Surfing The Kondratieff Wave, Reprinted from 2006

Here is a reprint of my second post as a blogger way back in May of 2006 and reprinted again in March 2009. 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.

A Precious Metals Market Perspective

There are three ways to own precious metals, take physical possession of the metal, or let a proxy hold the gold for you in a storage vault, or trade the metal with your broker using ETF’s (Exchange Traded Funds).

In the first process, taking physical possession, you have the metal to hold in your greedy little hands. In the second process someone else holds your gold in their greedy hands and there is a good possibility if every depositor wanted delivery, it just wouldn’t happen. And in the third method of “owing” the metal is through ETF trading. This last method is kind of paper trading of the metal. A person can buy and sell and never really deal with the physical metal.

There is one problem though. Physical gold, silver and platinum are real. A lot of these markets are hypothetical. They trade on the price of the commodity, with the buyer and seller not the least bit interested in taking possession of the precious metal. A buyer sells 1000 ounces of gold for September delivery and buys them back before the due date to avoid having to make delivery.

I’ve made several trips to a gold and bullion wholesaler. I was converting my junk silver and gold. People are buying, not selling. And I must admit when I first went there, I thought I was telling the owner something new about Obama printing dollars and how I wanted to preserve my buying power. The last time I was there, an elderly couple was telling him the same thing. And Chuck patiently listened to them.

So there are really two markets, one that deals in physical delivery of the metal to the buyer and one that deals with the change in price for the holder of the contract.

The precious metals have dropped in price considerably in the last two days. The thing to look at is the physical delivery. People on the street think that now is a good time to buy gold, since the price is down about $400 from its highs.

It appears the ETF’s and futures markets are where the battle over price of precious metals is being fought. A lot of those contracts can be bought with only 6% down. So Monday there had to have been some pretty heavy margin calls and if you didn’t make the margin call, you got sold out.

On a local level, I only have my own observations to report, but some bullion dealers around here are running short of gold and platinum maple leafs. It now takes a couple of days to fill an order. And it’s been that way since January. What we are looking at is not a real shortage, but it suggests more people are buying than those selling physical precious metals. Remember there is a $48 dollar premium on the purchase of gold and platinum per ounce; so you’re not going to change your mind on a whim.

I think that Joe Sixpack has figured it out. The banks pay zip for interest. Costs are going up and paychecks are going down. Silver rounds can be purchased for about a buck above spot. Physical ownership has a real feeling to it; you’re in control. It’s rather strange to see someone come in to this precious metal wholesalers shop with a stack of 100 20 dollar bills and leave with 60 ounces of silver. That buyer just made a statement; the banking system sucks. GOT SILVER?

The Governments Good Intentions

Our government thinks that the American dream is home ownership, a college education for everyone. and of course, health care taxes for everyone (under the age of 65).

We just went through a housing bubble crash. Notice the people that sold their homes got cash and the people who bought them got a house they couldn’t afford. So if you paid nothing down and moved in, the term “Underwater” kind of evokes sympathy from the reader, but in most cases it didn’t cost much to move in. In fact, to rent out here, you need first and last month’s rent which is about $3,500. So for as little as $1,500 you can still buy a home out here.

I was listening to Gov. Huckabee on FOX yesterday and he question the current government policy of lowering credit requirements for new home buyers; “Weren’t low down payments the cause of the housing bubble?” Well, kind of, but the government is in a situation where selling these foreclosures to someone new, improves their balance sheet somewhat (since they already own them). The worse that can happen is that they get the house back. The real problem is the financing.

Before the crash, the banks packaged and sold this “toxic waste” (that’s what the banks called the stuff) to investors. Now that won’t happen in today’s market for two reasons, everyone knows the stuff is bad already, and you could get some jail time for selling it. Now you see why Bernanke is buying real estate paper. Once the Fed purchases the paper, Fannie and Freddie have more money to offer for home loans. Taking advantage of the American dream of home ownership, the government transfers these foreclosures to our unsuspecting kids. The average home buyer is not interested in the cost, only the monthly payments. The higher the price, the more the homeowner pays in property taxes. “Oh Goodie” says Uncle Sam.

Here is where it gets interesting. Student loans offer a method to increase the amount of debt owed by our kids. Remember the dreams we had of future success after completing college? It’s a little like buying 100K in lottery tickets. You’ll read about the winners. I’ve known people who’ve had 30K in Visa debts and that is about where the debt goes from being manageable to unmanageable. At that point they file for bankruptcy. And of course with the student loans, bankruptcy is not an option.
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During tough times, the amount owed on a student loan could double in just 12 years. This is where home ownership and a wife that wants to stick around, are all part of a meaningless dream world that will fall apart. Too many debts will kill any marriage ever made. There is a way to escape this trap that Congress overlooked. Move to another country like Australia (sshhh that’s a secret).


Then on top of that I was doing my taxes and looking at what I, the wife and son pay for health care coverage combining our payments with our employers—about 20K. And this is just basic coverage. Obama care hasn’t even really kicked in yet. Why do I get the feeling that we will be paying a lot more real soon?

Let’s get rid of Fannie and Freddie. We don’t need to save homeowners who have no skin in the game. Give our kids a shot at a home that has a reasonable price tag. Modify student loans so bankruptcy is an option. Teach the lenders not to fiddle with kids right out of high school. It’s literally a license to steal from those too inexperienced to know what they are signing. As for Obama care, this law eliminates the decision many families made about what they considered necessary, like auto or health insurance. Why worry about your right to bear arms when the government can tell you what you are going to buy with your paycheck?

Do you get the feeling that all of this government help we’re getting is making things a lot worse?

We have a government that has successfully screwed up the housing market by trashing the bond market interest rates. The student loan program works for all the wrong reasons. It reminds me of those “fog a mirror“ real estate loans. The good thing, when your two years of unemployment runs out, your student loan will put food on the table for four more years--Then apply for your passport (wink wink).

Look for the work week to be shortened to 32 hours (to get more people covered by Obamacare). And of course Congress will have to raise the minimum wage by $4 per hour so workers don’t starve to death making their mandatory health care payment. On top of that, the government will probably lay off all of the people responsible for managing these programs to teach us a lesson for wanting leaner government (it gets meaner as it gets leaner). All of this lends more credence to the saying, “The road to hell is paved with good intentions.” This isn't the hike we signed up for. "We are not out of the woods yet" and Obama can't smell the smoke.