” communities, especially as our Creator designed and provides.

www.PreparedALHWays.com, published by ALHWays LLC – ALHWaysTM is our acronym for “Abundant Living in Harm’s Way – always and in all ways”.  This portal Web site features multi-media publishing, programming, and analysis related to the rapidly growing sustainable living movement. Being PreparedALHWaysTM helps families, businesses, and individuals benefit right where they live and work.  We help people, communities, and businesses connect with the thinking, expertise and other resources useful in developing local, satisfying and sustainable solutions tailored to their unique needs and circumstances.

We welcome the opportunity to answer your questions and/or to address your specific needs. Your future is our priority and we look forward to helping you plan and implement your own “Harm’s Way Solutions”.

Contact Sam: SamTownsend@ALHWays.com

Learn more: www.PreparedALHWays.com