SOS Red Alert! Financial Tsunami is here to stay!

Run, the sky is falling! According to Chicken little.

I have wrote a couple of pieces on the 2nd Financial Tsunami over the last one year. It is written not because I want it to happen, it is written actually to forewarn people to be prepared for it.

One may ask, it has nothing to do with me, why should I care? Well, there are not many that lives through the Great Depression of 1930s, so not many experience it. Say if you are 20 years old during the great depression, you will be around 100 years old today. Not many live to tell the tale of the Great Depression.

Let us look as Japan. Almost become super power (economically) in the late 80s. Today, the share market is only, it had dropped 75% from its peak in 1989. Properties in Japan today is around 60% lower than during the peak.

Most are saying China will take over USA in 2016. Most economist or financial experts always use the theory of extrapolation unknowingly. Who could have thought of that in the 70s where China will become the second largest economy in the world. Example, say China will grow 8% in the next 10 years, it will be bigger that USA in 6 years time. Well, they said the same thing about Japan in the late 80s and look what happen.

The only different today as compared with Japan is that the magnitude is much higher, thanks to the introduction of DERIVATIVES. Before we come to derivatives, what about the debt being accumulated over the past few decades by the USA? Derivatives is 10times the size of world economy add up.

MyView

Some may ask, why I spent so much time reading, watching, analysing, debating, discussing about the world economy? It is a valid question though, why? The short answer is to HELP others to realize the implications of the Financial Tsunami. To help whoever is reading to be prepared to face the financial tsunami. If not, one will not even aware what hit them during the tsunami.

So that people will stay away from Shares, Derivatives, and Properties where possible, or when it drops, it will be like or worst than Japan. Besides, one should also know what to do during those deleveraging period (no rush, easily takes a couple of years if not for decades)

SOS Doom Sayers

Doom Sayers of DJIA

• Peter Schiff


• Gary Shilling


• Robert Prechter


• Harry Dent


• Jim Rogers


• Marc Faber

And many more. However, timing is always an issue. Not many can get it on the dot. Perhaps it is not easy. But Charles Nenner is the timing guy. Must refer to him for guidance.

MyView

It is never easy to predict the timing. Some may get it right but for the wrong reasons. Some got it wrong but for the right reasons. Financial markets is emotional, hence, never be easy to predict.

SOS China in hard landing?

SOS Earnings Myth

The majority investment communities and experts believe that fundamental analysis is one of the best ways to evaluate whether the stock price is over or under value. It has been used for decades and seldom do they question the validity of using earnings (mainly) as a tool to evaluate a stock price. You can see financial analysts debating with each other reading the same fact in the financial statements.

Let us explore what is what fundamental analysis cover:

Internal:

1. financial ratios
2. management track record
3. costing
4. consumer change of taste
   

External

1. country risk
2. industry performance
3. natural disaster
4. man made disaster
5. market liquidity
6. black swans

You will see the major media talking about the same thing (say oil price increase) have both positive and negative impact on share price at the same time. If today oil price goes up and share price goes up, they will say, economy is peaking hence demand for oil improve. If today oil price goes up but share price goes down, they will say earnings margin is squeeze due to high oil price. Whichever way the share price goes, they explanation is always logical.

However, does that make them right?

MyView

What if we found out that share price are more social mood driven and liquidity driven than earnings and we are moving towards the next few decade of deleveraging. It may make a mockery out of the fundamental analysis experts like it always do.

SOS China: Expert Dismantle the Three Gorges Dam

Extracted from The Epoch Times June 2011, issue number 109.

The Three Gorges Dam (TGD) is a huge failure and should be dismantled, the sooner the better, an expert says.

The massive 17-year project on the Yangtze River that has submerged many communities and displace at least 1.4 million people, was to control and harness China's mighthiest river, and stand as a symbol of Chinese Communist Party's greatness and power over nature.

But since the completion in 2006, nature has not cooperated. Drought and every kind of disaster to quote one local official, have descended upon the region. The dam project is also become a financial sinkhole, requiring hundred of billion yuan in ongoing damage control. In 2006, the lowest levels in 130 years were registered near Chongqing.

At the same time, to generate electricity, the dam is holding back water, leaving little for the lower reaches of the river. Drinking water for tens of millions of people and livestock is threatened. Rice crops are failing.


MyView

The dam project was hailed by the CCP's as being able to secure the regions top needs:

• power generation
  
• inland shipping
• flood control
• agricultural irrigation

ALL has failed miserably. In 2009, US26 bil is allocated to solve evacuee relocation issues and geological disasters (as much as building the dam) Total requested from all areas exceeded US61.6 billion.

A Chinese expert in hydraulics said a big project like this is a HEAVEN for corrupt Chinese officials. US10.8 bil was allocated for the resettlemnet of evacuees, however each settler received only around US1000. THe numbers don't add up. (1.4 million evacuees x US1000 each = US1.4 billion)

When silt accumulation in the reservoir exceeds 4 billion tons, the Yangtze River will no longer be able to carry that much silt into the sea, and the middle and lower Yangtze River will be blocked, forcing the river to change its course. Once this occurs, demolishing the Three Gorges Dam won't be achievable even if the authorities want to.

The moral here is not to destroy the nature to fulfill one's ego. It will bring sufferings to millions, who is innocent and incapable to protect themselves.

SOS Kick the can down the road

End of the noble grand experiment for EU in the making? No, if they continue to kick the can down the road.

Greeks will not change, period. Unless significant change in population. German is more worried than Greek because of the risk of getting out of Euro.

It takes 3.3% GDP to have a stable employment, and 2% GDP going forward, the unemployment will get worst and worst in USA.

Gary Shillings prefers US Treasuries and US Dollar. Commodities is falling and it will be a hard landing for China.


MyView

One may delay the eventuality, but it will come back to haunt you later. There is a Chinese saying, a paper cannot be wrapped around fire, eventually the truth will prevail. The above chart shows the world in M3+credit which has reached its zenith, the age of deleveraging will cause deflation.

Toxic debt is about US65Trillion, unfunded social securities and medicare is US300 Trillion, derivatives outstanding is USD600 Trillion. World GDP is about US60 Trillion. It is very unlikely the world can take on anymore debt significantly as the toxic debt will implode faster than the new credit created.

SOS How does S&P since 1871 looks like?

Interesting charts for almost 140 years. Worst case, S&P will be around 300 to 400. So there is about 1000 points to go, about 70%.

MyView

S&P over and under valuation can be based on many methodology. Most like to use PE, which indicates currently at historical low (past 26 years) based on historical earnings. Should you use dividend yield, it is at 84 years historical low. So much for fundamental analysis, depends which indicators you choose.

Stock markets are hardly efficient, neither are they rational. It is inefficient and emotional. One day, they say Greek problem cause the market to go down, two days later, they say Greek finally resolved, market goes up again. Another day, they say Portugal, Libya, Egypt, China, Japan. One day say terrorist, tsunami, flood, hurricane, earthquakes. You name it, there are thousands of reasons.

According to Robert Reich (ex-Clinton), in the 1980s, 1% of the highest income earners own 9% of total income, today they own about 25%. The median income remain the same over the last 30 years. The one percent now pay less tax than 30 years ago, even though they own 25% of the total income now. In short, the rich influence the governments in its policies to their advantage at the expense of the remaining majorities until one fine day it implode, like DEBT and DERIVATIVES.

SOS Is DJIA sustainable?

Is this a bear market correction or a bull market correction? The market has rebounded nicely since March 2009, about 27 months. It appears to be running out of steam, as far as the volume is concern. Unless significant volume increase can support the next upside, it is unlikely there will be any significant upside, sideway at most.

However, should the volume shrink for the next few weeks, there is a high probability that the DJIA turning south. Any upside not supported by increase volume indicates a weak climb of fear. Once the steam stops, it will plunge down.

The second chart shows that the housing has about 20% downside to go. Las Vegas alone had dropped about 68%. The housing peak in 2006, and 5 years latter, they have not reached the bottom yet. Almost USD6.5 trillion of net worth in housing has been wipe off the planet (in USA alone). When the second Tsunami wave arrive, there is no way to run. This will hit the real economy as well, including the "financial markets," which think that housing had reached its bottom in 2009.

MyView

It is clear that the excess inventories in housing will wreck the economy again when it goes south again. Banks will get hit, another round. USA will face another recession and stagflation going forward. Looking at the first chart, we can see 3 tops, I do not believe we can see the next top for the next couple of years. Reduce your stock portfolio and focus on high dividend yield stocks, even that will not be a guarantee. When the Tsunami 2.0 hit, even high dividend yield stocks will follow the tides.

Wheat has dropped about 20% and oil has dropped about 10% over the last few weeks even when the main media talking about bad weather and wars in the MENA zone. What does it tell us?

SOS Fundamental Analysis, can we rely on it?

Fundamental analysis tells us the history of a particular company. However, the price action or the trade price of the company may or may not reflect the fundamental of the said company. Why? Price actions, or the price traded only reflect the actions taken by the partcipants, comprising rationale and non rationale actions.

MyView

Fundamental analysis is studying the strength of the financial statements. Of course, if the figure is cooked up, no one will know the strength of the financial statements, normally, not a good one. Sometime, no matter how good fundamentally the company is in, if the industry is a sunset industry, participants will shy away.

There is also times when it is effected by the market cycle. When the entire economy is not doing well, no matter how good the company, it will be undervalued.

One of the good measurement is to look at the daily sentiment of the financial markets. If they go to the extreme, it will revert. Once recognise, it will react.

SOS Dubai x 1000 = China

Peirs Morgan on Dubai....

• A handphone cost USD700K
• A car number plate '73' sold for USD2.5 million
• A 13,000 sf luxury apartment sold for USD17 million
• It cost about 500,000 pounds at The Palm and peaked at 3.5 million pound (in 6 years)
• A complex house a sky resort at -4 Celcius
• Highest building in Dubai, higher than highest building in the world by 40%

If this is not wasteful, what else can you call this.

Looking at the chart above, the price has "stabilized."

In 1990, it was size of 15% x Singapore. It doubled by 2000, and doubled again in 2005, which is 50% of Singapore size. The property burst in 2008.

Now back to James Chanos, he says China is Dubai x 1000 in 2009. Well, he was about 3 years early.

China right now looks like The United States in 2007. American consumption and speculation drove oil prices to $148 a barrel, copper was just under $4 a pound, and the stock market was surging.

MyView

All bubble always come to an end, a bitter end. It is simple, it is pure legalised gambling under the pretext of "a shelter over your head." Thanks to participation of all parties in the game. You need developers, architects, contractors, valuers, banks, and of course, the gamblers. Everyone is feeding each other with good news for 8 years, then, poof. Can this happen to China, it is almost certain, it is a matter of magnitude and timing. Same with HK, Singapore, Malaysia (certain pockets).

SOS Secrets of Substance over Form

Gerald Celente said lately:

As far as these “leaders” and their media are concerned, the only opinions that count come from a stable of thoroughbred experts, official sources and political favorites. Only they have the credentials to speak with authority and provide trustworthy forecasts. That they are consistently, if not invariably, wrong apparently does nothing to diminish their credibility.

How can any thinking adult possibly imagine that the same central bankers, financiers and politicians responsible for creating the economic crisis are capable of resolving it?Yet even in the face of their proven failures and gross incompetence, anyone daring to challenge the party line or the conventional wisdom is dismissed as an “alarmist,” “fear monger,” or “gloom-and-doomer.”

…with the Dow on a down trend and the economic data increasingly pointing in the direction of Depression, Washington and Wall Street remain in denial. The only debate among the “experts” is whether or not a “double dip” recession is likely.

However, for the man on the street – pummeled by falling wages, higher prices, intractable unemployment, rising taxes and punitive “austerity measures” – “Depression,” not “recession,” and certainly not “prosperity,” is just around the corner.







Well what do you think?

Now this is what Gary shilling said lately:
Now what do you think?

SOS Financial Disaster

Since the financial crisis in 2007-2009, nothing has change, as far as the regulatories on derivatives is concern.

Things that has change and don't matter much (to repair the economy)

• interest rates to zero


• more bailouts


• QE2 USD600bil that goes to Europen Bank (resides in USA)


• change of accounting standards (to reduce write off)


• only Bernie Maddoff goes to jail (and a few more)

SOS Does Fed controls the Markets?

Can Alan Greenspen or Ben Bernanke controls the markets?

Nope. Then who controls the markets, actually, it is the social mood.

SOS Bear Market Correction or Bull Market Correction?

First chart shows that big chunk of the oil price is based on speculation (non genuine purchaser or seller)

The second is the zenith of Debt at USD65 Trillion, excluding unfunded liabilities by federal governments USD300 Trillion and derivatives of USD600 Trillion.

When the debt reach its peak, there is no other way to go but to deleverage. Lots of paper money will "poof" or disappear. Say, one day the market is worth USD13 Trillion, few days down the road is USD11 Trillion.

SOS Emperor without clothes

David Rosenberg (former chief economist for Canada) is 99% sure USA is going for recession by 2012.

MyView

2007-2009

S&P 500 dropped 57%

Commodities dropped 57%

Oil dropped 78%

Emerging Market, Gold, Real Estate dropped significantly

30 yr Bond dropped 26%

10 yr Tresury notes dropped 10%

Will there be a repeat? Definitely, bigger and longer. The timing may be different this time. This is a very clear Japanese case of Balance Sheet Recession that will cause a Deflation and Depression.

SOS What is the End Game

Peter Schiff says: (MyView in Red)

Foreign governments too must get out of the way and let market forces work. Their support for the U.S. dollar must end. (I do not think the foreign governments is supporting the US dollar as they themselves are in trouble (referring to Europe, China or Japan) and are incapable of doing so)If they do, U.S. consumer prices and interest rates will rise, as they must. If the Fed tries to combat the effects of a falling dollar with more QE the dollar will fall even further and consumer prices will rise even higher. (No one is able to combat the dollar, including the Fed, period) The cycle will either end with the Fed as the only buyer of all U.S. dollar denominated debt (wiping out the value of the dollar) or a Fed engineered rate hike that brings the cycle to an end. Both scenarios are catastrophic, but the latter at least offers the possibility of redemption. (Unfortunately, Fed is unable to do both effectively. Fed is merely reacting to the trend set by the market (following herd mentality). When the bad debt eventually evaporate, trillions will be wipe out from the financial markets, and most investment assets will deflate, including properties, share prices, commodities, precious metals at different time frame)

The same experts who did not see the 2008 financial crisis coming also fail to see the world in these stark terms. And while it gives me no pleasure to forecast the demise of the U.S. economy, I hope that at least the reputations of these "experts" will sink with it. (Yes, many have seen the crisis in 2008, but the reasons are different)

MyView

One expert one opinion, thousand experts thousand of opinions. 90% always got it wrong. Opinion is Free, just like my view, so, no responsibility and accountability, although with a sincere heart to prevent wealth to be destroyed by irresponsible governments.

Hence, my view is that stock market in USA will drop 75% from its high of 14,000 to 3,500 within the next 5 years, 2016 (plus minus 10%). In between, there will be volitale and sharp correction as if the market has recovered (just like this one from March 2009 to May 2011).

Commodities will drop substantially, i.e. more than 40% from it recent peak (last one year).

US dollar will equite to Euro, one to one. Now is Euro 1 = USD1.43, i.e. US dollar will appreciate at least 30%.

Housing in USA will continue to drop at least 20%.

Derivatives will cause another financial Tsunami within the next 2 years.

SOS Unspoilt nature

Pursuit of Happiness. Some say it is a state of mind. Some say is the attainment of inner peace. Some say it is enlightenment.

Most common people is in pursuit of happiness. What do they pursuit, confort, happy family, status in society, respected, financially successful, great friends, healthy, great job, entertainment, etc. etc..

What happen when everyone is trying to attain the so called happiness? Conflict is produced. One will try to outsmart another. Ensure his or her boss is happy. In the process of happiness, conflict will arise e.g. it will cause envy, unfairness, jealousy, etc.

MyView

In a materialistic world, there is full of "attraction" and "distraction." We are like living in delusion. In fact, we are. In the name of pursuit of happiness, new rules are set. It moves toward materialistic achievement. It is what can be seen or heard. They no longer place importance to moral decay or virtue, because it cannot be seen or touched. So it moves further away from "spiritual believe" to "materialistic believe."

As we move away from the nature, we actually move away from inner peace or elightenment or a pure state of mind Life is short. What we are borned with, accumulated during this life, we cannot bring it together when we go. In a blink, your life is over. So, coming back to the philosophy of life, what is the purpose of life? In pursuit of happiness? Nope, I believe there should be deeper than that. Give it a thought.

SOS Worthless Money

FIAT MONEY GROWS WHEN BANK INCREASE CREDITS

Most experts says that fiat money is worthless money. History has shown it is true. US dollar has loss about 95% since 1971, when it was peg against gold, it was USD35 per oz, today it is USD1500 per oz. This is true in GOLD terms, BUT, would it possible gold will drop back to say USD100 per oz? or USD250 per oz? Yes and No, because nobody is able to predict that.

Fiat money grows every year, whether by physically printing (insignificant) or by credit creation by banks (via lending and derivatives instruments). If the fiat money is use productively via new credits, i.e. build a port, increase trading to accommodate new consumptions, and from this productive use, profits are made, some money is saved and allow new credit given to borrowers, hence, the ECONOMY is growing, economic sovereignty of the said country become stronger and bonds (new credit) can be issued at lower interest rate.

In such a case, fiat money is not worthless. If the fiat money continue to grow indefinitely and use for productive use (i.e. business is able to repay the credit created with interest), then more people will become richer i.e. GDP per capita will improve over time. So household income grow, able to consume more goods and services.

BAD CREDIT

The assumption of having productive use indefinitely is a MYTH, and it will not happen in the real world. So, say, credit given to unproductive use, say buy houses, and prices of houses continue to grow, until it is over supply and no one can afford such property, the prices will drop. In USA, the property market has dropped about USD 2 trillion. Fiat money is wipe off the ocean of fiat money. Household will lose money, bank need to write off their loan (not able to give more loans), business will fail, GDP shrink, unemployment goes up.

NET FIAT MONEY IN THE MARKET

What then will happen to the credit created when everything fail, say stock market drop, commodities drop, derivative burst, properties price continue to drop, say 30 trillion being wipe off, will the fiat money become worthless money? Yes, Fed can continue to creat credit, but is there any taker? It debt is so huge, even a layman can see that. Say, USA created USD50 trillion of credit, 30% is for productive use while 70% is for unproductive use, like trading of securities in financial markets via borrowed money, it will eventually become so huge that the creditor will not continue to fund such a wasteful use.

MyView

It would be a myth to say that Fed will continue to print until the US dollar become worthless, hence, paid their loan using worthless money. BUT will such a situation be ALLOWED by the American taxpayers? Think about it, who will gain when the US currency eventually become toilet paper, yes, suppliers, what about all the BANKERS, FED, RICH PEOPLE? Give it a thought, because I believe there is a limit to the PRINTING or CREDIT CREATION. Look at JAPAN today, the public sector may be allow to print due to trade surplus, what happen if this STOPPED?

SOS Tomorrow Gold

A book written by Marc Faber, an expert on global economies.

"Government, since it relies on a consensus of constituent interests, is typically among the last groups to succumb to the emotions of a financial or economic trend. It is telling, therefore, that central banks are now expanding their gold reserves for the first time in a generation." Robert Prechter

MyView

I believe the demand for "financial gold" is out of fear of "fiat money." It is a logical as long as the central banks continue to expand their credits. If we research the actual demand and supply of physical gold, the supply exceed demand. However, the demand and supply of "financial gold" (non physical gold) think and act otherwise.

Will the majority be right about gold prices? Will the central banks right about gold? Are most participants in gold is right? Of course, one argument is that gold is far from bubble, since not everyone in the market talks about gold.

As you see up there, blah, blah, blah, & expansion of gold by central bankers. Will there be right this time. Gary Shilling said that the US Government over its history try to tame the inflation for 12 times, only 1 time succeeded. Hmmm, I wouldn't bet on this.

SOS Are we taken for a ride, apa nama?

SOS Today I don't feel like to do anything...

SOS Bill Gross Says (we better listen)

SOS Gary Shilling & James Chanos on Housing in USA & China

SOS Goldman Sach

Goldman Sachs = best investment bank in the world or = scum bags?

SOS Real Economy Vs Financial Market

When we talk about an Economy, we must separate it from the Financial Market.

One is talking about the real demand and supply of goods and services, while the financial market is the manifestation of the real economy. A genuine purpose of a financial market like stock market is meant for raising equity and allowing the public to participate the growth of the Real Economy. However, this genuine purpose, as usual, being mixed with greed, turn mostly into another casino.

An example would be, a company is financially distressed, auditors qualified its report under going concern, announced a debt raising proposal, the share price increased 2.5 times, and then drop back near its original price before the announcement. While investors, speculators, day traders, play the shares up, the said company is still financial distressed, waiting for the "proposal" to be materialised. So, the real economy reflect the financial state of the company (financially distress) and the stock market reflect what "people" perception of the stocks, which is far from the "real fundamental" of the company. From this observation, we can say that the stock market is basically a reflection of all the participants perceptions (based on so called fundamental news or insider trading news or other) and act upon those "misguided" information. So, we can safely conclude that the actions by the participants are irrational.

MyView

There are many of such thing happens in the KLSE or other markets, it basically become a casino for many. The real fundamental of the companies is based on the guessing game of the participants or perception. So be very careful when we invest, speculate or gamble, there are simply too many variables that beyond the fundamental analysis. It is called Emotions, which, many have a hard time measuring it.

SOS Gambling vs Speculation

DON'T GAMBLE if possible.

Stock market = day trader = speculators = investors = hot money = insider trading = GAMBLING

Commodities Market = day trader = speculator = hedge fund players = hot money = manipulators = GAMBLING

Casino = GAMBLING

Property market = owners = investors = speculators = GAMBLING

Horse race = GAMBLING

Business market = genuine businessman = risk taking businessman = GAMBLING

Derivatives Market = hedging = risk management = GAMBLING

Investment bank = trading = GAMBLING

Currency trading = GAMBLING

Goldman Sachs = innovative CDS, MBS = high frequency trading = GAMBLING

MyView

It is hard to discern between genuine from fake in all aspect of lives. Human race today is more complicated than 100 years ago. More needs, more desires, more attachment, more temptations, more disruptions, more comfort and more of everything. A lot of area in live fall between the thin line of investing /speculation/ manipulation to GAMBLING.

GAMBLING become the second nature of human race. In financial perspective, they call it risk management, hiding behind all sort of legal means.

I suppose one cannot entirely eliminate GAMBLING from our lives but one should not be attach with GAMBLING.

SOS When will be the next Tsunami?

This is a trillion dollar question.

Even James Chanos is early by 2 years for shorting China properties.

Gary Shilling is also early by about 2 years in predicting that USA and commodities will go down again.

Robert Prechter is also early by about 2 years in forecasting that DJIA will collapse.

Charles Nenner is predicting in 2012.

Timing is a very very tricky issue. In economics, it is like a dynamic puzzle, it changes every time. It is emotional. One minute you have MENA, the next you have Tsunami, then you have Missouri flood, now the PIIGS is protesting and China overheating. In order to predict the reaction of investors, traders, speculators in the financial market is not that easy.

MyView

Although it is obvious the we are seeing the cracks, but it can last longer than you can expect. After all, the financial market does not work on rational actions. We know that derivatives are 10 times bigger than the world markets, but no one even dare to quantified its effects or it is damn difficult to calculate its effect. No professors from Harvard or MIT got it right. Look at LTCM. Look at Lehman, even 3 years later, know one would admit it was due to DERIVATIVES. With all this window dressing, covering ups, manipulations, the truth will take longer to review.