Surfing the Kondratieff Wave

Here is a reprint of my second post as a blogger way back in May of 2006 and reprinted again August 2007. Click on the link in this article, you won't be disappointed.
If you're into investment cycles and charts, the Kondratieff Wave is one to examine. Basically the boom and bust cycle had a 60 year span. Here is a link to more detail http://www.kwaves.com/kond_overview.htm Credit the picture above from this link.

The cycle this time around is a little long in the tooth. There is a reason for this and I believe as do some others, that it has to do with the increase in the length of the average persons life span.It use to be about 60 years now we are up to about 75 years.

Each generation has a group of elders that can draw from past mistakes. We are at a point right now, that the follies of the 1920's and 1930's are not part of our "group memory" any more. Most people from that era would be at least 100 years old now. Now when you quote some historical aspect a cause of the last depression, you hear the phrase,"Its different this time."

People today think that the interest only no money down mortgage is something new. Well it isn't. They were written right up to the collapse in 1929. The banks soon realized that it was like the neighbor taking out your daughter for a "test drive" before he married her. The responsibility factor was missing.

Cycles are usually displayed as circles that would follow through phases and complete back where they started. I think that this is not a true analogy of what is happening here. If you start with a spiral going out from the center, this more correctly displays "history repeating itself." It s not quite the same, things have changed somewhat.

People are consuming more and more, and with that, comes the creation of more debt. It is this debt that will be marked to market. Mr. Kondratieff's theory suggests that all of this debt will disappear and the money supply will contract accordingly (drastically in this case).

I don't think that people fully realize how money disappears. Take Lucent Technologies a few years back. It sold for $80 per share and went down to $2. Somebody owned it the whole way down.

What really scares me today, is the people with savings and retirement funds, they have been funding this whole thing. The market will always go up (believe that and I'll tell you another). The trouble is, a majority of the owners of wealth, are going to want to get out of the market pretty soon and they are at the head of the line-- the baby boomer's.The baby boomer's think that this will be a relaxing walk into retirement. More likely its going to be one hell of a panic. If Mr Kondratieff is right, there will be a drastic contraction of the money supply because of the debt marked to market, and because of this, commodities should fall in price.

My question is this. If the world population has increased 4 times in the last 60 years and most of these governments have been printing money at a very vigorous rate, can gold and silver still be considered commodities? I think that they reside outside the realm of consumables.

As an addition to the original post, here is a little bit of video from You-Tube that everyone is carrying.

Shut Down the Federal Reserve

During the Great Depression over 3,000 banks failed; interest only home loans and 90% stock loans, were major factors. When people started runs on the banks, the institutions started to collapse because there was no central authority that could bring in reserves. The Federal Reserve did not insure deposits. It was pretty much a zero sum game. The speculators that made money and the people who borrowed it, got wiped out if their funds were in a bank.

When you examine the 1930’s scenario, one person buys a home for 100K and then sells it later for 500K. There is 400K created in speculation that no one really had to work for. So when the house is sold for 500K the seller puts it back in the bank. If the buyer defaults, the bank goes insolvent and the home later sells on the market for the original 100K. The 400K that no one worked for goes poof and disappears.

In today’s market, with FDIC insurance, it works differently. First the Federal insurance will cover most deposits. Now also, the Fed will guarantee the value of the home loan notes by Freddie and Fannie. The speculative money created by the housing bubble is allowed to exist. Also since it wasn’t destroyed in the collapse, the banks have to be made whole by honoring the bad loans. So all of the money created by the housing bubble still exists (money that no one worked for) and on top of that we are going to cover the amount that the banks lost in this bubble (nobody worked for this money either). So in effect, the government will double the money created by the original bubble. No one has lost a dime. That pretty much takes care of the banks.

The mutual funds and retirement accounts are a little different. There is no FDIC insurance. About half of the money in these accounts can be withdrawn without penalty, the other half can’t. The only reason Bernie Madoff’s Ponzi scheme worked so well, was that no one needed the money they had invested with him. This group of investments’ is very suspect right now. These investment funds are probably selling Treasuries to raise funds for payout. If you happen to be in the half that can’t draw their money out without penalty, you can share the pain of Bernie’s depositors.

Here is a quote from the Feds FOMC meeting.

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

What the Federal Reserve is attempting to do is wrong, insanely wrong. This is stepping way beyond their mandate. They have to be stopped from doing this. They are exercising implied powers that go beyond their reason for creation.

I am beginning to see why Andrew Jackson shut down the Second Bank of the United States, which I believed up until now was a mistake. These actions to print money should violate some law of the land and it seems as if they don’t. If this bank cannot be controlled, it needs to be destroyed. Its new policies will destroy our financial system and ruin the retirement plans of many already on a fixed income.

In my humble opinion, the present policies of our government are devoted to preserving the status quo of the obscenely rich by destroying the middle class wealth by way of inflation. The poor lose nothing since they have nothing. Using the Federal Reserve in this sleigh of hand is unconscionable and despicable to say the least. Sadly I guess is what it boils down to is "Who cares?"

What is the Fed Up 2?

The Fed announced it will buy up to 300 billion of long term Treasury’s. Everybody just glosses over it, not understanding the implications.

First the Treasury sells the bonds to investors to finance debt. The Federal Reserve then buys the bond from the private investor offering a rate or a little above market rate to entice the owner to sell it. It is still a zero sum game. If the Fed prints the dollars and holds the long term bond, the day the bond matures, the Treasury redeems the bond held by the Federal Reserve and this returns the dollars put into the economy. Normally, the Fed might buy and then sell the bond way before it matures. It’s a way of increasing the money supply on a temporary basis.


There is another reason they might want to do the same thing. Suppose that the people owning the 30 year bonds need cash and have to sell in a hurry. Remember the bonds will pay face amount in 30 years at say 3.5% interest. That is a pretty long wait. To sell them fast, they need to discount them. So they might offer a 100K 30 year bond for 90K. That sort of a discount will move it pretty fast usually. When you discount the bond, the effective interest rate increases so in this case, the guaranteed yearly dividend of $3,500 divided by the purchase price figures out to be 3.89% interest for 30 years and a payoff of face amount 100k.

Look at it from a more realistic point of view. Suppose interest rates jump to 7%. In order to sell the 100k 30 year bond paying 3.5, you would have to discount it to 50K or wait 30 years for the full amount back. The interest rate doubled and the price of the bond dropped to 50% of face.

There are two things in play here. The interest rate paid on long term Treasury’s is a cost of doing business for government. The higher the interest rate, the more we the people have to pay on servicing the national debt. The second thing is investors trying to raise money by selling the long term paper. If there are no buyers, they have to discount it even more until it is sold.

What is happening here is that the Federal Reserve has become a market maker for people needing to cash in their long term bonds. If they buy every bond offered, the interest rate doesn’t have to rise, because there is no need to discount the bond. This is what the Federal buy back program is all about.

My interpretation of what is happening, is that the government sees massive redemptions of long term Treasury’s by failed financial institutions and needs to do some damage control. They will try to keep these Treasury’s from hitting the market and prevent interest rates from rising higher. This means they have to buy them all!

There is one slight problem here. The Feds need to sell the bonds back, later on, to contract the money supply. Their buying binge will probably fail. Then when interest rates rise to say 14%, each 100k bond will only be able to repatriate 25k not the 100k they dumped into the market. They can hold the bond for 30 years and collect the face amount, but they cannot contract the money supply by selling the purchased 30 year bonds unless they take a hell of a discount, and why do that? So from there inflation will roar to the finish line. I give this new program three weeks before it falls apart. The Huns (AIG) are looting the Treasury and Congress is helping them cart it away. Go figure! It's probably just my over active imagination running amok as usual.

A Touch of History

An Anonymous blogger has left a comment in the remarks section that I thought needed more exposure. AIM (An Inquiring Mind) is his byline. His thoughts adds some organization to what we have been discussing. Here is his post:

We've been on shaky ground and developing all sorts of systemic diseases for over a century due to operating with a central banking system controlled by The Fed, following Lord Keynes theories; income tax, going off the gold standard, totally utilizing a fiat currency, allowing politicians, lobbyists and the military industrial complex to dismantle our economy. Yet, as far as causality goes for this recent episode, here is my understanding and take on it:

It started with the Carter administration and the Community Reinvestment Act ("everybody should have a home and we'll lend you the money to buy it"). Clinton and Bush expanded it in their administrations.

Then we had the tech or dot com crash, a recession and the 9/11 terrorist attack. So, Greenspan lowered interest rates for a very long term. He created very cheap money. Lenders started coming up with all sorts of mortgage structures to facilitate home sales (ARMs, option ARMs, interest only loans, stated income only loans, etc.) They dropped all protective guidelines and standards because they were able to transfer the risk... they packaged and sold them to Wall St.

Wall St. with their new flock of financial engineers securitized these mortgages (as well as credit card, auto and student debt) in the form of CDOs, MBS's, SIVs, etc. and sold them off to every far corner of the world. They also transferred the risk to pensions, mutual funds, money market, hedge funds, etc. The credit agencies gave them falsely high ratings. Congress passed or rescinded laws in order to increase leverage, allow banks to become investment banks, create derivatives. The SEC allowed some to leverage at 40 to 1.

Then the bubble floated into a pin and popped. Beginning the financial collapse and cascade of trouble that we are now enjoying. Continuous and erroneous policies have been implemented as the solution (TARP, TALF, TLGP, TSLF, SLF, PDCF, HAM, ETC. ETC. ETC. ETC.) and they are being continued in the Obama administration. The fallout is historic: foreclosures, bankruptcies, commercial RE, debt destruction, unemployment, etc. etc.

There is a worldwide attempt to deleverage, restructure, and recapitalize. The International New World Economy boys see their chance to move things in their direction now, and will attempt to do so (under the "capitalism doesn't work" guise).

Our current administration has no focus or certainty. They go from one emergency or fire to the next. This is traumatizing the markets. We have a tsunami of trouble: zombie banks, zombie homeowners, key drivers of the economy are crashed, energy and food problems in the near future, etc. etc. And our government is basically running in the wrong direction with every solution they implement. They have no idea what other complications or collateral damage they are causing in our near and distant economic future.

The guys that caused this or allowed it to happen (Bernanke, Geithner, Summers) are now in charge of fixing it?! Many more explosions are yet to come. Due to this, there is really no way to predict where things are going and what will happen.

We've been forced into a situation of instability and inability to predict. We have to live week to week, month to month and can't rationally plan beyond these short time frames. The government is PUBLIC ENEMY #2. We are PUBLIC ENEMY #1 for allowing our government to grow into what it is and our politicians and corporate leaders to run astray.

More basic to this all is human nature. Once the government, wittingly or unwittingly, removed a significant amount of restraints the people went hog wild. Greed, something for nothing mentality, the party mentality, debt mentality, etc. all flourished and blossomed within the Capital building, the White House, Wall St., the halls of corporate America, the banks, the lenders, the shadow banking system, Main St. and in our own homes.

Hell, we are all to blame. Now we need rationality more than ever. Where is that going to come from?

Government "Enhanced" Spending

Some people have caught on to the new government approach to economic stimulation. If you have a credit card, you can still borrow, courtesy of the banks and the Federal Reserve. This is spending to stimulate the economy. I know people who have over 100K in credit card debt.

If you can’t pay off the principal on your credit card and it is way beyond being absurd; why not add more on to it, until they cut you off? It’s not like you have to work for what you’re buying. Be happy and consume. If you are broke, max out the card. Get what you can while you can. Plus if you are over 65 you get a bonus, you don’t need to file for bankruptcy. What wages can they garnish if you don’t work? Give your kids everything they’ve always wanted.

Somehow I don’t think that this concept of maxing out credit cards, has been appreciated for what it is, by the credit card companies. Unsecured debt is free money. Tarp funds are letting a very large credit card bubble grow even bigger. If the banks all got together and sorted accounts by address. They would realize that 15 different cards at one location, doesn’t indicate the residence is an apartment complex. It might indicate things are a not quite as they appear.

Unemployed? Start your own business. Buy a color Xerox laser printer and some linen paper and print up a couple of thousand 20 dollar bills. Let’s lend a hand, and help our government get this money printed. If we could get the unemployed set up to print dollars, we could be out of this mess by Christmas(Employment suggestions are for entertainment purposes only, talk to your probation officer for employment advice).

Poor old Barney Madoff has been put in jail for using creative Congressional financing practices. Congress is mad as hell. He spent a lot of that “rich people” money that they were going to tax. They are going to put him away for 150 years. That seems a little steep for impersonating a Congressman. There is a difference though, when Barney ran out of money, he went to jail. In our case Congress still has a check book, so we can’t be broke.

Here are some pictures from the past.











It's kind of a Grimm Fairy Tale with a bad ending for everyone.

Hard Times Lie Ahead

Here is another well written missive from the comments section of my last post, I thought deserved more exposure.

From Anon on a California Mountain:

This is the worst economic downturn the USA has experienced in 80 years. Granted, we have many safety nets, systemic cushions and advanced living systems that could prevent the degree of physical hardship that existed in the 30's, but avoidance of those hardships is not necessarily guaranteed. This crash could conceivably turnout to be the worst in this country's history.

We've had huge debt destruction and there is more to come. Huge de-leveraging is and will continue to take place. Assets have fallen precipitously in value and will continue to do so. Prices haven't followed and when the finally do (by marking to market, etc.) this will be a significant deflationary phase.

From an economic standpoint, the core reason behind this downturn is a generational period of very poor policy choices.

Healthy, sustainable economic growth is SAVING induced. Savings leads to a buildup of capital and productive capacity.

The economic "growth" that we have experienced in these decades has been POLICY induced. This has created booms that are artificial (i.e.Monetary Policy: long term low interest rates; Tax Policy: favoring debt and spending over equity and saving; Regulation Policy: opaqueness, laxity and lack of oversight; Social Policy: home ownership regardless of affordability).These policies created artificial economic demand that could only be financed by debt (because savings/equity didn't exist).

As I've opined in an earlier post, this is not a recession within a business cycle. This is a structural collapse... a soft depression, which could become a brutal and hard depression; a tsunami of deflation and then of inflation.

The economy must be reinvented. It must retool: it has to absorb trillions in bad debt and then transition into new productive endeavors. It must create productive capacity for the 21st century (energy, health, food and water being key areas that need new technologies and expansion).

The politicians want to reflate the value of assets, incurring trillions of dollars of additional debt to create the demand to buy these assets. Basically this is debt begetting debt.

This government intervention might bring about a limited period of "recovery"; although it will again be artificially generated and thus false. Unfortunately, this intervention will ultimately stifle actual long term growth, innovation and creativity for years to come. Our future will be dire unless we reinvent or restructure our economy.

Our leaders haven't learned from the past. Most anyone with first hand experience of, and an astute understanding of the Great Depression is no longer with us to point out the dangers. Our current leaders will destroy the currency through inflation in an attempt to halt the natural correction that is attempting to purge our system of its mal-investments, excesses and errors.

As individuals we can separate ourselves from the current political mindset and herd mentality, and utilize our knowledge of history and basic economic principles to predict the coming conditions and trends and implement strategies to mitigate the coming destruction within our personal lives.

The Pipe Dream

The government is going to stimulate the economy and create jobs with this multi Trillion dollar plan. It’s a little like the Marshall Plan in reverse. We are going to get the money before the disaster, not after it. The reasoning is, we get the free martini and the deck chair to sit in. Logic states that if you’re lounging in a deck chair enjoying the band, you can’t be standing in line to board the lifeboats.

Giving hundreds of billions to AIG is not going to increase jobs or stimulate the economy. This company is on life support, and we don’t even know why. This has to be a bill for previous consumption (financial insurance bets). We didn’t eat the meal, but we get to pay the bill. Add insult to injury, we have massive layoffs.

Interestingly there are two different types of layoffs. In the private sector, the layoffs are the result of a lack of consumption, car sales are in the dumps and real estate has gotten too real. In the government sector, the layoffs are a result of decreasing tax revenues, teachers and police. Notice if you’re in the latter group your workload increases and your wages don’t. It might be a good thing, less education makes for dumber criminals.

We couldn’t afford to spend the money when times were good and now we can??? It doesn’t take a pencil and paper to figure out that we have been shorted a couple of cases of whiskey, on this order!

The government isn’t creating new long term jobs. These jobs have to disappear when funding stops. Of course when you think about it, four years is a long term job in the government sector.

We need to invest in the private sector and focus on building items that people want to consume. Give that a thought or two. Look at all the business expenses the owner has to outlay for pension, health care, unemployment and taxes before he even hires one person. The government already has its hand in your till.

A lot of new entrepreneurs in California are starting pot farms; there are no government startup costs, fees or taxes. Plus the state offerers a free vacation plan if you get caught.

A world war seems to have pulled us out of the depression in the 1930’s. The government was buying from the private sector, tanks ships planes and armaments. The private sector needed employees to fill the government order. So if we carry this forward to today, a government contract to purchase four million General Motors vehicles could be a hell of a stimulus to the economy. Give the cars to the people that didn’t act financially irresponsible. It’s their savings that the government is spending anyway.

Of course, it’s probably not in the cards and that's what a pipe dream is all about; there is no realty, just a lot of smoke and government mirrors.

1929 Was Different

Our present crisis is not taking effect the same way things happened in 1929. There are some distinct differences.

In 1929 the individual investor made up the stock market. When the investor pulled out, the market tanked drastically. In today’s market the individual investor is removed from the market, the fund managers invest the individual’s money. These people don’t really have to have a position in the fund. Closing out the fund would tend to eliminate their reason for employment. So why sell if you can collect a paycheck. Using this perspective, the drop in the Dow could be a slow and long burn to the bottom.

When the banks failed in 1931 it was due to a combination of stock and real estate loans. Those who made a lot of money in the stock market and real estate and got out of the market just in time, still got killed when the banks went bust. In today’s market, those that got out at the top get to keep their winnings. The FDIC will cover the bank losses. The gains and losses are real; somehow what the bank lost will be made “unreal” by reimbursing the depositor. Notice the winners keep their winnings and the losers get reimbursed and the government has saved the banking system. Why go to Vegas when you get a real deal with the bank? The net result is 50% inflation and now that house is worth what the bank says its worth. What a *$@#*%$ miracle!

The third thing that is different is the welfare system in place in 1929. There wasn’t one. Hurricane Katrina pretty much displayed how much of that city depended on government support. There is a very large welfare system that is a way of life for many in this country.

Fourth, in 1929 hardly anyone paid income taxes, the government was small. We can’t say the same today. Everyone pays taxes including the drug dealer (sales tax)

Fifth, there was no real national debt in 1929. There was no Social Security or Medicare system in place like there is today. There was no threat of bankruptcy from spending too much on social programs.

Sixth, the repeal of the 18th amendment Prohibition, in December of 1933, probably convince some people that the government was starting to move in the right direction. The peculiar thing is that this is the only amendment to ever be approved by state conventions, not state legislatures (Congress figured the legislatures wouldn’t let it pass for political reasons). Having a drink meant a lot; the severe cocaine abuse of that time had scared many lives. Today, we are starting to lose faith in government. The amounts being spent are ludicrous.

So to sum it all up, we are not going to pay back what we are spending in the name of necessity. For some reason everyone thinks that this spending will work. Ask one question: How does one spend their way out of bankruptcy? Isn’t there a point that people stop loaning money to this country and say no? It’s a little like storing cyanide capsules in the fridge so they won’t spoil. Nobody is going to argue with your reasoning. Who wants to be the first, to test one that hasn't been refrigerated?