Is Inflation “Too Low”?

September 29th, 2010

John Mauldin, in his Frontline Weekly Newsletter, had a graph of Total Consumer Credit Outstanding, showing that it had peaked at the end of 2008 after running up to almost $2.6 trillion.

I instantly leap to my feet, howling in outrage because there are less than 100 million private-sector workers in the Whole Freaking Country (WFC), and private-sector workers are the only people that can show a profit, with which to pay debt, by their labors.

“This means,” I go on, “that each of these 100 million private-sector workers must produce enough in profits to pay off, in one way or another, $26,000 in credit card bills, plus, at an average of 16% interest on the unpaid balance, paying $4,160 a year in interest charges, too, which doesn’t even start talking about paying off a whopping $13.6 trillion national debt!”

You can see the look of impatience on Mr. Mauldin’s face as I ramble on and on, as this must all be elementary to him, but it is, as I prove, endlessly fascinating to tragic halfwits like me. Embarrassed, I just shut up and sat back down.

And I am glad I did, because the more surprising thing, and thus more fascinating to guys like me who have intellectual deficits and the associated poor table manners, hygiene, and lack of self-control, was when he went on that Total Consumer Credit Outstanding “had been growing steadily for 65 years until this last recession.”

Being Completely Freaked Out (CFO), I could only admire Mr. Mauldin for his calm serenity, which has allowed him to write that sentence without at least one exclamation point to indicate the importance of 65 years of steadily-growing personal debt! Hell, I can’t seem to write a sentence about it that DOESN’T end with a damned exclamation point, to show you how CFO I am!

Perhaps my agitation explains why I re-wrote Mr. Mauldin’s sentence for inclusion in my quarterly report to Glaxxnorgg, the new overlord of this sector of the galaxy. My excuse is that I was in a rush since I had trouble finding the memo containing the new obligatory salutation for our new hotshot in charge, which turned out to be, if I decoded the message correctly, “Greetings, Glorious and Magnificent Glaxxnorgg, Supreme Overlord, whose wisdom is surpassed only by his good looks, or maybe the other way around, depending on mood and time of day.”

It took a lot longer than I thought to find the misplaced memo, and so, in my rush to beat the nearing deadline, I hastily re-worded Mr. Mauldin’s sentence as, “Earth on Red Alert: Total Consumer Credit Outstanding grew for 65 freaking years in a row, and then it suddenly stopped! Stopped!! 65 years of accumulating a massive, crushing debt of just under 2.6 trillion freaking dollars to buy the massive flood of goods and services that grew an idiotic, distorted, malignant, cancerous economy based on financed consumption and government deficit-spending instead of production! And now the necessary, lifeblood of new debt has not only stopped growing – horrors! – but is – horror of horrors! – dropping, although by less than $100 billion a year! These idiot Earthlings are freaking doomed!!”

I am sure that you, as did Glaxxnorgg and Junior Mogambo Rangers (JMRs) around the galaxy, grasped the significance of the plethora of exclamation points, actually ending with two of them, so I shall not belabor the point.

I concluded my report with the summation, “Things are looking worse and worse here because the idiot central banks keep creating money so that their respective governments can borrow it to deficit-spend, and you know how that kind of Really Stupid Crap (RSC) always works out.”

As if to prove the point, I am still in a semi-reclusion defensive position since the last FOMC announcement when the foul Federal Reserve decided that they would make inflation in prices worse because inflation was “too low.”

Inflation being “too low” is, to a guy who has seen the historical record of inflation in prices, means that I am more petrified than ever of inflation in prices, which is the Big Nasty Killer (BNK) of people, economies and countries.

The FOMC statement was enough of a shock to me that I quit working immediately, but fortunately not for Scott Lanman and Joshua Zumbrun of Bloomberg.com, who apparently did a little research and found that the Federal Reserve said, significantly, “for the first time, that too-low inflation, in addition to sluggish growth, would warrant taking action,” which is interpreted as taking the Fed “closer to a second wave of unconventional monetary easing” to, as completely un-freaking-believable as it is to even say such a thing, cause higher inflation in prices!

This is outrageous! The “mission statement” for the Fed, and the purpose of the Fed’s very existence, is to keep prices stable! Stable! Meaning no inflation! Gaaakkkk!

That “Gaaakkkk!” was the sound of an original scream of outrage and fear of impending doom from inflation in prices that was suddenly choked off by my suddenly remembering, to my immense happiness, that I can just buy gold, silver and oil stocks!

Their prices will go up and up and up, guaranteed by the deadly resolve of a desperate, deficit-spending federal government and desperate, money-creating insanity by the Federal Reserve to accomplish it.

And with that kind of guarantee, all you do is buy gold, silver and oil, and all you can say is, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Is Inflation “Too Low”? 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:
Is Inflation “Too Low”?




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.

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Is a Falling US Dollar Causing a Stock Sell-Off?

September 29th, 2010

“As pressure mounts on the greenback, US stock futures chart a course modestly lower,” read a headline on MarketWatch before the open this morning.

Exhibit One on why the financial media is so confusing.

Up till now, a falling dollar has been given as the one constant that has propped UP stocks since coming off their late-April highs.

S&P Charted Against the US Dollar Index

In fact, the upward trend in stocks has become especially pronounced as the dollar has weakened during the September rally. When the dollar rallied in August, stocks sold off.

Now, apparently, a falling dollar is responsible for stocks charting a “modestly lower” course.

Argh.

The real takeaway: Since the April highs, the S&P is down 5% and the dollar index is down almost as much. Anyone holding an S&P Index fund just got handed a double whammy.

In our opinion, you’d do better to stick with specific stocks and forget the indexes as best you can.

Addison Wiggin
for The Daily Reckoning

Is a Falling US Dollar Causing a Stock Sell-Off? 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:
Is a Falling US Dollar Causing a Stock Sell-Off?




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

A History of Inflation, Deflation and Monetary Meddling

September 29th, 2010

“Forget football,” a friend told us when we arrived in Buenos Aires a few weeks back. “Avoiding taxes is the national sport down here.”

There are few things in life a freedom-loving wanderer appreciates more than a healthy distrust of the state. More on that later in the week. But first, the noise…

Stocks inched higher again yesterday, up almost half a percent by the close. Gold was up too. The anti-dollar investment had retreated a few dollars off another record high, last we checked. An ounce, as of this writing, will cost you (or bring you, depending on whether you are buying or selling) around $1,309. Not bad for a metal that, just one short decade ago, was shunned from polite conversation.

So we get gold’s mood. At least, we think we understand why the metal is moving higher. Put simply, there are trillions of reasons for it to, most courtesy of the Federal Reserve. Even the mainstream media is beginning to notice.

Writing in the UK’s Telegraph, Ambrose Evans-Pritchard explains…in an admirably penitent kind of way:

“I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.”

Kudos to Mr. Evans-Pritchard. Anyone can make a mistake. It takes a steely resolve to admit it…and to a mass audience, no less. Like many before him, the Telegraph’s International Business Editor believed that the Fed was capable of the one thing it most sorely lacks: restraint.

“My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION,” he wrote. “If the Federal Open Market Committee cannot see the difference, God help America.”

And therein lies the problem. Unlike Mr. Evans-Pritchard, who can cop to folly with few repercussions for the greater public, Mr. Bernanke enjoys no such leeway. The Fed Head must – and will – follow his convictions through to their inevitable end. One turn of the lever begets another. A tinker here, an adjustment there, each movement grounded on the fallacious assumption that one man, one panel of experts, can truly know and set the price of money itself…and before you know it you’ve got the credibility of an entire currency weighing on your back…and debtors from around the world knocking on your door. Like a spineless man in a bad marriage, Mr. Bernanke will follow his promises to the grave, from health to sickness, from better to worse, forever and ever. Amen.

Since 1913, when the Federal Reserve first assumed its role as money-printing monopolist, the value of the dollar has fallen some 97%. And with each freshly inked bill that hits the streets, the value of every one that preceded it erodes a commensurate amount. Pretty soon, the price of the “stuff” those dollars are chasing begins to go up. Inflation begins at the bank. Or, as Milton Friedman better phrased it, “Inflation is always and everywhere a monetary phenomenon.”

In this instance, not only is gold “stuff”…it is also the right stuff. Not only is it a commodity in and of itself, in other words, it is also the one true money, the sound alternative to a fiat anchored, papier-mâché economy built in the path of a rising tide.

This is what happens when planners get to planning. Whether it is your education, healthcare or the price of money itself, meddlers always find a way of making a reasonable situation worse.

Take, for example, Social Security. As of tomorrow, September 30, 2010, your retirement “fund” officially begins shelling out more money than it is taking in. Over the past couple of weeks, our special reports correspondent, Ian Mathias, has provided a few essays on that so-called retirement “lock box” and the millions of Americans who are counting on it to supplement their golden years [click here to see Part I, "The End of Social Security as We Know It" and Part II,  "Opt Out of Social Security"].

Here’s what a few readers had to say:

Thank you for your article on Social Security. Let me offer you another slant on that awful program.

One argument that I have used in the past against SS is a rather religious one, mainly the 4th commandment: Honor thy father and mother. When I was growing up, of course that always meant I was suppose to obey my parents…well, at least try. But as I got older, that also meant to take care of my parents when they became elderly. What I have argued is that SS short-circuits that process. Why bother with taking care of them monetarily? After all, they have Social Security, and that frees me from that responsibility.

In addition, it seems to me, that it diminishes the connection between generations. Obviously, there’s going to be more interaction between you and your parents if you’re helping to support them. And then there is the resentment that drives a wedge between generations. Why should I pay more and more into a program that isn’t going to be worth a damn once I retire? They’re going to get theirs, but I’m not going get anything.

I will be eligible for SS in 5 years. Believe me, I’m not counting on it. God help the people who are because they’re going to be in for one hell of a jolt.

And this:

The system may “go into the red”…but the federal government owes the trust 2.7 trillion dollars and the program is solvent for many years to come…unless the government defaults on its commitment to the trust…

And, finally:

As I fast approach the age of 70, I think back to the time when I first got a SS card. I was 11 years old, living in New York. I had a chance to get a paper corner on the crossroads of two busy streets, 5th Avenue & 5th Street in the Bronx. I had to get an SS card to get the corner. I was excited and when I got my first payment for the job I was doing, I questioned the card that came with the cash about the deductions that were withheld.

SS was explained to me and I have been paying into this fund for almost 60 years. During those years I seem to remember the government borrowing from the fund for some crisis or something a couple of times. My grandfather made the comment to me before his passing that SS should always be there unless the government does not pay back what they borrow.

Is this in fact what happened, and if so, did they ever pay back what they borrowed?

Thank you to all our Fellow Reckoners who wrote in with thoughts and concerns regarding this very important topic. For more insight on the Social Security bankruptcy and government meddlers, take a look at Ian Mathias’s brilliant essay “What’s Really in the Social Security Trust Fund?”

Joel Bowman
for The Daily Reckoning

A History of Inflation, Deflation and Monetary Meddling 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:
A History of Inflation, Deflation and Monetary Meddling




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

Update on SP500 Intraday Triangle and Market Internals

September 29th, 2010

You may be asking, “What are Market Internals saying about the recent price action in the S&P 500?”

Good question!  Let’s take a look at current intraday market internals and also note the developing ascending triangle price pattern that is forming – and of course the trendline price boundaries to watch for clues for a breakout or breakdown.

The S&P 500 5-min chart:

Click for full-size image.

Let’s start first with the Internals.

Given that price is forming a sideways trading range, internals for the most part are doing the same.

I highlighted the two recent price peaks (highs) so you can compare what Market Internals revealed at those points – and you’ll notice that in both cases, a negative divergence formed.

Internals (Breadth and VOLD) peaked on September 24th’s spike, and though price pushed higher recently, internals did not.

TICK did make a slight new extreme high on yesterday’s close (price spike), but that was right after making a new TICK low not seen since September 23rd.

In summary, internals are consolidating and diverging along with price – not really showing conviction in either direction.

So now let’s turn to the short-term price pattern – an ascending triangle – that is forming intraday.

The upper boundary at the 1,148 to 1,150 resistance is clear, but the lower rising support trendline is not as clear.

I drew a longer-term rising trendline (blue) that ends currently at 1,144.

The shorter term (red) trendline ends a little higher – right where we are now at 1,146.

However you slice it, look for a breakdown under 1,144 or 1,140 to be a potential short-sale trigger, just as a breakout above 1,150 would be a potential long/buy trigger.

Even though we call them “Ascending Triangles,” it’s best to think of them as price compression patterns that do NOT have any inherent bullish or bearish bias.

Price alternates between range compression (triangles, for example) and range expansion (breakout moves), so it’s best not to try to outsmart the market and be caught on the wrong side of a big breakout – which is forecast from the price compression (triangle) pattern.

Let’s see what happens next!

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
Update on SP500 Intraday Triangle and Market Internals

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XOM Forms Another Daily Triangle Pattern

September 29th, 2010

Exxon-Mobile’s (XOM) stock chart has a tendency to form triangle patterns – as I’ve pointed out in the past.

It looks like another symmetrical triangle price pattern has formed, with price slightly tipping above the upper boundary on lackluster volume and momentum – perhaps we’ll need to redraw the boundary.

Let’s take a look at the current pattern and key price levels to watch:

I discuss Triangle Patterns in the educational section on Triangles (Symmetrical, Ascending, and Descending).

Generally, triangles are just two price trendlines that converge at the apex, or cross-over point.  More times than not, price will break out of the triangle trendline boundaries before price reaches the apex (crossover).

It’s possible we’re seeing a breakout in XOM, but if so, we’re not seeing a corresponding breakout in volume or momentum – notice the 3/10 oscillator also shows a corresponding triangle pattern that has NOT broken out yet.

So if that’s the case, we’ll need to redraw the upper trendline, or just call this a potential “bull trap” or false breakout.

The currently drawn trendline rests at the $61.00 level, which also sports the 20 day EMA at $61.18.  Right now, that level will be the determinant – or key – to future price action.

It’s bullish if shares remain above $61, but otherwise a break back down under $61 sets up a short-term retest of $60, and a breakout under $60 would be a bearish turn-about.

Keep in mind that the 200 day SMA rests currently at the $63 area overhead, so a continuation breakout might have trouble rising above $63 in the short-term.

For now, watch $61 for support, $63 for resistance, and a breakdown under $60 as a bearish trigger.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
XOM Forms Another Daily Triangle Pattern

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XOM Forms Another Daily Triangle Pattern

September 29th, 2010

Exxon-Mobile’s (XOM) stock chart has a tendency to form triangle patterns – as I’ve pointed out in the past.

It looks like another symmetrical triangle price pattern has formed, with price slightly tipping above the upper boundary on lackluster volume and momentum – perhaps we’ll need to redraw the boundary.

Let’s take a look at the current pattern and key price levels to watch:

I discuss Triangle Patterns in the educational section on Triangles (Symmetrical, Ascending, and Descending).

Generally, triangles are just two price trendlines that converge at the apex, or cross-over point.  More times than not, price will break out of the triangle trendline boundaries before price reaches the apex (crossover).

It’s possible we’re seeing a breakout in XOM, but if so, we’re not seeing a corresponding breakout in volume or momentum – notice the 3/10 oscillator also shows a corresponding triangle pattern that has NOT broken out yet.

So if that’s the case, we’ll need to redraw the upper trendline, or just call this a potential “bull trap” or false breakout.

The currently drawn trendline rests at the $61.00 level, which also sports the 20 day EMA at $61.18.  Right now, that level will be the determinant – or key – to future price action.

It’s bullish if shares remain above $61, but otherwise a break back down under $61 sets up a short-term retest of $60, and a breakout under $60 would be a bearish turn-about.

Keep in mind that the 200 day SMA rests currently at the $63 area overhead, so a continuation breakout might have trouble rising above $63 in the short-term.

For now, watch $61 for support, $63 for resistance, and a breakdown under $60 as a bearish trigger.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
XOM Forms Another Daily Triangle Pattern

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ETF Securities Witnesses Influx Of Assets

September 29th, 2010

As the investment demand for precious metals continues to remain high, ETF Securities, the first US ETF provider to provide investors with access to a full suite of precious metal ETFs, recently surpassed the $2 billion mark for total assets under management.

 ETF Securities is known for the following ETFs which are all backed by their respective physical bullion:

  • ETFS Physical Swiss Gold Shares ETF (SGOL)
  • ETFS Physical Silver Shares ETF (SIVR)
  • ETFS Physical Palladium Shares ETF (PALL)
  • ETFS Physical Platinum Shares ETF (PPLT)

As for the future of these ETFs, it is highly likely that will continue to witness asset growth.  Fear and uncertainty appear to be driving up the demand for precious metals as a place to store wealth.  Furthermore, industrial demand is expected to provide further support for silver, platinum and palladium as emerging markets continue to grow at healthy rates and purchasing power in these developing nations elevates.

Disclosure: No Positions

Read more here:
ETF Securities Witnesses Influx Of Assets




HERE IS YOUR FOOTER

ETF, Uncategorized

What’s Really in the Social Security Trust Fund?

September 29th, 2010

“You’re kidding, right?” a Daily Reckoning reader wrote after our briefing from last week: “The End of Social Security As We Know It.” “Are you the only ones who believe in the accounting farces that are the Social Security and Medicare ‘Trust Funds’? Every dollar in both of those funds has been spent by the US Treasury…”

We weren’t kidding, dear reader… There’s only so much reckonin’ we can do in one day. Last week we chronicled a turning point for retirement in America: On September 30, the Social Security Trust Fund will officially begin paying out more than it’s taking in. Now, you – and many others who wrote in – provide an inadvertent introduction to our final question in this Social Security Series: What, exactly, is in that fund?

The quick answer is this, as we noted Saturday. “With $2.6 trillion left in the Social Security war chest, there is no immediate threat to the status quo.”

The Social Security Trust Fund is, in fact, worth roughly $2.6 trillion. The status quo is safe at the moment. But as you hinted, there isn’t a single US dollar in that fund…and anyone who thinks the money they’ve been sending the government to pay for retirement is neatly stacked in a giant vault – some super-sized swimming pool of money – has the wrong idea.

Indeed, your government-sponsored retirement fund has all been spent already. Didn’t you get your receipt?

The World’s Biggest Bond Investor – You

You, loyal taxpayer – not the Chinese – are the biggest US Treasury Bond investor in the world. The entire balance of the Social Security Fund, all $2.6 trillion of it, has been borrowed by the US government. Upon receipt of your payroll taxes (those are the ones that fund Social Security) the Treasury instantly converts them to special issue Treasury bonds. In simpler terms, money is taken out of the Social Security “vault” and replaced with an IOU.

That’s not necessarily bad. Many sovereign states purchase debt from other nations, government owned companies or private institutions, and for good reason. If that money is not needed right away, the interest on the bond will help guard the fund against inflation. Those bonds might even make some extra money.

But such an investment doesn’t work when a debt-burdened government borrows money from itself. While the American Social Security scheme is not quite as simple as taking money out of one pocket and putting it in another, it’s darn close.

“Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund,” the LA Times’ Michael Hiltzik neatly explained in August. “What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs – housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.”

The government is not using your payroll taxes to build retirement nest eggs or to insure the elderly and disabled. Rather, the SSTF is used to sustain government itself. Not a dollar is set aside for you…just debt. Given the current state of US affairs – $13 trillion in public debt, weak economic growth and a $1.3 trillion budget deficit for 2010 – this is not the kind of sovereign debt most investors want to own.

We should note, this is no conspiracy theory. On the SSTF website, the Trustees offer to-the-month spreadsheets of fund holdings, each and every one revealing nothing inside but US Treasury bonds. President Bush himself laid it out quite simply back in 2005:

Some in our country think that Social Security is a trust fund – in other words, there’s a pile of money being accumulated. That’s just simply not true. The money – payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust.

There is No Trust… So Why Trust Social Security?

This bookkeeping scheme known as the Social Security Trust Fund is not the biggest issue in America for one reason: US Treasuries are currently as good as cash. In fact, since they pay a paltry yield and are accepted everywhere, they might even be better than dollars.

But in a real, utilitarian sense, T-Bonds in the SSTF are way, way worse than cash. They are a liability, not an asset. The SSTF can exchange them for dollars, but those dollars must come from the very government that’s on the other side of the exchange. As President Clinton’s Office of Management and Budget once explained:

Balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

This is a similar situation to what China has called its “nuclear option.” As the largest foreign holder of US Treasuries, China could cripple the US by cashing out its bond holdings. The Treasury would be forced to either redeem the bonds or default, both of which would send American interest rates through the roof…maybe even destroy our economy altogether.

The SSTF isn’t that different, except China holds “just” $846 billion in US bonds, about a third of what’s owed to the Social Security Trust Fund.

So add up the American fiscal condition as we know it, dear reader, and tell us what you get:

76 million Baby Boomers about to retire
+ Life expectancies increasing
+ A Social Security Administration that’s now paying out more than it’s taking in
+ The Social Security Trust Fund holding nothing but $2.6 trillion in US debt
+ A national debt over $13 trillion
+ The worst US economy since the Great Depression
+ Unemployment near generational highs
+ Stagnant wages for over a decade
+ Average personal savings rate of 6% of disposable income
+ Minimal interest rates on those savings
+ Home prices (most people’s largest investment) down 20% from their peak
+ Stock indexes (and most private retirement funds) down 25% from their peak
+ Rising energy and healthcare costs

The sum of these parts, among other things, equals a lousy retirement landscape in America. Like so many other economic matters these days, it’s hard to picture a worse scenario for retirees since the Great Depression.

It Could Be Worse

One cliché has been working overtime lately: The night is always darkest before dawn. No one really knows how long this “night” will last in America. It’s running about 20 years strong in Japan, an economy eerily similar to our own. But just the same, most people felt like nothing could possibly go wrong in early 1999… and by September 11, 2001, just about everything had. Maybe now, as most of us are choking in the dark smog of this economy, a breath of fresh air might blow our way. Who knows?

But to bank on that is a bad move. If America doesn’t return to booming prosperity, the Treasury and Social Security Trustees will have to do something to keep the program alive. In the past, that’s meant raising payroll taxes and reducing benefits. Not only will the government have to accommodate Social Security operating at a deficit, but they’ll have to deal with all these bonds… the trillions owed to the American public and trillions more to foreign investors. Either income or sales taxes will have to rise dramatically, or the Fed will have to print money. Both “solutions” would seriously impact American purchasing power, particularly retired Americans living on a fixed income.

Even the rich ought to devise a retirement Plan B. The richest 1% of US population now accounts for 24% of the country’s income, the highest ratio since just before the 1929 market crash. Most of the other 99% is understandably bitter about that, and especially given the tendencies of the current administration, we expect the rich to get soaked good and hard over the next few decades. As we’ve forecast before, expect a Social Security means test in the near future and a hike in the SS taxable wage base even sooner.

Thus, all economic classes in America could feel the sting of imminent Social Security reform. Those that need it will likely receive fewer benefits, and those wealthy enough to retire on their own will likely be forced to pitch in for those that can’t. Meanwhile, all government welfare programs will likely be reduced, as one day – who knows when – Uncle Sam will have to start paying back money borrowed from the Social Security Trust Fund.

Your choice is to wait for that day and see what happens…or start preparing for it now.

Good luck,

Ian Mathias
for The Daily Reckoning

What’s Really in the Social Security Trust Fund? 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:
What’s Really in the Social Security Trust Fund?




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

What’s Really in the Social Security Trust Fund?

September 29th, 2010

“You’re kidding, right?” a Daily Reckoning reader wrote after our briefing from last week: “The End of Social Security As We Know It.” “Are you the only ones who believe in the accounting farces that are the Social Security and Medicare ‘Trust Funds’? Every dollar in both of those funds has been spent by the US Treasury…”

We weren’t kidding, dear reader… There’s only so much reckonin’ we can do in one day. Last week we chronicled a turning point for retirement in America: On September 30, the Social Security Trust Fund will officially begin paying out more than it’s taking in. Now, you – and many others who wrote in – provide an inadvertent introduction to our final question in this Social Security Series: What, exactly, is in that fund?

The quick answer is this, as we noted Saturday. “With $2.6 trillion left in the Social Security war chest, there is no immediate threat to the status quo.”

The Social Security Trust Fund is, in fact, worth roughly $2.6 trillion. The status quo is safe at the moment. But as you hinted, there isn’t a single US dollar in that fund…and anyone who thinks the money they’ve been sending the government to pay for retirement is neatly stacked in a giant vault – some super-sized swimming pool of money – has the wrong idea.

Indeed, your government-sponsored retirement fund has all been spent already. Didn’t you get your receipt?

The World’s Biggest Bond Investor – You

You, loyal taxpayer – not the Chinese – are the biggest US Treasury Bond investor in the world. The entire balance of the Social Security Fund, all $2.6 trillion of it, has been borrowed by the US government. Upon receipt of your payroll taxes (those are the ones that fund Social Security) the Treasury instantly converts them to special issue Treasury bonds. In simpler terms, money is taken out of the Social Security “vault” and replaced with an IOU.

That’s not necessarily bad. Many sovereign states purchase debt from other nations, government owned companies or private institutions, and for good reason. If that money is not needed right away, the interest on the bond will help guard the fund against inflation. Those bonds might even make some extra money.

But such an investment doesn’t work when a debt-burdened government borrows money from itself. While the American Social Security scheme is not quite as simple as taking money out of one pocket and putting it in another, it’s darn close.

“Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund,” the LA Times’ Michael Hiltzik neatly explained in August. “What’s happened to the money? It’s been borrowed by the federal government and spent on federal programs – housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001.”

The government is not using your payroll taxes to build retirement nest eggs or to insure the elderly and disabled. Rather, the SSTF is used to sustain government itself. Not a dollar is set aside for you…just debt. Given the current state of US affairs – $13 trillion in public debt, weak economic growth and a $1.3 trillion budget deficit for 2010 – this is not the kind of sovereign debt most investors want to own.

We should note, this is no conspiracy theory. On the SSTF website, the Trustees offer to-the-month spreadsheets of fund holdings, each and every one revealing nothing inside but US Treasury bonds. President Bush himself laid it out quite simply back in 2005:

Some in our country think that Social Security is a trust fund – in other words, there’s a pile of money being accumulated. That’s just simply not true. The money – payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust.

There is No Trust… So Why Trust Social Security?

This bookkeeping scheme known as the Social Security Trust Fund is not the biggest issue in America for one reason: US Treasuries are currently as good as cash. In fact, since they pay a paltry yield and are accepted everywhere, they might even be better than dollars.

But in a real, utilitarian sense, T-Bonds in the SSTF are way, way worse than cash. They are a liability, not an asset. The SSTF can exchange them for dollars, but those dollars must come from the very government that’s on the other side of the exchange. As President Clinton’s Office of Management and Budget once explained:

Balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

This is a similar situation to what China has called its “nuclear option.” As the largest foreign holder of US Treasuries, China could cripple the US by cashing out its bond holdings. The Treasury would be forced to either redeem the bonds or default, both of which would send American interest rates through the roof…maybe even destroy our economy altogether.

The SSTF isn’t that different, except China holds “just” $846 billion in US bonds, about a third of what’s owed to the Social Security Trust Fund.

So add up the American fiscal condition as we know it, dear reader, and tell us what you get:

76 million Baby Boomers about to retire
+ Life expectancies increasing
+ A Social Security Administration that’s now paying out more than it’s taking in
+ The Social Security Trust Fund holding nothing but $2.6 trillion in US debt
+ A national debt over $13 trillion
+ The worst US economy since the Great Depression
+ Unemployment near generational highs
+ Stagnant wages for over a decade
+ Average personal savings rate of 6% of disposable income
+ Minimal interest rates on those savings
+ Home prices (most people’s largest investment) down 20% from their peak
+ Stock indexes (and most private retirement funds) down 25% from their peak
+ Rising energy and healthcare costs

The sum of these parts, among other things, equals a lousy retirement landscape in America. Like so many other economic matters these days, it’s hard to picture a worse scenario for retirees since the Great Depression.

It Could Be Worse

One cliché has been working overtime lately: The night is always darkest before dawn. No one really knows how long this “night” will last in America. It’s running about 20 years strong in Japan, an economy eerily similar to our own. But just the same, most people felt like nothing could possibly go wrong in early 1999… and by September 11, 2001, just about everything had. Maybe now, as most of us are choking in the dark smog of this economy, a breath of fresh air might blow our way. Who knows?

But to bank on that is a bad move. If America doesn’t return to booming prosperity, the Treasury and Social Security Trustees will have to do something to keep the program alive. In the past, that’s meant raising payroll taxes and reducing benefits. Not only will the government have to accommodate Social Security operating at a deficit, but they’ll have to deal with all these bonds… the trillions owed to the American public and trillions more to foreign investors. Either income or sales taxes will have to rise dramatically, or the Fed will have to print money. Both “solutions” would seriously impact American purchasing power, particularly retired Americans living on a fixed income.

Even the rich ought to devise a retirement Plan B. The richest 1% of US population now accounts for 24% of the country’s income, the highest ratio since just before the 1929 market crash. Most of the other 99% is understandably bitter about that, and especially given the tendencies of the current administration, we expect the rich to get soaked good and hard over the next few decades. As we’ve forecast before, expect a Social Security means test in the near future and a hike in the SS taxable wage base even sooner.

Thus, all economic classes in America could feel the sting of imminent Social Security reform. Those that need it will likely receive fewer benefits, and those wealthy enough to retire on their own will likely be forced to pitch in for those that can’t. Meanwhile, all government welfare programs will likely be reduced, as one day – who knows when – Uncle Sam will have to start paying back money borrowed from the Social Security Trust Fund.

Your choice is to wait for that day and see what happens…or start preparing for it now.

Good luck,

Ian Mathias
for The Daily Reckoning

What’s Really in the Social Security Trust Fund? 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:
What’s Really in the Social Security Trust Fund?




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 Legacy of the Current Recession

September 29th, 2010

Epithet for a doomed economy…

What will they say? How will they describe the ’00s and ’10s?

Irish Prime Minister Brian Cowen was accused of being drunk when he gave a “croaky” radio interview two weeks ago.

He denied it.

But we’d be tempted to turn to the bottle too if we were in the fix Ireland is in. Ireland’s banks got into trouble. So the government threw them a lifeline…forgetting that the line was tied to its own neck. It guaranteed bank liabilities equal to four times Irish GDP. But isn’t that going to be the story of the whole period? Private sector banks and speculators got in trouble. Then, the public sector went down with them.

Irish bond yields hit a new record high yesterday – over 6.7%. Investors are afraid Ireland will default. If it does, its bonds will fall even more.

This is either a great opportunity or a trap. Investors could realize a huge windfall. If Ireland is bailed out…yields could fall in half. Then bond prices would double.

On the other hand, the Emerald Isle could actually default. Bonds could take a big hit.

Which will it be? We don’t know.

But we’ve been thinking a lot about the big picture. If you had been in the 1930s, the big picture would have been as difficult to see as ours is today. You would have had a lot of the same questions. Are stock prices rising or falling? Is the economy recovering or falling apart? Is it inflation we should worry about, or deflation?

But now we have a narrative. We know how it turned out.

There was a huge rally following the crash of ’29. Stocks rose up more than 50% in the “suckers rally.” There were several “recoveries” too. And there were 6 separate quarterly bounces between ’29 and ’33. They averaged 8% each.

Investors were entitled to think that the economy “had turned a corner.” Or, that the worst was behind them. Or, that they were “on the road to real recovery.”

But they would have missed the big picture. Looking back at it, the US economy was in a Great Depression. Investors would have been better off just staying away…from ’29 to ’49. Yes, dear reader, a 20-year period of abstinence would have made the heart grow fonder of equities – even though there were several good years as well as several bad years during that period.

What about now? Are investors kidding themselves by trying to make money in this market? Would they be better off taking a leave of absence for the next two decades?

We have to wonder about the big picture. What will people say about this period 30…50…years from now? How will they describe it? What will be the standard narrative?

Will they say it was a recession followed by a recovery? Nope. That story has gone with the wind. What then?

Maybe they will say it was a credit cycle correction…a balance-sheet recession…much like the ’30s. “Investors should have taken a long sabbatical,” they might say. “They should have sold in 2000…and come back in 2020…”

Maybe… But this time there is more to the story than there was in 1930. Back in the ’30s, the equity market turned sour…but the bond market was still safe and sound. The dollar was still as good as gold. Hundreds of local governments went broke, but there was never any question that the US government would default…or inflate…or ditch its own currency. Investors could take a break from stocks. All they had to do was to sell out…and hold onto their cash. They could buy the same stocks 20 years later for more or less the same prices. Why bother with risk? Why bother with the headaches?

But don’t try that this time, dear reader.

Why can’t you just hunker down…hold cash…and wait until this Great Correction is over? Because this time money itself is up for correction. Yes, that’s right. The dollar is no longer good as gold. Not even close. It was cut loose back in ’71. Ever since it’s been floating on a sea of debt, inflation, and hallucination. The feds imagine that they can create as many dollars as they want. They think inflation is good for the economy.

The US money supply has increased 1,300% since 1970. And now that the economy is correcting, the feds think they can fix the problem with the same thing that caused much of the problem in the first place – more notional dollars.

According to The Financial Times, Ben Bernanke is asking himself: should I, or shouldn’t I.

“Bernanke mulls launching QE2 to keep America afloat,” says the headline.

That’s it! That’s the solution! Flood the economy with dollars!

So, that’s what we’re wondering. When they tell the story of the ’00s and ’10s, they’ll probably omit the ups and downs…the “recovery” sightings…the inflation and deflation fears…

The story will probably go something like this:

“The private sector took on too much debt. It hit the wall. Then, the public sector took on too much debt. It hit the wall a few years later.”

Or, a slightly more detailed version:

“The stock market peaked out in real terms in January 2000. The feds responded with huge inputs of fiscal and monetary stimulus, causing bubbles in housing, finance, oil and other sectors. But the credit expansion had reached its end by 2007. Then, the stock market, real estate market, and the economy all turned down. Despite several futile ‘recoveries,’ the correction continued for the next 10 years. Investors should have gotten out in 2000…and stayed out.

“But not in dollars. Governments pumped trillions into the economy, beginning in 2008 – first borrowed money…and then printed ‘quantitative easing’ money. In the two years following the crisis, for example, only one out of every two dollars spent by the federal government came from tax receipts. The rest was borrowed. Or printed. For a few years, the gravity of private sector de-leveraging kept these additions to the money supply in check. But the feds just kept printing more and more money. And as they printed more paper money, the price of real money – gold – rose.

“And then, all hell broke loose. All of sudden, people lost faith in the dollar. They fell over one another trying to get rid of it. They bought houses, cars, stocks, toilet paper – anything. Most of all, they bought gold. When they could get it. The price rose to $5,000 an ounce…

“…and then it was over. The debt had been washed away. Savings, pensions, insurance plans… They announced a new currency, backed by gold, at $5,000 an ounce. It was over.”

Bill Bonner
for The Daily Reckoning

The Legacy of the Current Recession 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 Legacy of the Current Recession




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.

Real Estate, Uncategorized

The Legacy of the Current Recession

September 29th, 2010

Epithet for a doomed economy…

What will they say? How will they describe the ’00s and ’10s?

Irish Prime Minister Brian Cowen was accused of being drunk when he gave a “croaky” radio interview two weeks ago.

He denied it.

But we’d be tempted to turn to the bottle too if we were in the fix Ireland is in. Ireland’s banks got into trouble. So the government threw them a lifeline…forgetting that the line was tied to its own neck. It guaranteed bank liabilities equal to four times Irish GDP. But isn’t that going to be the story of the whole period? Private sector banks and speculators got in trouble. Then, the public sector went down with them.

Irish bond yields hit a new record high yesterday – over 6.7%. Investors are afraid Ireland will default. If it does, its bonds will fall even more.

This is either a great opportunity or a trap. Investors could realize a huge windfall. If Ireland is bailed out…yields could fall in half. Then bond prices would double.

On the other hand, the Emerald Isle could actually default. Bonds could take a big hit.

Which will it be? We don’t know.

But we’ve been thinking a lot about the big picture. If you had been in the 1930s, the big picture would have been as difficult to see as ours is today. You would have had a lot of the same questions. Are stock prices rising or falling? Is the economy recovering or falling apart? Is it inflation we should worry about, or deflation?

But now we have a narrative. We know how it turned out.

There was a huge rally following the crash of ’29. Stocks rose up more than 50% in the “suckers rally.” There were several “recoveries” too. And there were 6 separate quarterly bounces between ’29 and ’33. They averaged 8% each.

Investors were entitled to think that the economy “had turned a corner.” Or, that the worst was behind them. Or, that they were “on the road to real recovery.”

But they would have missed the big picture. Looking back at it, the US economy was in a Great Depression. Investors would have been better off just staying away…from ’29 to ’49. Yes, dear reader, a 20-year period of abstinence would have made the heart grow fonder of equities – even though there were several good years as well as several bad years during that period.

What about now? Are investors kidding themselves by trying to make money in this market? Would they be better off taking a leave of absence for the next two decades?

We have to wonder about the big picture. What will people say about this period 30…50…years from now? How will they describe it? What will be the standard narrative?

Will they say it was a recession followed by a recovery? Nope. That story has gone with the wind. What then?

Maybe they will say it was a credit cycle correction…a balance-sheet recession…much like the ’30s. “Investors should have taken a long sabbatical,” they might say. “They should have sold in 2000…and come back in 2020…”

Maybe… But this time there is more to the story than there was in 1930. Back in the ’30s, the equity market turned sour…but the bond market was still safe and sound. The dollar was still as good as gold. Hundreds of local governments went broke, but there was never any question that the US government would default…or inflate…or ditch its own currency. Investors could take a break from stocks. All they had to do was to sell out…and hold onto their cash. They could buy the same stocks 20 years later for more or less the same prices. Why bother with risk? Why bother with the headaches?

But don’t try that this time, dear reader.

Why can’t you just hunker down…hold cash…and wait until this Great Correction is over? Because this time money itself is up for correction. Yes, that’s right. The dollar is no longer good as gold. Not even close. It was cut loose back in ’71. Ever since it’s been floating on a sea of debt, inflation, and hallucination. The feds imagine that they can create as many dollars as they want. They think inflation is good for the economy.

The US money supply has increased 1,300% since 1970. And now that the economy is correcting, the feds think they can fix the problem with the same thing that caused much of the problem in the first place – more notional dollars.

According to The Financial Times, Ben Bernanke is asking himself: should I, or shouldn’t I.

“Bernanke mulls launching QE2 to keep America afloat,” says the headline.

That’s it! That’s the solution! Flood the economy with dollars!

So, that’s what we’re wondering. When they tell the story of the ’00s and ’10s, they’ll probably omit the ups and downs…the “recovery” sightings…the inflation and deflation fears…

The story will probably go something like this:

“The private sector took on too much debt. It hit the wall. Then, the public sector took on too much debt. It hit the wall a few years later.”

Or, a slightly more detailed version:

“The stock market peaked out in real terms in January 2000. The feds responded with huge inputs of fiscal and monetary stimulus, causing bubbles in housing, finance, oil and other sectors. But the credit expansion had reached its end by 2007. Then, the stock market, real estate market, and the economy all turned down. Despite several futile ‘recoveries,’ the correction continued for the next 10 years. Investors should have gotten out in 2000…and stayed out.

“But not in dollars. Governments pumped trillions into the economy, beginning in 2008 – first borrowed money…and then printed ‘quantitative easing’ money. In the two years following the crisis, for example, only one out of every two dollars spent by the federal government came from tax receipts. The rest was borrowed. Or printed. For a few years, the gravity of private sector de-leveraging kept these additions to the money supply in check. But the feds just kept printing more and more money. And as they printed more paper money, the price of real money – gold – rose.

“And then, all hell broke loose. All of sudden, people lost faith in the dollar. They fell over one another trying to get rid of it. They bought houses, cars, stocks, toilet paper – anything. Most of all, they bought gold. When they could get it. The price rose to $5,000 an ounce…

“…and then it was over. The debt had been washed away. Savings, pensions, insurance plans… They announced a new currency, backed by gold, at $5,000 an ounce. It was over.”

Bill Bonner
for The Daily Reckoning

The Legacy of the Current Recession 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 Legacy of the Current Recession




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.

Real Estate, Uncategorized

Problems For The Dollar Index

September 29th, 2010

The dollar index, which is heavily weighted with euros (EUR), is sinking fast. How fast is it sinking? Well, yesterday, even with the brief dollar rally in the early morning, the dollar index was unable to climb back to an 80 level, which is significant enough, but the other thing that happened once the dollar rally was over, was that the dollar index saw it’s 55-day moving average fall through it’s 200-day moving average… For all you chartists out there, that’s HUGE, right? Yes… It is… So, yesterday when I sent the note to Chris and Frank, the dollar index was hanging onto 79… This morning it is 78.82… The low this year was 76.60 back in January, before all the Eurozone GIIPS began to show rot on their vines.

For those of you keeping score at home, the dollar index reached a high of 88.71 back in June… So… Like I said the other day, the move in the currencies is very strong since June, and this dollar index data proves that!

OK… What caused the turn-around has quite a few opinions going around… But what I can tell you for sure, is that the recent run on the dollar has been the FOMC meeting, and the dance around the fact that they are planning to implement more quantitative easing (QE)…

When a central bank goes down the road of QE, they might as well just come out and devalue their currency too, because the QE is the sharpest knife in the currency debasement drawer. And… It’s what a central bank does when they’ve cut their interest rates to the bone, and have no other arrows in their quiver.

And then yesterday with all the dollar-selling going on… The US saw consumer confidence this month fall more than expected… Which, all I’ll say, is “it’s about time!” The Consumer Confidence Index fell from 53.2 to 48.5… A 4.7-point drop in one month, which saw a deterioration of both the “present situation” and “expectations” components of the index.

And I keep hearing people who should know better say things like “the economy is recovering” and “we’ll not see a double dip”… Well, to the second part of that statement, they’ll be technically correct… What? Yes… You see, once the group of people that decides when recessions start and end decided that this recession ended in “June of 2009”, that meant that if the US goes into a recession again, it will not be considered a “double dip” because too much time has passed. It’s all just grasping at straws, folks… Double dip, large scoop, whatever… It’s not good, and the sooner the government admits it, and gets out of the way, the sooner we can get on with recovering!

The Asian and Pan-Asian currencies are in rally mode this morning, after China printed a stronger-than-expected manufacturing report… Here’s the skinny… China’s Manufacturing PMI (index, that’s reported the same as ours), rose to 52.9, from 51.9 last month, which is the strongest monthly print since May…

Speaking of China… I should note that I’ve read a lot about this row they are having with Japan right now… China has flexed their muscles, and Japan is eating spinach, in an attempt to match muscle strength… And now China has blocked the exports of rare earth minerals – metals that are a collection of 17 chemical elements – to Japan…

Anyway… This saber rattling between China and Japan is not a good thing, folks, and let’s hope that it’s just a tempest in a teapot.

The euro traded to 1.3625 last night, then saw selling that took it down to 1.3580, where it was when I turned on the currency screens, but now has rallied back above 1.36 again… The euro got a bump when consumer confidence in the Eurozone printed firmer than expected, on the rising exports.

Speaking of consumer confidence, Sweden printed a confidence report last night that showed consumer confidence rising to its highest level in over 10 years!!!!!! Yes, that note got 6 exclamation points because 10 years is long time! Sweden also saw their manufacturing confidence print at a multi-year high… So… It shall be that the Swedish krona (SEK) was the best performer overnight!

In recent times, whenever I speak, I get a few people that tell me diversifying with currencies is a waste of time because it’s just a race to the bottom by all countries with their currencies… But, I point out that while I don’t believe that wholeheartedly, if it does happen, the US is leading the race… In fact, they’re already running ahead of the crowd, which will mean that the currencies hold an “edge” over the dollar in a race to the bottom, because the dollar will be the winner, winner, chicken dinner!

OK… In defense of my statement that I do not believe that “wholeheartedly”… The Aussie dollar (AUD) is within 1 1/2-cents of its all-time high, which it reached in July of 2008… So… I guess the Aussie dollar is not participating in the race, eh? The only race the Aussie dollar is in, is the one to the top!

Speaking of the top… The Swiss franc (CHF) continues to move higher past parity with the dollar, and is now $1.02… In 1971, when the dollar was bounced from the Bretton Woods Agreement, because Richard Nixon had closed the gold window because of too much deficit spending, which at that time was nothing compared to the deficit spending going on now, you could get over four Swiss francs for $1… Today? You can’t even get 1 franc with a dollar!

And while we’re talking about being on top… How about gold and silver? Apparently, $1,300 and $21 respectively for gold and silver are not scaring away investors, because the prices are still rising. Remember, just last week silver reached $21 and that was “cause to celebrate”? Well… Don’t look now, but silver has $22 in its sights, which seems pretty fast considering how long it took for silver to reach $21… But for people like me, who have held silver since the early ’80 s… It hasn’t been fast enough!

I’m really on board the “silver bullet,” and no I’m not talking about Coors Light! I’m talking about silver as an investment, and the prospects of the shiny metal to continue to move higher… You see, $1,300 for gold pretty much prices “Joe six-pack” from the market… But… Even at $21, silver is within reach… Think about that for a minute…

The data cupboard here in the US has been emptied out, and the markets will have to depend on other things to drive them once Europe closes down.

Then there was this… Household incomes plunged for the second year in a row in 2009, as fewer families earned over $100,000 a year while the ranks of the poor rose, according to census statistics released Tuesday. News that US households are spending less and saving more, ultimately reducing their debt, might appear to be an uplifting scenario. In reality, many of those households are defaulting on their debt, not tightening their belts. Capital Economics Group reported that almost half of a $77 billion decline in total household debt during the second quarter was because of bank charge-offs of credit card debt, residential mortgages and other consumer loans.

Hmmm… Doesn’t sound like the correct medicine for a recovery, but then, I look at things logically, and not through rose-colored glasses like the media and government…

To recap… A brief sell-off in the currencies overnight didn’t last long, as Eurozone Consumer Confidence was stronger than expected, and boosted the euro back over 1.36 this morning. The Aussie dollar is closing in on its all-time high, and the Swiss franc just keeps adding on to its “already higher than parity to the dollar” figure. The dollar index’s 55-day moving average fell through the 200-day moving average, thus pointing to potential further gains for the currencies. The data cupboard is empty today.

Chuck Butler
for The Daily Reckoning

Problems For The Dollar Index 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:
Problems For The Dollar Index




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

Begun, The Currency Wars Have

September 29th, 2010

For several years now the US and some other countries have been pressuring China to allow its exchange rate to appreciate, thereby making Chinese goods relatively less competitive in the global economy and, so the thinking goes, assisting the US and other heavily indebted economies with a necessary economic rebalancing away from consumption and imports toward investment and exports. In September, the US House of Representatives began formal debate on a proposed measure to label China a “currency manipulator” and impose a broad range of trade restrictions on Chinese goods. But as this dispute escalates, there are other important developments in currency policy taking place around the globe with potentially highly destabilizing and economically destructive consequences.

It is a common delusion that major exchange rates, such as those between the dollar, the euro, the yen and the pound sterling, are free-floating. The cause of this may be that FX rates appear to move up or down on a regular basis in seemingly random fashion, or that mainstream economic textbooks generally make this claim. But it is not true. Japan demonstrated as much in September, when the Bank of Japan, under the instructions of the Ministry of Finance, sold yen into the foreign exchange market, pushing up the USD/JPY exchange rate from 83 to nearly 86, a 4% move, in a single day. According to Japanese authorities, the yen had become too strong to remain compatible with their economic objectives of maintaining positive economic growth and preventing deflation.

Policymakers elsewhere were quick to condemn Japan’s unilateral action. One prominent vocal critic was Jean-Claude Juncker, Prime Minister of Luxembourg and, more importantly, the Chairman of the “Eurogroup”: the council of euro-area finance ministers responsible for coordinating economic and policy. As such, in matters of currency policy, Mr Juncker’s role is comparable to that of the US Treasury Secretary or Japanese Minister of Finance.

A possible concern shared by Mr Juncker and his Eurogroup colleagues is that, should Japan continue to intervene to weaken the yen, then the euro-area will become less competitive in world export markets, in particular for the machinery and other capital goods in which there is intense competition between European and Japanese firms.

Indeed, at an exchange rate of 1.35 to the dollar, the euro is at a lofty level relative to history. Yet at 113 versus the yen, the euro is in fact quite weak. Prior to the financial crisis in 2008, the EUR/JPY exchange rate reached nearly 170. Thus over the past two years euro-area exports have become much more competitive relative to Japanese. So why should Mr. Juncker be complaining so loudly if Japan is now attempting to prevent further yen strength?

It could be that he is concerned more by what unilateral currency intervention represents in principle, rather than what it in fact achieves in practice. Consider: What if not only Japan but other countries facing weak growth and potentially deflation begin to intervene? Well, many countries are already doing so. China manages its exchange rate versus the dollar. So do all other Asian countries in varying degrees. Brazil buys dollars on a regular basis to keep their currency, the real, at a targeted level. Russia does the same with the ruble. The risk is that, by acting unilaterally, Japan has escalated what is already a “cold” currency war, greatly increasing the chances that it becomes “hot”, with countries not seeking merely to maintain a given exchange rate but to devalue faster and by more than others in a, “beggar thy neighbor” policy.

Currency wars might thus appear to be zero-sum. But this is true only up to a point. For if all countries intervene to weaken their currencies in equal measure, then no country succeeds in devaluing versus the others. As such, they might then resort to raising trade barriers or enacting currency controls which restrict the flow of capital across borders. These sorts of actions cause substantial economic damage however and are thus hugely counterproductive. The 1930s were characterized by, among other things, currency devaluation, capital controls and rising trade barriers such as the infamous “Smoot-Hawley” tariff.

While potentially growth negative for the global economy, currency and trade wars can, however, contribute to rising price inflation. Why? Well, the weapons of currency wars are the printing presses. The more you print, the more you can weaken your currency, or at a minimum prevent it from rising. He who prints most, devalues most and “wins”. But if all print in equal measure, exchange rates don’t move, but the global money supply soars. As such, currency wars don’t stimulate real economic growth–indeed they are much more likely to weaken it–they stimulate only nominal growth, that is, inflation. The net result is most likely to be a global “stagflation”.

The economically devastating effects of currency and trade wars can be seen in the chart above, which shows the dramatic contraction in world trade that took place in the early 1930s. Now it is easy to mix up cause and effect here. It is perfectly normal for trade to contract when growth contracts. But when trade barriers are raised they become the cause of contraction rather than the effect. The Smoot-Hawley tariff was enacted in June 1930 but had already passed the US House of Representatives in May 1929, well prior to the stock market crash in October that year. It is thus rightly considered a cause rather than effect of the Great Depression. Nor was it an isolated act. Among other countries, Canada, the largest US trading partner, retaliated by raising tariffs on US goods. Great Britain devalued the pound sterling in 1931. Japan did the same with the yen that year. In 1934, the US devalued the dollar. These were all major acts in a prolonged and devastating currency and trade war.

Some might argue based on the 1930s US experience that currency and trade wars should lead to deflationary depression rather than stagflation. But the US experienced deflation, visible in falling commodity and consumer prices, only as long as it kept the dollar fixed to gold at $20.67/oz. Following the 1934 dollar devaluation to $35/oz, the deflation was over. Commodity prices generally moved sideways rather than lower in the second half of the decade. Growth remained weak, to be sure, but that was not the result of deflation but, rather, structural economic weakness related to the unprecedented level of government micromanagement in the economy, with all manner of wage and price controls and, of course, counterproductive global trade barriers such as Smoot-Hawley.

As neither the world nor the US are on a gold (or silver, or other) standard, currency and trade wars are thus likely to translate directly into stagflationary pressures, with economic growth generally weaker and commodity prices generally higher. This is a horrible set of conditions for corporate profit growth, which is going to get squeezed between rising raw material costs on the one side and poor overall revenue growth on the other. The 1970s are instructive in this regard. The CRB broad commodity index trebled between 1971–when the US devalued and went off the gold standard–and 1981, whereas the S&P index rose by a mere 35%. The lesson for investors today, as the currency wars escalate, should be obvious.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

Begun, The Currency Wars Have 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:
Begun, The Currency Wars Have




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

If the Recession Has Ended, Why Is the Fed So Worried?

September 29th, 2010

Claus Vogt

The National Bureau of Economic Research (NBER) is the official arbiter of U.S. economic history. It sets the officially accepted dates for the beginning and the end of U.S. recessions. And on September 20, its Business Cycle Dating Committee published an important statement …

It finally declared the end of the recession that began in December 2007. Here is an excerpt from what it had to say:

“The committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion.

“The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.”

Does this mean everything is okay now? That the economy is expanding and the world is headed to prosperity?

Of course not. The NBER is not in the forecasting business. Its job is to monitor economic events. In fact, its members felt it necessary to clarify this point by adding the following lines to their recent statement:

“In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.”

So there you have it … the Committee does not want to be misinterpreted as economic optimists. And I think they’re very wise to make that point at this stage of the current economic cycle, because …

Once Again, the Fed
Seems Worried

The Fed has vowed to do whatever is necessary to revive the economy.
The Fed has vowed to do whatever is necessary to revive the economy.

The bleak economic picture and the dire message of leading economic indicators have obviously not escaped our central bankers. They have again decreased their growth projections in the most recent FOMC press statement:

“Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months.

“Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months.”

With the housing market in shambles, bank lending contracting, and consumers being tapped out, there is no base for a sustainable recovery. And now — according to the Fed — even the sole bright spot of the current rebound, capital expenditures, is slowing.

However, Quantitative Easing Round Two is in the offing. So the bulls are again betting on the Fed. The big question is …

Will QE2
Save the Day?

The Fed, in the following statement, has reassured the public it will do everything it can to fight another downturn:

“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed.”

Well, that’s exactly the reassurance they offered and then implemented in spades in 2007/2008. But it didn’t help. The economy was headed for trouble, and it turned out the mighty Fed was not strong enough to stop the tide.

I can’t see a single reason why it should be any different now. If anything I expect the Fed’s efforts to prove even more ineffective this time around. That’s because interest rates are already close to zero. Consequently, there is no more leeway for additional lowering. All that’s left is quantitative easing.

Maybe Bernanke and Co. should ask the Japanese how they used this blunt tool to try to revive their economy — which led to years of economic stagnation, as shown in the chart below, and deflation. But I doubt they’ll bother …

chart If the Recession Has Ended, Why Is the Fed So Worried?

After all before QE1 the Fed didn’t consider Japan’s intervention experience with stock market and real estate bubbles. Instead, they insisted there was no bubble in the U.S.

Then when the bubble did burst, they used the exact policy as the Japanese did to fight the aftermath. And just like Japan, the Fed’s efforts failed.

Now by continuing to ignore Japan’s “lost decade” it looks like the Fed is about to do the same thing once again. And if they follow through on their promise, the weak U.S. economy could easily be headed for a further slowdown that amplifies the problems that already exist.

Best wishes,

Claus


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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

How Do Active ETF Bid-Ask Spreads Stack Up?

September 29th, 2010

There are many factors that investors look at when considering which ETFs to invest in. Probably the most important factor should be the investment strategy behind the ETF and how it fits into their portfolio. However, more often than not, the biggest consideration for investors ends up being the ETF’s expenses. This is a by-product of the intense price competition between ETF manufacturers and the duplication of exposures that various ETFs provide.

The same expense considerations apply when evaluating actively-managed ETFs. There are several parts to the total expenses involved in owning Active ETFs. The most prominent, of course, is the ETF expense ratio. You can find a complete list of expense ratios for actively-managed ETFs here. Another explicit component of costs is the commission on trades, which can vary from broker to broker. Some of the less visible or implicit costs when you trade Active ETFs include the premium/discount of the ETF price to NAV. This is something covered in detail in a recent article analyzing how Active ETFs stack up in minimizing premium and discounts. This article looks at yet another component of trading costs – the ETF bid/ask spread.

What is the bid/ask spread?

Whenever you purchase or sell a stock or an ETF on the exchange, you are exposed to the bid-ask spread for that security. The bid price is the highest price that an investor will be able to sell the ETF at and the ask price is the lowest price an investor will be able to buy at. The difference between the bid and ask is the spread that you would lose if you instantly bought and sold the ETF. Overtime, the spread can vary depending on trading volumes and market maker interest but the spread will be never be zero and investors will always be exposed to some minimal spread even in the largest, most liquid ETFs.

How do Active ETF bid-ask spreads stack up?

Comparison across ETFs for bid-ask spreads is most effective using the % spread as opposed to the dollar spread. The percentage spread is calculated by taking the dollar spread and dividing it by the ETF’s mid price (the mid-point of the bid and ask price). The data presented below has been collected from various sources, including Bloomberg and IndexUniverse.com’s data analytics page. Spreads were calculated as of market close on September 20th, 2010. So the assumption is that the snapshot of bid-ask spreads on that day was representative of the average. Of 36 actively-managed ETFs that are trading in the US and Canada, 5 had percentage spreads smaller than 0.1% or 10 basis points (bps). Majority of the funds, 15 of them, had spreads between 0.1% – 0.2%. 4 funds had spreads in excess of 0.5%, but none of them exceeded 1%.

Factors affecting Active ETF bid-ask spreads?

Looking at the big picture, the bid-ask spread depends a lot on several things that all play off the amount of interest there is in the funds from investors. If there is a lot of interest from investors, the ETFs will usually have high trading activity and a sizeable asset base. These two things would attract market makers to make markets in the ETF, which then leads to tighter spreads. If an ETF has an overly-wide spread, then market makers can create or redeem ETF shares directly from the ETF manager to meet orders and capture a small profit. However, for this to happen, there needs to be some minimum level of activity in the ETF in terms of share volumes in order to make it profitable enough for the market maker to step in and bear the cost of creating and redeeming ETF shares. For example, if there are funds which trade at wide spreads but only trade 100 shares per day, then the market maker has no incentive to step in. This is often the problem that plagues many brand new ETFs that have not garnered much investor interest as yet.

However, one point specific to actively-managed ETFs is that even though a fund may have a large asset base, it may not have large trading volumes. That’s because Active ETFs are intended to be long-term investments, just like active mutual funds, and not as short-term trading vehicles. For example, PIMCO’s Enhanced Short Maturity Fund (MINT: 100.96 0.00%) has an asset base close to $350 million, but it trades an average of 37,000 shares per day, lower than many would expect for a fund that size.

Spreads versus Dollar Volume and Market Cap

Comparing the Active ETF bid-ask spreads to the average daily dollar volumes on each ETF helps paint a more detailed picture. The table below looks at how ETFs in each volume bucket fared in terms of their bid-ask spreads. The numbers represent the number of actively-managed ETFs in that volume bucket which had a bid-ask spread in that range.

The table provides some indication that there is a correlation between the amount of volume in the actively-managed ETF and the spreads at which it trades. Another comparison can be made versus the market capitalization of the fund. That’s what the table below looks at, categorizing the Active ETFs into market cap buckets this time.

Like the volume split, the market cap analysis tends to point to the likelihood of large actively-managed ETFs having tighter spreads than the smaller funds. However, in all honesty, the sample size that we’re looking at in each case – 36 actively-managed ETFs – is too small to draw any concrete conclusions from the above analysis because with such a small sample, the exceptions or “noise” in the data can skew the results too much.

What’s the take away?

Having looked at all that data, it’s safe to say that size and lots of investor interest in an actively-managed ETF would go a long way in bring in bid-ask spreads and reducing trading costs for investors. Market makers or designated brokers can step in to tighten spreads but there is a minimum level of activity that will be necessary to entice them into taking action and provide them with some sort of arbitrage profit.

For a look at the bid-ask spreads on each actively-managed ETF in our database, refer to the table below.

Note: I’d like to give credit to Matt Hougan’s article, “ETFs, Spreads and Liquidity”, on IndexUniverse, for providing the analytical framework I’ve used for this article.

ETF, Mutual Fund