Aftershock

Here are the notes from this book I read.

1) The real estate bubble

2) The stock market bubble

3) The private debt bubble

4) The discretionary spending bubble

5) The dollar bubble

6) The government bubble

Real estate bubble – 2% growth in income from 2001-2006 and housing price up 80% from 2001-2006.

Gold bubble? Money supply up 300% from 2008-2011. Gold up 50.8% in same period. We’ve got a ways to go folks till gold catches up to the money supply.

Inflation = an increase in the price of goods and services not due to growing demand or shrinking supply for those goods and services, but due instead to the dollar losing its buying power through excess printing beyond GDP growth or population growth.

Is inflation bad? As inflation rises, so do interest rates, and as interest rates rise, asset values fall. It’s even worse when things are in a bubble. Prices will go up, but not as much as inflation does. Lenders know that inflation is occurring and will only lend at rates that are higher than inflation so as to make a profit on the loans they’re making. When money is more expensive to borrow, less lending occurs. When less buying occurs, and when less buying occurs, the demand for assets – like our homes, stocks, savings accounts, artwork, jewelry, cars, and all dollar-denominated assets – falls. Demand falls, supplies go up (because of fewer buyers), and asset values go south. Rising interest rates will cause bond value to fall, businesses to do poorly, stock prices to drop, and home prices to decline even further. Rising inflation and rising interest rates lead to falling asset values. Nominal prices may go up, but adjusted for inflation and these prices won’t have gone up.

What is good for borrowers is bad for lenders. If you don’t outpace inflation then you’re losing money, which is every investor in 10 year treasuries right now as even the government stated that the CPI is over 3% and the 10 year treasury yield is less than 3%. This flight into treasuries is complete nonsense.

With the government each time they refinance their debt they expose themselves to highest interest rates due to increasing investor skepticism. Look to Italy and my prior post if you don’t believe this.

Real estate prices at 4% interest. An increase to 5% interest is a 11% drop in asset prices to keep payment the same. 7.5% mortgage is a 32% drop in asset price. 10% interest merits a 45% drop in asset prices. Even worse as interest rates rise, the value of mortgage bonds falls drastically, which means there won’t be much mortgage money to lend, even if home buyers wanted to borrow it at the high rate. Higher rates means fewer borrowers for mortgages, business loans which means fewer hires, and eventually it lowers the price of stocks/bonds doing damage to everything.

Money supply has increased 300% since 2008, which will lead to double-digit inflation. When will that happen? See future blog post.

Fed is paying banks for excess reserves, which means they’re trying to delay inflation through fractional lending and its subsequent multiplier effect on the money supply.

Foreign inflows from foreign investors to buy our bonds is slowing from 1 trillion in 2007 to $824 billion in 2010, with some drops and increases in between.

Debt is close to 15 trillion. If we made 500 billion dollar payments per year, it’d take us 30 years to pay that off. More realistically we’d need the 500 billion and another 1.5 trillion (our yearly national deficit), which means we’d need to increase all taxes by 100 percent or income taxes by 200 percent, which isn’t economically or politically possible/feasible and thus we see that it is impossible for us to pay back our debts. What happens then? We WILL either default or we’ll print the money to pay off the debt, which causes inflation and possibly hyperinflation just like with Greece, Rome, Weimar Republic, Tulip Mania, Argentina, and Zimbabwe.

6 stages of psychological denial

1) Denial

2) Market Cycles

3) Fantasized Great Depression

4) Back to Basics

5) Imagined Armageddon

6) Revolutionary Action



Average sales price of Beijing apartment is 57 times that of the average workers income. 65.4 million houses went without electricity for six months straight, which means they were empty and that there is excessive overbuilding in China. Recommended max is buying something 2-3 times your gross income. What does this mean? The Chinese government has huge inflation coming down the pipeline. See blog post on China and Gold.

Aftershockeconomy.com

GDP 2007 – 14 trillion

GDP 2010 – 14.6 trillion

US government borrowed/spent – 163 billion in 2007

US government borrowed/spent – 1.4 trillion in 2010.

This means that our ‘recovery’ is fake and that all the growth can be attributed to government spending and not real legitimate growth.

Bond yields at record lows and prices at record highs…can only go up from here.

10 year treasury at 3% - goes up to 5%, loses 18% of its value, 6% loses 25%, 7% loses 31%, 10% loses 46%, and 15% loses 63%.

LEAPS – long-term equity anticipation securities that are long term and that you can short over the period of 1-2 years. www.cboe.com/products/leaps.aspx or www.optionseducation.org/basics/leaps/default.jsp. Government could limit/ban use of leaps and shorts in order to stabilize the falling stock market. It has happened before and is most likely to happen again.

ETFs for currencies: FXE, FXF, FXC, FXY. What about for Australia and Norway? Better to do ETFs or to do Merk hard currency fund? UDN is an ETF that rises when the dollar falls against a currency of baskets. What currencies are in that basket?

Are TBTF and TBT in Robert Kiyosaki’s trading program or any of these symbols for that matter?

Demand for us produced coal, grain, and beef to be good due to low value of dollar and increased export demand for these products, i.e. find solid companies that have this exposure and invest in them.

If gold has done well in a negative environment, how is it going to do in a good one, i.e. one with lots of inflation and high investor fear??? Over the past decade with low inflation, a pretty stable dollar, and two of the big alternative investments to gold – stocks and bonds- have done okay and yet gold is up over 400%.

Many whole life insurance companies will go bankrupt during the aftershock.