Oscar Vs. Dr. Vlado

Over the last few months, a debate has been raging regarding the economic future of the US, the world and the investment climate encompassing this. As editor and blogger, I am neutral/Bullish on the future of the US into the Year 2010. Dr. Vladovich is more concerned about the next two years and feels a greater threat to the U.S. Economy It is very clean that the world economic growth is more mired now in a ponzi-setup of every growing populations and income levels, using more and more debt to finance present consumption needs. If you have a retracement in growth of population or declining debt ratings, any system will fail to the inequities of the "reverse ponzi" Japan has been stagflated/deflated for some time due to "low" consumption" and a nation of aging people. The U.S. entitlement system, such as the Social Security system is another clear example of the ponzi system, where the U.S. government has admitted that soon there will only be 2 workers supporting one retiree... This last case is why the US no doubt is in some respects allowing the borders to thrive with illegal immigrant crossing. Dr. Valdo agrees with this all encompassing view. But our timing for a period of future volatility is different.

Oscar 1) In my experience in business, and trading the capital and derivative markets I have seen world governments and super economic banking enterprises move to remediate issues that come up. I go back the Russian Rubble Crisis, the Asian Currency crisis (97), Long Term Capital, and to a lesser extent currency implosions in S. America; Each and every time the "market makers" and governments step in to stop the crisis. My view is that any future issues the US economy may face will be met with this type of management.

Dr. Valdo 1) The personal Debt of American's is over 9 Trillion Dollars, growing at a clip of 300 Billion a month. This debt exceeds the normal admitted 7+ trillion debt owed by the US (which is in turn owed by the taxpayer citizens of the US). No where is history has personal debts exceeded government debts. The majority of this personal debt is in auto loans (GM and Ford Debt is near junk status), unsecured credits (credit cards, signature loans) and Home Mortgages (new estimates put 30% of those newest purchases under the speculative category) A third of all new mortgages (sales and refi's) are in the Adjustable category. My numbers are indicating at a maximum of 12+ trillion personal debt and 150 basis point move in the mid term credit markets, and the consumer will have a huge problem services his personal debts.

Oscar 2) The new "gilded age" is propelled by Debt. The buying power of the baby boomer in some ways is being matched by the Gen XYZ's easy credit environment. My numbers indicate these new "Americans" can sustain higher debt loads because many have dual sources of income, and small businesses expansion (self employed) is at a record pace. Many folks do not fully report income or are using other means to keep the tax man at bay. So true income is not in the non-farm payroll reports as once thought. Unemployment figures also are not as important as they were 15 years ago. Asset inflation in leveraged products has transferred from the NASDAQ 5000 to the Real Estate Market as well.

Dr. Vlado 2) The mortgage industry is in a frenzy that is near the end. Fannie Mae and the like are indicating problems. The asset backed securitization has created an industry that cannot police itself. Underwriters may sometimes look the other way just to get a deal funded or fib documents to get the Auto-Approval from an underwriting system. Who cares, that loan will be sold down the river attitude runs rampant some industry circles. Excessive fees to minority and Black borrowers even have the likes of Ford Motor Credit facing lawsuits. There also seems to be a new discovery that many loans outstanding have been doctored and may not truly reflect the credit risk that a bank may be undertaking during the underwriting process. The newest batch of innovative mortgages assure that this and future generations will be "leasing" their homes. If the underlying asset does not continue to rise in value, the US consumer may not have further spending power. Inventories will build up, building permits will fall and in many of the Coastal US areas, there will be room for price depreciation. Those leverage will find themselves underwater. This will clearly spell the end of the rope for the US Consumer.

Oscar 3) The US Consumer will continue to spend into 2010 because Real Estate is a very local proposition. Some cities, such as Las Vegas, NV are experiencing this pre-bust cycle but in trading we have an old saying "tops take longer to form then bottoms". Inland areas will continue to climb and allow breathing room for the speculation to continue. Those of higher net worth in the coasts will be able to bear a deeper depreciation because theoretically they are not as leveraged as the common US consumer. Fiat consumption has some time to go till it busts

Dr. Vlado 3) Single Family Housing foreclosures are at a 30 year high. The average household owes more money than it pulls in during the year. The carry trade that many headgefunds and money center banks have placed will have to unwind as the Fed grind the short rates to the upside. This unwinding is causing the yield curve to flatten (and if inverted signals a recession forthcoming). The cost of money will rise and so will the debt servicing. Debt exceeds saving by 700% or more...

Oscar 4) I agree in the threats and reality of monetary policy but the Federal government is applying many Fiscal processing (taxation of repatriations corporate profits for instance) to bring a further infusion of capital back into our shores. We will start to witness the "powers" create new "programs" to further fuel the liquidity in the US economy. A failure to keep the consumer confidence up can bring the system to a grinding halt. My biggest issue in threatening this comes from the price of crude (who is truly costing the consumer an inflation rate of 8-12% a year rather then the reported CPI). If crude Breaks 60+ dollars a barrel (which could happen if the dollar declines vs. Euro/Yen/Lb.) and moves into the $65/barrel range, the American SUB will end up on the side of the road. Big selling at the $57+/barrel range is keeping the prices down. Lots of resistance in this area. If its shorting, those short will get crushed if they run out of bullets. I am diametrically opposite to the thinking of regarded minds like Ken Fisher, who correctly state petroleum is only accounting for about 6% of economic GDP in our service economy. One only has to extrapolate the number however, to find that every increasing prices create an exponential costs addition to the economy. AND....The carry trade should get unwound without big issues in my view. Furthemore Corporate spending accounts for a great majority of spending in the economy..

Dr. Vlado 4) Corporate profits have been squeezed as many companies have taken on new debts in M&A activity and non-performance investments. The US Stock Market may be overvalued in some repasts and this could also hurt the equity value that much public/private debt is financed with.

Oscar 5) Implied Volatility and the VIX indicator are at historic lows. From a high at 42 in the September 11th attacks, its down to about 12 today. Speculation of movement is almost nil. The calm before the storm. Being we had recent NYFE breakout failures and broken ascending wedges in the chart patterns of many widely held indexes, I concur with this view. I also subscribe to the Austrian Business cycle theory and Wave Principle (Robert Prechter, among others). The length and severity of the probably recession depends on the dislocations and imbalances that have accumulated in the economy during the preceding boom. The NASDAQ had no business trading at 5000 in 2000. The final issue with the future lies with entitlement payements, healthcare costs rising inflation in coumption goods (not investment goods)

In our upcoming edition, we will explore ways of protecting yourself from what could happen in the future. Happy Easter

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