The World Reacts to QE2

November 5th, 2010

Markets everywhere are taking a breather today after yesterday’s epic run-up, induced by the Federal Reserve’s announcement of Quantitative Easing 2.0. Meanwhile, leaders in other countries are delivering scathing reviews of QE2…

  • “As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable,” says Xia Bin, an adviser to China’s central bank
  • Brazilian finance minister Guido Mantega – who warned in September the United States was launching a “currency war” – was more direct: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter”
  • Germany’s finance minister Wolfgang Schäuble was the most blunt of all, saying QE2 won’t solve America’s problems, but it will “create extra problems for the world.”

“With all due respect,” Schäuble added, “US policy is clueless.”

Just a wild guess here…but this doesn’t bode well for President Obama at the G20 summit next week. He might want to dial back on Treasury Secretary Tim Geithner’s scheme to have everyone limit their trade surpluses and deficits to 4% of GDP.

On that subject, China just issued its first official comment: “We believe a discussion about a current account target misses the whole point,” says deputy foreign minister Cui Tiankai.

“If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.” (Just an example, of course.)

More choice words from Cui: “The artificial setting of a numerical target cannot but remind us of the days of planned economies.” Ouch.

The summit is next Thursday and Friday in Seoul, Korea. Usually these gatherings are the stuff of mealy-mouthed joint communiqués and awkward photo ops. But for this one, we might want to grab the popcorn…

Even as the rest of the world savages the Fed’s actions this week, Fed leaders are gathering today for a celebration…at the scene of the original crime.

“A Return to Jekyll Island: The Origins, History and Future of the Federal Reserve” is the official name of the two-day conclave at the Georgia resort where plans to form the Fed were first hatched in secret this very month 100 years ago. (The Morgan and Rockefeller men in attendance were on a duck-hunting trip, it was claimed at the time.)

This affair promises to be more public. The final panel discussion tomorrow, featuring Ben Bernanke, Alan Greenspan and Goldman Sachs managing director Gerald Corrigan – will be webcast live.

Of course, real Fed transparency would come in the form of a full audit. Rep. Ron Paul, for what it’s worth, is promising to press again next year…and he’s sounding confident that unlike 2003 and 2005, the Republican leadership will actually let him chair the subcommittee on domestic monetary policy.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” he said yesterday. Better stock up on that popcorn…

Dave Gonigam
for The Daily Reckoning

The World Reacts to QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The World Reacts to QE2




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The World Reacts to QE2

November 5th, 2010

Markets everywhere are taking a breather today after yesterday’s epic run-up, induced by the Federal Reserve’s announcement of Quantitative Easing 2.0. Meanwhile, leaders in other countries are delivering scathing reviews of QE2…

  • “As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable,” says Xia Bin, an adviser to China’s central bank
  • Brazilian finance minister Guido Mantega – who warned in September the United States was launching a “currency war” – was more direct: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter”
  • Germany’s finance minister Wolfgang Schäuble was the most blunt of all, saying QE2 won’t solve America’s problems, but it will “create extra problems for the world.”

“With all due respect,” Schäuble added, “US policy is clueless.”

Just a wild guess here…but this doesn’t bode well for President Obama at the G20 summit next week. He might want to dial back on Treasury Secretary Tim Geithner’s scheme to have everyone limit their trade surpluses and deficits to 4% of GDP.

On that subject, China just issued its first official comment: “We believe a discussion about a current account target misses the whole point,” says deputy foreign minister Cui Tiankai.

“If you look at the global economy, there are many issues that merit more attention – for example, the question of quantitative easing.” (Just an example, of course.)

More choice words from Cui: “The artificial setting of a numerical target cannot but remind us of the days of planned economies.” Ouch.

The summit is next Thursday and Friday in Seoul, Korea. Usually these gatherings are the stuff of mealy-mouthed joint communiqués and awkward photo ops. But for this one, we might want to grab the popcorn…

Even as the rest of the world savages the Fed’s actions this week, Fed leaders are gathering today for a celebration…at the scene of the original crime.

“A Return to Jekyll Island: The Origins, History and Future of the Federal Reserve” is the official name of the two-day conclave at the Georgia resort where plans to form the Fed were first hatched in secret this very month 100 years ago. (The Morgan and Rockefeller men in attendance were on a duck-hunting trip, it was claimed at the time.)

This affair promises to be more public. The final panel discussion tomorrow, featuring Ben Bernanke, Alan Greenspan and Goldman Sachs managing director Gerald Corrigan – will be webcast live.

Of course, real Fed transparency would come in the form of a full audit. Rep. Ron Paul, for what it’s worth, is promising to press again next year…and he’s sounding confident that unlike 2003 and 2005, the Republican leadership will actually let him chair the subcommittee on domestic monetary policy.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” he said yesterday. Better stock up on that popcorn…

Dave Gonigam
for The Daily Reckoning

The World Reacts to QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The World Reacts to QE2




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

QE2 News Overshadowing Default Risk In Europe

November 5th, 2010

Ben Bernanke has officially announced quantitative easing and the markets are reacting with rising prices among all asset classes. QE2 is practically an economic tool to artificially raise asset prices to prevent deflationary forces. When asset prices decline due to a lack of demand you have deflation. Quantitative easing essentially is a preventive approach for central banks to prevent deflationary forces. This techniques is used when a central bank can no longer lower interest rates due to it being too close to zero, so they just print money devaluing the currency and raising asset prices across the board.

Once started with quantitative easing it’s very difficult for an economy to get off of it. As with many drugs, the high is great but the hangover comes the next morning and the repercussions are unknown. This is unchartered territory where you have a major devaluation of the world’s reserve currency. For every action of the central banks there are reactions.

Now we’re seeing a reaction with sovereign debt issues resurfacing in Europe as tensions grow over debt restructuring, bank bailouts, and budget issues. Borrowing costs are rising because unlike the Fed, the European Central Bank didn’t purchase debt. The ECB will need to address these concerns of a declining dollar and rising borrowing costs leading to a potential liquidity trap.

This may lead to a replay of the May flash crash where there were reports of banks refusing to lend to each other. It’s the beginning of a global trade war where countries engage in competitive protectionism through currency debasing. Interventions and market manipulations lead to market crashes.

A weak US dollar is an additional tax on the American consumer as many are still faced with poor job opportunities and falling home values. A devalued US currency puts pressure on emerging markets, which need a strong dollar to make their products competitive.

Today gold and silver made a breakout from the three-week consolidation from early October. In early October, I mentioned precious metals would have a pullback. Over three weeks gold pulled back and this latest quantitative easing has pushed the price up to the upper resistance level again. This isn’t a point where I buy or add to positions as during the past two years gold has made 20% to 30% runs and given about half of those gains. In this market — where interventions and manipulations are occurring — chasing markets could be treacherous. Taking profits when the news and the consensus is bullish is the disciplined trader’s approach. When everyone else is comfortable I get cautious.

Read more here:
QE2 News Overshadowing Default Risk In Europe

Commodities

QE2 News Overshadowing Default Risk In Europe

November 5th, 2010

Ben Bernanke has officially announced quantitative easing and the markets are reacting with rising prices among all asset classes. QE2 is practically an economic tool to artificially raise asset prices to prevent deflationary forces. When asset prices decline due to a lack of demand you have deflation. Quantitative easing essentially is a preventive approach for central banks to prevent deflationary forces. This techniques is used when a central bank can no longer lower interest rates due to it being too close to zero, so they just print money devaluing the currency and raising asset prices across the board.

Once started with quantitative easing it’s very difficult for an economy to get off of it. As with many drugs, the high is great but the hangover comes the next morning and the repercussions are unknown. This is unchartered territory where you have a major devaluation of the world’s reserve currency. For every action of the central banks there are reactions.

Now we’re seeing a reaction with sovereign debt issues resurfacing in Europe as tensions grow over debt restructuring, bank bailouts, and budget issues. Borrowing costs are rising because unlike the Fed, the European Central Bank didn’t purchase debt. The ECB will need to address these concerns of a declining dollar and rising borrowing costs leading to a potential liquidity trap.

This may lead to a replay of the May flash crash where there were reports of banks refusing to lend to each other. It’s the beginning of a global trade war where countries engage in competitive protectionism through currency debasing. Interventions and market manipulations lead to market crashes.

A weak US dollar is an additional tax on the American consumer as many are still faced with poor job opportunities and falling home values. A devalued US currency puts pressure on emerging markets, which need a strong dollar to make their products competitive.

Today gold and silver made a breakout from the three-week consolidation from early October. In early October, I mentioned precious metals would have a pullback. Over three weeks gold pulled back and this latest quantitative easing has pushed the price up to the upper resistance level again. This isn’t a point where I buy or add to positions as during the past two years gold has made 20% to 30% runs and given about half of those gains. In this market — where interventions and manipulations are occurring — chasing markets could be treacherous. Taking profits when the news and the consensus is bullish is the disciplined trader’s approach. When everyone else is comfortable I get cautious.

Read more here:
QE2 News Overshadowing Default Risk In Europe

Commodities

Remember Remember the Fibonaccis in November

November 5th, 2010

Borrowing a phrase from the Guy Fawkes Day chant “Remember, Remember the 5th of November” (popular in the United Kingdom), I thought it was fitting to take a look at the “Fibonaccis in November,” namely the Dow, NASDAQ, and S&P 500 61.8% large-scale Fibonacci retracements – which are playing a role in the current market environment.

Let’s start with the Dow Jones:

All charts start with the respective October 2007 market peak and end at the March 2009 market low.

The resulting 38.2%, 50.0%, and currently important 61.8% Fibonacci retracements appear in the charts – let’s just focus on the 61.8% line.

In the Dow, it’s already broken this week – the retracement is 11,245, which was the prior 2010 peak.

As long as the Dow Jones remains over 11,245, then it is a confirmation of the bull market in place and an argument that higher prices are yet likely – having shattered not just the 2010 prior peak, but the large-scale 61.8% retracement.

Opinion aside, this is as objective as it gets.  Either it’s above or not.  And for the moment, it’s above the line.

S&P 500:

Now, the S&P 500 bumped up against the all-important level this morning, and it will be key to watch in the week ahead.

In fact, I spend a lot more time focusing on the S&P 500, so to me this is a far more important price level that traders are watching.

It’s 1,228 on the S&P 500, and though we’re above the prior 2010 peak at 1,219, we’re not yet (officially) above the key 1,228 level.  A break beyond 1,230 firmly places the S&P 500 in the bull market camp.

Watch this level like a hawk – the market will.  Bull market above.

Finally, the ‘powerful’ NASDAQ:

While the Dow and the S&P 500 flirt with the 61.8% Fibonacci retracement, the NASDAQ looks back and laughs.

That’s because the NASDAQ pierced above this level at the start of 2010 and remained above the 2,251 level for most of 2010.   It supported strongly on the 50% retracement as shown in June.

Though it’s not labeled, the Fibonacci Level that the NASDAQ is flirting with currently is the 78.6% retracement, which happens to be at 2,520.  The prior high resisted against this level, though price is currently above them both.

Strongly worded bearish arguments lose validity as long as price objectively remains above these levels – particularly the 61.8% levels in the Dow and S&P and the 78.6% level in the NASDAQ.

As the next week begins, write down these index levels, memorize them, and take notice as to what happens – specifically whether price continues its rally up through them (bull market) or pauses and reverses here at these key levels.

Remember, Remember, the Fibonaccis in November.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Remember Remember the Fibonaccis in November

Uncategorized

Plumbers Crack

November 5th, 2010

Poor Ben Bernanke. There was a strange glow on his face as it appeared in Monday’s Financial Times…like a bearded St. Joan of Arc; his hands were clasped together as if in prayer, and his eyes seemed to reach up to the gods, if not beyond.

He made his reputation as a master plumber in Princeton, New Jersey, interpreting drippy money supply faucets and deconstructing clogged fiscal drains. And now, he has become the hope of all mankind. Or at least that part of mankind that hopes to get something for nothing.

How came this to be? The answer is simple. The plumbers who came before him botched the job. Applying their wrenches to the recession of ’01, they let too much liquidity into the system. Everything bubbled up. The subprime basement overflowed in ’07…Ben Bernanke has been on the job ever since.

And this week the financial world held its breath. It waited. It watched. Ben Bernanke was hunched over…sweat on his brow…easing on his mind. Commentators, economists, and the public wondered if he could really create new money…new wealth…out of thin air? If this were true, it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros…creating money – out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants. And give every voter a quart of whiskey on Election Day.

During the course of the last three years, the plumbers have spent hundreds of billions of dollars. It’s hard to know what the final bill will be, since so much money – more than $10 trillion – is in the form of guarantees and asset purchases. They’ve pumped. They’ve bailed. They’ve squeezed and turned. They scraped their knuckles and cursed the gods.

You’d expect they might think twice before spending so much money. But on the evidence, they haven’t even thought once. Quantitative easing has been tried before. Has it ever worked? Nope. Never. Do you dispute it? Give us an example.

Japan announced its QE program in the spring of 2001. The Nikkei 225 was around 12,000 at the time. It quickly rose to 14,000 as investors anticipated a payoff from the easy money. Then, stocks sold off again. Two years later the index was at 8,000. Today, it is still about 25% below its 2001 level.

Did printing money cause an up-tick in inflation? Not even. Core CPI was negative 1% when the program began. It rose – to zero – briefly…and then fell again and now stands at minus 1.1% after going down 19 months in a row.

America’s own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March of 2010, the Fed bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so’s you’d notice. The unemployment rate today is 200 basis points higher than it was when the program began. And despite the flood of cash and credit, core CPI in the US is still only a third of its level in 2008.

Of course, there are other examples where central banks printed money with more gusto. In Germany, during and after WWI, the nation’s real money – gold – was used to pay for the war and the reparations following. The central bank felt it had to create additional money – like the Fed – without gold backing. It added about 75% annually to the money supply, from the end of the war until 1922. By late 1923, the US dollar was worth 4 trillion German Marks. Still other examples – from Argentina, Hungary, Zimbabwe and elsewhere – are fun to read about. But they are not exactly the sort of thing you’d want to try at home either.

Even if Quantitative Easing were a precision tool in the hands of a skilled mechanic, it might be little more than a wooden club in Ben Bernanke’s dorky grip. This is the same man who missed the biggest credit bubble of all time! There is no evidence that he could fix a bicycle let alone the world’s largest economy. But there you have a more interesting question. What if economists were duped by their own silly metaphor? What if an economy were not like a bicycle? What if the gods were laughing at them?

Central planning and cheap fixes have been tried before. When have they ever worked? Give us an example. Perhaps an economy is too complex…like love or the weather…unfathomable…and largely uncontrollable, something you can make a mess of but not something you can improve.

We have no more information as to the fundamental nature of things than anyone else. A toaster oven is designed and built for a purpose. When it doesn’t work, it can be fixed. But an economy? Who built it? Who can fix it? It is an organic, evolving system…whose purpose and methods are infinitely nuanced. Does it let banks go broke? Does it back up once in a while? Does it permit falling house prices…high unemployment…and deflation? Yes…so what? Does it always do what politicians and economists want? No? So what?

It has a sense of humor too. Wait until it turns around and kicks the clumsy mechanic in the derriere!

Bill Bonner
for The Daily Reckoning

Plumbers Crack originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Plumbers Crack




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Plumbers Crack

November 5th, 2010

Poor Ben Bernanke. There was a strange glow on his face as it appeared in Monday’s Financial Times…like a bearded St. Joan of Arc; his hands were clasped together as if in prayer, and his eyes seemed to reach up to the gods, if not beyond.

He made his reputation as a master plumber in Princeton, New Jersey, interpreting drippy money supply faucets and deconstructing clogged fiscal drains. And now, he has become the hope of all mankind. Or at least that part of mankind that hopes to get something for nothing.

How came this to be? The answer is simple. The plumbers who came before him botched the job. Applying their wrenches to the recession of ’01, they let too much liquidity into the system. Everything bubbled up. The subprime basement overflowed in ’07…Ben Bernanke has been on the job ever since.

And this week the financial world held its breath. It waited. It watched. Ben Bernanke was hunched over…sweat on his brow…easing on his mind. Commentators, economists, and the public wondered if he could really create new money…new wealth…out of thin air? If this were true, it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros…creating money – out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants. And give every voter a quart of whiskey on Election Day.

During the course of the last three years, the plumbers have spent hundreds of billions of dollars. It’s hard to know what the final bill will be, since so much money – more than $10 trillion – is in the form of guarantees and asset purchases. They’ve pumped. They’ve bailed. They’ve squeezed and turned. They scraped their knuckles and cursed the gods.

You’d expect they might think twice before spending so much money. But on the evidence, they haven’t even thought once. Quantitative easing has been tried before. Has it ever worked? Nope. Never. Do you dispute it? Give us an example.

Japan announced its QE program in the spring of 2001. The Nikkei 225 was around 12,000 at the time. It quickly rose to 14,000 as investors anticipated a payoff from the easy money. Then, stocks sold off again. Two years later the index was at 8,000. Today, it is still about 25% below its 2001 level.

Did printing money cause an up-tick in inflation? Not even. Core CPI was negative 1% when the program began. It rose – to zero – briefly…and then fell again and now stands at minus 1.1% after going down 19 months in a row.

America’s own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March of 2010, the Fed bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so’s you’d notice. The unemployment rate today is 200 basis points higher than it was when the program began. And despite the flood of cash and credit, core CPI in the US is still only a third of its level in 2008.

Of course, there are other examples where central banks printed money with more gusto. In Germany, during and after WWI, the nation’s real money – gold – was used to pay for the war and the reparations following. The central bank felt it had to create additional money – like the Fed – without gold backing. It added about 75% annually to the money supply, from the end of the war until 1922. By late 1923, the US dollar was worth 4 trillion German Marks. Still other examples – from Argentina, Hungary, Zimbabwe and elsewhere – are fun to read about. But they are not exactly the sort of thing you’d want to try at home either.

Even if Quantitative Easing were a precision tool in the hands of a skilled mechanic, it might be little more than a wooden club in Ben Bernanke’s dorky grip. This is the same man who missed the biggest credit bubble of all time! There is no evidence that he could fix a bicycle let alone the world’s largest economy. But there you have a more interesting question. What if economists were duped by their own silly metaphor? What if an economy were not like a bicycle? What if the gods were laughing at them?

Central planning and cheap fixes have been tried before. When have they ever worked? Give us an example. Perhaps an economy is too complex…like love or the weather…unfathomable…and largely uncontrollable, something you can make a mess of but not something you can improve.

We have no more information as to the fundamental nature of things than anyone else. A toaster oven is designed and built for a purpose. When it doesn’t work, it can be fixed. But an economy? Who built it? Who can fix it? It is an organic, evolving system…whose purpose and methods are infinitely nuanced. Does it let banks go broke? Does it back up once in a while? Does it permit falling house prices…high unemployment…and deflation? Yes…so what? Does it always do what politicians and economists want? No? So what?

It has a sense of humor too. Wait until it turns around and kicks the clumsy mechanic in the derriere!

Bill Bonner
for The Daily Reckoning

Plumbers Crack originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Plumbers Crack




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

An Economic Certainty: Gold to Rise as Fiat Currencies Fall

November 5th, 2010

I was casually eating a burrito while having lunch at my desk, and was surprised to see some guy, writing on a “Feedback” blog of TheDailyBell.com, taking exception to David Morgan of The Morgan Report saying that “On a longer term basis silver and gold are going far higher in paper terms in any currency you wish to name.”

Idly, I was chewing a rather tasty bite of burrito and thinking to myself, “This is undoubtedly true!” as precious metals are nowadays priced in fiat currencies, and it has certainly been true for every paper currency that has ever, ever existed, including a list of 600-odd fiat currencies compiled by Addison Wiggin of Agora Financial in a research project a few years ago, undertaken to list all known fiat currencies, past and present, and their fate.

He gave up, he says, after listing all those fiat currencies beginning with the letter A and half of those beginning with the letter B. This tiny section of the alphabet contained 600 fiat currencies, most all of which are gone, gone forever, disappeared long, ago, thus undoubtedly taking a lot of wealth with them.

The total worthlessness of fiat currencies does not tell you about what is known in professional economics as The Great Wiping Out (TGWO), a scientific term first discovered, you may be surprised to know, when a new parent was caught with a baby that desperately needed changing, but was without any fresh diapers, and who decided to just “wipe out” the used-diaper in the host’s bathroom enough to get home, with the disastrous result that there was stinking baby-poop all over everything, including my pants and my shoes, and I think I got some in my mouth but I don’t want to think about it because it is so disgusting and I have been repressing even thinking about it until now, thanks for asking, damn it, and everything was ruined, and I never got promoted before I got fired, which I think was because of what happened in that poor bathroom, but my boss said no, but that I was being fired for being lazy and incompetent, but we both knew the truth.

Nowadays, The Great Wiping Out (TGWO) is a scientific term of absolute precision used by professional economists like me, after being cleverly invented by me in the previous paragraph, to describe the horrific enormity of the total amount of wealth lost by an economy as a result of another fiat currency literally biting the dust due to its over-creation, and making a big, big stinking mess that has serious, catastrophic long-term ramifications.

The beauty of TGWO is that it is easy to calculate, as it is the sum total of everything, as in “Every Freaking Thing (EFT)” leading to the phenomenon known as Total Freaking Loss (TFL).

The amazing thing was that this reader laughably does not mention TGWO, perhaps because I just made it up, or perhaps because it has nothing to do with anything.

Instead, he said, “Nobody, not Mr. Morgan, not you [the reader], nor I, nor economists [even ‘Austrians’], central bankers, investment ‘gurus’, tea leaf readers etc. etc., can reliably, consistently predict future economic events!”

At this, I jump to my feet and shout, with a tone of haughty victory in my voice, “Wrong, moron! I can predict some futures! Nothing is more reliably, more predictably, or more uniquely guaranteed than that silver and gold will go up in price over the long-term when priced in a fiat currency that is being created to excess!”

In response to my compelling argument, you can almost hear the desperation in his voice as he weakly persists, “The unacknowledged fact is that the economic future is unknowable,” which is so outrageous, in light of what I had just said, that I again jump up, this time onto my chair, adding a certain dramatic flair to my outburst, and again I scornfully say, “Wrong, dork-face! And the fact that every person owning gold and silver over the entire last decade made lots and lots of money as their prices went predictably up, while you, with your stupid investments in common equities and ridiculous belief in the stability of the buying power of a fiat currency, made nothing as the major indices have not gone up in 10 years! Nothing!

“And,” I mercilessly continued, “after adjusting your zero gains for the inflation in prices over the last decade, even using the mild inflation statistics of the Bureau of Labor Statistics, you have lost 27%! Hahaha! Moron!”

Of course, if he had read anything about the Austrian business cycle theory by merely going to mises.org once or twice in his whole life, he would know that wild, constant expansions of a fiat currency always lead to ruinous inflation in prices, which leads to social instability and upheavals when people get tired of deprivation because their pitiful little bit of money cannot buy enough food or heat because their prices are rising so high and so quickly.

And, then, if he had, he would know that Mr. Morgan was right, and that “On a longer term basis, silver and gold are going far higher in paper terms in any currency you wish to name.”

And it is that kind of certainty, especially in terms of the dollar that the Federal Reserve is destroying with more multi-trillion dollar creations of money, that makes buying gold, silver and oil such compelling investments so that you thank your lucky stars that “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

An Economic Certainty: Gold to Rise as Fiat Currencies Fall originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
An Economic Certainty: Gold to Rise as Fiat Currencies Fall




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

An Economic Certainty: Gold to Rise as Fiat Currencies Fall

November 5th, 2010

I was casually eating a burrito while having lunch at my desk, and was surprised to see some guy, writing on a “Feedback” blog of TheDailyBell.com, taking exception to David Morgan of The Morgan Report saying that “On a longer term basis silver and gold are going far higher in paper terms in any currency you wish to name.”

Idly, I was chewing a rather tasty bite of burrito and thinking to myself, “This is undoubtedly true!” as precious metals are nowadays priced in fiat currencies, and it has certainly been true for every paper currency that has ever, ever existed, including a list of 600-odd fiat currencies compiled by Addison Wiggin of Agora Financial in a research project a few years ago, undertaken to list all known fiat currencies, past and present, and their fate.

He gave up, he says, after listing all those fiat currencies beginning with the letter A and half of those beginning with the letter B. This tiny section of the alphabet contained 600 fiat currencies, most all of which are gone, gone forever, disappeared long, ago, thus undoubtedly taking a lot of wealth with them.

The total worthlessness of fiat currencies does not tell you about what is known in professional economics as The Great Wiping Out (TGWO), a scientific term first discovered, you may be surprised to know, when a new parent was caught with a baby that desperately needed changing, but was without any fresh diapers, and who decided to just “wipe out” the used-diaper in the host’s bathroom enough to get home, with the disastrous result that there was stinking baby-poop all over everything, including my pants and my shoes, and I think I got some in my mouth but I don’t want to think about it because it is so disgusting and I have been repressing even thinking about it until now, thanks for asking, damn it, and everything was ruined, and I never got promoted before I got fired, which I think was because of what happened in that poor bathroom, but my boss said no, but that I was being fired for being lazy and incompetent, but we both knew the truth.

Nowadays, The Great Wiping Out (TGWO) is a scientific term of absolute precision used by professional economists like me, after being cleverly invented by me in the previous paragraph, to describe the horrific enormity of the total amount of wealth lost by an economy as a result of another fiat currency literally biting the dust due to its over-creation, and making a big, big stinking mess that has serious, catastrophic long-term ramifications.

The beauty of TGWO is that it is easy to calculate, as it is the sum total of everything, as in “Every Freaking Thing (EFT)” leading to the phenomenon known as Total Freaking Loss (TFL).

The amazing thing was that this reader laughably does not mention TGWO, perhaps because I just made it up, or perhaps because it has nothing to do with anything.

Instead, he said, “Nobody, not Mr. Morgan, not you [the reader], nor I, nor economists [even ‘Austrians’], central bankers, investment ‘gurus’, tea leaf readers etc. etc., can reliably, consistently predict future economic events!”

At this, I jump to my feet and shout, with a tone of haughty victory in my voice, “Wrong, moron! I can predict some futures! Nothing is more reliably, more predictably, or more uniquely guaranteed than that silver and gold will go up in price over the long-term when priced in a fiat currency that is being created to excess!”

In response to my compelling argument, you can almost hear the desperation in his voice as he weakly persists, “The unacknowledged fact is that the economic future is unknowable,” which is so outrageous, in light of what I had just said, that I again jump up, this time onto my chair, adding a certain dramatic flair to my outburst, and again I scornfully say, “Wrong, dork-face! And the fact that every person owning gold and silver over the entire last decade made lots and lots of money as their prices went predictably up, while you, with your stupid investments in common equities and ridiculous belief in the stability of the buying power of a fiat currency, made nothing as the major indices have not gone up in 10 years! Nothing!

“And,” I mercilessly continued, “after adjusting your zero gains for the inflation in prices over the last decade, even using the mild inflation statistics of the Bureau of Labor Statistics, you have lost 27%! Hahaha! Moron!”

Of course, if he had read anything about the Austrian business cycle theory by merely going to mises.org once or twice in his whole life, he would know that wild, constant expansions of a fiat currency always lead to ruinous inflation in prices, which leads to social instability and upheavals when people get tired of deprivation because their pitiful little bit of money cannot buy enough food or heat because their prices are rising so high and so quickly.

And, then, if he had, he would know that Mr. Morgan was right, and that “On a longer term basis, silver and gold are going far higher in paper terms in any currency you wish to name.”

And it is that kind of certainty, especially in terms of the dollar that the Federal Reserve is destroying with more multi-trillion dollar creations of money, that makes buying gold, silver and oil such compelling investments so that you thank your lucky stars that “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

An Economic Certainty: Gold to Rise as Fiat Currencies Fall originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
An Economic Certainty: Gold to Rise as Fiat Currencies Fall




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Why the Price of Gold Soared After the QE2 Announcement

November 5th, 2010

Was the Fed action already fully priced in the marketplace? Had investors anticipated the Fed’s latest move and already bid up stocks and gold?

No!

The New York Times explains more of the Feds’ action:

The [Fed’s] action was the second time in a year that the Fed had ventured into new territory as it struggles to push down long-term interest rates to encourage borrowing and economic growth. In a statement, the Fed said it was acting because the recovery was “disappointingly slow,” and it left the door open to even more purchases of government securities next year.

The Fed is an independent body, its policy decisions separated from the political pressures of the day. But it acted with a clear understanding that the United States, like many other Western countries, seems to have taken off the table many of the options governments traditionally use to give their economies a kick, particularly deficit spending.

The Republicans regained control of the House for the first time in four years in part by attacking the stimulus plan – begun by the Bush administration and accelerated by President Obama – as a symbol of government spinning out of control, contributing to a dangerously escalating national debt.

This political reality has left Washington increasingly reliant on the Fed to take action, though its chairman, Ben S. Bernanke, has said the Fed cannot fix the problem alone.

Ordinarily the Fed’s main tool for spurring economic growth is to lower short-term interest rates. But those rates are already near zero. With no more room to go, it has to find another route to stimulate demand.

While the Fed step was telegraphed to the markets in recent weeks, most experts had expected $300 billion to $500 billion in purchases of Treasury debt. Still, the pace – $75 billion a month for eight months – disappointed some investors.

…in total, the Fed will buy $850 billion to $900 billion, just about doubling the amount of Treasury debt it currently holds.

So, what did investors make of it? The Dow shot up 216 points yesterday, after investors had time to consider what the Fed had done.

As for gold, it gained more in a single day than the entire price in 1971. That year you could buy an ounce of gold for $41. Yesterday, the price of an ounce GAINED $45.

Gold market investors figure they know what happens next. The Fed will pump in nearly $1 trillion more in this go-’round. If that doesn’t revive the economy and lower the unemployment rate, they’ll pump in some more. And they’ll keep pumping until they can’t go on.

When will that be? Nobody knows exactly. But if they keep this up, eventually the dollar will collapse and gold will soar. Maybe to $3,000 an ounce. Maybe to $5,000.

The point is this: the Fed has set its course. It has no reliable maps. Its captain doesn’t know where he is going. As for the navigator, first mate and other hands, they are a bunch of misfits, malcontents, and meddlers who have given no indication that they know what they are doing. Do you think they will arrive at their destination?

We don’t. But we’re sure they’ll end up where they ought to go.

Bill Bonner
for The Daily Reckoning

Why the Price of Gold Soared After the QE2 Announcement originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Why the Price of Gold Soared After the QE2 Announcement




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

OPTIONS, Uncategorized

Interesting New Leveraged Volatility ETN Coming from Citi

November 5th, 2010

Yesterday in Citi Files to Offer Long/Short Alternative to VIX ETFs, Murray Coleman of Barron’s tipped me off to a new ETN filing from Citibank for the C-Tracks Citi Volatility Index ETN.

I’d like to highlight two nuggets from the preliminary pricing supplement.

First, an overview:

“The Index is a new index established by Citigroup Global Markets Inc., as index sponsor. The Index is published by the Chicago Board Options Exchange (the “CBOE”) and is a measure of directional exposure to the implied volatility of large-cap U.S. stocks. As a total return index, the value of the Index on any day also includes daily accrued interest on the hypothetical notional value of the Index based on the 3-month U.S Treasury rate and reinvestment into the Index. The methodology of the Index is designed to produce daily returns that are correlated to the CBOE Volatility Index (the “VIX Index”), which is another measure of implied volatility of large-cap U.S. stocks. However, the Index is not the VIX Index, and returns on each of these indices may differ substantially.”

Second, some of the details of how this ETN works:

“The Index methodology uses a combination of returns on (a) a long exposure to third- and fourth-month futures contracts on the CBOE Volatility Index (the “VIX Index”) published by the Chicago Board Options Exchange, Incorporated (the “CBOE”) (the “VIX futures contracts”), multiplied by a factor of two, (b) a weighted short position in the S&P 500® Total Return Index (Bloomberg L.P. ticker symbol “SPXT:IND”) (the “S&P 500® Total Return Index”), as reduced by the Treasury Return determined by the formula described below under “—Composition of the Index—Treasury-Based Interest Accrual Component; Calculation of the Index Level” (the “Treasury Return”) and (c) an interest accrual on the notional value of the Index based on the 3-month U.S Treasury rate and reinvestment into the Index, all as described below.

The weighting of the S&P 500® Total Return Index short position is determined monthly by a regression over a 6-month backward-looking window of (a) the difference between the VIX Index daily returns and twice the daily returns of the relevant VIX futures contracts versus (b) the S&P 500® Total Return Index as reduced by the Treasury Return. See “Risk Factors Relating to the C-Tracks—The Index May Underestimate the Volatility Levels” in this pricing supplement.”

In a nutshell, the forthcoming Citi product tries to find a balance between the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) by using an intermediate point in the VIX term structure and adding leverage. The biggest problem with VXX has been the negative roll yield associated with the persistent contango in the VIX futures. At the other end of the spectrum, the problem with VXZ is that it moves like molasses and typically captures only a small fraction of any move in the VIX and VXX. See Lost in Translation: VXX and VXZ for an overview.

What the Citi product apparently hopes to do is to move down the VIX futures term structure to minimize roll yield and use leverage to amplify the changes in volatility in that portion of the term structure.

While there is no date set for the launch of the new Citi 3-4 month 2x volatility ETN, I am very much looking forward to its launch and firmly believe that it will provide the basis for some very interesting volatility trading opportunities, both on its own or in combination with VXX and VXZ.

Related posts:

Disclosure(s): short VXX at time of writing



Read more here:
Interesting New Leveraged Volatility ETN Coming from Citi

ETF, OPTIONS, Uncategorized

PIIGS Return to the Slaughter

November 5th, 2010

Friday is finally here… The end of what has been an exhausting week here on the trade desk. The dollar continued to get beat down through most of the trading day but started to rally back a bit in the afternoon. Overnight the dollar actually gained with the highflying Nordic currencies falling almost 1% versus the greenback. The euro (EUR) and commodity-based currencies also sold off a bit, and the sharp rally in both gold and silver stalled. A break in all of the price action was to be expected, but it may not last long as we will get the October US jobs report later this morning.

The report due out at 7:30 CST is expected to show the unemployment rate stayed dangerously close to 10% during last month. If the jobless rate comes in at 9.6% as expected, it would be a record 15 straight months that the rate stayed above 9.5%. The FOMC has tied future QE bond purchases to the performance of the US economy, so a poor payroll number will probably lead to another dollar sell-off. On the other hand, if the employment numbers come in stronger than expected, we could see some traders shift to thinking the Fed won’t have to continue the stimulus for as long as they have announced. But this is wishful thinking, as we all know the Fed is like a 17 year-old teenager whose parents just gave them $100 to go to the mall; the $600 billion is all but spent already, and there will probably be more to follow!!

Chuck sent me a note regarding the weekly jobs numbers during a break in his busy schedule down in Los Cabos:

I participated on a panel discussion Thursday morning at 7:30 am! My colleagues on the panel were all complaining the night before, while I, being the early bird, was sitting there on the podium a half-hour early waiting for it to start!

What I want to talk to you about today is the news yesterday that caught my eye… Here’s the title: US initial jobless claims rise more than expected in latest week.

Now, some of you might recall that the week before was the exact opposite and jobs claims fell… So what gives with the back and forth? It’s all due to the manual way the US bureau of labor statistics receives the files… I’m sure there are “cut offs” and such, so that’s what causes one week up and the next week down… The best thing to do is look at the data on a monthly basis, or… The continuing claims… And don’t forget the 99er’s… those are the people that have received their 99 weeks of unemployment, and now are getting nothing… They’ve been dropped from the “unemployed ranks” by the BLS, and things just don’t look great for them… The Consumer Confidence survey would have a different number if they only surveyed the 99er’s…

So… I guess the point I’m making in the end, is that the labor picture is a mess, and will remain a mess until small businesses understand what kind of tax burden they are going to have to deal with in the coming years… Health Care, included… The stimulus was supposed to deal with creating jobs… Didn’t happen… QE was supposed to give cash to banks for them to lend… Didn’t happen… It’s one vicious circle, folks… And I’m reminded of the Nitty Gritty Dirt Band playing the song, Will the Circle be unbroken? It’s all sad, that the country has run off into a ditch, but at some point we need to stop attempting to dig out of this hole, as we’re only making the hole deeper!

Thanks Chuck, great stuff for a Friday morning…

Well, as I reported yesterday morning, the BOE decided not to follow the Fed, and the ECB also diverged from the FOMC’s path. The ECB signaled they would stick with their planned stimulus exit strategy in spite of the fresh round of stimulus announced by the Fed. ECB President Trichet announced that the bank intends to begin pulling back some of the liquidity it injected into its banking system as early as next month. Policymakers left Europe’s benchmark interest rate at 1% yesterday. “The non-standard measures are by definition temporary in nature,” Trichet said at the press conference following the rate announcement. The euro rallied yesterday on confirmation the ECB would not be pumping any additional stimulus into their economies.

The announcement would probably have had an even greater impact on the euro if not for a flurry of stories about the possibility of future debt problems among the PIIGS. Yes, as if on cue, stories on the PIIGS hit the newswires. Problems do still exist in the “peripheral” European countries, but it sure looks like the ECB is using the press to “jawbone” the value of the euro, capping any appreciation by reminding investors that Ireland, Portugal, and Spain still need to refinance some huge debt issues.

The most prominent story out of Europe this morning concerns the Irish government’s delay in announcing its 4-year plan to narrow their fiscal deficit. Ireland’s finance minister announced savings and tax increases for next year worth 6 billion euros or 3.6% of GDP. A further 9 billion euros will be cut in the following 3 years. But the government will push back its publication of the details of the plan until early December. There is a lot riding on the details, as Ireland needs to impress global investors with these austerity measures. Ireland’s budget shortfall will be reduced to between 9.25 and 9.5% of GDP next year. The deficit this year will be closer to 12%, and Ireland wants to put measures in place to cut this all the way down to 3% of GDP by the end of 2014.

But the bond markets are convinced the moves will be enough to keep Ireland from having to tap the European Financial Stability Fund, which is the last “backstop” for European economies not able to find appropriate financing alternatives. Spreads have widened dramatically over the past few weeks, with the Irish government debt following the same path taken by Greek bonds in the weeks prior to the EU bailout. It worries many that the bond dealers have begun to take Irish debt down a similar path to the debt of Greece, and it really doesn’t matter what the Irish government does or announces.

Credit swaps on Portugal debt climbed 9 points overnight, and contracts insuring against a Greek default jumped 13.5 points. Default swaps for Spain and Italy also rose double digits, increasing these countries’ costs of financing their debt. Bond dealers look to be forcing the hand of the EU again, and the euro will continue to have a cap placed on any appreciation until this Irish bond crisis passes.

One of our favorite investors, Jim Rogers, was on the news wires last evening sharing his opinions of this week’s QE2 announcement by the Fed. A story that appeared on Bloomberg contained some great quotes by Rogers regarding the Fed head, and round two of QE. “Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers said in a lecture at Oxford University yesterday. “All he understands is printing money.”

“His whole intellectual career has been based on the study of printing money,” said Rogers, who predicted the start of the global commodities rally in 1999. “Give the guy a printing press, he’s going to run it as fast as he can.”

Jim had lunch with all of us on the trading desk about 5 years ago, and was adamant at that time about the coming commodity boom. He has consistently been ahead of the curve, and unlike our current Fed head, Rogers has booked the profits to prove he knows what he is doing in the financial markets.

Mark Mobius, another big name successful investor, had a different look on QE2. Mobius was excited by the prospects of a rally for global stocks and commodities, which he believes will come after the FOMC announcement. Mobius, who oversees about $34 billion, said the cash inflow should push commodity prices higher. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.” Mr. Mobius obviously focuses on stocks, but I’m sure if he were a currency investor he would suggest the currencies that are commodity-based, including the Aussie dollar (AUD), Canadian dollar (CAD), Brazilian real (BRL), South African rand (ZAR), Norwegian krone (NOK), and New Zealand dollar (NZD).

These currencies have all had a tremendous couple of weeks, as investors look at both higher yields and the possibility of higher commodity prices. We have had a number of callers to the desk asking whether it is the right time to buy, with all of the currencies and metals rallying so fast versus the US dollar. Chuck apparently has been fielding the same calls at the conference in Los Cabos:

I had a lot of people stop by to ask me my opinion on whether or not it was a good idea to buy currencies and gold at this point, with them being so high versus the dollar…

Well… Maybe there’s a pullback… But, come on, if there’s a pull back, it will be strictly technical in nature, and short-lived… The US has made its bed with the dollar, and now it has to lay in it! There are all kinds of resistance levels that the currencies are going through right now versus the dollar… And I would say, that it certainly seems risky to enter into these markets right now… But I think back, and I told a customer this today, and that’s that customers told me that $800 gold seemed to be too high to buy… Then $900 gold… Then $1,000 gold… And it goes on and on…

So, if you’re wanting to diversify out of the dollar right now, then to wait for a pullback that never comes, might not be the best plan…

And that’s all from me this week from Los Cabos, Mexico… It’s absolutely beautiful here, I had a massage therapist put my back right, and it’s warm, what else can I say? You know me, I always say… I’ve gotta go where it’s warm!

I hope you have a great weekend, good luck to my beloved Tigers who play down in Lubbock Texas on Saturday night!

Chuck has always told all of us, if you want to invest, go ahead and buy it!! Gold has moved back from the record-high that it hit in after hours trading last night. Yes, gold traded at $1,393.40 last night, just a hair away from $1,400. The Fed has basically given the green light for currency and metals investors. And silver has been outperforming, doubling gold’s performance this year. I think there are a few reasons for silver’s recent performance. First, silver had been lagging gold over the past few years, so it had some room to make up. Second, I believe there is a bit of psychology at work. Investors can either buy one ounce of gold, or 50 ounces of silver. I think they feel better making a 50-ounce purchase rather than just buying one. Finally, for those investors looking to protect against an “Armageddon,” one ounce of silver is much easier to barter with than one ounce of gold! Not that I believe it will come to this, but it does illustrate another reason silver has been out performing gold.

To recap: Jobless claims for October will dominate the markets today. Look for a positive number to possibly give the US dollar a bit of a break. Worries on the PIIGS debt crisis have been raised right on cue to cap the rapid ascent of the euro. Ireland definitely is swimming against the tide in trying to convince markets they will be able to get a handle on their debt issues. Jim Rogers gives his unabashed opinion on our Fed Head. And finally, Chuck suggests that it is always a good time to get invested.

Chris Gaffney
for The Daily Reckoning

PIIGS Return to the Slaughter originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
PIIGS Return to the Slaughter




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

Winners and Sinners in the Global Money War

November 5th, 2010

Mike Larson

There’s a Great Global Money War raging right now — and the U.S. is losing.

That’s the inescapable conclusion I draw from the market action I see on my screens … the headlines coming across the tape … and the actions being taken in the financial capitals around the world.

Here in the U.S.:

  • The Federal Reserve is keeping interest rates pegged to the floor in a range of 0 percent to 0.25 percent. And it just announced plans to buy as much as $900 billion in Treasuries through mid-2011 (including new asset purchases and reinvestments) …
  • Politicians are bickering about the small stuff while our debt load continues to spiral out of control …
  • Our currency is crashing against virtually every form of money on the planet! And all the dollars the Fed is printing aren’t doing squat for the domestic economy. Instead, they’re flooding out of the country to places they’ll be treated much better.

Meanwhile, in many overseas economies, central banks are raising interest rates to much more attractive levels. Policymakers are clamping down on speculation and taking prudent steps to grow their economies in a healthy fashion. Their currencies, stocks, and bonds are attracting a flood of capital we could only dream of.

The ramifications will be severe. The consequences for your wealth will be dramatic. So now is the time to get on the right side of this epic battle — before it’s too late.

Fed Thinks It’s Helping … but
It’s Doing Anything But!

This week, the Fed stuck to the plan it’s been hinting at for weeks. It announced it would buy $600 billion of new, long-term Treasuries. It will also reinvest money received from the maturing of old securities — to the tune of as much as $300 billion.

The current phase of the plan is slated to run through the end of the second quarter of 2011. But the Fed also left the door open to even MORE money printing, saying it will

“… regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”

Chairman Ben Bernanke honestly believes that what he’s doing is right. He thinks that driving inflation higher is better than the alternative. He actually believes artificially inflating stocks, commodities, and other assets is a wise choice.

Me? I think he’s nuts!

Maybe that sounds harsh. But frankly, I don’t care. Too many people have given the Fed too much deference for too long. It’s time we speak frankly.

'Insantity: Doing the same thing over and over again and  expecting different results.' - Albert  Einstein
“Insantity: Doing the same thing over and over again and expecting different results.”
— Albert Einstein

Under Alan Greenspan, and now Bernanke, we’ve seen massive bubbles resulting in part from way-too-easy monetary policies. Some have already popped. Others will clearly do so in the future. Dot coms. Housing. Commodities. Bonds.

Yet the Fed shows no sign of learning from its mistakes. It just keeps doing the same thing over and over and expecting a different result. As Albert Einstein famously said once, that is the textbook definition of insanity!

The Dramatic Consequences —
and How to Protect Yourself and Profit

The Fed’s ultra-low rate policy punishes both domestic savers and foreign investors looking for attractive returns. But that’s only half the story. At the same time the Fed is running a super-easy policy, foreign central bankers are behaving prudently — RAISING interest rates to tamp down inflation and restore normalcy to their money markets.

In fact:

  • The Reserve Bank of India just raised rates for the sixth time, by a quarter percentage point to 6.25 percent …
  • The Reserve Bank of Australia hiked rates for the seventh time, also by a quarter point, to 4.75 percent …
  • Central banks as far afield as Israel and China have done the same.

Money will go where it's treated best.
Money will go where it’s treated best.

The result? Capital is pouring OUT of the U.S. and IN to foreign economies where it will be treated better.

According to the research firm EPFR Global, fund inflows for emerging markets totaled $49.4 billion for stocks and $39.5 billion for bonds in the year through October. Those figures are the highest on record.

Meanwhile, the Investment Company Institute found that U.S. stock funds have seen $71 billion in outflows during the same period!

Folks, we should be doing things on the monetary policy to make the U.S. MORE attractive for investors. We should be taking steps in Congress to enhance the attractiveness of investing, hiring, and building here. But we’re not. We’re doing precisely the opposite — and the result isn’t pretty.

Foreign economies are booming while the domestic economy is just muddling along …

Foreign stocks and bonds are massively outperforming …

Foreign currencies are trading at some of the highest levels against the dollar in years … or in some cases, EVER.

The best way to protect yourself and profit? Follow the money! Invest with the winners in this global money war and avoid the sinners. If you want more specific suggestions on how to do so, take a look at this month’s Safe Money Report. You’ll find plenty of suggestions there.

Until next time,

Mike

P.S. Last night, I appeared on Money and Markets TV and broke down the performance of financial stocks in the third quarter, and outlined the challenges facing the sector. I also pointed out two banking stocks investors should avoid, and two that may have good upside potential.

If you missed last night’s episode or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.

Related posts:

  1. Tensions Rise as Global Policymakers Part Ways
  2. Central Bankers’ Global Race to the Bottom
  3. China’s Currency War: Enemy #1 for Global Economy

Read more here:
Winners and Sinners in the Global Money War

Commodities, ETF, Mutual Fund, Uncategorized

Largest 15 US States are Spending Over 220% of Their Tax Revenue

November 5th, 2010

The big news this week in terms of ginormous government transfer payments is, as usual, out of the Fed, as it embarks on an equally ambitious and ill-fated mission to buy $600 billion of US Treasury debt. Unsurprisingly, it’s not the only immense transfer of wealth taking place between governmental bodies. As spotlighted by Meredith Whitney, CEO of the Meredith Whitney Advisory Group, the feds are continuing to subtly bailout state governments at record levels and in an ongoing and unsustainable fashion which she describes in a recent WSJ opinion piece.

From The Wall Street Journal:

“What [...] investors fail to appreciate is that state bailouts have already begun. Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds. Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels. California is not alone: Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.

“Beyond debt subsidies, general federal government transfers to states now stand at the highest levels on record. Traditionally, state revenues were primarily comprised of sales, personal and corporate income taxes. Over the years, however, federal government transfers have subsidized business-as-usual state spending not covered by state tax collections. Today, more than 28% of state funding comes from federal government transfers, the highest contribution on record.

“These transfers have made states dependent on federal assistance. New York, for example, spent in excess of 250% of its tax receipts over the last decade. The largest 15 states by GDP spent on average over 220% of their tax receipts. Clearly, states have been spending at unsustainable levels without facing immediate consequences due to federal transfer payments and other temporary factors.”

Because the federal government will backstop the states regardless of their profligacy — a situation which tends to play out differently in the European Union, for example — the bickering, relatively speaking, flies under the radar and the fiscal irresponsibility just isn’t as high profile (as compared to the highly-visible EU member state (GIIPS) meltdown). As it goes, the state budget situation is continuing to deteriorate just as the Fed is firing up the presses for another moonshot-caliber of stimulus for the economy. Basically, when the debt-laden US can already least-afford the expenditure. According to Whitney, “almost all of the major federal government subsidy programs [for states] will run out in June 2011.” So, we can probably go ahead and mark that “unforeseeable crisis” announcement date on next year’s calendar.

You can read more details in Whitney’s WSJ opinion piece on how state bailouts have already begun.

Best,

Rocky Vega,
The Daily Reckoning

Largest 15 US States are Spending Over 220% of Their Tax Revenue originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

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Largest 15 US States are Spending Over 220% of Their Tax Revenue




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Chinese Stocks Thump U.S. Counterparts

November 5th, 2010

With all the discussion of quantitative easing and elections, it is all too easy to adopt (or continue to cling to) an Americentric view of the investment world.

The truth is, however, that the bulls have been doing much more damage in China as of late than in the United States.

The chart below shows the performance of FXI, the iShares FTSE/Xinhua China 25 Index, for 2010. Note that while much hoopla has been generated over the new 2010 highs in the S&P this week, FXI has repeatedly been making new highs for the year since the beginning of October and is now approximately 10% above previous highs.

Note also that in terms of relative performance (top study), FXI has been outperforming the S&P 500 index consistently going all the way back to the May 6th flash crash.

I have previously talked about thinking of China as a possible leading indicator for U.S. stocks. Recent data suggests that investors may want to give additional thought about the predictive power of Chinese stocks and reorient some of their geographic bias.

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